Cheesecake Factory Inc (CAKE) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2014 Cheesecake Factory earnings conference call.

My name is Kim, and I will be your operator for today.

At this time, all participants are in a listen-only mode.

Later we will conduct a question-and-answer session.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Matt Clark.

Please proceed.

Thank you, operator.

Good afternoon, and welcome to our second-quarter fiscal 2014 earnings call.

I am Matt Clark, Senior Vice President of Finance and Strategy.

Joining me on the call today are David Overton, our Chairman and Chief Executive Officer; David Gordon, our President; and Doug Benn, our Executive Vice President and Chief Financial Officer.

Before we begin, let me quickly remind you that during this call items may be discussed that are not based on historical facts and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

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, which is available in the investors section of our website, and its interim filings with the Securities and Exchange Commission.

All forward-looking statements made on this call speak only as of today's date, and the Company undertakes no duty to update any forward-looking statements.

David Overton will begin today's call with some opening remarks.

Doug will then take you through our operating results in detail and provide our outlook for both the third quarter of 2014 as well as the full year.

Following that, we will open the call to questions.

With that, I will turn the call over to David.

Thank you, Matt.

We continued our trend of delivering positive comparable sales in outperforming the casual dining industry with another quarter of consistent sales results.

When we look at the first half of 2014, we delivered a stable 1% comparable sales increase in essentially a no-growth GDP environment and against the backdrop of negative casual dining industry sales for the first six months of the year.

Our business is steady, and we see ongoing consistency across most geographies in weekday versus weekend sales, within dayparts and in-mall versus non-mall locations.

So while the consumer environment remains restrained for restaurants generally, the fact that we continue to gain market share is positive.

In addition, our execution within the restaurants is strong.

Our operations team delivered solid results across key performance indicators including food efficiency, guest satisfaction scores, management retention, and labor productivity.

As for our development, we opened two new restaurants during the second quarter: one in Metairie, Louisiana, and the other a relocation of our Atlanta Buckhead restaurant.

Both restaurants are enjoying strong sales trends, demonstrating the enduring appeal of the Cheesecake Factory brand.

And with the Atlanta location seeing a healthy increase in sales relative to its previous location, it again validates to us that strategic relocations in certain cases make good business sense.

Our restaurant openings during the past three years continue to exceed the performance of our existing base of restaurants.

While we are positioned to open restaurants at a faster pace, we remain focused on A-plus premier sites that we believe can hit targeted returns.

We continue to plan for as many as 10 Company-owned restaurants to open this year in a mix of new and existing markets, with two openings expected in the third quarter.

International growth continues to be an exciting area of opportunity for us with the opening of the first Cheesecake Factory in Mexico last week and the signing of our third license agreement this quarter.

The agreement with Maxine's Caterers Limited, based in Hong Kong, represents the continuing execution of our global strategy.

Maxine's is a leading operator in Asia, with nearly 60 years of experience in operating restaurants.

We anticipate Maxine's developing and operating a minimum of 14 restaurants in Hong Kong, Macau, Taiwan, and China.

The agreement has also the potential to expand into other companies in Asia.

We expect the first restaurant to open in fiscal 2015.

Our licensee in Latin America, Alsea, opened the first Cheesecake Factory in Guadalajara last week in a premier shopping center in that market.

The restaurant is approximately 8500 square feet, and opened to a wait, enjoying strong opening weekend sales.

In addition, Alsea has commenced development of the first location of the Cheesecake Factory in Mexico City.

For 2014, we continue to expect our licensees to open three to four restaurants in the Middle East and Mexico.

Overall, we remain highly confident in our ability to maintain our leadership position in casual dining and in our prospects for future growth both domestically and abroad.

As a result, we also announced that our Board showed another significant increase in our quarterly dividend as we remain committed to returning substantially all of our excess cash to our shareholders.

With that, I will turn the call over to Doug.

Thank you, David.

Total revenues in the Cheesecake Factory for the second quarter of 2014 were $496.4 million.

