Carrols Restaurant Group, Inc. (TAST) Q1 2023 Earnings Call Transcript

Carrols Restaurant Group, Inc. (NASDAQ:TAST) Q1 2023 Earnings Conference Call May 11, 2023 8:30 AM ET

Company Participants

Jeremy Watchus - Senior Director of Finance

Deborah Derby - President & Chief Executive Officer

Tony Hull - Chief Financial Officer & Treasurer

Gretta Miles - Controller & Assistant Treasurer

Joe Hoffman - Chief Restaurant Officer

Conference Call Participants

Joshua Long - Stephens Inc.

Jeremy Hamblin - Craig-Hallum

Jake Bartlett - Truist Securities

Hale Holden - Barclays

Carla Casella - JPMorgan

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Carrols Restaurant Group, Inc. First Quarter 2023 Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this conference is being recorded today, Thursday, May 11, 2023 at 8:30 a.m. Eastern Time and will be available for replay.

I will now turn the conference over to Jeremy Watchus, Carol's Senior Director of Finance. Please go ahead.

Jeremy Watchus

Thank you, operator, and good morning, everyone. By now, you should have access to our earnings announcement released earlier today in our earnings presentation that are both available on our website at www.carrols.com under the Investor Relations section.

Before we begin our remarks, I would like to remind everyone that our discussion, including answers to questions posed to management, may include forward-looking statements or comments with respect to our strategies, intentions or plans in the future direction of revenues, input costs or other aspects pertaining to our business. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed on them. We also refer you to our filings with the SEC for more details, both with respect to forward-looking statements as well as risks that could impact our business and results. During today's call, we will discuss certain non-GAAP measures that we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with generally accepted accounting principles. And a reconciliation to comparable GAAP measures is available with our earnings release.

With that, I will now turn the call over to our new President and CEO, Deborah Derby.

Deborah Derby

Good morning, everyone, and thank you, Jeremy. I'm delighted to be speaking with you this morning on my first call as Carol's new President and CEO. As I just finished up my first week on the job, so to speak, I will keep my initial comments brief and then turn the call over to Tony and Gretta to discuss the details of our spectacular first quarter.

First, I want to reiterate how excited I am to be part of the Carol's team during this dynamic period. As some of you may know, I have served on the Board of Directors of Carroll for the past 5 years. So I'm familiar with the opportunities and challenges of the business as well as the outstanding people that make up the company. I have seen the team persevered during one of the most challenging business environments of our time, and it is great to see the results of their hard work finally beginning to flow through to the bottom line. Second, I want to thank our partners at RBI and Burger King on their recent diligent efforts to reinvigorate and reinvest in the brand and their franchisees.

Those efforts are also starting to yield results. I spent my first week in meeting with our corporate team as well as training and working in the evening shifts to one of our local Burger King restaurants. From that experience, I have renewed appreciation and respect to what our team members do. My takeaway from my various interactions last week is that we have an incredible group of talented, engaged and dedicated employees who are passionate about the company, our brands and our customers. And I am confident that this is the foundation which will serve as the springboard for our continued future success and upon which we will continue to grow our business.

Thank you for your time today, and I look forward to our continued dialogue during future earnings calls. I will now turn the call over to Tony Hull, our CFO and Treasurer.

Tony Hull

Thank you, Deborah, and good morning, everyone. We're thrilled with what we were able to achieve in the first quarter of 2023. This included posting 11% growth in total restaurant sales, delivering $30.7 million of adjusted EBITDA and reducing our net leverage ratio to 5.2x. In the first quarter of this year, our comparable sales increase of 11.7% at our Burger King restaurants was driven by menu price increases and lower promotions and discounting, which together resulted in a low teens increase in average check. Combined with moderating inflation and our continued focus on operational efficiencies, we were able to flow much of the $46 million year-over-year increase in sales during the quarter into higher adjusted restaurant-level margins, which improved to 12.2%. To put this in perspective, this is our best first quarter restaurant level margin in 5 years. Adjusted EBITDA improved to $30.7 million, an increase of $26.4 million relative to last year.

