BJ's Restaurants Inc (BJRI) 2006 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. At this time I'd like to welcome everyone to the second quarter 2006 results conference call. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the floor over to your host, Jerry Deitchle. Please go ahead.

Thanks. Hello everybody. I'm Jerry Deitchle with BJ's Restaurants. Welcome to our quarterly investor conference call which we're also broadcasting live over the Internet. Joining me on our call today is Greg Levin, our CFO. Our Chief Development Officer, Greg Lynds, is out traveling looking for sites today so he can't be on our call today so I'm going to provide an update on his behalf with respect to our new restaurant development plan.

After the market closed today, BJ's Restaurants released financial results for the second quarter of 2006 that ended on July 4, 2006. And if you haven't had a chance to see our press release yet today, you can view it at our website -- www.bjsrestaurants.com.

Our agenda for the call today will be as follows. First, I will provide a brief business and operational overview for the second quarter of 2006, and then Greg Levin, our CFO, will briefly review our unaudited consolidated income statement, our summary balance sheet and our liquidity position as of the end of the second quarter. And then after that, we will be happy to take a few questions. We would like wrap up the call in about 45 minutes. So let's get started.

Before we get into the business review, I'd like to go ahead and make our standard cautionary disclosure with respect to forward-looking statements. Our comments on the conference call today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by forward-looking statements. Investors are cautioned that forward-looking statements are not guarantees of future performance and that undue reliance should not be placed on such statements. Our forward-looking statements speak only as of today's date, which is July 27, 2006. We undertake no obligation to publicly update or revise any forward-looking statements or to make any other forward-looking statements whether as a result of new information, future events or otherwise unless required to do so by the securities laws. Investors are referred to the full discussion of risk and uncertainties associated with forward-looking statements contained in the company's filings with the Securities and Exchange Commission.

Now with that out of the way, as we indicated in our press release today, BJ's reported outstanding financial results for the second quarter in spite of a very, very difficult operating environment for most casual dining restaurants in general. Compared to the same quarter last year, our revenues increased a solid 32% to $57.8 million. Our net income increased 14% to $2.3 million and our fully diluted net income per share increased 11% to $0.10.

Now as we noted in our press release today, we adopted a new financial accounting standard, FAS 123R share-based payment, like most other companies during the first quarter this year. FAS 123R requires us to recognize stock-based compensation on a go-forward basis. So the results of our operations in prior periods were not restated with this new accounting standard, so we're going to have a bit of an apples-to-oranges quarterly earnings comparison for every quarter this year due to the implementation of that new standard.

However, as we indicated in our press release, on a pro forma basis, if we were to include stock-based compensation expense in our results for the same quarter last year, then our net income and diluted net income per share for the second quarter this year would have increased 65% and 67%, respectively, on more of an apples-to-apples basis. Again, similar to our earnings release for the first quarter this year, Greg added a footnote to our press release today that provides a lot more detail on the individual components of our stock-based compensation expense.

Our 32% increase in revenues for the quarter was driven by an approximate 24% increase in total restaurant operating weeks, an approximate 6% increase in average sales per operating week, and a stronger than expected 5.9% increase in comparable restaurant sales that successfully hurdled a pretty tough comparison for the same quarter last year, which was up 4.8%.

Our favorable sales for the second quarter also contributed to the 80-basis-point improvement in our restaurant-level operating cash flow margins for the second quarter that rose to 20.5%, which we thought was a pretty nice performance.

Our 5.9% increase in comparable restaurant sales for the second quarter represents BJ's 39th consecutive quarter of positive comparable sales comparisons since the Company's IPO back in 1996, and I think as most restaurant investors know, was achieved in spite of one of the most challenging sales and operating environments for casual dining restaurants that we have all seen in recent years, again, given the recent increases in energy costs, gasoline costs, coupled with higher adjustable interest rates that are impacting the discretionary spending pattern for many consumers lately.

I think it's also interesting to note that BJ's is now in its 10th straight year of positive comparable sales comparisons. We think this is a strong testimonial to the sustained popularity and outstanding price value characteristics of the BJ's Restaurants concept, which has been in existence in one form or another for about 28 years now.

We continue to believe that BJ's offers a superior overall dining experience than most of what we call the mass market casual dining concepts out there. When you look at our average check per guest, which is only about $11, that's actually a little lower than most of the mass market concepts out there. So when you compare what we offer for what we charge, BJ's continues to have incredible value for the consumer and I think that that's certainly helping to carry the day in this very difficult operating environment.

In fact, I would bet that we probably have one of the most -- lower average checks in casual dining right now, except for those concepts that might have a breakfast daypart to them, and I think that is an important advantage for BJ's and something that we've got to continue to play to the strength of.

We also believe that our sales are beginning to benefit from some of our 2006 key initiatives that have just been rolled out to our restaurants, particularly the initiative that we call running the restaurant quality fast that includes, among other things, our new kitchen display system, or KDS for short.

While we were pleased with our solid comp sales increase for the second quarter, and I might add that our comp sales for the third quarter to date through the month of July remain solidly positive as well, I think it's wise to keep in mind that the overall operating environment for casual dining restaurants remains pretty difficult for everybody. It appears that most industry observers think the difficult macroenvironment is going to continue for awhile, and I would have to agree with that. As we've been mentioning during the last couple of conference calls, we still expect our comp sales comparisons to eventually track closer to our longer-term run rate expectation in the 2% to 3% range or so as we move through the rest of the year. But, depending on the progress of our quality fast initiative and our other sales building initiatives that we've targeted, everything else being equal, we certainly do have an opportunity to continue to do a little better on that measure. Generally, the better positioned, better differentiated and better executed concepts that provide better overall value to consumers ought to have the ability to do well in any operating environment, and we certainly believe that BJ's has many of those characteristics. But, having said that, we've got to work hard, even -- to work hard to make BJ's an even better proposition for the consumer, and that's really what all of our key initiatives are intended to do. Greg Levin is going to comment on recent sales for some of our individual restaurants in his remarks a little later in our call today.

