Red Robin Gourmet Burgers Inc (RRGB) 2007 Q1 法說會逐字稿

Good day and welcome to the Red Robin first-quarter 2007 financial results conference call.

(Operator Instructions).

It is now my pleasure to turn the floor over to your host, Ms.

Katie Scherping, Chief Financial Officer of Red Robin.

Please go ahead, ma'am.

Thanks, Tom.

Before I get started, I need to remind everyone that part of today's discussion, particularly but not limited to our outlook for fiscal 2007, will include forward-looking statements.

These statements will include but not be limited to references to our earnings guidance, margins, new restaurant openings or NROs, trends, costs and administrative expenses and other expectations.

These statements are not guarantees of future performance.

And therefore, investors should not place undue reliance on them.

We refer all of you to our 10-K and our 10-Q filings with the SEC for a more detailed discussion of the risks that could impact our future operating results and financial condition.

I also want to inform our listeners that we will make some references to non-GAAP financial measures today during our call.

You will find supplemental data in our press release on Schedule 1, which reconciles our non-GAAP measures to our GAAP results.

Now, I would like to turn the call over to Denny Mullen, Chairman and Chief Executive Officer.

Denny?

Thanks to all of you for joining us today.

We also have Eric Houseman, our President and Chief Operating Officer with us.

Eric and I will provide an update regarding various business initiatives, while Katie will provide a financial review of the first quarter.

And she will also talk about our annual guidance for 2007.

Before I talk about the highlights of the first quarter, I want to briefly comment on the announcement we made today about the amendment to our bank credit facility.

As we outlined in the press release, we have a committed arrangement with a syndicate of banks led by Wachovia for $300 million consisting of a $150 million term loan and a $150 million revolving credit facility.

In addition, we have access to an additional $100 million at our request and lender participation, giving us a total of $400 million in accessible capital over the next five years along with two potential one-year extensions on the revolver for a total of up to seven years.

This new facility will replace our $200 million current facility.

We feel that this new bank credit facility will allow us a great degree of flexibility in funding our future growth plans, funding the acquisition of franchise restaurants, as well as giving us the ability to repurchase our stock if we choose to do so subject to Board approval.

We have also negotiated a lower pricing structure than that of our current facility.

We expect to finalize the documentation and close on this expanded facility in the next week or so.

We're very pleased with the substantial amendment to our credit facility, and we believe it reflects our bankers' confidence in our long-range plans.

The other update we included in our press release this afternoon is the status of our shareholder and derivative class-action lawsuits, which are further discussed in SEC filings.

After mediation, the parties to the purported class actions have signed memorandum of understanding providing for settlements to resolve the litigations, each subject to approval by the court.

While the Company and the individual defendants continue to believe that the actions were properly dismissed by the District Court, a decision was made to enter into these memorandum of understanding to avoid the burden, risk, and expense that would result from continued pursuit by plaintiffs of the appeals and the underlying claims of these lawsuits.

The proposed settlements are both covered by insurance.

We expect that the Andropolis settlement will be filed with the court prior to the end of May and that the proposed Whistler settlement will be filed in late May or early June.

Now let's talk briefly about the first quarter.

On a GAAP basis, EPS we earned $0.44 a share compared to $0.44 in the prior year.

Same-store sales decreased 0.5% as we face a difficult 4.8% positive comp comparison from the first quarter last year, which is actually our highest comparable period for all of 2007.

I will let Katie share more of the quarterly financial results with you in a few minutes.

But first, I would like to give you an update on where we are with some of our major initiatives we have been working on in 2007 -- our construction cost initiative, our national media advertising campaign, our NRO normalcy initiative, and lastly the status of our franchise acquisition.

From a development perspective, we opened nine restaurants in the first quarter and supported the opening of nine new franchise partner restaurants for a total of 18 new Red Robin Restaurants for the 16 week period.

We estimate that we have reduced construction costs by $150,000 per building for our 2007 units from the average cost of our early 2006 units which cost us around $2.5 million.

We do expect that some cost inflation this year will limit the actual savings realized on our 2007 class of units.

On April 16, we opened the first restaurant built with our new 5600 square foot design in Georgia, which we estimate will further reduce construction costs by another $150,000.

The new design has the same seating capacity as our current prototype.

Of the 24 to 27 Company restaurants that we will build in 2007, we plan to build about five more units with this new design or a total of six for 2007.

We have had very positive feedback from our team operating this restaurant, and we congratulate our design team for accomplishing this daunting task with flying colors.

We expect to be able to roll this new design out to about 75% or more of the units in our 2008 development pipeline.

As you can see from today's press release, our non-comp restaurant volumes declined in the first quarter from the first quarter last year.

But we did see a slight increase from the fourth-quarter 2006 non-comp sales volumes.

The good news is that our 2007 openings are actually doing quite well and we believe they are responding positively to the NRO normalcy initiatives we have recently implanted.

Although, we're still very early in the assessment of these results.

Eric will talk more about the NRO objectives in a few minutes.

As I have indicated on previous calls, we believe the lack of brand awareness in new markets is putting pressure on our NRO performance.

To help brand awareness, we launched our new national media advertising campaign in mid-April, which is being funded by both Company-owned and franchise restaurants contributing 1% of their sales to the national advertising fund.

We expect to expend approximately 11 to $11.5 million on the national advertising in 2007, primarily on national cable and to a lesser extent on the Internet.

We're still in the midst of our first cable TV flights, which will run through June 11.

We're primarily targeting family-oriented programs to showcase our fun atmosphere and our craveable gourmet hamburgers.

You will notice that our advertising is focused on branding and raising awareness about the Red Robin concept and our gourmet burger offerings rather than specific promotions or discounts.

So far, we believe our spots have been well-received.

