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Carrols Restaurant Group, Inc. (NASDAQ:TAST)

Q1 2008 Earnings Call

May 6, 2008 5:00 pm ET

Executives

Paul R. Flanders – Chef Financial Officer, Vice President & Treasurer

Daniel T. Accordino – President, Chief Operating Officer & Director

Analysts

Bryan Hunt – Wachovia Capital Markets, LLC

Christian Hoffman – Lehman Brothers

Steven Rees – JP Morgan

Jeff Omohundro – Wachovia Capital Markets LLC

Bryan C. Elliott – Raymond James & Associates, Inc.

Greg Ruedy – Stephens, Inc.

Operator

Good morning ladies and gentlemen and thank you for standing by. Welcome to the Carrols Restaurant Group first quarter 2008 earnings conference call. During today’s presentation all parties will be in a listen only mode. Following the presentation the conference will be opened for questions. (Operator Instructions) This conference is being recorded Tuesday, Mary 6, 2008. I would now like to turn the conference over to Paul Flanders, Chief Financial Officer.

Paul R. Flanders

Good morning and welcome to our first quarter conference call. By now everyone should have access to the earnings announcement and release this morning which may also be found at our website at www.Carrols.com under the investor relations section. Before we begin our formal remarks 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 influence our future results.

On the call with me today is Dan Accordino, our President and Chief Operating Officer. Unfortunately Alan Vituli, our Chairman and CEO came down with a stomach flu last night and will not be joining us today. I will cover Alan’s prepared remarks and then walk through our financial results for the quarter. After that we’ll of course open up the call for questions.

We had an acceptable first quarter this year in what continues to be a tough period for ourselves and our industry and in fact, it exceeded our own internal forecast somewhat for the period. Comparable sales were strong at Burger King but a little softer than we would have liked at our Hispanic brands although operating margins while considerably low last year were actually slightly better than we had originally modeled. Our generally soft comps resulted in significant sales deleveraging across the P&L and this was further exacerbated by higher commodity costs at all three brands. In a moment I will address our strategies at Pollo and Taco to improve sales and later we’ll discuss our commodity costs and pricing strategy.

In the meantime, I will say that pricing in the current environment is certainly a balancing act between the value needs of our customers and our own desire to stave off further margin erosion. We opened a total of three new restaurants in the first quarter, two of which were new Pollo Tropical units in the Tampa Florida market bringing our total to seven restaurants on the west coast of Florida. We also opened one new Burger King restaurant, a relocation of in its existing marketing and closed one Burger King and one Taco Cabana restaurant. So far in the second quarter we’ve opened two more Pollo restaurants, one in Orlando and one in Naples Florida and added one new Taco Cabana in the Houston market. In total we have six to 10 new openings in Pollo Tropical planned in 2008 with the wide range reflecting the timing of several openings that are scheduled late in the year. We have several new units in the pipeline in the northeast and we believe that we could possibly get three more opened there later this year as we continue to expand our presence in the northeast markets. On our last conference call we mentioned a planned opening in Hartford Connecticut later this year. We also have new locations under contract in Little Ferry New Jersey and in Stanton Island New York. With respect to Taco Cabana we plan to open 11 or 12 new units this year mostly in Texas with more than half in Dallas and Houston two of our better performing but still under penetrated markets.

In Pollo Tropical we now have both a chicken and steak fajita on the menu which offers a whole new dimension to the brand. Our experience so far suggests that the fajita’s appeal to our entire customer base including our more traditional Caribbean customers. Our chicken and steak fajitas are priced at $5.99 and $6.99 respectively for individual portions and there’s also a value meal version. Given our success to date we hope to build more products around the fajita line using tortilla and are adding flat clam shell grills to the restaurants. These grills will enable us to expand new products to include Cuban sandwiches or wraps or perhaps a quesadilla and to expand our portable product offerings in off premises sales.

We’ve also increased our radio advertising campaigns at Pollo Tropical with more frequent spots tooting the value and healthful qualities of our menu as well as educating the consumer on our whole meal replacement business. Adding a substantial portion of our locations in south and central Florida where the housing market is among perhaps the weakest in the country the important of maintaining and growing mind share is of utmost importance to us. Lastly, we’re in the initial stages of developing a business plan to expand Pollo Tropical’s international franchising business. We’re not prepare to discuss this yet in any great detail but we’ll provide you an update on future calls.