Just moving to our newer restaurants, initial sales volumes for our openings that we had during the second quarter continued to exceed our expectations. We opened a wonderful restaurant on June 6 in Elk Grove, California. That is in the Sacramento market, and that restaurant set an all-time BJ's record for first week sales and sales have continued amazingly strong in that restaurant.

Initial [week] sales for our other restaurant that we opened in the Sacramento market in the second quarter in Natomas, California, that opened up on June 27. Their initial sales were not that far behind Elk Grove's record-setting pace, and sales continue to be very strong in Natomas. And closer to my home state of Texas, we opened restaurant number 50 in El Paso a few weeks ago, had very, very strong initial sales and we're very optimistic that El Paso has a good opportunity to eventually become BJ's highest sales volume restaurant to date that is located outside of the home state of California for BJ's. I think that's very, very encouraging to us as there are many more El Paso-type markets out there and available for future development for BJ's.

We do believe that the stronger sales volumes for most of our new restaurants are principally due to three factors. First of all, the strength of the concept itself, the broad consumer appeal and value that we have in the concept. Secondly, improved site selection under Greg Lynds' leadership; and thirdly and most importantly, our gradually improving ability to operationally staff, train and execute our new openings. Our operating and opening teams have continued to just do a better job with every new opening, and I think that's being reflected in our overall operational execution in our new restaurants.

BJ's has proven its ability to drive strong sales volumes successfully, not only in trade areas and markets with higher than average household incomes where BJ's has historically opened most of its restaurants, but also in markets with average household incomes. I think we have said this before and we'd like to say it again -- we're not aware of many traditional casual dining concepts that have this degree of versatility in their everyday appeal to different household income levels. So we believe this could be an attribute that's somewhat unique to BJ's and could also be reflected in a higher number of BJ's Restaurants that could be ultimately developed domestically over time.

Speaking of new restaurant development, as we mentioned in our press release today, our development pipeline remains in excellent condition, again, thanks to the hard work of our development staff. Our internal goal is to maintain at least 18 months of forward visibility for specific new locations at all times and we continue to be in excellent shape in that regard.

We've successfully opened six restaurants so far this year. We've got five more restaurants under construction for potential openings during the rest of this year. Those five are located in Temecula, California, which is here in Southern California; Bakersfield, California; Arlington, Texas, a suburb of the Dallas/Fort Worth market; Aurora, Colorado, a suburb of Denver; and Reno, Nevada. Our restaurant in Reno is going to also include an on-site brewery with the capacity to produce about 15,000 barrels of our premium handcrafted beer annually. So that will make our Reno brewery our largest capacity brewery with about three times the productive capacity of our current larger breweries here in California. Reno alone should be able to produce enough beer for about 18 of our restaurants, so I think that will get us down the road a little further in terms of increasing our brewing capacity pipeline.

During the first quarter of 2007 after we get the new Reno brewery up and running smoothly, we plan to rebalance all of our internal beer production activities among our various breweries to take full advantage of the economies of scale offered by the new Reno brewery to help us to reduce the average delivered production cost per barrel of beer to our restaurants. We've built a linear programming model. It is quite extensive and based on our preliminary modeling, the cost reduction that we're looking for could prove to be as much as 20% over time beginning after we get the Reno brewery up and running sometime during the first quarter of next year. And again, we'll have to see how that pans out, but that's what our model is telling us. But we will certainly keep you posted on the progress of our Reno brewery and production rebalancing activities during the next several months.

Back to our new restaurant development plan. I think most investors know that it's very difficult for us to precisely predict the actual timing of our new restaurant openings because there are so many factors that are outside of our control, including factors that are under the control of our landlords, our contractors, municipalities that grant us the licenses. With that in mind, as of today, we do currently expect our new Temecula restaurant to open in early September with the remaining four openings hopefully to occur during the fourth quarter all before Thanksgiving. Our restaurant and training and operating teams are gearing up to be ready to execute those openings with great quality and we've got a lot of confidence that we'll be able to execute accordingly.

We did mention in our press release today that we currently have five signed leases and several signed letters of intent for as many as 13 new restaurants during 2007. Our 2007 openings will likely include our first restaurants in the Central Florida and Ohio Valley markets, which we believe have great potential for the BJ's concept and we're excited to be able to bring BJ's to those exciting markets.

Our 2007 development plan is also going to include several fill-in restaurants in our established home court markets that are going to allow us the opportunity to prudently balance our growth in both established and new markets so that we can focus on the achievement of higher consumer awareness and improved food distribution and field supervision economies of scale. We continue to be very, very pleased with the overall quality of the new sites in our development pipeline.

For the next couple of years our primary growth goal remains to increase our restaurant productive capacity by 20% to 25% each year, and we measure that by total restaurant operating weeks. We believe that our internal real estate design and construction teams are staffed with strong professionals. We've got a solid network of outside engineers and general contractors of national standing as our partners. I've been in the business for 30 years and I know how difficult it is to keep a really good quality real estate pipeline properly primed and pumping at all times, and I think that BJ's is very, very fortunate to have the development team and restaurant growth opportunity that we have.

