Jack in the Box Inc (JACK) 2004 Q2 法說會逐字稿

Please stand by. Good day, everyone and welcome to the Jack in the Box second quarter 2004 earnings release conference call.

Today's call is being recorded. A replay will be available on the Jack in the Box website starting today for those of you that could not attend the live event.

During the question and answer period, please use your handset when asking a question. Please do not ask over a speaker phone.

Now at this time for opening remarks and introductions, I would like to turn the conference over to Mr. John Hoffner, Executive Vice President and Chief Financial Officer of Jack in the Box. Please go ahead.

Thank you. Good morning and welcome to the Jack in the Box second quarter conference call.

I'm John Hoffner, EVP and CFO; joining me today are Chairman and CEO, Bob Nugent; President and Chief Operating Officer Linda Lang. During the session, we will review the Company's second quarter operating results.

Additionally, as stated in the press release, issued this morning prior to our conference call, the Company has updated and raised its earnings guidance for the third quarter and fiscal 2004.

We have included certain non-GAAP financial information in this conference call to help supplement and enhance investor's overall understanding of our current financial performance and our prospects for the future.

Reconciliations to GAAP-reported results are included within this morning's press release, which was filed on form 8K with the SEC. You may access that filing through our website, jackinthebox.com, by clicking on the link for SEC filings on our investor page.

Also, please be advised that this presentation contains forward-looking statements about sales, earnings, expenses and other financial performance indicators. These statements reflect management's expectations for the business, and are based on current information.

Actual results may differ materially from these expectations based on risks to the business.

The Safe Harbor statement in today's earnings release outlines some of these risks and uncertainties, and is considered a part of this conference call.

Other material risk factors as well as information relating to company operations are detailed in public documents filed with the SEC.

Now Bob Nugent will open our conference call. Following today's presentation, we'll take questions from the financial community. Bob?

Thank you, John, good morning, everyone. Jack in the Box today reported earnings of 19.6 million for the second quarter, or 53 cents per diluted share.

This represents a 20% increase compared with last year's 16.3 million, or 44 cents per share and was nearly 10 cents higher than consensus estimates.

The increase is primarily attributed to a significant increase in same-store sales, our highest quarterly increase in 4 1/2 years. For the quarter, same-store sales increased 8.2% compared with a decrease of 4.3% a year ago.

Year to date, same-store sales increased 5.2%, compared with a decrease of 3.3% in fiscal 2003. The improvement is due, in large part, to innovative, high-quality products that we've added to our menu.

Linda Lang will discuss these new menu items in more detail, including some exciting products that we're adding to our Jack in the Box restaurants during the current quarter. In addition to the results generated by our Jack in the Box restaurants, we were pleased with the second quarter performance of our other brands.

Qdoba Mexican Grill had an increase in same-store sales, and the chain remains on track for a same-store sales increase in the high single-digits for the year on top of a double-digit increase in fiscal 2003.

Reflecting their confidence in the Qdoba brand, several Jack in the Box franchise operators are exploring franchise development agreements to add Qdoba restaurants to their portfolios.

Two such agreements were recently signed to develop Qdoba restaurants in southern California, the first of which are expected to open later this year.

Our Quick Stuff convenient store concept also continued to perform well, and we opened three new locations during the second quarter.

There are now 21 sites, combining a full-service Quick Stuff store with a full-size Jack in the Box restaurant and a major-branded fuel station.

Late in the quarter, Jack in the Box began testing our new brand re-invention initiative in San Diego at two completely remodeled restaurants that will serve as learning labs for us. Called JBX, these two fast-casual restaurants have attracted a lot of interest and the reaction of our guests has been positive.

Overall, I'm very pleased with the Company's performance during the quarter and I want to acknowledge the hard work of our employees in turning around the business.

From my coworkers here at the corporate support center to the employees in our field offices, and distribution centers to the crew members at our restaurants, everyone at Jack in the Box has contributed to the strong results that we reported today.

I've been most impressed by our employees' creative abilities in developing a viable long-term business plan for this company and by their dedication in executing the various strategic elements of that plan. That hard work over the past two years is beginning to pay off.

Let me also congratulate our Board of Directors for their role in creating a corporate governance program that institutional shareholder services now ranks as the strongest of any company in our industry group, and among the top five of all companies in the S&P 600.

In closing, I'm very proud to be a part of this organization, especially at this exciting time in the Company's 53-year history.

And now Linda Lang will discuss marketing and operations and provide a brief update on brand reinvention. Linda?

