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Edited Transcript of TAST earnings conference call or presentation 27-Feb-19 1:30pm GMT

Q4 2018 Carrols Restaurant Group Inc Earnings Call

Syracuse Mar 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Carrols Restaurant Group Inc earnings conference call or presentation Wednesday, February 27, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel T. Accordino

Carrols Restaurant Group, Inc. - President, CEO & Chairman of the Board

* Paul R. Flanders

Carrols Restaurant Group, Inc. - VP, CFO, & Treasurer

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Conference Call Participants

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* Brian Michae Vaccaro

Raymond James & Associates, Inc., Research Division - VP

* David William Kuck

Wells Fargo Securities, LLC, Research Division - Research Analyst

* Jake Rowland Bartlett

SunTrust Robinson Humphrey, Inc., Research Division - Analyst

* Jeremy Scott Hamblin

Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Consumer & Retail

* William Everett Slabaugh

Stephens Inc., Research Division - MD

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Presentation

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Operator [1]

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Ladies and gentleman, welcome to the Carrols Restaurant Group Fourth Quarter and Full Year 2018 Earnings Conference Call. (Operator Instructions) I would like to remind everyone that this conference call is being recorded today, Wednesday, February 27, 2019, at 8:30 a.m. Eastern Time, and will be available for replay.

I will now turn the conference over to Mr. Paul Flanders, Chief Financial Officer. Please go ahead, sir.

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Paul R. Flanders, Carrols Restaurant Group, Inc. - VP, CFO, & Treasurer [2]

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Good morning. By now you should have access to our earnings announcement released earlier this morning, which is available on our website at www.carrols.com under the Investor Relations section.

Before we begin our remarks, I would like to remind everyone that our discussion will include forward-looking statements, which may consist of comments regarding our strategies, intentions, guidance and plans. 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 more details, especially the risks that could impact our business and results.

During today's call, we will discuss certain non-GAAP measures that we believe can be useful in evaluating our performance. Presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with generally accepted accounting principles. A reconciliation to comparable GAAP measures is available with our earnings release.

With that, I will now turn the call over to President and CEO of Carrols Restaurant Group, Dan Accordino.

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Daniel T. Accordino, Carrols Restaurant Group, Inc. - President, CEO & Chairman of the Board [3]

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Thanks, Paul, and good morning, everyone. Before I discuss our 2018 financial results, I want to briefly cover the transaction that we announced last week. As we reported last Wednesday, we have entered into a definitive agreement to merge with Cambridge Franchise Holdings and to acquire 166 Burger King and 55 Popeyes restaurants across 10 Southeastern and Southern states. We are very excited about this transaction, which we hope to be complete in the late April time frame. We believe that the merger will strengthen our position in the Burger King system while enabling us to continue executing our acquisition and expansion strategy that also brings to us a strong growing second brand in Popeyes that will broaden our longer-term growth opportunities. We currently control Burger King's Right of First Refusal, or ROFR, in 20 states and are preapproved to grow to 1,000 Burger King restaurants. Conditioned on completing the merger, we have negotiated a new area of development and remodel agreement with Burger King that expands our preapproval for the acquisition of up to 500 additional Burger King restaurants, not including the Cambridge restaurants. This gives us substantially greater runway to expand within the Burger King system and to continue executing our consolidation strategy as we move forward. The new agreement expands our Burger King ROFR territory to include 4 new states: Arkansas, Louisiana, Mississippi and Tennessee, while we have agreed to relinquish our ROFR rights in 7 states where we are not currently expanding. We have also agreed to develop 200 Burger King restaurants over the next 6 years and to remodel or upgrade a number of our existing restaurants or restaurants to be acquired to the Burger King of Tomorrow image.

The Popeyes brand also adds a complementary platform to our core Burger King business, and we can expand and leverage as another avenue for growth. We will be assuming Cambridge's existing development agreement with Popeyes, which includes an acquisition ROFR in Tennessee and Kentucky and the development of approximately 70 new Popeyes restaurants over the next 6 years.

