Red Robin Gourmet Burgers Inc (RRGB) 2007 Q2 法說會逐字稿

Good morning and welcome to the Red Robin second quarter 2007 financial results conference call.

At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation.

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

Katie Scherping, Chief Financial Officer of Red Robin.

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 2007 and development expectations for 2008, will include forward-looking statements.

These payments will include but not be limited to references to our earnings guidance, margins, new restaurant openings or NROs, trends, costs, 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 of financial conditions.

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

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

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

Denny.

Thanks, Katie, and thanks all of you for joining us today.

We also have Eric Housman, 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 second quarter as well as talk about our annual guidance for 2007.

Before I talk about the earnings I want to give you some highlights of what we accomplished in the quarter.

In April, we launched our first national cable advertising campaign targeting adults 25 to 54 with families.

The first flight ran for a total of six weeks from mid-April to the first week in June.

In May we also initiated our Deal-Liciousness campaign on the Internet.

We saw a great response from our customer base both anecdotally from our comment cards and Internet responses as well as trending positive guest counts for the first time in three quarters.

Considering the overall challenge in traffic trends of casual dining industry during the same period we attributed much of our positive traffic trends in Q2 to our media campaign and we were quite pleased with the results after six weeks on air.

Building a national brand awareness takes time.

Our second flight of cable TV began earlier this week and will continue on and off air until September 30 for a total of five weeks.

We will be using this same series of commercials which focus on the brand as a whole and not on any specific promotions or discounts.

In June we closed on a $300 million amended credit facility we spoke about in last quarter's call.

On June 18th we used $43.3 million -- $44.3 million of this credit facility to fund the acquisition of 15 of the 17 existing restaurants owned by two of our California franchise partners.

The remaining two existing restaurants were operated by us under management services agreements.

In the third quarter we have since acquired one of the managed restaurants and we also acquired the 18th restaurant that was under construction and which opened on July 16th for additional cash payment of $4.6 million.

The financial results of the 17 existing both owned and managed restaurants were included in our results for the last four weeks of the second quarter.

As a reminder, the 17 restaurants generated $56.3 million in revenue in 2006, according to our franchise partners.

We are also pleased to report that in June we received a no action letter from the SEC, stating that the investigation into the Company has been terminated.

On another positive note, last week we successfully reached memorandum of understanding with the plaintiffs in our previously announced wage and hour lawsuits filed in the state of California.

The estimated settlement expense has been accrued in our second quarter financial results and amounted to a $1.65 million pretax charge or a $0.07 per share per diluted share after-tax.

With the closure of these lawsuits, our other securities class action lawsuits, and the SEC investigation we feel all material outstanding and legal issues are behind us now.

We also announced yesterday that [Patty Moore] will be joining our Board of Directors.

Patty has been consulting with Red Robin over the past three years on brand development and most recently on the implementation of our national advertising campaign.

She was with Sonic for over 12 years as Sonic grew from $900 million to over $3 billion in sales and from 1100 restaurants to over 3000 restaurants.

We are very pleased and fortunate to have this seasoned restaurant executive on our Board.

From a development perspective, we opened nine restaurants in the second quarter and supported the opening of two new franchise partner restaurants for a total of 11 new Red Robin restaurants during the 12-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 about $2.5 million ex land.

So far this year we have opened three restaurants with our new 5600 square foot design; and we estimate -- which we estimate will further reduce construction costs by another $150,000 and improve our returns although these savings may be somewhat offset by cost inflation.

The new design has the same seating capacity as our current prototype, albeit with a better configuration of tables; a smaller, more efficient kitchen; and slightly smaller lobby.

We have four more units with this design currently under construction.

So far the feedback from our teams operating these restaurants has been quite positive and our 2008 development plan, which I will speak to later on the call, is expected to include units built with this new design.

On a GAAP basis we earned $0.29 per diluted share for the second quarter compared to $0.43 in the prior year.

However, excluding onetime charges of $0.07 that we incurred related to our franchise acquisition, $0.01 in acquisition-related integration expenses, and $0.07 per diluted share in what we incurred in the settlement of the California wage and hour litigation, we would have earned $0.44 per diluted share in the quarter.

