Panera Bread (PNRA) Earnings Report: Q1 2015 Conference...
Transcript of Panera Bread (PNRA) Earnings Report: Q1 2015 Conference...
CompanyName:PaneraBreadCoIncCompanyTicker:PNRASector:ServicesIndustry:Leisure
EventDescription:Q12015EarningsCallMarketCapasofEventDate:4.69BPriceasofEventDate:182.11
©2014TheStreet,Inc.Al l R ightsReserved Page1of22
PaneraBread(PNRA)EarningsReport:Q12015ConferenceCallTranscriptThefollowingPaneraBreadconferencecalltookplaceonApril29,2015,08:30AMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
RonShaich;PaneraBread;Founder,Chairman&CEOSteveWest;PaneraBread;VP-IRMikeBufano;PaneraBread;CFO
OtherPart icipants
BrianBittner;Oppenheimer&Co.;AnalystDavidTarantino;RobertW.Baird;AnalystJosephBuckley;BofAMerrillLynch;AnalystJohnGlass;MorganStanley;AnalystJeffBernstein;BarclaysCapital;AnalystJasonWest;CreditSuisse;AnalystKarenHolthouse;GoldmanSachs;AnalystRobertDerrington;WunderlichSecurities;AnalystKeithSiegner;UBS;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator :
Goodday,everyone,andwelcometotoday'sPaneraBreadfirst-quarter2015earningsconference.Justareminderthattoday'scallisbeingrecorded.ItisnowmypleasuretoturntheconferenceovertoSteveWest.Pleasegoahead,sir.
SteveWest (VP-IR):
Goodmorning,everyone,andwelcometoPaneraBread'sfirst-quarterearningscall.ThisisSteveWest,VicePresidentofInvestorRelations.WithmethismorningareRonShaich,ourFounder,ChairmanandCEO,andMikeBufano,ournewChiefFinancialOfficer.
Asareminder,wemaymakeforward-lookingstatementsregardingfutureevents,expectations,plansorprospectsforfuturefinancialperformanceoftheCompany.Anysuchitemsorremarksconstituteforward-lookingstatementsforpurposesoftheSafeHarborprovisionsunderthePrivateSecuritiesLitigationReformActof1995.
Actualeventsorresultsmaydiffermateriallyfromthoseindicatedbytheseforward-lookingstatementsduetoanumberofrisksanduncertainties,includingthosediscussedintheRiskFactorssectionofourmostrecentannualreportonForm10-KwhichwasfiledonFebruary20,2015.
Inaddition,anyforward-lookingstatementsrepresentourviewsonlyasoftodayandshouldnotberelieduponasrepresentingourviewasofanysubsequentdate.Whilewemayelecttoupdatetheseforward-lookingstatementsatsomepointinthefuture,wespecificallydisclaimanyobligationtodosoevenifour
CompanyName:PaneraBreadCoIncCompanyTicker:PNRASector:ServicesIndustry:Leisure
EventDescription:Q12015EarningsCallMarketCapasofEventDate:4.69BPriceasofEventDate:182.11
©2014TheStreet,Inc.Al l R ightsReserved Page2of22
viewschange.Theseforward-lookingstatementsshouldnotberelieduponasrepresentingourviewsasofadatesubsequenttotoday.
NowIhaveoneadministrativeitemforyourfutureschedulingpurposes.Wearetentativelyplanningtopublishoursecond-quarter2015earningsreleaseafterthemarketcloseonJuly28withoursubsequentearningscallonJuly29at8:30AMEasternStandardTime.
Ontheagenda--Mikewillleadoffthecallwithadiscussiononourfirst-quarterfinancialresults.Ronwillthenprovidecolorcommentaryonourcompsandourinitiativestobecomeabettercompetitivealternativeandexpandgrowth.FollowingthatMikewillgiveabriefupdateonourvalueenhancinginitiativesandanupdateonour2015guidance.Andfinally,RonwillgiveaquickclosingcommentbeforeweopenitupforQ&A.IwillnowturnthecallovertoMike.
MikeBufano (CFO):
Thankyou,Steve.Beforegettingstarted,IwouldjustliketosaythatI'mexcitedandhonoredtohavetheopportunitytoserveasthePanera'snewChiefFinancialOfficer.IwouldliketothankRon,BillandtherestoftheBoardfortheopportunity.IlookforwardtocontinuingtoworkwithallourinvestorsandanalystsandgettingtoknowandworkwiththoseofyouIhaven'tyethadachancetomeetinperson.
Yesterdayafterthemarketclosedwereportedadjustedfirst-quarterEPSof$1.41,down9%yearoveryear.Thiswasinlinewithourexpectation.OuradjustedEPSexcludesan$8.9millionpre-tax,or$5.6millionafter-tax,one-timechargerelatedtoourrefranchisinginitiative.
AsIwilldiscusslaterinthecall,excludingone-timecharges,weexpectourrefranchisinginitiativewillbeaccretivetoongoingearnings.Includingtheone-timecharge,ourearningspersharewere$1.20inthequarter.
InQ1ourrevenuesincreased7%to$649million.ThiswasprimarilytheresultofopeningnewCompanyownedcafescombinedwith1.5%compstoresalesgrowthinCompanyownedcafes.Ronwillprovidemorecoloroncompslaterinthecall.
Nowletmetakeafewminutestodiscussmargins.Ourfirst-quarteroperatingmargin,excludingtheone-timerefranchisingcharge,declinedby180basispointsversuslastyeardueprimarilytopressuresonlaboraswellasincreaseddepreciationandamortizationrelatedtoourgrowthinitiative.
Steppingthroughthedetail,laborwasagainthemostsignificantdriveroftheoperatingmargindecline,deleveringby130basispoints.Twofactorsaffectedlaborinthequarter.One,wesawstructurallyhigherwageratesacrosstheboardduetocontinuedpressurecausedbyincreasesinminimumwages.Two,theinvestmentofadditionallaborhoursnecessitatedbystart-upcostsrelatedtoasignificantnumberofPanera2.0conversionsanddeliveryhubopeningsinlateQ4andQ1.
MovingdowntheP&L,foodandpaperdeleveredby60basispointsversusprioryeardueinlargeparttofoodcostinflation.Inthequarterweexperiencedapproximately2.5%ofyear-over-yearfoodcostinflation.Thisinflationwasdrivenprimarilybyhighercostforsoup,ourgrassfedbeef,ourantibioticfreehigh-qualityroastturkeyandproduce.
Thislevelofinflationwasinlinewithourexpectationsforthequarter.Weanticipateinflationwillmoderatethroughouttheyearandcontinuetoexpectfoodandpapercostinflationtobeapproximately1%to1.5%forthefullyear.
Finallyinthebakery-cafeP&Loccupancycostsdeleveredslightlyby20basispointsyear-over-yearassalesgrewslowerthaninflation.
CompanyName:PaneraBreadCoIncCompanyTicker:PNRASector:ServicesIndustry:Leisure
EventDescription:Q12015EarningsCallMarketCapasofEventDate:4.69BPriceasofEventDate:182.11
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Leavingthebakery-cafes,themarginsofourfreshdoughfacilitiesimprovedby160basispointsinthequarter.Thismarginimprovementisprimarilytheresultofayear-over-yeardecreaseinwheatcostswhichdeclinedbyroughly10%comparedtoQ12014.Asareminder,weladderourwheatpurchases[to]theimpactofswingsupanddowninthemarketaremoderatedinourP&L.
Onthecorporateside,wecontinuetomakeinvestmentsinthecapabilitiesneededtosupportourgrowthinitiatives.Atthesametimeweremaincommittedtoreallocatingresourcesfromsupportfunctionstothesegrowthinitiatives.YouseethisplayoutintheD&AandG&AlinesoftheP&L.
Depreciationandamortizationdeleveragedby30basispointsversustheprioryearduetoincreasedcapitalspendingrelatedtoourgrowthinitiatives,especiallyintheareaoftechnology.G&Aasapercentageofsaleswasflatversusthepreviousyearasyear-over-yearcostsavingsincoreG&Aeffectivelyoffsettheinvestmentsandgrowthinitiatives.
Ourtaxrateforthequarterwas37.4%,essentiallyflatversusQ12014andinlinewithourexpectations.Wecontinuetoholdourtaxrateestimatefor2015intheneighborhoodof37%.
Shiftingtonewunitdevelopment,duringthequarterweopened25newbakery-cafessystemwide,11CompanyOwnedand14franchiseoperated,bringingoursystemwidetrafficcountto1,901.Ofthe11Companyownedcafes,eightweretraditionalbakery-cafesandthreewerenontraditional.
TheaverageweeklysalesoftheeighttraditionalCompanyownedbakery-cafeswere$49,865,inlinewithourexpectationsforthequarter.Theaverageweeklysalesofthe14traditionalfranchiseoperatedbakery-cafeswere$53,665.
Ishouldnotethatthefirstquarternewunitaverageweeklysalesarehistoricallysomewhatchoppybasedonthenumberandtimingofopeningsaswellastheimpactofweather.Asaresult,year-over-yearcomparisonsinthefirstquartercanbetricky.OverallthoughletmereiteratethatwearepleasedwiththenewunitaverageweeklysalesinQ1.
Inaddition,weconverted19cafestoPanera2.0duringthequarterbringingthetotalPanera2.0conversionsto123.Wealsoopenedsevendeliveryhubsbringingthetotalto28andwenowhave183Companyownedcafeshubbedrepresentingabout20%ofourcateringsales.