And we are optimistic it will increase brand awareness and help drive system-wide restaurant sales volume, particularly in markets where we lack brand awareness.

Keep in mind that building brand awareness will take time, and we do not think we can turn the tide overnight in locations where we have not had a long operating history.

Although it is very early in this campaign, we are encouraged by the recent positive traffic trends and attribute those results to this campaign as well as our continued focus on execution within our four walls to deliver a great Red Robin guest experience.

Now, let me give you an update on where we are with the California franchise acquisition.

Today, we signed the asset purchase agreement to acquire the restaurants and territory owned by Top Robin Ventures and Morite of California.

We still intend to close the acquisition by the end of the second quarter.

Based on the numbers provided by our franchise partner, these 17 units had sales of 56.3 million in revenue in 2006.

As we have previously stated, we expect that this transaction will be accretive to earnings but we will not include these expectations in our financial guidance until it actually closes.

At which time, we plan to provide updated guidance for the 2007 fiscal year.

In addition to significant territory in California, this acquisition consists of 17 restaurants as well as an additional 18th restaurant currently under construction in Fresno that will be part of the transaction.

The 47 million -- 47.5 million purchase price reflects consideration for only the existing 17 restaurants.

We will pay the seller a consideration for all out-of-pocket construction costs related to the new restaurant, which is expected to open in July.

There is also the potential for up to an additional 3 million purchase price earnout to be paid to the sellers assuming the 18 acquired restaurants achieve certain 2007 sales targets.

As a show of support for our franchise partner expansion plans, we're pleased to announce that we have recently granted rights to five of our successful franchise partners to develop an additional 23 new restaurants in four to five years -- in the next four to five years.

We're very encouraged to see our franchise partners commit additional capital to Red Robin and consider it a reflection of the brand's continued growth and our franchise partners' enthusiasm for the initiatives that we have put in place.

We expect additional franchise restaurants will be developed in markets in seven states by experienced operators, who have achieved great success with our concept.

And we're pleased to be working closely with them in their development efforts.

During the quarter, we were pleased to announce that our CFO, Katie Scherping, and Chief Legal Officer and Secretary, Annita Menogan, were both named Senior Vice Presidents of our Company.

They are both exemplary leaders who have strengthened our executive team by providing critical financial and legal oversight.

And we're delighted to honor them with these promotions.

Also, I want to acknowledge Eric Houseman, who was recognized by the Denver Business Journal as one of the 40 outstanding professionals under the age of 40 for their business success and community contributions.

Finally, we recently welcomed Susan Lintonsmith to the Red Robin family as Senior Vice President and Chief Marketing Officer.

Susan is a seasoned marketing executive with 20 years experience building world-class brands including WhiteWave Foods, Horizon Organic brand a $400 million business, Western Union a $4 billion leader in the consumer to consumer money transactions.

And she also worked for The Coca-Cola Company and Pizza Hut in various marketing positions.

Susan will be responsible for leading the development and execution of our brand and marketing strategies and activities including national advertising and promotions, franchise marketing, media buying and public relations.

She will also manage our internal marketing team and several outside agencies.

With that, I'd like to turn the call over to Eric.

Good afternoon, all.

In the first quarter of 2007, our comp store sales were down 0.5% which consisted of a 3.1% increase in price and mix, offset by a 3.6% decline in guest counts.

For comparison purposes, we posted a 4.8% comp gain in the first quarter of 2006, which included 0.8% increase from price and mix and 4.1% increase in guest count.

This quarter was one of our most challenging comparisons for the year, and same-store sales comparisons do get a bit easier through the next three quarters.

You will recall that a restaurant enters the comparable base five full quarters after it opens.

Our first quarter had 151 Company-owned comparable restaurants out of the 216 total owned Company restaurants.

The 13th acquired franchise restaurants in Washington are not currently included in the comp base but they will be included beginning in the third quarter of 2007.

Average weekly sales for the 151 restaurants in the comparable base was 63,169 during the first quarter of 2007 compared to $63,491 for the same units last year.

Average weekly sales for the 52 non-comparable restaurants was $53,976 during the first quarter of this year compared to $56,916 for the 42 non-comparable restaurants in the first quarter last year.

Approximately 63% of our operating weeks from the non-comp restaurants in the first quarter of this year were from units in new markets.

This is compared to 56% a year ago.

Our focus on the performance of new restaurants has led to the development of a number of programs designed to improve our selection and retention of superior talent and to normalize new restaurant performance faster, which means maintaining as much as the honeymoon sales as possible, while ensuring a great Red Robin guest experience as our profitability normalizes quicker.

Our leadership selection process, which was revamped late last year, has and will continue to improve our selection and retention of great people that can thrive and prosper in the Red Robin culture.

Our improved training program, which was recently implemented with our Q1 2007 NROs, is focused on developing and measuring the proficiencies of our hourly team members to not only increase their productivity but to normalize margins sooner.

In support of these initiatives, we have raised our average pre-opening cost per restaurant by about $25,000 to $275,000, which does include cash rent expense.

In addition, we are also investing some additional resources for the first 45 days a new restaurant is open, which will add some additional expense during the honeymoon phase.

But we believe this additional investment will help in retaining more of our opening week sales as well as reduce the time it takes for an NRO to normalize its controllable costs.

We believe that by adding more trainers for each opening, we can ensure that our new team members are given the tools necessary to perform well and that they in turn can offer great Red Robin guest experience from the very first day.

As Denny referenced, we were pleased with our 2007 Q1 new restaurant opening performance and we're seeing some positive traction from our NRO initiatives.

We are also seeing recent positive traction from our national advertising campaign as well.

Although both initiatives are in the early stages of their influence, we're encouraged by the results we've seen so far.

