Red Robin Gourmet Burgers Inc (RRGB) 2015 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Red Robin Gourmet Burgers, Incorporated first-quarter 2015 earnings call.

Today's call is being recorded.

As a reminder, part of today's discussion will include forward-looking statements within the meaning of federal securities laws.

These statements are commonly identified by words such as anticipate, continue, plan, expect, intend, should, will, and other terms of similar meaning.

These statements include, but will not be limited to, statements that reflect the Company's current expectations with respect to the macroeconomic and competitive environment, the financial condition of the Company, results of operation, plan, strategy, objectives, and future performance, including the Company's traffic and revenue-driving initiatives, sales growth, operating margin and operating weeks, cost, expenses, expense management, deployment of capital, restaurant development, and remodel, performance of acquired restaurants, and other expectations discussed within the course of this call.

Although the Company believes the assumptions upon which preliminary or initial results, financial information, and forward-looking statements are based on are reasonable as of today's date, these forward-looking statements are not guarantees of future performance, and therefore investors should not place undue reliance on them.

Also, these statements are based upon facts known and expected as of the date of this conference call, and the Company undertakes no obligation to update these statements to reflect events or circumstances that might arise after this call.

Participants on the call today should refer to the Company's Form 10-K and other filings with the SEC for a more detailed discussion of risks and uncertainties and other factors that could impact the Company's future operating results and financial condition.

The Company has posted its fiscal first-quarter 2015 press release and supplemental financial information related to the quarter's results on its website at www.redrobin.com in the Investors section.

Now I would like to turn the call over to Mr. Steve Carly, Chief Executive Officer of Red Robin.

Please go ahead, sir.

Thank you, Eric, and hello, everyone.

Thanks for joining us this morning.

I'm here with Stuart Brown, our Chief Financial Officer.

We'll kick off by each sharing commentary on the business, and then we'll open it up for questions.

Denny is not able to join us today, but I want to publicly congratulate her on her well-deserved promotion to Executive Vice President, and to a newly created role here at Red Robin, the Chief Concept Officer.

She'll oversee franchise operations, marketing, menu innovation, and implementation, and is also serving as the President for our Canadian operations.

Let me begin with an update on our strategic priorities, which we've organized under the headings of engagement, efficiency, and expansion.

As you know, these provide us with the roadmap through which we are strengthening a brand, gaining market share, and enhancing shareholder value.

Related to engagement, we continue to provide our front-line team members with the training and tools necessary so that they can efficiently engage with our guests and deliver what we term RRR service, which is recognizing each guest individually, recommending something they are proud of, then reassuring the guests that they made a great choice.

Having a great Red Robin experience begins with our team members, because when they deliver, they have the ability to build frequency and expand upon the number of distinct occasions that our guests can now associate with Red Robin -- everything from a great family dining experience to adult occasions, including date night, coming in with your buddies after softball practice, guys' or girls' night out, et cetera.

Of course, critical to guest engagement is the breadth and quality of our food and beverage offerings, as well as our ability to bring innovation and creativity to the market on an ongoing basis.

Some recent examples of that include our Cure Burger that launched as a secret menu item January 1, and was positioned as the perfect remedy for guests in need of some post-holiday relief.

Of course the Wild Pacific Crab Cake Burger was the first premium seafood offering to join our Finest lineup and, at $14.29, continues to build trial and delivers strong repeat.

We have a few other great things coming up this summer, which we'll review with you in our Q2 call.

In addition, we continue to have an opportunity to grow our adult beverage category.

And, with our new Senior Vice President and Chief Marketing Officer, Lee Dolan, on board, who reports to Denny, we believe we'll get there.

Lee brings to us nearly two decades of experience at MillerCoors and Coors Brewing Company, and his responsibilities encompass menu innovation and implementation, along with key marketing strategy and tactics.

In particular, we believe he'll be a vital asset in evolving our positioning as Red Robin Gourmet Burgers and Brews.

In terms of our brand transformation initiative, guest reactions and satisfaction scores from the transformations have been excellent.

We are not only doing a much better job sorting at the door, which means matching each guest to the part of the restaurant where they will get the best experience, but creating unique and fun environment in our bars.

We're also bringing in guests who haven't tried Red Robin for a while, and we're reintroducing them to the new concept.