Revenues reflect an overall comparable sales increase of 1.2%, maintaining a healthy gap between our performance and the industry's.

As noted in our press release, comparable sales increased 1.5% of the Cheesecake Factory and declined 2.7% at Grand Lux Cafe.

External bakery sales were $11.1 million in the second quarter.

As expected, cost of sales was up 30 basis points in the second quarter of 2013, at 24.3% of revenues versus 24% in the prior-year quarter.

Higher dairy, shrimp, and salmon costs were partially offset by favorable poultry costs.

Labor was 32.4% of revenues in the second quarter as compared to 32.2% in the second quarter of the prior year.

We continue to see an increase in group of medical costs driven by both higher claims activity and more participants staying on our medical plan.

The group medical cost pressure of 60 basis points was partially offset by a combination of better labor productivity and lower payroll taxes.

Other operating costs were 24.1% of revenue, down 10 basis points from the prior year's 24.2%; and G&A was 5.9% of revenue in the quarter, flat relative to the second quarter of the prior year.

Pre-opening expense was $2.6 million in the second quarter of 2014 versus $2.5 million in the same period last year.

We had one new restaurant opening and one relocation in the second quarter of 2014 compared to one opening in the same period of the prior year.

Our tax rate this quarter was 27%, slightly better than our expectation due to greater leverage from the FICA tip credits and gains on our investments used as for our deferred compensation plans, which are not taxable.

Cash flow from operations for the first six months of 2014 was approximately $122 million.

Net of roughly $58 million of cash used for capital expenditures, we generated about $64 million in free cash flow through the second quarter of 2014.

During the second quarter, we repurchased approximately 528,000 shares of our common stock at a cost of $24.2 million.

That wraps up our business and financial review for the second quarter.

Now I'll spend a few minutes on our outlook for the third quarter of 2014 and an update on full year.

As we have done in the past, we continue to provide our best estimate for earnings per share ranges based on realistic comparable sales assumptions.

These assumptions factor in everything we know as of today, which includes the quarter-to-date trends, what we think will happen in the weeks ahead, the effect of any impact associated with holidays and known weather influences.

For the third quarter of 2014, we estimate diluted earnings per share of between $0.55 and $.58, based on an assumed range of comparable sales of between 1% and 2%.

With comparable sales in the first half of 2014 at 1% and while maintaining our comparable sales estimate for the second half of the year, mathematically that brings us to a full year of 2014 comparable sales range of between 1% and 1.5%.

Based on this assumption, we would estimate diluted earnings per share in a range of $2.19 to $2.25 for this year.

In addition to incorporating actual results from the second quarter, the change to our annual earnings per share estimates reflects two primary drivers.

First, our expectations for the cost of cream cheese have increased measurably as the cost of butter, which is a good proxy for cream cheese, spiked to all-time highs in the late second quarter.

Secondly, we have factored in some additional costs in the third and fourth quarters related to our self-insured group medical coverage based on the claims activity and the number of participants observed in the second quarter.

Although negatively impacting our earnings outlook for 2014 at this time, it is important to note that neither of these factors are associated with our operational execution or four-wall productivity, which are running at historically high levels.

Our outlook specifically for food inflation in 2014 remains between 3% and 4% for the year.

However, based on the higher projected cream cheese and overall dairy costs that I mentioned, we now expect to be towards the higher end of that range.

As to our corporate tax rate, we now expect it to be about 28% for the full year 2014, consistent with our year-to-date level.

Our total capital expenditures are still expected to be between $105 million and $115 million for planned 2014 openings as well as the expected openings in early 2015.

As David mentioned, we are increasing our quarterly dividend quite significantly for the second year in a row.

Since the initiation of our dividend, we have successfully met our objective of increasing it meaningfully over time, helping to grow shareholder value.

In total, we continue to expect to return substantially all of our free cash flow to shareholders in fiscal 2014 in the form of dividends and share repurchases with approximately $150 million in share repurchases currently anticipated for the year.

With that said, we will take your questions.

In order to accommodate as many questions as possible, please limit yourself to one question and then re-queue with any additional questions.