However, it is too early to quantify the impact from each of these initiatives today.

We do have some anecdotal evidence that we can share but we believe early indications that we are on the right track.

Many of our guests have spoken positively about the commercials that we've seen in our restaurants and team members and have referenced our advertising in many of their guest comment cards.

For example, in Mt.

Juliet, Tennessee, a fourth-quarter 2006 opening for us, we tracked over 600 guest comment cards.

Of those 600 guest comment cards, 65% of the responses referenced being not only a first-time guest but cited the television commercials as a key driver for their first visit.

While this of course is very, very limited data, we liked the initial results we were seeing.

And we are excited about the buzz that the advertising campaign is creating within our restaurants.

Turning to food, we recently launched our new menu in the latter part of April.

This year, we have four strategies when it comes to our menu positioning with our overarching theme of remaining America's gourmet burger experts -- one, enhance the elite burger category, our knife and forkers; two, enhance our bottomless value attributes for food and beverage; three, continue to enhance our quality cues and attributes; and lastly, improve profit without necessarily increasing overall price through the use of menu engineering and item selection.

Our knife and forker category now includes a new chicken bruschetta burger and a new pulled pork burger that we are very proud of.

We've also enhanced this category by adding our own signature garlic parmesan steak fries to all of our knife and forkers.

Additionally, back by popular demand, our A1 Peppercorn and Pot Roast Burgers.

The sales of both of these old favorites have been very well received by our guests, and both burgers are now within the top 10 in terms of sales and guest preference.

We've also made some minor changes to the entree selection by adding an adult chicken mac and cheese as well as a higher quality shrimp entree.

Rounding out the salad category is our New Apple Harvest Chicken Salad that has tested very, very well and is being pictured on the new menu.

For our spring menu promotion, we're featuring a blackened chicken burger and of course Adrianna's Spicy Asian Burger which was created by nine-year-old kid chef, Adrianna Montgomery, who won our Next Gourmet Burger Kids Contest this last year.

Her recipe is featured along with the top 50 kid burger recipes in a cookbook, which has just been unveiled in our restaurants last week.

This cookbook will be available while supplies last in all of the Red Robin restaurants with the profits from the sale of the cookbook benefiting the National Center for Missing and Exploited Children.

In fact, tomorrow, May 25, is National Missing Children's Day.

In honor of this day and to promote child safety, we will be holding a press conference here in Denver to announce that Red Robin is donating one cookbook to each public library in Colorado.

We will also donate a cookbook to each public library in Washington state, where Red Robin began nearly 38 years ago.

In the past few months, I think we've done a very decent job identifying and tackling the issues we face from a brand development and operational standpoint in an effort to drive long-term performance.

We are extremely passionate about this business and continue to instill this excitement in both our team members and in our guests.

Above all, we know that when we uphold the four cornerstones of our Company -- that is our values, our people, our burgers, and our guests' gift of time, i.e.

throughput -- we can create both brand equity for our Company and shareholder value for our investors.

With that, I think I will turn the call over to Katie, so she can review our financial results in further detail.

Now, let's talk about the results for the first quarter of 2007 which was a 16 week period.

Total revenues for the first quarter of 2007, which consist of restaurant sales and franchise royalties, grew 24.5% to $212.3 million from $170.5 million last year.

Restaurant sales grew 25% to 207.1 million from $165.7 million and consisted of $149.8 million in sales from our 151 comp restaurants, 17 million from the 13 acquired restaurants in Washington and $40.3 million in sales from our 52 non-comp restaurants.

Since Eric already covered our comparable restaurant sales metrics, I won't discuss those specifically.

But please note that the acquired Washington restaurants will not be included in our comp store sales metrics until the third quarter of 2007.

Franchise royalties and fees increased 8.8% in the first quarter to 5.2 million and exclude the royalty contributions from the 13 Washington restaurants from which we recognize $594,000 in royalty revenue in the first quarter last year.

The 95 comp restaurants in the US franchise system reported a 1.9% decrease in same-store sales, while the 18 comp restaurants in the Canadian franchise system reported a 3.3% increase in same-store sales for the first quarter.

Our restaurant level operating profit margin of 20.1% was 80 basis points lower than our 20.9% results for the prior year's first quarter.

The variance is primarily attributed to a 30 basis point decrease in cost of sales, a 40 basis point decrease in labor costs, offset by a 110 basis point increase in operating expenses and a 30 basis point increase in occupancy costs.

Our cost of sales decreased by 30 basis points to 22.7% this year from 23% of restaurant revenue last year.

The improvement here was due to several factors, such as more favorable hamburger, poultry, and cheese costs compared to the year-ago quarter.

We recently took a 0.9% price increase in conjunction with our new menu which we rolled out in late April.

However, we understand that there may be some near-term threat to our food cost, and we will continue to closely monitor those threats in conjunction with our future pricing plans.

Our labor costs were down 40 basis points to 34.3% of restaurant revenues.

As we expected, we did face the impact of higher minimum wage rates year-over-year.

As Eric mentioned earlier, our wages in our new unit openings are running higher than prior years as well.

The primary offset to higher wages was a reduction in our benefits and bonus costs which contributed about 160 basis point reduction to our labor costs this quarter.

We saw reductions in our restaurant bonuses of about 70 basis points year-over-year, group health insurance cost reduction of about 30 basis points which is primarily a reflection of several high-cost claims in the first quarter of last year, as well as reductions in our workers' compensation insurance costs of about 60 basis points.

We believe the workers' comp cost reduction is a result of a number of factors.

But, in particular, the success we have had in proactively dealing with our claims and raising the awareness of safety in our restaurants which are resulting in fewer workers' comp claims in general and we're seeing reported claims get resolved more quickly and for less money than was our previous experience.

