Ruth's Hospitality Group Inc (RUTH) 2008 Q2 法說會逐字稿

Hello. Good afternoon ladies and gentlemen and thank you for standing by. Welcome to today's Ruth's Hospitality Group, Incorporated, second quarter 2008 earnings conference call. At this time all participants are in a listen-only mode.

Following the formal remarks, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue for questions. Hosting today's conference will be Rob Selati, Chairman of the Board, Bob Vincent, Chief Financial Officer, and Geoff Stiles, President of the Ruth's Chris Brand.

As a reminder, today's conference is being recorded. I would now like to turn the conference over to Mr. Bob Vincent, Chief Financial Officer. Please go ahead, sir.

Thank you and good afternoon. We need to remind everyone that part of our discussion today may include forward-looking statements. These statements are not guarantees of future performance and, therefore, undue reliance should not be placed upon them. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks that could impact future operating results and financial conditions.

I would now like to turn the call over to Rob.

Thanks, Bob. Good afternoon. I'm Rob Selati, Chairman of the Board. Before Bob and Geoff discuss the quarter, I wanted to take a few minutes to address the other press release we issued today.

On behalf of the entire Board, I'm very pleased to announce the hiring of Mike O'Donnell as the President and CEO of Ruth's Hospitality Group. The Board had established a very high standard for the new CEO and conducted an extremely thorough search to find the individual who would meet this standard. Mike O'Donnell not only brings 25 years of highly relevant restaurant industry experience to the table, but also a terrific traffic record of and reputation for exemplary leadership, team building, unquestionable integrity, and consistently delivering shareholder value.

Mike's most recent leadership experience includes serving as the Chairman, CEO, and President of Champps Entertainment. Mike led an operational turnaround at Champps that culminated in the successful sale of the business to Fox and Hound Restaurant Group. Prior to that, Mike was the President and CEO of Sbarro, which, at the time, was a family-owned and operated business. During Mike's tenure as CEO there, operating income doubled, international franchise expansion accelerated, and the company which was highly leveraged at the time he joined, realized a significant reduction in leverage. Mike's tenure at Sbarro ultimately resulted in very significant value creation for the shareholders of Sbarro and he remains on the board of the company today.

Prior to Sbarro, Mike was the President and CEO of New Business at Outback Steakhouse. In this capacity he was responsible for all non-Outback Steakhouse brands, including Carrabba's, Roy's, Fleming's, and Cheeseburger in Paradise. He presided over a successful operational turnaround at Carrabba's, as well as significant unit expansion at both Roy's and Fleming's.

Mike's experience base is highly relevant in many respects. He has been the CEO of two public companies. He has had meaningful experience with both company-owned and franchise concepts, and has a proven track record of working well with franchisees, a very important constituent at Ruth's. Within his broad ranging sector experience, he's had excellent experience presiding over both full-service and upscale dining concepts, as well as multiple brands. He's had experience operating with a leveraged balance sheet, and, most importantly, he has consistently demonstrated great leadership skills as he's built and inspired the teams for which he's been responsible.

We feel that Mike is inheriting two great brands, as well as a terrific and dedicated existing team at Ruth's Hospitality Group. We're thrilled to have him onboard and look forward to working with him to build value for our shareholders.

I'll now turn it over to Bob.

Thank you, Rob. Now moving to the second quarter. It's really clear that the environment for upscale dining is more challenging today than it has been in recent memory. This is reflected in our second quarter results. Our top-line performance continues to be challenging. And while we have actively managed the costs we can control, the high fixed-cost nature of our concept has had a negative impact on both margins and profitability.

Overall, traffic counts for the quarter were weak, partly due to trends in our two largest markets, California and Florida, which represent approximately 45% of our comp base and clearly remain challenged. Results in those markets, for the most part, were inline with Q1 results and negatively impacted our Q2 comps by approximately 2%. However, the marketing initiatives that Geoff will speak to in a bit were encouraging, particularly in the last few weeks of the quarter.

As described in our earnings release today, for the second quarter ended June 29, 2008, we generated total revenues of $108.1 million, which was 37.9% higher than last year's $78.4 million. Company-owned restaurant sales grew at 39.7% to $102.8 million, from $73.6 million in the second quarter of 2007, largely due to a 59.7% growth in restaurant operating weeks for a total of 1,097. This included an additional 124 weeks at company-owned Ruth's Chris Steakhouse Restaurant in operation year-over-year and 286 additional operating weeks related to the Mitchell's acquisition.

