Texas Roadhouse Inc (TXRH) 2006 Q1 法說會逐字稿

Thank you very much, ladies and gentlemen, for your patience. We apologize for the delay, and welcome to the first quarter 2006 Texas Roadhouse Incorporated earnings conference call. My name is Bill, and I'll be your conference coordinator for today. At this time, all participants are in a listen-only mode; however, we will be facilitating a question and answer session towards the end of today's conference. [OPERATOR INSTRUCTIONS]. I would now like to turn the conference over to your host for today's presentation, Mr. Scott Colosi. Please proceed, sir.

Thank you and good evening, everybody. By now, everyone should have access to our earnings announcement released this afternoon for the first quarter ended March 28, 2006. It may also be found on our website, at www.texasroadhouse.com under the investor section. Before we begin our formal remarks, I need to remind everyone that part of our discussion today may include forward-looking statements. These statements are not guarantees of future performance; and therefore, undo reliance should not be put upon them. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks that could impact the future operating results and financial condition of Texas Roadhouse. On the call with me today is G.J. Hart, our CEO. G.J. is going to provide some general comments on the business, and then I'll walk you through the financials, including an update to our 2006 forecast. Then we'll open it up for questions. G.J.?

Thank you, Scott. And good evening, everyone. I'm pleased to report that we were able to post solid operating results for the first quarter. Our comparable restaurant sales increased 6.4% on top of a 6.7% increase in 2005. A little more than four points of our comp sales growth was attributable to an increase in guest counts. I do want to remind everyone that we took a 1% price increase in mid-January of this year. That said, I also want to remind everyone that as a part of this increase, we left our lowest priced items unchanged. Regionally, our comp sales growth was pretty healthy across the country for the quarter.

Our Midwest comps were about one point below our national average; and we were a little weaker in the northeast, but still solidly positive. During the month of April, comparable sales increased 1%. The first two weeks of the quarter, we were up a little over 4%, and then negative during Easter week, like many of our competitors, for a tradeoff week. Week four we were slightly negative, but we were lapping 19% comps for the prior two years, plus eight last year, and plus 10.5% in 2004. We will not be lapping comparisons that are quite as strong for the remainder of the quarter and the year. From a profit perspective, we also started off the year on a good note. Excluding noncomparable items, which Scott will talk about in greater detail, the income from operations and diluted earnings per share grew 27% and 33% for the quarter, respectively. Most of our expenses were close to expectations, and overall it was a pretty clean quarter.

In terms of development, in the first quarter we opened four company restaurants and our franchise partners opened one restaurant. For the full year, we still expect to open 23 to 24 company restaurants, about 85% of which will be in markets where we already have a presence. Based on the condition of our 2006 pipeline, we feel very comfortable with this forecast. In addition, we have made considerable progress on our 2007 development plan from both a real estate and personnel point of view. On the franchise side, we now expect that our franchise partners will open four to five restaurants in 2006. On the franchise acquisition front, most of you know that we completed our first round of acquisitions on the first day of fiscal 2006. We are continuing to review other potential deals, but have not as of today put any specific deals in motion.

I want to reiterate that we know many of you are concerned about the issuance of stock in these transactions, so we have had numerous discussions about utilizing cash and/or debt for any future transactions should they indeed occur. From a 2006 earnings forecast perspective, as noted in our press release, we have not changed our guidance of $0.44 to $0.45 per share, which includes the impact of the already completed franchise acquisitions and stock option expense. We are optimistic about the remainder of the year, but certainly the risk associated with higher costs of oil and the prospect of another hurricane season are wild cards. We are also well aware that some of you are uncomfortable with the level of selling of Rule 144 stock. Many of these Rule 144 stockholders have held their shares for close to ten years. Just like you, we do not have any control over when and how much these stockholders may sell.

In the past, we have encouraged these stockholders to sell in the most orderly fashion possible. If you remember, we were executed a follow-on offering last summer with the main purpose of providing an orderly liquidity opportunity to these free IPO holders. We do believe, however, that as some of these folks sell their stock, it creates an increased level of liquidity in the marketplace and ultimately allows institutions to more easily build and manage positions in our stock. With that said, I'll turn the call over the Scott to review the financials with you.

