CKE Q4 Earnings Call Transcript

123jump.com Staff
11 Apr, 2009
New York City

CKE fourth quarter net income shot up to $2.6 million from $100000 and earnings per share were 5 cents as against zero in the prior year quarter. Income for the year from continuing operations increased by 5.4% to $37 million.

CKE Restaurants, Inc ((CKR))
Q4 2009 Earnings Call Transcript
March 26, 2008 9:00 a.m. ET

Executives

John Beisler - Vice President, Investor Relations
Andrew F. Puzder - President, and Chief Executive Officer
Theodore Abajian - Chief Financial Officer and Executive Vice President

Analysts

Gregory Rudy (ph) – Stevens Inc
Keith Siegner - Credit Suisse
Tony Brenner – Roth Capital Partners
Christopher O''Cull - Suntrust Robinson Humphrey
Howard Penney – Research Edge
Michael Wolleben – Sidoti & Co

Presentation

Operator

Good day ladies and gentlemen and welcome to the fourth quarter and fiscal year 2009 CKE Restaurant’s earnings conference call. My name is Isha (ph) and I’ll be your operator for today. (Operator Instructions) At this time, all participants are in a listen-only mode. We will conduct a question-and–answer session towards the end of this conference. If at any time during the call you require assistance please press”*0” and an operator will be happy to assist you. As a reminder this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. John Beisler, Vice President of Investor Relations. Please proceed, sir.

John Beisler – Vice president of Investor Relations

Thank you, Isha . Good morning everyone. 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 12 weeks and fiscal year ended January 26th, 2009. Yesterday CKE issued a press release announcing its financial results for the 12 weeks and fiscal year ended January 26th, 2009. This release is available on our website, CKR.com. CKE has also filed its Form 10-K with the SEC. This call will reflect items discussed within the press release and Form 10-K. CKE management will make reference to them several times this morning. Consistent with this we also prepared an earnings release call presentation which is available on the website as well, ckr.com, click on investors and then on presentations. We will be referring to the presentation during this call.

Speaking on today''s call are Andy Puzder, Chief Executive Officer, and Ted Abajian, Executive Vice President and Chief Financial Officer. Andy will begin today''s presentation with a few comments regarding our fourth quarter and full year fiscal 2009 results and will analyze our fourth quarter results with you. Andy will conclude today’s presentation with comments on the strategic direction of the company. Andy and Ted will then take questions from callers.

Before we begin I''d like to remind you of our disclosure regarding forward-looking statements contained in our Form 10K and earnings release. Our disclosure regarding forward-looking statements can be found within our Form 10K under Item 1 of business. 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 the Chief Executive Officer, CKE Restaurants, Andy Puzder.

Andrew F. Puzder – Chief Executive Officer

Thank you, John and good morning everybody. Fiscal 2009 represented the most difficult macro economic environment that our current management team has experienced, including record commodity prices, the collapse of the housing and financial markets and a dramatic decline in consumer confidence and spending. Seeing the devastating drop in the year-over-year results across the retail sector certainly made our team thankful to be in the fast food business. Here even in our sector certain brands which one would assume would do well in an economic downturn struggle with sales while other brands with positive sales struggle, with restaurant level margins. The real challenge in this environment was to generate positive sales without a significant decline in profit margins. During fiscal 2009, this was our goal. While it is not to say we expected every period sales to be positive, we’d like them to be positive, we want to make them positive but the reality is that in this economic environment there would be significant ups and downs particularly as certain competitors resort to desperate sales generating tactics such as free food or deep discounting. I’ve heard investors comment that we should have value products and I’d encourage these individuals to visit one of our restaurants. All brands including ours have value products. They are a necessity in this economy. However a consistent focus on particular price points and the competent grading of quality so it can meet a price point is we believe not in the long-term best interest of our brands or our sector. Even in the current economic environment we believe it is possible to have positive same store sales while maintaining your operating margins is not just as easy as it once was. In this respect and despite the unprecedented challenges, CKE restaurants achieved a number of substantial accomplishments during fiscal 2009. These include positive same store sales and record average unit volumes in both our major brands, while holding the line on restaurant level operating costs, reducing general and administrative expenses, achieving net system like unit growth, successfully completing our Hardee’s re-franchising program, reducing our total debt while executing our capital plan and signing franchise development agreements to enter new domestic and international markets.

We accomplished all of these items while following our strategy of offering our guests innovative premium quality products at a reasonable price in a clean restaurant with excellent service. For fiscal 2009, CKE recorded net income from continuing operations of $37 million or $0.69 per diluted share versus $35.1 million or $0.57 per diluted share in the prior fiscal year. This 21.1% increase in diluted earnings per share was ex the benefit of our share repurchases in the prior year. This year’s results include $9 million or $0.10 per diluted share in interest expense as a result of mark-to-market adjustments related to our interest rates swap agreements. Last year we recorded a $11.4 million in interest rates and interest expense related to the mark-to-market adjustments. Absent these mark-to-market adjustments diluted earnings per share in fiscal 2009 would have been $0.79 versus $0.62 in the prior year. Fiscal 2009 blended same store sales increased 1.7% our sixth consecutive year of positive blended same store sales. Carl’s Junior achieved 2.1% increase it’s ninth consecutive year of positive same store sales, and Hardee same store sales increased 1.2%, it’s third consecutive year of positive same store sales and the fifth year out of the past six. You can see a comparison of our year and same store sales and those of certain of our competitors on page 3 of the presentation. Please keep in mind that we achieved these results without committing consumer’s long-term perception of our products, by deeply discounting them or giving them away. We believe that once we come out of this recession and we will come out, not having conditioned consumers to perceive our food is cheap will be a meaningful benefit to us as that’s a perception that is very difficult to undo.

