Red Robin Gourmet Burgers Inc (RRGB) 2015 Q4 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Red Robin Gourmet Burgers Incorporated fourth-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, strategy, objectives, and future performance, including the Company's traffic and revenue driving initiatives, sales growth, operating margin and operating weeks, costs, expenses, expense management, deployment of capital, restaurant technology, development and remodels, performance of remodels and acquired restaurants, new technology, devices, systems, and service offerings, 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 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 and expectations 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 the risks, uncertainties, and other factors that could impact the Company's future operating results and financial condition.

The Company has posted its fiscal fourth-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 Carley, Chief Executive Officer of Red Robin.

Please go ahead, sir.

Thank you Robert.

Good morning everyone.

With me on the call here at the headquarters of the Burger Authority are Stuart Brown, our newly minted Executive Vice President and Chief Financial Officer, and Denny Marie Post, who has been promoted to President of Red Robin.

Congrats to both of these talented leaders.

After we deliver our prepared remarks, we'll be happy to answer any questions you might have.

This quarter, we are shaking things up a bit and Stuart Brown is going to kick off the call with a brief update on Q4 financials.

Stuart?

Good morning and thank you all for joining us today.

Following the pre-release and this morning's full earnings release, I will keep my comments on our fourth-quarter performance brief and then cover 2016 outlook.

Steve and Denny will then fill in details on guest engagement and business initiatives that we have teed up for 2016 and to support continued growth thereafter.

I will not be reiterating all of the details in our earnings release or the supplemental reporting package, so please refer to those for more information.

Our 2015 full-year financial performance highlights includes comparable revenue growth of 2.1%, which outpaced our peers by 1.1% according to Black Box; adjusted EBITDA growth of 20.5% to $148.2 million; and adjusted diluted EPS growth of almost 25% to $3.32 per share.

Both EBITDA and EPS numbers are adjusted to exclude asset impairments, a one-time benefit from a change in gift card breakage estimates in 2015, and executive transition costs in 2014.

In the fourth quarter, comparable restaurant guest counts were negative 4.6%, which was 1.5% below the US casual dining peers according to Black Box.

Average check increased 2.6%, resulting in comparable restaurant sales growth being negative 2% on a constant currency basis.

Also, as a reminder, our Canadian operations have entered our comparable restaurant pool as of the fourth quarter.

Despite the lower comp sales, fourth-quarter operating margins held up nicely as lower ground beef costs helped to offset the sales deleverage we experienced and expenses associated with newly deployed restaurant technology.

This resulted in restaurant level operating margins of 21.9%, a 60 basis point increase from a year ago.

For comparable units, restaurant level operating profit per unit grew 2.1% despite the lower revenue.

For the full-year, our comparable restaurant level profit per restaurant increased 8.8%.

We opened 11 new restaurants in the fourth quarter, bringing our total to 21 openings for the year, including the reopening of one location which had been temporarily closed.

We are very pleased with the performance of our 2015 new unit class with Q4 being the highest quarter for openings in a very long time.

Looking at other lines on the P&L, depreciation in Q4 was favorable compared to our expectations.

We reviewed the useful lives of our fixed assets, particularly assets associated with our remodel program, which resulted in a net extension of depreciable lives.

This change was made in Q4 on a prospective basis and impacted depreciation in the quarter favorably by almost $1 million.

General and administrative costs, selling expenses, and preopening costs were all largely in line with our expectations.

The income tax rate was favorable to our outlook due mainly to Congress' extension of the Workers Opportunity Tax Credit in December.

WOTC reduced our annual tax rate approximately 2.6% and impacted fourth-quarter tax expense by about $1.7 million.

Our capital investments in 2015 totaled $168.8 million of which approximately $78 million was invested in brand transformation remodels, $47 million in new restaurants, and the remainder in technology, restaurant maintenance, and a single unit franchise acquisition.

Additionally we repurchased $40 million of our common stock during the year.

For 2016, we expect capital expenditures of around $150 million, of which about $70 million will be invested in new and relocated units and about $40 million in remodels and expansions.

With over 325 corporate locations conforming to our new brand standards at the end of 2015, we anticipate transforming an additional 70 or so units this year.

In response to investor feedback, we have changed the format of our outlook to now give specific EBITDA guidance in addition to other key metrics.

We expect EBITDA in 2016 to range between $155 million and $165 million.