Same-store sales increased 3.1% and after three consecutive quarters of negative guest counts we returned to positive traffic of .7% growth in the quarter.

We are encouraged by the positive impact of our media campaign had on traffic and we continue to focus on the execution within four walls to deliver a great Red Robin guest experience.

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

Thanks, Denny.

Good afternoon, everyone.

In the second quarter of 2007, our comp store sales rose 3.1% which consisted of a 2.4 price increase along with mix, coupled with a .7 improvement in guest counts, as Denny pointed out.

For comparison purposes we posted a similar 3.3 comp gain in the second quarter of 2006 which included a 2.4 increase from pricing mix and a .9 increase in guest count.

Our comparisons get easier over the next two quarters as we lap negative guest count trends and we hope to gain additional benefit from the national advertising second flight, which launched earlier this week.

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

Our second quarter had a 162 Company-owned comparable restaurants out of the 240 total Company-owned restaurants.

The 13 acquired franchise restaurants in Washington will be added to the comp base beginning in the third quarter of 2007, while the 17 acquired franchise restaurants in California will be added to the comp base beginning in the third quarter of 2008.

Average weekly sales for the 162 restaurants in the comparable base was 65,553 during the second quarter of '07, compared to 63,568 for these same units last year.

Average weekly sales for the 50 noncomparable restaurants was $59,979 during the second quarter of this year.

That is up 2.8% compared to the $58,330 for the 43 noncomparable restaurants in the second quarter last year.

The total non comp units weekly sales averaged 91.5% of total comparable unit sales during the second quarter.

We attribute these results primarily to the NRO normalization initiatives that we have recently implemented and the resulting strong opening sales averages we are seeing in our 2007 NRO class.

Approximately 59% of our operating weeks from the non comp restaurants in the second quarter of this year were from units in new markets.

This is compared to 56% a year ago.

Our long-term model calls for restaurant margins in the 20 to 22% range and, historically, it has taken new restaurants about three years to normalize to these levels.

In our experience, new restaurant margins generally are within the 10 to 15% range during the first year of opening; midteens, the second year; and reaching 20% plus in their third year.

Our recently implemented NRO initiative is designed to accelerate this process by maintaining as much of the honeymoon sales as possible and reaching more comp-like profitability sooner than we would have experienced in the past.

This is done through additional investments in leadership and training surrounding the opening and ongoing support of a restaurant.

Of course, these goals are predicted on selecting and retaining superior talent to ensure that we are identifying the right people.

Our selection process now uses key leadership traits, identified among our most successful GMs to select developed leaders to take the reins of our new restaurants.

Within the four walls of our restaurants our improved training program redefines and strengthens our manager and hourly team members capabilities by focusing on developing and measuring their proficiencies to increase their productivity and normalize margins sooner.

These initiatives are incrementally costing us about 20% more in preopening cost per restaurant but are well worth the investment based on the improved opening sales we have experienced from this year's opening class.

Similar to what Denny referenced with regard to our advertising campaign we are pleased with the performance we are seeing so far from an NRO initiative; and we believe it is making a meaningful impact on our 2007 restaurant-opening performance.

Both of these initiatives are in the early stages of their influence on our business; and while it is too early to give detailed results of their respective impacts the evidence we have seen gives us confidence that we are on the right track to drive long-term performance and create both brand equity for our Company and shareholder value for our investors.

And with that, I would like to turn it over with Katie so she can review our financial results in more further detail.

Thanks Eric.

Now let's talk about the results for the second quarter of 2007 which was a 12-week period.

Total revenues for the second quarter 2007, which consists of restaurant sales and franchise royalties, grew 31.5% to $178.6 million from $135.9 million last year.

Restaurant sales grew 32.4% to $174.9 million from $132.1 million, and consisted of $125.2 million in sales from our 162 comp restaurants, $13.3 million from the acquired restaurants in Washington, $4.2 million for the four weeks we owned the acquired California restaurant, and $32.2 million in sales from our 50 non comp restaurants.

Franchise royalties and fees [increased] 1.1% in the second quarter to $3.7 million from $3.8 million.

Last year we recognized royalty contributions from the 13 Washington restaurants of $435,000 as well as $406,000 of royalty contributions from the 17 California restaurants in the second quarter 2006.