Finally,letmediscussourdeploymentofcashinthequarter.Firstoff,ourEBITDAforQ1,excludingtheone-timerefranchisingcharge,was$94million,down3.5%versusprioryear.Wegeneratedapproximately$72millionofcashflowfromoperationsduringthefirstquarteranddeployed$50milliontowardscapitalexpenditures.
Wearecontinuingtoreturncashtoourshareholdersonaconsistentbasis.Duringthequarterwerepurchasedapproximately$25millionofsharesatanaveragerepurchasepriceof$160.84.Weendedthequarterwith$202millionincash.
NowIwillturnthecallovertoRonwhowillprovideanupdateoncompsandourstrategicinitiatives.Ron?
RonShaich (Founder,Chairman&CEO):
Great,thankyou,Mike,andgoodmorningtoeveryone,goodmorning.BeforeIbeginIwouldliketosayhowgladIamtohaveMikeasournewCFO.AsweconductedourinternalandexternalsearchitbecameevidentthatMikewasourbestcandidate.
DuringhisfiveyearswithPaneraMikehasprovenhimselftobeaneffectiveleaderbuildinghisfinancegroupintoakeystrengthofourCompany.Alongwithhisfinancialdiscipline,hisin-depthknowledgeof
CompanyName:PaneraBreadCoIncCompanyTicker:PNRASector:ServicesIndustry:Leisure
EventDescription:Q12015EarningsCallMarketCapasofEventDate:4.69BPriceasofEventDate:182.11
©2014TheStreet,Inc.Al l R ightsReserved Page4of22
ourinitiatives,ourplansandourpeople,willbenefitPaneraanditsinvestorsinboththeshort-termandthelong-term.IamhopefulyouallwillenjoyworkingwithMikeasmuchasIhavethroughtheyears.
I'malsogladthatmypartnerofmanyyears,BillMoreton,whosteppedinasinterimCFOthelasteightmonths,willcontinuetoserveasourExecutiveViceChairmanandassistmebymanaginganumberofkeyinitiativesandseveralfunctionsatourCompany.Nowtothebusinessathand.
ThismorningIwillprovideyouwithanupdateonourmultiyeareffortstoensurePaneraisabettercompetitivealternativewithexpandedgrowthopportunity.First,Iwillreviewourfirst-quartercomps,thenIwillreviewandupdateyouonourstrategicinitiatives.AndfinallyIwillprovidesomecontextforhowweholdthejourney.
Let'sbeginbyreviewingourperformanceinQ1relativetocomps.First,IwillsharesomedataandthenIwillexplainthoseresults.OurCompanycompsincreased1.5%inQ1.Diggingalittledeeper,bymonthcompswereup2.9%inJanuary,up1.1%inFebruaryandup0.6%inMarch.
Ishouldnotethatour2014compsincreasedthroughoutthequarterandin2015wewerecomparingtothelaunchofnationaladvertisingwhichbeganinlateFebruary2014.Let'snowreviewthemakeupofourcompgrowthinQ1.
Wesawtransactiongrowthof0.1%andcheckgrowthof1.4%.OurtransactiongrowthinQ1marksourfourthstraightquarterofpositivetransactiongrowth.Weviewourtransactiongrowthasapositivereflectionoftheinvestmentswearemakingtobeabettercompetitivealternative.
FromourperspectivetransactiongrowthmeanscustomersarewalkingpastcompetitorstoreachPanera.ThisiswhywecontinuetocompareourperformancetotheBlackBoxall-industrycomposite.InQ1ourtransactiongrowthwas70basispointsbetterthantheall-industrycomposite.
Stillourtransactiongrowthwasnotoverwhelming.HerearesomeofthefactorswethinkimpactedtransactiongrowthinQ1.First,reducedmediaspendyearoveryearwasaknownheadwindinQ1.Wereducedmediaspendby10%yearoveryearinQ1inanticipationofanewcampaignexpectedtobelaunchedinJuneof2015.WealsoincreasedpriceinQ1whichwasadragontransactiongrowth.
Finally,theweathersurprisedus.Weexpectedthehistoricallybadweatherin2014toserveasatailwindtocompsin2015.Unfortunately2015turnedouttobeeverybitasbadas2014.ThiswasparticularlytrueintheNortheastandtheMidwest,tworegionswhereweareoverindexedversustheindustry.
Okay,thereisonethingrelativetodemandthatIdowanttocalltoyourattention.Ourentreegrowthwasup1.4%inQ1.Aswe'vementionedinthepast,webelievegrowthinentreesisthebestmeasureinvestorscanusetounderstanddemandinourbakery-cafes,particularlywhenentreespertransactionaregrowingasrapidlyastheyareatPanera.Indeednomatterhowyoucutit,morecustomersarebuyingmoreentreesinPaneratodaythantheydidlastyear.
Okay,nowlet'sturnourattentiontotheotherkeydriverofcomps,check.Specificallyourcheckgrew1.4%inQ1.Thiscanbefurtherdisaggregatedintomixof0.1%andpricegrowthof1.3%.Let'sfirstdiscussmix.
MixtookastepdownfromQ4whenmixgrew0.9%.Whileyear-over-yearentreegrowthpertransactionwasstrong,itwasweakerthaninQ4andhadanegativeimpactonthemix.
Nowlet'sdiscusstheothersubcomponentofprice--ofcheck,price.PricegrowthwasmodestinthefirsthalfofQ1.Wetooka1.4%priceincreasepartwaythroughMarchwhichwefeltweneededtotaketocontinueattractingtoPaneratheteammemberswedesired.Wetookthepricetooffsetstructuralwageinflationwhichinturnwasdrivenbysignificantincreasesintheminimumwageinmanymarketsinwhich
CompanyName:PaneraBreadCoIncCompanyTicker:PNRASector:ServicesIndustry:Leisure
EventDescription:Q12015EarningsCallMarketCapasofEventDate:4.69BPriceasofEventDate:182.11
©2014TheStreet,Inc.Al l R ightsReserved Page5of22
weoperate.
InretrospectwelikelywaitedtoolongtotaketheincreaseastheminimumwageincreasesonJanuary1droveourmanagerstoquicklyraisewagestomaintainadifferentialversusminimum.Theincreaseweexecutedwasexecutedthroughacombinationofcompanywidepriceincreases,verymodestbutcompanywide,andstrategicpriceincreasesintargetedmarketswhereweknewwecouldtakeit.Thisstrategyreflectsthemorethoughtfulandresearch-basedapproachtopricingwhichweadoptedin2014.
Okay,let'snowdiscussQ2todatecomps.Letmenotethatinthefirst27daysofQ2compswereup2%primarilydrivenbystrongtransactiongrowth.
Letmeconcludeourdiscussionofcompswiththisfinalandimportantnote--andIwanttomakesureeverybody'sclearonthis.WhenoneadjustsfortheEasterholidayshiftsbetweenquartersin2013and2014onecanseeourmonthlytwo-yearcompshaveacceleratedeachmonthin2015.Theyweredown0.2%inJanuary,theywereup1.3%inFebruary,theywereup2.1%adjustedinMarch,andtheywereup3.9%inApril.Obviouslywearepleasedwiththistrendandhopeitcontinues.
Okay,letmenowcommentonwherewestandwithourinitiatives.Asyouallknow,we'refocusedonbecomingabettercompetitivealternativeandbuildingcapabilitiesforexpandedgrowth.
WebelievethebestwaytodothatistoimprovetheguestexperiencethroughPanera2.0,whichisinclusiveofbothdigitalaccessandimprovedoperationalcapabilities--wecallthatoperationalintegrity--aswellasit'sinclusiveofdrivingconsumerexcitementthroughinnovationinfood,marketingandstoredesign.
Thatinnovationisintendedtobringtolifeourreimaginedbrandpromiseofofferingfoodthatiscraveableandfoodthatallowsustoserveasanallyforwellnessforourguestswhileofferinganelevatedexperience.
We'realsofocusedonbuildingcapabilitiesthatwillallowustoexpandourrunwayforgrowthwellintothefuture.Wearedoingjustthatthroughlargeorderdelivery--manyofyoucallitcatering--smallorderdeliveryandourconsumerproductsgroup.
Iwanttoemphasizethatbuildingthesecapabilitiesandbuildingthesebusinessesispartofamulti-yearjourneythatisintendedtopositionus,topowerfullycompeteforyearstocomeinseveral$1billion-plusadjacentbusinesses.Anduseourcredibilityinsoups,saladsandsandwichestodojustthat.
OurgoalistobegintothinkabouthowmanydollarswecanvacuumoutofaspecificZ IPCode--howmanyhighROIdollarswecanvacuumoutofaspecificZ IPCodeasopposedtosimplyfocusingonhowmanycafeswecanopen.Let'sstartbydiscussingPanera2.0.
AsyouknowPanera2.0consistsoftwoelements:first,itconsistsofdigitalaccessthroughmobile,weband[kiosk];second,itconsistsofoperationalintegrity.EachisanecessarycomponentofPanera2.0andbotharecomplementary.LetmeexplainwhatImean.Let'sstartwithdigitalaccess.
Digitalaccesscreatesasignificantlybetterto-goandeat-inexperienceanditisthefoundationforcateringanddelivery.Italsomateriallyimpactslaborfavorabilityoverthelong-termasthereisnolaborneededtoinputorderswithdigital.