The low end of the range assumes 2016 casual dining traffic for the industry will be negative 3% or so, continuing the trend from the fourth quarter of 2015 as reported by Black Box.

Our growth rate in 2016 is expected to be limited due to cycling against the strong 2015 results and higher 2016 preopening costs as we increase our rate of opening new restaurants.

Further, we will incur costs for initiatives which Steve will discuss with the benefits starting later in the year and increasing into 2017.

Stock compensation, which we add back to EBITDA, is expected to increase only slightly in 2016 from 2015.

Total revenues are expected to increase between 8.5% and 9.5%, comprised of comparable restaurant revenue growth in the low single digits and the remainder from operating week growth.

Restaurant level margins are expected to increase modestly as lower cost of goods is mostly offset by higher labor rates, particularly from California's minimum wage increase.

Depreciation is expected to be between $82 million and $84 million as a result of the investments in remodeling to our new branch standards, as well as the impact of new locations, including those opened in 2015.

Beyond 2016, depreciation should increase more in line with new unit growth.

In addition to opening 25 to 30 new Red Robins and Burger Works in 2016, we plan to close two and relocate four Red Robin's locations this year.

We expect comp sales to be lowest in the first quarter of the year as we cycle over strong Q1 2015 traffic growth and continue to shift our marketing and media, which Denny will discuss further.

First-quarter GAAP net income will be slightly lower than last year, which included $3.4 million of benefits from the one-time gift card breakage and the lower workers comp and healthcare costs in the first quarter of 2015.

We have set a goal to double EBITDA over the next five years and are building our pipeline of new units to achieve the growth -- sales growth needed to meet this target.

We set this aggressive goal to align our resources and initiatives.

And at the same time, we will also continue to grow our cash returns on invested capital and create meaningful long-term value for shareholders.

Steve and Denny will take you through some of the initiatives underpinning RED Squared and marketing plans.

Steve?

Thanks Stuart.

A few weeks ago at the ICR investor conference in Orlando, we outlined our go-forward plan that we dubbed RED Squared, reflecting the objective of doubling EBITDA by 2020.

This plan focuses on three areas -- revenue growth, expense management, and efficient capital deployment.

I'd like to briefly touch on each one of these for you today.

Let's talk about revenue.

We still have a material opportunity inside our four walls to increase sales at our current levels of traffic.

Not surprisingly, with all of the changes we've made to our menu over the last several years, we've seen both our seating efficiency erode and our ticket times increase.

This has the result of creating false waits and negatively impacting our guest experience.

Currently, our average seating efficiency is about 70%, and our guest ticket times have climbed to 55 minutes.

Our goal is to improve our guest seating efficiency to the 80% level while reducing our guest experience times down to 45 minutes.

By rolling out our new kitchen display system this year linked to a dynamic table management software, these efforts can yield an increase in sales of approximately $50 million annually and significantly improve our guest experience by lowering their ticket times and improving the quality of our food at tableside.

We also have initiatives that focus on increasing guest preference by continuing to close Red Robin's 600 basis point gap versus the industry average in our alcohol and beverage mix.

Remember, each 1 percent increase yields $6 million in incremental EBITDA.

Of course, another major gap to close is the 800 basis point gap Red Robin has versus industry average in the area of to-go.

This can yield as much as an incremental $36 million in EBITDA in the years of 2017 through 2020.

And Denny will talk a little bit about this shortly.

We are also excited about expanding our restaurant base.

We have a lot of white space and opportunity to bring new restaurants to markets where we currently have very low presence.

For perspective, we have more restaurants in Washington and Oregon than we have total in the states of Texas and Florida.

Let's move to "E" on the expense side.

One of our projects for 2016 is to pilot our new supply chain management software which will replace our antiquated, manual, and time-consuming current system.

This project alone represents a 30 basis point opportunity in margin improvement starting in 2017, yielding improved control of waste and cost of goods while significantly reducing inventory levels at the restaurants.

As important as the P&L benefits are, we expect this new system to free up 80,000 hours per year per restaurant for our general managers who will now be able to spend time interacting with our guests and coaching and training our team members.

Our guest insight work reveals that one of the key drivers of loyalty is the presence of a manager on the floor of the restaurant, and this is where they are going to be instead of manually filling out forms in the back office.

