Texas Roadhouse Inc (TXRH) 2010 Q2 法說會逐字稿

Good day, everyone. Thank you very much for holding and welcome to the Texas Roadhouse, Inc. second quarter 2010 earnings conference call. Just a reminder that today's call is being recorded. (Operator Instructions) Following the presentation, we will conduct a question and answer session and instructions will be provided at that time for you to queue up for questions. Now, I would like to turn the call over to Scott Colosi, Chief Financial Officer of Texas Roadhouse, Inc. Please go ahead.

Thank you, Kevin, and good evening everybody. By now, everyone should have access to our earnings announcement released this afternoon for the second quarter ended June 29, 2010. It may also be found on our website at TexasRoadhouse.com under the investors section.

Before we begin our formal remarks, I need to remind everyone, that part of our discussion today will include forward looking statements. These statements are not guarantees of future performance and therefore, undue reliance should not be placed 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. In addition, we may refer to non-GAAP measures. Reconciliations to such measures can be found under the investor relations section of our website.

On the call with me today, as usual, is G.J. Hart, our CEO and Price Cooper our VP of Finance. G.J. will provide some insights about the performance and direction or our business and Price will give you the financial update and then we will all be here to help answer some questions. Now, I would like to turn the call over to our Chief Executive Officer, Mr. G.J. Hart.

Thank you, Scott. And good evening, everyone. We are pleased to experience a comparable restaurant sales increase of 1.4% during the second quarter while expanding our restaurant margins by 45 basis points. These combined with a few more operating weeks year-over-year, enabled us to grow diluted earnings per share by 7% during the second quarter. This puts earnings per share up 19% year-over-year which is pretty good, considering second quarter was impacted by a less year-over-year benefit from commodities and the fact that we incurred $1.4 million more on our annual conference in the second quarter this year as compared to last year.

In addition to positive comparable restaurant sales and margin expansion, we continued to see new restaurants perform very well on the top line. Price will walk you through some of the detail, but I will just mention that it was very nice to see our average unit volumes grow in line with comparable sales. This is the first time these have grown in tandem since mid 2005. We believe it is a testament to the fact that our operators are doing a great job, opening and running restaurants and it validates the tremendous consumer demand for the Texas Roadhouse brand.

From a capital perspective, nothing necessarily new as we continue generating cash flow in excess of our capital requirements. For the period, we used this excess cash to pay down debt and grow our cash position. We remain pleased with our capital structure as it currently stands. We believe our continuing commitment to food quality and guest service has enabled our operators to focus on results, specifically sales, during a challenging consumer environment and that this is reflected in our results.

In addition, we believe our commitment to growing new restaurants as returns justify is the right approach from a capital allocation perspective. I will get more into all of that in a moment, but first, Price will take you through the financials.

Thanks, G.J. During my review of the second quarter, please note that many of the numbers I will mention are listed in a scheduled supplemental financial and operating data that was included in the press release. Starting with our income statement for the second quarter of 2010 as compared to the same period in 2009. Total revenue increased 5% driven by a 5.2% increase in Company restaurant sales. The growth in Company restaurants sales was driven by a combination of a 3.6% store rate growth and 1.4% increase in average unit volumes. Our average unit volume growth matched our comparable restaurant sales growth for the quarter. We believe this is due in part to moderating our development schedule over the last 12 months and validates our focus on quality and value in a difficult environment.

Our comparable restaurant sales growth of 1.4% was comprised of positive guest traffic of 2% and negative check of 0.6%. By month, comparable restaurant sales were down 0.3%, up 1.7% and up 2.2% in April, May and June respectively. For the first four weeks of our third quarter comparable restaurant sales were up 3%.

We currently have no pricing in our menu and continue to give back a little in check primarily driven by selling fewer alcoholic beverages. In addition to seeing the gap close in terms of percentages between our comparable restaurant sales and average unit volume growth, we have also seen the absolute dollar gap between the two greatly diminish. For the quarter, the 237 restaurants in our same-store sales base averaged $73,200 a week in sales. These restaurants were open at least 18 months as of the beginning of the second quarter of 2010. There were 18 restaurants in our average unit volume base, but none in our same-store sales base there have been open 6 to 18 months as of the beginning of the quarter. These restaurants averaged almost the exact same in sales as $73,100 a week. Our newest nine restaurants, which were opened some time over the last nine months and are not in our bank store or average unit volume calculation, averaged $88,500 a week in sales during the quarter.