Furthermore,asdigitalutilizationgoesup,andsurelyitwill,laborgoesdown.Indeedwithhigh-performance,digitalaccess[inplace]Panerahasfargreaterpotentialtobothgrowsalesandtoreducelaborformanyyearstocome.
LetmeupdateyoubrieflynowonPanera'sprogresswithdigital.I'mexcitedtosharewithyouthenews
CompanyName:PaneraBreadCoIncCompanyTicker:PNRASector:ServicesIndustry:Leisure
EventDescription:Q12015EarningsCallMarketCapasofEventDate:4.69BPriceasofEventDate:182.11
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thatdigitalsalesarerunningover20%ofretailsalesinthePanera2.0cafes.Aswell,digitalsalesaretodayrunningatnearly9%oftotalCompanysales.
Thisislikelyoneofthehighestdigitalpercentagesintherestaurantindustry.Andletmesaythatisexclusiveofthepizzaplayerswhoarerunningcloseto50%digitalandwhohavebeenplayingthee-commercegameforalmostadecade.
Andkeepinmindsomethingelse,digitalutilizationatPaneracanbeexpectedtoincreaserapidly,particularlyasmorePanera2.0cafescomeonlineandasthecustomerbecomesmorecomfortablewithitsuseatPaneraandtheresult,lowerlaborcostasabyproduct.
Okay,letmesaythis:whilethecostofourdigitaleffortsmaybeweighingdownourP&Ltoday,wemustrecognizethevalueofhavingalreadymademanyoftheinvestmentthatothersinourindustryareonlynowcontemplatingmaking.
Forothersinourindustrytheonlyotheroptiontomakingtheinvestmentistofindanoutsidevendorwhooffersaturnkeysolution.Unfortunately,turnkeysolutionscomewithfeespertransactionofashighas10%ormoreofsales.
Inourcase,asPanera2.0rollsoutandasPanera'sdigitalsalesinevitablygoup,ourpertransactioncostwillcomedownandwillbeamongthelowestoutthere.Indeedwearecertainthatinvestorswillbeverypleasedwemadetheinvestmentswemadewhenwemadethem.
Okay,letmenowturntothesecondelementofPanera2.0,operationalintegrity.Operationalintegritymaybelesswellunderstood,butitisascentralasdigitalaccessistothesuccessofourPanera2.0initiative.
Asdigitalaccessincreasescustomerdemandandputsthecustomerincontrolofwhentheywanttheirfoodwithouttheconstraintimposedbyalimitednumberofregisterstoprotecttheproduction,theneedforahigh-capacity,rapidreaction,productionsystemincreases.Itwillhappentous,itisgoingtohappentoanybodyundertakingdigital.
TothatendweatPanerawanttoensurewehavetoproductioncapabilitiestoaccommodatethemanydigitalordersthatarriveinintenseburstsallbeingexecutedwiththehighlevelsofaccuracyandcustomersatisfactionthatareourhallmark.
Further,Panera,likeallrestaurantoperators,mustensurewehavetheprocessesandpeopleneededtoproducefoodthatguestsarecustomizingatratesapproaching70%inPanera2.0cafe.IencourageallofyoutositinoneofourdigitallyenabledcafeswithmeatnoonandwatchthekitchendisplaysystemlightuplikeaChristmastreewithordersallwithinabout5minutes.
IndeedIthinkevery--everyrestaurantCompanycontemplatingdigitalwillultimatelyfacethechallengeofensuringtheyhavethepeopleandtheprocessesneededtomeetnewlevelsofintensedemandandrapidlyrisinglevelsofcustomization.
Letmesharewithyousomeofthedataonoperationalintegrity.Weknowoureffortstoimprovetheguestexperienceareworkingascustomersatisfactionscoresyearoveryearcontinuetoimprove.Further,ourinternalresearchindicatesthereisahighcorrelationbetweencustomersatisfactionscores,frequencyandultimatelycomps.
Thatmayseemobvious,butIwantinvestorstoappreciatethatwhenweaddlabornecessaryforoperationalintegritywearecreatingvalueforthelong-termbyinvestinginandexecutingwithhigherlevelsofcustomersatisfaction.
CompanyName:PaneraBreadCoIncCompanyTicker:PNRASector:ServicesIndustry:Leisure
EventDescription:Q12015EarningsCallMarketCapasofEventDate:4.69BPriceasofEventDate:182.11
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Aswell,thelaborneededforoperationalintegrityisoffsetasdigitalutilizationkicksinandorderinputcostsgodown.Indeed,suchanunderstandingisessentialtoappreciatingwhyoperationalintegrityisasmartbetforourCompany.
Okay,let'smovefromoperationalintegritybacktoPanera2.0asanintegratedinitiative.WhileweexplicitlyarenotgivingupdatesonPanera2.0dataeachquarter,Iwanttosharesomeobservations.First,wecontinuetofeelpositiveaboutthetrendlinesweareseeingforPanera2.0.IwillalsonotethatweareseeingincreasedfrequencyinPanera2.0stores.
AndIwillnotethatit'sbecomingclearthataftercafeshavebeenconvertedtoPanera2.0foraboutayearweseecompsmateriallyaccelerate.ThismakessensegiventhatittakesaboutaquartertostabilizetheteamafterweconverttoPanera2.0.Andthenittakesthecustomer,whoonaveragevisitsPaneraaboutonceamonth,aquarterortwotorecognizethedifferenceandthenbegintochangetheirbehavior.
LetmeknowupdateyouonthestatusofourPanera2.0conversions.Weexecuted57Panera2.0conversionsinthefourthquarter.Mostofthoseattheendofthefourthquarter.Start-upexpensesandinefficienciesassociatedwiththatmanyconversionsimpactedourQ1profit.
InQ1weconverted19cafestoPanera2.0,thisisinlinewithourplan.Wenowhave123Panera2.0cafesinthesystemandweareontracktocompleteapproximately300conversionsin2015ontopofthe104openedin2014orearlier.
Further,wecontinuetoiteratethe2.0model,wehavebeentestingthePanera2.0experiencewithoutdeliverytothetableinstoresthatdon'tpresentlyhavedelivertothetableservice.Addingdelivertothetablewasprojectedtorepresentan80basispointincreaseinlabor.
BasedonourtestingwenowbelievewecaninstallPanera2.0intomanyofourcafeswithoutmakingdelivertothetableanecessaryupgrade.Thecriteriawewillbeusinggoingforwardrelativetoinstallingdeliverytothetablewillnowbejudgmentonthecompetitiveenvironment.
Let'snowshiftourdiscussiontoourplanstointensifyconsumerexcitementatPanera.Weseealong-termsecularevolutionasmoreandmoreconsumersseektobotheathealthyandeatfoodtheycrave.Theyaredealingwiththeconflictbetweenwhattheyfeeltheyshouldeatandwhattheywanttoeat.
Understandingthisphenomenon,wespentmuchof2014deeplyinvolvedinresearchandindefiningthroughafulsomestrategicreviewanunderstandingofhowwewanttore-imagineourbrandexecutiontoensureitisevermorerelevant.
Whatwecametolearnisthis,Panerahasthecredibilitytowininthisspace.We'vealwaysledtheindustryintransparencyandinofferinghighquality,lowercaloriemorenutritiousfoods.IndeedthroughtheyearsconsumerscontinuetogivePaneraveryhighscoresforthehealthfulnessofourfoodsandthehealthfulnessofPaneraingeneral.
Hereisthereasonwhywehavebeendoingit.Morethan10yearsagowesetanewindustrystandardbyofferingchickenraisedwithoutantibiotics.TodayeveryonefromChick-fil-AtoMcDonald'sandnowTysonthemselvesisfollowingourleadbyofferingsomeformofchickenraisedwithoutantibiotics.
Infact,Panera--we'vegonefurther--nowoffersmanyproteins,awiderangeofproteinsraisedwithoutantibioticsincludingroastedturkey,ham,breakfastsausageandbacon.Fiveyearsagowevoluntarilypostedcaloriesonourmenunationwide.Wewerethefirstonestodothatbecausewebelievetransparencyisaconsumer'srightandkeytoconsumertrust.
Mostcompaniesonlynowtacklingnutritionaldisclosureasitbecomesmandatedforchangelaterthis
CompanyName:PaneraBreadCoIncCompanyTicker:PNRASector:ServicesIndustry:Leisure
EventDescription:Q12015EarningsCallMarketCapasofEventDate:4.69BPriceasofEventDate:182.11
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year.Meanwhile,wecontinuetoraisethebar.
Lastyearwesharedourcontinuingprogressonouranimalwelfareinitiativesandwepublicizedourfoodpolicyandourcommitmenttoremoveallartificialingredientsincludingartificialcolors,artificialflavors,artificialpreservativesandartificialsweetenersfromthefoodinourbakery-cafebytheendof2016.
Todayallinnovationinfood,bakery,marketingandstoredesignarebeingrootedinourmissiontoofferclean,transparentandcraveablefoodalongwithanelevatedexperience.
Okay,solet'stalkaboutfood.InJanuaryweledtowithbrothbowls,ahealthfulextensionofoursoupofferingcreatedforadventuresomeeaters.InMaywearere-launchingallofoursaladdressing,indeedoversalads,they'llberootedincleandressings--thatmeansnoartificialcolors,flavors,preservativesorsweeteners.Thisisabigstepforusinbringingourfoodpolicytolife.