We also resolved the number of older workers' comp claims, particularly in California, for less money than was originally projected.

And we do believe we will continue to see the benefit from reduced workers' comp insurance costs as a result of the implementation of these programs of about 8 to 10 basis points for the rest of the year.

The 110 basis point increase in our other operating costs to 16.4% of restaurant revenue this quarter compared to 15.3% a year ago was primarily the result of higher supply costs, higher services repairs and maintenance costs, higher utilities because of the harsher winter weather this year and the contribution to the national advertising fund which began in March.

Remember, for 2007, the incremental costs of our national advertising fund contribution will be about 0.5% of revenue and increase other operating costs in 2007 beginning in March.

The remaining 0.5% will be a reallocation of our historical marketing spending.

Occupancy costs increased 30 basis points to 6.4% of restaurant revenue this quarter compared to 6.1% a year ago.

Lower average unit volumes at our newer locations combined with the higher average rent expense from the acquired Washington restaurants added to our portfolio in the second half of 2006 accounted for the increase year-over-year.

Depreciation and amortization increased by 50 basis points to 5.8% of total revenue from 5.3% a year ago, primarily as a result of the intangible asset amortization related to the Washington acquisition.

General and administrative expenses of 18.9 million were 40 basis points lower than last year at 8.9% versus 9.3% of total revenue.

The primary decrease is attributed to lower administrative bonuses and a 30 basis point decline in the stock compensation expense as a percentage of revenue year-over-year.

We are expecting about 20 to 30 basis points of leverage in G&A for the full year this year.

Our pre-opening expense in the first quarter 2007 was $2.5 million compared to $2.2 million last year, actually down 10 basis points on a percentage basis.

Our pre-opening costs typically represent costs incurred approximately six weeks prior to restaurant opening with the majority of the costs incurred in the final two weeks.

We opened nine restaurants in the first quarter last year and nine the first quarter this year.

The first-quarter 2007 pre-opening expense included 1.9 million of costs incurred for the nine restaurants we opened in the first quarter this year and about 600,000 of pre-opening costs incurred in the first quarter this year for restaurants we have opened or will open in the second quarter of this year.

As Eric said, we are now budgeting $275,000 per unit, which is up 25,000 from last year, with an extra emphasis on training and making sure our NROs start strong and stay strong.

Net interest expense rose to $2.3 million from $1.1 million last year.

Our interest expense increase reflected -- increase reflects increased borrowings to fund both our growth in the Washington acquisition.

Our effective tax rate for the quarter was 32% compared to 34.2% in the first quarter last year.

We continue to expect the full-year 2007 effective tax rate to be approximately 32%.

Net income for the first quarter was 7.5 million or $0.44 per diluted share compared to net income of $7.4 million or $0.44 per diluted share last year.

The balance outstanding under our current line of credit facility at the end of the quarter was $105 million.

As Denny spoke about earlier, we are working to close an amendment to our current bank facility that will replace our current facility and increase the availability for our future capital needs in more preferable terms.

We plan to use this amended facility to fund the California acquisition when it closes.

As we said on our last call, we no longer provide quarterly revenue, quarterly comparable restaurant sales and quarterly EPS guidance.

We will however provide guidance for these metrics on an annual basis which we may update throughout the year as circumstances and visibility changes.

We will continue to provide quarterly unit development expectations for both Company-owned units as well as franchise units.

Keep in mind that $250,000 of pre-tax earnings moves our EPS by about a penny.

Having said that, I have shared with you today some of the trends we expect to see throughout the year and we will continue to update you on our progress in our quarterly earnings announcements where we will provide updates to our annual expectations as we deem appropriate.

We also plan to update fiscal 2007 guidance when we announced the closing of the California acquisition.

For the 52 week fiscal 2007, we are still expecting total revenue of between 715 and $735 million, comparable restaurant sales of 2 to 3.5% and net income of between $1.75 and $1.85 per diluted share on a GAAP basis.

Our assumptions provide for an improvement in comparable restaurant sales concentrated in the last half of 2007 as comparisons gets easier throughout the year and expected guest counts benefit from the advertising campaign.

Based on the recent trends we have seen, we remain confident in our projections.

Our full-year 2006 -- our full-year EPS guidance includes the impact of stock compensation expense, which we're still estimating to be between $0.28 and $0.30 per diluted share as well as the cost of our national advertising campaign which is impacting our margins by an incremental 50 basis points from March forward to fund our portion of the 1% contribution to the national advertising fund.

As I mentioned earlier, we took a price increase early in the second quarter of about 0.9%, which will help offset some of the cost threats to our margins.

We reiterate our commitment to maintaining our restaurant margins over the long-term at 20% to 22% and to gain G&A leverage over time.

In terms of unit development, we still expect to open 24 to 27 new Company-owned restaurants and about 15 to 17 new franchise restaurants by the end of the year.

We will open eight to nine new units in the second quarter of 2007, of which four have already opened.

We have nine restaurants currently under construction.

And additionally, we still expect that the operating weeks from new units opened in new markets will represent about 60% of our non-comparable weeks in 2007.

We expect our franchise partners to open one to two units in the second quarter as well, of which one has already opened.

Taking into account the success of our cost reduction initiatives in our new building, we have updated our CapEx spending assumptions for the full year of 2007.

Our total CapEx should be around 75 to 85 million, of which roughly 12 to 15% is for ongoing maintenance.

Now, with that, I will turn the call back over to Denny.

We realize that 2007 will be a year of continued challenges for both Red Robin and the restaurant industry as a whole.

Our plans for the balance of the rest of the year are very clear.

As Eric said, we have initiatives which are designed to maximize the performance of all restaurants, particularly newer units and thereby improve our overall performance.