At Taco Cabana our promotional focus in the first quarter was on Taco Cabana’s 30th anniversary as well as our Shrimp Tampico product which was on the menu and advertised throughout lent. While these promotions did just fine, we continue to see softness at Taco Cabana due to competitive forces from QSR. As we’ve said in the past traditional QSR has expanded focus on late hours, breakfast and certainly on their value message creating more choices for the consumer. Not surprisingly, our greatest sales challenges at Taco Cabana over the past year have been in the late night and breakfast day parts. While we’ve rolled past the initial thrust of these initiatives we continue to experience softness in our late night business. We believe that this day part along with lunch and dinner are being affected by shrinking discretionary income and particularly with our heavy users in the 18 to 24 age group. Our research indicates that while our customers give us credit for having higher quality than our QSR competitors the value has become of every increasing importance giving the broader economic environment.

It is clear that we are better positioned in terms of food quality. We continue to increase our focus on value propositions to more effectively compete against QSR in these day parts. For example, we have been promoting our breakfast taco at $0.99 including an offer for a dozen at $9.99. Same store breakfast sales have responded well and in the first quarter were up more than 3%. We will continue to focus on value offerings as we move forward including an increased focus on late night as we move in to the summer. Without going in to the specifics at this time for obvious reasons we also have a new brand campaign in the works and are beginning to develop media campaigns for later in the year for Taco Cabana.

Burger King continues to post solid sales increases across the day but growth continues to be strongest in the late night day part where sales after 10PM were up almost 20% in the first quarter. We are generally pleased with the product pipeline, marketing and promotions at Burger King. However, where as sales continue to be supported by enhanced product offerings, we are not seeing meaningful margin improvement in view of the continued pressures on commodities and other operating costs.

In conclusion, these are certainly unusual times. I think as a restaurant company we are probably better positioned than many by virtue of our business model and the seasoned nature of our management team. We’re diversified across three separate concepts, a geographical footprint that expands roughly half the country and our exposure to multiple commodities thus limiting the shock impact of any one item to our bottom line. We know what tactics are needed to maintain a relevancy to the consumer and are executing accordingly. Overall, both Pollo and Taco are highly differentiated concepts and we’ll continue to capitalize on favorable demographic trends including the continued growth of the US Hispanic population as well as their influence on American eating habits in general. And of course, as a public company we appreciate and are determined to fulfill shareholder expectations as well.

I’ll now review our financial results in greater detail. Total revenues for the first quarter of 2008 increased 4% to $195.8 million. Our growth was driven by the addition of 19 new restaurants in our Hispanic brand since the beginning of the first quarter last year and by comparable unit sales growth of Taco Cabana [inaudible] which were slightly offset by a decline in comparable sales at Pollo Tropical. Revenues in our Hispanic restaurant brands increased 4.9% in the quarter and totaled $104.6 million. Our Pollo Tropical top line increased 6.7% to $44.3 million reflecting the opening of 11 new Pollo restaurants since the beginning of the first quarter last year including two new restaurants opened during the first quarter of 08.

Comparable restaurant sales in the first quarter fell 1% at Pollo Tropical despite the benefit of a 5.3% in cumulative menu price increases and against a -.1% comparison from the prior year. As you might recall, we raised prices at the brand in January by 2.9% so as you can see overall traffic trends worsened in Florida in the first quarter of 08. These trends have been more severe in Orlando where comparable sales were down 4.1% compared to south Florida where sales were essentially flat in the quarter for Dade, Broward and Palm Beach County and as a whole.

Taco Cabana revenues increased 3.5% to $60.3 million in the first quarter due primarily to the opening of eight new Taco Cabana restaurants since the beginning of the first quarter last year. Comparable restaurant sales in the first quarter rose .7% at Taco Cabana including about a 2.2% effect from the price increase taken in early August, 2007 and against a -.9% comparison from the prior year. We are taking additional pricing in early June which should approximate 2% at Taco and are contemplating another small increase early in the fourth quarter. Once again there were varied results across key markets for Taco Cabana. Comparable sales in San Antonio, a 39 store market were flat. Dallas a 32 unit market increased 1.9% and Houston where we have 38 restaurants was up 1.5% in the first quarter. However, our 20 store market in Austin continued to be under top line pressure where comparable sales were down 1.1%.