The 86 comp restaurants in the U.S.

franchise system reported a .2% increase in same-store sales while the 18 comp restaurants in the Canadian franchise system reported a 2.9% increase in same-store sales for the second quarter.

Keep in mind that our 2007 restaurant level operating profits has been and will be impacted by an incremental 50 basis points in contributions to our national advertising fund.

A restaurant level operating profit margin in the second quarter of 20% was 170 basis points lower than our 21.7% results for the prior year second quarter but still [looked] in our long-term range of 20 to 22%.

The variance is primarily attributed to an 80 basis point increase in cost of sales and a 110 basis point increase in operating expenses which includes the 50 basis points related to the national marketing fund for which there is no comparable last year.

Labor costs declined 20 basis points year over year.

Our cost of sales were negatively impacted by 80 basis points this quarter by (inaudible) cost in most of our food and beverage categories.

Please note that we took a .9% price increase in late April in conjunction with our menu rollout as we rolled off our April 2006 price increase of 1.5%.

We have and continue to see increase food costs in many categories; and in response to those rising food costs, as well as other cost [threats], we are planning to take a 2.9% price increase in early September to protect our margins.

Our labor costs were down 20 basis points to 34.4% of restaurant revenue.

As we expected, we did save the impact of higher minimum wage rates year-over-year along with higher labor costs from our new restaurant opening representing an increase of about 20 basis points over last year.

The primary offset to these increases was about a 60 basis point decrease year-over-year attribute to reductions in our workers compensation and health and welfare insurance costs, which we have experienced all year.

The remaining 20 basis points of labor decline were primarily from leverage of fixed wages.

Please note that the recent Federal Minimum Wage Increase had only a a nominal effect on our hourly cost structure since we operate in states where the state minimum exceeds the Federal minimum.

However many state minimum wages are now [indexed] to inflation so we expect they will rise annually in tandem with the CPI or some other widely used metric.

We expect to experience pressure from our increasing cost of labor into 2008.

The 110 basis point increase in our other operating costs to 16.4% of restaurant revenue this quarter compared to a year ago is primarily the result of incremental cost of our marketing and advertising spending, as well as higher utilities and higher travel cost for trainers post opening for our new restaurant.

As we continue to fund our marketing efforts we expect to see continued margin reductions for the full year of about 50 basis points, and higher energy and travel cost will most likely continue to put pressure on our margins.

General and administrative expenses improved 50 basis points year over year.

Our G&A expense increased about 23% over last year, slower than our 31.5% topline growth.

Included in the G&A expense for the second quarter of this year is about $200,000 in pretax expenses related to the integration of the California acquisition or $0.01 per share after-tax.

We are expecting to achieve up to 50 basis points of leverage in G&A for the full year this year.

Our preopening expense in the second quarter 2007 was $2.6 million compared to $1.9 million last year, up 10 basis points on a percentage basis.

Our preopening costs typically represent costs incurred approximately six weeks prior to restaurant openings with the majority of the cost incurred in the final two weeks.

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

The second quarter 2007 preopening expense included $2 million of cost incurred for the nine restaurants we opened in the second quarter this year and about $600,000 of preopening cost incurred in this echo quarter this year for restaurants that we have opened in the third quarter of this year.

We are now budgeting $280,000 per unit, which is up 20% from last year and reflects the extra effort to ensure NROs starts strong and stays strong.

Net interest expense rose $1.9 million from $0.9 million last year.

Our interest expense increase reflected increased borrowings to fund both our growth at two franchise acquisitions but was somewhat offset by lower average interest rates this year.

In order to true up our tax effective rate for the year to 31% we recorded an effective tax rate in the second quarter of 29.4% compared to 33.4% in the second quarter last year.

We expect the full year 2007 effective tax rate to be approximately 31%.

Net income for the second quarter was $4.9 million or $0.29 per diluted share on a GAAP basis compared to net income of $7.2 million or $0.43 per diluted share last year.

The current quarter includes $1.61 million in pretax require franchise costs related to the California acquisition or $0.07 after-tax; $200,000 in pretax acquisition-related integration expenses or $0.01 per share after-tax; and finally $1.65 million of pretax charges or about $0.07 per diluted share after-tax for the California wage and hour legal settlement that Denny referenced earlier in the call.

