TAST

Carrols Restaurant Group, Inc. (TAST)

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Carrols Restaurant Group, Inc. (TAST)

F1Q10 Earnings Call

May 11, 2010 4:30 pm ET

Executives

Paul Flanders – Chief Financial Officer

Alan Vituli – Chairman and Chief Executive Officer

Daniel Accordino – President and Chief Operating Officer

Analysts

Reza Vahabzedah – Barclay’s Capital

Jeff Omohundro – Wells Fargo Securities

Greg Ruedy - Stephens Inc.

Jason West – Deutsche Bank

Bryan Hunt – Wells Fargo Securities

Jonathan Waite – Precipia Research

Mitchell Speiser - Buckingham Research

Presentation

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Carrols Restaurant Group's first quarter 2010 earnings conference call. As a reminder, today's call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. I would now like to turn the call over to Mr. Paul Flanders, Carrols' Chief Financial Officer, for opening remarks. Please go ahead.

Paul Flanders

Good afternoon and welcome to our first quarter 2010 conference call. By now, everyone should have access to the announcement released this afternoon, which you can also find at our Web site at www.carrols.com under the Investor Relations section.

Before we begin our formal remarks, I need to remind everyone that our discussion may include forward-looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be placed on them. We also refer you to our filings with the SEC for a more detailed discussion of the risks that could impact our business and our financial results.

On the call with me today is Alan Vituli, our Chairman and CEO and Dan Accordino, our President and Chief Operating Officer. Dan will provide some commentary on the business and then I'll walk through the financial results for the first quarter and then we’ll be happy to answer any questions that you might have. I now turn the call over to Dan.

Daniel Accordino

Thanks, Paul, and good afternoon, everyone. As our financial results suggest, the first quarter was a challenge in certain respects with both revenues and profits negatively impacted by our Burger King business. On the other hand we were very encouraged by the top line performance of Pollo Tropical and Taco Cabana as both posted sequential quarterly improvements in comparable sales and guest traffic trends.

As I said on our last call, our earnings this year will be largely determined by momentum improvements and top line since continued cost improvements will be more difficult to achieve than last year. We note that the economy seems to be demonstrating some signs of recovery and consumer confidence is slowly improving.

However, unemployment remains high and we believe that lower levels of unemployment are key to a longer term consumer recovery. We are determined to continue to strengthen our business and improve our brand positioning. We are working on some very exciting initiatives at Pollo Tropical and Taco Cabana designed to enhance their long term positioning and to further differentiate these fast casual concepts from quick service competitors.

Beyond 2010 we would expect more aggressive expansion of our Hispanic brands as the economy recovers and the benefits from these initiatives take hold. For 2010 we continue to constrain our capital spending and to reduce outstanding debt with our free cash flow.

With that said, I’ll now discuss our three brands in greater detail. Comparable restaurant sales for Pollo increased 3.7% in the first quarter of 2010 and customer traffic which has continued to improve sequentially increased 7.4% in the period. We also modestly improved segment EBITDA for Pollo Tropical to $6.7 million and EBITDA margin by 15 basis points to 14.8%.

While the economy in Florida has not improved dramatically, it appears to have stabilized and we are particularly encouraged by the momentum that we’re experiencing at our restaurants. Customer traffic has been positive since the third quarter last year and although average check has declined somewhat with the introduction of our new sandwich line, our overall comparable sales has been strong.

Our customers are responding favorably to our new menu items, product line extensions, promotions, and our advertising. During the first quarter we featured our new handheld sandwich and wrap line including a chicken Caesar wrap, a Cuban wrap, a chicken sandwich with peppadew sauce, a chipotle chicken sandwich, and a guava pork bbq sandwich, all priced at $2.79 or a combo meal for $4.99. This handheld product line which is targeted to better serve the consumer’s need for grab and go has been very well received.

As I referenced earlier, we’ve also begun efforts to evolve the brand and to elevate our service model to better position us within the fast casual space. Specifically, to better align the dining experience with the quality of our food. We believe that these enhancements to further broaden the appeal of the brand and better position us for growth, particularly in newer markets.

We initially remodeled five Pollo Tropical locations in the Tampa Bay and Orlando areas to enhance the ambience and to get the restaurant more of a casual dining feel. We’ve upgraded the service model by adding silverware and dinner plates, add a hostess, and introduce modified table service.

We’ve also added sangria, wine, and beer along with a full service coffee bar including lattes, espresso, cappuccino, and American coffee. Preliminary results are encouraging. Our plans are to roll this out to 28 locations this year and to continue to use this elevated platform as our expansion model going forward. The average capital cost in conjunction with this upgrade is estimated to be a little over $100,000 per restaurant.

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