Duringthesummerwewillintroduceseveralnewsaladsandre-introducesomeperennialfavorites.Forinstance,inMaystrawberrypoppyseedwillreturntothemenualongwithournewMediterraneanquinoaandchicken,ourcontemporarytwistonaGreeksalad.
InJunewewillhighlightourbarbecuechickensaladandournewpowerkaleCaesar,ournewtwistonaCaesarsalad.Inthefallwewillfocusonoursandwichesandourcleanprotein.
StartinginSeptemberguestscanchoosetoupgradeanyofourtraditionaldeliturkeysandwichessothattheywillbeservedwithcarved,slowroastedturkeybreast,freeofantibioticsandallnitratesandprocessing.Itwillbesimplyturkeywithabitofsaltandpepperandoliveoil.SeveralexcitingnewsandwichesusingthatTurkeywillbeoffered.
Aswellbreadremainsanimportantdemonstrationofourbrandpromise,sowewillcontinueimprovingthehealthbenefitsofourbreads.BeginninginSeptemberallofourflatbreadswillfeature15gramsofwholegrainineachserving.
Finally,expecttoseeusremoveanumberofproductsandarangeofingredientsfromourmenuinordertoreducecomplexity,improvemanagerialfocusand,mostimportantly,toelevatetheguestexperience.
Okay,nowlet'sdiscussmarketing.AnewcampaignhighlightingourpositioningandgivingPaneraaunifiedvoiceacrossallmarketingchannelsisexpectedtodebutinJune.Iwillmakenocommentonthatcampaigntoday.Simplyput,Idon'twanttospoilthesurpriseofyouhearingitdirectly.ButIwanttotellyouweareveryexcitedaboutitandweareveryexcitedaboutitspotentialtosupportwherewehopetotakePanera.
Letmenotethis,wealsocontinuetousethegreatbenefit,ourMyPaneraloyaltyprogram.MyPaneraisapowerfulprogramforone-on-onemarketing,period.Ithas19millionmembers,accountingfornearlyhalfofallCompanytransactions.AndI'mquiteconfidentthereisn'tanotherrestaurantcompanyintheindustrythatcansayanythingapproachingthat.
Asanexampleofitseffectiveness,inAprilwelaunchedacoffeeclubpromotionallowingselectedMyPaneramemberstocomeinforafreedailycupofcoffee.Thisprogramisdrivingtransactionsand,thoughitdecreasescheckandpennyprofitpertransaction,itwillbeanoverallpositivecontributortonetsalesandprofit.
Lastly,wehaveanewmorecontemporarydesignindevelopment.Thenewdesignusesauthenticmaterialsuchasreclaimedwoodstocreateanupdatedandinvitinggatheringspace.
Inaddition,aremodelprogramthatevolvesourinternalface,thatredefinesourmenus,andalsoredefinesourinternalseatingareasandincorporateselementsofthenewcafedesignisbeingtested
CompanyName:PaneraBreadCoIncCompanyTicker:PNRASector:ServicesIndustry:Leisure
EventDescription:Q12015EarningsCallMarketCapasofEventDate:4.69BPriceasofEventDate:182.11
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andreadiedforusageinourmoreoutdatedcafes.
Okay,let'snowdiscussoureffortstobuildcapabilitiesthatprovideaccesstoseverallarge,powerfulgrowthrunways.Let'sfirstfocusoncatering.Wewillbeginbydiscussingourthesisrelativetocatering.Welikelyhavethelargestmarketshareinthecountryinlargeorderdelivery/catering.Butitisstillaverytinysliceofthepotentialmarketsharewecanobtain.
Weknowthatthisisalargebusinessopportunityandwealsoknowwecannotfulfillthatopportunityoutofthebackofa$50,000aweekcafe.Finally,weknewthatourcafesdoabetterjobwhentheyarefocusedononemaster,retail,andwhentheydonothavetomakethedifficulttradeoffsofstealingpeoplefromthecountertoservethecateringcustomerandviceversa.
Wehavecometolearnthatourcateringbusinessbenefitsfromdedicatedfacilitiesthataresetupandreadytohandlethesalesformultiplecafes.Becauseourhubsfillordersformultiplecafesandbecausetheyoperatewithmuchhighervolumes,they'reabletolowerthesalesvolatilitythatmakesacateringbusinesssodifficulttoefficientlyexecute.
Tothatendourhubswithmuchhighervolumebenefitfromhigherratesofdriverutilization.Aswellourhubsremovetheconstraintsourprofessionalsalesteamfacesinsellingfromcafesanditallowsustoapplydisciplineandfocustooperationalandsalesexecution.
Letmesharewithyousomethingelseaboutourhubthesis.Ourbeliefindeliveryhubsisbasedonourexperiencewiththem.Severalyearsagowewereforcedbyvolumetoopenanumberofhubsandinthecaseoftheseprototypicalhubs,wefoundtheygeneratedapowerfulIRRovertime.Butproducedshort-termP&Lpressureforthefirstyearortwo.
Addingacateringhubislikeaddingcapacityontoahotelthatisalreadyoperatingatfullcapacity--ittakessometimeuntilthatnewcapacityactuallyproducesincrementalprofitability.Letmesaythis,ItrulybelievethatinvestorsarewiseenoughtoknowthatthesekindsofhighIRRprojects,inspiteoftheshort-termpressurestheygenerate,areasmartbet.
Nowlet'sturnourattentiontodelivery.Thisisapowerfulsalesbuildinginitiative,andsomethingthateverybodyinourindustryseemstobetalkingaboutthis.InthecaseofPanera,we'vebeenworkingonthisforsometime.IndeedwehavebeentestingdeliveryforoverayearandarenowoperatingintwomarketswithourownPaneradrivermodelandintwomarketswithtwopartnersprovidingthirdparty[outsourced]drivermodel.
TogiveyousomesenseofourcommitmenttothiseffortIshouldnotethatourdeliveryeffortsareledbytheformerpresidentofoneofthebigthreepizzadeliveryoperatorsandhisformerseniorvicepresidentofoperations.
Letmesharesomeofwhatwe'vecometounderstandaboutdelivery.We'vecometobelievethatdeliveryoffersusthepotentialtomateriallyincreaseoursalesvolumespercafeandtobecomealong-termdriverofsalesgrowth.Infact,Iwouldcallitaverypowerfulopportunity.
Further,wehavecometolearnsaladsandsandwiches,becausethey'regenerallynotheatedandbecausetheytravelparticularlywellinavehicle,areaperfectproductfordeliveryespeciallyatlunch.
We'vealsocometounderstandthatdeliveryishardandthekeytosuccesswithdeliveryishavingthecapabilitiesinplaceneededtoexecutedeliveryconsistentwiththehighvolumesitcangenerateanddoingsoallthewhilewithoutdamagingtheretailbusiness.
Indeeddeliveryisnotsomethingyouwanttothrowintoanalreadyhighvolumecafeenvironmentasdoingsowillappearsmartintheshort-termbutultimatelyprovealimitedlong-termpositiveimpactifnot
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executedproperlywithhighcustomersatisfactionandwithadrivernetworkthatefficientlyleveragescost.
Indeed,we'vecometounderstandsuccessindeliveryrequiresseveralthings.First,itrequiresdigitaland/orphoneorderingwiththefullmenuavailable.Andthatmenumustbefullycustomizable,consistentwithwhatonewouldfindinaretailenvironment.
Simplyput,youwon'tbesuccessfulindeliveryifyouoffertheguestapartialexperienceorifyouofferaplain-vanillaoutsourcede-commercesolutioninwhichthecustomerneedstomanuallytypeincustomization.Itsimplydoesn'tgetthejobdonetothesatisfactionoftheguest.
Second,Iwouldaddthatwe'vecometounderstandaneffectivedeliveryprogramrequiresintegrationbetweentheorderingsystemandthefoodproduction(inaudible)ifoneistooperateathighvolumeandwithhighlevelsofcustomersatisfaction.Indeed,webelieveanythinglessthanfullintegrationleadstoaflawedsystemandultimatelycreatesdisappointedguests.
Third,webelieveaneffectivedeliveryprogramrequiresadrivernetworkthatisavailableandcost-efficientsothatdeliveryfeesultimatelychargedtothecustomermakesenseforfrequentuse.
Indeeditisourviewthatanycompanyinterestedinreallywinningatdeliveryisgoingtoneedtoresolvealloftheseissuesorriskfailure.Infact,wehaveconcludedthatfordeliverytobesuccessfulatPaneraweneedtobuilditsoourcafemanagersexperiencedeliveryassimplyanothertake-outorder.
Letmenotethatwebelievewehaveinplacetodaymuchofwhatwe'retalkingabout--wehavefulldigitalaccessandwehaveapowerfulsystem,ane-commercesystemthatlinksorderplacementtoourproduction(inaudible).
Indeedwebelievewehaveeverythingnecessarytorolloutdeliverybroadlywiththeexceptionofthedrivernetwork.Thatiswhywearepresentlytestingbothinternalandoutsourcedsolutionstoourdrivernetworkneeds.
Sowheredowegowithdeliveryinthefuture?Wewillexpandourtesttoadditionalmarketsin2015andwillmakeajudgmentrelativetoabroaderrolloutin2016.Inanycase,expectthatwhenPaneradoesdeliveryitwilldoitright.