With the successful national rollout of Ziosk, or Robin as we call it at Red Robin, we've addressed the number one pain point of casual dining, being held hostage by your check.

Red Robin guests appreciate the ability to pay at the table and our team members get to spend more time engaging with them.

The device has also eliminated some non-value-added labor such as running back and forth, clearing checks, and remote POS terminal.

The presence of this technology in our restaurants gives us a significant increase in our ability to effectively manage rising labor costs with creative staffing models that preserve our speed of service and maintain and enhance our guest satisfaction.

And finally under expense, there's always a potential for greater G&A leverage associated with higher revenues and the infrastructure improvements we continue to make which are easily scalable.

Moving on to the "D" for capital deployment, this year, we expect to complete our brand transformation remodels in all Company restaurants with franchise restaurants following closely behind.

We'll also be investing in additional restaurant level technology in 2017 and beyond that will make our restaurants even more efficient and position us well for the future.

We have a number of ways to deploy capital going forward, including other guest-facing technologies, share repurchases, and franchisee acquisitions.

Remember, the completion of our brand transformation efforts this year will generate a significant increase in free cash flow in 2017 and beyond to reinvest in the business as returns warrant and/or thoughtfully return to shareholders.

These three buckets -- revenue growth, expense management and efficient capital deployment -- contain a robust series of strategies and tactics for the next five years, enabling us to double our EBITDA by 2020 by growing our volumes within the current restaurants, accelerating new restaurant openings and expanding our EBITDA margins to best-in-class levels.

With that, I'll turn the call over to Denny to discuss some of the marketing initiatives we are excited about.

Denny?

Thanks, Steve, and good morning everyone.

As Steve said, we are coming to you from the home of The Burger Authority, and I hasten to add the home of the Super Bowl champion Denver Broncos.

Go Broncos!

I will take the next few minutes to share what we've learned from the last quarter and how we'll be applying it to our marketing and menu plans going forward, as ever mindful not to tip our hand to competitors as we are all seeking to gain and hold a competitive edge in this very challenging consumer environment.

In Q4, we were, frankly, swamped by competitive media pressure behind myriad $6 price point and a so-called endless food promotions.

While it is nothing new for us to be outspent by bar and grill competitors, it is no excuse, and we should have been prepared to outthink them.

We have relied on our $6.99 everyday value Tavern Double with Bottomless Steak Fries televised message on and off for much of the last three years.

We did not have a go-to backup tactic or compelling news worth talking about in earned media and PR channels.

When it became evident that the pressure was taking a toll, the team rallied and got us back in the conversation first with tremendous PR behind our new Finest chicken burger dubbed the Marco Pollo, and then by dialing up our outreach to Red Robin royalty members with a profitable traffic driving 12 Days of Burgers promotion.

By quarter's end, we were back in the fight.

This set us up for a better course moving forward.

We are working in earnest on a new advertising campaign to improve breakthrough and on thoughtfully reconsidering our media spending patterns and choices.

Changes will be evident in Q2 and beyond.

We are also digging deep with our consumer insights team on what market factors are uniquely affecting our business.

Research shows we are doing as good a job as ever, perhaps even better, at retaining core guests, but that we need to compete more actively for those casual dining patrons who make choices more on current deals than on brand affinity.

This informed our decision to go on air a few weeks ago with a limited time Double Tavern Double Plus offer.

This offer invites guests to enjoy any two Tavern Doubles of their choice, which includes styles like the Pig Out for our Fiery Ghost, with our famous Bottomless Steak Fries and either a $5 appetizer or dessert to share for just $15, up to $8.00 in savings.

Beyond this limited time offer, we have dialed up our product pipeline across the barbell of burgers informed by Concept Research.

We will be driving talked about product news all year long while we continue to fuel and grow the Red Robin royalty program which offers significant resident value and is driving frequency amongst our core guests.

We ended the year with over 5 million registered members, exceeding our expectations and supported by our new tabletop technology and Burgers for Better Schools program.

In summary, for the near-term, we will optimize our tactics in messaging to compete more aggressively for incremental guests.

Longer-term we have two high priority opportunities that Steve alluded to to drive organic growth -- continue to increase our sales of adult beverages, specifically beer, and getting in on the online to-go game.

As you all know, we have made steady, year-over-year progress on building our alcohol sales.