And we have taken the right long-term steps to enhance brand awareness.

In addition, we are being disciplined in our allocation of capital to where we can realize the best returns.

Our two franchise acquisitions offer excellent examples of the opportunities to maximize the returns for our shareholders.

And of course, we're going to stay focused on serving high-quality gourmet burgers and craveable menu items that have made us the premiere destination for America's families.

With that, operator, we are ready for your questions.

(Operator Instructions).

John Glass, CIBC World Markets.

Katie, on the labor line, can you talk about how the bonuses trailed off last year?

In other words, were you accruing bonuses in every quarter or will that year-over-year benefit you got this quarter fade out in subsequent quarters?

It will fade out because we had a 4.8% comp same-store sales increase first quarter last year, which generated a pretty high bonus compensation last year first quarter.

And this year, we didn't see that with a negative 0.5 obviously.

Did you pay any quarterly bonuses this quarter?

This quarter, yes.

There were a few restaurants that qualified, sure.

Okay and there were some bonus paid in the second half of last year as well?

Yes.

Definitely.

It's just -- year-over-year it dropped.

Then, you've commented about positive traffic trends recently since the advertising hit.

So could you just characterize it?

Does that mean traffic is positive or it's less negative than it used to be?

The trends are positive, John.

Positive and absolute.

Yes.

And then, since, Denny, you broached the topic of the '08 development plans with 75% of the units in this new prototype, do you have any more comments on how many units you might open in '08?

Not at this time.

We need to focus on that as we move into the June - July time frame.

So we'll probably -- when we close the Top Robin acquisition, then give changing guidance there, we'll be more specific on the '08 plan.

Nicole Miller, Piper Jaffray.

I just wanted to kind of drill in on the impact of the TV advertising.

I know it's very hard to sort of sort out the comp list.

But if we look at traffic from down 3.6 in the first quarter to positive in the second quarter, is it fair to make the assumption that some of that is due to the TV advertising?

Well first of all, we weren't down 3.6 -- in guest counts you mean?

Yes, Q1.

Yes, it's fair to assume that it's due -- a lot due to the television advertising and our operating initiatives.

And can you help us understand was there a certain comp list either by region that you saw a difference?

Can you talk about your regions?

And then second, what was the lift versus an existing market where you were assumedly doing better versus the struggling development developing markets?

Did you see more of accomplish there from the TV advertising?

First of all, we don't break down and have historically not broken down by region.

It's way too early to do that.

Even if it was appropriate, it's too early to break down now.

And as far as between comps and non-comps after four weeks or regionals after four weeks, it's just way too early.

Okay, fair enough.

And when is the next TV campaign and will you be using the same commercials?

Well, this one doesn't end until -- the last week of this one is on schedule the week of June 4.

And then, we are off until August 13.

And we will be using the same series of commercials for the second flight also.

Okay, great.

And you mentioned the Central California potential acquisition is on track.

Can you talk to us about the performance of those units?

I know you had -- I believe you had said they are 11 years old on average and they were higher AUVs than the Company-owned base and comping positive -- is comping positive in Central California still the case?

They did $56.3 million last year in calls.

And for 17 units, that's an average of 3.3 which is right in with our comp store base.

And I don't think we've given comps for them because we are hesitant to do that.

We don't know how they measure their comp, so we're just going to hold off on commenting on their comps.

And last quarter, Katie, you had given us -- we had talked about the NROs falling off on average I believe if I have this -- if I don't have this right, correct me -- but to 80% on average of a mature volume.

And then, at the end of the fourth quarter on the fourth-quarter call, they were around 84%.

Can we get an update on that group?

Well, keep in mind, that our average comp AUV went down as well -- or went up, sorry.

So you are going to see that delta shift a little bit.

So, that's a little bit misleading.

But I can give you the numbers.

Our total NRO AUV for the first quarter was 563,976, which is about 85.5% overall of our comp units of 63,169.

As a percentage, it's 85.5.

Andy Barish, Banc of America Securities.

I guess I'm a little confused if you've got 3 points in price and traffic is positive, why are these comp contributions going to be concentrated in the back half of the year?

What's expected to change from today I guess?

(multiple speakers) I guess I don't really understand your question.

Our comps are positive in this quarter as we just reported.

No, in the second quarter.

Television campaign just started in the second quarter the comps we expect to build through the second, third and fourth quarter to meet our target that we have given for the year.

Right, but you just said a month into the campaign, your traffic is positive and you have 3 points of price, so --

We just rolled off 1.5 point of price also.

We took 1.5 points off and then we added only 0.9.

So we have about 2.5% we're carrying on price.

I will follow up with you on that.

On the D&A, does that continue to kind of push in the high fives with the franchise acquisitions in there and I guess the new slate for the back half of the year?

Yes, it probably will.

We haven't given any specific guidance on the new acquisition and how that D&A will impact us.

We will have to reevaluate that as we get more clarity on what our intangible asset is that we will book out on that acquisition.

So that probably will be higher, continuing on through the rest of the year.

And then, we will probably add to that a bit with the new acquisition as well.

Matt DiFrisco, Thomas Weisel Partners.

I guess to just be more specific on -- along Andy's questioning there, the second half, in the report today or in the release, you say 2% to 3.5% approximately comp guidance.

And then you say a comment after that expected to be concentrated in the second half of fiscal year.

That would presume then to get to that average that one would read into that that you're going to be north of that range in the back half of the year.

Yet, your commentary right now says that 2Q is around 2.5 or better.

I think the operative word there is concentrated in the back half of the year.

And then, as far as looking at the acquisition, are there any stores that are under lease for 2008 from the acquisition to be opened -- property under lease that's not constructed yet?

We have one -- on the [TRV] acquisition?