I'll now turn to our financial results. In 2018, we grew restaurant sales 8.3% to $1.18 billion and increased adjusted EBITDA 12% to $102.3 million. Sales at our comparable restaurants increased 3.8% in 2018 for a solid 2-year trend of 9%. We finished the year operating 849 restaurants in 18 states, with net restaurant growth of 42 restaurants in 2018, including the acquisition of 44 restaurants and the opening of 8 new restaurants. We were also pleased with our sales performance in the fourth quarter. Our comparable restaurant sales increased 2.7%, which outpaced the Burger King system by almost 200 basis points, while lapping our strong 8.9% increase in the fourth quarter of the prior year or 11.6%, 2-year increase.

We improved adjusted EBITDA margin modestly in 2018, however, the impact from the heightened promotional environment was evident in our fourth quarter results. Although we expect margin pressures to persist early in the first quarter of 2019, we do, however, anticipate some relief in 2019 as Burger King has more recently made a number of changes to modify or reduce the impact of the more aggressive promotional offerings. In the fourth quarter, promotions included the new Crispy Chicken Tenders, which are now included as an option for our 2 for $6 Mix & Match, the $3.49 King Deal, the 2 for $10 Mix & Match, the $6 King Box, the Cheesy Bacon Crispy Chicken, the Philly Cheese King and the $1 10-piece Chicken Nuggets promotion.

In including, I would like to reiterate that we had a solid year in 2018 and are eagerly looking ahead to completing and moving forward with the Cambridge transaction. We believe that the additional diversified alternatives for future growth inherent in this transaction, combined with the significant expansion of our ability to acquire Burger King restaurants provides a strategic path for effectively allocating capital and building shareholder value into the future.

Paul will now go into greater detail with our fourth quarter financial review.

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Paul R. Flanders, Carrols Restaurant Group, Inc. - VP, CFO, & Treasurer [4]

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Thanks, Dan. Restaurant sales for the fourth quarter increased 8.4% over the prior year period to $307.8 million. Comparable restaurant sales increased 2.7% consisting of 3.3% increase in customer traffic, partially offset by 0.6% decrease in average check. The change in average check included 1.7% in effective menu pricing. As Dan indicated, our fourth quarter comparable result outpaced U.S. Burger King system by about 200 basis points and was very solid in light of a tough 8.9% comparison from the fourth quarter last year. However, both adjusted EBITDA at $24.3 million and restaurant-level EBITDA at $39.4 million were down slightly compared to the fourth quarter of last year.

Adjusted EBITDA margin decreased 120 basis points to 7.9% of restaurant sales due mostly to deleveraging cost of sales and labor. As a percentage of restaurant sales, cost of sales increased 92 basis points compared to the prior year period reflecting higher promotional levels offset somewhat by favorable commodity cost.

Beef cost averaged $1.87 per pound in the fourth or about 7% below the fourth quarter of the prior year. Restaurant labor expense increased 76 basis points to 32.3% of restaurant sales compared to the prior year quarter, reflecting a 4.7% increase in our hourly wage rate, our lowest quarterly increase in about 3 years. As a percentage of sales, other restaurant operating expenses decreased 20 basis points, while general and administrative expenses held steady at 5.5%.

Net income in the fourth quarter of 2018 was $1.8 million or $0.04 per diluted share compared to $3.9 million or $0.09 per diluted share in the prior year period. Net income included $0.3 million of impairment and other lease charges, as well as $0.4 million of acquisition expenses.

For the same period last year, net income included $0.8 million in impairment and $0.1 million of acquisition expenses. It also included a $0.8 million tax benefit from remeasuring net deferred taxes when the federal income tax rate was lowered to 21% in late 2017.

Excluding these items, adjusted net income was $2.4 million or $0.05 per diluted share compared to adjusted net income of $3.8 million or $0.08 per diluted share in the prior year period.

A reconciliation of net income under GAAP to adjusted net income, which is a non-GAAP measure is provided in the supplemental tables included with today's release.

Total capital expenditures were $21.5 million in the fourth quarter of 2018 and $75.7 million for the full year. On December 30, our cash balances were $4 million, and total outstanding debt was $280.1 million. At year-end, debt-to-adjusted EBITDA was about 2.6x, and lease-adjusted leverage was around 4.9x.

With that, I'll guide -- review our guidance for 2019. Note that this does not include the impact of Cambridge merger that we anticipate closing in late April or other acquisitions that we may complete in 2019. We expect total restaurant sales of $1.25 billion to $1.28 billion, including comparable restaurant sales growth of 2% to 3.5%.

