CKE Restaurants F1Q09 (Qtr End 5/19/08) Earnings Call Transcript

CKE Restaurants, Inc. (CKR)

F1Q09 Earnings Call

June 26, 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

Analysts

Brian Moore - Wedbush Morgan

Keith Siegner - Credit Suisse

Christopher O’Cull - Suntrust Robinson Humphrey

Tony Brenner - Wealth Capital Partners

Steven Rees - J.P. Morgan

Rachael Rothman - Merrill Lynch

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2009 CKE Restaurants earnings conference call. My name is Francis and I will be your coordinator for today. (Operator Instructions) I would now like to turn the call over to Mr. John Beisler, Vice President of Investor Relations. Please proceed.

John Beisler

Thank you, Francis. Good morning, everyone and thank you for joining us. 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 16 weeks ended May 19, 2008.

Yesterday, CKE issued a pair of press releases announcing its financial results for the 16 weeks ended May 19, 2008, and same-store sales for the four weeks ended June 16, 2008. These releases are available on our website, www.ckr.com. CKE has also filed its Form 10-Q with the SEC. This call will reflect items discussed within these press releases and Form 10-Q. 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 first quarter results, as well as our period five same-store sales results. Ted will then review our first 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 Form 10-Q and the earnings release. Our disclosure regarding forward-looking statements can be found within our Form 10-Q under item 2, 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 goals and operating performance, and are based on management’s current beliefs and assumptions. Such statements are subject to risks and uncertainties and actual results may differ materially from those projected in the forward-looking statements.

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

Andrew F. Puzder

Thank you, John and good morning, everybody. First quarter of fiscal ’09 was a very positive quarter for our company on numerous fronts. To begin with, the expense reduction efforts and price increases we implemented over the past year bore fruit as we substantially reduced our year-over-year unfavorable restaurant operating cost comparison.

In the second quarter of fiscal 2008, our restaurant operating costs were 300 basis points unfavorable to the prior year quarter. In the third quarter, operating costs were 190 basis points unfavorable and in fourth quarter, operating costs were 160 basis points unfavorable. In the first quarter of fiscal 2009, our restaurant operating costs on a consolidated basis were just 30 basis points unfavorable to the prior year. This 30 basis point increase was essentially due to increased depreciation from our ongoing remodel program at both brands. Both food and packaging costs and labor and employee benefit costs were essentially in line with the prior year quarter.

We also continued our focus on actual reductions to G&A expense in the first quarter. In this respect, we reduced G&A expenses by $1.5 million, a 3.3% reduction as compared to the prior year quarter. We also reduced G&A expense as a percentage of total revenue by 10 basis points.

We achieved these reductions despite a reduction in total revenue due to our refranchising of 195 Hardee's restaurants by the end of first quarter and an $800,000 increase in share-based compensation expense.

In addition to substantially improving our year-over-year operating cost trend and reducing our G&A expense, we also had positive blended same-store sales for the quarter. Blended same-store sales increased 1.8%, our 11th consecutive quarter of positive blended same-store sales.

With respect to our individual brands, same-store sales at company-operated Carl's Jr. Restaurants increased 3.9% versus flat results in the prior year quarter. Same-store sales at company-operated Hardee's restaurants decreased 0.6% versus a 1.8% increase in the prior year quarter. We also reported same-store sales for period five yesterday. For the four weeks ended June 16th, blended same-store sales increased 2.6%. Hardee's same-store sales increased 2.8% during period five. On a two-year cumulative basis, Hardee's same-store sales have increased 5.4%.

For the fiscal year-to-date, Hardee's same-store sales are now positive thanks to the successful launch of the Prime Rib Thick Burger, the latest of our decadent meat-as-a-condiment offerings. This burger features a 100% black angus charbroiled beef patty, sliced prime rib, grilled onions, Swiss cheese, and horseradish sauce on a ciabatta roll. Hardee's introduced it on May 14 during the last week of period four. On the first day of period five, Hardee's began airing our latest ad campaign featuring a fake restaurant in which unknown guests happily pay $14 or more for a variety of Hardee's thick burgers.

Carl's Jr. period five same-store sales increased 2.5%. On a two-year cumulative basis, same-store sales at Carl's Jr. have increased 5.3%. Carl's Jr. promoted the Chili Cheeseburger and Chili Cheesefries as well as the Jalapeno Chicken Sandwich in period five and began selling the prime rib burger on June 18th, the second day of period six.

As of the end of period five, the blended average unit volume for our company-operated stores was $1,191,000, a $29,000 increase over the end of fiscal 2008. Carl's Jr.'s average unit volume was $1,517,000, a $24,000 increase over fiscal 2008 and an all-time high for the brand. Hardee's average unit volume was $963,000, a $9,000 increase over fiscal 2008 and the highest average unit volume for the brand as far back as we can check.

As you would expect, with our same-store sales and AUVs increasing, restaurant operating costs stabilizing, and G&A expenses declining, our profits improved. Earnings per share in particular were up thanks in great part to our share repurchase program, which was the primary driver behind a reduction in our fully diluted share count of 13.9 million shares, or 20.4% of the diluted shares outstanding versus the prior year quarter.

First quarter net income was $16.6 million, a $900,000 improvement over income from continuing operations in the prior year quarter, despite a decrease in profits associated with our refranchising of 195 restaurants over the course of the last year. Diluted earnings per share for the quarter were $0.31, an $0.08 or 34.8% improvement over the prior year quarter.