Finally, we greatly improved our capital position as we achieved positive free cash flow during the quarter, paid off the outstanding year-end balance on our revolver and reduced our net debt leverage ratio to 5.2x, a reduction of almost 2 full turns relative to the 7.1x reported at the end of 2022. We -- on the sales front, top line growth was aided by the repositioning of promotional discount strategies by our franchisor, which drove higher sales of full margin products, along with the cumulative impact of menu price increases taken over the past year. These actions combined with renewed brand equity investments from the reclaim the claim effort and lapping weather-related softness from a year ago resulted in only a slight traffic decline in the face of an average check increase of 13%. This turned out to be a winning formula for us and one we expect will continue into Q2 of this year.

With that, let's discuss the progress we are making in our restaurant operations. The quarter produced continued sequential and year-over-year margin improvement, driven by increased flow-through on our higher average check. In fact, our food packaging and labor costs only increased $7 million compared to Q1 of 2022 against the $46 million revenue improvement. The margin leverage we saw in labor was especially encouraging, considering we also expanded our hours of operations and simultaneously reduce labor hours on a year-over-year basis. Additionally, we saw a deceleration in wage increases and a dramatic moderation in team member turnover during the quarter, aiding both efficiency and the guest experience. At the same time, these beneficial operating trends unfolded, we meaningfully improved our guest satisfaction scores during the first quarter as compared to the same period last year, with an increase of over 35% at our baking restaurants and over 10% at our Popeye’s restaurants.

Guest satisfaction is a priority for us and one we believe is a key driver of repeat visits and incremental traffic growth Overall, we've made substantial progress on operations. We're among the top operators in the BURGER KING system, but we continually strive to be the best. In terms of capital expenditures, we expect to maintain our spending at approximately $40 million for 2023. However, as a result of the financial subsidies we expect to receive from Burger King as part of their reclaim the flame initiatives, we have been able to increase the number of high teens return remodel projects we have undertaken. In addition, under our franchisors World Reset program, we are able to proactively upgrade our restaurant digital technology over the next 8 months at no incremental cost to Carol's as long as we match those investments with equivalent spend on restaurant maintenance and improvements.

Overall in the past 2 quarters, we believe we have showcased the power of our operating model when we have sustained solid top line growth and a renewed focus on operational excellence. While we are pleased with our results to date, there is much more to be done. We are excited about the positive momentum in our business and what we believe we can achieve during the remainder of 2023 and the years to come. Before I turn over the call to Gretta, I'd like to touch on some of our thoughts for the remainder of the year.

First, we are optimistic about the positive traffic impact the incremental marketing from the claim the flame could have on our business as additional initiatives are rolled out through the remainder of the year by our franchisor. Second, as I mentioned before, we have seen our average check improve favorably over the past 2 quarters driven by reduced discounting and menu price increases. This has provided us with an opportunity to expand restaurant margins and drive EBITDA growth. As we look to the back half of 2023, we do not anticipate the same level of average check benefit for 2 reasons. One, as inflationary pressures ease, we expect that our ability to raise menu prices in tandem will moderate. And two, we will lap our recently improved promotion and discounting profile in the third quarter of 2023. Consequently, we believe that positive changes in the trajectory of traffic trends in the back half of 2023 will be the most meaningful driver of comparable sales growth.

Finally, our top priority remains fortifying our balance sheet and reducing our net debt balances. We expect to stay the course on organic growth and do not currently anticipate making any multiunit restaurant acquisitions, increasing capital expenditures over the approximate $40 million we've already communicated or returning cash to shareholders in 2023. In closing, it has been a pleasure working closely with our talented management and restaurant operations team for the first 4 months of 2023 as interim CEO. And I am proud of what we were able to achieve together and look forward to working with Deborah and supporting her efforts to continue to build upon the positive momentum we have generated over the past year.

With that, I will now pass the call over to our Controller and Assistant Treasurer, Gretta Miles, for a detailed discussion of our financial results.