Commodity costs are expected to increase 1% to 2%, including an increase in beef cost of 2% to 3%. General and administrative expenses are expected to be $62 million to $64 million, excluding stock compensation expense and the acquisition-related costs.

Adjusted EBITDA is expected to be $100 million to $110 million. Total capital expenditures are expected to be $75 million to $95 million, including $25 million to $35 million for construction of 15 to 20 new restaurants.

Proceeds from sale/leasebacks are expected to be $10 million to $15 million. And lastly, we expect to close 10 to 15 restaurants.

That concludes our prepared remarks. So with that, operator, let's go ahead. We'll open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Jake Bartlett with SunTrust.

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Jake Rowland Bartlett, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [2]

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First, I had a question, Dan, about your comments on the functional strategy and the changes that Burger King is making. I can tell just by the website that, for instance, they've moved to $1.49 10-piece nuggets, maybe taking away the 2 for $4. Are we seeing those changes now, and it's just a matter of lapping more intense promotion from the back half of '18? Or is there a plan to get significantly less promotion than what we're seeing now by the back half of the year?

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Daniel T. Accordino, Carrols Restaurant Group, Inc. - President, CEO & Chairman of the Board [3]

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I think that what we will see is a moderating of the level of promotional activity as the year goes on. And as, I think, Paul indicated, in the first quarter of 2019, we still had many of those same -- that promotional activity was continuing, but beginning in the middle of February into March, we're seeing a moderating in the level of promotional activity.

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Jake Rowland Bartlett, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [4]

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Got it. And then that should continue to get even more moderate going forward from the current state?

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Daniel T. Accordino, Carrols Restaurant Group, Inc. - President, CEO & Chairman of the Board [5]

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I would expect that it certainly will not be at the same level as last year.

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Jake Rowland Bartlett, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [6]

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Okay. And then for modeling purposes, I just kind of tried to back into the restaurant-level margin expectations for '19, and I got some -- about 40 basis points of contraction. Maybe if you can confirm that. And should we -- how should we think about the cadence on a quarterly basis? Should we think about, kind of, similar level from -- that we saw in the fourth quarter, in the first or -- in the, kind of, the first half of the year and then better year-over-year going forward? Or how do you think about the cadence of the margin expansion or contraction?

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Paul R. Flanders, Carrols Restaurant Group, Inc. - VP, CFO, & Treasurer [7]

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This is Paul. I think -- to follow up on Dan's comments, I think it's going to progressively -- margin is going to progressively get under less compression as we move through the year as

promotions lighten up. I mean, I think clearly, as Dan has indicated, the first quarter, we're still running a pretty intense level of promotions, at least through February. So there's going to -- I think that we see that probably being the most pressure during the year and then getting better as we get further out.

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Jake Rowland Bartlett, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [8]

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Got it. And then in the context of the increasing promotional environment, which I think would be welcomed by many, but it's also helped you drive your traffic. So how do you, kind of, think about your ability to sustain positive traffic as that promotional cadence is decreasing?

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Daniel T. Accordino, Carrols Restaurant Group, Inc. - President, CEO & Chairman of the Board [9]

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This is Dan. From what I see on the Burger King marketing calendar, without getting into specifics, given the calendar, we're quite confident in the sales forecast that we have laid out for 2019.

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Operator [10]

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Our next question comes from Jeremy Hamblin with Dougherty & Company.

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Jeremy Scott Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Consumer & Retail [11]

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I wanted to, kind of, move forward a little with that second part of the question on the forecast, very strong forecast for the year on same-store sales. And I wanted to get a sense of the progression on menu pricing that's being implied within that. Are we -- where do we stand on menu pricing today? How do you expect that, Paul, to progress throughout 2019?

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Paul R. Flanders, Carrols Restaurant Group, Inc. - VP, CFO, & Treasurer [12]

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Well, we had 1.7% pricing in the fourth quarter, as I indicated. We've got about 1.3% carrying into the first quarter, and the carryover from 2018 as a full year is about 0.60%. Now I think as the year goes along, we would anticipate, as we have in the past, taking some small price increases probably a couple times during the year, with the intention of getting the price up probably 2% to 2.5% for the full year.

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Jeremy Scott Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Consumer & Retail [13]

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2% to 2.5% for the full year?