Among other things, this year’s results included a $2.4 million, or a $0.03 per diluted share benefit related to our interest rate swap agreement and a $1.3 million, or a $0.02 per diluted share income tax benefit resulting from recent tax regulations. A $1.3 million, or $0.015 per diluted share increase in facility action charges, and an $800,000, or $0.01 per diluted share increase in stock compensation expense partially offset these benefits.

We also achieved a $900,000 increase in adjusted EBITDA for the quarter, going from adjusted EBITDA of $53.7 million last year to $54.6 million this year. Again, we achieved this increase despite the refranchising of 195 restaurants over the year. Ted will go into more detail on these matters in a moment.

Our brands also continued to grow in unit count during the first quarter. On a net basis, we and our franchisees added 18 restaurants, taking our consolidated count to 3,101 units from 3,083 units at the end of fiscal 2008. The company opened four new units. Our domestic franchisees opened 16 new units, and our international licensees opened 12 new units for a total of 32 new units during the quarter. We also remodeled 26 company-operated Carl's Jr. and Hardee's restaurants during first quarter. At the end of first quarter, we had remodeled 262 restaurants, or about 29% of our company-operated system.

While accomplishing all of the foregoing, we also reduced our bank debt by $20 million, going from a year-end total of $351.1 million to total bank debt at the end of first quarter of $331.1 million.

In summary, while we and our industry as a whole certainly face challenges in the first quarter of 2009, which many of our competitors chose to address with margin impairing low prices and discounting, we continued to grow blended same-store sales and average unit volumes, improved our restaurant operating costs, reduced G&A expense, increased earnings per share, as well as our adjusted EBITDA, and made necessary investments in our business while reducing our debt.

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

Theodore Abajian

Thank you, Andy. Good morning, everyone. Before I get started, I want to let you know that during this conference call, I will refer to a slide we posted yesterday in the investor relations area of our website, which can be found at www.ckr.com. To view the slide, go to ckr.com, click on investors, and then click on presentations. At that point, you will see a list of our presentations. I will be referring to the presentation dated June 25, 2008, which is entitled Q1 Adjusted EBITDA Slide.

In addition, I need to make you aware that during this conference call, we will refer to certain non-GAAP financial measures, as explained in our earnings release issued yesterday, and in our Form 10-Q for the 16 weeks ended May 19, 2008.

During the first quarter, we made progress with respect to net new unit growth, increasing same-store sales and average unit volumes, controlling costs at the restaurant level, and reducing our general and administrative costs.

To help investors better appreciate the impact of our progress in each of these areas, I want to spend a few minutes discussing how these and other items affected our adjusted EBITDA performance for the first quarter. I will finish by discussing aspects of our interest and income tax expense.

First of all, I want to make sure that everyone understands why we refer to adjusted EBITDA as opposed to EBITDA. Adjusted EBITDA, as reported in our Form 10-Q, was calculated using the definition that is provided in our credit facility. In our case, EBITDA is adjusted for two items -- facility action charges, which is a line item on our income statement, and share-based compensation, which is a component of our G&A expense. Both of these items are added back to EBITDA to get to adjusted EBITDA.

I now want to refer to the slide I referred to earlier, which is again available on our website at ckr.com. This slide, entitled adjusted EBITDA Q1 FY08 bridge to Q1 FY09, identifies and quantifies the primary factors impacting our adjusted EBITDA performance for the first quarter of FY09 as compared to the first quarter of last year.

First quarter adjusted EBITDA increased by just over $900,000 versus the prior year quarter, representing our first quarterly increase in adjusted EBITDA since the fourth quarter of fiscal 2007. the factors that led to the increase in adjusted EBITDA can be put into two categories, as shown on the slide. The first category is changes in store count and the second is changes in operating results.

In the changes in store count category, you can see that the combination of store closures over the past year and the sale of La Salsa last July resulted in a $400,000 decrease in adjusted EBITDA in the first quarter. The refranchising of 136 Hardee's last year, along with 59 Hardee's during the first quarter of this year resulted in a net decrease in adjusted EBITDA of $1.7 million for the quarter. The decrease in adjusted EBITDA resulting from refranchising was more than offset by a $2 million increase in adjusted EBITDA during the first quarter, which resulted from our development of 23 new company-operated restaurants last year, along with four additional new restaurants this quarter.

Moving now to changes in the operating results category, our 1.8% blended same-store sales increase provided a $1.9 million increase in adjusted EBITDA for the quarter. This increase was partially offset by a $1.6 million increase in same-store labor and other operating costs.

The final item of significance was the $1.1 million reduction in general and administrative costs that we achieved during the first quarter.

To summarize, our $900,000 increase in first quarter adjusted EBITDA resulted from the benefits associated with new unit development, increased same-store sales, and a decrease in general and administrative costs, partially offset by the impact of refranchising and restaurant operating cost increases.

Getting back to the income statement, we are encouraged by our progress during the quarter in narrowing the gap in operating income performance versus the prior year quarter. First quarter operating income of $29.6 million was down about $400,000 versus the prior year quarter, which is an improvement from the fourth quarter when operating income was down by about $1 million from the fourth quarter of fiscal 2007.

Interest expense was $4.6 million for the first quarter, down $700,000 from the prior year. The year-over-year decrease in interest expense is the net result of a $2.4 million favorable adjustment to our interest rate swap agreements, partially offset by a $1.7 million increase in interest on our credit facility due to higher outstanding borrowings as compared to the prior year.