From the original Take Back the Bar initiative to our everyday value drink and beer pricing in lieu of happy hours, to our rebranding as Red Robin Gourmet Burgers and Brews, we have built the business back from just over 5% mix to 8%.

We won't rest until we are back in double digits and we believe a focus on beer variety.

After all, what goes better with a great burger than a perfectly paired beer, will get us there.

We are finalizing an initiative to bring 12 taps and 12 bottles to every Red Robin, increasing the number of draft lines an average of 50%, making room for the ever popular nationally distributed draft beers and the higher-end craft and local brews that guests are increasingly asking us for.

We will update you on our timing and outcomes as we move forward.

We have also fallen far behind competitors in the to-go and catering space, which are increasingly popular modes of access for guests who want options for restaurant food at home or in the office.

Currently, we mix below 4% for carry-out and have no online ordering capability.

Just lifting our mix to equal that of the average CDR players in this space would be the equivalent for us of building over 25 new restaurants.

We will get ourselves set this year with the technology, operations experience and marketing learning we need to capture our fair share of this growing opportunity in 2017 and beyond.

Doing what we do best as The Burger Authority, competing with smart dimes versus others' dumb dollars, and growing organically through higher PPA and to-go, will help us realize the revenue goals of RED Squared over the next five years.

So, with that, back to Steve for final comments before we take questions.

Thanks Denny.

To summarize, there are significant opportunities that remain in place for us at Red Robin going forward and we are very confident that the RED Squared roadmap will help us focus and capitalize on them, driving us toward our goal of doubling EBITDA by 2020.

As always, I'd like to thank our Red Robin team members for their hard work and dedication as they continue to stand apart from the competition by greeting our guests with bottomless fun and a genuine spirit of service.

Our teams are the reason we continue to be recognized as The Burger Authority.

At this point, operator, we'd like to open it up for questions.

(Operator Instructions).

Joseph Buckley, Bank of America.

Could you just review the different technology initiatives and what can be implemented in 2016?

Kind of across the waterfront, there was mention of a lot of things, but just to kind of understand the sequencing of it and how much -- how many of those projects can be accomplished this year?

Thanks Joe.

This is Steve.

As we look across the next 12 to 18 months, the first technology following up on Ziosk or our Robin platform will be the kitchen display system, which we expect to have implemented by midyear.

That is going to dramatically improve a couple of things, first our food quality.

Right now, the technique we use in the back of the kitchen to make sure an item that takes 10 minutes to cook comes up with an item that takes two minutes to cook is we scream at each other.

What we've learned that not surprisingly is this is not the most efficient method to do it.

So with KDS, there is algorithms that fire food exactly timed so that the full order for that table comes up at the same time in the expo window and can get delivered hot and fresh to the table.

We are then going to follow that up a little later this year with a dynamic software for table management, which is a way to seat guests more efficiently to make sure, if there's two chairs, two people sit in them and if there's four chairs, for people sit in them.

This is also going to be linked to the kitchen display system so that the kitchen has a heads up digitally about what the wait times are looking like.

We're also going to pilot the comprehensive supply chain management system this year which is going to automate our arduous and manual inventories, ordering, and production processes in the restaurant.

This is a significant upside for us.

Not only will it help us manage cost of goods and waste, including liquor waste, but it's going to free up our general managers to spend time training their team members and interacting with guests, so they will be on the floor instead of sitting in the back office.

And we are also going to get after online ordering and a wait list management, this the end of this year by putting those technologies in place.

So we'll get some pay off in 2016 on KDS and table management.

We are going to pilot these other key technologies, and we'll get the full benefits of them in year 2017 and out.

Okay.

That's very helpful.

A question just on sales sequence.

You know, it sounded like you took some initiatives toward the end of the fourth quarter and maybe ended the quarter a little bit better than the down 2%.

But I know the new advertising campaign is a second-quarter event.

And just curious kind of the sequencing of sales, particularly here, for the first quarter.

Joe, this is Stuart.

We don't typically talk about results in our quarter.

We did talk at ICR a little bit about -- and we talked about it here -- about coming back with new messaging and new news in December, which helped us to bend the trend as we exited the quarter.

Okay.

So you finished the -- did you still finish the quarter negative or can you say that much?

The industry in December was negative.

I think capital dining was negative about 3%.

So our performance relative to the industry was better in December than the previous months, but more detail than that we are not going to give.

Okay, thank you.

