Q1 2008 CKE Restaurants Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good day, ladies and gentlemen, and welcome to the first quarter 2008 CKE Restaurants earnings conference call. At this time all participants are in a listen only mode. We will facilitate a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS).

I would now like to turn the conference over to your host for today, Mr. John Beisler, Vice President of Investor Relations. Please proceed, Sir.

JOHN BEISLER, VP - IR, CKE RESTAURANTS: Thank you. Good morning.

My name is John Beisler, VP of Investor Relations for CKE Restaurants. CKE Restaurants is hosting this conference call to discuss our results for the 16 weeks ended May 21st, 2007.

Yesterday CKE issued a pair of press releases announcing its financial results for the 16 weeks ended May 21st, 2007, and its same-store sales for the four period ended June 18th. Both releases are available on our website, www.CKR.com.

CKE has also filed its Form 10-Q with the SEC. This call will reflect items discussed within those press releases and Form 10-Q. CKE management will make reference to them several times this morning.

Speaking on today's call are Andy Puzder, President and Chief Executive Officer and Ted Abajian, Executive Vice President and Chief Financial Officer. Andy will begin today's presentation with a comparable overview of our performance for the first quarter. Ted will then review aspects of the quarter with you. Andy will conclude today's presentation with comments on the strategic direction of the Company and our same-store sales results for period five. Andy and Ted will then take questions from callers.

Before we begin I would like to remind you of our disclosure regarding forward-looking statements contained in our Form 10-Q and earnings release. Our disclosure regarding forward-looking statements can be found within our Form 10-Q under item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations.

Matters discussed during our conference call today may include forward-looking statements relating to future plans and developments, financial goals and operating performance and are based on management's current beliefs and assumptions. Such statements are subject to risks and uncertainties and actual results may differ materially from those projected in the forward-looking statements.

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

ANDY PUZDER, PRESIDENT AND CEO, CKE RESTAURANTS: Morning, everybody. We undertook a number of important steps during the first quarter of fiscal 2008 to improve this Company. Our Board of Directors increased our share repurchase authorization and increased our dividend. We purchased a significant amount of stock, we initiated a refranchising program at Hardee's, we entered into an agreement to sell La Salsa and we amended our credit facility to lower our borrowing cost and provide increased borrowing capacity.

Each of these actions demonstrate our confidence in the financial strength and stability of this Company and our commitment to further enhance that strength and stability, while maintaining our focus on returning capital to our shareholders.

In March our Board of Directors approved a 50% increase in our quarterly cash dividend from $0.04 to $0.06 per share; and one month later, our Board increased our stock repurchase plan by $50 million raising the total authorization to $250 million. During the first quarter we returned approximately $86 million to stakeholders through share repurchases and quarterly cash dividends, including the repurchase of 4,380,020 shares of common stock at an average price of $19.02.

Since the inception of our stock repurchase plan in April of 2004 through the end of first quarter fiscal 2008, we have repurchased approximately 9.8 million shares or roughly 15% of our outstanding shares. Our average purchase price was $17.74 per share for a total investment of $173.9 million. As of May 21st, 2007, we have a total of $76.1 million remaining in our current share repurchase authorization.

We continue to have the financial flexibility to repurchase shares through open market purchases and privately negotiated transactions. We are also scheduled to purchase a minimum of $5 million of common stock each quarter through our nondiscretionary 10B-5-1 plan for the remainder of the fiscal year.

In April we announced our plans to begin refranchising approximately 200 Hardee's restaurants in a number of markets across the Midwest and Southeast. Refranchising these markets will accelerate their development and will allow us to focus our corporate development efforts in our core markets. In addition, refranchising allows us to allocate our financial and operational resources more efficiently, thereby facilitating our growth plans for Company-operated restaurants.

During the first quarter, we completed the refranchising of 28 Company-operated restaurants with three existing franchisees, generating proceeds of approximately $10.7 million. As of the end of first quarter, we had signed letters of intent with franchisees to sell an additional 74 Company-operated restaurants for approximately $29 million; and we are in negotiation with other franchisees and prospective franchisees to sell an additional 81 Company-operated restaurants for approximately $33 million.

In late May, we announced that we had entered into an agreement to sell La Salsa Fresh Mexican Grill to the owners of Baja Fresh. While we believe in La Salsa's potential we also believe our best opportunity for improving earnings and cash flow is to devote our resources to the future of Carl's Jr. and Hardee's. As such, selling La Salsa is in the mutual best interests of both CKE and the La Salsa brand. We remain on track to complete the transaction during the second quarter.

During the first quarter and for the first quarter in some time, our outstanding debt level has increased. The combined outstanding balance of our term loan revolving credit facility and convertible notes was approximately $208 million, a $77.1 million increase over the end of fiscal 2007.

We used our credit facility to repurchase stock during the quarter. We also amended our credit facility during first quarter to provide for increased borrowing capacity and to lower our cost of debt. As of the end of first quarter we had $170 million outstanding on our term loan and $22.5 million in borrowings on our $200 million revolving credit facility. Since the end of the first quarter, we have further reduced the balance on the revolving credit facility to $14 million. The revolving credit facility is available for letters of credit, general liquidity purposes and opportunistic share repurchases, and further underscores our lenders confidence in the underlying strength of our business.