Like most other restaurant companies, we have also been impacted by higher construction costs for our new restaurants during the past couple of years. But the good news for BJ's is the numerator of our restaurant level ROI equation has generally been able to accommodate most of that cost increase so that we're able to still target accessible return levels on our capital employed as well as total capital employed in the restaurant. So accordingly, we continue to move full-steam ahead with confidence with our expansion plan.

We've only got 50 restaurants open today in only six states. We believe there is a solid opportunity for BJ's to open at least 300 restaurants domestically over the next several years. Having said that, we're going to maintain the discipline to execute our growth plan in a very careful and controlled manner. We've got to have the right operational talent in place, we've got to have the right support infrastructure in place and we've got to have the right operational toolsets in place. Let me just take a minute and comment on some of the modern toolsets that we have just recently put into place and that we've currently got under development.

First of all, in connection with our quality fast initiative that I previously mentioned that we currently have our kitchen display system, or our KDS system, up and running in all of our larger brewery and brew house restaurants. We've had very good results so far. We're also installing KDS in every new restaurant that we open going forward. As our operators continue to gain experience with KDS and overcome the learning curve, we have seen our tickets times gradually improve. We have seen the amount of food comps and re-fires where the food comes out wrong, begin to gradually decrease. And most importantly to us, we have received many, many more compliments from our guests with respect to faster, better quality food.

With respect to our labor productivity initiative, all of our restaurants have now started using our new Web-based labor scheduler and productivity analyzer. They're gradually weaning off the previous method of trying to schedule labor based on achieving a targeted percentage of sales. We're scheduling labor based on achieving a target level of productivity, which we measure in labor hours per 100 guests in achieving the targeted average hourly wage. We believe that some of the benefits of this initiative are beginning to be gradually reflected in our results as evidenced by the slight reduction in labor and benefits as a percentage of sales during the second quarter from 35.8% to 35.1%.

While the new scheduling system can't be credited with that full reduction, our absolute labor productivity on a labor hours per 100 guests basis did slightly improve during the quarter, which is very encouraging. We also continue working on the design and implementation of a theoretical food cost system to help our restaurant operators better track and control food waste and yields. We now expect to have this system ready for initial testing in one restaurant by the end of the third quarter. Since we have a very large, complicated menu, this is going to be the most difficult new toolset that we plan to introduce and it's going to require very careful design and testing and we have been working on it for about three months now. Depending on the progress of that test, we currently expect to have [a] theoretical food cost system ready for rollout by the end of this year, and then having the actual rollout occurring gradually during the first half of next year.

As we've mentioned on our last couple of conference calls, our Chief Supply Chain Officer, John Allegretto, has been reviewing our current purchasing and distribution agreements with the goal of improving purchasing and distribution leverage for all of our restaurants, particularly those that are outside of our core of California markets. We have worked hard over the past two or three months to evaluate some very competitive proposals from some of the leading national foodservice distribution houses, and I'm happy to inform you that we have executed a new lower costing national foodservice distribution agreement with a national foodservice distribution system whose affiliates are prominent regional foodservice distributors and they have all kind of joined forces to provide the economies of scale and technology of a large national organization.

This system will include our current principal distributor in California, who has been a strong supplier partner with BJ's for many, many years. So our new distribution agreement will provide us with a more leverageable supply chain footprint for all of our existing restaurants, and more importantly is going to provide us with a better supply chain leverage opportunity in all of our new markets going forward, such as Florida and Ohio. So we're not going to have to wait several years to get that leverage. We already have that in place.

So our plan is to complete the transition to this new agreement in our new out-of-state distributors by the end of the third quarter and have it fully functional beginning the fourth quarter of this year.

Finally, we have essentially completed what we call our quality restaurant touring initiative at our restaurant here in Irvine, California. This initiative included, among many things, the testing of new dining room decor and furnishings. We've got new china, silverware and glassware to upgrade our food and beverage presentations. We've got a completely new, exciting and contemporary bar design with the latest LCD flatscreen TV technology, we've upgraded and fully enclosed our patio seating area, we've got new floors in the dining room, we've got remodeled restrooms, we've got new contemporary staff uniforms, a brand-new front desk operation with an automated table management system, we've got new kitchen prep and cook line equipment, we've got new guest service procedures that are involved with dramatically improving the overall hospitality in our restaurants. All of this test is intended to help BJ's to continue to play to the strengths of its current positioning as a premium or casual-plus dining concept according to what our guests tell us they think about us.

The purpose of this test initiative over at Irvine is not to revolutionize the BJ's concept, but it's really just to continue its natural evolution. Our job is not to change BJ's, our job is to make sure we are BJ's, and that means we want to protect all of the brand equity that we've built up over the years, and at the same time, continue to evolve the concept to keep its strong, contemporary feel, a very high energy level and really keep some non-chain points of differentiation in the concept so that we can continue to capture and retain more market share as we grow at the expense of those mature mass-market casual dining chains out there that have thousands of restaurants and that all seem to deliver the same kind of average experience to consumers these days.

So now that all of the components of the quality restaurant touring initiative have essentially been completed over at Irvine, we're going to assess the viability of each component during the third quarter and then we're going to put together a very careful, prudent implementation plan, and we will keep you posted on our decisions in that respect.

I might go ahead and add that all of our new restaurants are already receiving some of those components of the initiative that are very easy to decide, such as the new LCD television technology. I would also offer up if we have got any local investors out there who have visited our Irvine restaurant recently and want to share your thoughts about that restaurant with us, don't hesitate to give us a call and let us know what you think because we are formulating our final thoughts here in the next couple of weeks.