Excluding these three onetime charges in the quarter our earnings per diluted share would have been $0.44 in the quarter and $0.89 year-to-date.

We also incurred $1.8 million of pre-tax stock compensation expense or $0.07 per diluted share after-tax in the second quarter of 2007 and $1.4 million in pre-tax stock compensation or $0.05 per daily share after-tax in the second quarter of 2006.

For the 12-week third quarter we have already opened all five new restaurants that we had expected to open in the period.

Our franchisees are expected to open one to two new franchise restaurants in the third quarter.

For the full year, we are expecting to open 25 or 26 new Company-owned units while our franchisees are expected to open 14 or 15 new restaurants.

And as a reminder we still expect that the operating lease from new units open in new markets will represent about 60% of our noncomparable operating links in 2007.

For the full year 2007, which is a 52-week fiscal period, we anticipate revenues of $760 million to $772 million, inclusive of our recent California franchise acquisition; and we still expect comparable restaurant sales to increase approximately 2 to 3.5%.

We have essentially kept our full year EPS guidance the same.

However taking into account the acquisition related accretion and expenses as well as the legal settlement expense, our GAAP basis net income is expected to be between $1.65 and $1.76 per diluted share.

Our 2007 GAAP EPS reflects the estimated $0.05 to $0.06 accretion from the California franchise acquisition; the onetime charge of $0.07 per diluted share related to the reacquired franchise costs; $0.01 per diluted share charge related to acquisition-related integration expenses; and a $0.07 per diluted share charge, related to the California litigation settlement.

Also included in our full year 2007 EPS guidance is $0.28 to $0.30 per diluted share for stock compensation expense.

Please note that implicit in the assumptions we have provided in our guidance is an expectation from improvement in comparable restaurant comp store sales, concentrated in the second half of the year, as comparisons not only are easier but we also expect to continue to improve GAAP traffic in response to our advertising campaign.

As I mentioned on our last call we took a price increase early in the second quarter of about .9% as we rolled off our April 2006 increase of 1.5.

In early September, we plan to take an increase of 2.9% and we will roll off a 1% increase we took last October and a .4% increase we took last December in the fourth quarter.

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.

Keep in mind that our national advertising campaign 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.

Taking into account the success of our cost reduction initiatives in our new building, our 2007 CapEx should be around $75 million to $85 million with roughly 12 to 15% for ongoing maintenance.

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

Thanks Katie.

Let me just briefly summarize our observations on -- from the second quarter.

Our national advertising campaign helped drive positive traffic in the second quarter after being on-air six weeks from mid-July to early June.

We look forward to seeing results -- the results of the next flight that started this week and will end September 30th.

We understand that it will take a long time to build our brand and we will be carefully considering our 2008 media strategy.

And we will share that with you on the third quarter earnings call in November.

Our new restaurant opening initiatives are improving our initial sales volume above and beyond the volumes we have seen in the same time period for the last several years.

We are achieving these impressive results in both new and existing markets and we are cautiously optimistic that these initiatives will help us retain more of these high sales volumes.

Our new prototype development has delivered the cost savings we had hoped to achieve and has provided us with a very functional building with the same sales volume capacity to improve our return on invested capital.

We are anticipating that about 75% of our units in 2008 will be built with this new design.

In addition, we are considering more real estate options and we have several endcap locations in our development pipeline for 2008, which are typically lower-cost to build than a freestanding unit.

Given the favorable results of our initiatives to date the Board has approved accelerating the development of our restaurants and continuing to build our brand nationally.

We expect to open between 30 and 33 new Company-owned units next year with over half of the 2008 new restaurant operating weeks coming from existing markets.

Finally we announced today that our Board of Directors has authorized the Company to repurchase up to $50 million in the Company's stock.

We have not entered into an accelerated stock buyback program at this time; but we may repurchase shares opportunistically from time to time at stock prices that would be accretive to our earnings.

So in summary, although we are in the early stages of implementation we are pleased with the progress we are making in our operational marketing and development initiatives.

We would like to thank all of the great team members for their efforts in the second quarter and we look forward to updating you on the results during our next call.

With that, operator, we are ready for questions.

(OPERATOR INSTRUCTIONS).