(Operator Instructions) Joe Buckley from Bank of America.

Just a couple of questions on same-store sales.

We have seen the NavTrack] numbers that weekend in June.

I guess I'm curious if your sales over the course of the quarter showed a similar pattern.

And then, David, I know you said there wasn't much difference geographically, but I think last quarter some of the bigger markets -- the California, Texas, Florida markets -- had done a little bit better.

Have they pulled back to be within the pack now, or are they still doing a little bit better than average?

On the month-to-month changes within the quarter, sales were mostly positive throughout the quarter.

Whereas I believe, as you said, the casual dining experienced some falloff, predictably in June.

We need to be careful, I think, in looking at month-to-month numbers for our results, a little careful, because April was a very strong month for us, as we expected it to be, because of the shift of the spring break holiday.

And the June month was negatively impacted by the World Cup.

And both events don't seem to affect us the way that it necessarily affects the rest of the industry.

So April was our best month in the quarter.

May and June, after taking into account of what the impact of the World Cup was in June, were about the same as each other.

They are both positive, and they are both about the same as each other.

Some restaurants, I think, did really well with the World Cup, but we are not that type of restaurant.

And geographically I would say things were pretty much as they were in the previous quarter.

Yeah, I don't think there's a lot of change.

I don't think we are trying to imply that.

In fact, there continues to be a pretty tight distribution between the lowest-performing markets and the best-performing markets.

But our strongest markets continue to be some of the markets we have a lot of restaurants, California and Florida and in the Southwest.

Thank you.

John Glass from Morgan Stanley.

First, if you would just on the comp question - just if you could break down the traffic and ticket, that would be helpful.

And then my main question is this group medical that you discussed, Doug, as being a pressure - and if I look at back in my notes over the years, it has been a constant kind of discussion, that line item.

Is that larger for you maybe if you could frame the size of that expense item?

Is it larger for you than a typical restaurant?

Are you seeing significant changes as the healthcare laws change and people are just taking you up more often on it?

And what is the underlying driver in how big an item actually is that?

Okay.

Let me see if I can answer that.

First of all, on the comp split, at 1.2% comp, 2% was pricing and around 1%, right at 1% negative traffic and a little bit of positive menu mix is the way that that shakes out.

With respect to the group medical, we have had - that expense has had some variability over time with us.

Sometimes it's very positive and sometimes it's negative.

In fact, we've had two years in a row where we were saying one of the things positively impacting our P&L was the fact that group medical was less.

So we saw this quarter it came from, as I said in my opening remarks, this quarter and in the first quarter higher claims activity and more participants than we expected staying on our plan.

And I think that neither of them necessarily has a lot to do with the new healthcare law.

They have to do with - it's hard to say specifically what's causing the higher claims activity because we only have limited visibility because of HIPAA.

But suffice it to say, as you might expect, there were a higher number of larger claims during the quarter.

But what I would say, it's difficult to predict the specific timing.

We have seen variability of this expense in the past.

We don't believe it will continue forever or that it's particularly related to the new healthcare law.

This is Matt Clark.

It's also not bigger than you would expect for any other restaurant company.

I think maybe it's around 2% of sales.

What Doug is talking about is really just quarterly variability, too.

On a yearly basis, it usually smooths out.

But because we are self-insured, as you mentioned, then there are times when the claim activities are higher or lower versus a company that may be fully insured, and they are straight-lining it in a more smooth fashion throughout the year.

Thank you.

Jeffrey Bernstein from Barclays.

Just two related questions on the comps.

Just looking at the second quarter, it seems like the comps came in slightly below what you had - the lower end of what you had guided for.

I think you said April was the strongest.

That would seem to imply that May and June must have come in below your estimates.

I'm just wondering, with that as a backdrop, you mentioned that the second-half comp assumptions were unchanged.

I'm just wondering why you would leave your second-half assumption unchanged if the second quarter effectively slowed from what you were thinking.

And as you mentioned, the industry clearly slowed in the latter part of the quarter.