In terms of restaurant margins, we experienced another quarter of expansion with margins increasing 45 basis points over the prior year period. Once again, cost of sales led our improvement as it was down 73 basis points. As anticipated, we did not benefit as much from food cost deflation during the second quarter, due to the way we purchased some of our proteins this year and the fact that produce costs were up quite a bit. As we head into the back half of the year, we anticipate our food cost deflation will pick up somewhat in the back part of the third quarter and into the fourth quarter. We still anticipate 2.5% to 3% food cost deflation for the year. Partially offsetting the cost of sales decrease, was a 35 basis point increase in the other operating lines driven by higher bonuses due to higher sales and profitability as well as increased general liability insurance due to unfavorable claims experience.

Moving down through the income statement, a couple of other items to point out. Preopening expense was up year-over-year for the first time in a couple of years. This is due to having more new restaurants in the pipeline than at this time last year. Depreciation and amortization costs continue to come in lower as a percentage of sales and in terms of dollars versus the prior year. With more moderated development we now have more assets becoming fully depreciated than we are adding.

G&A expenses were up 40 basis points as a percentage of total revenue and $1.7 million in terms of dollars. The driver was the incremental costs associated with our annual managing partner conference G.J. mentioned. As we discussed on our last call, this year's conference was held in New York City, which was an expensive venue. In 2011, our annual conference will be in Florida and we anticipate the cost with it will be much closer to $2 million to $2.5 million as compared to the $3.4 million this year.

The effective tax rate for the quarter was 31.9% which was lower than the first quarter. We are now projecting a lower rate for the year in anticipation of receiving higher tax credits for the year. The 31.9% for the quarter puts our year-to-date effective tax rate at 32.7%, which at this point, is in line with what we are projecting for the year. As for our capital structure, balance sheet and cash flow during the quarter we paid down $10 million in debt and increased our cash balance by $6 million. Thus, we ended the quarter with total book debt of $79 million and cash of $60 million, implying a net debt number of $19 million. Throughout the balance of 2010, we anticipate continuing to generate excess cash flow and paying down more debt.

For full year 2010 we are now estimating our diluted earnings per share will be up 16% to 20% from 2009's reported diluted EPS of $0.67 This is an increase from our prior guidance of up 14% to 18%, due to the fact that we are basing our diluted EPS estimate on comparable restaurant sales being up approximately 1% for the year versus the flat to up 1% we had been using. We remind you that in determining our estimated diluted EPS growth for the year, we tried to base it on reasonable assumptions, the most impactful of our assumptions is the 1% comparable restaurant sales growth. Year-to-date, through the second quarter, 1% is where where we are. And one thing I will mention, is that we do anticipate December sales will be negatively impacted by Christmas falling on a Saturday as compared to a Friday in 2009.

In addition to our sales assumptions, we want to reiterate the following assumptions relating to our 2010 estimate. Assuming 14 to 15 Company owned openings. Food cost deflation of 2.5% to 3% and total capital expenditures of approximately $50 million. With regards to impairment and closure costs, I will remind you that we've had anywhere from $1.7 to $3 million of cost for this item, each of the last three years. We typically have a handful of restaurants we are monitoring for impairment and/or closure. And we do have over $100 million in goodwill in our books. While we cannot specifically plan or improve for improvement, we do incorporate the possibility of having these costs in our EPS estimates. With that said, I would like to turn the call back over to G.J.

Thank you, Price. While we really don't have any new initiatives to share with you today. As we are sticking to the basic blocking and tackling that has driven our results we will update you on just a few things.

First and foremost we remain focused on operations and providing legendary food and legendary service. We believe that this has paid dividends in terms of capturing market share and will continue to do so. We are not working on menu engineering or any new labor scheduling models that might diminish the overall guest experience.

Second, we are continuing to work on our new store economics. We are very encouraged by the sales performance of our new restaurants that Price mentioned. And, as we shared with you the last time we remain optimistic that we will see our average total investment cost decrease by $200,000 to $400,000 by the end of this year.

Additionally, we are on track to open a slightly smaller Texas Roadhouse prototype later in 2010. It will be about 10% smaller in terms of both square footage and seats. We are optimistic that with the lower development costs, this will generate a good return on invested capital. We will know more in 2011 as to how this might impact our development plan going forward. As of now we are on track to open more restaurants next year than the 14 to 15 in 2010. We should be in a position to talk more about this in November.

Concerning our Aspen Creek concept, we just opened our second restaurant today in Irving, Texas. In contrast to the first Aspen Creek, we will serve both lunch and dinner at this location. The first Aspen Creek is performing well, traffic wise. Our challenge is given the aggressive price points, the average check is pretty low. We need to figure out how to drive more sales by getting more bodies to the restaurant. Beyond today's opening we are looking at opening one more Aspen Creek location later this year and will continue evaluating its long-term potential from there.