Gretta Miles

Thank you, Tony, and good morning, everyone. Restaurant sales in the first quarter increased 11.4% to $445.2 million compared to $399.5 million in the first quarter of 2022. For the quarter, comparable restaurant sales at our Burger King restaurants increased 11.7%, comprised of a 13% increase in average check, which was partially offset by a 1.1% decline in traffic. Comparable restaurant sales at our Popeye’s restaurants increased 9.5%, comprised of a 10% increase in average track and a 50 basis point decrease in traffic.

Turning to expenses; our cost of food, fabric and packaging improved 260 basis points to 28.2% of restaurant sales as commodity inflation of approximately 8% was more than offset by the positive benefit from pricing actions and lower promotional discounting. Beef averaged $2.53 per pound during the quarter, which was a 7% decrease from the same period last year but has risen to the mid-80s in the last few weeks. From where we stand today, we expect commodity inflation to be in the mid- to high single digits for the second quarter of 2023. Restaurant labor expense decreased 260 basis points to 32.9% of restaurant sales as labor inflation was more than offset by reduced labor hours and the impact of pricing actions and lower discounting. Average hourly wage rates for our team members before overtime increased by 5.6% during the quarter compared to the prior year period.

As we look ahead, we expect wage inflation in the mid-single digits in 2023 compared to the high single-digit inflation we saw last year. Other restaurant operating expense increased $3.7 million and decreased by about 80 basis points to 15.5% of sales. The dollar increase was driven by higher royalties on higher sales as well as higher utility costs. Renting expense decreased 60 basis points year-over-year as a percentage of sales compared to the prior year period, primarily from the benefit of higher sales on fixed rental agreements. General and administrative expenses as a percentage of sales increased 30 basis points year-over-year due to incentive compensation accruals that were absent in the prior year period.

Excluding non-recurring costs as well as stock compensation expense and including the impact of higher incentive compensation accruals this year relative to last year, we anticipate 2023 G&A expense of $23 million to $24 million per quarter. For the first quarter, our net income was $900,000 or $0.01 per diluted share compared to net loss of $21.3 million or $0.42 per diluted share in the prior year period. On an adjusted basis, first quarter net income was $7,000 compared to an adjusted net loss of $17.1 million or $0.34 per diluted share in the prior year period. Free cash flow for the first quarter was $1.1 million, a significant improvement compared to negative free cash flow of $39.1 million in the same period last year.

As a reminder, our first quarter cash flow included our final $10.8 million repayment of the deferred FICA obligation. In the first quarter of 2023, we used free cash flow generated, along with cash on hand to pay down our outstanding revolver balance of $12.5 million in full. Cash and cash equivalents was $4.9 million at the end of the quarter and long-term debt, including the current portion in finance lease liabilities was $478.7 million. Our overall interest rate on our debt this past quarter was 5.8% as approximately 90% of our debt is fixed. As of quarter end, there were no revolver borrowings, and we had $10.5 million of outstanding letters of credit, leaving us with $204.5 million of availability under our revolver at the end of the quarter.

And with that, this concludes our prepared remarks. We'd like to thank you again for your interest in Carrols, and we are now happy to answer any questions that you may have. In addition to Deborah, Tony and myself, Joe Hoffman, our Chief Restaurant Officer, is also available during the Q&A session.

Operator, please open the line for questions.

Question-and-Answer Session

Operator

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Joshua Long with Stephens.

Joshua Long

I was hopeful we could talk through kind of the underlying competitive environment and also some of the operating initiatives that you've been working through. It seems like getting some momentum there. And I was curious just any sort of trends you can share by daypart, what you're seeing by -- from the consumer and just how generally the first quarter shaped up versus your expectations?

Tony Hull

Sure. So on the dayparts, we made a concerted effort to increase our hours of operation. So I think from a competitive standpoint, in terms of our -- in terms of our results, we saw a pretty significant increase in traffic from the APM on time period. So that's been very well received and well executed. So that's both operational and competitive, I think. From the consumer standpoint, we're seeing a continuation of what we saw last quarter, which is the number of items per transaction is pretty much flat, maybe down 1% or so. We're seeing a little bit of reduction in soda add-on. But -- so that's one end of the spectrum, higher coupon usage, higher digital coupon usage. So sort of what you'd expect in this environment in one part of our consumer response consumer actions.