Next I will address our income tax expense for the quarter, as well as our expectations for the remainder of the year. Income tax expense for the first quarter was reduced by $1.3 million as a result of recent tax regulations, resulting in an effective tax rate for the first quarter of 36.2%. We expect our effective tax rate for the remainder of fiscal 2009 to be approximately 41%.

As a result of our income tax credit carry-forwards and reversal of temporary timing differences, we expect that our fiscal 2009 cash income taxes will be approximately 22% of our pretax income.

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

Andrew F. Puzder

Thanks, Ted. While we believe we made meaningful progress in the first quarter, we intend to push forward aggressively in our efforts to drive sales growth and implement cost containment initiatives in the face of well-publicized consumer weakness and inflationary pressures. We will continue to actively manage all aspects of our business and where possible reduce or eliminate costs without negatively impacting our operations at either the restaurant or the corporate level.

At our annual shareholders meeting last week, I discussed in some detail our G&A expense, capital plan, and the reasons why we believe our new unit growth plans are in the best interests of our brands, our franchisees, our company, and our shareholders. My comments and my presentation from that meeting are available at our website, www.ckr.com.

Although some repetition is unavoidable, I think it’s important to underscore the progress that we are making in several key areas. We have a number of exciting initiatives in progress which bode very favorably for the future of our company. Let’s start with international development.

Last week we issued a pair of press releases announcing significant international development agreements. First, we’ve entered into a master license agreement with Bread Talk Group Limited and ASPAC F&B International to open a minimum of 100 Carl's Jr. restaurants in China over the next seven years. We also announced development agreements with MDS Foods and Global Food Connection LLC to open a total of 25 Hardee's restaurants in Pakistan over the next five years.

Including these deals, we now have development agreements in place that will double our current international unit base to more than 600 units by fiscal 2014. Historically, many of our international licensees have opened more restaurants than required by their development agreements and we are hopeful that our licensees will develop significantly more units than those for which we currently have commitments.

We believe these recent announcements reflect the potential of our brands internationally. We are pursuing additional new markets, such as Canada, Turkey, and Australia, as well as a number of European and South American countries, and a potential joint venture in Mexico.

Overall, we remain very excited about our international platform, which we expect will become an increasingly significant growth driver in the medium term.

Our capital plan -- we are currently in the third year of our five-year capital plan. In fiscal 2007 and fiscal 2008, we expended a total of $209.2 million. This includes $135 million of non-discretionary spending, which includes remodels, maintenance capital, and investments in IT and our distribution center. The remaining $74.2 million has been discretionary spending, which includes new unit growth and dual branding of our restaurants.

As we previously stated, the non-discretionary projects in our plan are necessary as we invest in areas where capital spending has been deferred for some time and we need to rebuild our infrastructure as required to maintain our existing business and to grow. We’ve also stated that we would adjust the discretionary portion of our spending as results and conditions warranted. We’ve encountered three issues with respect to our capital plan that warrant reducing our anticipated spending over the remaining three years of the plan.

First, our refranchising efforts have reduced our capital spending, as our franchisees will remodel the restaurants they purchased and maintain them going forward. Second, as the economy slows, commercial as well as residential real estate development has also slowed. As a result, there are fewer new high quality sites available than we anticipated when we announced our original plan.

We will not build just to build and we are not satisfied building on anything other than a high quality site. Deferring some of our new restaurant construction should also give us the opportunity to improve the return on our new Hardee's restaurants with the goal of bringing those returns much closer to the return on investment we are getting on our new Carl's Jr. restaurants. As such, we have reduced our projected new unit growth for company-operated restaurants through fiscal 2011 by 40 units, going from a projected total of 126 units to a new projected total of 86 units.

Third, given weather conditions in the Midwest and Southeast this last winter and spring, plus the difficulties of obtaining permits in California, we are reducing the number of remodels we will complete during the next three years by 71, from 511 remodels to 440 remodels. Given the difficulties posed by inclement weather and permitting, we believe this is a more realistic and achievable number.

These adjustments will result in a reduction in projected capital spending for fiscal 2009. We are now projecting capital expenditures of $120 million to $130 million, versus our prior guidance of $135 million to $155 million. As we’ve stated in the past, we intend to fund our capital plan from operating cash flows and proceeds from our refranchising initiative.

In fact, we believe we will reduce our total debt year-over-year by the end of fiscal 2009.

Over the next three years, we currently expect to make capital expenditures of $354.2 million versus our prior total of $408.4 million, a $54.2 million reduction. Since we originally announced our capital plan in fiscal 2007, we’ve reduced our planned capital spending by a total of $86.6 million, going from $650 million to $563.4 million.

This year we now expect to build 24 Carl's Jr. restaurants and seven Hardee's restaurants. In addition to these 31 company-operated restaurants, we anticipate our Carl's Jr. domestic franchisees will open 37 units and our international licensees will open 27 units, for a gross opening total of 88 Carl's Jr. units in fiscal 2009, up from 69 units in fiscal 2008.

On the Hardee's side, we project our domestic franchisees will open 13 units and our Hardee's international licensees will open 25 units. In all, we expect to open a gross total of 45 Hardee's in fiscal 2009.

For fiscal 2009, we expect to increase our restaurant portfolio by 80 units net, an increase from net unit growth of 74 units in fiscal 2008 and the largest net increase in unit count for our brand in any year this decade.

With respect to refranchising, since our initial announcement last April, we’ve refranchised a total of 201 Hardee's restaurants. This includes 136 units during 2008, 59 in the first quarter of 2009, and six subsequent to the end of first quarter. We have refranchised these units to a combination of existing Hardee's franchisees, new franchise partners, and existing Carl's Jr. franchisees. In addition, the franchisees that acquired these units have agreed to build an additional 103 restaurants.