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Paul R. Flanders, Carrols Restaurant Group, Inc. - VP, CFO, & Treasurer [14]

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Yes.

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Jeremy Scott Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Consumer & Retail [15]

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Okay. So would that imply back half of the year of something maybe 3% or over?

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Paul R. Flanders, Carrols Restaurant Group, Inc. - VP, CFO, & Treasurer [16]

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Yes. I think you'll see us take some things before the mid-year, mid part of the year, and something a little bit later.

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Jeremy Scott Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Consumer & Retail [17]

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Okay, understood. And then the guidance on top of

almost 4% comp from last year, 2% to 3.5% same-store sales guidance for '19. Can you give us some color? I mean that's a pretty impressive result on top of the 2017 strong result. Can you give us a sense of how quarter-to-date trends are tracking?

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Paul R. Flanders, Carrols Restaurant Group, Inc. - VP, CFO, & Treasurer [18]

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Yes. Just to put a reference point, I mean, the first quarter of 2018, we're up 6.2%. So

comparisons was difficult certainly in the first quarter of last year, and we are running low single-digit positive against that.

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Jeremy Scott Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Consumer & Retail [19]

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Okay. Great. And then just on the commodity pricing, a lot of puts and takes on that. Beef prices certainly were favorable last year. You're, I think, implying 2% to 3% in your guidance on beef prices this year. Where are your current trend rate? Are they kind of around $2 a pound? What are you seeing currently on the beef pricing?

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Paul R. Flanders, Carrols Restaurant Group, Inc. - VP, CFO, & Treasurer [20]

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We've been running, I would say, sort of in the mid-1.90s. Early in the year, we creeped up, it's just crossed $2 here in the last week or so.

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Jeremy Scott Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Consumer & Retail [21]

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Okay. And the implication for the year is, what, about $2.05 to $2.10 a pound?

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Paul R. Flanders, Carrols Restaurant Group, Inc. - VP, CFO, & Treasurer [22]

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Yes, and that $2.10 is too far out. $2.04, $2.05, and averaging something that's 2% to 3%.

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Jeremy Scott Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Consumer & Retail [23]

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Okay. And then thinking about the transaction and adding that there will be about 20% of your stores

after the deal is done. As we think about that transaction and the impact that it might have on your labor cost. You noted on the last call that their system, I think, it is about $1 an hour lower on the wage scale. Have you had a chance to, kind of, flow through your model in terms of how would that labor as a percent of restaurant sales likely change over 2019 as you fold in those couple hundred restaurants that you're acquiring?

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Paul R. Flanders, Carrols Restaurant Group, Inc. - VP, CFO, & Treasurer [24]

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Yes. I mean, we've obviously modeled this

somewhat. I mean, we're not going to have a full year benefit of the acquisition and merger, obviously, in '19 anyways. But in terms of wages, I think, in '18 we're -- we'd be in about 32.5%.

Their pro forma is 200 or 300 basis points lower than that, so the way it is impacted is going to be pretty significant.

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Jeremy Scott Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Consumer & Retail [25]

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Okay, so is that something that -- that's actually really helpful color. In terms of thinking about that, so I think probably most of us model

labor as a percent of sales up in 2019. Is that something that's on a full year basis where you could see that's enough of an impact to outweigh the wage pressures that you're getting in your current geographies?

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Paul R. Flanders, Carrols Restaurant Group, Inc. - VP, CFO, & Treasurer [26]

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I mean, no. We need to spend a little bit more time, I mean, especially, as you know, we oftentimes we add labor when we go into these restaurants. So to some degree, that number may be a little low just sort of because the hours are not as high as we would put it in relative to our formulas. We'll provide more guidance as we get a little more insight.

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Jeremy Scott Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Consumer & Retail [27]

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Okay, and then one last one. In terms of thinking about the Popeyes' opportunity. It sounds like it's a much more fragmented system and that probably means lots of opportunity for you. Have you been able to spend a little more time with that brand and concept and get a sense of what that would mean in terms of, kind of, future growth opportunities? Is it something where you're going to take it on a more cautious approach and add more slowly? Or would you -- is there just more opportunity in that, where you would expect to get aggressive in that concept maybe sooner than later?