So just to wrap up on the update of all of our key initiatives, while we are unable to precisely predict the amount and timing of any specific sales or operating margin benefits from each initiative, we are confident that taken as a whole, our initiatives will provide us with the best opportunity to gain additional leverage of our four-wall restaurant operating margins over time and be able to go out to markets like Orlando and Columbus, Ohio and the Ohio Valley and capture additional market share.

Other leading restaurant companies have proven the viability of many of these tools and methods in their operations. Really, our principal challenge is to take these methods and tools and adapt them with BJ's concepts.

One more comment, and then I'm going to turn the call over to Greg Levin for his financial review. You're going to note in our press release today that our G&A expenses for the quarter and year-to-date reflect, among other things, some absolutely necessary investment spending to continue to strengthen our restaurant manager recruiting, training and development programs. When I joined BJ's a year-and-a-half ago and assessed the status of the five necessary pipelines to support the growth of a pure operating model like BJ's -- we don't franchise, we don't drive our sales with heavy media advertising, we drive it based on pure operational execution, great locations and great execution. It was very clear that our restaurant management pipeline needed some work. We really can't run that pipeline on a just-in-time basis. We've got to stay a bit ahead of the curve and build some prudent bench strength. That is what we have really been working on for the past several months.

While we've got many, many capable restaurant managers already on our team for which we are very thankful, we do need a stronger bench to help us improve our overall execution in our established restaurants and to support our future growth, particularly when we take on new markets, such as Florida and the Ohio Valley, that are further away from our home court. So we have made and we're going to continue to make up-front investments in stronger restaurant managers for which we would expect to earn a good ROI over the longer run. We do currently expect to have our restaurant management pipeline and bench strength closer to where we would like it to be by the end of this year.

So again, in a pure operating growth model like BJ's, generally there is plenty of capital and plenty of good real estate available to support the growth of new restaurants. I think the critical challenge for us in our operating model is to recruit enough great restaurant managers to join our team and to develop them to correctly execute our concept in a very consistent manner. We can only grow as fast as we can recruit, train, develop, reward and retain great restaurant managers, and that continues to be a major focus of our management team.

So now, I'm going to turn the call over to Greg Levin and he's going to review our quarterly financial results in more detail. Greg, it's all yours.

Thanks, Jerry. I'm going to go through a couple of highlights for the second quarter and then provide some forward-looking commentary for the third quarter and the rest of 2006.

As Jerry previously noted, our total revenues for BJ's for the second quarter increased approximately 32% to around $57.8 million from $44 million in the prior year's comparable quarter. This increase is the result of 120 more operating weeks this quarter than last year, which is about 24% as we mentioned previously, and a 5.9% increase in comparable restaurant sales.

Just to give you a quick flavor of our comparable sales for the quarter, our non-California restaurants continue to see strong comparable restaurant sales. In fact, our non-California restaurants had comparable sales of almost 11% this quarter and that is really on top of the 11.8% comparable restaurant sales they had in Q1. Some of our best performing comparable restaurant sales outside of California were our Clear Lake and Louisville restaurants which had comparable restaurant sales of 17.5% and 15.3%, respectively, and our Summerlin restaurant, which is in Nevada, had same-store sales of 16% during the quarter.

In our home court of California, our Irvine restaurant, which as we mentioned is going through an extensive brand image and service enhancement, had comparable restaurant sales increase of almost 9% for the quarter, and our San Jose restaurant continued to perform well with comparable restaurant sales of almost 11%.

Additionally, our company-wide average weekly sales for the first quarter was up about 6% to approximately $93,900, or almost $94,000, compared to the same quarter last year. And this solid increase really means that not only are our mature restaurants doing well and continue to show strong comparable restaurant sales growth year-over-year, but our sales volumes for most of our new restaurants continue to come in line greater than our company average.

However, as always, I want to caution investors that many of our new restaurants will open up at volumes typically greater than their expected mature run rates, particularly in our home state of California. This honeymoon period may last up to six to nine months, and therefore, we caution analysts when developing their models to take this honeymoon period into consideration.

The 5.9% increase in comparable restaurant sales was principally due to increased customer traffic, coupled with approximately 1.8% of menu pricing for the quarter. For those of you that are monitoring menu pricing, we rolled out about 1% of menu pricing this past June, and therefore, we have a little over 2% menu pricing going into the third quarter. Approximately -- about a little over 1% of our menu pricing will roll off in November of this year as we lap our November menu. And as always, we will evaluate our margins and menu pricing opportunities prior to our next menu change that's coming November. However, I think it's important to note that our pricing strategy is really based on protecting our current margins.

Moving on to the middle of our P&L, our cost of sales of 25.6% in the second quarter was consistent with last year's second quarter, as well as the first quarter of this year. From a detail perspective, the majority of our commodities were slightly down from the prior year, and they were offset by a little bit of increases in produce where we saw in the first part of the quarter related to some late rainfalls in California, and we are seeing some higher costs for certain grocery items. And as we mentioned, a fuel surcharge is passed on to us by our food distributors.

I do want to mention that as we continue to grow and open new restaurants, we will experience pressure in cost of sales related to the timing of new restaurant openings. As we have mentioned before, we do expect our cost of sales to be higher at our newer restaurants during the first 90 to 120 days of operations versus our mature restaurants as our management teams become accustomed to optimally predicting, managing and servicing sales volumes typically experience in our newer restaurants. I would anticipate that on a go-forward basis, we will continue to see a cost of sales in this mid-25% range.

Our labor and benefits during the quarter decreased 70 basis points to 35.1% of sales from 35.8% of sales last year. This decrease is a result of improved productivity and leverage, especially in the management, labor and benefits as a result of our strong comparable restaurant sales of 5.9%. The increase in productivity was a result of our restaurant operators really beginning to use some of the tools that's provided to them which allow them to optimally manage the restaurants based on hours and guest counts and not percentages. We did see some incremental cost in hourly labor related to some additional training for the rollout of our new kitchen display system.