John Glass, Morgan Stanley.

Just first maybe on a high level, so RED Squared you are going to grow -- double EBITDA in five years, so you are going to compound growth, grow it at maybe 15% a year.

So, how do you think about -- is this primarily a revenue plan and expenses are secondary, or is it balanced?

How do you think about the big buckets that you discussed and how they contribute to that 15% growth each year?

John, this is Stuart.

I think it's going to be a combination of things.

Some of it is going to be topline driven, which then you get leverage off of.

So in order to achieve that, to your point, yes, you need to get, on average, EBITDA growth of 15%.

You need EBITDA margins to expand.

Our EBITDA margins today are still probably around 200 basis points below industry.

So even just getting back to industry margins over that time frame will cover a big piece of it.

So if you get topline growth, total revenue growth of call it 8% to 10%, then you'll need margin expansion of somewhere 200 to 250 basis points in order to achieve that over the time frame.

Okay.

And if I were just to summarize how you think about the buckets for revenue, it sounds like it's the to-go business and maybe the alcohol beverage business, and then on the expense side, it's like KDS and table management that kind of allows better labor -- are those like the four or am I missing a couple of other big building blocks that will get you there?

This is Steve.

Remember the KDS and table management piece is going to dramatically enhance our ability to grow the sales during particularly our peak times when we are on wait in our existing four walls.

The supply chain stuff which we will pilot this year and begin to benefit for in 2017 is going to help us out in margin expansion.

And then I'll turn it over to Denny for a couple of the major revenue growing initiatives that are big opportunities for us.

Obviously continue to drive frequency through Red Robin Royalty is a key for us and we continue to see upside there.

Just frequency of visit makes a huge difference for us, John.

And additionally, some segmented and targeting efforts that we've got going on in our advertising programs I think can start to give us some edge as well.

And then just one final question.

This offer you are doing, the Two for $15 deal, and you emphasized a few times limited, so is this a one-time tactical offer?

Or do you think you have to evolve to a more different -- I know you've had before an everyday lower offer, the Tavern Double, but does it have to evolve to a permanent like more sharp value, or is this just a one-time tactic and then you feel like your prior value messaging really works on a more go-forward basis?

We are currently viewing it as a limited time tactic to bridge us to our next efforts around product news.

And I would say we are always evolving.

So we just need to keep sharp.

Okay, thank you.

Will Slabaugh, Stephens.

I want to ask about the Tavern platform and future plans there.

How did that platform trend during the period where you had increased discounting from a lot of your bar and grill peers?

And can you give us any more detail about what types of changes you feel like you need to make to better insulate your proposition to your guests?

I don't think we saw material change in mix in Q4 for Tavern overall.

Certainly, emphasizing it now, we've seen some uptake with taverns, which is a good everyday value trial tactic for us so the guests come to know us.

There is still limited awareness of the fact that we do have a $6.99 offering to start every day.

And then beyond that, I think we have opportunities to always increase the value side of that barbell but to do so in a way that doesn't involve discounting as much as it involves every day value.

So we are working to see what other items we can add there that will bring some news.

Got it.

And as a follow-up there, are you planning that the burger focused discounting that we saw so heavily in 4Q continues throughout 2016, or are you assuming some of that tapers off, which I realize we've seen some of it taper off already?

In terms of competitors?

Right.

They use burgers a lot of times as the low end of their menu to pull other folks into their entrees and other things.

So, we've seen increased activity.

I wouldn't ever count it out, and certainly would expect it to come back certainly by fall.

Okay.

And lastly, whenever you think about the buyback that you put out this morning, that was a pretty big number, so just curious on any sort of thoughts you can give us around how that could play out through 2016 as you think about share repurchases.

Will, I think it's very consistent with what we've been telling investors and shareholders in terms of our capital allocation strategy over the next few years that, as we wrap up our brand transformation remodel program, we will start to free up free cash flow and we will continue to look for ways to optimize returns for shareholders.

There's a number of different things we can do.

We'll get great returns on the technology we are talking about.

So we will put capital to work there.

And at some point, though, I expect that we will generate more free cash flow than we can effectively put to work, at least for some periods of time.

And so we'll look for ways to return that to shareholders and expect that to be increasing as we look out over the next two to three years.

Thanks guys.

Alex Slagle, Jefferies.