On the pricing front, we did not take any pricing with our recent May menu. That said, we will be testing some price increases in the latter part of this year. At this point, it is really too early to speculate on when we would take any additional pricing and what amount that might be. While we generally anticipate inflation and things such as labor and utilities over the long-term, commodities can really vary. A lot of what we would do, and when, depends on where we see commodities in 2011.

And on the commodities font, we have started our process of locking in some of our protein prices for next year. We are not going to get into specifics for competitive reasons. However, we will tell you that, as we sit here today, we are not overly worried about there being material inflationary pressures from commodities in 2011. We should be in a better position to talk in more detail on our third quarter call in November.

So, in summary, 2010 is shaping up to be a very solid year for Texas Roadhouse. We are anticipating solid EPS growth, comparable sales and traffic are positive. Sales productivity at newer restaurants continues improving and our new store investment costs are down. As we mentioned, we do plan on opening more restaurants in 2011 and we are optimistic that we can open even more in 2012. However, we are trying to remain conservative and ensure that we are growing for the right reasons. And that is to generate returns on capital versus just growing for growth's sake. This discipline has served this Company well during tougher economic times and we believe it is imperative to our future success.

In closing, we understand that none of our prior success or continued growth is possible without staying focused on food quality and service levels. So, a special thanks to our 40,000 team members who continue making Texas Roadhouse what it is today. With that, operator, that covers our prepared remarks. Please open the lines for questions.

Thank you very much. (Operator Instructions) First up, we'll hear from David Tarantino at Robert W. Baird.

Hi, good afternoon. Question, G.J., just following up on your development comments and the potential to ramp up the unit development next year. At this stage, what would you say would be the limiting factor in terms of your ability to accelerate the growth and maybe if you could give us a little bit of perspective on how much faster you might be going next year relative to that mid teens in terms of unit locations this year.

Well, the limiting factors are twofold. Number one, it is just getting enough locations in the pipeline given that we slowed are development plans in 2010. Secondly, it is the whole people process of getting the right people on board. And I will remind you that our intent is to have our managing partners in the system for a year before they get their restaurant.

In respect to the number of units that will increase, as we indicated we will be in a position in November to comment more about specifically what that will be. We just at this point want to leave it that it is more than 2010.

Okay, that's helpful. And, just to clarify, this decision to ramp up the growth, is this more of a strategic call that you are getting the unit economics that you like now and you are going to ramp as fast as you can or as fast as possible going forward or is this sort of a temporary step up in and we will see how it goes and decide later what the right growth rate should be?

David, as you know, we have always said we are a growth restaurant company. Our intent is to continue to grow units and we will continue to do so as long as it is prudent from a return on capital perspective. So, it is our plan to ramp up development as we see fit. We generate a lot of cash and we are in the restaurant business and we want to be a growth company.

That makes sense. That is helpful. One question, Price, on the guidance for the comps for the year plus 1. Last few months you have been running better than that. I just want to understand how you are thinking about the second half and the potential impact from that Christmas shift in the fourth quarter? Are you expecting that to be a big impact on the fourth quarter? Thanks.

Thank you, David. Christmas impact projected to be about a point on the month of December alone. So, maybe three 0.3 on the fourth quarter alone. I think you know the way we give guidance is we just base our EPS off on assumed same-store sales growth and sitting here for the first six months we're up 1%. So, we think that's at least a reasonable starting point for the balance of the year to base our guidance on.

Thank you.

Next up, we have a question from Jeff Omohundro at Wells Fargo Securities.

Thanks. I guess first is a bit of follow-up on that development, but more in terms of utilization of cash. It looks like your cash build is likely to continue and unless you significantly step up the pace of development, I'm just curious how you're ranking your use of cash in a moderate growth scenario. Would you consider share repurchase and dividends and so forth? Thanks. That's my first question.

Hello Jeff, it's Scott. Yes, in priorities, by far the biggest priority by far is development. Priority number two would be a conservative flexible balance sheet. And so, that's becoming more of a reality for us every day. Keep in mind we are 80% company owned, so we know we've got a bit of operating leverage in running a high percentage company system. After that, then we do have discussions about -- we have a share repurchase program. I think it is 18 million left on that program and it is still outstanding.

And actually, we have seen other folks have done with regards to dividend announcements. Naturally, it is something to talk about. There is another option which, of course, is acquisitions as well. So, there are a number of things on the table. By far, by far, the biggest thing is development of Texas Roadhouse.

