CKR dedicated a big portion of its presentation at its annual meeting today to addressing the concerns communicated in Ramius LLC's letter to CEO Andrew Puzder. To recount, the letter called for the company to:
1.) Significantly reduce operating costs
2.) Shrink the capital spending plan to improve free cash flow
Mr. Puzder stated that before his tenure as CEO began in FY01, that the prior management had significantly reduced G&A expenses (through substantial headcount reductions) on two separate occasions as management bonuses at the time were tied to G&A cost reduction targets. In FY01, as CEO, he had to make further cuts in G&A spending, resulting in a level of spending in FY04 that could not sustain the brand. In FY04, the $107 million G&A spend amount was the lowest it has been since he has been CEO. At that level, he said the company was in survival mode and that such spending could not be maintained without deteriorating the brand.
In FY08, the company's G&A expense was $144 million. Of the $37 million increase off of FY04's low level, he attributed $11.3 million to stock compensation expense (not included in G&A prior to FY07), $2.2 million to Sarbanes-Oxley expense, $12.1 million to inflation, $9.5 million to supporting growth and $1.9 million to unusual charges. Without all of these expenses, which I recognize as costs of doing business today, Mr. Puzder said G&A expenses would not have increased.
He also addressed Ramius' suggestion to consolidate CKR's headquarters, saying that the company has good lease rates on all three of its locations and that although the Anaheim rate is the highest of all three, that relocating the 328 employees that work there would not be cost effective. He did not mention, however, how much money the company could save from less flying time in the Cessna Citation X (please refer to my posting from June 17 for more details about that).
On a positive note, management did slightly lower its capital expenditure plans (down $54 million over the next 3 years) and reduced its new unit growth goals for Hardee's. Despite this welcomed reduction to only 7 new company-owned Hardee's units planned for FY09 (down from 12), Mr. Puzder also said that management will not speed up this growth until the right level of returns are achieved. While I agree with that investment decision, I think an even better decision would be to not build any new Hardee's until the proper level of returns can be achieved. In response to Ramius' suggestion to significantly reduce capital spending, management justified the need for new unit growth for both Carl's and Hardee's, saying that a successful concept must continue to grow in order to maintain its market share.
Although Ramius' letter did not mention any concerns about management compensation, I would have liked to hear management talk about why it has been so overpaid while shareholders have lost money, but I guess that will have to be a story for another day.