Last week, we also announced our intention to expand our refranchising program to include an additional 40 restaurants, bringing the total number of restaurants scheduled for refranchising to 241. We are currently in negotiation with potential franchisees for 33 of the 40 additional units, and actually I am rethinking whether we should sell those other seven units, so it may be 33 instead of 40 but we haven’t made a final decision on that yet. We will endeavor to complete the sale of these units, at least 33, within the next year.

We will now take your questions.

Question-and-Answer Session

Operator

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

Brian Moore - Wedbush Morgan

Congratulations on a very good quarter. A question on the P5 same-store sales release, certainly a very impressive acceleration of comps at Hardee's. I’m hoping you can maybe talk to whether you’ve seen a similar trend one week into the launch at Carl's with the Prime Rib burger, as well as maybe talk about the impact of weather, if any, during period five.

Andrew F. Puzder

Well, obviously whether in the Hardee's markets improved in period five. You know, it’s still -- I mean, Sonic came out with a press release I think earlier in the week or in the last week talking about weather conditions and how they impacted Sonic’s restaurants, which really are in a lot of our Hardee's markets. So weather -- I mean, you just have to watch the national news. We do have franchisees in Iowa. We don’t own any restaurants there but we have one franchisee who had a very high average unit volume unit that is simply gone. I mean, the river took it away.

So there are still weather conditions but obviously things have mitigated certainly across the Southeast and in our two principal markets, St. Louis and Indianapolis. Indianapolis is luckily not on a river, and St. Louis is, as you know, on the Mississippi but we haven’t really seen the kind of flooding that we’ve seen north of St. Louis yet.

So weather improved substantially in period five and I think that is, along with the introduction of the Prime Rib Thick Burger, and also a Strawberry Biscuit. We introduced a Strawberry Biscuit at breakfast at Hardee's and that’s been performing very well as well, so those have had a positive impact on our sales and I think that should continue on.

I would love to tell you how we are doing the first week with Prime Rib at Carl's but obviously I can’t. You have to wait another four weeks until we release our period six results, but --

Brian Moore - Wedbush Morgan

I thought I’d try, Andy.

Andrew F. Puzder

Yeah, good try.

Brian Moore - Wedbush Morgan

The success of the Prime Rib product versus some of your past burgers like the Philly Cheesesteak, is it --

Andrew F. Puzder

Well, you know, Philly Cheesesteak was a very successful burger. I am hoping this will meet or exceed those expectations. I think it’s the best burger we’ve ever had. I don’t know if you’ve tried it yet but it’s -- as I actually stuck in what was on it today in the script, even though I really didn’t need to, just because I wanted to get it out there, it’s an incredible burger. It’s delicious.

Brian Moore - Wedbush Morgan

Okay, I have had it. A question maybe for -- thanks on that -- for Ted and maybe John Dunion if he’s around, on really costs. Can you give us an update on where you are contracted on commodities and perhaps your outlook there? Maybe speak to some -- I guess some of your peers have made comments regarding difficulty of contracting for typical periods of time.

Theodore Abajian

Good morning, Brian. John is actually not with us today but I did sit down with him before we came to the call today. Really, I think everybody is starting to see beef prices go up again, with feed prices having gone up. And you know, that’s something that everybody is going to have to deal with. We are going to certainly look at taking additional price increases as needed to offset incremental costs.

But certainly the -- I think all of the inflationary factors that continue to impact or that have been impacting food costs continue to impact food costs and that is something that again we’ll have to deal with through pricing over time.

Brian Moore - Wedbush Morgan

Okay, and any way to quantify kind of -- I mean, you had very impressive sequential improvement the last two quarters on, you know, I guess in terms of the pressure you’ve had. Has it been alleviated on the restaurant level margin line? As you look into Q2, could you give us some help there perhaps?

Theodore Abajian

Well, again Q2, we certainly do roll over the prior year that had significant cost pressure, so in that regard it perhaps becomes a bit of an easier comparison but as I just said, we do have new cost pressures creeping up. Beef actually wasn’t an issue during the first quarter. We are expecting to see beef prices go up in second quarter. In fact, we’ve already seen that and of course, we are seeing the federal minimum wage increases taking place, which is really more of a Hardee's issue here in Q2.

But as I said, we will take price increases. We’ve taken price increases, we will continue to take price increases to offset these costs and so hopefully we can keep the price increases at a level that will offset these inflationary pressures.

Andrew F. Puzder

Brian, I can tell you that there are some things -- there are different approaches to this problem. The approach we took last year and that we’ll take again this year is that we will sequentially raise prices as these commodities go up, and depending upon how quickly they go up and how many of them go up at the same time, sometime it takes us a little while to catch up. Sometimes we can do it almost immediately and we are really on top of the price increases that we are already experiencing in Q2, and we’ll deal with those not only by price increases but also other ways to adjust cost increase issues.

And the one way -- the two ways we will not deal with the issues are by trying to drive business through discounting our products, serving inferior products, or massively couponing.

So you’re not -- we’re going to -- you’re going to basically see us continue to do what we’ve been doing and whether it takes a short period of time or a little longer period of time, we will almost always catch up to those price increases.

And the question you are asking is a good one because it’s one we address constantly, which is are prices increasing so fast that we can’t keep up, as happened last year. You know, it took us a couple of quarters to get caught up. Or are they increasing at a rate where we can keep up and we certainly do everything we can to make sure it’s the latter situation as opposed to the former.