I just wanted to follow-up on Joe's question earlier on just the trends, you know, actually looking into the first quarter and weather -- how we should think about weather and the Super Bowl having an impact on your business, especially with the Bronco's involvement.

Yes, we had Seattle last year, which is a strong market for us as well.

So I think, in terms of what we are cycling over, I mean we have weather every year.

Our goal is to continue to outperform industry trends, as probably everybody saw Black Box and I guess maybe even Knapp-Track has released numbers as well.

The industry has cycled over a very strong January last year.

On our call a year ago, we didn't talk about January's performance because it was really strong and you never know how the rest of the quarter is going to play out, and we'll do the same thing now.

And in the fourth quarter, was California still a strong market for you, or was there any change regionally?

California continues to perform well just as a regional market for us.

We've got -- from an operations standpoint, they do a fabulous job and the economy there has held up nicely as well.

Great.

And then on the mix drivers for 2016, how should we think about overall check growth from menu mix in 2016, whether it's the apps, or beverages, premium items?

Yes, I mean we are going to continue.

I think a lot of the same efforts that we've been doing, and Denny talked about alcohol mix, growing traffic counts as well and cranking up the to-go as we get in later in the year.

I think from a pricing standpoint, next year, we'll continue to watch COGS.

The one thing I think for everybody to keep in mind is that the COGS benefit will be much greater in the first half of the year.

Ground beef prices really came down really sort of in the August time frame of 2015.

And so we'll be cycling against higher numbers really for the next six or seven months and then the COGS numbers below.

As we get further in the year, we'll give more guidance on sales and pricing.

I'd also point you to our current promotion.

We've just rolled back into the Wild Pacific Crab Cake Burger which has returned for the Lenten season.

I was at Red Robin last night, enjoyed one, it was terrific and also started off with Voodoo fries which is a -- will blow your head off I will tell you that.

It is smoking hot -- and enjoyed the voodoo fries to start the meal last night.

So we are continuing to drive news with that.

I didn't have room for my root beer float cake, but I did take some Doh!

Rings to go using Robin to order.

And so continue to see a lot of opportunity across all elements -- and my husband had a beer.

Sounds good.

So, those opportunities continue to exist.

I try to go to the restaurant wherever I can to model that kind of behavior.

Got it.

Thank you.

Imran Ali, Wells Fargo.

With your accelerating pace of development this year and going forward, what is the cadence of these openings in 2016?

Yes, I mean it's inherent in our overall revenue guidance.

We were quite back-end weighted in 2015.

2016 will be a little bit more balanced.

It's still fairly back-end weighted.

I would say sort of on average, we've got about half of them still opening in late third quarter, fourth quarter, but it will be more well-balanced, and that's what's inherent in the operating week guidance.

Okay, understood.

And just looking beyond this year, just how is your pipeline, if it's not too early to talk about it?

How is your development pipeline shaping up in 2017?

And also, can you remind us what you believe your ultimate unit potential is?

Yes, the overall unit potential, it's been a little while since we've updated it but there continues to be at least 400 additional sites as we look out there, especially as we've gone more towards building the midsize units.

They cannibalize less, so we can build tighter densities of networks, which is great.

Profitability, team member, training, openings of those have been great.

And so it's -- if we got the pace back up to call it 35 per year, which I think is where we peaked in the mid 2000s, I think we are -- something we've handled from a management perspective.

The pipeline is getting in better shape.

We've reorganized our real estate team, reengaged brokers.

We've changed a number of processes.

So, in addition to having a better pipeline, our development timelines are coming down in terms of how long it takes us to get locations opened from when we get a lease signed.

So, we are feeling very good.

And then we see an increasing number of conversions of existing teams as well.

So, we've got landlords coming to us to take over other restaurant spaces.

Okay, great.

Thanks very much.

David Carlson, KeyBanc.

Denny, Stuart brought up a couple of minutes ago in discussing mix, he also discussed traffic initiatives as well.

But you know, it's not really apparent from the recent results that the remodel program has driven much same-store sales improvement and traffic performance over the last year was pretty volatile.

So realizing you don't want to tip your hand to the competition, but hope you can help us understand what are the most important initiatives to drive sustainable traffic growth this year?

I think competing as we talked about for that deal buyer to start off of the year, getting back in the conversation with regards to product news.