Our guest feedback and research shows meaningfully higher ratings and facility attributes, service, and atmosphere, resulting in a significantly higher overall guest satisfaction score.

Based on the guest feedback we've received, we now expect to complete at least 150 remodels this year, up from the 125-plus we stated previously, and we should be able to complete the entire Company-store base by the end of 2016.

Another element of engagement is the Company-wide roll-out of the Ziosk table-top device, which we are still on track to complete by the end of this year.

Ziosk will also further enhance our ability to customize the Red Robin guest experience, with the added convenience of paying at the table, ordering refills on demand, improving speed of service, and, of course, the option for game entertainment on the table, too.

As for marketing, we continue to advertise our $6.99 everyday value offering of Red's Tavern Double with bottomless fries.

That's featured on television, and continues to meet the needs of our value-conscious guest.

We also featured a movie ticket tie-in, in Q1, with that cinematic gem, Paul Blart Mall Cop 2, which our research showed had significant appeal with our guests.

We'll continue to do movie screening research to ensure that our guests are interested in the movies we do movie ticket tie-ins with.

We also continued to grow the Red Robin Royalty program.

We send each Red Robin Royalty member occasional offers to maximize their incremental visits, in addition to the base frequency reward program.

Let's talk about efficiency for a second.

You can see that our operating margins continue to expand.

We have savings from repair and maintenance costs as we've consolidated vendors, which will include janitorial and inventory management.

Our acquired restaurants are performing well, and we continue to find other opportunities in the business to consolidate vendors and offset inflation.

Regarding our Canadian operations, we are developing a labor management system, and we believe we can achieve additional improvement in the middle of the P&L, this year, in Canada.

Looking toward expansion, in 2015 we plan to open 20 Red Robin restaurants, along with 5 Burger Works, while our franchisees are expected to open 2 locations.

Interestingly, we're seeing more development opportunities as the macro-environment improves.

This should enable us to pick up our development pace in 2016 and 2017, relative to this year, and we are actively working on our pipeline.

Burger Works is also gaining momentum.

We're very pleased with the kitchen and the heart of the house, and its ability to turn out customized hot gourmet burgers with hot, crispy fries, in a time that meets and exceeds our guest expectations.

We're encouraged that the downtown Chicago and Washington, DC, locations continue to do well, and the original Colorado locations continue to comp positive.

If you haven't been to any of our latest locations in Chicago and Washington, DC, I encourage you to do so.

They represent the branding, menu, and real estate strategy that we believe is the right formula for our use going forward.

These include further penetration of new restaurants in Chicago, Washington, DC, and Denver, and we are planning to open a fourth market.

With that, I'll turn it over to Stuart.

Thanks, Steve, and good morning, everyone.

As you have seen in our earnings release and our supplemental filing, Red Robin's first-quarter operating and financial results were quite strong.

Our marketing programs, together with our operations teams, performed extremely well, with great execution and cost control.

Additionally, our results benefited from favorable changes of gift card breakage estimates and lower benefits claims, which we believe are largely one-time related, and we'll talk about more in just a moment.

EBITDA increased 27%, to $47 million, for the first quarter, adjusted to exclude the impact of the additional gift card breakage.

As a percentage of total revenues, adjusted EBITDA increased to 11.9%, from 10.9% in the first quarter of 2014.

On a trailing four-quarter basis, our adjusted EBITDA totaled $132.9 million, an increase of $19.4 million, or just over 17%, compared to the same period ending a year ago.

Earnings per diluted share on a GAAP basis was $1.16, or $1.10 excluding the change in gift card breakage estimates.

Further, first-quarter earnings per share benefited about $0.07 from the timing of the benefits claims compared to a year ago.

We continue to take market share in the quarter, with revenue and guest-count growth that exceeded our casual dining peers.

Red Robin's comparable revenue increased 3.1%, comprised of 2% of price mix and 1.1% of guest-count growth.

According to Black Box Intelligence, our guest-count growth outperformed the casual dining industry once again this quarter by 2.1%.

Restaurant-level margins of 23% were an increase of 60 basis points from a year ago.

This would have been 22.2%, or a decrease of 20 basis points, if excluding the year-over-year reduction in benefits claims.

The margin performance was better than expected, not only from favorable commodity and labor inflation, but also from our operations teams leveraging of favorable mix and capturing a strong profit flow-through of the sales increase.