On the other hand, we don’t want to get in a situation like some of our competitors did that they raised prices massively last year, took huge price increases and now they’ve driven away some of their business and they have no room to take further pricing.

So it’s a real balancing game but we think we’re on top of it and we believe we have the situation in control.

Brian Moore - Wedbush Morgan

Thanks for that color, Andy. Maybe a follow-on to that in terms of do you see a price ceiling at all for fast food hamburgers? I mean, I’m here in the California market. Obviously you launched the Prime Rib burger here. It’s approaching the $6 level, obviously, so where do you see that kind of topping out?

Andrew F. Puzder

I’m not sure. You know, I think that as long as we can stay -- as long as we serve a burger that’s as good or better, and I think better, particularly this Prime Rib burger, than the casual dining places serve, and as long as we approach it as a -- you know, we market value different than other companies. You’ve probably seen the fake restaurant ads but we’re not saying come in and get a piece of gut fill for $0.99, when everybody knows you couldn’t go to the grocery store and make something for $0.99 that was edible, and you’re not paying labor and rent. Instead of doing that, we say look, here, you know, people are willing to pay $14 for this burger in a restaurant. You can get it at Carl's or Hardee's for $4, $5, or $6.

The Prime Rib Thick Burger that was one of the main drivers of our improvement in same-store sales at Hardee's the last period is the most expensive thick burger we’ve ever sold. But people do perceive that there’s a value to that, that they are going to get something that’s worth more than what they pay for it, they pay less than what it’s worth and I think as long as people perceive that as a value, that we are going to be able to continue on this path.

Brian Moore - Wedbush Morgan

Okay, thank you. Just two more quick questions; on G&A, the $1.5 million improvement, could you speak, give us some color -- is that headcount reduction? Should we annualize that savings in the out-quarters?

Theodore Abajian

Well, Brian, I think there are -- there’s been a number of areas we’ve made reductions but I think in terms of trend, you know, I do look at the spending levels in Q1 as a good starting point for expectations for the remainder of the year. However, I will point out, and this is in our 10-Q as well, that there will be -- within G&A is our share-based compensation expense and there is about a $1 million year-over-year increase in Q2 that you will see. Again, there was I think $800,000 in Q1, so it’s about the same level of increase in Q2 on share-based comp. But I think Q1 overall G&A run-rate is an appropriate run-rate to be modeling.

Andrew F. Puzder

And also, Ted, you don’t -- the share-based comp applies if we’re looking at our profitability but not to your EBITDA analysis, is that right?

Theodore Abajian

That is correct.

Brian Moore - Wedbush Morgan

Okay, thank you. Just a final question, maybe for you, Andy, on the beverage platform, energy drinks, new products, is that a calendar year ’08 type event or something in ’09?

Andrew F. Puzder

Well, we’re actually working with Coke right now on updating equipment, putting in new equipment, updating the quality of the drinks. We are testing -- we’ve been testing an energy drink. You know, energy drinks -- my favorite one is Full Throttle and that’s a Coke product and we’ve tested putting that in some restaurants and I can’t say that it’s had a particularly meaningful impact on sales. I know one brand, one of our competitors, McDonald’s, has had -- apparently having some success with sweet tea, and of course we’ve sold sweet tea at Hardee's for years and years, so it’s kind of already built in. But we’re working with our partners at Coca-Cola on our beverage variety, which I think needs to be improved and which we are improving and on the quality of the beverages we sell, so we’re moving forward on that.

Brian Moore - Wedbush Morgan

Great. Thanks so much. Congratulations.

Operator

Your next question comes from the line of Keith Siegner with Credit Suisse. Please proceed.

Keith Siegner - Credit Suisse

Thank you. First, with the debt reduction this quarter, with EBITDA up, with margins seemingly on the right track, leverage ratios are very manageable here, can you just remind us of how we should prioritize or think about prioritizing allocation of excess capital between debt reduction, share buy-backs, dividends? Especially with this more conservative CapEx plan.

Andrew F. Puzder

Well, Keith, you know what our dividend is and obviously if we were going to make a change in that, it would be something the board would do, so we would announce it and we have not announced any change to the dividend, so you know what that’s going to be.

We told you this morning what we believe our capital expenditures will be, that $120 million to $135 million number. And to the extent we have borrowings on our revolver, I would use excess cash to reduce our revolver debt.

Now our term loan debt, we have an extremely favorable rate on and it would be -- I’m not sure what the circumstances would be that would encourage me to reduce our term loan debt, which we’ve got for about another three-and-a-half years, because I won’t be able to borrow money again at this rate. So I’m not sure what we would do once we have the revolver paid down. I doubt very seriously I would be paying down the term loan but circumstances could change and make that a possibility.

I don’t know if that helps you or if Ted, you want to add anything to that.

Theodore Abajian

No, I think you covered it, but the CapEx range is $120 million to $130 million for this year.

Andrew F. Puzder

Yeah, that rights.

Keith Siegner - Credit Suisse

Okay, no, that definitely helps. In terms of the CapEx plan and some of those factors that you talked about that led to the reductions, I mean, is there anything that could change or would change that would enable you to maybe reaccelerate that unit growth at this time? Or is that not necessarily foreseeable without some major changes in the macro per se, for example?

Andrew F. Puzder

Well, if the -- you know, we’ve had some very good results with our recent Hardee's new units and you can see from what Ted showed you this morning, the impact on EBITDA and cash flow of these new units and how beneficial they are to the system. So if the returns on the Hardee's units improve to the point where we think that it’s something we want to pursue more aggressively, you know, it probably takes you about a year, year-and-a-half just to get more sites in the pipeline but that’s something we certainly could accelerate.