Our blended average unit volume increased $70,000 in fiscal 2009 to $1,232,000. The average unit volume in Carl’s Junior increased $35000 to $1,528,000. At Hardee’s the average unit volume increased $39000 to $993000. Our historical average unit volumes are set forth or page four of the presentation through period 1 of fiscal 2010. On consolidated basis our restaurant operating costs as a percentage of company operated restaurants revenue were unchanged versus the prior year at 81.1%. We believe this is a significant accomplishment in light of the substantial difficulties our business faced this year including record commodity costs, federal and state minimum wage increases and a 15 basis point increase in the depreciation expense related to our on going remodel programs at both brands. We offset this increase in occupancy and other expense by reducing labor and employee benefit costs by 70 basis points through more efficient labor scheduling and the sales leverage benefit from our increased blended same store sales. Our food and packaging costs were unchanged versus the prior year as price increases and other menu initiatives offset the rise in the costs for beef, potatoes, oil, cheese and wheat, a very few change that we have been able to say that lately. Our annual consolidated operating costs for the past 10 years are set forth on page 7 of the presentation.

At the brand level, our restaurant operating costs as percentage of your company operated restaurant revenue increased 30 basis points at Carl’s Junior to 78.8% of company operated restaurants revenue. Hardee’s restaurant operating costs increased 30 basis points to 83.9% of company operated restaurant revenue. In regards to our balance sheet and financial condition we successfully executed our scaled back capital plan spending $116.5 million on capital expenditures while reducing our bank and other long-term debt. By year end we had reduced our bank and other long-term debts by$36.3 million. Adjusted EBITDA for fiscal 2009 was $167.3 million, a $2.3 million increase over the prior year despite a $9.6 million negative impact to adjusted EBITDA from our re-franchising of 102 Hardee’s restaurants during fiscal 2009. A year-to-year EBITDA bridge is set forth on page 14 of the presentation. Our total debt to adjusted EBITDA ratio for the fiscal 2009 was 2.3 well below our current leverage ratio covenant of 2.75 that is in place for all of fiscal 2010.

During fiscal 2009, we and our franchisees added 37 net Carl’s Junior and Hardee’s units raising our system wide unit count to 3116 units marking our second straight year of net unit growth. The company opened 24 new units, our domestic franchisees opened 45 new units and our International licensees opened 40 new units for a total of 109 new units. Over the next five years we project that units operated by our franchisees and licensees will represent 75% of our total store base versus approximately 71% today. In addition international new unit will account for approximately 20% of our store base versus 10% today. Our projected unit growth till fiscal 2014 is set forth on page 9 of the presentation. We singed a total of 20 franchisee development agreements with new and existing franchisees in fiscal 2009 representing commitments to build a total of 380 restaurants domestically and internationally. The two most significant agreements are a 100 unit agreement into China and a 121 unit agreement in Dallas and Houston markets. Subsequently at year end we signed an additional development agreement for 72 stores in Dallas and Houston markets. We believe these transactions especially those with our new franchisees are very positive signals by the franchise community concerning management of our company as well as how our business model focuses on franchisee’s profitability as well as top line sales.

We remodeled a 162 company operated Carl’s Junior and Hardee’s restaurants during fiscal 2009. At the end of fiscal 2009, we had opened 88 Carl’s Junior and Hardee’s in the past six years and remodeled 398 for a total of 54% of the store base beside the new or remodeled. We also completed 41 company operated dual branded Green Burrito and Red Burrito conversions during the year. At the end of fiscal 2009 we and our franchisees have a combined total of 439 Carl’s Junior units dual branded as Green Burrito and 110 Hardee’s units dual branded with Red Burrito including 211 Green Burrito and 86 Red Burrito company operated dual branded units.

We reduced G&A for fiscal 2009 by $3.7 million versus the prior year. The reduction was primarily related to our re-franchising program and lower overall corporate spending. As a percentage of total revenue G&A spending increased only 10 basis points despite a $51.9 million or a 3.4% reduction in total revenues as a result of the re-franchising of 102 Hardee’s restaurants over the past year. We also re-franchised 40 Hardee’s restaurants during fourth quarter resulting in the successful completion of our Hardee’s re-franchising program. Since April of 2007, we’ve re-franchised a total of 238 Hardee’s restaurants exceeding out initial goal of 200 restaurants through a combination of new and existing Hardee’s franchisees as well as the existing Carl’s Junior franchisees. All of these transactions were completed without any company backed financing. In addition the franchisees that have acquired these units have agreed to build an additional 115 restaurants in these markets also exceeding our expectations at the start of the program.

During the fourth quarter net income was $2.6 million or $0.05 per diluted share versus $100,000 or $0.00 per diluted share in the prior year quarter. This quarter’s result included $8.4 million or $0.09 per diluted share of interest expense to mark-to-market interest rate swap agreements versus a $9.5 million or $0.11 per diluted share expense in the prior year quarter. Fourth quarter blended same store sales increased 2/10th of a percent, our 13th consecutive quarter of positive blended same store sales. On a three year cumulative basis blended same store sales increased 3.2% for fourth quarter. With respect to our individual brands same store sales at company operated Hardee’s restaurants increased 1.5% on top of the 4/10th of a percent increase in the prior year quarter. Same store sales at company operated Carl’s Junior restaurants decreased 6/10th of a percent versus a 1.4% increase in the prior year quarter. Our consolidated restaurant operating costs as a percentage of company operated restaurant revenues for the fourth quarter increased only 10 basis points versus the prior year quarter. Our depreciation and amortization expense increased 70 basis points during the quarter primarily due to our ongoing remodel program. Period 2 of fiscal 2010 ended on Monday and we don’t as yet have the final numbers for the period but it appears that same store sales at Hardee’s will be positive in the low single digits and at Carl’s Junior will be negative in the mid single digits. For period 1 you may recall that Carl’s was negative 3.6% while we had positive sale of 1.6% in the prior year for two year cumulative at -2.2%. Last year in period 2 Carl’s Junior was positive 6%. It was the strongest same store sales period of the year. Going forward same store sales will not be as high. While we anticipate that Carl’s Junior two year average for period 2 will be negative it will be a much lower number than 2.2% and probably closer to -1%.