It would seem like you are setting yourself up for a more aggressive guidance when the comparisons don't seem to get easier.

Just some thoughts on the back half and then I have a follow-up.

I think if you look at back at this quarter and in prior quarters, our comps have been running for about five quarters in a row at just right at about 1%.

So that's where we are.

The pushes and pulls in this quarter had to do with the spring break shift into April, which was almost 60 basis points of increased sales.

And we factored that into our guidance.

But also then on the negative side, we had the World Cup and that affected us 20 basis points or so.

So I would say we were a little bit below our range but not materially below our range.

We are not concerned with what we are saying going forward at 1% to 2%.

I think that that's right in where we - I think we are running right about there.

And then just to follow up with a clarification from a restaurant margin perspective.

I know you gave the food cost details, which seems like it's unchanged.

Just wondering the pushes and pulls with the remaining line items.

Would you expect the restaurant margin on the back half of the year to see similar compression to the first half?

Is there any insight you can give on particular line items that might move unusually?

Or broadly speaking, should we assume that restaurant margin is in the same pressure point we are seeing (inaudible)?

Yes, I would say if you want to just go right to the total operating margin expectation for 2014, I think the pressure that we are seeing this year - some of it is coming from healthcare, but it's really driven primarily from cost of sales.

The shrimp, salmon and now the dairy, butter issues that spiked a lot more than what we expected to see.

So while we are managing the remaining aspects of our business roughly in line with our sales growth in total, we would expect our operating margins for the year to be maybe 2/10 below what they were last year at the midpoint of the earnings sensitivity range that we gave.

And that's factoring into the second half of the year and, additionally to put we had before, about $0.05 per share relating to continued group health pressure and a higher dairy cost than what we had originally thought.

So when we changed our guidance for the full year, that's about a nickel of it has to do with what we are factoring in to the back half of the year related to those two what I will refer to as temporary pressures that are there for 2014.

Got it.

So that seems to reflect the entire reduction, then.

It seems like you brought down the full-year guidance by the midpoint, maybe $0.05 or so, and you are claiming the full of that was related to group health and the dairy.

Well, we brought the top end down $0.08, and it was $0.03 related to the fact that we were $0.03 below the top end of the range in the second quarter.

And then the additional $0.05 for the top end of the range and $0.05 for the bottom end of the range.

The answer to those two things, we didn't change anything else.

Understood.

Thank you.

Brian Bittner from Oppenheimer.

This is Mike (inaudible) on for Brian.

Related to the Grand Lux brand, you have only had a couple of quarters of positive same-store sales over the last couple of years.

So the question is how do you think about that brand?

What is the strategy there longer-term?

Are there any thoughts of separating that piece of the business?

Well, not yet.

We are opening the restaurant next year, which - again, we are putting in all the best information that we have.

We're going to see how it's doing.

Again, we have some very big restaurants in Las Vegas.

It's very hard to do better than the casinos that we are in, and that has greatly affected us.

Overall, we are still doing what our competition is doing, just not better, as Cheesecake is.

But at this moment we are still trying to get it right, and we still have hope to grow it.

Yes, we would look at Grand Lux's comps and say that, of course, we would want them to be positive, but they are not alarmingly negative any more so than, really, the rest of the industry.

And they are so impacted, because there are only 11 units, by greater variability in any one location.

Great.

Thanks.

David Tarantino from Robert W Baird.

My question is about the international growth.

I was just wondering if you could give us an update on how the international locations are performing both from a sales and operations standpoint and how your partners in international are gearing up for the growth as we move into 2015.

I think that we are still really confident with what's happening internationally.

In the Middle East, sales continue to remain strong and all the locations are currently open.

We are excited that our opening week in Guadalehara was as strong as it was.

We opened to waits and lines.

And typically what we would see here is a strong NRO in the States.

So we feel very good about that.

And as we move into 2015, we are excited to kick off our partnership with Maxine's and, again, start the brand strong in Asia as well.

So, so far, we feel great about it; we know our partners feel very good.

They continue to work with us side by side to ensure the operations and the brand are being strong and consistent, and sales reflect that thus far.