Our operating and occupancy cost as a percentage of revenues decreased 10 basis points to 18.8% from 18.9% last year. And this decrease is a result of leveraging the higher sales over the fixed nature of many of these costs. Looking at the details of these items, we have seen higher absolute dollar costs in many items such as utilities and paper costs related to the higher fuel and we have also incurred a higher restaurant supply cost and maintenance as a result of our deliberate decision to improve the quality of our facilities and dining room and kitchen supplies.

Our general and administrative expenses as Jerry touched on earlier, increased to 8.7% of sales from 7.2% of sales last year. And as we stated in today's earnings release, beginning with the first quarter of this year, we adopted FAS 123R, share-based payment, and as you know, it requires us to expense stock-based compensation. Included in G&A expense for the second quarter of 2006 is approximately $400,000 of stock-based compensation, which equates to about 0.7% of sales. If we exclude the stock-based compensation, G&A on an apples-to-apples comparison increased 80 basis points to 8% of sales.

On an absolute basis, excluding the $400,000 in stock-based compensation, G&A increased to $4.6 million from $3.2 million last year. This dollar increase is a result of really three areas. First is the planned increase in additional expenditures associated with the continued infrastructure investment in our business, for the field supervision and corporate support. For example, over the last year, we have invested in the supply chain capabilities of which we should begin to see some of this benefit beginning late in the third quarter, as Jerry mentioned. And in field supervision, we added a regional vice president of operations and a vice president of kitchen operations, which will really allow us to carefully grow our business into Florida and Ohio next year.

The other area of increased costs relate to our manager and training, which Jerry previously touched on as well. These are the costs associated with recruiting and training of new managers. In essence, this is our management pipeline. As we have mentioned before, we can only grow as fast as we can recruit and train new managers. As such, we have put a lot of resources behind this pipeline and we're really playing catch-up with this year so that we can optimally run our restaurants with quality execution from day one.

During the second quarter, we had over 16 managers in training in the system, which is close to a 50% increase compared to last year. Additionally, we put in a fast-track GM program in which we recruit high-potential, high-quality managers. In these cases, these managers will cost us more in the short run, but will have an immediate positive effect upon the restaurants that they manage and provide a significant ROI over the long run. I would anticipate this year as we continue to build this pipeline that these costs may continue to be significant from a year-over-year perspective. Finally, we incurred some additional travel expenses related to the rollout and training of our new kitchen display system.

Our depreciation and amortization increased to $2.3 million during the second quarter of 2006 from $1.7 million during the comparable quarter of 2005. The increase in total dollars is primarily due to depreciation on our new restaurants and the depreciation related to our investment in toolsets for our restaurant managers. As we previously mentioned, I would expect our depreciation to average somewhere in the low 4% range for the rest of 2006.

Our restaurant opening expenses were approximately $1.3 million during the second quarter of 2006, which was a little higher than the $1.1 million in last year's second quarter. Preopening costs in the second quarter were primarily from our two restaurants that opened in the quarter, which was Elk Grove and Natomas, California, and some opening costs for our El Paso restaurant, which opened on July 11, and our Westminster, Colorado restaurant, which opened on the last day of quarter one. On average, our preopening costs are running about $450,000 per restaurant.

As we've previously discussed, we did adopt like our peers, FASB Staff Position 13-1 -- Accounting for Rental Costs Incurred During Construction -- which requires us to expense non-cash phantom rent during the construction period. As a result, we incurred almost $200,000 of non-cash phantom rent during the second quarter, compared to zero last year.

It is important to note for people developing their models that we will now incur preopening expenses, primarily phantom rent for a new restaurant, as early as four months before a restaurant opens. And therefore, quarterly preopening costs may have greater variability from the actual number of new restaurants opened in the quarter.

Looking toward the third quarter, we anticipate opening two new restaurants, of which one has already opened in El Paso, Texas, plus we will incur a significant amount of preopening costs for our Bakersfield and South Arlington restaurants, which are expected to open early in the fourth quarter. In addition, we would anticipate incurring preopening rent for as many as four new restaurants expected to open in the fourth quarter. As we have mentioned before, we anticipate preopening rent to be almost $60,000 per restaurant.

Our interest income for the quarter of $325,000 was pretty much in line with last year's interest income of $292,000. Our tax rate for the quarter was 34%, bringing our year-to-date tax rate to about 34.5%, and we anticipate that our tax rate should be somewhere between 34% and 35% this year.

Turning to our balance sheet, we ended the second quarter with approximately $35.6 million in cash and investments, approximately $138 million in shareholder equity and no funded debt. Our balance sheet provides -- should provide us with the financial flexibility to continue to execute our growth plan for the near future.

Additionally, our CapEx through the first half of this year was approximately $25 million, which is primarily due to new restaurant construction.

Before I turn the call back over to Jerry, I want to remind everyone that our primary growth goal is to achieve a 20% to 25% compounded annual increase in productive capacity, and again, productive capacity measured in terms of total restaurant operating weeks. Our long-term sustainable expectation for comparable restaurant sales is in the 2% range. However, shorter-term results may be higher or lower depending on many factors both within and outside of our control. During the past four years or so, our annual comparable restaurant sales have averaged in the plus 3% to 4% range.