We are working diligently to further close that gap and get Carl’s back on the positive same store sales track we are used to. But the bottom line is that despite a very tough comp, actions we took during period 2, improved the gap between the current year and the prior year versus period 1. We have strategic initiatives in place and strategic initiatives we are putting in place which we believe will continue to improve this trend throughout the year and which I’ll discuss later in this presentation. On a very positive note, we believe that Hardee’s has reached its initial average unit volume goal of $1 million. This is a huge milestone for Hardee’s and one many people considered dead when our management team took over. We will issue our formal same store sales release for period 2 with final numbers around the middle of next week. I’ll now turn the call over to Ted. Ted?

Theodore Abajian - Chief Financial Officer

Thank you, Andy. Good morning everyone. Since Andy has already provided a good overview of our financial results for fiscal 2009, I’ll focus my comment on the following key areas of our performance. First, how we grew adjusted EBITDA in fiscal 2009, operating income performance, items that impacted fiscal 2009 which are not expected to recur in fiscal 2010, and finally an update on our credit facility and liquidity. Before I get started, I need to make you aware that during this conference call we refer to certain non-GAAP financial measures as explained in our earnings release issued yesterday and in our Form 10K for the fiscal year ended January 26th 2009. During fiscal 2009, we continued to increase adjusted EBITDA despite a very difficult operating environment that included commodity price increases, minimum wage increases and declining consumer sentiment. We achieved this increase in adjusted EBITDA through net new unit growth, increasing same store sales and average unit volumes and controlling our costs. As I have done in our recent earnings conference calls I’ll review how these and other items affected our adjusted EBITDA performance in fiscal 2009 as compared to fiscal 2008. First of all I want to review our use of the term adjusted EBITDA as opposed to EBITDA. Adjusted EBITDA as reported in our Form 10K is calculated using the definition that’s provided in our senior 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 arrive at adjusted EBITDA. I now want to refer you to page 14 of the presentation that Andy referred to earlier in the call.

This slide headed adjusted EBITDA fiscal 2008 bridge to fiscal 2009 identifies and quantifies the primary factors impacting our adjusted EBITDA performance for fiscal 2009 as compared to fiscal 2008. Fiscal 2009 adjusted EBITDA increased by $2.3 million versus the prior year. The factors behind 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 restaurant closures and the re-franchising of 102 Hardee’s restaurants and three Carl’s Junior restaurants over the trailing 13 period resulted in a $10.2 million decrease in adjusted EBITDA during fiscal 2009. $9.6 million of this decrease was attributable to re-franchising. These decreases in adjusted EBITDA were partially offset by a $4.5 million increase in adjusted EBITDA related to the partial year impact of opening 23 new company operated restaurants during fiscal 2008 combined with the impact of opening 24 new company operated restaurants over the past year. In addition adjusted EBITDA increased by $1.4 million due to the sale of our La Salsa brand last year.

Moving now to the changes in operating results category, a 1.7% increase in blended company operated same store sales provided a $3.4 million increase in adjusted EBITDA for fiscal 2009. In addition, G&A reduction and other expense reductions resulted in a $4.7 million increase in adjusted EBITDA. These items were partially offset by a $1.8 million decline in adjusted EBITDA related to higher same store operating costs. To summarize fiscal 2009 adjusted EBITDA grew by approximately $2.3 million despite the negative $9.6 million impact of re-franchising add on adjusted EBITDA during the year. We reduced this increase by growing same store sales, controlling restaurant operating expenses, opening new company operated restaurants and reducing our G&A expenses.

Turning now to the income statement, revenue from company operated restaurants increased by $70.3 million or 5.8% to $1.13 billion during fiscal 2009. This increase is primarily due to the success of the Hardee’s re-franchising program which more than offset the benefit of opening 24 company operated restaurants this year and a 1.7% increase in blended same store sales during fiscal 2009. As Andy mentioned earlier, consolidated restaurant operating costs were flat to prior year as a percentage of company operated restaurant revenue. Although restaurant operating costs for both brands increased slightly during the year, we do share an increase in our company operated restaurant revenue this year from Carl’s Junior which has lower restaurant operating costs than Hardee’s. As such our blended operating expenses were flat to prior year. Reiterating Andy’s earlier comment, I believe this is certainly a significant accomplishment given that we had to absorb a 50 basis point increase in depreciation expense as a result of our ongoing remodel programs.

Shifting now to operating income, fiscal 2009 operating income was $84 million as compared to $88.3 million in fiscal 2008. In general the same factors that influenced our adjusted EBITDA performance this year also contributed to our operating income performance with one addition. The additional item is facility action charges which as I mentioned earlier is excluded from the calculation of adjusted EBITDA. All facility action charges are driven primarily by gains and losses on our re-franchising transactions, impairment of assets and lease reserve charges that we incur when we close the restaurants. In fiscal 2009, facility action charges were $4.1 million as compared to a gain of about $600,000 in fiscal 2008. The $4.7 million increase in facility action charges is primarily due to losses that we incurred in this year on re-franchising transaction as compared to last year when we recorded a gain on our re-franchising transactions. Absent the impact of facility action charges, fiscal 2009 operating income would have been $88.2 million as compared to $87.8 million in fiscal 2008.