The guests in those markets are returning, and I think that certainly shows in the Middle East.

We have been open now long enough to know that we have some strong repeat business, and our partners are operating the brand really well.

Great.

And then maybe one more.

On the domestic growth outlook, I know, David, you mentioned that you would like to grow the pace of openings a little faster.

And I was just wondering if you have any early reads related to your ability to do that next year based on the pipeline that you have.

I certainly think it's possible.

Things move around so much right up to the last minute, it really drives us all crazy when we put out a number.

But the way it looks right here is that we can do more next year than this year, and we'd like to.

So although we usually give you more of an idea at the end of the third quarter, right now I would just say you are right.

And what I said is I'm confident that we can do more next year than we did do this year.

Great.

Thank you.

Matthew DiFrisco from Buckingham Research.

Doug, can you just - I'm sorry, the pricing you said - you said 2%.

Was that in the quarter, or was that current and going forward?

I think it would apply to both.

Okay, because you normally take --

Around 2% in the quarter, so we are doing a menu change in August and 1% is rolling off and another 1% is rolling on.

So it will remain at right around 2%.

That was the root of my question.

Great.

New Year's Eve not occurring in the fourth quarter - is that a net negative to 2014 or a positive?

New Year's Eve is busy for us in total.

But the way the holiday moves around with Christmas and the way that the shoppers are, hard to tell exactly how that plays out.

I don't think it's significant in either event.

Okay, I thought that would be a little bit meaningful.

But that's factoring to the guidance, I presume.

It's a little bit, but it's in the guidance already.

That's an accurate way of thinking about it.

And then relocations - when you gave the 10 number, that's still a gross number, 10, and then you are expecting 2 relocations?

One relocation.

So we've already done it.

We've opened three restaurants so far this year out of 10; one of them was a relocation.

And we don't have any relocations planned for next year.

Okay.

So we're going to have a net nine stores is how we would look at?

If you look at it that way.

If you want to look at it that way.

One thing to realize is that these relocations - everyone that we have done, the three last year and the one this year, are all immensely successful.

And that's what - for instance, the one we did this year, the Atlanta location, the new one is up somewhere between 35% and 40% for sales volume than the prior one.

So it's not really a net of 9%, it's a net of 9.3% per quarter.

You are anticipating every single one of my follow-up questions.

That's exactly what I was trying to get onto.

How about that?

I know.

Great minds think alike.

So 35-40% jump, that's great on a relocation.

I guess if you were to look at the next three to five years, is this something that you think is now the lifecycle of where the brand is, that maybe you can get 2%, 3%, 4%, 5% of the brand every year or so, relocations?

So maybe two to three stores that you could relocate?

Unless the lease is up, it would be very expensive to do that; or if a store was losing money and we had to get out of it or something, which we really don't have.

But no, I don't think you can think that.

I think that as leases come up, we make a decision and see what the landlord wants to charge and what's nearby so we don't lose those particular guests, and we will look at it.

But for the next years, we don't see very many coming up at all.

And we might want to say - after we evaluate it, we might decide want to stay exactly where we are and work out some kind of negotiated renewal with the landlord.

Okay, great.

Last question - the new prototype and the little bit trimmed-down version - as you look ahead, the percentage of the stores that are going to be that 8000-square-foot store versus the 10,000-square-foot store, would it be 75% of them or so?

Well, I think that's probably a good guess.

Again, this thing is four years old already.

We don't look at it as a new prototype.

We have so many of 7500 to 8000, even 8500 or whatever we can fit in there.

And we really built very few 10,000-footers these days because we found that at 8500 we can do just as much business.

And we can do $10 million and over.

So it just made sense to build somewhere in the 7500 to 8500 square feet if that's in fact the square footage we can take.

And so yes, I think that is correct.

It allows us to go into smaller markets.

It allows us to get up to that number of 300 restaurants.

And that will be the way I see it in the future.

As we said before, there might be 50 or 60 sites out there that we would build 10,000 or 12,000 square feet.