Candidly, we didn't have a lot go on past mid-summer of last year when we were tied in with the Terminator movie and got a lot of activity around that terrific burger.

So, the internal combinations of great value and great news, and then once they are in the restaurant, getting them to step up to whether it's the finest mix which continues to grow -- our Marco Pollo chicken item that was just added there has been doing really, really well, we are very pleased with that -- or adding on the things we talked about, alcohol, apps, and desserts.

And with regards to BTI, those locations continue to outperform those we have not yet transformed.

And so it's still the right thing for us to have done moving the business forward and inviting our guests in for multiple occasions.

Particularly in an economically-pressed environment, we want to make sure we are capturing adult dine-in as well as family.

Maybe as a follow-on to that, we saw selling expense down 15% year-over-year in the fourth quarter, which likely led to that traffic number you guys said up front.

But would you say that -- would you expect selling expense to be down in any of the quarters year-over-year in 2016?

Selling expense patterns will largely -- I mean as a percentage of sales -- will stay largely the same in 2016 as it did in 2015.

And the timing of that gets impacted by different things, just gift card costs and timing of media.

But overall --

We are not cutting back.

-- we are going to be largely the same.

We're not going to be cutting back.

We're not cutting back.

Okay, fair enough.

Then, one more if I can.

You guys have noted that the Red Royalty program is really an important part obviously of the overall marketing strategy.

I was hoping you guys could let us know what percentage of your sales is generated by that loyalty program?

Like you know, we let everybody else know we are not going to do that.

Sorry.

It's material and growing.

It's material and growing?

There's a good one.

Fair enough.

But if I can add something onto that, are these numbers more or less reliant than non-loyalty members to coupon usage and other discounts is really what I'm getting at.

They are responsive to great offers, but as you remember, our program is structured primarily on the earned value of buy nine, get 10.

That's the majority of how our guests engage with it.

Otherwise, it becomes an opportunity for us to speak directly to them about things like the Lenten Crab Cake being back or to go out and tap into them with something like 12 burgers of Christmas which we did the end of last year.

So, but I wouldn't say they are any more reliant on it.

It certainly creates resident value for them.

David, recognize that, with this base of users, we understand both their frequency of visit and their spend.

And so we don't market to this base the same way.

We can put an offer to someone who hasn't been in for six months that's very, very different from someone who comes in on a monthly basis, and that's one of the secrets to the program.

It allows us to micro-target specifically against users' frequency and spend levels appropriately to see if we can't generate the behavior we want.

So it's much better than, say, some of our competitors here in Denver as an example who will drop a Sunday insert in the Denver Post, basically carpet bomb the market with two units.

We don't have to do that.

Thank you guys for the time.

Brian Vaccaro, Raymond James.

Just a couple of quick ones for me.

First, just back on the fourth quarter comp, Stuart, can you provide the price mix breakout of your average check in the quarter?

Yes, price was, in the fourth quarter, was about 1.9% of the total.

Okay, all right.

And sorry if I missed this, but how are you thinking about menu price increases as we move through 2016?

I think, overall, the guidance assumes sort of price mix total of call it 2% to 2.5%, and we'll break out more of that as we get through the year and see what happens from a COGS perspective and how much we need to take.

Okay.

All right.

And on the 2016 guidance, I appreciate the EBITDA guidance you provided.

But as you think about store margins, I think you said modest leverage in 2016.

Can you provide a little more color as it relates to sort of your food and labor cost outlook in terms of the inflation or deflation as it would seem you are going to see on the food cost side?

I think obviously, in total, 2016 will probably look a lot like it did in 2015, obviously higher labor inflation, particularly with California minimum wages going up $1.00 as of January.

And so you'll have COGS that will be for the year flat to slightly down, obviously within the seasonality that I talked about earlier on that.

So, on the labor side specifically, I think, in the past, you talked maybe about let's say a 4% type of range?

Yes, yes, 3.5% to 4%.

3.5% to 4%?

Okay.

And just the last one, on the G&A outlook, I know you didn't guide to it specifically, but it looks like you are expecting relatively flat, just sort of looking at your EBITDA guide.

Are there any costs associated with the technology and equipment rollouts that you discussed in that, or is that purely flowing through CapEx?

No.

Some of that is in the EBITDA guidance as well.

Some of that will hit the restaurant.

Some of that will hit G&A, and so you'll get some G&A growth with inflation but also new unit growth largely.