Looking forward to fiscal 2010, there are two items totaling approximately $4.5 million that favorably impacted our results in fiscal 2009, that are not expected to recur in fiscal 2010. These items are noted in footnote 3 and 6 on page 14 of the presentation. First of all we recognize $2.7 million in initial franchises in connection with our re-franchising program for which there is no similar expectation for fiscal 2010 given that our re-franchising program is now complete. Second, we collected approximately $1.8 million in previously unrecognized rent payments from significantly past due franchisees which we do not expect to recur to the same extent in fiscal 2010. While I’m on the subject of fiscal 2010 I’d also like to point out that we expect our effective income tax rate for book purposes to be approximately 41% in fiscal 2010.

We’ll now move to our balance sheet and credit facility. As of the end of fiscal 2009, we reduced our bank and other long-term debt by $36.3 million as compared to the end of fiscal 2008. Our debt reduction includes $21 million in cash payments on our term loans and revolver and the conversion to equity during 2009 of the remaining $15.2 million in convertible debt. At the end of fiscal 2009, our total debt to adjusted EBITDA ratio or leverage ratio was 2.3. The maximum leverage ratio allowed for our credit facility for fiscal 2010 is 2.75. Our credit facility is in place through March 2012 with very favorable terms including minimal required principle payments on our term loans through calendar 2011, and interest rates on our term loan and revolver that could not be obtained in today’s credit markets. At the end of fiscal 2009, we had $102.4 million available under the revolver portion of our credit facility. In closing we have an outstanding credit facility with very strong banks and therefore we expect to continue to have the resources and flexibility to successfully manage our business.

I’ll now turn the call back to Andy.

Andrew F. Puzder

Thanks Ted. I’m going to talk a little bit about the coming year and starting with what happened with our economy and despite our brands because of the government’s efforts to fix our economy, a sustained financial recovery seems unlikely during fiscal 2010. None of our sector and our branch continued to outperform other retail sectors. You can hold back on that new car or that new piece of jewelry, you can even wait for a year or two for that new set of clothes but you eat everyday and probably more than once. At Carl’s Junior and Hardee’s you can get a great quality meal with 100% black Angus Beef burgers, skin-on fries and hand scooped ice cream malt and shakes, salad, chicken sandwiches and desserts for a price that maybe less than even what you would spend to make the same item at home or you want to buy them at a casual dining restaurant. With the level of quality that’s unmatched in the fast food sector and we’d argue just about any other sector, we are encouraged that maintaining our focus for retaining the flexibility to adjust the change in economic conditions in our markets will continue to produce positive results in the long-term. In particular we have a number of exciting promotions, products and ad campaign set for 2010. The first of these will be the introduction of the Western Bacon Thickburger at Hardee’s supported by a provocative ad featuring Padma Lakshmi the Indian super model, cooking show hostess and cook book author. One of our best selling burger at Carl’s Junior, we just started selling the Western at Hardee’s and we’ll premiere our ad in Hardee’s market on Saturday, March 28th. We’ll also start running this ad at Carl’s Junior in support of the Western Bacon $6 burger within the next couple of weeks, probably in sporting events such as Laker’s Games or March Madness. There has already been significant online excitement about this ad among our young hungry guy demographic and the ad will not disappoint. In addition Carl’s Junior will soon be promoting Chili Dogs on air to go along with our Chili Cheese burgers and our Chili Cheese Fries taking us back to the consumer favorite on which Carl founded our company 68 years ago. We also have some great new burgers coming out this year which I will not identify for competitive purposes but we recently introduced one at Carl’s Junior known as the Kentucky Bourbon Burger, so, quintessential sit down restaurant burger at a fast food place. Our innovative products promotions and provocative ad campaigns have successfully driven sales of our brands for years and we believe that they will continue to do so in the coming years. All of this year we will be addressing more directly consumer’s economic concerns by stressing the value of our products versus those in more expensive casual dining chains as well as our superior quality versus those in our segment at our essentially selling price. These are important messages in markets such as California where due to misguided economic policies unemployment is high and businesses are meeting the fate.

In addition to building restaurants in Texas where many of these businesses seem to be moving we are testing some strategic initiatives which we believe can meaningfully impact our Carl’s Junior business in California in the near future. Again for competitive reasons we can’t discuss all of them at this time. However, on the value front which seems to be on everybody’s mind we are bringing back our one-eighth Beef Patties at Carl’s Junior to provide more flexible value options with better margins than our current offers. Carl’s Junior is also testing some of the mid tier price products that have been very successful at Hardee’s. While symptomatic we believe these initiatives will benefit same store sales at Carl’s Junior through the remainder of the year. On the cost side, we expect to get a benefit from the easing commodity costs in fiscal 2010 particularly with respect to products such as cheese, oil and wheat. Should the dollar strengthen we’d expect an additional benefit on the commodity side. As we have a larger percentage of company operated restaurants than most of our competitors we should get a proportionally more significant benefit from easing commodity costs which directly impact restaurant level margins but have no impact on royalty income from franchisees.

On the franchisee side, there has been concern in recent months as to whether franchisees would have the ability, the financial ability, to remodel their restaurants and to build new restaurants consistent with their existing commitments. We believe such financing is available and we are working with potential lenders and our franchisees to secure appropriate financing where it is needed. Nonetheless in this respect we recently heard encouraging words from Washington as the White House announced the small business stimulus plan consisting of a series of moves to get credit for small businesses. The measures include boosting bank liquidity with up to $15 billion and the unfreezing the secondary credit market, reducing lending fees, increasing loan guarantees and easing tax burdens. The Administration also announced that the 21 largest banks receiving government money must report monthly on how much lending they do to small businesses. The administration’s express goal for this point is to help small businesses make payroll, buy equipment and maintain or even expand employment. The provisions that could be most impactful for our franchisees include one, the ability to ride out $250,000 in qualified investments in property and equipment. We assume that new restaurants and remodel investments will qualify, two, the expansion of bonus depreciation deduction till 2009. This petition allows businesses to take a larger tax deduction within the first year of the properties purchased and three, an acceleration of SBA lending. It is going to save smaller franchisees in need of financing for remodels or new restaurants. While we believe there are currently sources for fair checking finance in the remodels and new restaurants development, these provisions could further assist our franchisees and encourage a quicker phase for remodeling and even expand a new unit growth. On our side we are discussing incentives to further encourage our franchisees’ growth in this difficult economy so they can leverage the distress by negotiating favorable lease rates or purchase prices for real estate and lower construction costs for new units and remodels.