Jeff Omohundro with Wachovia.

My first question, on that '08 real estate decision to step up the growth, I wonder if you could talk about how the real estate pipeline looks right now in terms of secured sites, how the quality of the sites look to you at this time.

And I think you said -- I didn't quite catch it -- but what the percentage of new markets would be in that '08 outlook, say, relative to the '07?

I will start with your last question first.

The new markets in 2008 are expected to be less than half.

We will have more than half in existing markets.

The real estate pipeline, keep in mind when we did a slowdown or so-called slowdown in '07 from the 32 units we did in '06, down to 25 to 26 in '07, we pushed a number of units at that time into '08.

So the pipeline is in very good shape with, obviously, we believe very high-quality units similar to what we have been opening in '07.

So we don't anticipate any problems with the pipeline.

Very good and then my other question is about this price increase that will be coming in September of 2.9%.

Will that be in association with a manual update or do you envision just you know a reprint with higher pricing?

It's just going to be the same old menu, just new pricing.

Same old menu that we just rolled out in April (multiple speakers).

Right and then finally, on the commodity outlook, I guess your update on the contracts for the balance of '07 and what you are thinking about '08?

Right now we have the contracts on poultry, fries, bread and seafood.

Pretty much till the November December of '08 (multiple speakers)

contract until '08.

Great point Katie.

Poultry is actually at the same price for this year as well as for the remainder of '08 and, obviously, hamburger we buy on the spot market and then oil, cheese, and dressings on futures.

Nicole Miller with Piper Jaffray.

I just wanted to clarify something in development.

First if you say half existing markets that leads us to believe half in developing markets and can we at this point distinguish like developing meaning going into markets where they are not penetrated by it?

I guess my ultimate question is are you actually going into a new market and putting stores where there's not -- there aren't any stores in '08?

Well, again, the definition of new markets I think we've talked about before, by if we go into a one particular town I could pick one in '08 it may have one unit in it but it's not going to be -- it will be a contiguous date or it could even be in a contiguous county and still be considered a new market if it doesn't have another restaurant within 30 miles or it hasn't been there a couple of years.

So predominantly and it's no different from the '07 development schedule in new markets where we continue to penetrate.

There aren't a whole lot of markets or a lot of states that we are not in at this point, where there's a good population base.

So this thing with the other half is it fair to understand that you are going to go back and backfill where you've been going in, in '07?

Yes.

Very definitely.

More of the Tennessee's and Alabama's, North Carolina's, South Carolina's where we have been opening.

(multiple speakers)

And we've got Colorado and Arizona and California as well (multiple speakers).

And Washington.

For a long time.

So there is some backfilling of it developing our new markets?

Yes.

And then of the 30 to 35 (inaudible) how many of those are signed leases or letters of intent?

30 to 33.

30 to 33.

I don't have that in front of me but I assume -- I'm sure all of them are signed letters of intent and many of them are under construction at this point.

Okay.

I just wanted to go back to the fourth quarter pricing, Katie.

I know you are seeing 2.9 in September (inaudible) about 5.3 for that month and then is it 1.5 you roll off in October (multiple speakers)?

1% in October and then about a .5 in December.

So you'll be running on what is -- it's about 3.5% in the third quarter and what does it come out to be in the fourth quarter?

About 2%?

(multiple speakers)

Weighted average -- .

Weighted average will be about the same -- .

Weighted average is about the same because September has only got one -- really one full month in the quarter in the third quarter.

So you will be running at about 3.5% in the back half of the year?

Yes between 3 and 3.5, I would say.

And can you talk to us about the California impact?

Are you seeing anything there and specifically I guess both in current results and development plans for 2008, how much of that stems from an ability to now go into California?

Do you mean because of the acquisition of the California franchise?

Yes.

Not a whole lot of them are in that territory yet because, again, the development takes 18 months to two years and we just closed on it not too long ago.

So I mean we did open the one in Fresno.

But that was under construction that we bought from them.

But we are actively looking in California in all markets.

And we had some other area restrictions down in San Diego that we eliminated.

So we can do some more things down in that area too.

And in regards to the first part of your question, Nicole, we have said that we will break out or we'll talk about when there are regional differences in what we call the Big Three.