On the other side, we're seeing an increase in purchases of full-price combo meals that are outside the value menu. And that's -- we think that's trade down, which is obviously going to -- we think is going to continue to be a positive driver throughout the year. And the other thing that's continuing to show strength in the first quarter was delivery. So really, you're seeing sort of both ends of the spectrum on our customer changing behavior slightly, but it's all working in our favor. So we're excited about that.

Joshua Long

That's helpful. And maybe digging into some of the additional hours and maybe that late-night daypart that you talked about, I think in the past, we talked about part of that was going to be a staffing pickup or just a normalization of the staffing environment. But I also believe that you had shared previously that you were able to do more with less in terms of just being more efficient with a smaller number of team members at the store level and really focusing on just utilization efficiency, et cetera. Can you talk about that? And what's the staffing environment look like at the store level? And just what are your operational initiatives and focus allowed you to do as you start thinking about building onto the that later daypart.

Tony Hull

Sure. Well, I'll start and then hand it over to Joe. But the headline numbers are that we increased in hours by 3.5%, and we were able to actually reduce labor hours by about 3% to 4%. So that's really discipline coming out of COVID on more productivity at the restaurants. At the same time as we're increasing hours. But I'll turn it over to Joe about the whole the overall labor environment.

Joe Hoffman

Yes, I think from an operational standpoint, everything kind of clicked this for the application flow has continued to be pre-COVID level as of now. As the turnover continues to go down, the stability is greater in the restaurants and therefore, we're more efficient. And we can do it with less people because obviously, the tenure of the individual team member is longer, better train, cross-train can do more than one station. So as this continues, we should be able to get more efficient in the future as well as we move forward.

Joshua Long

Great. That's helpful. One follow-up for me. Tony, to your comments on restaurant-level margins, strong results here in the first quarter. And then as you think -- as we think through the back half of the year, it feels like some of your comments were pointing to the fact that maybe some of those year-over-year gains might moderate. But should we still be able to expect to see some at least upside as we think about on a year-over-year basis in the second half of 2023 on that restaurant-level margin line item, perhaps upside, but maybe just somewhat moderated versus what you printed in the first quarter here?

Tony Hull

Yes. I think it's really -- it's an unknown right now what the back half is going to look like if things continue to click the way they did in the first quarter, we could see the reclaim the flame media investment, which has really just started. So we're going to see the bulk of the power from that come in -- from here on out for the year. So that should be a positive for traffic, a softer economy, I think we'll get more trade down. So it's really -- we've sort of locked in the benefit of lower discounting and price increases, I think, for the year. Now it's a question of what's going to -- how strong is the traffic and to respond to reclaim the claim and also our operational improvements.

Operator

Our next question is from Jeremy Hamblin with Craig-Hallum.

Jeremy Hamblin

Congratulations on the strong results. Deborah, welcome to the team. I wanted to start just by making sure that I understood expectations around menu pricing for the remainder of the year. So you talked about menu price average check, I think, was up 13% here in Q1. I wanted to understand where menu pricing was specific to Q1. And then what you're thinking in terms of menu pricing in Q2 and then the back half of the year?

Tony Hull

Sure. I'll take that up. And menu pricing was 9.7% to be -- to put a fine number on it in the first quarter. We did -- included in that was about a 3% increase we did in the latter part of March. So I think that 3% is going to continue to help us, obviously, in the second quarter. And so I think we'll see maybe a slightly lower number in the second quarter because we're rolling off a May increase in the second quarter, may increase from '22. So -- but still in the high single-digit type area for the back half of the year, we're eyeing September as the next time we do a price increase, but really that's going to be highly dependent on what the inflation picture looks like and what the consumer behavior is looking like. So if we're in a softer economy and inflation -- commodity inflation is starting to come down as we expect and maybe more than we expect, we probably have less ability to raise prices. And I think at that point, the focus would be on a little more value offering to our consumer, affordable value. So that's sort of how the year played out. But I would say the most striking -- and I'd also say in the back half, we're going to still be at this nice discounting level. So -- we don't expect that to change in our discussions. We don't -- with our franchisor, we don't expect that to change.