Thanks,G.J. During my review of the first quarter, please note that many of the numbers I will mention are listed in a schedule of supplemental financial and operating data that was included in the press release. Also, we have included additional supplemental financial schedules which exclude the significant noncomparable items contained in our first quarter results in order to facilitate more relative comparisons to 2005. These items include stock option expense, franchise acquisitions, and the timing of our annual conference, which shifted to the first quarter this year from the second quarter last year.

So starting at the top of our P&L for the first quarter of 2006 as compared to 2005, total revenue increased 34% and company-owned restaurant sales increased 35%. Our franchise acquisition contributed about ten points of sales growth, with the balance, about 25%, coming from development and comparable sales growth. As G.J. noted earlier, comparable restaurant sales increased 6.4% on top of the 6.7% gain achieved last year. Of the 6.4% growth, about four and a quarter points were attributable to transactions, and about two points to price and mix, with about one of the two points coming from price. Average unit volumes increased 5.8% for the quarter and weekly sales averaged just above $81,000. Even though our average unit volume growth is a little less than comp sales growth, our new restaurants are performing pretty well.

During the quarter, there were 105 restaurants in our comparable sales base. And these restaurants averaged about $81,000 a week of net sales. In contrast, our newer restaurants that are in the average unit volume calculation but not in the comp sales base calculation averaged about $79,000 per week. There were 18 of these restaurants in this group. Franchise royalties and fees increased by $65,000 to $2.5 million. The benefit of comp sales growth was slightly offset by a net decrease in the number of franchise restaurants opened during the period primarily as a result of the franchise acquisitions. In terms of cost, as a percentage of sales, restaurant operating costs were 15 basis points higher than last year on a reported basis.

However, excluding stock option expense and the franchise acquisitions, restaurant operating costs were actually 40 basis points lower than last year. Food costs were up about ten basis points all in on a reported basis, and flat to last year excluding the impact of the acquisitions. On a sequential basis from the fourth quarter of 2005, food costs dropped about 40 basis points, as expected. Restaurant labor costs were up 21 basis points all in as reported and 44 basis points below last year, excluding stock option expense and the acquisitions. Most of the reported to adjusted difference relates to stock option expense. We grant a significant portion of our stock options to our restaurant operators. And as a result, a significant portion of stock option expense gets recorded as a restaurant labor cost. Certainly some of the 44 basis point comparable improvement relates to sales leverage on our comp sales. But some of it also relates to our accounting for preopening expenses, which I will address next.

Our preopening expenses were up significantly from last year, about $1.2 million higher. Before I get into why it is up, I want to describe a change we have made to our accounting for preopening. We used to charge preopening with the cost of the new management teams only during the construction period for restaurant, which is typically about four months. The cost during the preconstruction period, which could be six to ten months or longer, was charged to G&A. We now consider any newly hired manager in training to be a preopening expense of the manager's eventual home restaurant from the date of hire. The net of this change is that we have moved moneys or reclassified them from G&A into preopening. And why did we make this change? Because it gives us a better snapshot of how much we are really spending on preopening, and ultimately the cost of opening new restaurants.

We've reclassed our first quarter 2005 results to give you more comparability on both the G&A and preopening lines. So why is preopening up so much? Two reasons: One is that we have many more restaurants in the development pipeline than we had a year ago; and two, we continue to hire new managers sooner, which gives them significant experience in our system before they open their own restaurant. And finally, how does preopening impact the labor line? Well, these new managers in training are getting charged -- the preopening line -- they're also working a number of positions in our existing restaurants. Over time, these new managers become very productive; and as a result, the restaurant that they are training in can schedule less labor. So in essence, some of the benefit we saw on the labor line relates to the increase we experienced on the preopening expense line.

Now moving on to rent expense. Rent expense was about 26 basis points better than last year, primarily due to sales leverage. Other restaurant operating expenses were up slightly all in, and up 16 basis points excluding the acquisitions. This increase was due primarily to higher utility costs, mostly from natural gas. Depreciation and amortization costs were 36 basis points higher than last year, and about 30 basis points of this increase was driven by new restaurants. G&A expenses as a percentage of revenue, were about 150 basis points higher than last year on a reported basis. Excluding noncomparable items such stock options expense and the charge relating to our franchise acquisition, and finally for adjusting for the timing of our annual conference, G&A was actually 50 basis points below last year.