As we've previously mentioned, some of our newer high-volume restaurants are beginning to drop into the comparable sales base. In fact, at the end of the second quarter, we had only 24 large volume restaurants in our comparable sales base. Our newer, large format restaurants in many cases are already operating at capacity or very close to capacity, and therefore, we expect their increase in comparable sales to be closer to our menu pricing, which will traditionally be in the 1% to 2% range.

With only 24 large format restaurants in our comparable sales base, these new high-volume restaurants may have the effect of lowering our overall comparable restaurant sales from the strong 5.9% rate that we experienced in the second quarter as these new restaurants become part of the comparable sales base.

I would like to -- now, I will turn it back over to you, Jerry.

Thanks, Greg. Just to wrap up our comments, and then we will get to the Q&A session. BJ's achieved very solid results for the second quarter of 2006 in almost every key measure in spite of the continuing challenges facing most casual dining restaurants in the general operating environment. Thanks to the hard work of all of our restaurant operators, I think we continue to enjoy strong sales for both our new openings and our established restaurants, and that doesn't happen by itself. It's a result of a lot of hard work and a lot of things being executed correctly in our restaurants.

You know, the modern-day BJ's is still in my view a relatively small and young restaurant company in most respects. We're still investing in certain parts of our business to help us build a stronger foundation for growth and to improve our overall execution. I believe that we continue to execute a little better every day. But having said that, we can and must execute even better as time goes on. We can never be satisfied with our operational execution in any aspect of our business. We constantly remind our troops that we've got much more work to do to help BJ's make the transition from a good restaurant company that is growing to a restaurant growth company. Those are two very, very different types of companies, and we are striving to be a growth company.

Our new restaurant development pipeline for 2006 is fully primed and staged for completion at this point. We're almost done with our 2007 development pipeline, so we strongly believe that the best years for BJ's are yet to come. We sincerely appreciate the support of our investors. Just one more thing, I also want to thank our restaurant managers, our staffs, our brewers, our home office support team for choosing to work at BJ's and for all of their good work so far this year in a very challenging environment.

This concludes our formal remarks. Now we're going to open up the call for a few questions. Again, if we don't have time to get to your question on this call, give us a call at our offices. We're here in California and we will be manning the phones. We will try to help you as much as we can. We're ready for some questions.

(OPERATOR INSTRUCTIONS). Jeff Farmer, CIBC World Markets.

You guys have seen very impressive same-store sales growth outside of California. I understand that these restaurants opened at lower volumes, but what else is really driving that strength in your guys' opinion?

I think it's really overall better operational execution in a lot of our restaurants outside of the state of California, coupled with the impact of some of our operational toolsets that we have been rolling out. One of the investments that we made in our G&A infrastructure about a year ago was to appoint a regional vice president for our Texas operations. This is a very experienced young lady who has several years at one of the largest casual dining restaurant companies and restaurant operations. She's responsible for all of Texas and all of Arizona and I think a bit of Southern California. Under her leadership, she has been able to really improve the overall staffing of our restaurants from a management perspective. Part of that initial G&A cost that we have been I guess realizing over the past several months has been to recoup stronger restaurant managers to those parts of our operations. And I have to tell you, operational execution in all of those restaurants is much, much better.

A lot of times in our business when we look at the sales trends for established restaurants, oftentimes we automatically think, well, if they're going up or down, it has got to be due to some type of an external stimulus. Either the macroenvironment, which clearly can play a role, or maybe for the mature big chains that have advertising, heavy media advertising it's the result of a change in advertising and media [waves] or what they're promoting. But I have got to tell you, in our restaurant operating model, sales are highly dependent on great operational execution. And I do believe that the KDS has had a significant impact on our ability to turn tables, particularly at peak meal periods in all of our restaurants, and particularly in our Texas restaurants. So I would have to attribute most of it to just better improved operations, plus the fact that we have been now in a lot of these trade areas for about three years. So overall awareness is gradually increasing. With a business model like ours that doesn't have a media advertising support umbrella, when you take on a new market, you've just got to rely on a great location and great operational execution, and it takes awhile for you to build your credibility and your reputation with consumers in your trade area, and it takes awhile to get consumers to figure out who you are, how to use you and to get you in their dining rotation.

I think as I've seen at other companies in my career that have a similar business model, it's not uncommon to see increases in guest counts due to just overall improved consumer awareness in years two, three and four in a lot of these concepts. So I think we have all of those factors in play right now. Greg, would you add anything to that?

No, I think you're right on the rotation and operational execution.

So that's how we would assess.

Quickly following up on that, with KDS in terms of restaurants that have had this for let's say three, four, five months, average ticket time -- is that dramatically down or down a few minutes? What is that difference there between restaurants with KDS and those that do not have KDS?

It's a great question. We unfortunately don't really have, I would say, the analysis done on pre-KDS because we just weren't tracking ticket times. However, we manage it each week and we look at our ticket times overall. And as the new restaurants get KDS, you see a little bit higher ticket time in the first couple of weeks, and then you start to see that trending down. Based on just that analysis, we see about a 1 to 2 minute deduction or reduction in ticket time as they get used to the system.

One other quick follow-up for you, Greg. You mentioned labor costs are down 70 to 80 bips in both the 1Q and 2Q. Is it realistic to think that that's sustainable, assuming you guys can keep your comps at let's say a low- to mid-single-digit range?

I think that is reasonable, right at that number. I don't know if we're necessarily getting much more improvement out of that. You've got to look at it and the fact that when you start to look at the productivity on labor, some of it is due to the sales. And if the sales maintain in those areas, they're going to be able to get some leverage there. But I give the operators a lot of credit for really looking at what we call here labor hours per 100 guests and managing to that, and as well, some of the systems that we've put in place.

Mike Smith, Oppenheimer.