Okay,IwillnowturnthereinsbacktoMikewhowillprovideanupdateonourvalueenhancinginitiativesandhewillalsoprovideguidanceforQ2andfull-year2015andthenIwilltakeitbackforafewclosingcomments.Mike?
MikeBufano (CFO):
Thankyou,Ron.AsRonsaid,Iwillstartbyspendingafewminutesonourrecentlyannouncedvalueenhancinginitiativesandhowweholdthem.Aspartofitsongoingevaluationofourcapitalstructure,ourBoardofDirectorsapprovedanincreasedsharerepurchaseauthorizationto$750million.
Aswepreviouslyannounced,weexpecttopurchase$500millionofshareswithinthenext12monthsthroughacombinationofcashonhand,cashflowfromoperationsandupto$500millionofnewdebt,takingadvantageoftheattractivecurrentinterestrateenvironment.
Additionally,theBoardapprovedtheuseofthenetproceedsfromourrefranchisingefforttoalsobeusedtowardsrepurchasingshares.
Toprovidealittlemorecoloronthenewdebtwehavestartedverypreliminarydiscussionswiththebanksbutnothingisyetdefinitive.Fromthesepreliminarydiscussionsweexpectinterestratestobein
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theneighborhoodof5%.
Wewillprovidefurtherupdatesaswefinishdiscussionsandsecurethedebt.Inthemeantime,wewillcontinueourrepurchasingprogramusingcashonhand,cashflowfromoperationsandourcurrentrevolverifneeded.
Basedonthetimingofsecuringthedebtandtheanticipatedtimingofthebuybackweexpecttheincrementalbuybacktobemodestlyaccretivein2015andmoresoin2016.
NowIwouldliketoupdateyouonourprogressagainstourrefranchisingtargetof50to150cafes.DuringthequarterwesoldoneCompanyownedcafeinamixedCompanyandfranchisemarkettoanexistingfranchisee.
Additionally,aspreviouslyannounced,wesignedlettersofintenttorefranchise73bakery-cafes.Thesecafesareinprofitablebutmateriallybelowaverageprofitabilitymarkets,sopriortransactionsdonotprovideagoodbenchmark.Wewouldcounselyoutothinkofthemintermsofvaluationsasopposedtotryingtobenchmarkthemagainstanabsolutevaluepercafebasedonourpastacquisitionsofaboveaverageprofitabilitycafes.
Itisimportanttostressthatweexpectthesaletobe73cafeswillbeaccretivetoongoingearningsbeforetheuseofproceedstorepurchaseshares.Thisaccretionwasfactoredintoourfull-year2015expectation.
Duetoaccountingruleswehadtorecognizetheone-timechargeinthefirstquarter,aheadofwhenweactuallyrealizedtheproceedsfromsaleuponclosing.Asyouwillseeanour10-Qfilinghaveclassifiedthecafesasheldforsaleonthebalancesheet.
BeforemovingonIwanttoemphasizeonepoint.Wewillonlyrefranchisemarketswheredoingsomakeseconomicsenseandgeneratesongoingearningsaccretionexcludingtheimpactofanyone-timecharges.Ourrefranchisinginitiativeisnotachangeinstrategyaswehavelongheldthat35%to50%Companyownedcafesistherightbalance.
Finally,Iwouldliketotouchontheworkwe'vebeendoingonourcoststructure.Weremaincommittedtocloselymonitoringournonstrategiccoststoenableustoreallocateresourcesfromsupportfunctionstogrowthinitiatives.
Aswenotedinthefourth-quartercall,forfull-year2015weanticipatethiswillresultina5%reductionincoreG&Aexpenses.Saidanotherway,thatisessentiallya5%reductionincore--insupportfunctionsoutsideofIT.Aspartofthiseffortwemadethedifficultdecisiontoeliminate36rolesincoresupportfunctionsinthefirstquarterof2015.
OurcoststructurewillremainafocusareaforPaneramovingforward.WeareestablishingaleanSixSigma-basedapproachtocostsavingswithafocusonidentifyingandeliminatingnon-valueaddedactivitiesandreducingcostonproductsandservicesthatwillnotaffectourcustomerexperience.
Inaddition,inFebruaryweengagedaleadingglobalmanagementconsultingandtechnologyservicesfirmtoreviewourtechnologyplans,processes,proceduresandcost.
Letmenowmoveontoourfull-yearandsecond-quartertargets.Wearemaintainingourfull-yeartargets.Excludingtheone-timerefranchisingloss,wereiterateouradjustedEPSgrowthtargetofflattodownmid-tohigh-single-digitsversusour2014adjustedEPSof$6.53.
WecontinuetotargetanadjustedEPS--I'msorry,EBITDAgrowthrateofflattodown--up4%.Letmesaythatagainjustsoweareclearonthatpiece.WecontinuetotargetanadjustedEBITDAgrowthrateof
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flattoup4%comparedto2014againexcludingtheone-timerefranchisingloss.
Finally,wearereiteratingourkeyassumptionsincludingsame-storesalesgrowthof2%to3.5%;operatingmargincontractionof100to175basispoints;105to115newbakery-cafessystemwidewithaverageweeklynetsalesof$43,000to$45,000;approximately300unitsconvertedto2.0;50to150Companyownedbakery-cafesrefranchised;andaneffectivetaxrateofabout37%.
Giventheverydynamicnatureoftheinvestmentswearecurrentlyundertakingwearenotgoingtogivespecificguidanceforthesecondquarter.Wecontinuetoinvestaheadofthecurveand,althoughthebenefitsofmanyoftheseinitiativeswillplayoutoveranumberofmonths,youshouldcontinuetoholdourcurrentEPStrajectoryaschoppy.
However,wewouldexpectthatoursecond-quarterEPSresultswillonceagainbeatthelowerendofourfull-yearEPSrange.WiththatIwillnowturnthecallbackovertoRonforclosingthoughtsbeforeweopenupthecallforyourquestions.
RonShaich (Founder,Chairman&CEO):
Okay,thankyou,Mike.Acoupleoflastthoughts.Paneraisclearlymakinganumberofinvestmentstoensureitremainscompetitiveanddrivesgrowthwellintothefuture.However,withthatinvestmentcomesshort-termP&Lpressure.Itistrue.
Whileitmaycostusintheshortterm,weareconfidenttheseinvestmentsgeneratehighreturnsforshareholders.Indeed,webelievenotmakingtheseinvestmentswillresultinafarlessvaluableCompany.OurintentioninexecutingthisplanistoensurePanera'sabilitytogeneratedouble-digitearningsgrowthformanyyearstocome.
AsarelativelylargeshareholderwiththevastpreponderanceofmypersonalandfamilynetworthinPanera,Iwantverymuchtodriveupshareholdervalue.ButIknowitwon'thappenunlessPaneraisabettercompetitivealternativewithexpandedgrowthcapabilities.
Letmestatetheobvious,reengineeringanycompanyforgrowthisdifficultandittakestimeandistypicallyastepfunctionphenomenon.Extensiveprototypingandtestinghasshownusthatourinitiativeswillhaveamateriallypositiveimpactonourbusinessoverthenextyearortwo,butourtestingalsoindicateswemustbepreparedtogivetimefortheseinitiativestotakeholdandtobuildsalesandtoleveragecost.
Tobeclear,leadingindicatorswillbevisible,butrealprogresscannotbemeasuredinacompanythesizeofPanerainamonthortwoorevenaquarterortwo.Rather,progresswillbemeasuredinyear-over-yearimprovement.
Iwanttoremindpeopleofsomethingelse.WhatsetsPaneraapartiswehavedonejustthesekindsofevolutionssuccessfullybefore.Wediditinthemid-1990swhenweevolvedSaintLouisBreadintoPanera,establishingavisionforwhatwouldbecomethefastcasualmarket.
Backthenpeopledidnotbelieveinourvisionandyoucouldhaveboughtboatloadsofourstockforbetween$3and$4ashare.Aninvestoronceaskedme,whydidn'tyoutellme?Ididn'twanttoremindhim,Idid.
Wediditagaininthelate1990swhenwesoldAuBonPain,thelargerofthetwocompanies,tofocusallourenergyonPanera.MyBoarddidn'tbelieveitwastherightthingtodo.Backthenyoucouldhaveboughtthestockforabout$3ashare.Andagainaninvestoraskedme,whydidn'tyoutellmetobuythestock.
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Anddon'tforgettheyearsaroundtherecessionwhenwewerecontrarianandchosetoinvestinthecustomerexperiencedespitetheeconomicslowdown.Ultimatelyourcompsimprovesignificantlystrongerandwewerebeatingothercompanies.Ourstockpricenearlydoubledin2009versus2008.Andonceagainsomeoneaskedme,whydidn'tyoutellme.
Therealityiswehaveatrackrecord--wehaveatrackrecordofseeingthefutureandexecutinginitiativesthatcreatesignificantlong-termvalue.Hereistheproof--Panera'sshareswereupnearly4,000%overthepast15yearsascomparedto39%fortheS&P500.SoIwilltellyousomethingItrulybelieve,wewilldoityetagain.