And right now we are not seeing any differences that are material.

And on the advertising side, was this next flight from August and September are there any new commercials and have any networks been added?

No it's -- I think I said this.

It's the same commercials that we did before.

They started running on Monday or actually like Sunday on a movie and they will run through September.

Same networks?

Yes.

Same networks.

Same type of programs.

Same target.

Same target.

And can you just walk us through what the -- either the same-store sales are so far in the third quarter or just you know qualitatively what the track trends look like?

How it's picked up or how you are monitoring that in between the traffic via TV periods?

As consistent with our policy we'll talk about mid period traffics.

We will -- we just started again TV.

We will know a lot more as we continue to build throughout the quarter as we move into the third quarter call.

Is it fair to say as we look at July results, where there was no advertising specifically, that traffic was still positive?

We are not going to talk about July specifically.

We obviously stopped -- TV went off air in first part of June so we were dark until last Monday where we had no paid media promotion, and that was up against last year where we were running radio and some direct mail.

But other than that, we are happy with where we are in this process.

Jeff Farmer with CIBC World Markets.

I wanted to follow up on some of the development questions.

It's been more than a year since you last talked about this but at one time you were pointing to a 17, 20% long-term Company-owned unit growth rate.

And it looks like in '08 you're pointing to a 13% growth rate or so.

So is that closer to what we should expect longer-term?

That 13% rate?

No.

It's just what we are comfortable with committing for '08 at this point.

And it's actually 20% higher than what we did this year.

That's how we always calculated our long-term growth, was based on the number of restaurants done each year, increase that number going forward.

So that is how we always calculated it in the past.

So you can look at the 30 to 33 guidance from where we are this year to next year.

Still about 20%.

And then a little bit more color on the NRO normalcy efforts.

I definitely understand the increased training in your efforts to measure your proficiency, but I think you guys have also brought on some seasoned restaurant level managers to work with some of the restaurant managers of the NRO units during the high noon phase.

Is that correct?

Yes.

We've done a couple of things.

In terms of our selection program we've really stepped that focus up with our benchmarking to determine the right leadership and characteristics.

And we are also getting a year get a year out and are achieving that and identifying the GAMs and the CAMs that are Red Robin seasoned veterans that have been in the system and performing for at least a year.

So and obviously if we had to open up a new restaurant with a brand-new manager to Red Robin then, yes.

We will support them with a seasoned Red Robin general manager.

But that's the last thing we want to do.

We want to open up all of our restaurants with seasoned GM and CAM leaders.

And then, just as a follow-up to that are you doing this both in established as well as new markets?

Correct.

And you expect to continue to do this out to '08 and '09?

That is the bench strength plan.

Matt DiFrisco with Thomas Weisel Partners.

I just wanted to ask about the promotional environment you are seeing out there now.

And should we read into I guess the continuation of meaningful price increases that you still feel as evidenced by your positive traffic that you can take price here?

And or are you seeing the acceleration of maybe possible competitive pressures from the more generic bar and grill such as your Chilis, Ruby Tuesday's and Applebees?

How do you contend against that and what are you seeing out there right now?

That's a lot of questions which we don't clearly have the answer to everything that you're asking.

We think we have pricing power.

We reluctantly raise prices to maintain margins.

We've talked before on where we think we are on the perspective of pricing and we monitor closely what some of the others that you mentioned have taken in pricing.

So we still think we are in good shape although we are always nervous about pricing.

And the environment is what it is out there.

And in terms of a little more color the -- both the franchise acquisitions that we made over the last 12 months, the franchise in Washington as well as the franchise in L.A.

and Fresno, both currently have menu pricing above our highest tier across the country and are experiencing positive same-store sales.

That was going to be my next question.

Do you see any disparity between the regions?

I know (inaudible) that cited California in July was soft.

Are you pretty much well-balanced in that 3.1% in 2Q?

Are we balanced in terms of the sales?

Yes.

Yes we are.

There's been no reason (multiple speakers) we have no present at this point to call out California or any other markets that some others have mentioned.

[Dustin Thompkins] with Morgan Keegan.

My first question is just a clarification on the percent of development in '08 that is going to come from the smaller prototype, the 58 -- I'm sorry the 600 square foot prototype.