Thank you. My other question was regarding that negative check impact in the alcohol mix trend. Just curious what you can do and if there are efforts to spur alcohol sales at the units?

Hello Jeff. It is driven by fewer alcoholic beverages being in total. Right now we are actually in the midst off running an internal promotion.

Hello Jeff, this is G.J. I'll just follow up on that. While we're running a beverage contest, which we typically do in the summer, the balance is we are not driving this business based on alcohol sales. We are in the food business and recognize that. So, it is not something that we are going to continue to look and say look we will get up 1% and grow our alcohol sales by 1%. We're going to do it providing what the guests want. We will continue to selectively promote items and see where the chips fall from there.

Hello Jeff, it's Scott. We're also not going to extend our operating hours to midnight or 1 in the morning or 2 in the morning to drive some incremental sales, obviously most of which would be alcohol, I think at those hours. That's not our deal.

That's helpful, thanks.

Next up, from Morgan Keegan, this is Destin Tompkins.

Thank you. My question is on the July same-store sales trends that you mentioned. Can you give us some perspective there? Do you feel the 3% is representative of the month? Was there some impact from the shift of the 4th of July? Why couldn't that number be sustained for the quarter? Is there something you see, harder comparison or something that we should be incorporating into our models?

Thanks Destin, this is Price. As far as July is concerned, July was our softest month in the year. We were down 5.7% in July. I don't think there was anything -- there wasn't anything as far as a calendar shift in July 4th. To your point, maybe our 1% does prove to be conservative, but as we sit here today, we think it is a reasonable number to use for our EPS assumptions for the year.

Okay great. Also, I believe it was -- you rolled out a new menu at the beginning of July or recently in the summer, had some new items, upgraded burgers, fried pickles, that had tested well. Any comments about the success of those menu items? Has there been a noticeable change in the mix of some of nose items?

It's a little bit too early to tell really to know if there's a sustained change or not. I think they have been received very well and we'll leave it at that.

Lastly, G.J., on the development, you mentioned that you are seeing a little bit better cost. I'm curious, also, in terms of the sites you are looking at, are you seeing anything different in terms of competition for the available sites that you're looking at? Is there more or less? What does that environment look like at this point?

I don't think there is any significant change from what we reported the last quarter. There's probably less casual diners out there looking for the same sites that we are. We still have the same cast of characters competing for some of these out lying lots and parcels that we look at. But nothing significantly different.

Okay great. Thank you.

Moving on now to a question from Matt DiFrisco at Oppenheimer.

Thank you. Just a couple of quick questions here. Looking at your comment with respect to 2011 as a faster growth year, more openings. Can you give us a little bit of guidance hand holding on the preopening given that perhaps 1Q you might be opening more stores so some of the preopening might affect 4Q of 2010. Where should we be looking at as far as preopening range, I guess, if you want to give it to us in the full year, if you can?

This is Price. Generally the $400,000 to $450,000 per opening is a good number to use. To your point, it is very likely that we could see preopening picking up in the back half of this year with more openings in line. Are you specifically talking about 2010 or on into ' 11?

Yes, I'm concerned about within your guidance, what is the preopening number basically that we should come close to for Q4? Given that you're going to have more stores opening in 1Q '11 that are going to cause some expenses in 4Q 2010 to be higher. So, looking for a tighter range I guess on the preopening number for 4Q so we stay pretty close to that.

I think if you use, in the neighborhood of $400,00 to $450,000 for that 14 to 15 openings this year, I think that will put you in the range for your annual preopening, give or take.

So, there is not going to be a dramatic bump from more stores opening in 1Q versus what was opened in 1Q of this year?

No, I don't think so. For our timing of next year's openings. They will not necessarily be Q1 -- front-end loaded next year.

Okay. And then, just on a continuing basis looking at that other operating expense line. Is it purely just the contribution of profit sharing and that you're making more money now versus last year where it was much lower, the profit sharing component ? Or are there things in that other operating expense that might have some inflationary creep or something that we should be

Hi Matt, it's Scott. Where the guys are making more money this year, it's because our margins are better than sales per se. That's why the expense is higher as a percent of sales. Because we're getting nice benefit from having lower food costs. That's probably the biggest thing driving our [inaudible] today. So, that expense goes higher without the sales being substantially higher.

So, is there a counter balance then, as commodity costs get less of a benefit to you that you're going to have less of deleverage on other operating expenses?

Well, we wouldn't have less deleverage -- we would have less deleverage, you're right. Because if our guys are making little bit less profit sharing because their food costs are higher, that's where you get -- you can call it a benefit -- of that.