Burger King restaurants had a strong quarter as overall sales increased 3% to $91.2 million. This increase came despite the closing of seven restaurants since the beginning of the first quarter last year including one unit closed in the first quarter of 08. Comparable restaurant sales increased 4% at Burger King in the first quarter compared to a 1.1% increase in the first quarter of 07. Our cumulative menu pricing increase was approximately 3.1% including a 1.5% increase in April 07 and another 2% taken in January, 2008. Average check however was only up about 1.5% due to the effect of mix changes mostly from the breakfast value menu introduced late in the first quarter last year. You can see though increases in traffic have been fairly strong and represent a large part of the overall sales increase.

Now, in terms of costs, costs of sales as a percentage of restaurant sales increased 166 basis points to 29.5% during the first quarter and 27.8% in the same period last year. This increase reflects the significant increases that we’ve experienced in a number of our commodities since the beginning of last year. Sequentially, cost of sales were up about 20 basis points from the fourth quarter of last year which was generally in line with our expectations. At Burger King cost of sales increased 174 basis points with a 4.5% increase in ground beef accounting for about 22 basis points of the increase and higher cheese prices another 35 basis points. With the transition to trans fat free oil shortening cost were up 60% or 35 basis points on sales and lastly, the run up in wheat costs have caused bun prices to increase at double digit rates accounting for another 35 basis points of the increase.

In our Hispanic brands cost of sales rose 74 basis points at Pollo Tropical brought about by the increase in our chicken contract this year and to a lesser extent some product mix shifts. Cost of sales increased 209 basis points at Taco Cabana with higher cheeses prices again being the most significant driver year-over-year. Although the sequential increase in cheese prices receded to low single digits in the first quarter these increase were between 30% and 40% over the first quarter of the prior year causing 133 basis points of the overall increase. I’ll comment further on our commodity outlook in a second.

Restaurant wages and related expenses were up 18 basis points overall due to increases at Pollo and Taco offset partially by leverage on sales increases at our Burger King. Restaurant expense as a percentage of sales increased 19 basis points to 5.9% mostly due to the effect of sale leases backs entered in to since the first quarter last year. Other restaurant operating expense were 15.1% of sales an increase of about 20 basis points compared to the first quarter last year due mostly to higher maintenance expenses related to the reimaging of certain Pollo restaurants. Advertising expense decreased 54 basis points to 4% in the first quarter from 4.5% in the same period of 07. This decrease was related to the timing of our advertising at Taco Cabana which was more heavily weighted to the first quarter last year, lower promotional activities in certain of our Burger King markets. On the other hand, we have stepped up marketing efforts at Pollo and the advertising for that brand has increased on both an absolute and a percentage basis.

General and administrative expense as a percentage of revenues decreased 35 basis points to 6.6% in the first quarter due to lower bonus costs as well as the leveraging of sales increases. Income from operations was $9.7 million in the first quarter compared to $12.3 million last year. Interest expense decreased $922,000 from the first quarter of 07 to $7.4 million reflecting lower effective interest rates on borrowing under our senior facility. Our senior facility is tied to LIBOR rates so we benefited from the significant drop in the short term rates over the last few months. In addition, we refinanced our senior credit facility in March 07 so our current facility at 125 basis points over LIBOR is quite favorable in view of current market conditions. Net income was $1.4 million or $0.07 per share in the first quarter compared to net income of $1.6 million or $0.07 per share in the first quarter of last year on a share base of 21.6 million shares in both years. 2007 results included a non-recurring charge related to the refinancing of our senior credit facility of $.9 million after tax or $0.04 per share.

As we indicated in our press release we are maintaining our previous guidance for 08 at this time. We’ve called for earnings of $0.70 to $0.75 per share. However, we feel that our visibility is somewhat limited in the current environment and that it is possible that we could be in the lower part of this range. Following consumer sentiment, persistent weakness in the Florida economy and a significant increase in operating cost will continue to impact results. We still believe that an overall revenue increase of 5% to 6% is reasonable however, based on results thus far our sense is that Burger King could be a bit stronger than what we anticipated. On the other hand trends at Pollo have been soft and while we expected that early in the year it is unclear whether we will see an economic turnaround as quickly as we initially thought which could affect the turnaround in Pollo’s sales trends.