Thank you, Bob. Good morning. The second quarter was a very busy one for Jack in the Box.

Between new products, guest service improvements, and our brand reinvention initiative, we have a lot of information to share with you this morning. Let me begin with new products.

In February, midway through the quarter, Jack in the Box introduced three new gourmet sandwiches, unlike anything ever before served in a QSR environment. Called Pannidos, they're as unique as their name, and our customers love them.

We've combined real cheeses with high-quality deli style meats like aged salami, Black Forest ham, and oven-roasted turkey, all in a sleek, foot-long, toasted ciabatta baguette.

Sales of Pannidos contributed to our highest quarterly increase in same-store sales in 18 quarters. Like Jack's Ultimate Salads, Pannidos are indicative of the kind of high quality products that we've been adding to our menu.

And speaking of salads, earlier this month we added a fourth entre to our line, a Greek salad featuring spring mix and romaine lettuce topped with real feta cheese crumbles. Our Greek salad includes authentic Kalamata olives and Pepperinchini slices imported from Greece. Red onion slices, cucumber slices and grape tomatoes. It's served with gourmet seasoned croutons in an Herb vinaigrette dressing on the side.

We also offer a low-fat balsamic dressing as an alternative.

Guests choosing the low-fat dressing may also appreciate a new premium product that we plan to roll out next week, the Southwest Chicken Pita, with just 260 calories and 4 1/2 grams of fat, the Southwest Chicken Pita features fajita-style chicken and onions topped with black beans, roasted corn, and shredded lettuce stuffed in a pita with a fire-roasted salsa served on the side.

As you can see, these new products not only underscore our own going commitment to menu innovation, they also meet the increasing consumer demand for healthier, high-quality menu choices.

In addition to adding variety to our menu, we're also making it easier than ever for guests to customize their meals, whether that means opting for a low-carb version of our burgers or otherwise substituting or omitting ingredients.

To help guests evaluate the nutritional aspects of their customized orders, in March, we added an online nutritional calculator to our website called Build Your Meal.

This interactive wizard enables our online visitors to custom-build their favorite burger or sandwich to evaluate the nutritional information.

Also in March, Jack in the Box opened our new 70,000-square foot Innovation Center, next to our San Diego headquarters.

With nearly half of the building occupied by test and culinary kitchens, quality assurance labs and consumer research facilities, the Innovation Center will facilitate the development of new products as well as new equipment and processes that will enable Jack in the Box to more efficiently deliver those products in our restaurants.

We're also making progress on another key element of our strategic plan: improving guest service.

Through new training initiatives, including a computer-based training program that we've started rolling out in all of our restaurants, as well as the use of new recruitment tools, we are seeing higher retention levels while reducing the administrative demands on our restaurant managers.

Regarding our brand reinvention strategy, in March, the Company opened two completely remodeled restaurants in San Diego that feature an entirely different exterior and interior design as well as an upgraded menu and higher level of guest service.

These fast-casual restaurants also bear a new brand name: JBX. Our objective with the redesign was to create an experience superior to what is currently available at quick serve restaurants. According to our preliminary research, we've succeeded in doing that.

The initial guest response to JBX has been very positive, and we're proceeding with our plans to expand the test to selected restaurants in two additional markets: Bakersville, California, and Boise, Idaho by calendar year-end.

This test phase is intended to evaluate the opportunity to generate incremental sales by attracting new customers to JBX as well as benefiting from the transfer of sales to nonconverted Jack in the Box restaurants.

Expansion into Bakersfield and Boise has been moved back approximately 3 months to more fully incorporate and refine the learnings from the San Diego market.

We are planning to expand the test in 2005 to a fourth market, which will be identified later this year.

We will carefully evaluate the results of our market test before determining how best to expand the positive elements of brand reinvention in our system.

From improving our menu and guest service, to testing an entirely new restaurant concept and brand name, we made significant progress during the quarter toward achieving our strategic goals.

While we test brand reinvention and execute our multi-faceted growth plan, we remain focused on further improving our core Jack in the Box brand.

We know that we still have a lot of hard work ahead of us, for example, we'll be rolling over some tougher same-store sales comparisons in the third and fourth quarters. Primarily due to the successful launch of Jack's Ultimate Salads a year ago.

But with new products like Pannidos and the Southwest Chicken Pita as well as additional items already in test and scheduled for system rollout later this year, we're optimistic that we'll continue to meet our sales targets.