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Daniel T. Accordino, Carrols Restaurant Group, Inc. - President, CEO & Chairman of the Board [28]

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This is Dan. As we've reported, we have a 70-store

obligation that we have to build over the next 6 years. But I would also say that as acquisition opportunities become available, particularly in areas where we already operate Burger King restaurants, that we'll be looking at those opportunities in the near term.

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Jeremy Scott Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Consumer & Retail [29]

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And would you expect the multiples to pay on an acquisition basis to be similar to that historical, kind of, 4x EBITDA that you've been able to get in the BK system?

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Paul R. Flanders, Carrols Restaurant Group, Inc. - VP, CFO, & Treasurer [30]

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I don't think we know at this point.

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Operator [31]

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Our next question comes from Will Slabaugh with Stephens Inc.

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William Everett Slabaugh, Stephens Inc., Research Division - MD [32]

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Congrats on the acceleration in the fourth quarter. As you mentioned, it seems like the layering of aggressive discounts are set to slow at least somewhat in the coming quarters. So -- and I'm sure that's a welcome change. And my question is more on the cost side around that. Your cost of goods obviously ticked up a little bit toward 29% this quarter, the highest level we've seen in a little while. I'm curious how you think about what that means from a value perspective to the consumer versus what they expect. I know you -- to the point earlier, as the discounts slow, I would expect maybe that to come back down a little bit. But I'm curious as you weigh, sort of, that discount environment versus the slightly higher inflation that you mentioned a minute ago. How we should think about cost of goods as 2019 rolls through?

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Paul R. Flanders, Carrols Restaurant Group, Inc. - VP, CFO, & Treasurer [33]

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Yes. I mean, the discounting this has is an enormous effect on margins, and that's been in the face of beef cost being actually lower in 2018. I mean, just to put it in perspective, I mean, year-over-year, the impact of the promotional schedule in the fourth quarter alone was about 200 basis points on cost of sales. So I think as you think about that promotional cadence lightening up moving forward, I think you can similarly anticipate some reasonable leverage on the cost of sales line, irrespective of some modest value promotions.

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William Everett Slabaugh, Stephens Inc., Research Division - MD [34]

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Got it, got it, okay. And, kind of, getting back to the deal, I realize there's a lot of work to do here to not only get this deal finished, but with the integration as well. Should we expect a few quarters of focus on the execution within those stores before you begin looking for additional acquisition opportunities on either the Burger King or Popeyes side? Or would you consider Carrols fairly open to looking at additional deals while this closing process is still ongoing?

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Daniel T. Accordino, Carrols Restaurant Group, Inc. - President, CEO & Chairman of the Board [35]

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The latter -- this is Dan. The latter. We are actively looking at a Burger King acquisition as we speak, and there may be a Popeyes acquisition also in 2019, in the next couple of quarters.

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William Everett Slabaugh, Stephens Inc., Research Division - MD [36]

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Great. And last thing, I don't recall if we talked about this last call or not. Is there any real estate associated with the Cambridge deal?

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Paul R. Flanders, Carrols Restaurant Group, Inc. - VP, CFO, & Treasurer [37]

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Yes. I mean, they've been -- they are very active in developing new units, as we've said, and we expect that there's going to be at least $25 million to $30 million of real estate involved. In fact, we pointed that out in last week's release that we expect to have about a $25 million sale/leaseback to be complete shortly after the acquisition.

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William Everett Slabaugh, Stephens Inc., Research Division - MD [38]

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And -- okay, so you expect there to be -- this timing to be fairly quick after that deal is closed?

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Paul R. Flanders, Carrols Restaurant Group, Inc. - VP, CFO, & Treasurer [39]

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We think so, yes.

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Daniel T. Accordino, Carrols Restaurant Group, Inc. - President, CEO & Chairman of the Board [40]

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This is Dan. In addition to that, I mean, one of the things that was appealing about this transaction is that there's the opportunity in those markets, the markets that Cambridge currently operates, for us to buy land and, therefore, be able to own more real estate, which will be subject to sale/leasebacks. So there's more land available and it's less expensive than the building that we've been doing in the more Northeast markets.

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Operator [41]

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(Operator Instructions) Our next question comes from Brian Vaccaro with Raymond James.