Jerry, do you have any idea of when those 13 will open up? Are they going to be weighted to the second half?

You know, we're in the process right now of finalizing our expected development schedule by quarter for next year and I think on our next conference call, we'll be able to give you a little bit of guidance as to how we think they're going to roll off. As it stands today, I think we have a very good chance of having some pretty smooth openings throughout the entire year, but we're still in the process of trying to slot everything in. The good news is, we have got a lot of sites to kind of work with, which is a great advantage to have when you're trying to execute a growth plan to hit a 20% to 25% increase in operating weeks. So give us another three months to wrap up and then we will give you some more specific guidance next quarter. But right now, it's looking fairly smooth throughout the year.

Your management and training program, where do you get those managers, number one, that you put on the fast track, and how long does the training last before they're ready to take over a store?

Right now, our general manager training program lasts about 10 to 11 weeks and we're in the process of evaluating that to make sure that it's adequate enough for BJ's. As far as where do we get our managers, we get them like -- really from the same sources that all of the other casual plus and upscale casual dining operators source their management talent from. They look to the mass-market casual diners. And they look at -- there's, what, 5, 6, 7000 of those restaurants out there and if you add up three or four or five managers per restaurant, that's really kind of the farm club. All of us are trying to recruit the very best talent out of the mass-market casual diners that have the ability and the desire and the capability to really step up in their careers and come up from like (technical difficulty) to AAA ball and to major league ball. So all of us are really relying on that source of talent to try to find the very best that we can recruit, train, develop and bring to our business.

Of course, we also look at when we go into the markets such as El Paso, for example, if we can find some good talent locally from a great independent operator, we will certainly do that as well. We also get our fair share of inquiries from some of our fellow casual plus and upscale casual dining operators that for whatever reason, some of those fellows and ladies think that BJ's offers may be a better career opportunity. But it is very, very competitive for those people. In our business with this business model, clearly, the competition for capital and the competition for great sites is very, very intense. But the real competitive battle is in the war for great restaurant management talent. And that is why these casual plus and upscale casual dining operators spend so much time and allocate so much resources to that talent, acquisition and development.

Do you have -- have you developed a toolset that allows you to evaluate these people?

Yes, we do. We have extensive toolsets that we have in place. When we are going through the recruitment process, we have quite an extensive recruitment process that involves a lot of personal interviews, it involves what we call manager follows where the candidates actually go to a restaurant and follow a manager around. We have personality assessments, we have intelligence assessments. We gather as much data as we possibly can and as many opinions as we possibly can so that once we make that recruitment decision, we are able to retain the vast majority of our recruits and we don't have anybody washing out on us. So, yes, we spend a lot of time on it and that continues to evolve.

Easy question. What is -- how did that opening go in terms of -- kind of rank it with some of the others?

It hasn't been as strong as initially out of the gate as we would have liked. The center that we're in there isn't yet fully completed. And I think from a design and lighting perspective, we're working on some opportunities there to improve the overall exterior energy and feel of the restaurant. Plus, we're working on some things to better teach the consumer as to who we are and how to use us. That's really our first restaurant in Denver. We have had this little brewery up in Boulder, but Westminster is really our first restaurant in Denver. So really no one really knows who we are quite yet. We've got our second restaurant coming in Aurora, and I think it's an outstanding location and we'll see how we go. But this I think will be one of those restaurants that 18 months from now we will be delighted to have in our comp base.

Just out of curiosity, you did make the comment you thought El Paso could eventually be the biggest BJ's?

Outside of California, based on the first three weeks in sales, you know, that is exactly what we believe. It's a wonderful restaurant with a great location and a great operational team and I think we're going to be the hottest thing in El Paso for many years to come, I hope. So we are very, very excited about the potential of that restaurant. And when you think about similar markets to El Paso, and since I'm from Texas, it's easy to think about the Lubbocks and the Wacos and the McAllens and the Corpus Christis and the Tylers and all of those great cities that are just very much like El Paso from a density perspective, from a consumer demographic perspective. And I just picked locations in Texas. But, heck, you think about the entire Midwest and Southeast, it's just very, very encouraging to us.

Congratulations on a good quarter.

Frank Alonso, T. Rowe Price.

Just a quick question. These new markets, Columbus and Florida, I think Orlando, have you chosen managers for these locations yet? How many of these personnel to run these restaurants are you going to be sourcing out of -- how many people are you going to bring over, how many people are you going to hire there? Can you just give us the dynamic of some of that, just given that these are new markets, kind of away -- not exactly home games for you guys?

Absolutely, one of the best questions that we've ever been asked, Frank. And we already have our manager for our first restaurant, which will be right across from the Millennium Mall in Orlando. We already have the general manager selected for that and we have already been in the market recruiting in both markets. So basically what we are trying to do is to recruit locally so that we don't have to worry about relocation. But the general managers will come from volunteers from our existing general manager cadre here probably in our home state of California where it's very easy to fill them with an established assistant general manager. So in this game when you're entering new markets with a concept like ours, you want to bring in an experienced GM, you want to try to find a good KM and then you want to build your staff, your other management team, which we have about five or six from local sources, and you've got to have them really onboard six months ahead of time because you've got to get them through the MIT program and you've got to get them seasoned so that they can hit the ground running. So that's exactly how we approach it.

Destin Tompkins, Morgan Keegan.

Jerry, as we look at the tools you guys have implemented recently, the KDS, the web-based labor scheduling system and you talk about the learning curve over the next few months, when would you expect that we would see some leverage from those programs? I know you talked a little bit about it, but can you expand and say maybe we would see something in Q4 or can you just give us a little more detail?