I think the rest, we are going to build, again, as I said, the 7500, 8500.

Okay.

And then just a question longer-term about the trends you have had as far as traffic and negative traffic as it looks when you report your comps.

Is that a legitimate trend that you are seeing in consistent falloff in physical bodies coming into your store?

Or is it more a little bit of a SKU because of how comps are measured in entree counts and maybe not accurately capturing everybody at the bar?

Are you seeing less physical demand in your store and people are paying up a higher check?

Or is it just the business is migrating more to the way they account for small plates and the bar business that might be making up for center of the dining room entree business.

We really haven't changed the way that we count our entrees.

So we count our entrees the same way.

I wouldn't attribute it to counting.

I would just say that it is only 1%, so it's not like that's - how many guests is that, Matt?

18.

Yes, you would notice at one of the restaurants that there are less people in the restaurant.

But it's around 1%.

So we haven't changed the way we account for -

Technically, Matt, we actually account for the number of bodies.

I know a lot of restaurant companies will use the entree as some sort of proxy.

But we actually in our system capture the number of bodies.

So it's accurately reflected.

Okay, perfect.

Thank you.

Sharon Zackfia from William Blair.

Just a few questions.

I think on the first quarter you talked about some labor inefficiencies.

I know part of that was due to the Easter shift, but just curious as to how you feel you managed labor this past quarter.

And then secondarily, I know shrimp costs have started to come down, Doug.

I don't remember if you are locked in for this year already on shrimp.

But if you can give us an update on that, that would be helpful.

Yes.

First of all, with respect to labor productivity, we did talk in the first quarter about the spring break shift and weather causing us to have a little problem with managing labor productivity.

But that wasn't the case at all for the second quarter.

In the second quarter, basically our labor is 20 basis points higher than it was in the previous year.

But 60 basis points, so more than that difference, was the group medical.

So the fact that the group medical - we actually made up some of the difference between last year and this year with better labor productivity.

And so that was really a positive for us in the quarter the way that we were running these restaurants.

And with respect to shrimp, we are now contracting for the majority of our expected shrimp needs for the rest of the year.

We expected to be able to do that when we provided our update for you in April.

We continue to believe that the shrimp supply issue is a near-term issue for 2014, maybe a little bit into 2015.

But we are seeing some other countries, India being an example of that, increase their shrimp production to meet demand.

And they are producing a very high-quality product, which will slowly help to resolve the problem.

And in fact, there's already been some slight moderation in shrimp prices.

But at this point in time, we are locked in with that.

Is a shrimp and salmon still $0.04 to $0.07 hit this year?

I know that was the initial guidance, I just don't know if you've ever updated it.

Yes, that's accurate.

It's in that same ballpark for the full year.

Okay.

Thank you.

Keith Siegner from UBS.

You mentioned during the call a desire to still look for the A-plus premier sites.

And I'm just wondering if you could talk a little bit about the accessibility with the ability to find those A-plus premier sites.

And as you do find them, what type of landlord investment and/or rates are you finding?

How are you finding these real estate parcels today?

Are the prices going up?

Are the prices going down?

Anything along those lines would be helpful.

The price is about the same as it has always been for us.

It might go up for others, but we are still considered a mini anchor because of the people we bring in.

So I would say that's very stable.

And the second half question is (multiple speakers) - we are finding them.

Obviously, I'd like to find more of them.

But it's all about the demographics; it's all about what's in the area; it's all about other restaurants' comps; it's all about the actual retail area and what is there.

We have about 20, 25 different factors we look at when we choose a site.

And once we get pretty much all of them, then that's what we consider an A-plus site, and that's when we are willing to move forward.

And that's really how it works.

But you are maintaining that same very high standard of or a very high standard -

Yes.

There's nothing worse than operating losses.

And you take these sites, and you guys are happy or other people are happy.

But then over the next couple of years, your profits start to whittle away.

It gets very hard to operate.

Your best people go to your worst stores.

It's a vicious cycle.

And we have always done nothing but have A-plus sites that are - everyone is successful, and we would like to keep it that way.