Workers' compensation and healthcare costs were, together, about $2 million, or 38% lower than the first quarter of 2014, due to fewer claims in the quarter, but we expect these costs to revert back to normal in the second quarter.

Results at restaurants acquired from franchisees last year continued to perform at or above expectation, absent some slowdown in Edmonton, Alberta, where lower oil prices are hurting the economy.

Depreciation and amortization was in line with expectation, at $23 million, having increased $4.1 million from a year ago, due primarily to the restaurants acquired and opened in the last year, as well as investments in restaurant remodels.

I often get the question why our depreciation rate is higher than most other casual dining chains.

We have about $4 million annually of amortization related to franchisee acquisitions, which we believe is unique when compared to our peers.

The $50-million balance of re-acquired franchise rights relates mainly to acquisitions in the mid-2000s, and the related $4 million of amortization in 2015 reduces our EBITDA margin about 30 basis points, and earnings per diluted share by about $0.17.

Turning to capital expenditures, we increased our expected investments for 2015 to be approximately $170 million, from $140 million previously.

The $30-million increase relates mainly to the additional 25 remodels, which we expect to complete this year; the decision to complete 15 major remodels of older, larger units; and, our plan to relocate three units, which was not contemplated when we provided our original guidance.

The average cost per remodel of our standard prototype has increased to a bit over $400,000 due to construction inflation and costs of additional signage.

Further guidance includes about $5 million of capital for restaurants that will open early in 2016.

Regarding new restaurants, we have been impacted by several significant delays in landlord deliveries and permits this year, which is resulting in a decrease in expected operating weeks associated with new restaurants, and has pushed the majority of openings into the fourth quarter.

This, together with the continued weakness in the Canadian dollar, has reduced our 2015 outlook for non-comparable restaurant revenue growth.

Other changes to our 2015 outlook relate mainly to the strong first-quarter operating performance, some of which we expect to carry through for the year.

While annual restaurant-level margins for 2015 are expected to approach 22% -- about 50 basis points higher than 2014 -- second-quarter margins are expected to decrease, and should be about 100 to 120 basis points below the first quarter, as workers' compensation and benefits costs normalize.

Restaurant-level margins are expected to expand, though, in the back half of 2015, after we cycle over last year's lower margin acquisition, the increase last year in California minimum wage, and then the spike in ground beef prices.

Remember also that, as a percentage of revenue, selling typically increases in the second quarter, while general and administrative costs typically decrease.

Combined, these costs as a percentage of revenue should be relatively flat in Q2 compared to last year.

As Steve mentioned, we continuously look for ways to increase efficiency through better procurement, more efficient use of marketing dollars, and improved product mix.

Our success is dependent on our continuing to build on our strong guest engagement initiatives, while also investing in our team members so that they are better for being a part of the Red Robin team.

Some portion of our improved operating results will be used to offset inflation, but also for team member engagement initiatives, such as enhanced training, and building our bench strength to assure that we are positioned to accelerate new unit growth if we choose, as our remodel program winds down in 2016.

With that, let me turn the call back over to Steve for a few comments before we take questions.

Thanks, Stuart.

In conclusion, we are forging ahead and executing on the key items that we believe will sustain and grow our business and strengthen our brand.

We have set ambitious goals across all three of our strategic buckets -- engagement, efficiency, and expansion -- and look forward to providing ongoing updates as we move closer towards achieving our goals.

I would like to thank our great Red Robin team members for their hard work and dedication this last quarter, and continuing to transform the Red Robin brand.

Operator, let's open it up for questions now.

Thank you.

(Operator Instructions)

We'll take the first question from Joseph Buckley, Bank of America.

Hi, this is Greg Frankfort on for Joe.

Can you talk a little bit about the increasing number of remodels, maybe how they're performing?

I think in the past you've talked about sales mixes of roughly 4%, or sales lifts of roughly 4%.

Are you guys seeing maybe sales lifts coming a little bit better than that, or is that how we should think about it still going forward?

On the increased guest satisfaction scores, what are you seeing there that's driving you guys to take up that remodel mix?

Good morning, this is Stuart.

I'll start out with the financial results of the BTI models.

No, we've been really pleased with the performance.

Historically, we've been able to talk about 3.5% to 4% sales lift relative to control group.

As we've remodeled more and more restaurants, we're losing that control group.

I think the easiest way to talk about it is if you look at how those remodeled units are comping versus the non-remodeled base.