Was that 75 (multiple speakers)

About 70%.

So I guess we should assume that based on the three you opened so far you feel confident enough to increase that percentage in 2008?

We have four under construction also.

Additionally as we look at the addition of Patty Moore to the Board should we expect that she would remain fairly involved with the evolution of the advertising strategy?

Oh yes.

Yes she will.

I had one more question.

That's good.

Thanks.

(inaudible) wanted to know about the blackened Bayou Burger that is coming up in the fall promo, I bet.

Conrad Lyon with FTN Midwest.

Maybe this is a question for you, Katie.

I'm not sure if you've spoken to this.

Can you give any indication of what your diluted shares might be for '07?

The diluted shares for '07 if you'll hang on for a second.

If you have another question I will look it up for you.

And part of that question is getting at if you are going to bake in any type of repurchases into the number?

We've got 16,814,000 at the end of the second quarter weighted average and for the year it won't materially change probably 16.8-ish and depending on if there is any buybacks certainly that would take that number down.

But we haven't put any of that in our guidance expectations at this point.

In terms of your development schedule for '08 I'm not sure if you talked about this as well, but percentage of mall-based versus non mall-based?

80/20 currently and next year I don't know if we've got (multiple speakers)

It could be in that same 80/20 range.

It depends at the tail end if we -- in California where it is a little bit more expensive we are looking more and more in malls and our acquisitions that we did at Top Robin they had predominantly mall-based units.

Let me shift over to your advertising.

The spot.

This next flight, is it going to be the same spots that you are running?

Yes.

Exactly the same.

Okay.

(inaudible) the first flight.

Okay.

Yes, no, I meant congratulations on that.

It sounds like you guys did pretty well.

I thought there might be some little trial and error going forward but it sounds like you guys are doing well there.

In terms of maybe competition here, who -- has the competitive set changed at all for you?

I mean there were some questions about Chilis here but what brand would you say keeps you up most at night?

Red Robin.

Our execution was in the four walls and taking care of guests.

We look inside out and we can't change what a competitor is doing.

We can only impact what we do.

Fair enough.

Let me ask you this then.

In terms of the macroenvironment is there any one that you -- that creates a little bit of a drag for you guys?

Is it -- just call it gas prices, interest rates, subprime?

Any worries there?

I mean we read the paper and we've experienced all the paranoia if you will just like it was today in the market.

So we are concerned about all that.

We were very concerned about this when we raised prices.

That's why we monitored what else, what others have done in the marketplace and how we felt about our pricing power.

Commodities, we've talked about on the last call.

Everybody in the industry is talking about it on this call.

We think we covered it both commodities and with the price increase.

Ashley Woodruff with Friedman Billings Ramsey.

Questions on advertising.

You know, as you said you got all brands advertising this year and not promotions or promoting specific items.

As you look into 2008 is that under consideration to tweak that somewhat?

It's always under consideration but as we said we haven't -- we won't make a finalization.

We need to see how the next flight goes.

We will be doing creative briefs, talking to our franchise partners and developing that as we go into the late fall.

Then on the sales impact have you seen a material difference in I guess improved performance in new markets versus existing markets with the advertising?

Or has it kind of affected them all the same?

I would say -- we saw our noncomps increase 91.5% of our comps surveyed.

So that's a good indication that we are starting to see some impact there and we are almost equal in existing and new markets as a percentage of comps.

So we are starting to see those new markets catching up and that could be part of the media.

It could be some other of the initiatives we have got going on that are in the noncomp base now.

So it's hard to bifurcate that into what exactly is causing that improvement.

But we are seeing some improvement.

And then on commodities.

Chicken costs I believe you did have it contracted for all of '07 favorably and now you have said you had extended to '08, did you have to give up a little bit of that favorability of '07 in order to extend the contracts?

Let me tell you the short story and we can take it offline.

We had a contract.

As everybody knows corn prices went over $4.

This is a supplier we've dealt with for years and years and years.

They came to us and said, we're getting killed.

As we did in '05 or '06.

When it went the other way, they worked with us, so we worked with them and we took an increase in chicken.

So we were -- where we were probably flat, Katie?

Before?

(multiple speakers) Flat to 1% favorable early on, we're probably 10 to 15% unfavorable at this point.