With that, I'll turn the call over to John for a review of our second quarter performance and earnings guidance. John?

Thank you, Linda and again, good morning. The highlights of our second quarter financial results, which include comments on both the income statement and the balance sheet, have been provided in our news release issued this morning.

Also provided in the release is the Company's earnings guidance for the third quarter, and our updated guidance for fiscal year 2004.

As such, we will not repeat that information on this call, but rather, we'll emphasize a few key points contained in the release that we hope will be helpful. Our earnings per diluted share in the second quarter were 53 cents versus approximately 43 cents forecast, and 44 cents last year.

Excluding a 15-cent per charge related to the refinancing of the Company's credit facility in January, our year-to-date earnings per diluted share were $1.11 compared with $1.00 year-to-date last year.

The 10-cent increase over guidance in the quarter can be summarized as follows: 4 cents from improved operating income related to higher sales at company-operated and franchise restaurants.

5 cents from cost leverage on increased sales and profit improvement program initiatives in both restaurant operating costs and G&A expense. And 1 cent from lower than expected food costs. Primarily beef.

Beef prices have moderated but were approximately 6% higher than last year's second quarter, and were about 13% higher year to date. As Bob mentioned, our same-store sales increased 8.2% in the quarter, versus a forecasted increase of approximately 7.5% and a 4.3% decrease last year.

Year to state, same-store sales improved 5.2%, compared to the 3.3% decrease last year. With this improvement in sales and the strong cost controls in the field, our restaurant operating margin increased in the quarter to 17.8% of sales versus 16.4% last year.

And year-to-date, restaurant operating margin was 16.8% compared with 16.6% last year. Other revenues in the quarter, which are primarily related to gains and fees from sales of restaurants to franchisees, were 5 million versus approximately 10 million last year.

And year-to-date were 12.3 million versus 18.6 million in 2003. The lower average gains and fees per restaurant versus last year primarily reflect the differences in sales and cash flows of restaurants sold and more challenging financial market conditions.

As forecast, our interest expense decreased in the quarter to 4.1 million versus 5.8 million last year.

Due to the Company's refinancing of its senior credit facility in January, we expect interest expense for the full year to be about 20 million, excluding the 9.2 million charge related to that refinancing.

In the quarter we reduced our estimated annual income tax rate for fiscal 2004 to 37% from our previous estimate of 38%, primarily related to the Company's ongoing tax planning initiatives.

Additionally during the quarter, the Company exercised its option to purchase approximately 80 Jack in the Box leased restaurant properties and plans to sell and lease back these properties at more favorable rates.

Regarding our earnings guidance for the third quarter, we expect to earn approximately 53 cents per diluted share, versus 54 cents per share last year.

The lower estimate is primarily due to higher SG&A expenses, as forecast, for pension, brand reinvention, market test costs, incentive accruals, and the Innovation Center relocation costs, as well as lower gains on restaurant sales to franchisees, and a lower tax rate in the third quarter of 2003.

Regarding our updated earnings guidance for the 53-week 2004 fiscal year, and excluding the 15-cent-per-share charge related to our first quarter refinancing, we now expect to earn approximately $2.14 per diluted share versus $1.99 in fiscal 2003, and $1.68 in our original forecast for the year.

Primarily due to the results achieved in the first half of this year plus ongoing interest expense savings from our refinancing.

The Company currently expects its 2004 capital expenditures to be approximately 155 million--slightly higher than originally forecast--due to a recent decision to finance the new Innovation Center out of our credit facility instead of through a sale lease back transaction.

This increase will be largely offset by savings on Jack in the Box new restaurants and the opening of fewer Qdoba company units. Finally, the Company has adopted a policy statement on brand reinvention disclosures, which I would now like to read.

Consistent with its measured approach to all major initiatives, Jack in the Box will thoroughly test its brand reinvention strategy. During fiscal 2004, this test began with two completely remodeled restaurants in San Diego.

These fast-casual restaurants, called JBX, are serving as learning labs to determine which elements of brand reinvention are successful and will be carried forward, and which ones won't.

By the end of calendar '04, the Company will expand its test of brand reinvention in two additional markets, Boise and Bakersfield.

Additionally, the Company plans to add a fourth test market during FY05 to maximize our cost engineering efforts, and to evaluate returns on capital investment prior to committing to any further expansion.

The Company expects that these tests of brand reinvention will not have a material impact on operating results for some time. As such, and also for competitive reasons, the Company will not comment specifically on brand reinvention financial performance.

