Ruth's Hospitality Group Inc (RUTH) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to today's Ruth's Hospitality Group, Inc. first quarter 2009 earnings conference call. At this time all participants are in a listen-only mode.

Following formal remarks, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. As a reminder, today's conference is being recorded.

And now, I would like to turn the conference over to Mr. Bob Vincent, Chief Financial Officer - Ruth's Hospitality Group, Inc. Please go ahead, Sir.

Thank you and good morning. 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 Michael O'Donnell, President and Chief Executive Officer of Ruth's Hospitality Group.

Thanks, Bob, and thanks, everyone, for joining us today. We are pleased with our first quarter results, given the state of our industry as a whole.

Sales certainly presented a challenge for the period, but we were pleased that the expense reductions we made at the end of 2008 contributed to a solid bottom-line increase in earnings per share versus the fourth quarter.

As you saw from today's release, comparable sales were down 18.5% at Ruth's Chris during the first quarter, similar on a sequential basis to what we experienced in the fourth quarter last year. The private dining business also experienced some weakness and, while not as significant to us in the first quarter as it is in the fourth, it was down 25%. Early week dining Sunday through Wednesday was softer than the week -- than the end of the week dining as we had expected.

Once again, based upon the upscale steakhouse Napp Track Index that we use as a benchmark, we gained market share from a traffic perspective for the third consecutive quarter. That being said, the entire category is obviously contracting. So while we are enthusiastic about our outperformance, we understand the context it is in.

Given the geographic distribution of Company-owned locations, our Ruth's Chris sales performance was dictated mostly by our two largest markets, California and Florida, which represents approximately 45% of our sales base, with each state having 14 restaurants. California was better than the system average as it was down 16.2% on a comparable basis, while Florida was a bit weaker, down 21.9%.

On a more positive note, our five class of 2008 Ruth's Chris Company-owned restaurants exceeded the system sales volume average by 13%. While this level of our performance is sequentially down from the fourth quarter last year, it nonetheless reflects the health of these newer locations as a group in a difficult economy.

Please recall that we are not building any Company Ruth's Chris restaurants this year, although we are working with our franchise partners in their expansion efforts of between three and five restaurants. Two of these have already opened -- Greenville, South Carolina, and in Dubai.

As you can see, we experienced significant deleveraging on our restaurant level operating expenses as Bob will explain, but there were bright spots on the P&L. Between our supply-chain restaurant level and corporate infrastructure initiatives, we are leaner and more productive and the first quarter results prove that out.

Additionally, we realized a $1.3 million improvement in G&A expenses on essentially the same revenues as the first quarter last year. We also demonstrated our ability to manage cost inputs that are within our control as the restaurant operating expenses were identical on a percentage basis with the fourth quarter. Also our beef costs fell approximately 15% from the fourth quarter and we were able to take advantage of this as only 50% of our prime beef needs this year are contracted.

Switching topics to our brand leadership, I am very pleased to report that Kevin Toomy, at Ruth's Chris, and Sam Tancredi at Mitchell's have really settled in. Having several months under their belt, they have a clear strategy to drive operating performance through execution with a focus on optimal staffing and tight controls.

At Ruth's Chris, we continue to focus on our positioning as a classic American steakhouse, featuring the same approach to sizzling steak and Southern hospitality that Ruth Fertel created 44 years ago. That said, we've made changes with regards to our value initiatives to include bundling -- bundled offerings and price-certain or prix fixe menus and we believe that these actions will attract more people and increase their frequency over time.

In early February, we launched our Ruth's Classic which is a $39.95 three course meal, featuring a choice of one of four entres, such as a 6-ounce filet with shrimp, a personal side and dessert. It is being received well by our guests and is only having a modest impact on our -- impact on our guest check average, which is down approximately 4.5% to $71 from the prior year.

Our early week $19.95 steak and [treats] promotion is also being evaluated in four test markets.

In terms of Mitchell's, the sales trends were down year over year but still exceeded the performance of Ruth's Chris which was not surprising, given its lower average check. We are offering bundled menu items such as Mitchell's Favorites, a three course meal that are value-oriented at $19.95 and $22.95.