(multiple speakers)

It will blend about 2.9% [threat] for the full year.

It depends on -- and we monitor corn prices and obviously if corn drops dramatically, we'll be going down to talk to them to go the other direction.

(technical difficulty)

They've generated 85,000 almost 85,600 AUV in the second quarter of '07.

So for 13 restaurants against a total comp of 160, it will be 175+ comp units next quarter.

You can do the math on the weighting average of that.

That's all thanks.

We'll break it out then, too.

[Jeff Fisher] with Bear Stearns.

It's Jeff Fisher.

I'm calling in for Joe Buckley.

I was curious as to where you see -- what price level you see the share repurchase being accreted?

At this point, we don't have any comment on that.

We just got it approved last week and we will be running models and looking at it.

And also on advertising.

How many more advertising windows will there be this year?

Will there be one more after this current one?

This is the last one that's contracted for.

So you'll have to revisit that I guess?

In terms of major media.

In terms of television.

We can always revisit it.

Definitely.

One final clarification, on the new unit investment cost.

Did you say it was $2.5 million in '06 on average?

It was about $2.5 million, yes.

And then '07 (multiple speakers) $150,000 less?

Yes with the two -- the construction.

What?

Yes I was talking construction (multiple speakers).

2006 to about a $2.5 million average and we are going to shave -- we've saved $150,000 off that your so we are in the 2, 3s right now and then if we as we build the 2007 prototype that will be another $150,000.

Mike Smith with Oppenheimer.

Real quick question.

What is the cost of that $30 million -- I am sorry, that line of credit that you have?

The cost of the line of credit?

What the interest rate is?

Yes.

It's LIBOR plus 75 basis points right now.

And we are real happy to have gotten that done.

And we have the ability to lock at three and one, three, six month LIBOR tranches.

The majority of our LIBOR right now is locked up till mid-December.

Matt DiFrisco with Thomas Weisel Partners.

Just wanted to know in this environment with the improved improvement of of your new stores and everything, do you guys -- are you encouraged now enough to maybe look to sign up some new area development agreements and get some new franchisees onboard?

Actually no.

There's been no change in that.

If we wanted to expand our franchise territory we would do it as we have been -- announced on the last quarter with our existing partners.

So you would add to them, which would also be not adding new relationships but expanding the development pipeline?

Right.

With existing relationships.

And then, where do we stand and can you refresh us on your history with how frequently you might go to revisit upping things or renegotiating franchise agreements such as -- I think Sonic in this space right now is going through a process of raising the royalty rates and updating their franchise agreements with existing franchisees.

When was the last time you've done that and what is your philosophy on that?

About like never.

And my philosophy is that we signed a deal with these guys to go back to them now and say we wanted more in terms of royalties.

It would be disingenuous I would guess.

What we have done, Matt, last year when we initiated the national marketing fund is we went to all the franchise partners and asked them to contribute 1% to the national marketing fund.

We would -- to the extent that we feel like it's appropriate to increase the national marketing fund, we would go to the partners and ask them if they would do it again.

But that would be the only area where we would go to our partners and ask for more.

[Tom Lightcap] with Value Holdings.

Can you repeat the CapEx guidance for this year with the maintenance part of it to?

$75 million to $85 million, 12 to 15% in maintenance.

Also, a final question on competition.

Noticed that McDonald's is now rolling out some new premium burgers.

And I know you don't consider yourself fast food, but do you have any sort of guess on how that might affect you competitively if at all?

No.

No guess or it won't affect you?

No guess.

Were you aware of this because it wasn't in a press release it was I saw (multiple speakers)

Yes we've seen it.

We have seen it in their test markets.

But you can't get the Red Robin experience, Team Members experience, the value, the bottomless prize etc.

that you can get in the Red Robin so I mean as Eric said earlier we are aware of it but we have got to be concerned on what we're doing inside our own four walls.

Thank you.

That is our final question.

I will turn the call back over to you for closing remarks.

Thank you all for joining us.

As many of you know, our core values are honor, integrity, seeking knowledge and having fun.

And with that -- Red Robin Yum!

Thanks a lot.

Bye.

This does conclude today's conference call.

We appreciate your participating.

You may disconnect at this time.