The Company may, from time to time, publish directional comments on new test markets, consumer reactions and modifications to strategy, if any, that may arise from the Company's learnings.

Once the market tests have been fully evaluated and if the results are deemed positive, the Company expects that a phased expansion of brand reinvention would take place over a four to five-year period.

During this phase and again, primarily for competitive reasons, the Company will not comment specifically on the financial performance of the markets or the individual restaurants involved in brand reinvention until it determines that separate reporting is appropriate.

The Company may, from time to time, publish directional comments on its assessment of progress.

Brand reinvention financial expectations will be incorporated into the Company's consolidated earnings guidance and will not be separately discussed all such disclosures will be made in the form of company press releases.

And all comments made in conference calls, investor meetings, and conference presentations will conform to those disclosures, which is consistent with the Company's strong commitment and practice to adhere to SEC regulation FD requirements.

And now I'll turn the call back over to Bob, and we'll take your questions.

Thank you, John. Happy to take your questions.

Thank you, the question and answer session will be conducted electronically today. If you do have a question, please press star 1 on your touch-tone telephone.

Once again, that's star 1 to ask a question. And we'll pause for just a moment to assemble the roster. And our first question today will come from Joe [Steinburg] with JLF Asset Management.

Thank you very much, congratulations, guys, you're doing a terrific job reinventing the brand.

Thank you.

My question is, would you be kind enough to update us -- it seems like given that the comp, and therefore the earnings, came in better than you had thought that it would, that you must have gained momentum over the course of the quarter, excuse me, as all the new food and product initiatives were rolled out.

Bob, would you be kind enough to give us some flavor in this public forum, how we're doing thus far, we're halfway through the third quarter in April and May, if this continued to strengthen the product initiatives and execution has continued?

When we revised our guidance at the beginning of April, we gave approximately 7.5% increase in same-store sales for the quarter and it came out to 8.2, which is a little above 7.5% for sure.

What happened in the - in the - third quarter is that we are predicting that our same-store sales will be 3 to 3.5% up, and the reason for the difference between second and third quarter is primarily the fact that we have a little tougher comp to roll over.

The third quarter is when we introduced salads a year ago and salads were very favorably received and so that's the reason for the 3 to 3.5%. We have confidence in that number.

Are you able to give us any flavor how we're trending thus far?

No, we're not.

Okay, we'll it sounds like you're continuing to be conservative. Congratulations on the continued success.

Thank you, Jeff.

Next we hear from Mark Sheridan with Johnson Rice.

Linda, I had a question for you and then probably one for Bob.

I'll just ask them both first. Can you talk a little bit about some of the new products, obviously you have a year now with salads, and a few months now with Pannidos, in terms of the delivery - deliverability of that product to the guest?

I know that's something you talked about, you know, your -- you're concerned about, you know, making sure you monitor new products and the deliverability of that to the guest, and I know the whole new facility there in San Diego is, you know, that's one of the focuses of it.

But I don't know how you track that in terms of average service time, or can you tell us a little bit about -- about, you know, how you're getting these new products out of your kitchen in a timely manner, you know, to people that are more time-constrained?

So, that's one for you.

And then Bob, can you talk about the franchise program, and my guess is franchisees are experiencing similar results to the Company and, you know, -- and I know you mentioned that some Jack in the Box franchisees have become excited about the Qdoba possibility, but what about Jack in the Box franchisees and their ability to expand within their territory with additional Jack in the Boxes?

Okay, Mark, good morning. Regarding our new products: When we developed the salad line and launched them last year, we had a very, very positive response from our consumers because of the high quality, but we also designed them to make them very efficient for restaurant operations so that they did not have an impact on our speed of service.

In fact, they are -- they are assembled and then delivered to the guest so it has a positive impact on our operation. Most of the work is done at the prep level.

With regard to Pannidos -- and that continues to be the case for the Greek salad that we just launched. In regards to Pannidos, we also were very careful in designing a product that we could execute consistently and a very high - deliver very high quality and that has been the case.

There's been very positive response from the Pannido launch, continues to be positive and we're able to execute at a very high level.

So, no impact on our speed of service and our ability to deliver the service times. Does that answer your question?

Yes, it does. Thank you.

Okay.

Mark, regarding franchising, at quarter-end we had 421 franchise restaurants versus a year-ago 370. So, as we've stated publicly, we're moving our franchise ratio to somewhere around 35% over the next five years. A year ago it was 19.5%.