Indeed,Ibelievethat,asinthepast,shareholderswillbenefitmostwhenwechangethetrajectoryofourrelationshipwithourguestandwhenweexpandourgrowthopportunities.Thoughwehavechosenthemoredifficultpath,Iamconfidentitwillultimatelyleadtomoresustainableandlongerlastingearningsexpansion.ThankyouandwewillturnitovertoStevewhowillconductthequestions.
SteveWest (VP-IR):
Allright,operator,wewilltakequestionsnowatthistime.
QUESTIONS&ANSWERS
Operator :
(OperatorInstructions).BrianBittner,Oppenheimer.
BrianBittner (Analyst-Oppenheimer&Co.):
Aquestiononjustthe2.0dynamicsherein2015.Youmentionedthe57storesthatyoudidinthefourthquarterdid--wereamaterialreasonwhywesawthemargindeclineinthefirstquarter.
AndIthinkallofuscanappreciatethat,asyouhaveoutlinedmany,manytimes,howtheinvestmentcyclefora2.0storeworks.Andwhenyoulookforwarditdoesappearyouneedtoconvertabout90plusstoresperquarteroverthenextthreequarterstohityour300goalfortheyear,whichisunprecedentedforyourmodel.
AndIamreallywonderingdoesthisprovidearisktothemarginguidancethatyou'vegivenusfor2015atall?AndIaskthatbecauseyouareassumingmarginsdeclineatalesssevereratefortherestoftheyeardespitewhatdoesappeartobeanintensifyinginvestmentcyclehere.Soifyoucouldjustputsomecolortothatthatwouldbehelpful.
MikeBufano (CFO):
Yes,Brian,itisMike;IwillstartandRonwilladdsomecoloraswell.Soitisbuiltintoourguidancenow,thatrateofinvestment.Whatyouhavetorememberisitisnotjustthekindofupfrontinvestment.AsRonsaid,oncePanera2.0hasbeeninthecafesforawhilethesalescontinuetobuildaswell,soyoukindofhaveatwoprongedpieceofit.
Sothe100thatweopenedbefore2014,the19we'veopenedalready,the123intotal--youwillstarttoseesomeofthesalesliftcomefromthoseaswellatthesametimeyouareseeingtheinvestmentcome.
RonShaich (Founder,Chairman&CEO):
Yes,Iwouldjustaddthe57--57weopenedinthefourthquarter,Ithinkthevastpredominanceweopenedatthelastfourweeks.Andinsomewaysitwasreallyatestforusofourorganizationalcapabilitiestoexecuteit.AndIfeellikewegotveryclearaboutthatinour--tookabreakbutweare
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thereandverycapabletodoit.
BrianBittner (Analyst-Oppenheimer&Co.):
Okay,thankyou.
Operator :
DavidTarantino,RobertWBaird.
DavidT arantino (Analyst-RobertW.Baird):
Ihaveanear-termquestionaboutthecompsoutlook.And,Ron,Iwashopingmaybeyoucouldgivesomeperspectiveonyourconfidencelevelinachievingthefullyearplanthatyouhavelaidout,givenwhatyouhaveseentodate.
AndIguessifIlookatthemathitdoesrequirefurtheraccelerationinthetwo-yeartrendsrelativetowhatyoulaidout.Sojustwonderingwhatyouthinkthedriverofthatpotentialaccelerationcouldbeandyourconfidencelevelingettingthere.
RonShaich (Founder,Chairman&CEO):
Well,Iwouldsayitthisway,andIthinkitisprettysimple.Ourfullyearrangeis2%to3.5%.Weareat2%;wehaveanumberofmaterialinitiativesunderway.Wearebuildingsomemomentumunderneaththecompswiththeseinitiatives.
We'refeelinglikethesearestructuralthingsbuttheyaremakingadifferencewhetheritbe2.0,whetheritbewhatwearedoingwithinnovationinfood,whetheritbethecampaignthatwillrolloutinJune,whetheritbewhatwearebeginningtodowith--we'regettingthebenefitsupwithoperations.
SoIthinkitisreasonabletosaywe--inaworldwherenobodyknowswhatthefutureisgoingtobring,particularlycomps,feellikethatwearereasonablycomfortableinourviewthatwewillbeintherangeof2%to3.5%.
DavidT arantino (Analyst-RobertW.Baird):
Great,andifIcouldjustaskonefollow-up,itisrelatedtothefirstquestion(multiplespeakers).Iguessthefollowitisaroundmarketing.AndIguessinhindsight,howmuchdoyouthinkthemarketingspendincomparisonmighthaveinfluencedthefirstquarterrelativetokindofhowyouarethinkingaboutitontheoutlook?
RonShaich (Founder,Chairman&CEO):
Straightup,Idon'tthinkanybodyknowswiththatlevelofprecision.Thesearestewsandthereismanyfactorsinthere.WhatIdoknowismarketingwasdown10%andthatisreallyallIcansay.Itismaterialityrelativetoawholebunchofotherthingstotoughtopullout.
Operator :
JosephBuckley,BankofAmericaSecurities.
JosephBuckley(Analyst-BofAMerrillLynch):
Ron,canIaskyoutogobacktothesalesanalysis?IfIlookattheentreegrowthof1.4%,itmakesthecheckgrowinthequartervery,verymodestlookingatitonthatbasis.Andsoitbegsthequestionwhatcateringdelivered.
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Andcouldyouclarifythattwo-yeartrend,becauseonthereportednumberstheApriltwo-yearcompactuallyslowed.SoIknowtherewasanEastershift2013versus2014,butnotthecase2014versus2015.SojustifyoucouldanswerthisbroadquestiononsalesprovidingthatperspectiveagainIwouldappreciateit.
RonShaich (Founder,Chairman&CEO):
Youwanttotakeit,Mike?
MikeBufano (CFO):
Yes.So,Joe--.
RonShaich (Founder,Chairman&CEO):
Givethisguysomeairtimehere.
MikeBufano (CFO):
Yes,solet'sstartonthecalendarshift.SoIthinkwhatweweretryingtotalkabout,Joe,wasthetwo-year.Soyouareright,itdidn'tmove2014versus2015butitdidmove2013versus2014.
Soagain,thewaywelookattheadjustedforEastertwo-yearcomptrend--right,whichisthetrendthatwereallyfeellikematterssothatgetsridofthenoise--isP1wasminus0.2;P2was1.3;P3was2.1;andthenthefirst27dayswas3.9.SothatiswhenyoumaketheadjustmentforEasterback2013to2014.Sohopefullythatclarifiesthatpartofthequestion.
Intermsofyourquestionaboutentreegrowthandhowthatplaysintototalcheckgrowth,rememberthereisotherfactorsbeyondjustentreegrowth.Entreegrowthisonethingthatcandriveupthemixonourcheckifentreesaregrowingfasterthantransactions,itdidinthisquarter.Butthere'sabunchofotherfactors.Therearesomesecularthingsgoingonaroundbeverageattachment,thereisalotofpieceslikethat.
So,yes--andalsothedaypartpieceplaysintoitaswellforus,right.Thebreakfast--breakfasthasalowercheckthantherestoftheday.Ithinkwehadtalkedaboutoncallslastyear,sothisisaquarterwherewedidseebreakfastgrowfasterthantheotherdaypartsaswell.Soallthosethingsplayintoit,soitisnotjustkindofjustentreegrowthgrowingfasterthantransactiongrowththatwoulddrivethecheckup.
JosephBuckley(Analyst-BofAMerrillLynch):
(Technicaldifficulty)andthatansweraswell,please?
MikeBufano (CFO):
Whatwasthat,Joe,wedidn'treally--?
JosephBuckley(Analyst-BofAMerrillLynch):
Couldyouputcateringinperspectiveaswell,justwhatthecateringsaleslooklikeversustheoverallcompandwhatthemixwas,justanybarometersoncateringwouldbehelpful.
MikeBufano (CFO):
Yes,Imean,Joe,atahighlevelwhatwewouldshareisthatcateringgrewalittlebitfasterthantherestofthebusinessishowwewouldqualifyit.
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RonShaich (Founder,Chairman&CEO):
Joe,youandDavidarelong-timeanalystshereanddearfriends,andsoyougotthatoneandahalf,butwearegoingtoholdeverybodytoone.Let'smarchforward.
JosephBuckley(Analyst-BofAMerrillLynch):
Thankyou.
Operator :
JohnGlass,MorganStanley.
JohnGlass (Analyst-MorganStanley):
Withonequestion.Ron,Iappreciatethecoloron2.0thisquarter.Canyoutalkaboutwhetherthemostrecentlyconvertedstoresinthefourthquarterarenowbeginningtooutcompthesystem?YoutalkedaboutalittlebitofalagandthatwassortofnewIguess.Arethesenewerstorescompingquickerthanthey--thantheoldercohorts?Areyouhelpingconsumersunderstand2.0forexampleinthestoresbetterthanyouusedto?Anycoloronthatwouldbehelpful.
RonShaich (Founder,Chairman&CEO):
Yes,I'mgoingtotellalittlestory,John.Afterthelast--wewentintolastcallandIdecided,youknowwhat,everybodykeepsaskingthesequestionsabout2.0.I'mjustgoingtoputeverypieceofdataliterallywithtremendousgranularity.IfIhadmydruthersIwould'vegivenittobystore.
AndafterthecallIgotalltheseinterestingresponses.Somepeoplesaidtheremustbeareasonyou--Ihaveneverseenanybodyputoutthatmuchstuff.Whatareyoutryingtodo?AndIthinkinsomewayswerealizedinputtingitoutitjustgivepeoplealotofirrelevantdatathattheybegantochokeon.Wethoughttheywouldseeit.