Average weekly sales for all company-owned Ruth's Chris Steakhouse Restaurants were $98.3 thousand in the second quarter, compared to $107.3 thousand in the same period last year. Comparable restaurant sales at Ruth's Chris Steakhouse decreased 7.1%. The average check increased by 2.1%, driven by menu mix shifts and year-over-year pricing of approximately 2.5%. We also experienced a 9% reduction in entres. Our comparable restaurant sales at Ruth's Chris Steakhouse during last year's quarter were down 0.4%.

With regards to our Mitchell's acquisition, we generated $23.1 million in restaurant sales from our new Fish Market and Steakhouse Brands for the second quarter of 2008. We are combining the Fish Market and Steakhouse Brand for the purposes of both average weekly sales and operating weeks, although the latter reflects less than 15% of both metrics.

There were 286 Mitchell operating weeks included in our second quarter results this year. Once again, we will not consider Mitchell's to be comparable until the end of the second quarter of 2009, at which point we have operated these locations for more than a full year. We, therefore, will only provide Mitchell's average weekly sales in fiscal 2008, which, for the second quarter, were $80.8 thousand compared to $86.9 thousand in the second quarter of 2007.

Franchise income grew 2.1% to $3 million, versus $2.9 million in the second quarter of 2007, due primarily to the net addition of seven franchise-owned locations year-over-year. Domestic comparable franchise-owned restaurant sales decreased 9.1%, while international comparable franchise-owned restaurant sales increased 4.1%, which combined for a blended comparable franchise-owned restaurant sales decrease of 7%.

Other revenue was up 26.3% to $2.4 million, from $1.9 million, as a result of higher gift card breakage. Please note that we calculate breakage on an 18-month basis. So, therefore, breakage recognized in Q2 of '08 reflect unredeemed gift cards purchased in Q4 of 2006.

In terms of our cost structure as a percent of restaurant sales, food and beverage costs decreased 110 basis points, 30.7% from 31.8% in the prior period. Favorable beef and seafood costs offset higher grocery and dairy costs through the period. Once again, (inaudible) prices have been favorable, as we continue to purchase on the spot market with approximately 25% of our prime needs locked this year. We are constantly monitoring the market as it relates to our purchasing requirement. And while it is difficult to time the market, we are pleased with our position today.

Restaurant operating expenses as a percentage of restaurant sales increased 380 basis points, 50.2% from 46.4% in the prior year. The majority of this deleveraging was due to weak comparable sales, as many of these expenses are fixed. That being said, we are actively focused on containing costs in our restaurant without compromising anything that touches the guests.

Marketing and advertising costs were $4.8 million in the second quarter compared to $2.2 million in the prior year or 4.4% of total revenue versus 2.8%.

As we detailed on our prior call, we are raising our annual marketing expenditure this year by approximately 100 basis points in an effort to create more awareness for our brand and to promote a value-oriented message to drive traffic. Geoff will discuss some of the specifics in a few minutes.

G&A costs as a percentage of total revenues increased by 210 basis points, largely due to $1.4 million in severance costs related to the former CEO, $900,000 in FAS123R costs compared to $300,000 in previous year, along with $800,000 in incremental costs associated with the Mitchell's acquisition.

Operating income was $4.7 million compared to $9 million last year. Our net interest expense was $1.2 million in both periods. However, in the second quarter of this year, we had an approximate $1.2 million mark-to-market non-cash benefit relating to an interest rate swap.

Net income available to common shareholders for the quarter was $2.7 million or $0.11 per diluted share, compared to $5.4 million or $0.23 per diluted share for the prior year. Our effective tax rate for the second quarter was 26% versus last year's 32% rate. On an adjusted basis, you have to exclude the non-cash interest rate swap benefit this year as well as the CEO severance cost adjusted diluted earnings per share for $0.12 in the second quarter of 2008.

I would now like to make a few comments regarding our balance sheet and reiterate some of what I said at an investor conference in Boston a few weeks ago. Long-term debt at quarter end was $179.8 million. Our leverage ratio at the end of the second quarter, which is essentially total debt divided by adjusted LTM, EBITDA, as defined in our credit agreement, was 3.25 times versus a covenant level of 3.5 times. Hence, we were compliant from a covenant standpoint. As we also mentioned in calculating LTM, EBITDA swap covenant purposes, we get to add back certain non-cash charges and we also get to treat the EBITDA from the Mitchell's acquisition as if we had owned the business for a full-trailing 12-month period at the time of the calculation.