I previously indicated that we anticipated opening six to 10 new Pollo restaurants and 11 to 12 new Taco Cabana restaurants which is in line with the original guidance. Accordingly, we will still expect capital expenditures of between $70 and $80 million which includes $35 to $45 million for new restaurants. We also plan to close about $15 million in sales lease backs this year. Depending on where our cap ex falls we could tap up to approximately $10 million of our revolver although the bulk of our cap ex will be funded internally from operating cash flow. In terms of cost, pressure on commodity costs has not abated and to some extend continues to create pressure despite the fact that we have many of our key items contracted. Our initial outlook called for cost of sales to increase 40 to 50 basis points. It appears that this could be worse based on the additional pressures we’ve seen particularly on buns and tortillas give the significant increases in wheat and to a lesser extent on our cheese costs.

On the other hand we believe that labor pressure continues to moderate and that savings will offset some of the additional pressure that we may face in commodity costs. We have indicated we took pricing at Pollo in January and plan to take additional pricing at both Taco and Burger King as we move through the year. Our menu and past discipline over price increase gives us reasonable pricing power without undermining our value proposition though we will obviously balance this in light of the consumer environment. Despite the cost pressures of the current environment we believe that we have two differentiated Hispanic concepts that resonate in the marketplace and continue to have favorable long term prospects along with a strong Burger King business that is clearly benefitting from the current strength in QSR segment. This combination positions us reasonably well for today’s challenges given the diversification and stability of our business model. We are also responding to the current environment by aggressively addressing not only margin pressures but our sales trends with new products and more aggressive marketing campaigns.

Now, Dan and I would be happy to answer any questions that you might have. Operator you can open the lines.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Bryan Hunt – Wachovia Capital Markets, LLC.

Bryan Hunt – Wachovia Capital Markets, LLC

Given that you exceeded your internal forecast, does that give you any optimism regarding your ability to exceed or raise your guidance by the time you get to the end of the year? Or are the headwind pressures just too much?

Paul R. Flanders

Well, I think there are two things going on. I think while we say we exceeded our numbers slightly we’re a little concerned about the headwinds as we go forward. No, I don’t think that I see an increase as a result being above the first quarter.

Bryan Hunt – Wachovia Capital Markets, LLC

If economic conditions deteriorate further how flexible are your cap ex plans for 2008? I mean, are they pretty much set in concrete or is there ability to push some stuff off in to next year?

Paul R. Flanders

We continue to look at that. I think a fair number of these units are sort of back ended in the year particularly with Pollo I didn’t go through the numbers on the call today but as you know w have a fair amount of remodeling, we’ve looked at that and we’ve reduced that slightly already this year. But unfortunately a lot of that is non-discretionary it’s just a function of franchises that we have renewing so we recognize that it’s a big cap ex number but there is a little bit of flexibility and we continue to look at that.

Bryan Hunt – Wachovia Capital Markets, LLC

And, a topic that everybody asks, how are the northeast Pollos performing in this quarter relative to last quarter? Are they continuing to make progress on AUVs and profitability?

Paul R. Flanders

In terms of top line the units have come down a little bit probably from where they were last year but remember, that’s more of a settling in process from the initial openings so that was not necessarily unexpected. They performed well, the inline units are doing $1.6 to $1.8 in that range, the two in lines and the new unit that we opened in Woodbridge which is the free standing unit that was opened late last year is on track to do about $2 million. So, top line is where we expected. We talked on the call before operating costs have been running higher and certainly when we initially opened these units the fact that we have pretty significant pre-opening costs will certainly affect profitability in the first year, we’re not making money in the first year. Of course, we’ve got those behind us at least on the three units that are opened and so we’re very focused on continuing to improve operating margins at those brands. Having said that, we still have some inefficiencies in terms of our costs just given the fact that there’s only three units open at this point.

Bryan Hunt – Wachovia Capital Markets, LLC

Last two questions, one could you give us an idea of what happened with regards to traffic and check at each concept during the quarter? Then, given that Pollo is probably struggling the most is there any way you can give us comps on how they progressed maybe monthly in Q1 for Pollo?