Soweclearlydon'twanttostarttorespond,asmuchasIwouldliketo,tohowdidthismarketdosixweeksintoitversussomethingelse,becausewearegoingtogodownapaththatisn'tnecessarilygoingtohelpyou.SoIamgoingtorefrainfromrespondingtothatquestion.
MikeBufano (CFO):
Yes,andwewillsharethedataonthenextcall.Soyouwillbeabletoseethelonger-termtrendonthoserecentconversions.
JohnGlass (Analyst-MorganStanley):
Areyouatleasthelpingtheconsumerfigureitoutfasterthanevenifyouarenotgoingtosaywherecompsare?
RonShaich (Founder,Chairman&CEO):
Arewehelpingtheconsumerfigureitout,I'mnotsureIknow--.
JohnGlass (Analyst-MorganStanley):
Yes,ifitistakingthemacoupleofquarterstofigurethisoutanduseit,can'tyoushortenthatperiodoftimesothattheyengagequicker?
RonShaich (Founder,Chairman&CEO):
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Well,youcanbesurewecontinuetoiteratethat,thatispartofthewholeprocess.Buttobeclear,whattakestime?First,whenyouputthisintoplaceyouareretrainingpeople.Thewholeorganizationisgoingthrough,inthatstore,abitofadisruption.Theythenhavetogetnewmusclememory.Theyhavetoknowhowtodoit.
Theyhavetofeelconfidentwithit,theyhavetoworkdowntherelaborcharts.Theyhavetobuilduptheirsenseofthisisthewaywedoithere.Thatisoftendisruptivetocustomers.
Thenwehavetotrainthecustomeronhowtousethekiosk,howtofeelcomfortablewithit,howthestoreworks.Thatusuallytakesusaquarter,itcouldtakeustwoquarterstosortofgothroughthosephases.
Itisparticularlyinterestingbecausethecustomeronaveragecomesonceamonth,sotheymaynotevennoticethechangeforawhile.Itthentakesthecustomerthemselveswhatevertimeperioditisforthemtoevolvetheirbehavior.
Soyouhavethiscycle,anditisnotonecustomergoesthisway.Youhavesomeittakeslonger,awholebunchitmovesmorequickly.Whatiscleartousisitclearlymoves.
Operator :
JeffBernstein,Barclays.
Jef f Bernstein (Analyst-BarclaysCapital):
Aquestionontherefranchisingeffortwhichyoualludedtolastquarterandweobviouslygotsomemorecolortoday.SoIunderstandbeingontrackforthat50to150in2015.
MyquestionIguessbroadlyspeaking,Imeanacoupleofparts,butjustwonderinghowthatnumberwasestablished.Whetheryouhave--Ithinkyoumentionedthetargetis35%to50%,whetherweshouldassumewearenowonapathtogotowards35%andkindof50%isdoneorwhetherornotweshouldseeanaccelerationofthatnumbermaybein2016?
Andjustlastly,whenyoudothoserefranchisings,doyougetapromisemaybeofeithera2.0upgradeordoyougetapromiseoffuturenewunitgrowth?ImeanIthinkthatwouldbeagoodcarrotforpotentialfranchiseesifyouofferitatabetterpriceiftheypromisetodocertainthingsthatyouwouldliketohaveaccomplished.Thanks.
MikeBufano (CFO):
Sothereisafewpiecesinthere,Jeff.IwillcertainlystartandRonmaychoosetoaddsomecoloraswell.Sotoyourinitialpartofthequestionofhowdidweestablishthe50to150,likeIsaidonthecall,weareonlygoingtorefranchisemarketswhereitmakeseconomicsenseandwebelieveitisgoingtobeaaccretivetotheP&L.
Sothatishowwecameupwiththatnumber,welookedatthemarketsthatfitthatcriteria.SoIthinkthatstartstoansweralittlebitofyoursecondpartofthequestionofwouldwedomore?Imeanweestablishedarangeof50to150,we'vemadeprogresson73andthatiswhereweareleavingthatpartofthediscussionrightnow.
Intermsoffuturepromises,ImeanallofourfranchiseeswanttodoPanera2.0,sowedon'thavetoputacarrotouttheretogetthemtodoit.Mostofourfranchiseesarecontinuingtoaggressivelybuildouttheirmarkets.
Imeancertainlywhenwesellandmarketwegothroughthefuturedevelopmentinthemarketwiththebuyer,butitisnotlikewehavetolowerthepriceorputsomecarrotouttheretogetpeopletoinvest
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behindthebusinessbecauseourfranchiseesbelieveintheconceptandwhatwearedoing.
Jef f Bernstein (Analyst-BarclaysCapital):
Thefranchiseesarealloverthe2.0rollout,itisnotasiftheyarewaitingtoseehowyourstoresdoandthey'regoingtobeayearbehind?
RonShaich (Founder,Chairman&CEO):
No,theyarereadytogo.Differentplacesbuttheyarereadytogoandwejusthadabigmeetingwiththemwheretheyliterallyweretouchingit,feelingit,goingthroughnumbers.AndIthinkthatthereisalotofexcitement.Andastheiterationscontinuetogetbettertheyarethebeneficiaryofit.
Jef f Bernstein (Analyst-BarclaysCapital):
Great,thankyou.
Operator :
JasonWest,CreditSuisse.
JasonWest (Analyst-CreditSuisse):
And,Ron,IwilltakeyouuponthatoffertohavelunchataPanerawheneveryouhavesometime(laughter).But,yes,IguessJeffkindofstolemyquestiontherearoundtherefranchisingphilosophy.ButIguessjusttoaddontothat(multiplespeakers).
RonShaich (Founder,Chairman&CEO):
(Multiplespeakers)secondquestion.
JasonWest (Analyst-CreditSuisse):
Thereyougo.Thethoughtsonthebuybackthatyouannounced,whichobviouslygotareallypositivereception,ifyoualsothoughtaboutadividendasyoumovetoabitmoreofanassetlightmodelIguessandaddingsomemorecashtothebalancesheet.Howdidthatplayintoyourthinkingandisthatsomethingthatyouthinkinvestorswouldbelookingfor?
MikeBufano (CFO):
Jason,wearealwayslisteningtoinvestors,wearealwayskindofthinkingthroughthis.ItisanongoingdiscussionwehavewiththeBoardaroundcapitalstructure.Atthistimewebelievedthebuybackwasthebestwaytoreturncashtoshareholders.Butwecertainlykindofconsiderallouroptionsaswehaveallthesediscussions.Allright,nextquestion.
JasonWest (Analyst-CreditSuisse):
Allright.
Operator :
KarenHolthouse,GoldmanSachs.
RonShaich (Founder,Chairman&CEO):
Karen,beforewetakeyourquestionIwouldjustliketoaddoneothercommenttoJason.Therewassomediscussion,beingverystraightonit,onthepoliticsofthewholebuybackandhowitoccurred.Thereality
CompanyName:PaneraBreadCoIncCompanyTicker:PNRASector:ServicesIndustry:Leisure
EventDescription:Q12015EarningsCallMarketCapasofEventDate:4.69BPriceasofEventDate:182.11
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isIthinkforusIthinkweinternallyandIthinkthatwithinourBoard,thisisadiscussionwe'vebeenhavingforalongtime.
AndIthinkweactuallyfeltstraightupthatthebuybackandtheexpansionoftheauthorizationwastherightthingnotbecauseofpressurebutreallytherightthingtodoforrunningthisCompanyforthemedium-andlong-term.Andthatisthecontextinwhichthatdecisiongotmadewhichiswhyitisarelativelyeasydecisionforus.Sorry,goahead,Karen.
KarenHolthouse (Analyst-GoldmanSachs):
Noproblem.Soaquestionaboutmenucomplexity.Canwethinkaboutthereareacoupleofputsandtakesforaddingsomenewthingstothemenuandthenmenusimplification.ShouldwethinkofthatasthetotalnumberofSKUsgoingintothekitchengoingupordown?
Andwiththeabilitytoupgradeproteinsaddinganincrementalversionorwaytocustomizeanorder,whichissomethingthathasbeenachallenge,arethereanyway--isthereanywaytoquantifyoranupdateonwithPanera2.0unitsordigitalorderstheextenttowhichorderaccuracyisactuallyimproving?
RonShaich (Founder,Chairman&CEO):
Sure,alotinthere.Letmefirstjustsayyouactuallygottothekickandit'sbeenhardformetohelppeoplegetthere.Complexityisnotrootedinthenumberofmenuitems,itmaybeinthewaytheconsumerexperiencesandtheirabilitytoorder,butfundamentallyitisrootedintheSKUs,thenumberofingredientsyouhaveonyourline.Complexityisrootedandthedifferentprocessesyouusetomakethatfood.
Andsoourwholeattemptandouroperator'sattempttosimplifyisrootedinreducingSKUsandreducingduplicativeordifferentprocessesthatcreatechallengesfor[operators].Aswellitistryingtotaketheadministrativeburdensawayfromourmanagersusingtechnologyasameanstodothat,whichwehadn'tdonebeforequitehonestly,sotheycanfocusonwhatreallymatterswhichisguestexperience.Soyoureallygetit.