On remodels, we reduced the number. I think we probably were overly aggressive. We’ve done the -- in our -- not this time but the prior time when we told you how many we thought we would do. I guess we’ve done the ones in California where the permitting was easy, and so now they are trying to deal with the ones where the permitting is difficult and so that’s slowed us down somewhat. And I’m not sure how we could accelerate that unless California decides not to be a socialist state anymore and we can, [more entrepreneurially].

In the Midwest and Southeast, we could probably do Hardee's remodels. I guess we have the potential to accelerate that but we were really stalled this spring, late winter and early spring, we were really stalled by weather conditions, which really made it impossible to go forward with remodels in a lot of the areas we would have liked to have been remodeling, and so I think the current number we are showing is probably a more realistic number and a more realistic average over time, because some years you have good weather, some years you have bad weather.

So I guess new units at Hardee's is an area where we could increase if we decided that we had the money and it was the kind of investment that we would, you know, the most desirable investment or most desirable use of funds we could make, we could increase there.

Keith Siegner - Credit Suisse

One other question, and on a different topic but I was definitely impressed with the franchise margin this quarter and I was just wondering if you could help kind of walk through the opportunity here say longer term as we think about leveraging administrative costs but also the volatility that we’ve seen in the distribution line -- what’s really the opportunity, or how should we think about that for the franchise margins?

Theodore Abajian

A couple of things there, Keith. First of all, this quarter, I think that what you are seeing in terms of that “distribution” of margin is really number one, as refranchising activities continue, that does have an impact in terms of the -- you know, in the quarter we sell restaurants, we record franchise fees associated with those restaurants and this quarter there’s about $1.5 million of franchise fees within franchise revenue, so that dramatically improves that margin calculation you are referring to.

The other side is related to distribution and if you’ll recall last year in the first quarter, we were right in the middle of our relocation of the distribution center and installation of a whole new distribution management system, which cost us in terms of operating efficiencies. So we’ve regained those operating efficiencies this year, so on a year-over-year basis you do see that level of improvement.

I think going forward what the -- clearly as we continue refranchising or as we roll over last year’s refranchising, you do have this shift in revenues in terms of a shift to royalty-based revenues in those, in the case of the refranchised stores versus the company-operated revenues.

The one other wildcard is looking back at last year to determine the amount of franchise fees that we received last year when we did the bulk of the refranchising, and I think the bulk of that occurred in the third and fourth quarters last year.

Keith Siegner - Credit Suisse

Okay. I will let somebody else go. Thanks.

Operator

Your next question comes from the line of Chris O’Cull from Suntrust. Please proceed.

Christopher O’Cull - Suntrust Robinson Humphrey

My first question relates just to the Hardee's development. Andy, it seemed like a lot of the development -- well, the development strategy at Hardee's has been around opening a few incremental locations in just various markets. I was wondering if you can really tell whether Hardee's units are generating strong returns without being more aggressive, maybe with like a market penetration strategy.

Andrew F. Puzder

You know, a market penetration strategy would certainly produce better results but what we’d like to see is we’d like to see the units that we are -- and part of this has been a learning process for us. Obviously Hardee's has changed significantly from when we took it over with menu and who we market to and how the brand is regarded, not only with respect to quality but the age group of our customer and our target.

So what we really needed to find out, and we’ve been doing this in various markets, is are we still primarily a breakfast brand? Are we a brand that goes in high income areas or lower income areas? Are we an urban brand or a rural brand? Or are we all of those brands? And so we’ve been putting restaurants in different locations, some of which perform exceptionally well. We put one in the downtown St. Louis, near Busch Stadium and it’s near our corporate headquarters and it’s in an old Wendy’s location and sales have been very, very impressive. We just opened one in Atlanta that’s been very impressive to date and so there’s some -- so we are trying to get some indication as to where we could build and where we should build, and when we get -- I think some of the problems have been you really need -- this is a brand that hadn’t built restaurants in a long time, so you really didn’t have operators that were accustomed to dealing with new restaurant openings, where you might have a really huge dinner business, for example, and all of your operators that have been in traditional Hardee's were used to a very small dinner business and maybe you didn’t staff it correctly and then people didn’t come back because you didn’t have the business the way it was supposed to be at dinner.

So we’ve actually taken one of our operators, a woman who’s just done a great job for us and we’ve put her in charge of new unit openings. And when we get a few more under our belt, it easily could be the case that we are going to get the kinds of returns that we need to get to justify going into a market and seeing that if we do a market penetration approach, we are going to be better off, because if you go -- some of these markets, particularly in the Midwest and Southeast, to go from a C advertiser to a B advertiser, you may only need five or 10 units. And to go from a B to an A, you might only need five or 10 units, and that can make a huge difference in your average unit volumes for the whole market, which improves profitability across the market.

So this is -- Chris, your question is a good one and it’s one that our real estate and development people are on top of and that we are watching very closely.

Christopher O’Cull - Suntrust Robinson Humphrey

The reason for my question is because I’m in Nashville, as you know, and it just seems like this market is ripe for a Hardee's development, and it would really improve top-of-mind awareness for the brand.

Andrew F. Puzder

Yeah, that’s a market where we have a lot of development opportunity and an exceptionally good operator, so we are -- that is one of the markets we are looking at closely. That could be a great -- you are absolutely right, Chris, that could be a great market for us.