Again, it's very, very difficult to precisely predict timing and amount of any additional leverage that we might get. But I would personally be disappointed if we didn't begin to see some noticeable leverage in Q4. Again, when you roll these toolsets out, we just really got them done early, which I think was a very good effort on the part of our support staff and our training staff. And for any new system, you've got a learning curve of at least two to three months to really get your kitchens up and running. And when you put a KDS in a BJ's restaurant, it just doesn't impact the kitchen, but it really impacts the entire service system of the restaurant. We have made many changes with respect to how we stage the food, how we expo the food, how we run the food out to the tables. So I will tell you for our new restaurants, it's much easier because you're not having to break a lot of old habits and practices. But for our established restaurants, like any new system it's going to take you two to three months to really hit your stride with those systems. So I'm thinking by Q4 we ought to be able to begin to see some measurable results. And, again, gradually over time, I'm hopeful that we (indiscernible). What do you think, Greg?

You know, this is an interesting question because if you think about the external, the macroenvironment, there's a lot of cost pressures that are going on out there. In essence, you're not seeing any erosion in our margins right now, which maybe means, hey, maybe we're already getting some of that leverage. You already see it in labor as we've kind of pointed out. And I know we didn't talk about it specifically, but when we analyze our restaurants in regards to what we call [poise] and adjust when you have to re-fire, and that actually reduces your kind of gross sales down to your net sales, we're actually picking up somewheres about 40 basis points or about a 12% reduction in comps or adjustments to the gross sales. So in that sense, we're already picking up some of the leverage there and really I kind of look at it more in the fact that we are offsetting what I would call a pretty high increased cost environment with fuel surcharges putting out there, higher utility rates, higher packaging costs for our takeout and to-go. So in essence, I think we're seeing some of that leverage being offset against some of the inflationary pressures.

That's helpful. One other question, if I may. On the G&A, the accelerated G&A spending you guys have had over the last couple of quarters, how long do you expect that to continue?

With respect to the management training program, I think by the end of this year, we should be in a much better position with respect to the bench strength that I think we're looking for to enter 2007. So that is really the best guess at this point in time. We have been trying to run this for many, many years on a just-in-time basis. It is very, very difficult to be able to do that, because if you have any wobble anywhere in your operation it kind of puts you from being just-in-time to being behind time, and that impacts your overall ability to operationally execute as well as to grow. So we need to get a little bit ahead of the game. So you've got two things going on. Not only do you have an absolute increase in the number of trainees based on our models for our needs, but we are also increasing the overall quality of the folks that we're going after. And I would expect by the end of this year to really be in a much better position on that part. Greg, do you want to add something to that?

No, I would agree. I think when we look at our G&A, the area that's really I would say incremental is the managers and training program. I think the rest of it from an infrastructure standpoint is really at a much lesser rate than what our growth rate is at the top line. Absolutely.

I think we'll take one more question and then we will take questions off-line.

Conrad Lyon, KeyBanc Capital.

I got lucky. Can you give us a sense of your all-in costs for your newer units over the last couple of quarters, just to see where it's tracking?

I think in our targeted ROI models, when you look at our capital employed, I think we've got an average of about $3.5 million, if I'm not mistaken. Is that correct, on our new restaurants?

Yes. I would actually say, if you kind of take the last 12 months, it's probably a little bit less just because of when the inflation and certain changes might have hit us (MULTIPLE SPEAKERS) in that 3.2 to 3.5.

Let me go within the four walls. In terms of dayparts, do you notice any difference between dinner, lunch?

You know what? Absolutely not. That was one of the things that I have been hearing from some of our other casual dining peers out there. We took a hard look at it, kind of looking at anything from appetizers to alcohol sales to lunch, dinner. And really looking at our mix, our lunch has been consistently in the kind of 35%, 36%, 37% range, and our dinner kind of in the 55% range. And we've got that late-night business, it's really getting -- kind of been sitting around 7%. It has been very consistent.

How about consumer preference towards any particular items that are maybe more cost-sensitive -- any noticeable change there at all?

Nothing that I have noticed. I would say like any company out there, when we put some new menu items on, everybody flocks to those at first and then they kind of readjust. But we haven't seen any real change in our menu mix.

We don't really try to manage the selections by our guests. We offer about 100 menu items and we let our guests pick whatever they want and whatever they're happiest with and we really haven't seen any material shifts in preferences over the past six or seven months. We are working on some experimental menus. That's a personal project of mine to see just through menu reformatting, and again, I don't particularly want to surreptitiously get our guests to move around a little bit on the menu, but as there may be a way to increase or the average gross profit delivery from our menu just do a little bit more of a thoughtful rearrangement of some of the categories, and that is something that we're working on and hope to be testing here in a restaurant or two in about 30 or 45 days. And that's something I'm very, very interested in, so we'll see.

Are you guys getting a better feel for optimal guest turn with KDS and your new initiatives? Might it be 35 minutes --?

We don't really have a way of actually quantifying that overall duration of the dining experience yet. Now, I will tell you though, we're working on a table management system test in our Irvine restaurant that will automatically integrate with our kitchen display system and will also integrate with our POS system. So at some point in the future, it will be possible for us to measure the duration of each of the components of the dining experience at our restaurant based on when the guest checked in and the table management system, when their meal got checked in to the POS system, the KDS system said that the system was done and with their food and when they check out on the POS system. So at some time, that technology is there and I would think not only us, but a lot of other restaurant companies are really looking hard at trying to really measure overall durations. Okay?

That's great. Thank you very much.

Thank you, and that will be it. Please call us at our office if you have any further questions. Thank you.

This concludes today's conference call. You may now disconnect your lines.