The two main regional challenges we face at Mitchell's are in the Ohio and Michigan markets, where we operate eight restaurants. This is primarily due to issues related to the auto industry and its affect on the local economy. Ultimately, we think the concept has great potential in other areas of the country, but given the environment, growth plans are currently on hold. But we still do believe in the growth potential in Mitchell's.

The decisions we made, centered on managing our debt and maximizing free cash flow, are improving our performance. We still have limited visibility on topline, but we are doing a good job on the variables we believe we can control.

I would like to turn the call over to Bob to review our financial results in greater detail. Bob?

Thank you, Mike. As described in our earnings release today, for the first quarter ended March 29, 2009, we generated total revenues of $97.5 million which was approximately 1% lower than last year's $98.6 million. Total Company-owned restaurants sales growth was slightly lower at $94.7 million and we had a 23.2% increase in restaurant operating weeks which, for the quarter, totaled 1,140.

Average weekly sales were all Company-owned. Ruth's Chris Steak House restaurants was approximately $87.5 thousand in the first quarter compared to approximately $107.2 thousand in the same period last year. Comparable restaurant sales at Ruth's Chris Steak House decreased 18.5%.

Comparable sales consisted of an average check decrease of 4.5%, an entre reduction of 14.6%, offset by mixed shifts and pricing of approximately 2%.

First quarter also included $19.9 million in revenues from the Mitchell's acquisition. Average weekly sales at Mitchell's Fish Market were $71.3 thousand compared to $80.1 thousand in the prior year quarter. And those sales results are for the full 13-week period in both years, including the time period before the acquisition closed.

As we have stated before, Mitchell's Fish Market restaurants will be considered comparable in the second quarter of 2009. So beginning with next quarter's earnings release, we will include comparable sales for the Fish Market brand.

Franchise income fell 18.7% to $2.7 million versus $3.3 million for the first quarter of 2008. These results included the net addition of seven franchise-owned locations year over year. Domestic comparable franchise-owned restaurants sales decreased 22% while international comparable franchise-owned restaurants sales decreased 28.1%, which combined for a blended comparable franchise-owned restaurants sales decrease of 23%.

In terms of our cost structure, as a percentage of restaurants sales, food and beverage costs decreased 280 basis points year over year in the first quarter. As Mike said earlier, favorable beef costs primarily drove the improvement and we are locked for approximately half of our prime beef requirements for the balance of 2009.

We also experienced some favorability on produce and dairy.

Restaurant operating expenses as a percentage of restaurant sales increased 550 basis points from the first quarter last year to 53.5%. The majority of this deleveraging was due to lower comparable sales as many of these expenses are fixed. We continue to make progress on containing costs in our restaurants without compromising anything that touches the guest.

Marketing and advertising costs were essentially flat on an absolute dollar basis and on a percentage of total revenues, as we attempt to maintain top of mind awareness of our brand and promote our value-oriented message, particularly for bundled menu items. G&A costs as a percentage of total revenues decreased by 120 basis points to 5.8% of total revenue, primarily due to the corporate reorganization completed in late October, combined with lower travel and general and administrative expenses.

Appreciation and amortization rose 60 basis points as a percentage of total revenue, due to comparable sales deleveraging. In the first quarter, our operating income was $6.9 million versus operating income $9.3 million in the same period last year. Our net interest expense was $2.3 million in the first quarter this year, compared to net interest expense of $3.2 million for the same period last year.

In 2009, we recorded a favorable mark to market adjustment of $300,000 versus a charge of $1.4 million in the first quarter of 2008. Net income for the first quarter was $3.7 million or $0.16 per diluted share compared to net income of $4.5 million or $0.19 per diluted share in the prior year period.

In terms of our balance sheet, capital expenditures during the first quarter totaled $1.4 million. Long-term debt at the quarter end was approximately $157 million, a reduction of $3 million from the balance at the end of the fourth quarter.

We have also had an additional pay down of $2.25 million in the first week of April. We are compliant with all of our loan covenants and our EBITDA to debt ratio at the end of the first quarter was 3.98 versus a maximum of 4.75 for our amended credit facility.