Iwouldsaytoyousecondly,yes,wemonitoritall.Oneofthemost--thebestthing--oneofthebestinnovationswemadelastyear,Iwillbeverydirectonthis,inallofPanerawasthedevelopmentofourwholecustomerinformationsystem.AndwenowgooutandweliterallygotoourMyPaneramembers.Anditiscompletelyunbiased,theydon'tcallintoustheydon'tuse--theydon'tselfselect,wegoouttothem.
Andwearegettingtensofthousands,nearly100,000piecesofdataacrossthesystemeverysinglemonth,we'restatisticallysignificantineverysinglestoreinsignificantwayswithunbiaseddata.Soweareveryabletomonitorcustomersatisfaction,wemonitoraccuracy,wemonitorfoodquality,wemonitorwarmth.
Andwehavealsogoneinanddidthedeepanalyticstounderstandwhatcorrelateswithwhat.Itisnotenoughtoknowyouwanttodrivecustomerhealth,itiswhatlevelofspeed,whatlevelofaccuracymatters.
Finally,whatweknowinusingthatsystemisinthe2.0storeswe'vebeenabletodrivethefrequency.Andinparticulardaypartsbecauseit'snotacrossthewholemenu,right.We'vebeenabletomateriallydrivetheaccuracy.Soweseeit.Andweknowthoseinternallyaretheleadingindicatorsforwhatwewantwhichis[sat]whichtiesintofrequencywhichultimatelydrivescomps.AndIcanshowyouthecorrelationsandallthat.
CompanyName:PaneraBreadCoIncCompanyTicker:PNRASector:ServicesIndustry:Leisure
EventDescription:Q12015EarningsCallMarketCapasofEventDate:4.69BPriceasofEventDate:182.11
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KarenHolthouse (Analyst-GoldmanSachs):
Great,thankyou.
Operator :
RobertDerrington,WunderlichSecurities.
RobertDerrington (Analyst-WunderlichSecurities):
Ron,theopportunityfordeliveryforPaneraisaprettyexcitingone.NowIguessthatbeingsaid,asyoulookatthat,howdoyouthinkaboutdelivery?Isitsomethingthatyouwould--youneedtohavedeliveryhubsinplaceinordertodo?Andifyoudon'tneedthose,howdoyou--wouldyouovercomplicatethecafebusinessifyouhaveyourowndeliverydriversonhandtorundeliveryoutofyourcafes?
RonShaich (Founder,Chairman&CEO):
Greatquestion.Justtobeclear,weareassumingthehubsareusedprimarilyforcatering,largeorderdelivery,whichwethinkofasdifferentmenuitems,differentproductionprocessanddifferentdeliverymechanism.Theywouldbeusedforsmallorderdeliverybutthat'ssortofsecondaryandtertiary.Onourpresentmodeldeliverywillbedoneinourretailstore.
Nowourmission,asIdefinedforyouearlier,thewaywethinkofdeliveryisithastomanifestitselforshowuptoourstoremanagersassimplyanotherto-goorder.Iftheygetmoreinvolvedinitthanthatitisgoingtocomplicatetheirlivesandbeproblematic.
Thatiswhyitissoimportantthatwehavethedigitalorderingsystem.Thatiswhyitissoimportantthedigitalorderingsystemliterallytieintotheproductionsystemsintheir[KDA],theydon'tknowitisanydifferent.
Nowwhatourmodelcallsforisthedriversthatwoulddeliverthatdeliveryandtheactualdeliverystructurewouldbeessentiallyeitheroutsourcedormanagedthroughamodestlydifferentmanagementsystemmuchlikewemanageourbakingthatisfocusedonthosedrivers,sothatwe'reabletomovedriversaroundbetweenstores,weareabletohiredriversinafocusedwaydistrictbydistrict,marketbymarket.Andsounderstanditinthatsense.
RobertDerrington (Analyst-WunderlichSecurities):
Youknow,that--.
MikeBufano (CFO):
Sorry,Bob.
RobertDerrington (Analyst-WunderlichSecurities):
IfIcouldjustfollowuponthat,Ron.Onthedeliverypiece,clearlytheleverageofthatopportunityisterrific.Andifinfactyouuse--itsoundslikeyouranswerpointstowardsathird-partyoutsource.Ifthatisthecase,howultimatelydoyoucontrolthedeliveryforsomethingotherthansame-dayserviceordriversgettinglost?Haveyouworkedthroughsomeofthosedynamics?
RonShaich (Founder,Chairman&CEO):
Absolutely--letmeagainsaywhat--firstoff,letmeanswerdirectlyyourcommentandthenletmesharewithyousomedataorinformation.First,Idon'tthinkitnecessarilypointstoanoutsourcedsolution.Ithinkanoutsourcedsolutionbringswithitplusesandminusesandacontrolledbutseparatelyexecuted
CompanyName:PaneraBreadCoIncCompanyTicker:PNRASector:ServicesIndustry:Leisure
EventDescription:Q12015EarningsCallMarketCapasofEventDate:4.69BPriceasofEventDate:182.11
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deliverysystembringswithitcertainplusesandminuses.
Ithinktheyarebothreality.AndIthinkthatisthereasonweareouttherewithtests,withtwooutsourceproviders,peopleyouwouldknow,majorplayers.Andwearealsointestswithourowninternal[resources].Idon'tknowtheanswertothatyet.Wearelookingatit,wearestudyingit,wearethinkingaboutit.
WhatIdoknowisthatdeliverysystemhastodeliver100%ofthetime,ithastodeliverinalimitedtimeframeandcan'tbedependentonwhetherthereisadriveravailable.Ithastoworkandithastobesomethingthecustomercancounton.Aswellitcan'tbesomethingthatissortofpricedonasurgebasisthatcouldrun$5,$10,$15andnobodyknows.
Thatmaybewonderfulinaverytightphysicaldomainanditmaybeinterestinginsortofsqueezingthetopofthemarketforsomebodywhoiswillingtopayforconvenience.Butitdoesn'tdrivetothekindsofvolumesweknowaretheretobehad.
RobertDerrington (Analyst-WunderlichSecurities):
SothatrulesoutUber?
RonShaich (Founder,Chairman&CEO):
Ididn'tsaythatatall.Isaid--excusemeletmejust--Ididn'tsayitrulesoutanything.
RobertDerrington (Analyst-WunderlichSecurities):
I'msorry.
RonShaich (Founder,Chairman&CEO):
Isaidwhatwearetryingtoaccomplishinaveryrealway.
SteveWest (VP-IR):
Operator,willtakeonemorequestionandthenwewillcloseoutthecall.
Operator :
KeithSiegner,UBS.
KeithSiegner (Analyst-UBS):
Ron,Ijustwanttoswitchitupalittlebithere.Whenwetalkabout20%plusdigitalordersatthese2.0conversions,nineacrossthesystem,youexpectitto[move]--itisafundamentalchangeinhowthecustomersandyourbrandareinteracting.
Sowhenyoutalkaboutthingslikenewdesignsindevelopment,aremodelprogrambeingtested,etc.,isthereanopportunityheretosaylookforandseethatnewrelationshipandmaybecomeupwithnewrealestateoptions,notstandardboxes?
Couldyoudodeliverycarryoutonlyboxes?Couldyouplayaroundwithmoreotherformats?Basicallybroadenouttheoptions,reducethecostofrealestatepersalesdollar?Areyouexploringtheseoptionsaswell?
RonShaich (Founder,Chairman&CEO):
CompanyName:PaneraBreadCoIncCompanyTicker:PNRASector:ServicesIndustry:Leisure
EventDescription:Q12015EarningsCallMarketCapasofEventDate:4.69BPriceasofEventDate:182.11
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Yes.
KeithSiegner (Analyst-UBS):
Couldweseeanyofthem?
RonShaich (Founder,Chairman&CEO):
ImeanI'dsayittoyouthisway,Keith.Yes,noquestion,yougettosomeofthekindsofopportunitiesthatexist,right,simplystoresthatareto-goanddelivery.It'sveryreal.Wehavehadvehicleslikethatintestfor24monthsormore,straightup.Iamnotcommentingonitbecausewehavelotsoftestsinvolved.
Ithinktheimportantpointtotakeawayfromyourcomment,andyougetit,iseverythingwehavecreatedandarecreatingcreatesastructureandabasethatallowsustodosignificantlymoreinthefuture.Thatiswhatwemeanwhenwesayweareplayingforarunwayforgrowth.
Wearenotsimplyplayingtopopthecompsnextquarter.Weareplayingtoputourselvesinapositionthatwearemajorplayers--majorplayersincatering,indelivery,andultimatelyinconsumerproducts.Andwehavebig--wehaverealsizableexperiencesinthat,realsizablesuccess.Wehavedoneit,Ithinkweunderstandwhatittakestodoitdeeplyandwearemovingforward.
Therearemanythingsthatwekeeplearning.ThethingaboutourCompanythatIlovethemostisthatwekeeplearning.Andwearegoingtolearnagreatdealmoreaboutopportunitiesthatcomefromthethingsthatwe'reputtinginplace.TheonethingIknowisthatitwillcreateopportunity.Thankyou.
SteveWest (VP-IR):
Allright,operator,thatconcludesourcall.Thankyou.
MikeBufano (CFO):
Yes,thankyou,everybody.
Operator :
Onceagain,ladiesandgentlemen,thatdoesconcludetoday'sconference.
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