Paul R. Flanders

In case of Burger King, as I said check is up about 1.5% and we had an effective price increase of about 3.1%. The disparity there being the effect of the value menu. But with the comp number we’re talking about obviously traffic was pretty strong at Burger King we were up clearly positive at Burger King. In case of Pollo average check was up about 4%, 5% of that was price and we clearly have seen negative traffic at Pollo and that’s a continuation from late last year. In Taco Cabana it’s basically similar, we’ve got about 2.2% in pricing, effective pricing in the first quarter so traffic was down about 3%.

Bryan Hunt – Wachovia Capital Markets, LLC

The lastly, was there any progression in Pollo’s comps? Were they becoming more negative throughout the quarter or where they stable or were they improving?

Paul R. Flanders

It’s interesting because if you break it down by market, because the story is a little bit different in different markets. In the first quarter we were -4% in Orlando, so Orlando has been very soft whereas south Florida has been at least flat. In April south Florida actually got better, we’re slightly positive in south Florida. In Dade County as an example we were up about 1.5%, Broward we were up 3.3% so we’ve seen some improvement in south Florida but I think we’re looking at that a bit cautiously. On the other hand though Orlando has gotten even worse and in the month of April we were down over 10% in Orlando. Net/net we were basically flat to down slightly at Pollo so no, it hasn’t gotten better.

Bryan Hunt – Wachovia Capital Markets, LLC

Is that because of a shift in spring break and the Easter holiday, the Orlando comps?

Paul R. Flanders

I think that’s had some effect. I think that’s one factor, I think the other thing is while tourism in the net might not be off in Orlando, I think a lot of the tourism is not coming from the US, a lot of it’s coming from Europe or places outside of the country given where the value of the dollar is. Those travelers tend to not leave the properties much or given the results we are looking at certainly not eating at Pollo as often as we would like.

Operator

Your next question comes from the line of Christian Hoffman – Lehman Brothers.

Christian Hoffman – Lehman Brothers

I just wanted to del in to cost a little bit more, you mentioned that the 40 to 50 basis point increase might be slightly higher, can you quantify that a bit?

Paul R. Flanders

Yes, as we indicated initially in our guidance that cost would be up 40 or 50 basis points. I think that there’s a lot of variables, we obviously don’t have total visibility on where some of these commodities are going. It could be 70 to 80 basis points, as sort of a frame of reference.

Christian Hoffman – Lehman Brothers

You mentioned buns, tortillas, cheese as some of the items that are increasing, do you have contracts for those items?

Paul R. Flanders

We’re partially contracted on tortillas at Taco Cabana and the buns are more of a Burger King phenomena and we purchase through the Burger King co-op which controls purchasing so no we don’t contract on those commodities.

Christian Hoffman – Lehman Brothers

Are there any other items that are causing you concern?

Paul R. Flanders

The other one is that we have exposure on is cheese. All the Burger King commodities are not subject to contract because of the way we buy. We’re pretty much contracted at this point at Taco, cheese, wheat, base products are the exception to that. At Burger King we don’t contract for most. It’s interesting we just got yesterday the beef price for May and we’re seeing a spike in beef costs which was not anticipated.

Christian Hoffman – Lehman Brothers

Then on the traffic and check mix at Pollo have you seen some negative mix shift there? I know you mentioned you saw some at Burger King.

Paul R. Flanders

No, not significant.

Operator

Your next question comes from the line of Steven Rees – JP Morgan.

Steven Rees – JP Morgan

Just on the Burger King comp I think that you mentioned that sales after 10PM were up 20%, did I hear you right? Then, if you could just talk about how sales are trending in the other day parts, breakfast and lunch? Then, you mentioned the breakfast value menu, are you also seeing a shift down towards just the everyday value menu impacting your average check?

Paul R. Flanders

In terms of day part sales we’ve begun to lap the breakfast roll out so first quarter breakfast was up maybe 1% on the breakfast day part so the comps in addition to having a strong pop on late night which of course is a fairly small piece, we have basically been up pretty strong across all the other day parts, lunch, dinner.

Steven Rees – JP Morgan

Then part of the reason for the slightly lower development of Pollo this year was just the escalating construction and real estate costs in Florida, have you seen any evidence of some softening there? And I guess, if so, how is this going to impact your development plans for next year?

Paul R. Flanders

Dan, do you want to handle the cost side of that?