I think the key point there is the remodels that we completed in 2012, 2013, and 2014 are all comping better than the non-remodeled base.

We're getting the lift in year one and continuing to see that in the second year.

The original base that we did is pretty small, so I hate to read too much into that, but we still feel good about the sales growth numbers.

I'll turn it over to Steve and talk about guest sat.

Greg, recognize that many of the Red Robin restaurants have not been meaningfully remodeled for sometimes up to 10 or more years.

When we talk about guest satisfaction, the first thing the guest experiences is a totally new exterior and a new signage package, along with the brews label.

Secondly, they come into a completely transformed restaurant -- not just wallpaper, but a restaurant that's been dramatically transformed into several separate sections designed to maximize that guest experience, given what they are looking for on that visit.

Our research is showing that that's paying off first and foremost in higher ratings for the facility, also improvements in service and atmosphere, and those all add up to higher guest satisfaction scores overall, which is exactly what we want to see.

Combined with continuing to comp and great overall guest satisfaction scores, we're going to take the total remodel target this year up to 150.

Okay, that sounds great.

Then a follow-up.

I think you talked about having the whole system done by 2016.

How many restaurants would that include if you get 150 done this year?

How many more would be remaining in 2016 to complete?

If you look at where we'll be, we'll be somewhere probably just short of having 300 of our restaurants to our new brand standards by the end of this year.

That includes what we remodeled previously.

The new stores we're building obviously have the new brand standards, as well as the 150 this year.

That will get you a little shy of 300, or almost 70% of the system done.

That will leave us whatever, 125 or so, to complete next year for corporate.

The franchisees, those will probably go into 2016 and 2017 until they have gotten all of theirs done.

Okay, thank you, and congrats on a great quarter.

Thank you.

Our next question is from Alex Slagle with Jefferies.

Hi, thanks.

A question on the development outlook.

Just like to get some more perspective on the more favorable real estate opportunities you're seeing.

Is this going to be for both the mid-size Red Robins and Burger Works?

Then any other clarifications regarding the potential acceleration in unit growth in 2016 and 2017, whether that's potential increase in number of units, or percentage growth?

Alex, if you look at the number of units that we're putting into the pipeline next year, we're working hard and have a great relationship with a number of our landlords, so that as conversion opportunities come up and things like that, we're trying to be sure we're getting the first bite at the apple.

Even the relocations this year were opportunities that came up where we had sites that were sort of -- the leases were up, and we were negotiating with the existing landlord and the new landlord to decide where we wanted to stay.

We're getting in some cases a choice of locations.

That said, we're taking it this year from 20 to a number higher than that is what we're going to really position ourselves for, if the economy's ready, and make sure we've got a lot more flexibility going forward than we've had in 2015 and even in 2014.

The Burger Works sites, those continue to be the highest in demand.

We're really focused on dense, urban area in a few markets.

Now that we've got some built and really performing strongly, it makes it much easier for landlords to go and buy in and see those to say wow, this is great, this is going to increase the value of my overall real estate property.

While that's building, it's still a really tough space to define and get over the goal line.

Got it.

Just want to get your thoughts on the same-store sales outlook for the year now that you've passed the toughest comparison of the year?

What other things do you see out there that keep you a bit tempered and reluctant to raise the comp guide a little more than you did?

Yes, it's -- if you look at what our guidance of 2.5% to 3% comp growth, it's really got traffic and mix about 1.5%, and price will be somewhere probably a little bit under 1.5%.

I would say I would be more optimistic, if I wasn't, when I'm looking at the industry trends.

Everybody got really excited with the strong January, and pretty much every month since then has gotten softer.

You look at the consumer confidence numbers, and it's just the consumer continues to stay skittish.

If the economy and the industry does for the last three quarters what they did for the first quarter, I think Black Box has got comp traffic -- I think it was negative 60 basis points or so in the first quarter.

That was after a very strong positive January, right?

Our guidance assumes that the industry for the rest of the year is down call it around 2% traffic.

If the industry is better than that, then, yes, our guidance will prove conservative.

Got it.

Thank you.

Our next question is from Will Slabaugh with Stephens, Incorporated.

Yes, this is Billy on for Will.

Thanks, guys, and congrats on another great quarter.

A follow-up to that last one.

I was wondering if you could speak a little bit to some of the geographical trends you might be seeing from the comp.