Similar to last quarter, we are not in a position to offer any definitive earnings guidance. The economy continues to be very challenging and unpredictable and, with respect to our business, sales trends have actually trended downward since the end of the first quarter. There is definitely some seasonality in these numbers as warmer weather and the onset of the grilling season are not great catalysts for our business.

We are also seeing a negative impact from the Easter holiday shift into April. We are rolling over a 2% price increase in March of '08 and we are overlapping some promotional activities in April of '08.

It is difficult to discern between these factors and the inherent volatility in consumer confidence at this time. Although we only had a few weeks of data from Napp Track for April, our performance against our competitive set remains positive. We, therefore, are maintaining our previous expectation of comparable sales trends down in the low double-digit range for the full year.

On the cost side, food and beverage costs are now projected to be between 29.5% to 30.5% of restaurants sales compared to earlier expectations of 31 to 32% restaurant sales, while our marketing spend is still expected to be between 3.3 and 3.5% of total revenue. G&A expenses should be at the ranch of $22.5 million to $24 million, similar to what we communicated on our prior call and, obviously, down considerably from approximately $30 million we spent in 2008.

CapEx spending is projected at $10 million to $12 million primarily from maintenance capital, along with a few previously committed remodels. Again this is significantly below the 2008 capital expenditures of approximately $31 million.

And finally, we expect to generate free cash flow in the $12 million to $14 million range.

Now I would like to return the call back to Mike.

Thanks Bob. I would like to leave you with a few thoughts before we go to the Q&A portion of our call. (inaudible) to Ruth's Hospitality seven months ago, we have accomplished quite a bit. We've come through a significant reorganization, improved financing terms by lending groups, hired talented leaders at both of our brands and modified our developments.

As we've stated, all of these efforts fit with our highest priorities which are maximizing cash, paying down debt and driving traffic. As we sit here today, I would say we have already made progress generating free cash and paying down debt. But in terms of traffic, we obviously still have some work to do.

Fortunately we have inspired leadership at both brands. And after several months of addressing corporate level challenges, we all have time to invest in our plan and how it is executed.

The foundation of our plan, as always, is the Ruth's Chris plan. A 44-year history of great service and sizzling steaks while Mitchell's has also proven, celebrating its 10th anniversary this year. These two great brands have proven their longevity.

Finally, we are working with our franchisees as they continue development of Ruth's Chris and we appreciate their continued partnership and working with us through these difficult times. They remain the heart and soul of the Ruth's Chris business.

I would like to thank all of our operators and our support staff in both the Ruth's and Mitchell's brands for all of their great work in quarter one.

With that, Operator, let's open the lines for questions.

Thank you, Sir. (Operator Instructions). Jeff Omohundro with Wachovia Securities.

Thanks. My first question as regards to the menu strategy and your thinking around initiatives this year to address the traffic issues. And in particular what you are thinking is about further efforts and bundled offerings, value and initiatives. And does the improvement in food costs give you a little bit more flexibility perhaps to push more aggressively on those efforts? Thank you.

You know, we've started -- we actually started a year ago when we looked at two for $89 at Summer celebration and research that we did said that the customer liked the price certainty of that but would prefer more flexibility; and as a result, wanted an individual prix fixe opportunity.

So that is where the Ruth's Classics came into play. We have seen a very high rate of preference for that on us, meaning a key mix shift -- a product mix shift -- and feel like that that is delivering an experience to folks at a predictable and maybe slightly more affordable price range. And as I said earlier that the expectation is that that will give them the greater opportunity to come back more often.

In terms of what we are seeing in the food costs, we remain aggressive, I guess, as it relates to promoting our $39 and $49 which is a buy up opportunity for the classics.

So we are going to stay on that strategy. We will continue to promote that strategy through the summer and probably will have that in a variable theme through the fourth quarter although we are refining what that -- what is taking place now.

The issue of food costs allowing us rater flexibility, I think that is one of the reasons we have been testing $19.95 steak and fries as an early week promotion. And so I think we are conscious at this point of being able to do some things like that. Leveraging our food costs -- however, recognizing that food costs may not stay there long term, we have to make sure that we don't have a complete shift in the business. So I think we are staying with that theme for the balance of the year.

