Q4 2007 P.F. Chang's China Bistro, Inc. Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good afternoon, and welcome to P.F. Chang's China Bistro fourth quarter 2007 earnings release conference call. Your lines have been placed on listen-only mode until the question-and-answer session of the conference. (OPERATOR INSTRUCTIONS) . Today's call is being recorded. If you have objections, you may disconnect at this time. I would now like to turn the call over to Mr. Mark Mumford, Chief Financial Officer for P.F. Chang's China Bistro. Please go ahead,

MARK MUMFORD, CFO, P.F. CHANG'S CHINA BISTRO, INC.: Thank you. Hello, everyone. Welcome to P.F. Chang's fourth quarter 2007 conference call. Before we get started, I just want to remind you we expect to file our Form 10-K later this week. And as described in that document, the industry we operate in is full of risks and uncertainties. Throughout this call, we may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our actual results could differ materially from those stated or implied in forward-looking statements as a result of the factors detailed in today's press release and in our filings with the SEC. With that, I'll turn the call over to our CEO, Rick Federico to begin.

RICK FEDERICO, CHAIRMAN - CEO, P.F. CHANG'S CHINA BISTRO, INC.: Good morning. Joining me today are Bert Vivian, President of P.F. Chang's, Russell Owens, President of Pei Wei Asian Diner, Mike Welborn, our Chief Administrative Officer and Mark Mumford, our Chief Financial Officer. I'll have brief opening remarks followed by Mark's financial review, Bert's update on the Bistro, Russell's update on Pei Wei and then we'll close with some questions and answers.

It goes without saying, but the macro environment remains challenged. Candidly, it looks like this will be with us for at least the balance of the year, as there are no short-term solutions to the issues the consumer faces regarding discretionary spending. Internally we have our own set of challenges, but we are confident we are starting with two brands that a clear consumer favorites. For example, we continue to believe that our Pei Wei brand is well positioned and is a good consumer option in this macro environment. In spite of the economic issues, Pei Wei continues to be a consumer favorite. Recently released independent research of over 130 quick service or quick casual restaurants placed Pei Wei as the top consumer choice with the highest percentage of guests rating their experience as excellent. To even be included with outstanding companies like, In-N-Out Burger, Starbucks, Panera, and Chipotle is an honor, to be on top is special.

Traffic in our Pei Wei restaurants grew in 2007. The reality is our Pei Wei guest did trade around the menu a bit, ordering more lower priced bowls and fewer high priced entree, but the net result was more guest dined with us in 2007, than the prior year and without the benefit of price, comparable sales were flat. We did see the highest increase in traffic during the fourth quarter. In spite of Pei Wei's increasing popularity, we recognized that improving operating margins is a priority. Russell will comment on internal operational and development plans designed to enhance returns from the concept.

At the Bistro, we found the fourth quarter to be very interesting and encouraging. In general, during the fourth quarter, we did see sequential improvement in our comparable sales. In particular, the California market improved, while Florida was a bit softer. During the holiday period, when the guests decided it was time to open their wallets and enjoy themselves, the Bistro was clearly on their list. The Bistro did spend the better part of 2007 designing, testing and rolling out initiatives that will enhance the guest experience. We are basically 100% complete with the introduction of the grill, rolling out the lunch bowl features, and the development of the mini desserts. We continue to evaluate the impact of marketing and messaging against these initiatives. These plans reflect a respect for the pressure the consumer faces today, and we believe help maintain the Bistro as a top consumer choice in the years to come. As promised, I committed to make a decision about the future of our Taneko business by the end of the year. There were many positives that came from our investment in Taneko, like the Grill to Bistro, the evaluation of online reservations, the development of a direct CRM process, and enhanced technologies that aid in improving operating efficiencies. However, we were not successful in broadening the audience for Taneko and felt our time, energy and capital were best spent on our core brands. As announced, we currently have a memorandum of understanding to sell Taneko and expect the asset purchase agreement to be completed in the next 60 days. We will maintain a minority interest in the new L.L.C., but only as a limited investor. We will not have any ongoing operational involvement once the transaction is completed.