Daniel T. Accordino

From a land cost standpoint, a ground lease standpoint we still haven’t seen a significant modification in terms of what developers are looking for in terms of dirt. From a actual building construction costs, cost per square foot costs it’s stabilized, it has not softened but it hasn’t, the increase that we were experiencing previously has somewhat lessened and that would be true for all three brands from a construction cost standpoint.

Steven Rees – JP Morgan

I guess Paul, to accelerate development again next year what would you need to see? Would you need to see a significant improvement in the fundamentals of the business? Or, construction costs to come down even more [inaudible] returns.

Paul R. Flanders

Well, I think obviously we’d like to see the business improve and not just our business but the economy more broadly. I think in terms of our expansion, yes we’re building restaurants in Florida but the markets that are probably more relevant to us as we accelerate expansion plans is the northeast. Certainly the economic situation is different there than in Florida and they’re obviously not dealing with the same kind of real estate cost issues that we have in Florida. We’re seeing a lot of activity there so I think in general to answer the question, the broader issue we need to see is a broader turnaround in the economy.

Steven Rees – JP Morgan

Then just finally, the clam shell grills at Pollo, that seems pretty interesting. What’s sort of the timing for the roll out there and the estimated cost per unit and if that’s embedded in to your capital plan for this year?

Daniel T. Accordino

It will be the end of the year before they are all in place and it’s going to cost somewhere in the neighborhood of $2,000 per restaurant.

Steven Rees – JP Morgan

So we shouldn’t expect to see the new products come out to 2009.

Daniel T. Accordino

Across the entire system. We’ve rolled it out in the expansion markets first so they’re on the west coast of Florida and they’re in the northeast where we’re selling kids quesadillas and three different types of wraps that are working quite well in those markets. So, we will be completing the roll out and also Orlando will be done with the grills in two months and then we’ll back all the roll out in to south Florida.

Steven Rees – JP Morgan

So, the entire system by the end of the year?

Operator

Your next question comes from the line of Jeff Omohundro – Wachovia Capital Markets LLC.

Jeff Omohundro – Wachovia Capital Markets LLC

My first question is really a kind of big picture one, I hear your cautionary comments regarding macro environment impacting visibility. I’m curious I guess first if you can share with us what you’re thinking is about the potential benefit of the over $100 billion in tax rebates that are currently being distributed and how that might impact your outlook?

Paul R. Flanders

I’m not sure it will have a significant effect on our outlook. Of course, the big question is where are people going to spend that money? I think the last time there were rebates I’m not sure that the effect for us was noticeable. I don’t recall frankly so it couldn’t have been that significant. I think certainly in terms of comparison to the last time the rebates were done I think there are consumers in a different place and it will be interesting to see how many of those dollars actually get spent in the discretionary manner versus paying credit cards and the like.

Jeff Omohundro – Wachovia Capital Markets LLC

Then looking at the momentum at Burger King I wonder if you can comment a little bit about what you’re seeing in the product pipeline just as the BK lunch wrapper and how the Steakhouse Whopper has performed?

Daniel T. Accordino

The Steakhouse burger is performing as well as was forecasted, it’s doing quite well and it’s a good check builder. The entire, I guess what Burger King would call their barbell strategy is continuing to work well from a sales standpoint but it’s causing some margin pressures. As more people gravitate to the value menu and these commodity costs continue to increase it’s a little challenging from a margin standpoint but from a full margin product standpoint I think Burger King is doing a great job in terms of rolling out products that are selling at full price points and to some degree attempting to offset the pressure on the value menu.

Jeff Omohundro – Wachovia Capital Markets LLC

Could you remind us where you are on extended hours across your system?

Paul R. Flanders

Prior to the most recent mandate which I think was announced last week, we’re open until 2AM on Thursday, Friday and Saturday. Prior to that it was Midnight and all of our restaurants were open to Midnight or later. I’ve got my region people looking at how many restaurants we have to now move to 2AM on Thursday, Friday and Saturday and I don’t know what percentage are open to that late at this point. But, at most it’s going to be an extension of an hour or two.

Jeff Omohundro – Wachovia Capital Markets LLC

What is your thinking about that mandate and the potential impact on sales?