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Brian Michae Vaccaro, Raymond James & Associates, Inc., Research Division - VP [42]

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I just wanted to circle back on the labor line. And it's encouraging to see the wage inflation moderating a bit here. Can you impact what's driving that moderation, maybe what you're seeing in terms of turnover and staffing levels? And then what are your expectations on wage inflation as you look into 2019?

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Daniel T. Accordino, Carrols Restaurant Group, Inc. - President, CEO & Chairman of the Board [43]

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The reason that you saw some moderation in the increase -- this is Dan. The reason that you saw some moderation in the wage-rate increase in the fourth quarter was because the turnover has gotten lower. Somebody has got a lot of reverberation here. The turnover was lower in the fourth quarter. We've done a much better job at reducing our team member turnover. And we've -- by virtue of that, we've also been able to reduce some of our overtime expense, which also was a factor in the wage-rate increase previously.

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Brian Michae Vaccaro, Raymond James & Associates, Inc., Research Division - VP [44]

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Okay, that's helpful. And if we could just shift to the CapEx guidance for a second, the $75 million to $95 million. So, Paul, I know $25 million to $35 million of that is on new units. But could you break down, sort of, what you expect from a maintenance and remodel perspective as well?

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Paul R. Flanders, Carrols Restaurant Group, Inc. - VP, CFO, & Treasurer [45]

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Yes. I mean, this guidance excludes the Cambridge deal, obviously, but we have begun to shift some of the projects in anticipation of that. But in terms of some of the breakdown, maintenance is about $12 million, which is pretty typical for us. That excludes any additional investments in restaurant equipment we may make. And then another -- assuming another $4 million or $5 million for investments at the restaurant level. Namely we'll start rolling out the out the digital menu boards on the outside of the restaurants beginning in 2019. We anticipate to probably get about 25% of those installed through the course of the year, probably later in the year. So that's a big piece of what's in there. We provided guidance on new stores, as you said. The balance is largely some of the remodeling activity that we're doing. I think there's $30 million to $35 million for remodeling.

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Brian Michae Vaccaro, Raymond James & Associates, Inc., Research Division - VP [46]

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Okay. So $30 million to $35 million for remodels. And how many units does that include?

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Paul R. Flanders, Carrols Restaurant Group, Inc. - VP, CFO, & Treasurer [47]

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Well, it's a series of -- we've got full remodels related to franchise renewals. We're anticipating there'd be $20 million to $25 million. We've got a handful of scrapes and rebuilds that we're doing. And then, as I said, we're starting to shift towards some of these upgrade projects as well. So there's another, call it, 60 or so upgrades built into this, including about 40 stores that we're doing on Burger King fee-owned property, where we also get a contribution from Burger King as the landlord, which is not netted against that CapEx, by the way.

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Brian Michae Vaccaro, Raymond James & Associates, Inc., Research Division - VP [48]

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Okay, all right. That's helpful. And then last one for me. Thinking about the Cambridge acquisition, and just wanted to ask about how you're approaching capital allocation, given the new ROFR terms and your commitment to build a few hundred restaurants over the next several years. I think it'd be helpful if you could walk us through the ROI you expect to achieve on organic unit growth and how that compares to your opportunity to acquire additional restaurants?

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Paul R. Flanders, Carrols Restaurant Group, Inc. - VP, CFO, & Treasurer [49]

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Yes. I think what's happened is, as Burger King or 3G has improved the average unit volumes and the brand over last 2 years, the fact is unit economics and new construction look much better than they did obviously 4, 5 years ago. And in terms of capital allocation becomes another good alternative for capital in addition to, as you know, the acquisition strategy that we've had and will continue to have moving forward. But just to throw a few numbers out, I mean, if you assume that you got a new unit, that's doing about $1.5 million, and we -- a couple of different scenarios, it costs us about $1.5 million to build these with equipment and building, excluding land. And so on a ground lease, the cash-on-cash return is in the high teens on that announcement. If we buy the land for, say, another $600,000 or $700,000, burden the store with a sale/leaseback, the levered return jumps to 50% plus. So to the extent that these new markets with Cambridge offer us opportunities to buy land in more instances and assuming we can -- we do buy land and then just do sale/leasebacks, the levered returns on these investments are pretty attractive, as you can tell. So we see that as a good alternative or a supplement to our acquisition strategy, where we're -- as you know, we're getting 20% plus returns typically.