Now it's about 21.5%. But we're moving in that direction, and satisfying many of our franchise needs -- franchisees' needs to grow by selling them company restaurants.

Additionally, many of those conversion deals have attached to them a development agreement and many of our franchisees are anxious to develop new restaurants. I think we'll add nine new restaurants this year and that number will certainly increase next year.

Furthermore, as I mentioned in my presentation, our franchisees are now permitted to explore opportunities outside of Jack in the Box as long as it meets certain criteria, and one of those criteria is Qdoba.

And we have some of our franchisees, I mentioned that there was two deals signed, there's actually now a third deal, with the Qdoba group and so they'll be coming online in the next -- sometime in the next six months.

Does that answer your question?

It does, thank you. And maybe, John, I shouldn't leave you out, either! [ Laughter ]

Thanks, Mark.

You're welcome! The $155 million capital plan for the year, I know you mentioned there were a couple of moving parts in that, that you were going to do the, you know, the big facility next year there and internally rather than sell these back offset by fewer company Qdoba openings and something else.

What is the -- what effect does your ability to not sale lease back -- is there anything else that went into your thinking about not doing a sale lease back on the facility next door? And what kind of, you know, dollar impact is that specifically?

Mark, yeah, I - we -- what I had said on -- with respect to the increase in Cap Ex from roughly 1.50 to 1.55 is the addition is due to the new Innovation Center, offset by fewer company -- lower costs on - the new company restaurants and fewer Qdoba company units.

So, that's kind of how the math works in general. With respect to the Innovation Center, it's really -- it was really a financing decision right now.

We -- we've taken a look at our -- our borrowing costs under our new credit facility versus prevailing sale lease back rates that are out there right now, and we've looked at that over the terms of -- of a sale lease back and we also looked at that versus mortgage financing and we currently continue to believe that the financing out of our existing credit facility is -- is better right now for the Company.

We also feel pretty good about our cash flow forecast so the Company doesn't have, right now, need to sit on extra cash that we would generate from a sale lease back transaction.

Oh, good, John, thank you very much.

Thank you, Mark.

Next we'll hear from Jeff Omohundro with Wachovia.

Yes, thanks. A couple of questions. First, sounds like there's a few things changing in the Qdoba growth model.

Maybe you can - kind of reset for us what you're currently thinking about company and franchise growth rates over the next couple of years?

Well, the growth rate this year in Qdoba is about 70% and that is not a sustainable growth rate.

We have decided to back down the number of company of stores that we'll be developing to allow the group to focus more on helping the franchisees to develop.

So, I think you'll see the ratio company to franchise development swing a little more toward the franchisees and we use our resources to help them do that.

Okay. And then I guess my second question would be on the Pannidos and the success that you've had in that product.

How is evolution of mix on the product, than, say from shortly after the rollout to -- to now? Has it been building since the -- since the introduction?

You know, Jeff, we really don't disclose the pattern of our sales mix, but I can tell you it continues to be a strong product in terms of sales and mix, and we believe it really has legs because it's so innovative and we've really created another category on our menu, so, it continues to be strong.

Yeah, that - that's really the legs for what I was interested in. Okay, and then finally on the JBX test market efforts, I'm wondering if you can just maybe put a rough range of number of units that you're talking about when you go through these phases?

Right, at this point in time we're not disclosing the number of units or the location of those units. We have indicated that we are going in and selecting restaurants to convert to JBX and the remainder of the market will remain Jack in the Box.

Okay. Thanks. Appreciate it.

Sure.

We'll now move on to [Dean Haskell] with JMP securities.

Yes, good morning, congratulations on a great quarter, gentlemen.

Thanks, Dean.

And Linda, of course.

Thank you, Dean!

John, not to leave you out, we're going to single you out, you mentioned something about purchasing 70 properties and refranchising them, would you explain and explore that further, please?

Well, yes I will. It was actually 80 properties and the -- you'll see a big change in the balance sheet under Other Current Assets, and that's because that the purchase of those properties is -- are being held in a classification called Assets Held for Sale and Lease Back, not franchising.

And our plan is to re-sell and lease back those properties at much more favorable rates than what we had under our existing agreement there.

And the majority of that will take place over the balance of the year.

And where are those properties located in general?

They're -- they're all over.

No specific geographic concentration? California or Texas?

No.

Okay. Thank you.

You're welcome.

We'll now hear from Mark Kalinowski with Smith Barney.