And then some of it is also recycling -- we had with the rollout of Robin last year some of last year's technology -- there is something inherent already in the run rate.

Okay, all right, fair enough.

Just one last quick one.

On the acceleration in your unit growth that's underway, can you speak to the unit economics that you've achieved, say, in the class of 2013 and 2014 that have sort of reached a maturity curve here that supports that accelerated rollout?

Can you give an update on that?

Yes, no, we continue to be really pleased with how they are doing.

Again, we balanced out the number of openings between what's in our core existing markets and what's in new markets.

And so I mean overall, the blended returns continue to be IRR in the upper teens on average and we are getting a 25% to 30% cash on cash return.

We continue to see some inflation in build costs, particularly in the Pacific Northwest and in the Northeast, but those returns are holding up nicely.

Okay.

Thank you.

Steve Anderson, Maxim Group.

So good morning.

And I know you guys discussed some of your bar and grill competition.

It looks like, if I read it correctly, like some of the burger-based promotions may be -- may have decelerated a bit from what you saw in fourth quarter.

But what about what's going on in the quick service burger segments?

I don't know if you are seeing any kind of defection there.

I know they had a fantastic quarter in the entire segment.

But I just want to see if that's the kind of -- if you are seeing any kind of overlap with those kind of customers.

I was going to say, certainly, with burgers being one of the most popular menu items right up there with pizza, you are always going to see some overlap of usage, but we have not seen that I don't think specifically, particularly when you look at occasions and how we meet different occasions for guests.

That occasion is primarily filled by to-go, on-the-go, lunch, drive-through now obviously with being able to get breakfast at least one or two places all day long.

There is some pressure there but it's a different occasion than we serve with the full-service dine in.

Okay.

Thank you.

Joseph Buckley, Bank of America.

Round two.

Just a couple of quick ones.

Did Canada entering the fourth-quarter comps have a significant impact one way or the other?

I wouldn't say it's significant because of the number of restaurants, but given the impact of the lower oil prices and what that's doing on the economy in Alberta, the impact was negative.

They tend to underperform the US and from a comp standpoint, it was negative 3%, 3.5% I think on the top line, really economically driven.

Five of our 18 locations are in Edmonton, Alberta, and have been very heavily affected.

Okay.

Then I'm curious on the time, the service time, growing so much longer.

Do you have a sense of what has driven that as you attempt to drive those service times -- to take the table service times back down?

Sure, Joe.

If you look back at our menu five or six years ago, we had a line of gourmet burgers that had multiple different buns, the same size patty, and different builds.

Fast-forward to today, we have the entire Tavern platform which tends to cook much more quickly than another platform we put in place that we really, really love, which is the Finest platform.

So you come in with me and I get a Tavern Double and you get a Smoke & Pepper, the difference in cook times is material in the kitchen.

We've simply asked our people to figure it out.

And as we add more apps and more desserts and as we added more nonalcoholic beverage options, we've reached a point where we need to give those heart of the house teams the tools, the technology tools, that, quite frankly, many of our -- almost all of our competitors already have to help them manage the variance in cook times, to ensure that a table of four entrees comes up all at the same time in the pass-through window and is immediately run to the table.

We have a high level of confidence the technology we are putting in place is going to really address that issue.

Okay.

And then just a question on the Finest mix.

Denny, I think you said it continues to rise.

Are you seeing any leveling affect there?

Is there some natural ceiling to -- that you can see in the trend in terms of how high that Finest mix can go?

That's part of the reason that we are relying so heavily on our things like the crab cake, bringing it back right now.

It attracts a different user, Joe, so you can broaden the mix beyond what beef is able to do.

Why did we focus on LTOs like the Mad Love which was so popular in December?

The results on those who tried that burger are just through the charts in terms of interest in repeat purchase.

And then having just launched the Marco Pollo, we've actually seen mix double from holiday to winter.

So as we drive trial, it's really stepping up, and we know that adding different proteins to that line had the opportunity to continue to grow it.

Okay.

That's helpful.

Thank you.

This concludes our question-and-answer session.

I will now turn the call back over to Mr. Carley for closing remarks.

Thanks, everybody, for your time and attention, and we look forward to speaking with you here at the Q1 2016 call.

Thank you.

And this does conclude today's conference call.

Thank you again for your participation and have a wonderful day.