It seems like in this period there was a broadening of the delta between the Company same-store sales and franchise same-store sales. I wonder if there is anything behind that and how the health at the franchisees would be?

I think our franchisees --. Most of our franchisees have been around for a substantial amount of time. They are well-capitalized. They are -- and wonderful people doing a great job on the operating side.

I think that we have had some geographic challenges. They operate in some smaller markets that may have been impacted by the closing of that certain businesses around them or industry around them more than maybe we have. Some, not all of our franchisees have participated in the Ruth's Classics while some of them have.

I really would say that their results really reflect more of the markets that they are in than what is going on in the business.

Thank you.

Nicole Miller with Piper Jaffray.

Thank you. Good morning. Can you quantify how much the Easter impact may be approximately in April?

We probably estimated it's probably about 2.5 to 3.5%.

Okay, and to the negative because --.

Correct.

Correct. Thank you. And development, I wanted to make sure -- I note there is no company but it's two franchisees that opened in first quarter and does the last one come in the tail end of the year ?

No, you are correct. We have two openings in Q1. We are saying three to five so there would be one to three additional. And one is under construction in the Midwest and scheduled to open either the end of the second quarter, early third quarter and then the others would likely occur in Q4.

And Mitchell's average weekly sales, can you just walk me through? There were -- I see what's in the press release here, the [69 6] -- it's a small difference, but you talked about [71 3] but it sounds like there's a reason for the difference.

And the press release, we included both the Fish Market brand and the steakhouses. In the comments, it is really just the Fish Market. I mean the business -- the business we bought was really the Mitchell's Fish Market.

It's just helpful for modeling purposes so thank you. And my last question, what promotions are you lapping in the second quarter? And then I noticed first quarter marketing expense is only 2.6% and you are still guiding for 3.3 to 3.5. So what quarters are going to have more marketing and what things are you focused on?

On terms of the overlap, a year ago we had a $25 Be Our Guest promotion where we had a targeted direct mail campaign about half the system. And in terms of the spending pattern, given the economic uncertainty in Q1 here, we made a conscious decision to kind of reallocate the funds for the balance of 2009 with a little less spending coming in Q1.

But we will start to pick that up here in Q2 and 3.

Thank you.

[Paul Nouri with Noble Equity].

I was just wondering if any market did better or worse than others? I note you had mentioned it with the franchise, but in general?

I think in Mike's prepared remarks, we talked about California which is our largest market with 14 restaurants performing slightly better than the system as a whole, and our Florida market, which also has 14 restaurants, though a little less in terms of aggregate volume than California, slightly underperformed the system average.

So those are the real -- they represent almost 44, 46% of our business. So those are the most significant market metrics we can share with you.

And is interest expense going to increase the next few quarters because of the revised agreement and your credit line?

The interest rate doesn't really change until we get into 2000 -- after Q3. So for the next two quarters there really shouldn't be significant changes in that and then in the fourth quarter we will probably have a little bit higher carrying costs.

Okay and I assume that any free cash or most of the free cash is going to go toward debt paydown?

That is correct.

All right. Thank you.

Paul Westra with Cowen.

Great. Thanks. Good morning. If I can just follow-up a question on your beef. You mentioned I think that the half your beef floating and your first quarter comps -- I'm sorry, your first quarter costs trapped some 15% from fourth quarter.

I was trying to gauge how much further I have -- your beef costs looking forward for the year, when does the year contract beef come off and what would the pricing on your contracted beef year over year?

I would tell you what we've got contracted is our prime beef which probably represents about half of our overall beef purchase. And in terms of the lock, we have secured for our requirements through the calendar year '09, and the pricing is approximately 2% below what we actually spent in Q1.

Okay. And --.

The tenderloin market, we are purchasing on the spot.

So you are obviously seeing some significant 20, 30% in your spot purchases, tenderloins?

They have been very significant. Correct.

Right. Okay. And then, follow-up question -- or a question regarding your private party business. Can you talk a little bit more about what your annual mix is and what that mix shift is from the summer to the holiday season and maybe some efforts both this summer and then as you gear up for the holiday season maybe you are thinking about the (inaudible).