On the company side, we are anticipating a reduction in capital spending of about 10% for fiscal 2010 and by year end we contemplate that new units and remodeled units will total 71% of our company operated restaurants and that 10% reduction is from the $100 million to $110 million number that we gave for capital spending that we announced in period 3. The unit numbers that have been remodeled and that are new for each brand is set forth on pages 12 and 13 of the presentation. Our remodel program and our new unit development both contributed significantly to our ability to generate positive adjusted EBITDA in fiscal 2009 as you can see on this slide on page 14 of our earnings call presentation. We expect to continue the positive contribution in fiscal 2010. However since our new or remodeled units stand at 54% of total units as of fiscal year end 2009, we’ve already remodeled the majority of our units that were in desperate need of a remodel. If the economic conditions indicate a need to slow the remodel process, or new unit development to preserve cash, we are prepared to do so although we don’t contemplate that we will need to do so at this time. Well as we said all along and as we demonstrated in fiscal 2009 we intend to maintain our flexibility in that opportunistically. In conclusion while we see obstacles ahead in the coming year we are very optimistic that we will continue to address the difficulties and take advantage of the opportunities in the coming year as we did this past year. We believe we have navigated through a terribly difficult period extremely well particularly from a margins perspective. We have a truly differentiated brand that has not been damaged by discounting and are positioned to take advantage of margin opportunities going forward. We have very good leverage ratios, and increasing free cash flow particularly as we get through our remodels. We are also in the early stages of significant domestic and international franchise growth. Our brands are strong, well regarded and both franchisees and our company team are motivated and enthusiastic and we’ll now take your questions.

Question-and-answer session

Operator

Ladies and gentlemen if you wish to ask a question please press “*1”. If your question has been answered or you wish to withdraw your question press “*2”. Questions will be taken in the order received and your first question comes from the line of Gregory Rudy (ph) with Stevens Inc, please proceed.

Gregory Rudy – Stevens Inc

Thank you. With the Hardee’s re-franchising program complete what kind of boost to margins did you realize in the fourth quarter and what’s the leverage opportunity there in fiscal year ’10? And I have…

Andrew F. Puzder

Ted do you have a breakdown of that?

Theodore Abajian

No I don’t. I mean there was as Andy mentioned a couple of times 102 units re-franchised over the course of this year. Really we haven’t provided any details on the impact to margin. They are obviously they came out over the course of the year. So, there was some minimal impact but it really wasn’t that significant.

Gregory Rudy – Stevens Inc

Okay and then the outlook for fiscal year ’10?

Theodore Abajian

In terms of impact from re-franchising?

Gregory Rudy – Stevens Inc

Yeah.

Theodore Abajian

Two pints I’ll make there. One I already mentioned in the call was the fact that we did record $2.7 million of franchise fees in fiscal ’09 because we are not pursuing re-franchising in fiscal ’10 would not automatically recur. And on the other side in terms of the continuation of the roll off which is say of the stores which were re-franchised throughout ’09 with what we hear in fiscal ’10 and ’11 will be collecting royalties at lower rates. The dollar impact to adjusted EBITDA is the metric I have is what, less than a $1 million, negative effect. I can’t comment as to whether that would improve margins. In all likelihood it could have a minimal favorable impact to margins percentage. I mean in terms of dollars it is less than a $1 million negative impact.

Gregory Rudy – Stevens Inc

Okay in the fourth quarter it appears you took 32 franchise units back. Was there any impact to the fourth quarter margins or earnings?

Theodore Abajian

No. Not anything significant at all.

Gregory Rudy – Stevens Inc

Okay. And then Andy you mentioned the wrought of an 8 pound burger. Any plans for marketing round that?

Andrew F. Puzder

We wouldn’t go on TV. We do not do value or deep discounting on TV. As I said we do our value products, you can come in and get a good quality value burger at Carl’s. As you can I remember at our competitors but we don’t, one of the difference is we don’t go on air and we don’t, we will not take quality below a certain level and I think the 8 pound burger which we used to have at Carl’s, we had it there but we took it out of there about two years ago, then wheat prices dropped and we were able to the quarter pound burger is the value but since they have gone back up, we are going to bring the eight pound back. It has been at Hardee’s for a number of years. We have a double cheese burger at Hardee’s that we serve with eight pound patty. So, I don’t imagine any promotion. We did do an ad once for a double cheese burger which would end up being a quarter pound burger that is 2 eight pound patties. If possible we could do something along those lines again but I will not contemplate anything at the moment. We have the ad if we want to do it but I don’t think we have got it. I guess not in the calendar.

Gregory Rudy – Stevens Inc

Okay last one and I’ll pass it on. In the capital plan it looks like you’ve switched some CapEx around and plan to increase your investment in the IT distribution center. Can you provide some color there? Thank you.

Andrew F. Puzder

I think what you are seeing there Greg is the amounts that we are allocating to rolling out our new point of sale above store system and store management system at Hardee’s. It is our point of sale software system that goes into Hardee’s late this year.

Theodore Abajian

And that’s the color over the last two years.

Andrew F. Puzder

Correct.

Gregory Rudy – Stevens Inc

Thank you.

Operator

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

Keith Siegner - Credit Suisse

Good day, first question I just want to talk about the franchise comps on call a little bit and then we have seen some steady deterioration on one year and in your twin basis somewhat of a variance between them and the company comps. I just want to talk a little bit about help me understand maybe what’s leading to the difference in the comps of franchisees versus the company’s stores at Carl’s and what might help that or lead that gap to close?

