Sonic Earnings Call Nuggets: Advertising Contributions and Sales Progression

Sonic Corporation (NASDAQ:SONC) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

Advertising Contributions

Matthew DiFrisco – Lazard: I just had a couple of quick questions here with respect to the media, with that slide where you show the percentages. Can you also just put into context the absolute dollars for FY ’13 and ’14, how it might compare to prior years?

J. Clifford Hudson – Chairman, President and CEO: For ’13 and ’14, well, do that a little more directly for ’12 into ’13. The dollar difference was not appreciable. It was more the allocation of the dollars. So, that’s why we depicted it that way. The difference in the absolute amount for the two years is not significant. ’13 going into ’14 will have some movements in part because of some efficiencies in buying and in part because of same-store sales growth. So we’ll get some slight increase going into ’14.

Matthew DiFrisco – Lazard: But are you allocating more dollars are you asking for a greater advertising contribution from the aggregate system?

Stephen C. Vaughan – EVP and CFO: No we are not intending to add the system for increased advertising spending contribution.

Matthew DiFrisco – Lazard: Then I guess just with respect to the I guess the only change really in guidance that I could see was in your store openings. The franchise number was indicated to be slightly higher in FY ’13 on your last call and now it’s slightly lower the 25 to 30 falling a little bit lower than the 36 open in FY ’12. I guess is that any, is that correlated to the weather as well, is did any of those stores should we suspect some of those stores fell into FY ’14 and FY ’14 will be meaningful ahead of that pace?

Stephen C. Vaughan – EVP and CFO: You should expect ’14 to being to pick up and it will – we will – there’s no doubt that we’ll see store that we would have hoped to open in the summer that will fall into the first quarter. You will also see the year begin to build as ’14 does progress. If you look at with the development pipeline as it is in that 2012 time frame I, try not to go too much deep to the earlier. But the 2012 time frame, to pick up the sale. Pick up the profitability the proving out getting probably upwards to the year, but opening of our first drive-in proving out of that smaller building. So once you get in to – arrive into ’13 and then begin attempting to sell more you add a period of time for that development so if its maybe 12 to 15 months and it’s a smaller town and that’s why we’ve focused on those initially in core markets. So you add in essence for calendar ’13, you add the kind of 12 months to 18 months. You get into calendar ’14, you will begin to see that pickup, the rate pickup to break out of the pattern that you have seen in the last whatever, 24 months or so.

Matthew DiFrisco – Lazard: Could you shed some light on sort of the – what did cause though the change from three months ago when you thought there would be more openings in FY ’13 than ’12? Was it the comp, the weather or is there a cog in the system as far as the uncertainty with the lending market. I’m just curious if you can shed some light on that just to give us greater comfort in this FY ’14 outlook.

J. Clifford Hudson – Chairman, President and CEO: I don’t know that there is a single thing that you can point to say this is the impact. You will see some falling into the first quarter that we hope would’ve opened in the summer quarter and I mean, there really will be a slug of stores that do that. But the pickup in terms of the trend over time, you kind of break that cycle as we get into ’14 and particularly calendar ’14, you will see more of that impact. It’s – it will affect the core. The way we are looking at this versus 12 months or 18 months ago, proving at that small building has caused us to – the elements of the small building, the elements of the media have caused us to look at core markets differently than new markets in terms of how we’d go about development and where we will open. So in the near-term, you will see more impact from smaller towns, core markets and then by the time, late ’14 into ’15, you will start seeing it developing in new markets play a greater role in that. So, it may be on Thursday that we’ll go through some more detail and how we see that breaking out over time more than we’re laying out today. It should give you more profit into that how that will play out…

Matthew DiFrisco – Lazard: That would be great. I guess, just to complete the thought for FY ’13, the other comment was that you were going to have less – you are expected to have equal to less closures in FY ’13 than you did in ’12. I mean, that would hold you at only about two closures out of the franchise system for 4Q. Should we not be – should we be looking for more of the pace that you’ve had in the last couple of years about a dozen or so in 4Q, or has the health of the system that now much more improved that you only expect maybe a handful?

Stephen C. Vaughan – EVP and CFO: We would expect that number to decline there. It shouldn’t be a dozen; it should be significantly less than that. So I think you will see a handful of additional closings in the fourth quarter, but not as many as we had in the fourth quarter last year.

 

Sales Progression

Will Slabaugh – Stephens: I wanted to ask you about the sales progression you saw month-to-month in the quarter since March. I think you just give us a little more color there. You felt like it was 100% weather driven, or where there other factors there improving month-to-month? And then on the back of that any commentary into June will be appreciated?

J. Clifford Hudson – Chairman, President and CEO: Well, one of the factors that would have an impact that is separate from weather that had an impact as the quarter progressed is the media. So the media was shifted in January, but the weighting of the media is stronger or greater as the year progresses. The (Lopez ad) is kind of (indiscernible) with the sun shine if there’s a greater opportunity for sales, people are moving around and May, versus March versus January they were allocating dollars to help drive the business during those months. So, part of it is more dollars being allocated in those months and part of it is the growing ad awareness. So, in a core market when we get increased advertising it’s brand awareness and the brand loyalty that the promotional elements can really help. Developing markets seems to help fairly quickly, but the new market there is so much less penetration that it took a few more months and more sustained better weather to really kind of take hold. So, I think in addition to the weather fees the increased awareness over time kind of a critical math to help the quarter progress, separate and apart from better weather. As it relates to getting you the insight on June, we do not intend it to, we don’t ordinarily do that the promotions that we’re running in June, we ran in May, we ran in May to have price (indiscernible) we continue to do that in June and we’re still using the Two Guys and we’re still using a lot more National Media. But beyond that we do not intend to give you information on June, we’ll do that when we talk about the quarter in a few months…

Stephen C. Vaughan – EVP and CFO: The other thing I would just add to that, Will, is that May of last year was our strongest month of the quarter, so that being our strongest month of this year was also a good indication that’s kind of that building momentum and our temporary level of this national media strategy is having a impact on the business.

Will Slabaugh – Stephens: On that national media, so like you’ve seen these results come in and as the waiting increases it seems like that’s definitely had a nice impact on your sales. Is there a potential for you to increase that further or do you think right now it’s a pretty good mix where you are today?

J. Clifford Hudson – Chairman, President and CEO: Well I think, well, there is an opportunity to do going forward is one of the benefits of this re-allocation; it is accurately described as shipped from local to national. But, it’s also accurately described as the larger national fund that will allow it to address developing and growing digital mediums, and so, and opportunities going forward will be utilization of that fund not at the expense of local dollars, but the expansion of the allocation for digital non-television means that can help us target customers on specific products and promotions and geographies and so on.

Will Slabaugh – Stephens: Just one quick follow-up on the refinancing. So, congrats on first of all on getting that completed, wondering if there is a potential for down that road of you guys to refi the remainder of that facility, kind of how you are viewing the two pieces of that right now.

Stephen C. Vaughan – EVP and CFO: Sorry, can you repeat that Will?

Will Slabaugh – Stephens: So, the facility now, refied $155 million of it, the remainder of that facility, if there is a potential to refi that as well or what your plan is there?

Stephen C. Vaughan – EVP and CFO: There is a (make) whole associated with the remainder of the balance that we owe and so it’s not economical to refinance that portion at this point in time.

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