One of our primary corporate objectives at this time is to maximize free cash flow and to pay down debt in order to ensure maximum operating flexibility and to remove any risk related to debt covenant compliance going forward. There are a number of initiatives that we are undertaking to ensure this. First, given the difficult sales environment, we have launched several cost-cutting initiatives that we believe will not impact the quality of our guest experience and that are targeted to produce over $8 million of annualized savings. These savings, which we expect will be fully realized in 2009, are in the areas of supply chain, G&A, and restaurant level expenses. We expect to realize approximately $3 million of these savings during the balance of fiscal 2008.

Second, we are actively seeking to monetize some of the real estate assets on our balance sheet. As we announced earlier today, we have executed a purchase and sale agreement for a sale leaseback transaction for five company-owned restaurants. We expect to close this transaction in mid-September with net proceeds of approximately $16 million. We are also evaluating a sale leaseback of the company's corporate headquarters building, but do not have any committed plans at this point.

Third, we have revised our development plan. We will now open five company-owned Ruth's Chris Restaurants in fiscal 2008, versus previous guidance of six openings, of which three openings have already taken place. Fresno, California, our fourth, will open next week, and Barrington, Illinois is expected to open in the fourth quarter. In terms of our franchise development, we expect to open six to eight franchise restaurants, six of which have already opened.

We have existing commitments to open three company-owned Ruth's Chris Restaurants in 2009, and, at this time, we do not anticipate that we will open any more than that. We continue to be very optimistic about the expansion potential of Mitchell's and do plan to open two Mitchell's in 2009, although we do not have any signed leases at this point.

Given the corporate priority of maximizing free cash flow in this environment, we are applying a very high level of scrutiny every capital expenditure we make. That includes new restaurant spending where we are working hard on value engineering costs out of the build-out as well as significant remodels. While we have not yet finalized our capital spending plans for 2009, we expect that the aggregate amount of capital expenditures in 2009 will be materially less than that in 2008, on an apples-to-apples basis, that is excluding the Mitchell's acquisition.

Coming back to 2008 guidance. We now expect comparable sales declines to be in the minus five range, which is at the low end of our original range. We believe that the above-mentioned cost-cutting initiatives will largely offset the drop in earnings associated with the sales shortfall and, as such, at this time we still believe that we can deliver EPS from continuing operations without an -- within our original guidance range of $0.55 to $0.60, excluding charges associated with our CEO transition.

However, if negative sales trends persist at the level we experienced in the first half or if cost savings do not materialize as quickly or as significantly as we expect, we will likely come in below this range. We will update this guidance at the end of the third quarter.

I would like to reference one other item before I turn it over to Geoff Stiles. Every year end, as part of the audit process, we examine our existing base of restaurants for the purposes of determining whether or not any of our assets are impaired. As with any large restaurant company, we believe that there is some risk that two to three of our under-performing restaurants, if they were to continue to under perform, could be deemed impaired. If this is the case, we would be required to take a non-cash charge related to the impairment. Because we don't know what the outcome will be at this point, we have not reflected any of this in our guidance. We will be in a position to comment on the likelihood and magnitude of this when we announce our year-end results.

With that, let me turn the call over to Geoff Stiles, President of the Ruth's Chris Brand.

Thanks, Bob. I'd like to address our efforts to re-energize traffic and navigate through the current economic environment. First, we believe that our value-oriented approach may well be the foundation to improve traffic trends and return to a stable comp sales base and support our guidance previously stated. Our approach, driven by menu initiatives is a response to our core guest desires and current fine-dining trends.

On June 2nd of this year, we rolled out our Summer Celebration with a bundled offer, two guests to -- can dine for $89. This includes a variety of entre choices and is a compelling proposition, considering that our average check is normally in the mid-$70 range. The effect of this offer has been relatively insignificant on our check average. The focus of the campaign is to promote our value-oriented items, which might sound ironic for an upscale dining brand, but is the surest means to reach the special occasion diner today as special occasion dining within Ruth's Chris is an important element of our business.

While we are sensitive to those that suggest we are placing the premium nature of our brand at risk, we do not think that is the case. This is simply a tactical move to spur traffic and, due to menu engineering, we can still drive very solid margins. We extensively tested the Summer Celebration in multiple markets beginning in late 2007, and found the results to be very positive. Beginning June 2nd, 2008 and tracking the first eight weeks, our system of restaurants are achieving parallel results we saw in testing. The results of this offering have been positive and we are examining the potential for continuing this promotion through September.

We also have a chef's feature page in each and every menu which highlights daily offerings of appetizers, entrees and desserts. It also provides our culinary teams the flexibility to respond to the local demand of our guests. Despite being a large organization, in many ways we still view ourselves as the neighborhood premium steakhouse restaurant and relish the entrepreneurial spirit that comes with thinking and acting like a small business.