I know anecdotally we've heard the west coast continues to out-perform, at least from other companies that are exposed there.

Perhaps you've seen a snap-back in the northeast from another year of unfavorable weather.

Is there a noticeable difference in Texas.

Overall, wondering if we can get a little more color on what you're seeing, and maybe where most of that traffic out-performance versus the industry is coming from?

This is Stuart.

Overall, we out-performed everywhere.

I think, again looking at Black Box, they show your point, West Coast, particularly California and actually southern California, performing quite strongly.

Some of that I think is still strengthening from the 2008.

Southern California continues to build.

That's probably one of the strongest.

To your point, we've rebounded up in the northeast, particularly New York, New Jersey is continuing to improve for us as we've continued to build there, get more units, more in the consideration set of guests.

Building that critical mass, we think, is continuing to help us there.

I think if you look at the weakest places for us on a comp basis, New England itself is quite small, but we're having some cannibalization there.

We've opened up a couple of units.

I think New England is only less than 10 units for us.

Florida continues to be a little bit tougher than we would like as well.

But other than that, other markets are all performing better, or on the industry.

Great, thanks.

A follow-up, if I could.

Commodity cost inflation for the year, I know we're hearing some -- at least a little bit more positive commentary from a lot of companies, particularly when they speak to the back half of this year.

Can you maybe talk about what you're seeing currently, I guess mostly on ground beef.

Then what you're looking at for the balance of the year?

Yes, our original guidance on COGS, we thought it would be coming in around 4%.

We're probably now looking at about 3% COGS inflation.

First quarter was actually a little bit even less than that.

With that, we're actually going to take a little bit less price this year than what our original guidance was.

That said, we're having pretty strong flow-through of the price we took last November.

But yes, COGS inflation continues to be fairly favorable.

Given the amount of rain we've had in Colorado over the last couple of weeks, hopefully we'll have another good crop this year.

Good.

Great, thanks guys.

I appreciate it.

The next question is from John Glass with Morgan Stanley.

Thanks very much.

Stuart, on the full-year cost guidance, there's a number of little line items that add up.

There was higher G&A.

Maybe some of that was reflected in the first quarter -- higher D&A.

I guess that's explained by the remodels.

The advertising kicked up.

Can you maybe -- they're all small things, but they add up a little bit.

Were there any unusual items going forward in those line items, or was this just running through what you saw in the first quarter for the full year?

It's really running through what we saw in the first quarter.

G&A was a little bit higher.

Some of that was incentive compensation.

Selling is more to some degree timing.

Actually, gift card expenses, as we continue to sell more gift cards and the programs continue to do well, is really the biggest issue in selling.

Selling's almost a rounding error.

Really, absent a little bit of lower COGS, maybe a little bit less price, it's really flowing through from Q1.

The last three quarters of the year, I wouldn't expect any dramatic changes from what we've guided originally.

You assume in your guidance that the health care and workers' comp benefit that you got in the first quarter reverts back.

What does that mean?

Are you sort of -- why -- is that a conservative assumption?

Does it necessarily have to revert back?

Do you know about expenses now in the second quarter, for example, that will do that, or is that trend-lining what your annual spend is, or annual expense is?

It's to some degree trend-lining.

The workers' comp and benefits costs together, claims were down in the first quarter.

Together, if I look at what it was together for the first quarter, those two lines was -- I'm sorry, in 2014 was about 1.6% to 1.7% of sales.

We were at 90% of sales in Q1.

We do -- there's no reason to think that fewer benefits claims for some reason is going to drop off.

Nothing dramatic, that dramatic, has happened in our business.

There's actually risk that goes the other way for some reason.

You get some volatility.

This is a little bit more favorable than what we would normally see in terms of what a normal quarter-to-quarter volatility is.

Right now, our guidance assumes it goes back to normal, not that there's even a catch-up from the favor of Q1.

Got it.

Okay, great.

Thank you.

We'll go next to Alton Stump with Longbow Research.

Thank you.

Good morning, and great job on the quarter, guys.

Thanks, Alton.

I had a quick question on the franchise side of the house.

This doesn't come up too often, because you guys are mostly a Company-owned model.

Looking at the comp growth, it looks like an almost mid-teens, two-year stack comp growth first quarter.

I would guess there's probably not a lot of franchise stores that have done a remodel yet.