Just general question, I guess it is a follow onto the use of cash. You have about 120 of your stores that you own the land on. Is there something that we look going forward that maybe being a.landowner might be something more appealing as you do have a very strong balance sheet to control your own destiny a little bit more and even strengthen your balance sheet even more by taking on more land opportunities where you can find them?

We don't have an aversion to buying land per se. A lot of times we say where we do think the optimal location is. A lot of times we don't have the choice to buy the land. It's lease or don't be there. So, that's mostly how we've ended up leasing a higher percentage of our locations over the last few years. There are one or two over the year that we are purchasing the land and we are comfortable with.

Okay. Thanks.

Next is Jason West of Deutsche Bank.

Just a couple clarifications. One, whenever you guys give the monthly comps for the past quarter, is that a system wide number or is that a company number only?

That's a company number.

Okay. Just wanted to clarify that. Price, you had a comment on the deflation outlook on the second half. I think you said the deflation would pick up in the back half of 3Q and into 4Q. Did you mean that the trends would get better from a food cost stand point there, or worse? I wasn't quite clear on that.

Yes, I'm sorry. Anticipate them getting better from a food cost percentage point of view.

Okay. So, the 3Q, 4Q could possibly look a little better on the gross margin line than we did even though you would typically think about it starting to flatten out against tougher comparisons?

Yes.

Okay. And then last thing, just any color you guys can offer on the environment. I know you have given a comp outlook that feel a little conservative given the improving trends you guys have been seeing. But, is there a lot of volatility you're seeing from week to week? Are you still concerned about the discounting going on? Are you seeing some variations by geography? If you can talk a little bit about that, that'd be great. Thanks.

Yes, this is Price, I'll start off. We're not seeing a whole lot of variation by geography overall. Now, within different geographies, you certainly have restaurants that are up and down. If you look at the overall regions of the country, we are not seeing material differences there. We're still seeing -- still losing a little bit of check. We are not seeing a whole lot of difference as far as from a days of the week perspective. Our weekly trends as well as have been pretty consistent over the last several weeks, couple of months.

Jason, it's Scott. I think from a competitive standpoint, we don't seem to feel ups and downs based on what a lot of the competition is doing. We seem to feel more ups and downs when the economy is moving up and down. So, last year things were really, really tough and everybody suffered. This year, maybe a little bit better but there is a big question mark on are things improving, staying the same, getting a little bit worse. Nobody seems to know. It's a different message every day. I feel like wherever the economy goes, we kind of go along with that to a certain extent.

Okay, that's helpful. Thanks.

Moving on now to Morgan Stanley's John Glass.

Thanks. A couple questions. First, just when you look at the third quarter, the seasonality within the quarter, how important is July relative to August and September from a sales perspective?

Just a minute, John.

In other words, many restaurants have a very, very light September given back to school.

We do as well. September is a light month for us.

Really it's more than -- Do you have a percentage of sales by month for the quarter. It's a lighter month than July and August. Do you have a percentage of sales by month for the quarter?

We don't. We are talking on a weekly sales perspective and the way our calendar works, John, July and August has four weeks but September has five weeks. So, from a profitability perspective, September is pretty important. As is every five week month for us, that's just the way we do it. But on the average weekly sales perspective, July is very average for us and August and September are a little bit below.

Okay. That's helpful. I know you don't want to talk about what you contracted or how much below the rate is for food commodities. How much of next year's food usage do you have contracted?

I don't think we actually have that figured out yet, John.

We will be in a better position to talk about that on our next quarter call.

Ok, then, just a bigger picture question is your store margins this year will probably approach your highs you had going back to 2006 and 2007. But the difference is labor is up, rent is up, other operating is up. The only thing that's really down materially during this period has been the cost of sales Can you just maybe over multi-year, not just this year, but over multi-year, ,what's really changed? Has is been you've been able to buy better in addition -- I imagine it's not just the commodities have gone down, but maybe it is. Have you bought better? Has your mix changed? It's pricing. I don't think you have been particularly aggressive in pricing over the past several years. Do you think what ever has changed is permanent, so that your food costs are now going to run lower permanently than they did three to four years ago.

Let me give that a shot. With our growth, clearly our purchasing power has improved. Can I quantify what difference that is, the answer is no. The markets have been favorable here of late. So we've certainly benefited from there. I would also tell you that I think we've been able to time the markets reasonably well in our purchasing in the last 24 months. Can I say that those things are permanent? Some are and some aren't. In terms of what I think you are getting at, which is a long-term trend. Did that get to some of your question?