On the last call, we discussed our thoughts on our development plans and our authorization to repurchase our shares. I will have Mark update you on the repurchase activity during the fourth quarter in his report. In the future, we plan on being both flexible and opportunistic in our repurchase plans. With regards to our 2008 development plans, I discussed on the last call we do not see any additional changes this year. We have already adjusted our Pei Wei development down to 25 strategic sites that best fill out or enhance markets where we currently operate. As we continue to monitor results from our margin enhancement exercise, and our ability to develop our leadership teams, we are keeping flexible on our thoughts on our 2009 development. As we get more clarity, we will share our thoughts.

Regarding the Bistro, we continue to believe there are 17 to 20 great sites each year that can generate the returns we expect. We are evaluating all projects, confirming our original assumptions when we signed the original letters of intent. We will not change our return expectations and should we conclude that unsigned sites in our pipeline do not meet these hurdles, we will adjust accordingly. Again, we are speaking about 2009 development plans.

Before I turn the call to Mark, to close my thoughts, I do believe that 2008 will be a challenging year. We will face both top and bottom line pressures. However, we will continue to adjust with an eye on doing what is right for our business long-term. That vision includes a short-term focus on needed enhancements and a longer-term perspective that maintains our brands at a very high level of relevance to the consumer. With that as a final thought, I'll turn the call over to Mark.

MARK MUMFORD: Thanks, Rick. I would like to make a few comments on the Q4 2007 consolidated results, touching on a few of the larger adjustments and then we can move to the balance sheet and the 2008 forecast. Total EPS for the quarter came in at $0.28, which included an impairment charge of approximately $0.08 for the write-down of Taneko assets in conjunction with the planned sale of that concept. Net of this charge, Q4 EPS of $0.37 versus a forecast we put out on January 11, of $0.32 to $0.34, with the over achievement coming from more favorable tax rate then we were anticipating. Let's quickly walk through what drove that favorable tax rate. The majority of our rate variance is attributable to events or actions that are unique to this quarter and for the most part we do not anticipate them having a significant impact in the future. They include the benefit of state tax credits in Texas and California, amendments to prior year tax returns to reflect additional expense deductions, and the release of discreet reserves for positions that are no longer deemed to be uncertain based on updated facts. As we look at our forecast for fiscal 2008, we expect our effective tax rate will be closer to 27%.

Our Q4 results also include better than expected Workers' Compensation expense. Over the past few years, the company has focused on providing a safe environment for associates and guests through a number of safety programs and initiatives. This investment spending is beginning to have an impact on the frequency of our claims and we expect this favorable trend to continue. In addition, Group Medical expense came in slightly favorable to what we are expecting. This reverses the trend that we had seen earlier in the year, where Group Medical was edging higher than our expectations. Cost of sales came in slightly higher than we expected, primarily due to higher produce and a slight uptick in some of our proteins. On Pei Wei, minority interest is almost 400,000 favorable, which is attributable to a current year reclass of additional minority interest expense to the labor line for imputed partner bonus. As you may know, for reporting purposes, a certain percentage of minority interest expense is deemed to be compensation. Excluding this reclass, minority interest expense was in line with our forecast, and labor expense leveraged to a greater extent. If someone wants more detail to these or other variances on the income statement, please give me a ring after this call.

Now let's switch gears and turn to the balance sheet. We ended the quarter with 24 million in cash versus 32 million at the end of fiscal 2006. Borrowings on our credit line totaled 85 million versus 12 million at the end of last year, an increase of 73 million. So where did we use the cash? Well, first we generated cash from operations of 138 million, an increase of 12% over the 123 million in 2006. We used 152 million in gross CapEx before TI, another 13 million in the purchase of minority interest, and another 50 million in share repurchases. These amounts represent the majority of our increase on our revolving line of credit of 73 million.

Diving into our CapEx number a little deeper, the 152 million is a gross number. We collected about 24 million in TI allowances, given as a net number of 128 million. Of that spend, about 23 million related to planned store openings for Q1 of 2008, when we will open five Bistros and 11 Pei Weis. We are projecting net CapEx spend for 2008 to be between 105 and 110 million, with the decrease driven by lower development plans for both concepts. We will open 25 Pei Weis in 2008 versus 37 in 2007, and …