As I mentioned during our last call, we are now lapping increases in G&A related to becoming a public company, and we expect G&A as a percentage of revenue to fall over time. That gets us to the income from operations line. Income from operations increased 2% on a reported basis; and excluding noncomparable items and the ongoing impact of the franchise acquisition, income from operations increased 27%. Interest expense was a bit higher than last year for two reasons: One is our franchise acquisition; the other is that we paid off a few high interest rate notes and incurred some prepayment penalties as a result. Minority interest expense increased to $207,000 of expense $27,000 of expense in the first quarter of 2005. This increase was driven by additional joint venture restaurants that have opened over the past year.

We will open two additional JV later this year, and they are part of our 23 to 24 restaurant development plan. Equity income from unconsolidated franchise affiliates increased to $88,000 from $52,000 of income in the first quarter of 2005. This increase was driven by additional restaurants that have opened over the past year. Our effective tax rate for the quarter was 40% even, including the impact of stock option expense and the charge relating to the acquisitions. The rate is higher because we do not get a tax duction for the stock option expense related to our ISO group of stock options, nor do we get a deduction for the acquisition charge. Excluding stock option expense and the acquisition charge, our effective tax rate is still 35.3%. Our weighted average diluted share count was about $76.5 million.

So the bottom line for the quarter was $0.11 per diluted share, which is about 8% below last year on a reported basis. Excluding stock option expense and the nonrecurring charge related to our acquisition, and adjusting for the timing of our annual conference, earnings per share was approximately $0.16, or about 33% over the first quarter of 2005. All in all, a pretty good quarter for us. This earnings per share growth does include the ongoing accretion of our franchise acquisition. Now on to full year 2006 guidance. As G.J. noted earlier, our earnings per share forecast for 2006 is unchanged at $0.44 to $0.45. This forecast is all in, meaning it includes all of the ongoing and nonrecurring impacts of our recently completed franchise acquisition and stock option expense.

Some of the other key assumptions in this guidance include that we'll open 23 to 24 Company, and our franchisees will open four to five restaurants this year. We're expecting comparable restaurant sales growth of at least 3%. We expect stock options to cost us between $0.08 to $0.09 for the year. We expect capital spending the to be between $65 million and $75 million, all of which we should fund with operating cash flow. On a reported basis, our $0.44 to $0.45 forecast represents very little growth over 2005. Please note that we still expect to earn $0.54 per share diluted EPS prior to stock option expense, and a nonrecurring acquisition charge. And this $0.54 represents 29% growth over the last year's comparable number. And with that, I'd like to turn the call back over to G.J.

Thanks, Scott. Looking ahead, we feel very good about our prospects for continued strong sales and profit growth. We've had a strong start to the year. Our 2006 development plan is on track, and we've already identified virtually every site for 2007. Our new restaurants continue to perform very well. We have firmly protected our most aggressive price points and continue to focus on the day to day operational execution of the business. We believe that we have a very strong foundation from which the drive continue to EPS growth in excess of 20%. That covers our prepared remarks; so operator, if you would, please open the line for questions.

Thank you very much, sir. [OPERATOR INSTRUCTIONS]. And our first question comes from the line of Jeff Omohundro of Wachovia, please proceed.

I wonder if you could elaborate a little bit more on, I guess, your appetite for acquisitions. I think I understand the financing side of it in terms of the cash in debt versus stock. But how that impacts your ability to do additional acquisitions is my first question. And then my second one, would be if you could just talk a little bit about mix and what you're seeing with customers in terms of their actions on the menu? Is the, say, the filet mix versus sirloin shifting, do you see them trading up or down on your menu? Thanks.

Hi, Jeff, it's G.J. I'm assuming you mean on the acquisitions, you're talking about franchise acquisitions?

Yes, I'm sorry, I should have mentioned that.

Let me first start by saying all along we've said that our acquisition strategy as we develop it is really based on people and potential development. And so while we continue to evaluate those opportunities, we clearly want to do what's in the best interest of our shareholders and we also clearly want to note that we've heard what some of our shareholders have said, and that's why we brought up the whole comment about cash and debt versus the stock given the high multiple, if you will, that it converts to today. So at this point, as we've said in our remarks, while we have nothing currently planned, we clearly are going to continue to look at it from a people and a development strategy perspective.

Thank you.

And then in terms of your second question, in terms of mix. Jeff, we really haven't seen any mix change at all.

Very good, thank you.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Andrew Barish of Banc of America Securities, please proceed.