No, (multiple speakers) the California acquisition.

No, not in 2008.

The Fresno store is under construction and it opens in July of 2007.

So, you didn't inherit any ground with no building yet begun?

No, we did not.

Then, can you give us some insight into today how many sites do you have secured for 2008?

No, we'll do that when we give the updated guidance for 2008 later.

And then Katie, can you tell us what is available right now on current share authorization repurchase?

We haven't gotten any approvals from our Board yet.

We just baked or put this into our new facility to give us some flexibility if we choose to do that.

So, you do not have any standing authorization?

No, we do not.

Can you give us what the 144 number was in G&A -- I'm sorry, the 123, FASB 123 in the G&A number?

This was $0.07 in the quarter.

I meant the dollar number.

I can get it off-line from you.

Then, last question, the prototype, am I mistaken but it says -- I think you said the new prototype, you say it's 6300 square feet.

I was under the impression that was going to be a little smaller.

No, 5600 square feet is the new prototype.

The old -- so-called old prototype is 63.

6350, yes.

Right.

And the Georgia store, I think it says -- they call it a new store and it's 6300 -- or a new prototype and it's 6300 square feet.

(multiple speakers) I think what you are referring to might be the press releases.

The press release didn't have the updated details on it.

It really is the 5600 square foot prototype.

Okay, so the Georgia store that is the new prototype is 5600.

Correct.

Yes.

Yes.

Jeff Omohundro, Wachovia.

Just a follow-up on the new prototype.

The 5600 versus the 6300 with the same seating, where exactly are you saving the square footage?

You know, Jeff, we're saving quite a bit in the heart of the house, in the kitchen, which is where the majority of the savings is coming from and some better configuration in table alignments in the front of the house and a slightly smaller lobby.

But the majority is in the prep in the kitchen.

But, in terms of the seating configuration, is there much difference I mean that the customer would notice?

Not that the guests would notice.

It actually gets us a little closer to some better utilization with some more two tops.

And then also on this stock buyback, is it -- when you think about your utilization of free cash and your borrowing capacity, is it the plan to incorporate share repurchase?

We have no plans at this time.

We just wanted to incorporate the ability to do that in the new credit facility, which we didn't have that ability in our existing facility.

As Katie said, there's no authorization at this time to do anything.

And then finally, on this litigation and the proposed settlements, where do you stand in terms of -- does this clean up most of the significant items?

Are there other overhangs that we should be aware of?

That cleans up the derivatives and class actions connected to the events of August of '05.

The SEC investigations that we have reported are still underway and we have not heard anything from the SEC on that.

Joe Buckley, Bear Stearns.

Just a couple of questions.

On the food costs, two questions I guess.

On the last call, you mentioned some produce pressure possible in the first quarter.

Did you realize that?

The food costs actually came in pretty good it looked like.

Yes, we didn't really see anything, Joe.

Okay and then you referred to some potential food cost issues coming up.

Could you maybe just run through some of your major commodity items and where you stand on them?

Sure, Joe, right now, we are under contract.

Our current poultry price is actually below -- up through today below last year.

However, we expect that to rise slightly.

We're contracted on fries, bread, seafood, cheese, and bacon.

However, we buy hamburger on the spot market and futures on oil.

So, we expect there's a lot of talk out there with corn and that kind of stuff.

Do your poultry contracts runoff?

Is that what you are saying?

I'm not sure what your message was on the poultry.

Currently, we are not under -- we are under contract with poultry.

But, that could rise slightly and we expect it to the latter half of this year.

And then, just a question on the new restaurant.

Well, the new markets -- as you go back a couple of quarters in your third-quarter call, it sounded like your volumes in those new markets were continuing to trail off pretty significantly.

And I think you had a bunch of stores enter the comp base that sort of took the comp number down.

Tell us what's been going on in those markets as more stores are coming into the comp base.

Are you seeing some improvement or stabilization there or are those volumes still declining?

Joe, we're still seeing pressure from new stores as they come into the comp base.

We had four new units come into the comp base this first quarter and they did put a drag on our comps averaging quarter-to-quarter and we did see that.

And we're going to continue to see that.

Next quarter, we will see those 11 stores from the fourth quarter of '05 come into the comp base, nine of which were in new markets.

So, those are still coming in at a much lower AUV.

And we will see pressure on that comp store AUV as we add those new units in in second quarter as well.

Those units -- take those nine, are they still seeing volumes decline sequentially?

Or have they stabilized and started to turn back up yet?

Specifically on those nine, they are going to come in as our traditional first quarter into the comp base.

They will be negative comp year-over-year.

But, as far as where they've trended from fourth quarter and first quarter, I can't comment on that.

I don't have that information right at my fingertips.

It's tough to comment on that because of seasonality when you're not comparing quarter-to-quarter on year-to-year.

Also, to reflect on a macro-basis, that's the reason why we started the national media campaign is to build brand awareness in those new markets where we didn't have brand awareness in the past.

So we would expect the tide to lift all boats.

Ashley Woodruff, Friedman, Billings, Ramsey.

Another question on advertising.

I believe that you had most of your weight towards the beginning of those flights.

I believe that's where you had most of the -- I guess the largest waiting.

Did you see a strong increase in sales sort of right when you went on TV and when you had the highest weights?

Or have you really seen it kind of improve gradually since you started advertising?

This is Denny.

The average weights weren't that much different at the start.

We just ran like two solid weeks before we started rotating a week on and a week off.

So there's no real trend of loading up.

We were never below -- we were never above 100 gross rating points I don't think.

And we probably stayed no lower than 50.

And it would've been with 15 seconds versus 30 would be the only mix change.

And in terms of specifics within that four weeks, we're just not going to quantify that at this time.