We've also created a program with about 50 of our vendors who coordinate a variety of different beverage initiatives such as wine tastings and wine dinners. Relative to this, we've also been testing and are in the process of introducing to a couple of more restaurants our prime bites program which provides guests with a variety of smaller food tastings at the bar coupled with an expansive beverage selection. Younger guests, in particular, respond favorably to the dining in the bar versus traditional seating. In fact, the fastest growing segment of our business is the 21- to 35-year-old demographic, which we consider to be our next generation of dedicated guests.

Another focus of our operating teams is to develop greater sales through promoting and supporting private dining. We have just completed an upgrade of all company-operated restaurants providing high-speed Internet connectivity and, in select locations, video conferencing capabilities. We are supporting this position -- this portion of our business with the new collateral and a fresh marketing campaign targeted at meeting planners and business executives.

We've seen a slight reduction of our private dining sales, and our Q2 results are very consistent with Q1. We have also initiated a platform in our company restaurants created within our franchise system called meet-and-greet. This provides access to potential guests and has resulted in incremental private dining bookings as a result.

On the marketing front, we've recently initiated a relationship with American Express Membership Rewards. This program provides us with greater access to high-end clientele, as AmEx cardholders are both business and individual consumers.

We've created a wonderful relationship with ESPN promoting Monday Night Football through luncheon programs with announcers, players, and team ownership. Our operating team's been very effective at managing expenses at the restaurant level and, yet, ensuring that our guests receive the best quality service possible.

We believe we have some opportunities to operate more efficiently without in any way compromising the quality of the guest experience and are in the process of realizing those efficiencies. To that point, we use a measurement system that relates the number of guests each week with the number of hours dedicated to serve these guests in each restaurant. And I'm very pleased to report that we are consistent with levels provided today when compared to operation results over the last couple of years, ensuring that the guest experience is as good as it always has been, if not better today.

We completed three significant remodel projects earlier in the year in Tampa and Ponte Vedra, Florida, and Northbrook, Illinois. As a result of these remodels, these restaurants have shown improved sales over prior year. I should also add that the two restaurants we opened earlier this year in Forth Worth and New Orleans are off to an excellent start and are generating average weekly sales well above the system average.

With regards to Mitchell's Fish Market, the integration continues to go smoothly. We are testing a variety of marketing initiatives, including e-mail, print, and local radio. We have seen positive results from these tests and are optimistic regarding the marketing plan and are seeing positive sales impacts from these initiatives implemented late in the second quarter.

We feel great about the operating teams in Mitchell's. They are very passionate about executing the Mitchell's brand, as we are at Ruth's, with the same commitment to core values, food quality, and guest experience. We are actively pursuing the synergies of our two systems focusing closely on purchasing as that greatest opportunity. We consider the opportunities outlined to be significant.

So in closing, we are as dedicated as ever to the core values of company, great food, and genuine hospitality. Our culture is deeply rooted in our teams, and, despite a tough economy, morale remains solid. We are certainly not satisfied with our recent performance and have implemented the initiatives described with the intention of driving traffic and creating value for our guests. Above all, we have two solid brands that have been time tested and can produce strong economic results over the long run.

At this point, why don't we open the lines up for questions?

Thank you. (OPERATOR INSTRUCTIONS) We'll pause a moment to assemble the queue. We'll take our first question from Nicole Miller with Piper Jaffray.

Good afternoon.

Nicole, how are you?

Hi. Good. I just one -- Bob, could we get the franchise same-store sales, please?

The, for the quarter, the combined -- the blended combined result was down seven. That was composed of domestic down 9.1, and our international I had a positive 4.1.

So franchise combined down seven?

Correct.

Domestic down six and franchise plus --

No. Domestic was down nine and the international franchise group was a positive four.

Okay. Thank you. Were there any shares repurchased in the quarter? I believe there's still 50 million authorized. Is that right?

That is correct, and, no, there were no shares repurchased during the quarter.

And the marketing expense it was very clear you'll do the 100 basis points, you know, that you're allocating this year versus last year. In '09, just sort of -- should we us that same run rate as another additional 100 basis points or are you going to kind of keep it flat to '08?

I think it's too early, Nicole, to comment on that at this point. We're just beginning our process for planning in '09.

Okay. That's fair. And the cost of goods sales trend being down, is that sustainable in the back half, or I guess -- I guess I'm kind of asking what's implied in the guidance ad it relates to cost of goods sold?