Hey, Scott. I know there's a lot of moving pieces. Just wondering on the line item guidance going forward here, G&A and the tax rate after the first quarter -- I mean, it sounds like G&A on a reported basis will be somewhere in the mid-6% or so, is that sort of in the ballpark?

G&A with reclassing this expense would be closer to the mid-5s, including stock option expense being in there, because G&A does take a hit for stock option expense. And that's progressively moving down kind of each quarter --

Okay.

-- from where we are today on a reports basis. The tax rate -- the tax rate should be closer to 38%, maybe a little bit below on a reported basis, including the impact of stock options.

Great, thank you.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Matt Difrisco of Thomas Weisel Partners, please proceed.

Hi, can you give us a little bit more of a timeline on those 23 to 24 stores you expect to open by '06 quarter if possible?

Pretty much going to be about a third first half of the year and two-thirds second half of the year, which consistent with prior years.

Okay. And then, can you tell us maybe in dollar terms or basis points, just as a point of reference, what the shift represents into G&A -- out of -- into preopening out of G&A?

It's close to a couple million dollars. At least.

Okay. And then, also, just remind us of your price factor right now. You said you took a 1% in mid-January. What are you running right now and when is the next cycle of a price increase?

Well, we're running 1 right now, and there's no definitive date on any future price increase.

Okay. And then, within respect to your guidance, when you gave your initial guidance of the 44 to 45, were you with the presumption that your net tax rate in that was going to be 40%, or is this sort of now that we've hit this and you've gone through the math of the ISOs, et cetera, that it is a little higher?

No, when we gave this guidance that included the $0.08 to $0.09 for stock option expense, that $0.08 to $0.09 included the nondeductibility of the ISO group of stock options. And when you add that in to our base business, that creates the higher tax rate. So the net impact of the stock options is still $0.08 to $0.09.

Right, okay. And then are you going to use ISOs going forward?

Really, I have no comment on that. Right now, nothing is changing as far as our stock option program.

Okay. And then last question, what is the tax rate that you are using then in the out quarters for the 40 to 45, considering that you won't have the acquisition charge in there?

It's closer to 38, maybe a little bit below 38.

That's what I got. Okay, thank you.

You're welcome.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Paul Westra of SG Cowen, please proceed.

Great, thanks, good evening. Question, Scott, for you on the G&A question again. If you look at your restated G&A numbers, they were up year-over-year about 5% excluding the broken out noncomparable pieces. Is that a good level that you -- is that a good number to look at going forward as your absolute dollar growth rate of G&A, give or take a little going forward?

You know, Paul, I see it growing a little bit faster than that over time. Our target is 50% of revenue growth, so it would be, you know, maybe in the low teens. I'd like to think we could get it between 50 and 75% of revenue growth, you know, over time. That's kind of what we're shooting for. And keep in mind that our conference expense, which its G&A, is going to be in the second quarter -- I'm sorry, was in the second quarter last year, first quarter this year. So we should see a much lower reported G&A number in the second quarter than we did the first quarter this year.

Yes, okay, that's great leverage. I guess, you're feeling pretty good about your infrastructure right now and investments, so nothing you see on the horizon that might accelerate that G&A?

I think we feel very good about our infrastructure right now. Absolutely. And most of the positions we're hiring for are mid to below mid-level type positions from a G&A standpoint.

What was the conference cost last year, roughly?

Last year it was probably close to $2 million, and this year it's going to be about $2.3, two and a quarter million.

Great, thanks. And I have one other question for you on this -- I mean, shifting, you mentioned that some of the preclassification may have helped the labor line; and what I thought I saw -- may have got it wrong here -- but it looks like 325,000 or so because of the hire general managers you mentioned [INAUDIBLE], but wasn't the general manager's cost always not in the labor line, didn't you mention it was always in the G&A side?

No, the general manager -- the managing partner who is assigned to that restaurant, their salaries have always been charged to the restaurant itself. If you have a new manager, a manager in training, that manager, who's not in their new store yet, they would either being charged to G&A when they first got hired or they were charged to preopening when the store began construction. And what we said is they should be charged to preopening the whole way, because that's the real cost of opening a store.

Now, what happens is, while that manager is in training, they're working in restaurants. And they're experiencing a number of restaurants, so they really get a feel for what it's like being in our system and they're well prepared to open their own restaurant. Well, as I mentioned in my remarks, they get pretty productive, and therefore the existing managing partner can use them to run shifts, et cetera, and ultimately run less labor -- reported labor -- in their own restaurant. Does that answer your question?