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Operator [50]

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Our next question comes from Jake Bartlett with SunTrust.

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Jake Rowland Bartlett, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [51]

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Thanks for taking the follow-up. I just had a question on the impact of the acquisition on restaurant margins. I think many of us are going to try to take a whack and putting this in the model, but what is it due to? I mean, without any, kind of, cost savings that you typically would get, would the acquisition make the restaurant-level margins go up or down or have a neutral impact? How should we think about that?

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Paul R. Flanders, Carrols Restaurant Group, Inc. - VP, CFO, & Treasurer [52]

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Well, it's going to evolve over time, obviously. I think, the way to think about it initially and there probably will be some negative impact initially as we invest in labor, which down the road we would expect to see sales increases, and over time, obviously, we will anticipate improving margins by lowering cost of sales. But I think initially, probably the way to think about it is, sort of, neutral because these Cambridge units are a little bit lower volume than our system to begin with and they come with a somewhat lower cost structure. So there's an offset to the values.

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Jake Rowland Bartlett, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [53]

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Got it. So the margins are roughly the same, kind of, as a starting point?

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Paul R. Flanders, Carrols Restaurant Group, Inc. - VP, CFO, & Treasurer [54]

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Yes, at the restaurant level.

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Jake Rowland Bartlett, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [55]

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Okay. And then, Paul, you've talked about the ability to kind of acquire stores, I think, at a rate of 50% to 70% kind of loosely a year. As we think about 2019, are there any, kind of, factors we should think about when we consider whether we would diverge from that rate? And I'm wondering whether some of the margin pressure over the last year or 2 from the promotional environment has caused your pipeline to, kind of, potentially increase as franchisees are under more pressure and maybe wanting to sell. Any anything that, kind of, would impact the rate of acquisitions in '19 versus your typical rate?

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Daniel T. Accordino, Carrols Restaurant Group, Inc. - President, CEO & Chairman of the Board [56]

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This is Dan. In 2019, the only thing that's going to affect our rate of acquisition is the fact that we have to absorb the Cambridge restaurants, which, as Paul indicated, is something that we're very mindful of doing as quickly as we can, so that we can generate a sales increase as well as improve the cost of sales margins. So I think that in 2019, that will be our primary focus other than the couple of Burger King acquisitions that we have been working on and will close in 2019.

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Jake Rowland Bartlett, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [57]

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Got it. And is there any sense you can give us as to how large those acquisitions are? Are those, kind of, of the smaller variety?

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Daniel T. Accordino, Carrols Restaurant Group, Inc. - President, CEO & Chairman of the Board [58]

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Smaller variety.

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Operator [59]

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Our next question comes from Bryan Hunt with Wells Fargo.

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David William Kuck, Wells Fargo Securities, LLC, Research Division - Research Analyst [60]

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It's Dave Kuck on for Bryan. Wanted to touch on the acquisition real quick. Obviously, it gives you another leg to stand on. I'm just curious if you have a preference to develop or grow one concept over the other, a Burger King or Popeyes, or if it's just really based on where you have the highest return opportunities?

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Daniel T. Accordino, Carrols Restaurant Group, Inc. - President, CEO & Chairman of the Board [61]

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Well, we have a 200-store obligation in the Burger King world over the next 6 years. So that's baked into the development strategy. In addition to that, we certainly will look at Popeyes' new-build opportunities on a regular basis as part of our overall development strategy.

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David William Kuck, Wells Fargo Securities, LLC, Research Division - Research Analyst [62]

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And then to finance the deal, are you all wed to going the term loan route or would you consider doing bonds, alternatively?

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Paul R. Flanders, Carrols Restaurant Group, Inc. - VP, CFO, & Treasurer [63]

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I think our preference, given how the term B market has evolved, is probably going to go to term B market.

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Operator [64]

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Thank you. Ladies and gentleman, that's our last question. And now I'd like to pass it back to management for closing comments.

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Paul R. Flanders, Carrols Restaurant Group, Inc. - VP, CFO, & Treasurer [65]

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We appreciate your attention today. It was nice to speak with you so often in the last couple weeks and a whole lot. We will report back after the first quarter. Thanks for your time.

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Operator [66]

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Ladies and gentlemen, that concludes our conference today. You may disconnect your phone lines, and thank you for joining us this morning.