Andrew F. Puzder

I want to give you three perspectives. One is our operators will tell you it is better operations. And our franchisees will tell you that’s not true. I think that the two big factors are at least in my opinion, the two big factors, one will be remodels. We’ve remodeled a lot of our restaurants and they are at the very, very infant stages of doing remodel, which isn’t unusual. Franchisees normally wait until the company gets the remodel done and then they come in and find ways to do it less expensively than the company does. So, but they are just beginning to do the remodels and we think remodels have had a positive impact on our business. The second thing is our pricing. I think they took pricing they may have taken pricing more aggressively than we did. They are already higher priced when we started to raise prices and so we maybe a little behind them on pricing. Otherwise I would expect that we are pretty comparable at this point. But I’d say the big difference to me would be the remodels.

Keith Siegner - Credit Suisse

Sure. As you’ve kind of matured through the remodeling process and they are still in at the infant stages, should we see that gap kind of close and they maybe outpace the company stores. How should we think about the timing of their remodel programs as it accelerates?

Andrew F. Puzder

They are going to be, they are having obviously easier numbers that we are because as you would have noticed they are following on in the process last year. So, I’d hope to see more progress on the franchise side. I know the franchisees would anxiously get this one eighth pound patties and so that will help some of them who because their royalty payments have a more difficult time pricing a larger patty as a value option will now have more flexibility with respect to value. I think that will help them on the price side. And I think that they would do better once they get through the remodel process. For example this last period we were rolling 6% positive versus the prior and I am not even sure that I think they were on flatter side or negative. So, there should be some advantages and I think once they get their remodels accelerating they will see some better results.

Keith Siegner - Credit Suisse

Okay Ted I have a question for you. I was a little surprised by what we saw at Hardee’s on the franchise rental revenue line and cost line. There was like $700,000 decline in rental revenue sequentially and the costs actually increased sequentially in line with the change in the unit count. I just was a little confused by whether there is something specific that’s going on there, anything unusual?

Theodore Abajian

Yah I actually feel Keith that’s a fair question to ask. The real as you are looking at sequentially, the real issue actually occurred back in Q3 when we collected about $700,000 in past due rents…

Keith Siegner - Credit Suisse

Yeah that’s what I wanted to…

Theodore Abajian

So, when you get to back that out and look at the trend sequentially it is right in line with what you would have expected.

Keith Siegner - Credit Suisse

So, fourth quarter is more of a run rate that we could anticipate on a rent specific basis or something.

Theodore Abajian

That’s correct.

Keith Siegner - Credit Suisse

Okay and then one last question on Hardee’s as well. I was talking about the franchisees, on the distribution business, I mean I understand that it is largely equipment driven and it is very lively on the revenue side, given that it is mostly equipment but the margin actually was negative 9% this quarter which is well outside of the standards kind of variance around…

Theodore Abajian

Yeah.

Keith Siegner - Credit Suisse

Kind of zero to three, any thing you need there might have been timing, could we see it first next quarter?

Theodore Abajian

No you are absolutely right. That’s a unique item there specifically in fact the topic came up from Greg earlier. We mentioned that we took back 32 restaurants during the quarter from the franchisees. Unfortunately we recorded the $300,000 bad debt charge for some equipment they purchased from us during the quarter. That given obviously has an significant impact on that fairly small revenue base. But that’s what took us to such a significant negative margin if you will.

Keith Siegner - Credit Suisse

Okay that’s very helpful. I’ll get back in queue. Thanks.

Theodore Abajian

Thank you.

Operator

Your next question comes from the line of Tony Brenner with Roth Capital partners. Please proceed.

Theodore Abajian

Hey Tony.

Tony Brenner – Roth Capital Partners

Good morning. You are going to actually call these things patties or are you calling them by their proper names Burgers?

Andrew F. Puzder

Actually the sliders you get…I did kind of a competitive shop like a week or so when I was in Jacksonville and competitor’s sliders were nowhere near a pound. I mean they are much smaller that that burger. An eighth of a pound is what we call eight to one. Those are…others are less than ten to one.

Tony Brenner – Roth Capital Partners

Those are Chinese ones.

Andrew F. Puzder

That’s very fragile. Carl’s used to have one. I am not familiar with how they are paying the burger, double cheese burger. We just took them out maybe like maybe 24 months ago.

Tony Brenner – Roth Capital Partners

Andy you mentioned that for period 2 of Carl’s costs will be down in single digits and you pointed to yearly comparison. Is that the only way or are there other factors specifically affecting Carl’s for that period?

Andrew F. Puzder

I think there are things that affect Carl’s that affect everybody. I should say the economy in California effects everybody included Carl’s. What some of the more desperate moves by some competitors. I used to joke that people are giving away free food and now it is not a joke. They used to be consumers who go into these stores and say, oh great a free burger. I think they are now going in and saying, where is my free burger? It has just become very common. And as long as people are doing that, that sort of hurt everybody. There is something like that but we end up saying I would say there is nothing out there we can’t address if we don’t have a plan to address and the comps going forward we are not coming up a hurdle like we had in period two. For the rest of the year we do have some good positive things or so for periods of 3.5% to 4% but not above 6%.

Tony Brenner – Roth Capital Partners

So you would pretty aggressively state that this is a relatively high priced product in a period where consumers will probably feel that is your most premium so far. Is that factor you think?

Andrew F. Puzder

I think it absolutely was. It was really off our burger message and I think maybe you could do that once in while when things are going around well. But I think in retrospect well I love the ad for the ads sake. I mean I wish the ad could continue to run. It probably was the one product for a long time. If it was we would be doing a lot of burgers for the rest of the year.