A little bit. But that's just an observation; those managers and trainers were never in the labor line, even like, for instance --

No, they were never in the labor line before, but we've increased our pipeline so much of managers, that it's having more of an impact on the labor line.

Got it, so it's a year-over-year increase.

And we're bringing them in sooner. So it's like a double -- a double -- two things going on at the same time -- more restaurants in the pipeline and the managers are coming in sooner.

Right, I'm clarified, on that. And last question, on a go forward basis, preopening, can you give us a round number of what that line will look like now on a per store basis?

Probably closer to $350,000, somewhere in that range, per store.

Not much different than what you had. Okay, great. I'll let someone else queue up. Thanks.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Destin Tompkins with Morgan Keegan, please proceed.

Good afternoon. G.J., could you just kind of give us your take on the current health of the sales trends? Obviously, same store sales are a major concern in this current sales environment, and it sounds like if you back out the noise of the Easter shift and the tough comparison for that last week, it sounds like things are pretty solid, especially relative to many of the competitors, that they're seeing pretty weak traffic trends. Can you just kind of, I guess, add some additional color and give us what your sense is?

Well, I think as our sales have -- as we've reported them for the first quarter have been strong, and certainly compared to some of those competitors; and I think as we've gone through other challenging environments -- and we've talked about this a lot on different calls, as well as different conferences -- you know, we see it as an opportunity for us. I think it's too early to tell in terms of the long -- if there's long prolonged high gas prices and what that impact will be. So at this point, it's really -- you know, it's too early to tell. But clearly, if you listen to the shift in the April period, we started off very strong.

Right. And Scott, could you give us any update on the technology front? You know, you've talked about a labor scheduling software and a theoretical food cost system, Kind of where we stand with those programs?

Well, theoretical food costing has been in our system for about a year, and our folks are continuing to learn more about the system and use it and leverage it over time. And I still think there's a lot of potential. On the food cost side with that system, I think it will be a long time coming and a little bit kind of in drips and drabs over time. The labor piece of that still in test in three of our restaurants, and one day it's probably going to be rolled out. It may be a year from now, it may be nine months from now -- I can't tell you for sure. But we're going back and forth with the vendor with the various changes to some of the software code and what not; but longer term, I feel very good about the direction that we're going with both those two systems.

Great. And one quick one, Scott. On the share count, it seemed a little bit higher than your previous guidance. Is that just a function of the treasury method, or is there anything else driving that number?

I don't know if it's higher than my guidance, it might just be the acquisition in there.

Okay.

But I think it's actually a little bit below my forecast. So it could just be us getting confused on the --

Excess?

Yes.

Okay, great, thanks.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Jeff Farmer, CIBC World Markets. Please proceed.

Great, thank you. I was hoping to drill down a bit on the restricted share topic. It looks like you guys have been working through the overhang. So still hoping to get a better picture of what's still out there in terms of the number of restricted shares?

Yes, I mean -- I don't -- I don't know for sure, Jeff. I can only see what folks people have -- what shares people have filed to sell --

Yes.

-- at some point in time. My best guess is that's probably in the range of 15 million shares that I haven't heard about or haven't seen any paperwork filed upon.

Okay.

And then in addition to the 15 million, would be 20 million that Kent owns and that sort of adds up to all the restricted shares.

Okay, I guess going about this a slightly different way. In terms of shares outstanding at the end of the 1Q '06, I can honestly see the average number, but where did you guys end the quarter?

Where did we end the quarter?

Yes, in terms of share count? I mean, if it's roughly that 76 million number, that's fine, but I just wanted to --

Well, from a basic perspective, it's roughly, probably about 73.5 to 74 million. Actually outstanding before the diluted impact of options.

Okay, on a diluted basis?

On a diluted basis, it's about 76.8, thereabouts, 75 even.

And in terms of -- it's hard to get an accurate float count, are you able to get that for your share base -- do you know what that is right now?

I don't know what it is.

Okay, and then just last quick question. In reference to -- I know you don't have a ton of insight to know what's going on in terms of the 15 million restricted shares by the other shareholders; but as far as you guys know -- I mean, Kent have any plans to sell his 20 million shares anytime soon? Do we have a sense of the timing of that?