Yes. That's helpful. I'm just try to go understand if there is a structural change in addition to commodities. It sounds like there is but it is hard to put your finger on.

I think as you know, we have continued to trail behind our competitors from a pricing perspective. I think that has served us very well and it continues to pay us dividends and we will continue to be conservative pricing wise. Having said that, we recognize, as you indicated labor, other expenses continued to rise and that's the very reason we need to recognize we need to test pricing as we go into the fall now.

John, this is Scott. One thing I do want to make clear is we have not in any way gone to cheaper ingredients or cheapened anything that we have in our food whatsoever. There is not one penny of savings from using a lesser quality ingredient of any kind.

Thank you.

Next up is Chris O'Cull at SunTrust Bank.

Good afternoon, guys. G.J. let me just follow-up on the pricing question. You mentioned later this fall you were going to test an increase. It seems like the Company's had some difficulty raising prices without seeing some check decline. Will there be a different approach to pricing later this year?

It is somewhat what up in the air at the moment. We will be pricing a more straight across the board pricing increase in our tests which will be different than what we have done in the past.

Okay. What do you mean by that?

Well, in the past we have typically priced different parts of the menu and quite frankly probably telegraphed some of the lower items we have protected and in one of the tests we will be doing will be doing more across the board price increases.

That's helpful. Question in terms of development. Should we expect, given we have greater development expectations next year, should we expect more managers to be hired through the back half of this year or are there plenty of managers on the bench today ready to fill in these new stores?

Hi Chris, it's Scott. We would imagine more managers to be hired this year and part of that will be in the preopening numbers. Not a big number, but some of that will be in the preopening numbers later this year. Still, most of our preopening expense will be driven by current quarter or current month openings.

Okay. And then, on the new prototype, the smaller prototype, what do you expect the cost of that to be? I know you've lowered costs on average by $200,000 to $400,000 this year. But is the new, smaller prototype supposed to be 10% smaller and 10% lower in cost from that new level?

It won't be 10% lower in total capitalized cost from that level. Remains to be seen how cheap it is going to be. We won't know until we do all the work on it. At least probably $100,000, maybe $200,000 when it comes to building construction itself. There will be additional savings with regard to site work. Overall real estate costs, how much land, how many parks will we need to have longer term assuming the small prototype will still have the sales on small prototype.

Will it be close to $3.2 million?

It depends on the deal. Some of the deals could absolutely be within $3 million to $3.5 million.

Next up is Larry Miller RBC.

Yes, thanks. G.J., you said, and I'm probably going to get this wrong in the paraphrasing, but you said inflation shouldn't be much of an issue in 2011. I know you don't want to discuss any specific contracts. Would it be fair to say that you have some of your beef contracted at this point?

Yes.

I don't think you guys ever talked about this. You are reducing debt at a pretty aggressive rate. Any sense of what is a good number for the end of the year as far as debt levels?

Hi, Larry, this is Price. If we continue down the path of using our cash flow or development, I would project us to end in a little bit of a net cash position at the end of the year. A lot of that will be gift card related to the fact that fourth quarter is a big gift card promotion for us so in essence we will be taking in a lot of cash that goes out the door during that first quarter. I would project at the end in a net cash position as of the end of the year.

So maybe said another way, you haven't had much more than $5 million to $10 million of cash on the balance sheet. That's a good number in that sense?

We have $60 million cash right now on the balance sheet. We do have $50 million in interest rate swaps out there. I think we would end with $50 -ish million in dept, got a little bit of third party on top of that, and then have more that in cash.

Okay. It would take -- it would be -- it would have to be cost effective for you guys to unwind that and you wouldn't do that. You might switchback to share repurchase at that point?

Its possible.

Thanks very much.

From Cowen and Company this is Paul Westra.

Great, good afternoon everyone.. Couple more questions. Quick line items questions. The operating line item you mentioned the up tick in bonuses, was there any one time catch ups in either of those? Or is the second quarter a descent run rate number?

No, it's a descent run rate. No one type stuff this year.

Okay. And then one more one the cost [inaudible]. You mentioned the deflation. Should we expect deflation sequentially since second quarter on that line item? I think last quarter you mentioned a goal of being in the mid to low 32%.

I think it is still fair. We get a little bit inflation for the first part or less deflation for the first part of the third quarter. It comes back to us more later in the third quarter. I would imagine the third quarter would be less than the second. Even a little less and then hopefully a little bit lower in the fourth quarter, directionally.

That's helpful. Second question, what is your current new store return on capital and can you give us an idea how much you mentioned the good performance in the last 18 months of the stores? What percentage are they clearing that hurdle?