Based on your comments that things should improve in the second half, you probably have seen kind of a gradual (multiple speakers)?

Well, no, and based on the fact that I've said we've seen positive trends, yes since the quarter ended.

Then, you know there's 11 stores that will come into the comp base in the second quarter.

Do you have a sense of how much they will negatively impact same-store sales trends?

We're looking at about maybe 1%.

But, again, Denny's comment back to national advertising, it is going to be hard to gauge that.

But based on the pre-media, we think it will maybe have about a 1% drag.

And then, just lastly, on 2008, you said you're still kind of evaluating what your growth plans will be.

I guess what do you need to see in these newer markets based on advertising?

What types of sales trends or returns do you need to see this year that give you greater confidence as you look out to expand again in '08?

Well, we're not going to share the decisions we're going to make in terms of the Board making their ultimate decision on our '08 plans.

We have Board meetings coming up and we will be discussing that.

But it's not only the we need to see the lift and continued lift from media.

We need to see the operation in Georgia continue to be successful which it will be.

We have a number of -- we have a number of stores that when we did the slowdown, we pushed into '08.

And Todd and his team are monitoring those very closely.

And as we get closer and closer to those decision points, we will certainly move forward.

But we expect that will be in the June-July time frame.

Mike Smith, Oppenheimer.

I wonder if you could give me the weightings by quarter of how you anticipate the Company stores opening this year.

We said we would have -- we did nine the first quarter.

We said eight to nine second quarter.

And then, we'll do 24 to 27 so you can figure out the back half will be pretty equally distributed between Q3 and Q4.

Of those 24 to 27, how many will be in new markets?

About 60% of our operating weeks.

And since we're front-end loaded, more in the first half of the year will be in new markets than the back half of the year.

But we'll still have about 60% of our operating weeks coming from new markets this year.

And what was your CapEx in the first quarter?

Hang on for just a second and I will look at my cash flow statement and I will tell you.

I think it was about 24 million but I'm trying to remember.

It's in the press release.

Let me get it for you real quick.

Do you have another one while she's looking that up?

It was about 28 million.

That's right; I saw it in the Q.

No, that's okay; thanks.

Steven Rees, JPMorgan.

Can you talk about the variance of restaurant level margins kind of around that 20 to 21% average?

I think you said that the planned acquisition was within that range.

But, can you provide some color on how the restaurant level margins of the new restaurants are coming in?

Well, the new restaurants, are you speaking about first quarter 2007 or what?

The non-comparable restaurants.

Well, the non-comparable actually the first year that they are opened are much lower obviously than a comp restaurant is.

They kind of ramp up over time with historically what's been about a three-year ramp to get to normalization, which is the whole premise behind trying to normalize these sooner.

We are in about a 12 to 15% range the first year, mid-teens the second year and 20 plus in the third year.

So, that's how we ramp them historically.

And are they still coming in the 12 to 15% range now?

Eric talked about the additional labor pressure because we're adding more trainers early on in the 2007 class that we've opened this first quarter.

So they are below that even hopefully which will be temporary.

And then can you just talk about your lunch versus your dinner business, how those businesses are trending and any change there since you've added the advertising?

No, there's no change.

It's still about 50-50.

50-50.

Conrad Lyon, FTN Midwest.

I just want to talk a little bit about your same-store sales.

Can you remind us what type of same-store sales number that you need to get before you start to see some leverage, perhaps a range?

About 2%.

About 2%.

Okay, great, thanks.

Let me shift over towards new stores and hiring managers.

Have you found it any easier to get the type of manager that you need to maintain your level of service in new markets?

Since what time period?

Since when media started?

Yes, just over the last -- call it the last three months.

I mean within that time frame.

You know, that's pretty limited.

We have -- we strive to have all of our new restaurants successfully staffed 10 to 12 months out.

And so we're working on Q1 of '08 and beyond right now.

Or said differently though, do you find the labor -- how do you find the quality of the labor force these days?

We're -- we've had no issues.

I shouldn't say we have no issues.

It's very tough because the people were out there.

It's probably the toughest thing we do but we've never had to delay an opening because we didn't have enough of the right talent.

Last question, menu focused, what items on the menu would you say are your bestsellers these days?

Well, it's still the cheeseburger is still king.

And the barbecue which also happens to be focused on the media commercial.

Dan Geiman, McAdams, Wright, Ragen.

You took the price increase early in the second quarter.

At this point, do you anticipate any additional increases during the year?

And also, can you remind us when you roll-off of your pricing taken over the past year?

I will answer the second question first for you, Dan.

Here's how our pricing laid out last year.

We had 1.5% in April, 1.5% in October, about a 0.5% in December.

So we were carrying about 3.5 into this year.

We realized about 3.1 of that in the first quarter and then we rolled off -- obviously had rolled off that 1.5 in April but we replaced that with the 0.9%.

And to your question on pricing and going forward, we have historically and continue to say we want to protect our margin -- restaurant level operating margin in the 20 to 22% range.

As Katie said in her text, we will monitor these threats as we go forward.

And, we will take those into consideration with any future pricing plans.

We think demographically with our target market at 70,000 in income and above.

And our average unit check as low as it is comparatively, we do think we have pricing power.

But I think you who have followed us from some time know that we are very conservative about taking pricing.

Great.

And also, can you quantify the impact of weather you had on your traffic counts during the first quarter?

We don't quantify it.

It was ugly.

It was -- you've heard it from everybody else.

We are one of the last to report.

Colorado got beat up, the worst it's been in many, many years.

But, we've got to deal with that.

So, hopefully, it won't snow as much next year.

Let's hope.

All right, thanks.

Barry Stouffer, BB&T Capital Markets.

1 question, when you say recent traffic trends are positive, what do you mean by recent?