So I think the back half, we're going to have a really strong foundation on the average check side. So we'll be able to flex depending on what the environment throws our way. The economic environment throws our way. But I would point out, Jeremy, that the fact that we were able to have that price -- the average check increase in Q1 of 13% with only a modest -- very modest traffic impact, we are pretty happy about that. I mean that was more than -- it was definitely above our expectations on both sector of that equation. So we were really happy with the results, and we're really happy with the sequential traffic that we're seeing quarter-over-quarter. So definitely feeling in a good spot for the rest of the year.

Jeremy Hamblin

Just to clarify what that meant. You're saying the traffic has improved slightly from Q1.

Tony Hull

No, no. I was in Q4 to Q1.

Jeremy Hamblin

I see. And so then I wanted to ask about the reclaim, the flame and the media spend that's on tap. It hasn't really been turned on yet, but I was hoping you might be able to provide a little bit more insight. We heard from parent company. Clearly, there's quite a bit of enthusiasm. There's quite a bit of social media buzz around the BK brand, which really has been kind of a market share loser over the last several years. It does feel like there's a little bit of an inflection happening here, maybe across the quick service industry but certainly for the BK brand, I was wondering if you could just provide a little bit more insight as to how you think that is going to impact results? And where you think the thrust of that spend is likely to come and benefit BK franchisees like you guys?

Deborah Derby

I'll jump in here. I think we're pretty excited with the results that we've seen so far from their initiatives in the first part of the year, and we know that's actually a relatively minor part of the spend and more of that's going to come in the second half. So I think there is some good energy around that in terms of the timing. I believe there is one coming in mid-May that we're going to see shortly. And then there's another one planned for later in the fall. We actually don't have all the details of that, and I don't think that's being released at this time. But they're very optimistic at BURGER KING, and we're pretty optimistic, too, that this is going to be a great traffic driver for us. And honestly, in the second half, it will actually help offset some of the things that we're going to be comping against with the traffic with the discounting and other things there. So like I said, very optimistic about it.

Jeremy Hamblin

Great. And then I wanted to also ask you just about food costs, it does sound like you're continuing to see some moderation on food price inflation. One, I might have missed this, but what was the ground beef per pound in Q1? Kind of where is it tracking so far in Q2? And then are there any changes in terms of kind of the mix in business, obviously, media spend and marketing has really been centered around the Whopper. But are there any other changes that we need to think about in terms of your food cost basket, other proteins that are meaningfully changing one way or another.

Gretta Miles

Sure, I'll take that, Jeremy. Importantly, beef has been doing exactly as we expected for the year, and it's continuing in the past that we had anticipated. In the prepared remarks, we did mention $2.53 per pound for beef in the first quarter, and that was about 7% less than the first quarter of last year. We have seen that rise to the mid-20s in the last few weeks.

Jeremy Hamblin

For the mid-20s?

Gretta Miles

That's right.

Jeremy Hamblin

Okay.

Tony Hull

I mean, again, that's just to happen because of the supply/demand dynamics happening in that industry. We're a little bit sheltered versus some of our QSR competitors because a good chunk of our beef is kind of purchased on an internationally. So we don't get the whole brunt of it, but we're definitely seeing the USB market do what we thought it would do, which is there was a culling of the herd, so that put a damper on supply. And then we get -- as we get into the summer months, there's increased demand as there is every year. So we expect that to continue for maybe a few months. And then it will start to -- as it always -- as it has typically start to come down starting in the third quarter and the fourth quarter.

Jeremy Hamblin

Got it. But fair to assume that your cost of sales percent would track up here in Q2, probably more than 100 basis points. I would...

Tony Hull

There's I mean, if that's what your -- that's what you think that's great. But...

Jeremy Hamblin

I'm sorry, I didn't hear that answer.

Tony Hull

I'm just saying there's a lot of moving parts in that equation. So I wouldn't jump to that conclusion necessarily.