Tony Brenner – Roth Capital Partners

Okay one other thing. Food costs are now as low as a percent of sales have been lowest for the past two years despite the fact that your potato and beef costs have been increasing pretty steadily. Beef prices are now apparently coming down pretty shortly. Would that affect you quickly? Are you hedged or pound? How should we look at that?

Andrew F. Puzder

No, we are not hedged on beef. We buy beef in the spot markets. So, when beef comes down unless something else is going up, if beef comes down, beef is a big percentage of our total food costs, when it comes down we should benefit.

Tony Brenner – Roth Capital Partners

That’s happening now?

Andrew F. Puzder

We believe it’s happening now. It is clearly happening on the agricultural side. Wheat is coming down. Oil is also coming down and cheese is coming down. The only question is on the porking side, with chicken, pork and beef and I’m certainly hopeful with beef will come down. A lot of that depends on a lot of things going into that. One is where the dollar is and well I think there are very strong arguments. Maybe it’s a good place to put your money right now. There are also some arguments that maybe its not such a great place. So, we’ll have to see what happens with the world economy but with the strength of the dollar and where the beef market goes it could help us out this year and we are hopeful.

Tony Brenner – Roth Capital Partners

We are sure. Well, thank you.

Andrew F. Puzder

Thanks Tony.

Operator

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

Christopher O''Cull - Suntrust Robinson Humphrey

Hi good morning guys.

Andrew F. Puzder

Good morning Chris.

Christopher O''Cull - Suntrust Robinson Humphrey

Andy I had a question regarding one of the slides in your presentation. You described unit growth goals for next five years. If my calculations are correct that implies a compound annual growth rate of about 6% for franchise units, which is one of the fastest rates we have seen in the QSR space. So, can you maybe comment a little bit about your visibility to reach that goal?

Andrew F. Puzder

There seems to be we are dealing with a lot of different people who are in both franchise with Carl’s and Hardee’s. We have got Carl’s franchisees who are actually getting into the Hardee’s restaurants because they see a real opportunity. We’ve got existing Hardee’s franchisees who want to go Hardee’s. We’ve got new franchisees coming into Carl’s and Hardee’s and we have some huge growth opportunities. I think our biggest growth opportunity is Texas where we have very few restaurants. The restaurants we have opened to date have done better that we expected them to and we are actually leveraging that distress where we are building restaurants, and managing kind of around the leases and buy property for lower amounts that we had contemplated when we had looked doing expanded franchise growth about two year ago. So, and then the other huge opportunity is obviously international where there seems to be a lot of interest and a lot of discussion about going into various countries and various places of the world where we are not even involved now, like South America, Central America. We are not there and in Mexico a 100 fresh units in Mexico will do spectacularly well. We are doing great in the Middle East but we are not in Europe. And now we are beginning to develop Asia which we find to be very exciting. We’ve got restaurants doing very well in Singapore already and those franchisees clearing us through with other Chinese franchisee in Shanghai in June of this year and then Shanghai, Beijing. So, I really think we’ve got number 1 since we have a higher percentage of company owned restaurants we have a lower percentage of franchise restaurants than some of our competitors so that might make our growth rate a little easier because we are growing off a smaller base. But number 2, we’ve put some investments into this. We’ve put a lot of focus into it and we are seeing some real returns.

Christopher O''Cull - Suntrust Robinson Humphrey

Still the units that you took out as target as franchise openings, a lot of those units are already, some of the franchisees have already signed development agreements and are working towards opening those units or committed to at least opening those units over a set period of time.

Andrew F. Puzder

That’s correct. Like I think in the presentation I talked about the 280 units we signed up for and then you’ve got that 115 new development agreements. The thing is that 115 would be Hardee’s guys who bought restaurants recently signed up for. So, we have got a lot of new units already committed to buy these routes.

Christopher O''Cull - Suntrust Robinson Humphrey

And these I know the one in Texas I think you are right. I think it is an exciting market to be opening Carl’s. When you look at those openings in Texas, those franchisees have already probably paid the fees. So, they are probably going to be breaking ground soon in that market. Is that correct?

Andrew F. Puzder

Correct. The have paid their upfront fees and I guarantee you they want to get going just as fast they can.

Christopher O''Cull - Suntrust Robinson Humphrey

Right okay and then one other question on that, the franchisees are starting to remodel stores. Is there any risk that we could see franchise unit z openings slow because obviously they are going to be spending capital to remodel existing stores or a lot of the franchise openings from new people are in the system?

Andrew F. Puzder

All those Texas units, the 121 and the 72 are all new. We made those. Those are not the…

Christopher O''Cull - Suntrust Robinson Humphrey

New to the system.

Andrew F. Puzder

New to the system. So, we could have people who were going to build two or three stores, maybe they want two stores having got their remodels done but they have all got time schedules, the guys who signed up and agreed to develop and they lose their territories and their advances if they don’t live up to the schedule. So, there is some incentive for them to do both. But you could. I mean quite honestly, I would be building more restaurants if I wasn’t doing remodels at the same time.

Christopher O''Cull - Suntrust Robinson Humphrey

Okay great and then one last question, Ted, during the fourth quarter Carl’s check average was roughly flat like year-over-year despite you guys promoting these higher price offering. Any explanation for that?

Theodore Abajian

No, nothing.

Andrew F. Puzder

I’ve one. We were offering higher priced item the year before too. We didn’t have any strategy but we really didn’t take the kind of price increases this year that we took the prior year. We took a lot of pricing in the prior year to meet those commodity cost increases and we took some pricing this year but not near the magnitude. But I think you are seeing people trade down to some lesser expensive products. In other words, instead of getting a $6 burger you might get a famous star, you might get a super star, which is a little lower priced and we are seeing a reduction in combo incidents which is really something we are going to be addressing very aggressively over the next few periods but I’d say the time encumbrance had probably big impact on the lower unit check. And that’s something that we hear from our suppliers is happening across the segment is that young guys would come in and order a $6 burger and sort of make it a super star or a famous star or a rest room and a glass of water. So, that why a lot of things are going to happening. So I think they were the major ones. Ted do you have anything?