Paul R. Flanders

I certainly think it’s going to increase sales. Whether or not those two hours are profitable obviously is questionable. If they were profitable my assumption is we would have been open already until 2AM. So, to the extent that we’ve got 50 or 60 restaurants that were closing an hour or two earlier, my sense is that a judgment was made by the operating people that it wasn’t profitable to be open that extra hour or hour and a half.

Jeff Omohundro – Wachovia Capital Markets LLC

I guess my last question is on Pollo in the northeast, in thinking about the volume differential on the free standing versus your in line and then also thinking about the higher cost involved in the free standing, maybe update us in terms of the strategy going forward how free standing units fits in and what the available pipeline of sights for free standing, how that looks to you?

Daniel T. Accordino

We’re primarily dealing with traditional free standing Pollos with drive thru in the northeast, that’s what we’re looking for. The three that Paul references earlier, two of those are conversions of existing free standing former users and one is, the one in Hartford Connecticut it will be a ground up traditional Pollo. I was in the market two weeks ago with our real estate folks and we have a lot in terms of five or six in 2009 potential opportunities for traditional free standing Pollos in the northeast.

Operator

Your next question comes from the line of Bryan C. Elliott – Raymond James & Associates, Inc.

Bryan C. Elliott – Raymond James & Associates, Inc.

You mentioned Paul the international franchise sort of acceleration or effort picking up a bit. Could you elaborate some on that?

Paul R. Flanders

Well, it’s very early. I’m just mentioning it and I’m not going to elaborate on it a lot today, no. We’ve hired someone to head up that effort and we’re in the very early stages of looking at the various markets and opportunities and really at the initial stages of putting a business plan together. So, we don’t have a lot to talk about at this point other than we see it as a significant opportunity that we should look at and if appropriate exploit.

Operator

Your next question comes from Greg Ruedy – Stephens, Inc.

Greg Ruedy – Stephens, Inc.

Paul you mentioned a new brand campaign at Taco Cabana, is that purely media based or are there physical changes to the units themselves? And if so, what kind of capital investments are we talking about?

Paul R. Flanders

It isn’t that physical. This is a new media campaign positioning and new advertising.

Daniel T. Accordino

They’ll be POP elements and that sort of thing in the restaurants but it’s not part of a capital, it’s part of the marketing budget.

Greg Ruedy – Stephens, Inc.

Given that, then how should we view sort of the linearity of the advertising spend in the second half?

Paul R. Flanders

Well, as I said earlier we’re skewed a little heavier in the first quarter for Taco last year than we were this year. So, I think by extension of that we will be spending heavier in the next couple of quarters, even the next three quarters really on a relative basis, an absolute basis to last year.

Greg Ruedy – Stephens, Inc.

Shifting gears to Pollo on the clam shell grill, what opportunity do you have to drive the mid afternoon sales day part?

Daniel T. Accordino

These products are not specifically geared towards any specific day part. The wraps which we’ve been testing in the northeast seem to have been generating some traffic and this expands our kids’ opportunity as well. The kid’s quesadilla seems to be generating some excitement on the west coast of Florida. So I wouldn’t say it’s specific to an afternoon snack meal period. For the afternoon meal period the thing that seems to be working quite well for Pollo are our slushy product which we put in a little over a year ago and we’re selling a fair amount per day for that which is primarily an afternoon product.

Operator

Your next question comes from the line of Christian Hoffman – Lehman Brothers.

Christian Hoffman – Lehman Brothers

Just a follow up, on the sales lease back transaction can we get a sense of timing for that?

Paul R. Flanders

Yes, in the first quarter, as I said we’re doing about $15 million this year, in the first quarter we did about $1.7 in sales lease backs. The bulk of the balance will be spread mostly in the second/third quarters.

Christian Hoffman – Lehman Brothers

Then just a housekeeping item, can I get your cash balance at the end of the quarter?

Paul R. Flanders

Cash balance at the end of the first quarter is about $4 million.

Operator

Mr. Flanders at this time I am showing no additional questions in the queue. Please continue with any concluding remarks you may have.

Paul R. Flanders

We really have no additional comments. But, we thank you for your attention today and we look forward to speaking with you next quarter.

Operator

Ladies and gentlemen this does conclude the Carrols Restaurant Group first quarter 2008 earnings conference call. AT&T would like to thank you for your participation and you may now disconnect.

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