Could you talk a little bit about what you think, having the key drivers behind that performance?

Well, first, Texas is almost exclusively a franchise market for us, and they are doing very well.

Secondly, each one of our major largest franchisees has a transformation complete or in the process.

They are seeing obviously future opportunity there going forward.

I think that some acquisitions we made may have taken some lower volume restaurants out of the franchise base, which again helps on a year-over-year basis.

Makes sense.

As you look at the pricing mix part of the equation, it would appear that you're still getting a good lift from the Finest launch, even how they started to lap -- as you guys started to lap that effective in 4Q.

How much of that is just due to new products that you've launched, the seafood offering coming here in the first quarter, versus overall consumers becoming more aware of your Finest products?

Yes, if you look at overall what we're cycling over, is really I think where I'll start with.

The benefit of mix last year that we had from -- particularly from Finest -- was over 2% of our comp increase related to mix.

The mix benefit that we had in the first quarter was a little bit Finest and Crab Cake, but also continuing some more appetizers and alcoholic beverages.

Our alcoholic beverage mix continues to grow, as well.

If you look forward, we're cycling over pretty strong growth.

As Steve said, we're trying to put menu items out there for our guests that they can enjoy and add on themselves, and not trying to force mix all to itself.

If we put great menu items on there, our guests will come into the restaurant.

They may see the $6.99 everyday value menu item, come in, trade up to Finest or other entrees on our menu.

That will continue to drive mix for us.

Driving mix this year's not going to be a big driver of sales.

It's going to be really primarily comp growth associated with the brand transformation remodels.

Got it, makes sense.

Then if I could slip one last one in and hop back in the queue, obviously there's a lot of news flow about last summer being a terrible box office.

You had the Tier 1 promotion with Hercules.

Could you talk about heading into this summer -- it would sure feel like we're going to see a much better box office -- what your strategy is, if there will be any more Tier 1 promotions, or if you'll stick with the Tier 2 heading into summer?

Alton, as you know, we began screening our movie titles this year.

We have a high level of confidence that the product that we've picked this summer is going to do very well.

We'll give you some more details about that at the Q2 call.

But we do think the box office does have momentum, which is also good.

We think we've got a good program for Q2 as it relates to this burger and a movie promotion.

Got you.

Thanks guys for your time.

Thank you.

We'll go next to Brian Vaccaro with Raymond James.

Good morning, and thanks for taking my call.

Just a quick -- a couple quick clarifications.

Stuart, did you say what menu pricing was in Q1 on a year-over-year basis?

Menu price, and I didn't, in the first quarter was about 1.4%.

1.4%, okay.

As we think about moving over to the cash flow statement, what was CapEx in the first quarter?

Hold on just a second.

Total CapEx was about $31 million, $32 million.

Okay, great.

Then just last quick one, you talked about gift cards and the tie-in with the promotions with Mall Cop 2, et cetera, but can you give us a sense of what -- how gift cards were looking year on year, both in the first quarter and maybe remind us how your gift cards were up in the fourth quarter during the holiday season?

Thank you.

We continue to see a lift.

If you look at our guidance this year, we've assumed we're going to get a gift card lift continuing of about 10% to 15%.

As Steve mentioned, Mall Cop 2 performed from a sales standpoint as well as Godzilla, which from a profitability standpoint, does really well for us.

We're continuing to bring new news into our gift card program, and that just continues to grow.

Okay, thank you.

The next question is from David Carlson with KeyBanc.

Hi, guys.

A real quick question on the $30-million increase in CapEx.

I understand the 25 additional units at $400,000 apiece, and then the three locations.

It gets me about 2/3 of the way there.

I was hoping you could touch on what the remainder of the increase is supposed to come from?

Then as you look to close out the remodel campaign next year, should we expect the costs to creep higher than $400,000 per store?

Yes, I think the piece you're missing is -- and I touched on it in my remarks -- is you've got about $5 million of new restaurant CapEx related to 2016 openings.

That's probably the other piece of it.

Got you.

That's exactly what I missed.

Sorry about that.

Then one other--

Yes, and then the cost per re-model, if you look at overall construction inflation, and you saw the housing numbers this morning.

Construction inflation I think is going to continue to pick up.

As we move more towards the east coast and northeast, we may get more impacted by more union labor areas, so I would expect there to be probably 4% to 5% inflation on that.