Hi, I was just curious what the approximate percentage of company-owned stores that have the 24-hour drive-through open are? And if that is a meaningful increase year-over-year by any chance? Thanks.

Let me take that, Mark. Approximately 100% of our company stores have a 24/7 drive-through, and that's been the case for, what would you say, Linda, years? Three years, four years.

Three or four years --

Okay, I was unaware of that.

Yeah. Now you are! [ Laughter ]

Okay, thanks! Great quarter, guys.

Thanks, Mark!

Thank you.

And before we move on, once again, as a reminder, if you do have a question, press star 1. We'll now hear from Joe Buckley with Bear Stearns.

Thank you, I had a couple of questions. Just going back to Jeff's question, the number of JBX units, do you consider the two units in San Diego enough to call that one of the test markets? I mean just to give us some -- some sense of the number you may do per test market?

We are calling the San Diego restaurants actually learning labs. It really is to gauge the consumer response to the concept, and in determining that it is a very viable concept, we are then moving forward with our market test in Boise and Bakersfield.

Okay, but you don't comprise a test market?

No, they do not.

No. No.

Okay. Okay. One thing on the same-store sales that you just reported, the 8.2, if you could give us a breakdown of check in traffic?

You know, we don't disclose the breakdown between average check and traffic. I can tell you it trends more towards average check given our strategy of -- of introducing higher quality and higher margin products and reducing our discounting, our level of discounting.

Okay. Presumably, though, traffic was positive, as well?

Presumably .

Was it positive?

As I said, we don't really disclose the breakdown.

Okay. And then, Bob, a question for you.

You know, given your brand reinvention and efforts to reposition Jack in the Box, it seems you have a very negative view on traditional QSR, and given the recent resurgence in the business, including your own, I'm wondering if that changed at all, and if that alters any of your thinking on the need for such a significant brand reinvention?

No, my view about the industry remains the same and -- and my view is simply this: that the industry is very mature, it is very crowded. The opportunity for growth is limited, if at all.

And in order to be able to -- to grow the business, you have to figure out how to differentiate yourself. And that's a whole reason for getting into the strategy that we're in.

And so I think -- I think the answer to your question, Joe, is that the business is -- is a difficult one, it remains difficult, yes, although it's arising at the moment, but I think that's - long-term that's not going to be the case.

Okay. Thank you.

You're welcome.

As a final reminder, that's star 1 to ask a question. We'll now hear from Peter Oakes with Piper Jaffray.

Hi, excuse me, good morning, guys. Linda, I'd be kind of curious, are you seeing any surprises regarding the demographics of the customers who have been responding to your new menu items, you know, as you noted, been out there essentially for a year now?

I would say it's not a surprise. It was planned -- a planned strategy to broaden the appeal of our -- of our brand by introducing products that appeal to a broader audience and we are seeing that with the salads and with the Pannidos. So, it's -- it was a planned strategy.

And if we kind of -- if you can kind of remind us kind of how you were planning it, is it a totally discreet on gender, or income-driven or lifestyle? Or are you seeing kind of a trade of existing customers kind of being a little more, you know, exploratory?

It's really broadening the appeal. To those that are not heavy fast food users, somewhat more moderate and light, so it's based on occasion and frequency, but that generally is a group that's slightly older and skews a little bit more female.

Okay, thanks a lot.

Next we'll hear from Fitzhugh Taylor with Banc of America.

Hey, guys. Just a quick question on cost of sales. With commodities up, obviously you've mentioned beef, I was wondering how kind of the contribution margin or gross margin of the new products is affecting cost of sales?

Fitzhugh, this is John.

I think what we notice with respect to food cost impact on restaurant operating margin is year-over-year our commodity costs are higher, and we -- we've commented on that and we've mentioned -- we've singled out these, but generally commodity costs were higher year-over-year.

And we've offset that to some degree with higher prices and a reduced reliance on discounting in -- in our restaurants, and we are also enjoying a favorable shift in mix to top tier products versus bottom tier products. So, those are the positive factors affecting our margins.

Did the new units have a better margin percentage than the traditional units?

When you say new units --

I'm sorry, the new products, Pannidos, salads, et cetera.

Compared -- certainly compared to our bottom tier mix, yes.

Okay, thanks.

And there appear to be no further questions at this time, Mr. Hoffner, I'll turn the conference back to you.

Okay, thank you, everyone, for joining us. We'll look forward to talking with you again to report our third quarter results. Goodbye.

That does conclude today's conference. Thank you for your participation.