Christopher O’Cull - Suntrust Robinson Humphrey

Where -- I mean, how far away do you think you are from trying this kind of market penetration approach?

Andrew F. Puzder

First of all, we may build some -- you know, we are looking at Nashville as one of the areas where we would build, so it’s -- so you will probably be seeing some new units in the next couple of years. But the -- I would say before we made a -- we’re probably a year away, maybe, from making a decision as to try and penetrate a market heavily and see if that benefits the brand.

Christopher O’Cull - Suntrust Robinson Humphrey

Okay. And then Ted, just in terms of the boneless beef question, are you exposed to price fluctuations on the 50s and the 90s?

Theodore Abajian

We are. Again, on the domestic beef that we purchased, which is all of our Angus products, we are essentially on the spot market there. We do import some beef as well, but -- which is a bit more stable pricing, although with the dollar deterioration that pricing advantage has been deteriorating over time. But you know, as we’ve always been, we’re essentially on the spot market on our beef products.

Christopher O’Cull - Suntrust Robinson Humphrey

Okay, and then Ted, I think on the last call, John Dunion mentioned that the company had favorable coverage on wheat through July. Have you been able to enter into new contracts for wheat?

Theodore Abajian

You know, I believe we have some partial coverage through September, in addition to the coverage we mentioned for July. So we do have some additional coverage but it’s not 100%.

Christopher O’Cull - Suntrust Robinson Humphrey

Okay. Are the biggest exposures right now boneless beef and maybe wheat and dairy?

Theodore Abajian

Yeah, I mean, the same that have always been there and of those, really the one that is -- that hasn’t been much of an issue but that is becoming an issue is beef, and so given the magnitude of the impact of beef on our overall food costs, that’s an area we watch very carefully.

Christopher O’Cull - Suntrust Robinson Humphrey

Soft drink syrup, we’re not seeing any kind of changes this fiscal year in pricing there?

Theodore Abajian

No, we have a new -- we have a contract in place and that’s actually on a net basis when you include the overall allowances we’re afforded by our contact, we’re actually slightly favorable in that area.

Christopher O’Cull - Suntrust Robinson Humphrey

Okay, great. Thanks, guys.

Operator

Your next question comes from the line of Tony Brenner with Wealth Capital Partners. Please proceed.

Tony Brenner - Wealth Capital Partners

Two questions; first of all, are you done for the time being with your share repurchase program?

Andrew F. Puzder

Yeah, we’ll be opportunistic. I mean, I can’t tell you that if some great opportunity came up, we wouldn’t take advantage of it but we’re not doing anything at the moment.

Tony Brenner - Wealth Capital Partners

Okay, and my second question has to do with your ability to pass along prices, as you implied you would do earlier in the call. Just looking at the Carl’s data in your Q, it appears given that comps were up 3.9, transactions were up 1.9, and pricing is up something more than 4%, it appears that at least for Carl’s, which is largely California, there’s been some trading down by your customers. And I’m wondering, with almost a $7 average ticket, which is bordering on the fast casual category, whether you are seeing any kind of negative reaction or anticipating any and do you really believe that the fact that you have a superior burger allows you to just fully pass on all the cost increases that you may incur?

Andrew F. Puzder

I think first of all, everybody’s got to pass on the cost increases. I think even the brands that are basically franchisor brands and are now doing everything they can to drive the top line and kind of ignoring some of the franchisee’s concerns, eventually they are going to have to pay attention to those concerns because if the franchisees don’t stay in business, the franchisor doesn’t stay in business. So I think everybody is going to have to improve on pricing.

Transactions I think are misleading. Please keep in mind that they are not customer counts. They are influenced by how much drive-thru business you have, and a lot of things go into what transactions mean. I think for Q1, what you are seeing at Carl's is, with respect to any indication that there’s trade-down is people getting Chili Cheese Fries, because Chile Cheese Fries we’re finding are not just something you get with your burger. There are people that actually came in and got them as kind of snack items. So Chili Cheese Fries were a big help to us in Q1. They are the kind of thing that drives transactions and may even actually lower your average check, although again I don’t think that’s particularly meaningful but I think that may have had a big impact on what happened in Q1.

Tony Brenner - Wealth Capital Partners

You indicated that the Chili Cheeseburgers are now a permanent part of the menu. Are the fries also?

Andrew F. Puzder

Yes, and we’ll be -- yes, they are, absolutely.

Tony Brenner - Wealth Capital Partners

Thank you.

Operator

Your next question comes from the line of Steven Rees with J.P. Morgan. Please proceed.

Steven Rees - J.P. Morgan

Thanks. My question is on the Hardee's margin performance in the quarter, still down 110 basis points and I guess I was thinking that there might be more of a positive impact from the refranchising, as I thought the units that you refranchised were lower margins. Was that correct or is there any way to quantify how much that impacted the margins?

Andrew F. Puzder

Yeah, Steven, there is some favorable impact there but I think unfortunately what we are seeing is more than offsetting that is just the overall increase in mostly wheat and dairy, which continue to be a big issue. And if you think back last year in the first quarter, we didn’t have wheat or dairy issues whatsoever. So while I probably have buried somewhere a chart that would help me quantify that, I think ultimately the food cost headwind is really the much bigger impact. And we are dealing with that through pricing.

Steven Rees - J.P. Morgan

Okay, and then how are you thinking about the longer term margin potential at Hardee's? I mean, is it still -- do you see structural opportunity there or is it really just a question of waiting for the volumes to improve to narrow that gap between Hardee's and Carl's?