I think that it's conservative, but that's really the way we want to run Cheesecake.

And if you look at the past three years, 12 quarters, we have exceeded our own expectations of higher sales per square foot than we were expecting, and really, it is worked; the strategy has really worked, especially for the past three years.

And, Doug, one question for you - last quarter you had mentioned how SG&A most likely would not leverage in 2014.

And given some changes to the rest of the guidance, can you give us an update as to how we should you thinking about SG&A -- or G&A, I should say, into the back half?

Yes, I would say that we put expect G&A for the year to be about flat.

So it won't lever, it won't go up.

We are continuing to make appropriate investments in our infrastructure to support our growth, particularly in international growth.

But we are also ensuring that our entire business is being run effectively in this cost environment, in this what I will call slow growth sales environment.

So close to plan is what we would expect for G&A.

Thank you much.

Will Slabaugh from Stephens.

Can you touch a little bit more on the cost of goods?

First up on poultry, Doug, you mentioned some favorability there.

So can you talk to what that may look like in the back half of the year, especially given the rise that we've seen across all proteins including poultry?

And then also in cream cheese, you have contracted a lot of that in the past.

So I was wondering was that not the case in the first half of 2014, and does it make sense to begin locking in, if you are not already locked, in the back half of 2014 or even into 2015?

Yes.

With respect to poultry we are contracted on it, and it's just a favorable thing for us for the entire year.

So there's not a big change in our thoughts about poultry.

It's just that that is something that is offsetting the things that are higher like shrimp and salmon and dairy cost.

With respect to cream cheese, our expectations changed measurably this past quarter.

Generally, what you see with cream cheese is it usually slacks off from a pricing standpoint in early spring.

And that's when we generally lock in the rest of our cream cheese purchases.

But this year it didn't slack off; in fact, it remained high and then went to all-time highs from there.

So it didn't act like it did before.

The export demand for cream cheese, particularly in China, is very high right now.

We expect, though, that that will moderate over time with additional suppliers continuing to ramp up such as in New Zealand.

But we included it in the second half of our second-half guidance.

We already see the possibility of entering into futures contracts that could be significantly less than this but not probably right now for this year.

So I think it's a temporary thing.

It's really unusual.

Butter was really, again, the proxy for cream cheese pricing, was an all-time all-time high.

This wasn't like the top quartile; this was the highest ever.

Got it.

Thank you.

Andy Barish from Jefferies.

Couple of questions.

First on the international side of things, with the Maxine's deal in the quarter, was there anything kind of one time in there?

And just overall are you making more money than you were a year ago internationally now that you've got a handful of units up and running overseas or your partners do?

And then secondly, just on the return of cash to shareholders in terms of free cash, it actually looks like you're going to be returning more than just free cash, meaning you're going to have to borrow some money this year or burn down the rest of your cash balance.

Is that a little bit of a change in philosophy, or am I missing something on my cash flow here?

Let see if I can remember all that.

I'm going to start with the last one, and then you may have to remind me again.

But on that one, we haven't changed anything in our philosophy.

We're going to return our free cash flow, and plus included in that our proceeds from stock option exercises.

So that's not included in the operations cash flow line.

But for last year, that number was $70 million - 70-something million dollars.

So this year we don't expect it to be near that high; we expect to be $20 million or $30 million.

But anyway, that's additional cash flow that we distribute to our shareholders.

So we don't see any need for there to be any long-term continuing borrowing associated with our share repurchase program.

We did borrow $25 million in the first quarter of the year to execute the accelerated share repurchase plan that we put in then, but we would expect that to be paid off before or by the end of the year.

And then on international -

So we don't comment, obviously, on what the puts and takes of the international deals are, the royalties.

There are some fees that are up front.

I don't know that it moves the quarter enough to swing a model.

But certainly as we continue to ramp up our sites, it will become more meaningful.

I don't think that we've decided yet at what level we will start reporting that out yet, but it's probably a little ways off.

Thank you.

John Ivankoe.

I have two questions, if I may.