Moving on to our first-quarter results, net income in the first quarter of fiscal 2008 was $15.4 million or $0.23 per diluted share versus $16.2 million or $0.23 per diluted share in last year's first quarter. Income before income taxes and discontinued operations was $26.3 million compared to $27 million in the prior year quarter. However, this year's net income reflects a $1.3 million increase in non-cash share-based compensation expense, compared to the prior year quarter as well as an additional $1.3 million due to cost and start-up efficiencies associated with the recently completed relocation of the Carl's Jr. Food Distribution Center and the simultaneous installation of a new overall distribution management system.

Carl's Jr. Company-operated same-store sales for the first quarter were flat versus the prior year quarter. However as noted in our period five press release sales were positive 2.7% in period five as Carl's Jr. returned to promoting a popular burger product -- the Hawaiian Teriyaki Burger. Carl's Jr.'s trailing 13-period average unit volume of $1,461,000 and the end of the first quarter represents a $21,000 increase over the level reported at the end of fiscal 2007, and the highest average unit volume ever recorded for the brand. This increase was due to our sale last year of the Oklahoma market.

Carl's Jr. restaurant operating costs as a percent of Company-operated revenue were 77.5%, a 240 basis point increase over the prior year quarter. This increase was primarily due to three items. First, greater depreciation expense related to the installation of a new point-of-sale system in our ongoing remodel program. That was 60 basis points. Second, higher rental expense due to annual CPI inflation adjustments and the sale of our Oklahoma market last year; and that was 50 basis points. (inaudible) third higher food and packaging cost due primarily to cost and start-up inefficiencies related to the recently completed relocation of our Food Distribution Center and the simultaneous installation of a new overall distribution management system. That was 80 basis points.

This relocation cost and start-up inefficiencies negatively impacted food costs and franchise operating expenses at Carl's Jr. Going forward we anticipate that the Distribution Center relocation and the new distribution management system will positively impact Carl's Jr.'s operating expenses.

Hardee's Company-operated restaurants recorded a 1.8% same-store sales increase for the quarter. Its fifth consecutive quarter of positive same-store sales. Hardee's continued this positive same-store sales trend with its 20th consecutive period of positive same-store sales in period five.

Hardee's trailing 13 period average unit volume of $923,000 at the end of first quarter represents a $7,000 increase over the level reported at the end of fiscal 2007 and is the highest average unit volume for Hardee's since 1995. Hardee's restaurant operating cost as a percent of Company-operated review were 82%, unchanged compared to the prior year quarter; lowered labor costs were offset by higher repair and maintenance expense due to necessary investments in the restaurants we acquired from a terminated franchisee in the prior year quarter; and higher food commodity cost mainly pork and soft drink syrups.

Hardee's increased repair and maintenance costs were incurred in the Atlanta market, which we consider a growth market and which we are planning to codevelop with a franchisee. We needed to expend these monies to facilitate growth in that market.

All in all, the first quarter was a quarter in which we accomplished a great deal and continue to lay the groundwork for growth and enhance profitability going forward.

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

TED ABAJIAN, EVP AND CFO, CKE RESTAURANTS: Thank you, Andy, and good morning, everyone.

Before I get started, I need to make you aware that during this conference call we will refer to certain non-GAAP financial measures as explained in our earnings release issued yesterday and in our report on Form 10-Q for the 16 weeks ended May 21st, 2007.

Also our reported financial results have been adjusted to reflect the pending sale of our La Salsa Fresh Mexican Grill chain, which has been reclassified as a discontinued operation within our consolidated financial statement.

I will now take you through our first-quarter results. First-quarter income before income taxes and discontinued operations was $26.3 million versus $27 million in the prior year quarter. This year's pretax income includes $3.1 million in non-cash share-based compensation expense which is an increase of $1.3 million over the prior year amount.

In addition, this year's pretax income includes approximately $1.3 million in cost and start-up inefficiencies associated with the recently completed relocation of the Carl's Jr. Food Distribution Center at the simultaneous installation of a new overall distribution management system. These distribution center costs and start-up inefficiencies negatively impacted food costs and franchise operating expenses at Carl's Jr.

Offsetting these cost increases were facility action charges which were $2.8 million lower than the prior year quarter and interest expense, which was $1.7 million lower than the prior year quarter. The decrease in facility action charges was primarily due to charges incurred in the prior year quarter that did not recur this year, related to the closure of 16 Hardee's restaurants we reacquired from a terminated franchisee, as well as an $800,000 gain in the first quarter this year on the sale of 28 Hardee's restaurants to franchisees as part of our refranchising program at Hardee's.

The decrease in interest expense is primarily due to lower average debt balances during the quarter as compared to the prior year. However we did increase our borrowings late in the first quarter to fund additional share repurchases.

First quarter net income was $15.4 million or $0.23 per diluted share compared to $16.2 million or $0.23 per diluted share in the prior year quarter. At Carl's Jr., first-quarter same-store sales were flat rolling over a 5.6% increase in the prior year quarter. Restaurant operating costs increased by 240 basis point to 77.5% of Company-operated revenue. The increase in restaurant operating cost was driven by a 100 basis point increase in occupancy costs, primarily due to higher depreciation and rent expense. Labor costs, excluding workers compensation, increased 20 basis points.

Finally, total food and packaging costs as a percent of Company-operated revenue were 80 basis points higher than prior year. The increase was primarily due to costs related to the recently completed relocation of our main distribution center and the simultaneous installation of a new overall distribution management system.

Turning now to Hardee's, first-quarter same-store sales at Company-operated Hardee's restaurants …