Theodore Abajian

No the combo incident was a more relevant one.

Christopher O''Cull - Suntrust Robinson Humphrey

Thanks guys.

Operator

Your next question comes from the line of Howard Penney with Research Edge. Please proceed.

Howard Penney – Research Edge

Thanks good morning. Thanks for taking my question. It is a competitive question I guess primarily related to Hardee’s but Hardee’s has been up for the last couple of years with major competitor Wendy’s. They seem to have put their act together or they are getting their act together. Is there anything new you would do with advertising product wise within the Hardee’s system to sort of leave any issue that Wendy’s might given that they are putting their act together?

Andrew F. Puzder

I mean Wendy’s like 5, 6 years ago when they were averse to be some fresh ground and really promoting quality would have been a bigger concern. Now Wendy’s is one of the brands that I went to get some product sampling and if you think they are competitive with Hardee’s I’d encourage you to go into a Wendy’s and try their burger and then go to Hardee’s and try a burger. I think they are taking a different path. I think they are trying to compete more with McDonalds and Burger King on that value deep discounting front and they are trying to compete with Hardee’s on the thick burger and the Wendy thick burger side. So, you have seen Hardee’s numbers and they are actually better this year than they were last year. So, I don’t really see Wendy’s, I don’t see their current strategy impacting the Hardee’s consumer.

Howard Penney – Research Edge

Well thank you.

Andrew F. Puzder

Again they pool a lot of breakfast which is probably healthy.

Howard Penney – Research Edge

Right, okay thanks.

Operator

(Operator instructions) As a reminder, press “*1” for questions, your next question comes from the line of Michael Wolleben with Sidoti & Co. Please proceed.

Michael Wolleben – Sidoti & Co

Hey guys thanks. Just I want to touch on the health of the system as a whole year. I guess you guys certainly agree that there are a number of units that aren’t generating cash. I just wanted to know if you can give us a picture here if that number has been increasing here in recent months. Whether those are at Carl’s or Hardee’s and if you are seeing any geographic concentration on those?

Andrew F. Puzder

Yeah I mean almost all of those restaurants are Hardee’s and I don’t think there is any material change in the number of stores in that category and just to be clear, we charge our advertising expenses and regional overhead expenses to our restaurants. So, when a store is negative cash flow that does not mean that, it’s a drain on the company. It means that we’d like it to perform better of course but it is contributing advertising dollars, contributing to our overhead structure at the field level and you like those stores to be better. I don’t think we are seeing a material change in the size of that group.

Theodore Abajian

Say in your average $1 million volume that number is a whole lot more than it was just a couple of years ago

Michael Wolleben – Sidoti & Co

Okay great and I may have missed this. With the cutback on your capital expenses the plans for the free cash is debt repayment I’d assume?

Theodore Abajian

If we have free cash, that’s what we use it for. So, as it is that may change or could change but I’d like to see our debt come down. I like paying down debt.

Michael Wolleben – Sidoti & Co

Is there a target that you’d like there or?

Theodore Abajian

As much as I can. I mean I’ll pay just like in my personal life. If I like I’ll pay debt as fast as possible. I like the company to have as little debt as possible. So, we are focused on that and again we do need to get this remodel programs so that our units are not only competitive with our most successful brands but prove that we are the best brands that don’t have the capital to remodel right now and desperately need to do so and out there, there are a bunch of them. So it is something that we’d be through in about a year and we’d increasingly use our cash to pay down debt and maybe build some restaurants in Texas.

Michael Wolleben – Sidoti & Co

Thanks.

Operator

We have a follow up question from the line of Keith Siegner with Credit Suisse. Please proceed.

Andrew F. Puzder

Keith welcome back.

Keith Siegner - Credit Suisse

Thank you. One last question on the Hardee’s in term of the company’s restaurant margins. There was a pretty substantial year-over-year headwind on your occupancy and other operating expenses which I think was caused by the units that you took back having been all rented. Is that right?

Andrew F. Puzder

There is a component of that yes. They were all leased properties and I mean the other headwind of course is depreciation as we have been saying.

Keith Siegner - Credit Suisse

Okay so, now that most of the re-franchising and other acquisitions activities seems to be coming to an end should the second half run rate be more than the run rate we are looking at going forward for the occupancy and other expenses at Hardee’s? Is it 24 as opposed to the 21, 22 for the first half?

Theodore Abajian

I will interrupt this way Keith that no question there was more of a depreciation impact in the second half of the year than the first as we ramped up our remodel. So, rather than focusing on a particular number and rolling that number forward in future quarters I think you should pay more careful attention to the year-over-year trend because there is a fair amount of seasonality in our business in terms of when our sales volume is coming during the course of the year and that’s where obviously going back to the cues and working out our year-over-year change in occupancy expense by quarter and what growth and detailed disclosures that we make there, I think would be helpful to you.

Keith Siegner - Credit Suisse

Okay thanks.

Andrew F. Puzder

And Keith before you go I think John and Ted also mentioned that you were wondering why capital spending went down in Q4. Is that right?

Keith Siegner - Credit Suisse

Capital spending on the remodels a little bit yes. That’s one thing…

Andrew F. Puzder

That’s due to the holidays and the weather. You just can’t remodel. It will always go down in fourth quarter.

Keith Siegner - Credit Suisse

Okay yeah good, thanks.

Andrew F. Puzder

Okay.

Operator

There are no further questions. I’ll now like to turn the call back over to Andrew Puzder for closing remarks.

Andrew F. Puzder

Well, thanks everybody. It was a great year. We look forward to the next year and talking to everybody again I guess in June when we would report our first quarter results. Thanks and look forward to seeing you and talking to you soon.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.