Generally our private dining business is fairly static through the first three quarters of the year, probably around 9 to 11%. And then, in the fourth quarter it's clearly the biggest part of our business. Sometimes running 13, 14%. We have several initiatives ongoing where we are getting into a program where we will have satellite capabilities in our system, both in the root system as well as the Mitchell system where we will be able to attract large groups to broadcast throughout the country.

And we've just launched this initiative. We have got some -- we've secured some commitments already and we think it could be a sizable business as time passes. But we think that will help mitigate, at least here in '09, some of the weakness that we've experienced in the first quarter.

And the primary focus for that is that the changes in Pharma rules and the way that they are allowed to entertain and the leverage that we can create out of having satellite locations, we and they do very favorably.

Right. That makes sense. Then lastly just a general question. Obviously, pleasant wait to see no write-downs on units this quarter. Can you give us an update on your most latest unit by unit review? And maybe give us an idea of maybe how many stores are at or near cash flow negative?

I think it's a little bit premature at this point to -- we did a thorough, an extensive analysis at year-end. I didn't think in first quarter there were any significant changes. I think we had three or four stores that were negative cash flow, but frankly those stores were in fact impaired in Q4.

Right. Okay and then, no additions. That's it. Thanks and congratulations on your quarter.

(Operator Instructions). Jason West with Deutsche Bank.

Just a few questions. One, you mentioned the Napp track that you guys are outperforming the peer group. Can you tell us exactly what the peer group is? Is that just high-end steakhouses or is that upscale dining in total?

No, it's primarily high, upscale steakhouses. Capital Grille, Flemings, Smith and Wolinsky, the Palm are some of the names in that index.

Okay. And in terms of pricing, you guys -- can you update us where that will be as we move through the rest of the year? I think you said it was 2% in this quarter and you had some rolling off?

Yes, no. Well, we -- the last price increase we took was March of 2008 and, at this point, we have no plans to initiate any pricing in '09.

So the pricing will go from 2% in the first quarter to -- when does it go to zero? I guess it's now at zero.

It is now, (inaudible).

And any thoughts of maybe lowering some prices on some entree items given that beef is down so significantly ?

I think that we have answered that currently with our $39.95, $49.95 opportunity. We are pleased with the way that is behaving and at this point that's the direction we are taking from a price standpoint.

You guys said you had started running that a year ago or was this something added in the last year?

No. What I said was that we ran Summer Celebration last year which is our first venture into a value-oriented opportunity. And that was two dinners for $89.95.

What we started in early February was Ruth's Classics which gives you a choice of an entre, salad, and individual side and dessert and that runs between $39.95 and you have a buy-up opportunity at $49.95 which we see a fairly even split. With the profits going slightly towards $39.95.

I got you. And lastly just in terms of industry overall, you know, obviously, everyone is kind of struggling on the topline. Any increases in store closures that you guys are seeing or are other companies kind of taking the same tact as you guys which is waiting it out and cutting costs and maintaining, managing cash flow and sort of keeping the door -- the lights on?

I honestly don't -- I'm not privy to the strategy of others. We are seeing some independent closures in various markets. But from a chain perspective other than what they may have announced in terms of their closings, I'm not really familiar with what their strategy is.

Okay, thanks.

(Operator Instructions). Bryan Elliott with Raymond James.

Thank you. Good morning. Just a follow-up to that last question. Is there any noticeable change in business patterns when you had an independent close in a trade area?

It is really market by market and it really depends on how strong the competitor was in the first place. I mean I'm sort of stating probably what the obvious is. I mean the weaker competitors are going out earlier and as a result, it is not as impactful as you might think it is. Although we do see some lift.

But it is not necessarily sustainable. So I think that where people are going out it is because there truly is an imbalance in seats and it tries to get back to a balance. And it tries to get to a balance. I think we -- anybody else that is remaining gets a little bit healthier. It's not for instance shifted dramatically towards us.

All right.

There are no other questions in queue at this time. I'd like to turn the call back over to management.

Thank you very much for your time this morning. We look forward to seeing you out there eating steaks and seafood. Thanks.

That concludes today's conference. Thank you for your participation.