Paul, it is Scott. We approve deals in the mid to high teens at our range. That's where deals get approved at, mid to high teens. Too early to tell on the restaurants that have opened so far this year. The sales have been outstanding. They haven't been open long enough to get a good sense of where they're settling post honeymoon. However, we are extremely encouraged by the opening sales to date and based upon sales of previous honey moons, we feel very confident that these restaurants will significantly exceed our projection so far.

Any thoughts on what is happening to the base commodities, the wheat markets and how that may or may not spill over into the [inaudible] proteins for you?

We didn't hear the front end of that.

What is going on in the base commodity markets, particularly wheat here, with Russia and those markets spiking up in the last 30 to 45 days, how that may or may not affect your ability to negotiate on your protein commodity?

I don't think it will have that much of an affect on the base proteins that we utilizes. It would have a potential affect on what we have already contracted out some of would be in our bread mix and we have some of that done for 2011.

You have some of your breads contract done for 2011?

Not all of that.

The last question is, can you give us an update on where you stand in y are your general remodel program just sort of looking back, you had significant growth in the mid 2000's here as far as new development. Are we entering a base for the 24 or 36 next months of a step up need to base remodel?

Hi Paul, this is Scott. The last few years, we have been spending a good amount of money on remodeling older restaurants, so I wouldn't say there is a big step up required at this point. We have been investing pretty heavily in our stores. To the extent that we've got the average clash year is going from 20 to 25 from high 20s to 30, there will be a little up tick there, stores hitting ten years old. We have been pretty good about investing money and doing pretty substantial remodel work on the restaurants. So, we are not projecting to have a big increase in capital spending related to that.

On your base upgrade remodel, there is no major cost of element addition or anything? You are pretty comfortable with --

It is substantially just sort of taking off the old and putting on the new.

Right. Thank you.

We will move on now to at Peter Saleh with Telsey Advisor Group.

Great, thank you. Just a quick question on hourly turn over rate, where you stand today and where you were at the peak?

I will take that. I think the question was where are we today on hourly turn over and where was it at the peak?

Correct.

Hourly turn over has been pretty consistent since the last quarter. It was 80%. At the peak it was 135%.

Any more updates on the C expansion program?

It's Price. We have expanded the seats in 49 of our restaurants. This year we will end up doing nine or ten in total this year. We have another 6 or 7 left for the back half of the year.

Thank you very much.

From Raymond James, this is Bryan Elliot.

Thanks. Most of my questions have been answered but one hasn't been touched on. The end cap experiment that you are testing, that you all talked about in the past? Wondering if we can get an update on that and a little help on waiving the second half openings?

Hi Bryan, this is Scott. We are still looking at end cap development, in-line development, conversion or substantial remodel development, all of the above. One of the locations we opened up earlier this year in [inaudible] was an end cap doing very, very well to date. So we are -- our Aspen creek we opened today down in Dallas is a remodel location. So we are doing them hit or miss, if you will on finding these locations.

It is tough to find good locations whether it is end cap, end line, free standing. When you are talking about 6000 or 7000 square feet, when you need more square footage and parking, it does make it a little more challenging. We are still doing it, just again, a few here or there.

But, what you are saying it is not part of the basis for the optimism on moderately accelerating expansion next year, would that be accurate?

All that contributes to it. Level of confidence and getting the returns that we want.

Big picture question. I don't know if you or G.J. or both of you want to take a stab at this. If you could articulate for us your philosophy on share repurchase, as we are all looking at a number of questions here about the cash build, et cetera. Is it formulaic? Is it -- you have been active in the past and then haven't been. And certainly the world's changed a lot in the past few years. . Can you give us a sense of what your philosophy is on that? Thank

I'll say this, Bryan. We feel very good about what we have done so far and we bought the stock back for $8.72 a share and we feel very good about that and we also at the same time feel very about the strengthening of our balance sheet, the cash we have put in the bank and the debt we've paid down and we are virtually at a net debt position of zero as Price mentioned earlier. We feel very good about those two things. I will leave it at that as far as any other methodologies or anything like that as far as how or when we might buy stock back.

Anything further, Mr. Elliot?

That's helpful. Thanks.

We will move onto Keith Siegner at Credit Suisse.

I'm actually out of questions. You can move onto the next one.

As a reminder, if anyone does have a question, press star 1 and we will move onto our next question in line, that is John Ivankoe of JPMorgan.