Gretta Miles

And the impact of the lower promos and discounts has had a huge impact on our cost of sales margin. So like we said, I mean, we saw like an 8% commodity inflation in the quarter, but it was more than offset by the positive impact we had from price and promos and discounts and getting our average check up to a place to kind of offset all the inflation we've seen in the last quarter -- serious quarters with center.

Jeremy Hamblin

Great. And best of luck on the continued momentum.

Operator

Our next question is from Jake Bartlett with Truist Securities.

Jake Bartlett

Great. And also welcome, Deborah. Great to have you on board. My question is on the momentum in the business. And if you could help us understand how sales -- same-store sales trended by month in the quarter? And then any commentary on April momentum would be helpful. What I'm trying to understand is the underlying momentum, I know there was a successful promotion, I think that the Spicy Chicken Fries, I think sold out earlier than expected. We had a pretty [indiscernible] throughout the quarter, early in the quarter. So I'm just wondering on momentum and specifically whether that's continued quarter-to-date.

Tony Hull

Yes. I would say the monthly the monthly results aren't that informative because we had some weather lapping some huge weather in January 22 plus o, believe it or not, was still pretty ramp in January 2022. But anyway, so I would just -- it was pretty even month-to-month if you take those factors sort of out. But we're pretty happy with -- again, with the overall result, which we had good average check improvement and very modest very modest traffic decline. On sort of looking ahead, we think this quarter is going to be sort of a high single-digit type number based on what we've seen sort of halfway through the quarter so far.

Jake Bartlett

Great. That's really helpful. And then I know there's a lot of moving pieces here, but I'm wondering if you can kind of rank order the drivers to the same-store sales in the first quarter. I remember I think it was the fourth quarter that you attributed most of the improvement to less discounting. So I heard you talked about it, I think it was 3.5% more hours. There is still a lot less discounting year-over-year. You do have the reclaimer motion [ph] or campaign kicking in. How would you rank order the drivers to the strong same-store sales in the first quarter?

Tony Hull

Number one was menu price increases. Number two was lower discounting. And I think the other -- I think customer service, which is what we control operationally has been dramatically improved. So I think that was very helpful. Obviously, hours of operation improving was there. And then I think that the most -- from an operational among for Joe, but I think that the consequential positive impact of lower turnover is going to be the -- is going to be where we add to the traffic the most over the -- between happy customers and repeat customers. I think that's going to really drive -- really help drive our numbers for the rest of the year.

Jake Bartlett

Great. And then my last question is on the commodity outlook. It sounds like you're expecting commodity inflation to be about the same in the second quarter versus the first. Any more visibility on the back half just the year as a whole, whether you -- I think my expectation is that commodity inflation is going to decelerate for you by the back half of the year, but I just wanted to get your perspective. And is that a valid assumption? Or is it still very much up in your view?

Tony Hull

We would agree with your conclusion on that or your assumption on that? Sorry -- it's going to decelerate. We think it's going to decelerate in the back half.

Jake Bartlett

Okay. Would you think it would reaccelerate what remain inflationary? Or I mean, is there a possibility that we...

Tony Hull

I mean I don't -- I guess the answer is I think it's going to be the economy, it's going to be the economy that -- I mean, if we go into some sort of meaningful recession, I think the commodity thing is going to be much less of a headwinds in that period. But either way, I think it's going to decelerate.

Jake Bartlett

Got it. Great. And then really the last question is, I think it's going to come out in the Q, but what was the level of the percentage of promotional sales discounts? I think last first quarter was 18%. I have 14% in my model, but what was the actual number in the first quarter?

Tony Hull

It improved 700 basis points.

Jake Bartlett

Wow. It's about...

Tony Hull

Beating it improved 700 basis points. So it's -- it was low -- it was low double digits, low teens.

Jake Bartlett

Okay. And do you think that level is going to continue for the rest of the year?

Tony Hull

Plus or minus, it's going to -- I think it's going to continue, plus or minus a small number, it's going to continue. We -- again, we don't think that's going to -- we don't think that's going to change dramatically as the year progresses. But it's great to have that. We view that as the step one if we claim the flame, which was incredibly helpful to our profitability. So we are very grateful to our franchisor for that strategy and executing on it so well.