We believe that it's certainly sustainable in the current quarter. Generally speaking, historically, the last six weeks of the year there's some pressure on beef due to demand. And so our folks think that we may have a little bit of pressure at the end of Q4, but don't believe that it will be sustainable as we move into 2009.

Okay. And I guess I understand reiterating guidance has a lot to do with the cost savings. But from a comp perspective, I guess being down five does really imply that there's a little bit of improvement in July. Is that the case?

I won't -- we won't make any comments about -- on a go-forward basis, if you will. But what the guidance does imply is that we will have improvement in the second half of the year over the first half of the year, in part due to the easier comparison, but also in part to what we believe are very effective marketing initiatives that are in place.

Okay. That is helpful. Also, the debt-to-EBITDA ratio is extremely helpful. Can you give us what that was for the first quarter as well?

I believe it was -- it was three times.

Okay. And then I did not catch, is Mr. Mike O'Donnell on this call or available for a question or should we save that for another time?

He is not on this call.

Okay.

He certainly will be available at our next call.

Rob, I don't know if it's okay to ask, but I just -- in your intro you talked a little bit about Mike and -- both in the press release and in your prepared comments. I just noticed quite a few times that he had sold prior concepts. I'm not sure that we should read anything into that. I certainly don't want to. So I just kind of wanted to come out and ask if --

No, it's a good question.

Okay.

I wouldn't read anything into it, Nicole. I mean, the -- we were trying to make the point that he's consistently delivered shareholder value, and those two instances happen to manifest itself in the form of a sale. But I wouldn't read anything into that at all.

Okay. I just wanted to make sure to clarify. That's all I had, and thank you very much.

We'll go next to Steven Kron with Goldman Sachs.

Thanks. Good morning. Good afternoon. Excuse me. Just a question back on the balance sheet as it relates to covenant testing, Bob. Is this testing, I would assume done quarterly. Is that correct?

That is correct.

Okay. And if I got the numbers correct, at 3.25 times the, I guess the breach point would be 3.5 times. I would assume that that remains consistent throughout the year. Is that right?

That is also correct.

Okay. So if I do quick math, am I in the ballpark to think that if, on a rolling basis the EBITDA gets reduced by around $4 or $5 million, you'd be in and around that 3.5 times? I'm just trying to get a sense for degree of magnitude.

Well, there's two, obviously, there are two components, the debt --

Assuming -- I'm sorry. Assuming the debt doesn't get paid down at all.

Well, again, if debt -- I guess I would say if debt remained at $180 million, call it, EBITDA, to your point, would have to decline probably about 10%, 12% from current levels.

Okay. And I guess how does the decision to monetize real estate play into that equation? It's just getting those proceeds and paying down the debt, right?

As I said in my prepared remarks, yes, our intent here is to take those proceeds and reduce the leverage to ensure that we have some operating flexibility as we move forward.

Okay. And then as it relates to the guidance in the back half, it does just seem in the first half the earnings growth, even backing out kind of the one-timers from this period. It looks like in the first half you're down around 30% from an EPS perspective and to get back into that $0.55 to $0.60 range, you'd need more of a flat-back half. So it didn't seem as thought $3 million from the cost savings that you laid out would really get you there. So is there anything else in the P&L from a year-over-year cycling standpoint that we should have in mind?

Well, Steven, I don't have the benefit of your calculations. So I'm not sure I can respond. As we look at it and as we model it, we think those savings, as well has improved top-line results, even though they may not be positive, but certainly would be improved over the current first-half level. And we think that is enough to get us to our -- to our guidance.

Okay. And then last question I had was, maybe, Geoff, this is for you as it relates to the Summer Celebration testing and the value-oriented menu. You mentioned that there was really no negative mix shift on the check and the -- it seems though at a $99 price point versus a single person more in the $70-plus range.

So I guess it begs the question is, is this really being bought? I mean, how could it not have that negative influence on the check? I'm just trying to reconcile that comment.

Yes. Steven, first of all, the offer is $89. And what we have found is a fairly heavy preference to the offer and -- but what we've seen is incremental improvement on wine and some other additional elements of purchasing.

I think that when you -- when you examine the structure of the offer, it is one that individuals know kind of what they're going to spend before they come in the restaurant, and then understand if they add, what the result will be. And we have seen a slight erosion on the check but it is, depending upon the restaurant, it varies a little bit.

Okay. Thanks, guys.

We'll go next to Jason West with Deutsche Bank.