Then on the -- I just wanted to clarify one of the comments from earlier.

I think that you mentioned that you guys were impacted by some delays in permitting, things of that nature.

Did you say that you would expect the majority of the 20 or 25 openings when you include Burger Works, but the majority of those are now expected in the fourth quarter?

Yes, it's more the Red Robins.

The Burger Works, we opened up three of those in the first quarter.

The other two of those will probably be in the fourth quarter.

It's just -- it's amazing, the things we had.

We had two restaurants delayed this year where our landlord had to get approval from another tenant for us to go in there, and the tenant's general counsel quit, and that added four weeks to getting approvals.

Those are the types of things we're facing this year that are a head scratcher, but yes, that's the cause of it.

Thank you, guys.

Thanks.

The next question is from Steve Anderson with Miller Tabak.

Good morning.

I just have a question on Burger Works.

Someone asked if it's maybe too early to provide any kind of margin break-down on the Burger Works side of the business, and how comparable they are with the full-service restaurants?

Thank you.

I think overall if you look at the unit economics, Steve, AUV ranges will be dependent upon the location -- call it $1.1 million to $1.5 million.

The restaurant level margins overall, sort of what we're targeting, will be upper teens.

If you put that together with a build cost of $600,000 to $800,000 depending upon the location, you'll get a cash-on-cash target of somewhere around 30% or mid-teens IRR.

Okay, thank you.

(Operator Instructions)

We'll go next to Robert Derrington with Wunderlich Securities.

Yes, thank you.

Stephen, can you give us a little bit of color on what you've seen in test with the Ziosk and some perspective on how to think about the timing of the roll-out of that this year?

Sure, Bob.

We've been testing Ziosk for several years, if you look at our franchisees' experience in Lehigh Valley.

It's consistent with what you've heard from other folks there.

The single biggest paying point it brings for the guest, which is significant, is the ability to pay at the table.

The guest is not held hostage by their check, which all of us know as consumers is irritating at best, and very frustrating at worst.

Secondarily, we get some -- literally some labor savings as you look at the server not having to go over to a remote POS station with a card and then come back.

It seems trivial, but when you look at all the times that happens in our system, it adds up.

We think that one of the things Red Robin has and we're very proud of, and we know we have opportunities to reinforce, is our bottomless proposition.

We know our bottomless proposition is really important to guests, whether it's fries, root beer floats, or broccoli.

Ziosk gives the guest the ability to order their bottomless refills on demand.

We think that's great, because we want our guests to take advantage of that, because we know what a powerful value and brand enforcer that is.

Then I think last, but not least, there is an opportunity for us to completely engage our servers with it, and make it part of the Red Robin experience.

We've got some basic back-of-the-house work to do from a technology standpoint, as a contingency before we can roll Ziosk out, which really drives the Ziosk roll-out into Q3 and through the balance of this year.

That's mostly Q3 and Q4, is that -- do I understand that correctly?

Yes.

All right.

Then one more thing on the Ziosk.

I'm trying to think about how families with kids, gaming, is that an opportunity for you?

Have you looked at that?

Have you seen much in tests at this point?

Well, you remember the old pre-remodel Red Robins had a bunch of arcade games in the lobby, which is not exactly what you wanted to see in your Match.com first date.

We think that the ability for parents to engage with their kids in the family dining experience is a positive.

We need to make it clear that there's a charge for that, and we think that some parents love the fact that they can connect with their kids during the dining experience.

Other parents love the fact that they can disconnect from their kids and put them onto a game.

That choice is important, too.

Got you.

Stuart, if I could with a quick one, there was a story out I guess, oh, a month and a half or so ago, about some litigation involving one of your franchisees in a minimum wage lawsuit.

Can you give any color?

Is that a risk exposure for the Company?

Is that franchise-related principally?

How should we think about that?

If you look at it, it's some former employees of one of our franchisees, our franchisee in Pennsylvania suing the franchise group.

It's litigation that they are involved in.

It's not something that we're involved in.

Completely inappropriate for us to comment.

Got you.

Okay, terrific.

Thank you.

It appears there are no further questions at this time.

Mr. Carly, I would like to turn the conference back to you for any additional remarks.

Thanks, Eric.

We appreciate everybody's time and attention this morning.

Remember, we'll be back in Q2.

Thank you.

This concludes today's call.

Thank you for your participation.