I -- yes, I really have no idea what Kent's plans are or aren't.

Okay.

I think he likes being a big owner of the company.

That's essentially what I'm getting at. As long as he's not immediately planning to lighten up his position. All right, thank you, guys.

You're welcome.

Thank you very much, sir. Ladies and gentlemen, our next question is a follow-up from Mr. Matt Difrisco from Thomas Weisel Partners. Please proceed.

Hi, just doing an observation between the comp and the average [INAUDIBLE] sale -- the narrowing of it, I guess, since the last two quarters where it was -- basically, it seemed like the gap was around 1.5 or slightly greater. Are you seeing a less round of stores that are opening, and even the stores that opened toward the back half of last year, better opening volumes, better honeymoon periods? Can you comment on that? Just give us an update?

I'd say overall -- first on the honeymoon period, it's still probably averages in the low teens or so. There is a significant, though, standardization between restaurants, and dependent upon where we build them. Some of the new markets that we've gone into, where we don't have a presence for at least a few hundred miles, we've opened fantastic. And it's too early to tell in some of those restaurants because they haven't been opened long enough really with their honeymoon periods, but they've opened up exceptionally strong.

I'll tell you as a group, the '05s and '04s have opened kind of consistent with prior years, and they're doing sales that are consistent with prior years. And as I mentioned, you know,our comp group, which obviously has a longer history, is on a couple thousand dollars a week higher than the noncomp group. So -- and the most recent stores in the average unit volume calculation, they're doing a few thousand dollars a week more on average than all the other stores. So you know, overall, we're pretty pleased with our development success.

Okay. And then just a little bit also looking into the same store sales, did you buy in the spot market, or did you fully purchase everything off your contract? I was curious since you had a better than expected type comp number if you were out there and buying and taking advantage of lower beef prices in the new term.

No, we contract on an annual basis, and our contracts on all of our primary commodities run through the calendar year of '06.

Okay, thank you.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Mr. Andrew Barish of Banc of America Securities. Please proceed.

Hey, guys, just two follow ups. On the development in terms of new versus existing markets, can you refresh my memory on that? And then on the 44 to 45, just want to make sure, you are starting out by using the $0.11 in the first quarter that was the reported diluted EPS, is that correct?

Yes, Andrew, that's correct. From a new market perspective, Andy, I would tell you that, I think we're going into two or three new markets. One of them is upstate New York where we've already opened, and we opened in Little Rock, Arkansas, which technically for us is a new state. To us, it's not really a new market, because we're kind of all around Arkansas, but that's basically it for us.

Thanks.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Jason Whitmer of FTN Midwest Research. Please proceed.

Hi, good evening. Scott, , do you know what the -- I'm trying to blend out all these calender shifts here in the current period. Do you know what the run rate is on an average two year comp through all that on a normalized basis so we can get a complete picture as to how things are shaping out right now?

Which time period you talking about?

The current time period.

Defined as what?

Sorry, 2Q -- the April -- the first four weeks of April. There's all these calendar [INAUDIBLE].

I've got to look it up here. Bear with me one second. The two-year comp, excluding -- well, all in is run at about 8% for the month of April -- the April month.

Okay, okay. Are the -- on food costs, I was actually a little surprised that that was a little bit higher than what I was looking for with pricing in play and some contracted items actually looked pretty favorable. Is that something that, you know, will take some time through this year to improve, or can you describe maybe how that sequentially played out year-over-year and the comparison on that?

Well, one thing that happened was in January, tomato prices were still pretty high. And they had spiked up at the end of last year; and when I say high, it was like 4 or 500% inflation high for most of January. And even though tomatoes are a low mixed item for us, they cost a lot of money when they have that much inflation. And that all passed, so February and March were better months for us. So that's some of it. Okay, that's a simple -- that's some of it.

Valentine's day in February, you know, we have a -- a lot of higher-priced, higher food costs as a percent of sales offerings. So that's a four or five-day promotion there. And that ticks up a little bit sequentially versus Q4, and we're still down 40 basis points, so we were pretty pleased with with that.

And then your other costs actually looked not as bad as what I was thinking, it was in utilities or some other restaurant expenses [INAUDIBLE] and so forth. What -- anything changed within your assumptions, particularly on utilities and energy, through the balance of this year?