Hi. Thanks. I was wondering whenever the debt covenants are calculated, is that based on the EBITDAR or EBITDA? Just wondering how the sale leasebacks might affect the calculation.

It's an EBITDA calculation.

The new lease --

Yes.

-- then would not go against you on the leasebacks?

No. What would happen is that would be operating -- operating rents, which would be a charge against EBITDA. But we would have a corresponding offset in depreciation.

Okay. And just wondering what the practical implications would be if you were to trip the covenant at some point this year. Obviously a lot of concern out there about that. But, I mean, have you talked to the banks about their willingness to work with you and let business sort of continue as is or just any sense of what the implications may be if that were to happen and maybe people are making too big of a deal out of it, it's just it's tough to tell here.

Well, I think people are making too big of a deal out of it, but that's my own personal view. I think in reality we have a very strong relationship with our bank group. And they know that we are working very diligently on managing cash and challenging all of the things that we do here. And I think that if the timing of this sale leaseback transaction were to slip, I think it's only going to slip slightly. It's not a case where it's not going to get done. So I think that based on our relationship with our bank group, the Madison Dearborn Partnership with our lenders, the fact that we're in the market, we've executed a purchase and sale agreement, it's not a question of if it gets done it's just when it gets done. I feel very confident that if timing were to slip for any reason we would be able to come to an outcome with our bank group that would -- that would work for us.

Okay. Thanks. And separate question on the beef side. I was a little surprised at the optimism that you continue to run a favorable rate there given what we've seen in the wholesale market. I know it's been a bit volatile lately. But it seems like a lot of other people are complaining about higher costs recently, but you guys seem to feel like you're still getting pretty favorable numbers in the spot market. Just curious what's different about your buying situation?

Yes, Jason, this is Geoff. What we've seen is that there is increased competition and demand for the choice market but not so much in the prime market. And we have not seen the pressures in prime. As a matter of fact, we've seen the yield in the prime market at some of the highest rates that it's been over the last three to five years.

Okay. Thanks a lot.

Go next to David Tarantino with Robert W. Baird.

Hi. Good afternoon. Question on the expense savings. Could you talk about or elaborate on what you're doing there to generate that $8 million?

Well, I think as we -- as we said, it comes from three areas, supply chain, and specifically there we are working on a new national produce program which we think will have some benefit. We are also starting to realize some synergies with the Mitchell's acquisition on the purchasing side. And we also have a new distribution program which we think will end up being favorable to us year-over-year.

On the G&A side we have -- we've made some changes in terms of corporate support to really fit what we think the new development schedule is likely to be. Clearly, we had built up over the last few years in anticipation of driving new unit development probably in a double-digit range. And as I mentioned earlier in our remarks, we're likely to -- we'll have five units this year, three units next year, a little slower than what has taken place in the past two years. So we've made some adjustments in our support relative to a more moderate growth plan.

And on the restaurant side, I think it's again related to growth. I mean we had a lot of managers on the bench, if you will, to support a ramp-up of growth. And through attrition some of those folks have moved on. And there's really no need with a slower growth plan in place to backfill those. So we think some of that stuff will come through at the restaurant level. And so it's a combination of all those kind of activities just to give you kind of a feel for some of the things that will produce those savings.

That's very helpful. And just a follow-up to that. Do you view the slower growth here as a transitory issue given the environment and that you would return to faster growth when the environment normalizes or is it -- or is this more of a permanent shift to a slower growth profile?

David, I don't think I want to speculate on that at this point. I think clearly the environment is influencing our thinking at the moment. But, obviously, we're going to have new leadership onboard. And I think collectively the management team with new leadership and the Board, we'll really evaluate and think about how we manage this thing as we get into late '09, '10, and '11.

And, David, this is Rob Selati. I'll just elaborate on that. I don't think there is any fundamental change in the view of the Board or the management team as to the magnitude of the expansion potential for either of these brands. I think our view is that it's just prudent to do what we're doing in this environment.

Great. That makes sense. And then, Bob, one question on the guidance. Back to the comps guidance for the back half. It looks like getting to five -- or down 5% for the year would require something like down low single digits in the back half. And is that the improvement from down seven, is that really being driven by the marketing initiatives or the comparison? I know you mentioned both. But are you seeing that kind of lift in the marketing initiative?

Well, David, again, I don't want to provide any forward guidance. But again, we are encouraged, both Geoff in his remarks, as well as in mine, suggest that we have seen improvement. And again, as I mentioned to Nicole, the fact that we do have some easier comparisons and we have some significant marketing initiatives in place for the balance of the year and we believe that we've seen very effective results from those initiatives, even though it's early, but, yes, it does give us the encouragement that we think we can bring in the guidance.