Hello, thanks. I just noticed in your opening comments and was reminded, you made some comments and I think it is very interesting that you haven't touched your food specs taking anything away from your customer or the employee and you haven't cut your labor metrics of cutting labor hours or labor optimization whatever the euphemism is. I guess a couple of things is one, has your consumer noticed that your competition has made changes in that regard? Secondly, are your own guest satisfaction scores widening relative to your competition in real time?

John, it is G.J.. Let me take that from this perspective is that the best metric that the industry uses is [Naptrack] if you look at the distance over the last 18 months and where we have come in from a call perspective versus the aggregate of what Naptrack says, we continue to feel that is a good indication. We continue that we pay dividends by our guest for the food quality and service we have given them. That's one thing.

From our overall guest satisfaction scores and our secret shopper scores, they continue to improve as well. It is not significant numbers, they do get better and better. Our operators have continued to do a better job of staying focused because we haven't given them curve balls saying we will change this or that. Because they have the confidence and they can provide the service and the quality, I think that has paid us dividends as well. At the end of the day, we feel like we are making the right decisions in terms of our food quality, our labor standards, the service that we give our guests and our results are showing.

Allow me to ask this, assuming maybe commodities, the part that you don't have locked in over the next six months do tick higher to some extent in fiscal ' 11. Given the fact that you really haven't pulled any cost levers, do you think you can maintain 100% with your employees and guests and pull some cost savings levers calendar '11 if the situation warrants?

I don't think we look at our business quite like that. Part of the deal is we have always said as we go into the end of the year that we need to evaluate what pricing might we need to take. We're going to be testing that to the first part of your question, is there an up tick in costs, particularly commodities that we don't have booked, those are still unknowns that are sitting out there. We are not sitting back saying how do we squeeze the employee, how do we squeeze the guest experience? In fact, we believe over the last 18 months, the worst recession since the great depression. I believe that's why we continue to out perform many of our competitors.

Thank you.

We will move back to a question from Destin Tompkins.

Thank you. One quick follow-up, Price, you mentioned in your comments about the operating expenses being up 35 basis points and pressure from bonus expenses and general liability insurance. I'm curious, do you see the higher expenses or pressure on operating expenses continuing? We have heard some other companies mention higher utilities, credit card fees, things like that. Do you anticipate continued pressure on the operating expense line?

Over the longer term, I think we do. The long-term utility pressure in particular. Shorter term, as long as margins continue to expand as Scott mentioned earlier, we would anticipate some pressure from the operator bonuses. And then beyond that, some of your repairs and maintenance supplies, utilities, some of the other costs, some of that, quite frankly, will depend on what sales do in the back half of this year. Definitely, over the longer term, we tend to think of it there will be pressure there, a little bit.

And as far as for the next couple quarters, you think some of the same factors affecting the second quarter will continue?

I think in terms of the margins --

I think -- Destin, this is Scott. It depends on the item. For example, the general liability which was a hit to us the second quarter related to prior year's claims. Because there is a pretty long tail on some of these claims particularly with general liability versus workers comp. On the current year estimates we are doing pretty well from a general liability perspective. Typically we have had a little bit of a credit that we have earned on the current year's claim estimates and typically that's in the third quarter is when we are looking at the previous 12 months. The insurance has previously been October to September. So, we are relooking at our numbers every quarter but three of the four quart he is relates to prior year claims and how those are developing and the September quarter correlates to the current year. We are doing quite well in the general -- in the general liability lining in particular. We may see a credit there in the third quarter. Where we ended up in Q2.

That's very helpful. Thank you.

We will take our last question as a follow-up from Matt DiFrisco.

Okay, thank you. I'm going through the transcript and I think you reiterated again that the guidance is off of the 67 reported number from 2009. Just doing the calculation though, unless -- Are you assuming a large impairment or anything of that nature in the back half of the guidance for EPS from 3Q to 4Q?

The short answer is yes, we assume that there can be some impairment or closure costs. We have had anywhere from $1.7 to $3 million in the last two or three years in particular. I think I mentioned we had a $100 million in goodwill in our books. A lot of that is associated with individual stores we bought over the years. We do our annual impairment tests in the fourth quarter of the year. I don't know of anything specifically sitting here to date but we build the possibility into our forecast.

It is then accurate to say your operating earnings number would be higher than that? You have a couple million dollars imbedded in there as far as impairment charges in the fourth quarter?

Right.

Thank you for your questions. That will conclude the question and answer session. I will turn things back to management for any additional or closing comments.

Thank you everyone for joining us this evening and we look forward to being with you again in early November. Good evening. Once again, thank you all for joining us. That will conclude today's call. Have a good evening.