No, I'd say utilities are still pretty bad and inflation was still close to 20% for the quarter. So if there's one expense item that I'm less comfortable with, it's definitely utilities. And my sense says that until we get through the majority of the hurricane season, it may stay pretty high, those expenses.

In terms of actual units, is there anything to throw out for us yet on '07 on the pipeline? And I guess maybe broader speaking, in '08 and '09? Are you setting a system in the pipeline where you can get up to 30, maybe 40 units year?

I think 30 to 40, absolutely. That's the direction we're heading. I think, you know, above 40, who knows? I don't know what the maximum number is for us we'd be comfortable building, but I can tell you 30 to 40 is definitely realistic.

Great, thanks.

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Paul Westra of SG Cowen. Please proceed.

Great, thanks. Scott, just one more quick question. What was the impact on the prepayment penalty in the interest expense line so we can get a gauge of what that should look like going forward?

That was about 150, $180,000, something like that. So I'm thinking interest expense might be around 50,000 a month for us --

Great.

-- going forward.

Just this last question, [INAUDIBLE] I'm looking at this $2.6 million preopening number and it looks like a lot of shifts went on, but it still looks pretty large. I know you mentioned in the release that development stores got in that number, but it's still a pretty large number if you're looking at about a base cost of 350 a store going forward. Can you comment on how many stores might influence that number that open the second quarter?

Second quarter, not so many, Paul. Most of the increase is really for what we're seeing for the third and forty and also first quarter next year, potentially. Our real estate folks are out working hard and they're building up a pretty big inventory of sites and we're telling our operators, once we've got deals signed, they need to make sure they've got management teams in our system so they can get sort of a full year, if you will, of experience before they take over a restaurant. So we're trying to be very, very protective of the quality of our openings and the experiences that our guests have when we open a restaurant.

Great, okay. Thank you.

Thank you very much, sir. Ladies and gentlemen, your next question will be from the line of Barry Stouffer of BB&T Capital Markets. Please proceed.

That was interesting. Scott, could you comment on the change on average hourly wage rates in the quarter?

Sorry, Barry, did you ask about the increase in average hourly wage rates?

Yes, I did.

Yes, it's about 1.5% for us, and it's been that way almost every quarter for the last couple of years.

There have been a couple of exceptions, but it's been pretty steady around that level.

Okay, and would it be safe to say that the comp trends the first half of April were pretty similar to March?

No, only because Easter was in March a year ago, so that helped us in March.

Okay.

So I've got a bump in one of the weeks in March, I've got a pretty big bump because of the favorable Easter lap.

I guess what I'm trying to get at, I assume your comp trends were stronger in January, and then February probably hurt by weather. What I'm trying to get to, has there been any noticeable change in the trend if you subtract out the Easter impact?

I would say no.

Okay.

If you remember, when we reported the full year results, we talked about the first seven weeks, which takes you through February -- most of February.

And can you clarify the basis point increase in utility cost expense in the quarter?

Yes, I can. It was about 40.

Okay, that's all I had. Thank you.

Thank you very much, sir. And I apologize for the mispronunciation of your company name. The next question will be our last from the line of Dave Goldberger from [INAUDIBLE]. Please proceed.

Hey guys. You know, there's been a lot of movement on below the line, but can you give us an indication of what you're seeing out there generally in terms of beef and chicken and other commodity costs?

Sure. Well, let's start with the chicken. We've clearly seen some lower prices on chicken, particularly on breast and tenders on a spot basis. On a long-term contract basis, you haven't seen significant movement. And of course, we are contracted through the end of the year. In terms of beef, similarly, you've seen the beef numbers are bigger; however, the middle meats do continue to be very strong, particularly choice and prime cuts. I think that's primarily due to the quality of the cattle that's being raised at the moment, but the number is going up. On the pork side, it's been fairly flat; and particularly the products that we use, I think has been fairly flat. I will say that going forward in '07, again, I would say I'm optimistic -- cautiously optimistic -- in terms of what the commodity markets will bring for us, particularly in the beef area.

Got it. All right, thank you very much, and good luck.

Thank you.

Thank you very much, sir. Let me turn the call back over to our management for any closing remarks they may have.

No, that's it. Thank you very much, we'll see you next time.

Thank you very much, sir. Thank you, ladies and gentlemen, for your participation in today's conference call. This concludes the presentation and you may now disconnect. Have a good day.