Great. Thank you. Good luck.

Thank you.

Thank you, David.

We'll go next to Jeff Omohundro with Wachovia.

Thanks. First, I was wondering if you could talk through your thinking around pricing currently at Ruth's Chris and how that meshes with the value-oriented strategy. Thanks.

You know, Jeff, I think the pricing strategy that we have tried to maintain in the past has been somewhat consistent and parallel to inflationary rates. I think we're being a little more conservative than perhaps we have been in the past, being that we are making every effort to create value for our guests. But I do feel that there is some elasticity in the [proteins] and we will be revisiting that later in the year. I understand whether in it's necessary and to what degree we feel there is flexibility with each and every item.

And when we look at Mitchell's in average weekly sales there, there were some remarks made about marketing spending. Wonder if you could, perhaps, give us a little bit more of insight into traffic building initiative for that concept. And also an update on your experiences around turnover in management and labor at Mitchell's. Thanks. That's all I have.

Jeff, let me address the turnover first. We have seen no up-tick over where they have been previously in both hourly and management. And I think that the stability in the teams really is very solid and the morale appears to be very good as well.

And then on traffic building?

Yes. Traffic building, we have three basic fundamentals. We have e-mail, print, and radio. We've been testing those extensively and have found pretty good traction within certainly print and radio. And I'm not really able to share because the results are still trickling in, as it's something we've really been testing heavily here over the last probably six or eight weeks, and I can't really quantify them yet. But I can share that we've been pleased with the investment and the return we're getting on it.

Very good. And congratulations to the Board and Rob and moving in such timely fashion in replacing Craig. Look forward to hearing from Mike in the near future.

Thanks, Jeff.

Thanks you, Jeff.

Thank you, Jeff.

Go next to Bryan Elliott with Raymond James.

Hi. Good afternoon. First, Bob, can I -- I want to clarify the understanding on the sale leaseback accounting. The instruction in a way that you're highly confident that it's not going to be capitalized and, therefore, it's just going to be operating rent on the income statement?

Yes, Bryan, we have -- we have obviously been working with third-party accounting folks to make sure that we're compliant with the rules to -- for operating lease treatment and we do believe that that will be the case.

Obviously, proceeds pay down debt and we don't get the -- any of the new lease debt counted against debt for covenant purposes?

Well, as I said earlier, I mean, we will, once the transaction close, have operating rents which will be --

Yes, against EBITDA. But as far as the denominator we get to reduce the denominator by the proceeds and there's going to be no add-back for any capitalized rent or anything like that?

Absolutely correct.

Okay. All right. And that would, without question then, widen the range -- you had an earlier question about kind of how much room you have on EBITDA. That would significantly widen that range that you would have as far as EBITDA deterioration in this environment going forward?

Well, just on the debt side itself, those proceeds would reduce the leverage ratio by approximately 30, 35 basis points.

Okay. Very helpful. Thank you. Thinking about '09 and the reduced growth, just has, as you're negotiating deals and looking at situations, has the environment changed and the pressures on developers, et cetera, resulted in any fundamental change on what we should expect from tenant improvement allowances and, therefore, any change pending and sort of out-of-pocket costs to open a typical unit?

Well, two things, Bryan. One is that the deals that we're opening in '09 were negotiated anywhere from six to 18 months ago. So those deals were done and there's no re-trading, if you will. But I do think what is important is that we are really scrutinizing our investment costs and we do believe that through value engineering, as well as some efficiencies that have been picked up as we've gone through this process, we do think that we will be able to reduce or improve our investment, whichever way you want to look at it, but, nonetheless, bring down that side of the equation so that even in a challenging environment from a sales point of view, we still think we'll be able to generate very strong [on our] returns on our new development in '09.

I know you've given us some data in the past about the reduction and square footage investment cost in new units, and I believe we got down to around 300 bucks a foot. Is that a good number to use at this point, over the next year and a half or so, or do you think you can get some more out through the engineering? Sounds like you might be able to get some more out.

Well, we're hopeful, but I don't want to speculate at this point.

Okay. Very good. Thank you.

Go to Steven Rees of J.P. Morgan.

Hi. It's actually John Ivankoe filling in for Steve. I had a question on your marketing and advertising expenses recorded in the second quarter. I mean, I guess I was a little bit surprised to see that jump on a year-and-year basis in basis points, but that your comps, stayed similar to the first quarter despite the easier comparison.