Are you referring to since the quarter ended or one week, two weeks?

And what kind of traffic are you comparing against last year in that time frame?

Since the quarter ended and comparing it to last year.

And what would the comparison have been last year quarter to date as far as traffic is concerned?

Barry, we don't have that information.

We don't comment month-to-month.

Our second-quarter '06 guest count was 0.9.

Nicole Miller, Piper Jaffray.

I just wanted to go back to the acquired units.

Eric, you had mentioned I think it's the Washington stores coming in in the third quarter.

What impact do you think that will have to same-store sales?

Well, they have average unit volumes that are well above our comp store sales.

They had 82,514 AUV in the first quarter of 2007.

But, we're not going to break out the acquired just like we don't break out regions.

Yes, going forward, we will just blend them into the comp base starting in Q3.

Okay.

So if I'm looking at this correctly, I mean it's an obvious positive impact to the average weekly sales.

But I assume these are mature restaurants that might not be comping -- they might not be high comp restaurants.

Yes, they are mature restaurants; that's right.

Then, on the NROs -- going back to that, the 85.5% -- I just want to make sure I'm interpreting something correctly.

If I look at the class of just the first quarter of '07 and you made the commentary that training initiatives had a positive impact on those openings.

First of all, those openings I assumed are -- they are considered in that NRO 85% calculation, right?

Correct, yes, they are.

They are.

And so did they open better and that contributed to that number going up or was it like the class of '06 that increased or both?

The comp AUV went up.

So the comparable AUV on NROs from last quarter was 53,557.

This quarter is 53,976.

So, actually it went up from Q4 to Q1 in the NRO AUV.

But the comp units went from 6141 to 63,169.

You asked (multiple speakers) --

You have to take both drivers into account for the percentage.

We are pleased with the '07 openings.

They are above our projections.

When you look at the comp and the non-comp AUV, you have to remember that you have two things that are two levers.

You have restaurants that are moving in -- obviously the new restaurants moving in.

But you also have restaurants that have been in that are moving out that can affect then the other side of that equation.

So, it's only a snapshot in time and there's a lot of moving pieces.

So really, we don't look at that as a barometer.

That's actually very helpful.

And then, just one final question.

And I'm sorry if I'm going in the wrong direction.

But, I mean I guess I can make the assumption then that these first-quarter '07 openings that they didn't fall as low as let's call it like the class of '06.

But on average, you probably want below 70 to some degree.

But on average, you're at 70.

It's 80% of mature volumes.

It sounds like the stores that opened in '07 opened stronger and stayed stronger or didn't fall as much because you do have that typical honeymoon.

Am I thinking about that correctly?

Well, we don't -- we don't have even -- they've only been opened at very best for a number of periods now.

So even some of them haven't even been opened six weeks or at least from the quarter.

So, it's too -- still too early to tell but we are pleased with their opening volumes.

Fair enough, thanks.

Just keep in mind, just to follow up on that '07 openings, that was pre the national media campaign.

Matt DiFrisco, Thomas Weisel Partners.

Actually, all my questions have been answered.

Thanks.

Ashley Woodroof, Friedman, Billings, Ramsey.

I had just a question on labor.

I think before you were saying that labor costs should be up about 80 to 85 basis points this year because of the pressures of the minimum wage.

And particularly, it's hit minimum wage in some of the states you operate in.

What are your thoughts on that now, given the first quarter where you actually got leverage on that line?

Well, the leverage primarily came from some of those benefit cost reductions.

So, 160 basis points came from lower bonuses and lower benefit costs.

So, you offset that to net 110 basis points rise from the cost of labor, so you've got minimum wage in there and you've also got some of the pressure from the new -- the additional labor for training in those new restaurants that we talked about.

So, there was about 120 basis points of pressure offset by 160 basis points of benefit to net that 40 basis points out in the positive category.

So, taking those two into account, we did see the impact to minimum wage in the first quarter as well as some higher labor costs from our new restaurant openings.

2 things -- two things to dovetail on what Katie said.

We don't expect to see a quarter-over-quarter 160 basis point benefit in terms of benefit costs and workers' compensation for the remainder of the year.

We will see some because of the operations within the restaurant and the practices we put in place.

But we won't see that much.

And in terms of the labor pressure, we will see some as we open the new restaurants in the second quarter.

But, again, that's pressure that we are making an investment in the first 45 days.

And after that, it rolls off and hopefully -- we are confident that that investment will result in better retained sales of the honeymoon sales and then better normalization at the margin line.

Okay, so for the next two quarters then, it's probably fair to assume you see pressure on labor.

But that 80 to 85 basis points is for the minimum wages.

But that will still be offset by lapping -- and the new NRO pressure but that still will be offset a little bit by lapping last year?

Yes.

And we did take a little bit of pricing -- 0.9% -- that should help offset that and some of the cost pressures.

Mike Smith, Oppenheimer.

I'm taking away from this conference call that because of advertising or maybe because of higher gas prices, traffic has increased since April 22nd at the system as a whole or from the customers?

Because of gas prices?

You mean, everybody walking to our restaurants?

I'm not sure I follow you, Mike.

No, that was a joke.

So was mine.

But I think I heard -- what I've heard you say is that traffic is positive so far in the second quarter.

And I know you've only got about a month of it.

But is that--?

That's an accurate statement.

There are no further questions at this time.

I would like to turn the call back over to Mr.

Mullen for any closing comments.

We thank you all for your time today and look forward to updating you when we close the Top Robin acquisition.

We will also update our development plans for '08 at that time at least that's our plan.

We clearly want to thank all our great team members out there for their efforts in the first quarter and look forward to talking to you all soon.

Thanks.

This does conclude today's conference call.

We appreciate your participation.

You may disconnect at this time.