Andrew F. Puzder

I think the volumes are -- you know, we’re at 963. We’re looking to be at $1 million within a reasonable period of time, so the volumes are going up and we own a bunch of the real estate, so occupancy -- once we are through the remodel phase, occupancy shouldn’t be -- should be a real benefit to us and then when commodities either begin to hold firm or come down, I think you are going to see dynamic margin improvement. And I’ve actually heard that wheat may be coming down, that we have a very abundant wheat crop, maybe the second biggest wheat crop ever coming to harvest this year, so wheat may be coming down as well, which will be very helpful to Hardee's.

If you look at the EBITDA bridge that we did for the shareholders meeting for Q1 and then the one that Ted just updated here today, you really can see the impact of these commodity cost increases and conversely, you should be able to see the impact of commodity costs leveling and our pricing catching up, or commodity costs beginning to decline. And I think that’s -- that will be very meaningful for both brands.

Steven Rees - J.P. Morgan

Okay, and then just on the refranchising, Andy, you mentioned that you are going to do another 40 but it may be 33 for Hardee's. I mean, does it stop here? Are you are the right mix? Because I think you are still a little bit above the QSR average, or do you see further opportunity?

Andrew F. Puzder

I don’t think there’s a right percentage. I think that you -- when commodities are good and labor costs are good, you want to own as many as you can and when they are not, you want to be a franchisor as much as you can. I think the real key is how many restaurants can you effectively and efficiently run, and are you in markets that you will grow? And I think that once we get rid of these last 33 restaurants, and again there’s seven that are on the bubble, but in that range, once we do that I think we’re in the markets we need to be in and with the right amount of restaurants.

Now that doesn’t mean that if opportunities present themselves, we may not refranchise additional restaurants but I would say that that’s -- you know, we’re pretty much through what we think we need to do, at least in the short-term or the medium term.

Steven Rees - J.P. Morgan

Okay, and then just finally on the CapEx plan for this year, the 120 to 130, what -- how much of that is non-discretionary? And then what percentage of the $354 million for your plan is non-discretionary as well?

Theodore Abajian

No, I don’t have those numbers calculated out but if you want to give me a call, certainly --

Steven Rees - J.P. Morgan

Okay, great. Thank you.

Andrew F. Puzder

It will probably be in the next presentation too.

Steven Rees - J.P. Morgan

Okay, perfect.

Operator

(Operator Instructions) Your next question comes from the line of Rachael Rothman with Merrill Lynch. Please proceed.

Rachael Rothman - Merrill Lynch

I have a quick follow-up on the Hardee's margins. Can you help us think about as we move through the year and you cycle the refranchising, and then wheat costs obviously have been coming down but minimum wage going up, should we think about margins improving or deteriorating or -- how should we think about the sequential progression as we move through the second quarter and into the back half of the year?

Andrew F. Puzder

Well, the wheat is a help, and ground beef is going to hurt us a little bit but it’s not going to hurt as much at Hardee's as it would at Carl's. And then we are going to take more pricing, so we know we are coming up against the minimum wage issue, so we’ve been planning that pricing for a while and we’ve actually increased the pricing we’re going to take somewhat because of the increase in beef.

So it depends -- really, Rachael, it just depends on how much beef goes up and what happens with the other commodities. I wish I could give you more guidance but I don’t know anymore. I mean, Ted, have you got any better guidance than that?

Theodore Abajian

I mean, of course our goal is to continue to narrow that gap, as has been the case for the last three quarters, so that’s certainly our objective.

Andrew F. Puzder

And it’s a big focus. I mean, it’s -- that and keeping G&A under control and reducing it are really the two big strategic initiatives within the company. They are the thing we talk about the most and work the hardest on, so we are all over the pricing issue.

Rachael Rothman - Merrill Lynch

And then in the updated reconciliation slide of the adjusted EBITDA numbers, the G&A figure that you cite says that it excludes G&A savings associated with the refranchising. Do you guys have an estimate of how much G&A you’ve saved from the refranchising, either in the quarter or over the last 12 months and how we should think about that opportunity going forward as you cycle over the 200 units?

Andrew F. Puzder

I think it says it includes those cost reductions. Is that what you just said?

Rachael Rothman - Merrill Lynch

I thought it said it excludes them.

Theodore Abajian

Well, it -- what it is, I mean, in calculating the net impact of the refranchising, I include in that line any G&A reductions that occurred as a result of refranchising, so it’s not counted in both places, obviously.

Andrew F. Puzder

Yeah, it’s just in a different place, right.

Theodore Abajian

Yeah, it’s in a difference place but as we get into Q2 and Q3, mostly Q3 is when the majority of the refranchising occurred last year. We’ll start to roll over -- because we make those cuts immediately when the stores are sold, so we haven’t -- other than the quantification we gave I think late last year, which was -- I don’t know, $22,000 to $24,000 per store reduction that we make, I still feel good about that estimate.

Rachael Rothman - Merrill Lynch

But it is immediate, so if you cut the stores in the third quarter, it would come out in the third quarter?

Theodore Abajian

Yeah, just depending on when it occurs during the quarter.

Rachael Rothman - Merrill Lynch

Correct. Perfect. Thank you so much.

Operator

At this time, I would like to turn the call over to Mr. Andrew Puzder for final remarks.

Andrew F. Puzder

Well, thanks, everybody. It was great reporting the quarter. We are very proud of what we did and we were happy to tell you about it and we look forward to coming back at the end of second quarter. Thanks very much and God bless you all.

Operator

Thank you all for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a good day.

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