So I would just like to kind of look in in the second quarter how marketing and advertising may have benefited the second quarter and whether there may have been a timing issue of money that was recorded in the second quarter that may, in fact, see the air in the third for example.

Yes, John, I think you hit it. It's a timing issue. In terms of our Summer Celebration promotion, it really was launched on June 2nd. So the second quarter we had basically 27 days of benefit. The promotion will run through September, or into early September. So clearly we're going to have a benefit of, call it 60, 65 days here over the third quarter. But we had to because of the accounting rules, the production costs have to be expensed when incurred. And so we probably had 60% of the spend for promoting this program booked in the second quarter, against, as I say, only about a third of the benefit. So there is clearly a timing difference that you can see there.

Okay. That's a great answer. Thank you. And secondly, and I'm sorry if I missed this. Could you say the fiscal '08 CapEx and how much of that CapEx is for new units?

I think in our previous guidance we had indicated that CapEx was going to be between $125 and $130 million for '08, of which $92 of that was directly related to the Mitchell's acquisition which closed in February of '08. And I don't know that we've really provided any breakdown of kind of the non-acquisition kind of capital, vis--vis new units, vis--vis maintenance cap, vis--vis new models.

Okay. All right. Thank you.

(OPERATOR INSTRUCTIONS) We'll go next to David Rainey with Akre Capital.

Thank you. Just curious about the tax rate in the quarter, if there's anything special going on. It looks like it was five or six percentage points below where it'd normally come in.

No. Simply, unfortunately, with the results as they are, we have lower pre-tax earnings. And the credit that all restaurant companies enjoy is this FICA tip tax credit, and that has stayed constant. Actually, it's grown for us with the -- with the Mitchell's acquisition. So we have a larger credit that's going against a smaller base, if you will. And that's really the main driver of the reduction in the effective tax rate.

Okay. And then one other, one other question about long-term debt and the covenants. Can you tell us what the quarterly adjusted EBITDA number was that you would use for covenant purposes? I've calculated $9.2 million of EBITDA in the quarter. But how would that number be adjusted for bank purposes?

Well, there are a lot of what I would say standard non-cash add backs. Clearly, 123R is an add back. In this particular case where we had severance cost, that is an eligible add back. So those are -- those are an example of a couple of things that we can bring back into the calculation.

Okay. And can you -- can you tell us what the number was for the quarter?

Well, I think you can -- you can do the calculation. I gave you the --

Right.

-- the leverage ratio for the quarter and you know what debt is. So I think you can pretty much back into the calculation.

Okay. Thank you.

Go next to Bryan Elliott with Raymond James.

Just a clarification on that last question too. I believe is pre-opening an add back as well?

No, it is not, Bryan.

It's not, okay. And also, what was CapEx in Q2?

I believe it was $10 million. But, I tell you, if you give me a minute, I will make sure that that's accurate.

Okay. And is there any reason why you've given, I think a little bit of a push-out in expansion for this year. I'm just looking at my -- yes, we're pushing one unit out. Can you give us some help in updating or some help in modifying the CapEx guidance? Would it be correct just to take a unit out or is there something more complex maybe happening?

Well, first of all, it was $10 million for the second quarter. And I think on a year-to-date basis it's $21 million. And so I think that our second half, as I said earlier to a -- in -- to a -- in a response to a question -- excuse me -- that $125 to $130 million was our total for the year, back out $92 million for the Mitchell's acquisition, and then the $21 that we spent to date and you kind of have a range of the second half.

Okay. So we're not -- from prior guidance which had six new units, we're not going to see it change by pushing the one unit out because I guess it's --

I think we already did that. I think the original guidance was $125 to $135.

Okay. Okay. Very good. Thank you.

Okay. Thank you.

We'll go next to Jason West with Deutsche Bank.

Yes. Thank you. Two quick follow ups. One, what should -- what tax rate should we be using over the second half of the year? And, two, I believe you -- I just want to confirm that the expense savings number you guys are targeting for the second half is $3 million. I thought someone else may have said $8 million, but I want to confirm that.

Yes. In terms of the effective tax rate for the balance of the year, we are projecting it to be about 28%.

And in terms of the savings, you've got both numbers. But just to clarify, $3 million is expected to be realized in 2008. And then the full annualization in 2009 would be the $8 million total.

Okay. Got you. Thanks a lot.

And at this time we have no further questions.

Okay. We would like to thank all for sharing this with us and thank you for your interest and look forward to speaking to you again next quarter.

Ladies and gentlemen, this does conclude today's teleconference. We appreciate your participation, and you may disconnect your phone line at this time.