First, Doug, there's been allusion throughout the call of a number of different commodities and kind of 2014 in how you think they may trend over time including 2015.

So is it too early to just give us a broad sense of what you think the basket could be, 2015 relative to 2014, with everything that you know today that the future markets might be indicating?

And I have a follow-up.

Yes, I think it is too early, John.

I wouldn't - our purchasing people wouldn't even give that to us, and they are a lot closer to it than I am.

So I don't think that I can do that.

I would say that I would certainly expect that cream cheese would be lower next year than it was this year.

(inaudible) about anything else.

I think you mentioned that shrimp could be lower, for example, next year versus this year.

Again, it cost us a lot of money.

Shrimp and salmon cost a lot of money.

So just based on the fact that we paid a lot for cream cheese and a lot for shrimp this year and we are contracted for the rest of the year but not at a particularly low price, that you might just intuitively think that it should be lower next year.

In total lower, or less of an increase?

Well, maybe just less of an increase, John.

I think that's a good way of framing the question.

But those are only a couple of the variables that are involved.

Certainly, dairy is a lot harder to hedge.

And so, even though there's a futures curve on that, it's not going to be as indicative of where next year might be.

So it just feels a little bit early to us to give anything more specific than that.

Okay, but still very helpful.

Thank you.

And David, maybe a question for you - obviously, you have the right customer base and a lot of the right trade areas.

Are you seeing a pickup in relevant independent restaurants that maybe have seen some competitive intrusion in some of the higher-profile trade areas that you are operating in?

Do you think that that's an issue at all, or is the brand still immune in total?

I wouldn't say it's immune.

We have no head-to-head competitors, yet everybody can take a little nip out of you here and there.

It takes an awful lot of restaurants to open around a Cheesecake to take bites out.

But no, there's nothing in particular that we're seeing.

There's no place that we stay out of.

We are just all site-based.

So there's nothing out there that I'm seeing that's different than it has been in the last few years.

Okay.

Thank you.

Bryan Elliott from Raymond James.

All I got left, actually, is, Doug, maybe just a little help with what the underlying pre-openings is in the Q3 guidance and if $14 million-ish is still a good number for this year.

In the Q3 guidance, okay, so let see if I can -

Bryan, $14 million is still a pretty good number for the full year.

And I would say the preopening in the third quarter, we would say somewhere around $3.8 million to $4 million.

Okay, great.

Thanks a lot.

Peter Saleh from Telsey Advisory Group.

I just wanted to ask about, going back to the Grand Lux, have you considered at all, in the locations where it would make sense, maybe just swapping out the name to the Cheesecake Factory?

Would you think that would help?

It seems like it's an operational issue more just in terms of brand awareness.

No, they are all too close.

I don't think there's - I have to think, but I think there's no Grand Lux that we could swap out that would either be allowed by our radius restrictions or by our landlords.

So of the 11 we have, that won't be possible.

Alright.

And then, Doug, on the World Cup impact, most of the World Cup games in the month of July, so just wondering if you could just - should we expect that July would be a little bit weaker as well, similar impact to what you saw in June?

Most of US games happened in June.

So there was some World Cup in July, but the biggest impact to us was when the US team was playing.

Great.

Thank you very much.

Our last question will be from the line of Steve Anderson.

You've answered most of my questions, but one question - I think it was related to your presence in malls, is your proximity to movie theaters.

There's a press report today talking about there's a 15% to 20% decline expected for the summer box office season.

And I just want to see if you feel any of that decline in traffic to movie theaters maybe being a contributing factor to your performance in recent months.

That's an interesting question, and we do watch that.

But I think that has actually been going on for the past couple of months.

So that our understanding is that the movie season starts after Memorial Day.

And from the get-go it has been down at those levels.

So really if you think about what our Q2 reported comp is, it's already in there.

Right?

So I don't think that there would be any new news for us to talk about with the movie trends that would impact the guidance that we are providing.

I understand.

Thank you.

Ladies and gentlemen, that concludes today's conference.

Thank you so much for joining.

You may now disconnect, and have a great day.