Jake Bartlett

Appreciate it.

Operator

Our next question is from Hale Holden with Barclays.

Hale Holden

I had two. Deborah, I was wondering if you could just give us some big picture thoughts on where you thought the business was going and the kind of strategic overlays. I know it's only 1 week into the job, and it sounds like you work nights most of the week, but any thoughts?

Deborah Derby

Well, first of all, nice to meet Jake. Very excited to be here at this time. I mean I think there's just great momentum in the business already. It's an exciting time, both from internally at Carol's and what's going on and some of the initiatives that Joe and his team are working on and also simultaneously what's going on with franchisor [ph] and the whole reclaim the plan. So like I said, in the 5 years that I've been on the board, this is probably the most exciting time that I see right now for joining the company. At a high level, I think there's lots of opportunities, and I'm not going to go into a detailed strategy on today's call because I really have to dig deeper into the business and validate that with the team. But there are certainly opportunities, I think, at a very high level for kind of identifying best practices and finding ways to leverage those across the company. I think there's opportunities for cost efficiencies and leveraging our economies of scale. So at a very high level, those are the types of things, I think, we'll be digging deeper into. There's been great work done in the past by both Apollo and others to kind of identify some of the operational initiatives, and we'll be fine-tuning those and really focusing on those that are going to deliver the biggest impact going from there.

Hale Holden

Great. And then the other question I had was, it would seem to me as we go forward, whether there's a shallow no recession, deep recession, however you want to define it, that the level of promotional intensity that you might have in the back half of the year will be probably one of the bigger drivers in terms of where margins go. And I was wondering if you could talk about your ability to kind of hold promotional cadence at the depth of promotion that you're seeing in now? Or do we think it's going to possibly deepen or increase?

Tony Hull

I think we're very aligned with our franchisor. Obviously, they're very interested in keeping the work hard to get to the promotional level. We are ahead now. And they are focused on franchisee profitability as they've been very transparent about that. So obviously, anything they did to go a different way on discounting would be a negative to profitability. So I think we're all aligned. So I feel really good that if it does change, as I said in the last answer, I think it's going to be a point or two, not 600 points or something like that. So I just think it's great that we're all aligned, and I think that's going to keep -- and that is something -- it's something they control, but I think we're on the same page on that one. So I feel very confident that, that will go our way.

Gretta Miles

I think another thing to remember is that we always focus on our competitors as well to make sure that our price point and our average track is providing a good value for our customer that we have value options for the consumers that are coming in to look for a good deal. So I think from a promotional perspective, if you could see if the commodities come in, there's things that could -- that could impact that, but we feel like we're in a very competitive place with our direct competitors on our price.

Hale Holden

Great. Thank you so much. I appreciate the time.

Operator

[Operator Instructions] Our next question is from Carla Casella with JPMorgan.

Carla Casella

Most of my business questions have been answered. So just one dead question. You mentioned that you've locked in some rates on the term loan. And I'm wondering if the interest rate hedges you put in place limit you from kind of prepaying term loan as you look to repay debt and you have no more revolver to repay.

Tony Hull

I mean, yes, we could pay down some more, but not very much as you're pointing out, because we want to take advantage of the we don't want to be exposed beyond our outstanding on the term loan B on the hedge. So I think the one message that we want to make sure comes across is that we want to -- we're going to continue to focus. We're going to stay the course on deleveraging. It may be deleveraging because of increasing cash, which is net out of the net debt number. At this point, we haven't really -- that's really the most we've discussed with the Board to stay the course. It's not -- as I mentioned, what we're not going to do, and we're not going to bear from where we've been over the last year, and that's really the capital allocation is to reduce the net debt. And that -- I think for this year, that's going to be mostly from just to increase our cash balance.

Operator

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn the call back over to Deborah Derby for closing remarks.

Deborah Derby

Thank you again, everyone, for joining us this morning and for your interest in Carols. We appreciate your time, and we look forward to speaking with you next quarter.

Operator

Thank you. This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.