Ruth's Hospitality Group Inc (RUTH) 2009 Q4 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., fourth quarter 2009 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 up for questions. Hosting today's conference will be Michael O'Donnell, President and Chief Executive Officer of Ruth's Hospitality Group, Inc. Also Bob Vincent, Chief Financial Officer. As a reminder, today's conference is being recorded. And now I would like to turn the conference over to Mr. Vincent. 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 condition. Finally, I would like to remind you today that today's call may not be reproduced in any form without the express written consent of Ruth's Hospitality Group Inc. 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 thank you all for joining us today. We were very pleased with our operating result for the fourth quarter. Stabilizing comparable sales and favorable expenses allowed us to increase our diluted earnings per share to $0.11 from $0.04 excluding charges in both periods. More specifically, we benefited from favorable beef costs, sustainable cost savings, lower interest expense, and solid four-wall execution in our restaurant.

Digging a bit deeper into sales, we have increasingly seen signs of stability, characterized by a steady progression of improving performance across our restaurant portfolio. During the early to mid-months of 2009, there were periods where we simply did not have any restaurants with year-over-year revenue growth. But as we ended the third quarter, we started to see improvement and a discernible trend. In fact the fourth quarter saw approximately 15% of our restaurants in positive growth territory year-over-year. And in January that percentage was approximately 50%. This led to January revenues being down in the low single-digit range.

While our policy is not to comment on monthly sales results, we did feel providing these results supports our belief that the sales environment appears to be stabilizing. For the full year, we delivered on our goal of strengthening our financial condition by optimizing free cash flow, managing our capital expenditures and paying down debt. To that point in 2009, we generated approximately $20 million in free cash flow, and reduced our indebtedness by $34.8 million. That was before our recent completed rights offering close, which I will speak to in a moment.

Turning to our brands Ruth's Chris experienced a comparable stores sales decline of 11.2% for the fourth quarter, and Mitchell's Fish Market experienced a decline of 2.5%. For the quarter, we under performed the Knapp-Track benchmark index for the steakhouse segment by 190 basis points in sales and 450 basis points in traffic. We saw more discounting from our competitive set during the period, a trend that has gained momentum in recent months. To be clear, although, we are never pleased to see share moved away from Ruth's Chris. There is a limit to what we're willing to do to preserve it. Specifically we're not willing to compromise the brand with a long-term discounting strategy. Instead we would rather focus on brand building and awareness and make sure that people understand the uniqueness of dining with us. This will drive traffic over time, but more importantly it will drive the kind of traffic that we ultimately want.

On a geographic basis, Ruth's Chris two markets, California and Florida, both performed below the system average on a comparable basis, and were down 11.7% and 13.5% respectively. Regarding our sales mix, Ruth's Chris private dining business was down 3.3% during the fourth quarter, but performed better than our comparable sales results. In terms of traffic, private dining was in positive territory for the first time in two years, increasing by 5.5% for the period. We attribute that rebound of private dining to renewed corporate interest in rewarding their employees during the recent holiday season as well as pent up demand on the parts of our customers looking to celebrate with their families and friends.

I would note that we saw attraction with our new professional satellite meeting capabilities which are available in over 100 Ruth's Chris and Mitchell's Fish Market dining rooms and are geared for live interactive sessions. We think having this capability is particularly relevant today as companies seek alternatives to hosting large meetings and conferences with groups from across the country.

Our marketing strategy for Ruth's in 2009 was to establish a value proposition. We did that with a Ruth's classic promotion at $39.95, $49.95 prefix. Our customers have shown through their purchases that they appreciate the value and price certainty associated with this. We featured these offers in most of our advertising last year. This year, we are returning to a more brand enhancing message. We will be reminding people that we want them to savor the moments of life with sizzling steak and genuine hospitality at Ruth's Chris. We intend to spend 3% to 3.5% of sales using print, direct mail, and radio. In fact, you may have seen us in the masthead in the lifestyle section of USA Today. We will be running ads there every other Thursday throughout the year.

Turning to Mitchell's, we're very excited about the brand and we know that the concepts positioning offers significant points of differentiation and authenticity in the marketplace. For the fourth quarter, Mitchell has generated relatively solid sales performance with comparable sales down only 2.5% and the month of December showed slight positive comps and positive traffic. Considering its geographic concentration in the Midwest in price point, we are pleased with these results.

Mitchell's will continue to focus on superior execution for fresh fish as its point of differentiation in the polished seafood sector. We expect to further our position as seafood experts by intensifying our training for our service staff. We found success with early week promotions with emphasis again on the quality of the product as bundled offering. Through testing, we found that it was not necessary to run this type of offer later in the week or weekends, so simply, we won't. We have changed advertising agencies to Americaly and Partners, Ruth's Chris agency of record. We have been pleased with Americaly's work on the Ruth's Chris brand and look forward to the impact they can deliver for Mitchell's. In 2010, we'll have a mix of brand-enhancing methods supplemented by promotions in new product endorsement. We will be opening our first new Mitchell's fish market in 2010. We expect we'll open by midyear in Winter Park, Florida, a suburb of Orlando. The location is very near our corporate office which will allow our support teams to spend more time with the Mitchell's Fish Market without the added expense of time and travel. We have seen good sales and profits in our Mitchell's in Jacksonville and Tampa, and believe Orlando will show similar results. Accordingly, as part of our larger strategy, we have begun looking for additional real estate for Mitchell's in Florida.

Before turning the call over to Bob, I do want to make a comment on our recent financing transactions and what it means to out various stakeholders. First, we are very pleased with the rights offering that recently closed. It was oversubscribed by approximately $20 million, and we see that as an endorsement of our brand. As you know, the completion of the rights offering triggered the BRS investment, and we are fortunate to add Harold Rosser to our Board. Hal and BRS are successful restaurant industry investors, and we will benefit from their experience. We welcome them. In a broader sense the money we raised and the balance sheet flexibility it will give us is very important to our shareholders. It allows us to shift from playing defense, where we were almost exclusively focused on cost cutting, debt reduction and quarterly culinary review to offense, where we can fully engage consumers, target brand and building, market share gaines and reenergize our top line by continuing to invest in our people and physical plant. We are doing groundwork on both prototypes and beginning to source real estate for both brands.

We are excited to be looking for strategic growth partners in both the casino and hotel business and expect to further that effort this year. We think there are many advantages to a 45-year old iconic brand, world class franchise operation and a seafood concept celebrating its 10th year. We are now in a great position to look forward into the future. I'll now turn the call back over to Bob.

Thank you, Mike. As described in our earnings release today for the fourth quarter ended December 27, 2009, we generated total revenues of $87.4 million, approximately 10% lower than last year's $96.9 million. Total Company-owned restaurant sales declined by approximately 10.5% to $83.8 million, compared to $93.5 million for the fourth quarter last year. Restaurant operating weeks were 1,118, versus 1,138 last year. Average weekly sales for all Company-owned Ruth's Chris Steakhouse Restaurants was approximately $79,200 in the fourth quarter compared to approximately $88,200 in the same period last year. Ruth's Chris Steakhouse comparable sales decreased by 11.2% and consisted of an average check decrease of 2.5% and an entree reduction of 8.9%, offset by mix shifts. The Company's last menu price increase was in March of 2008.

Average weekly sales at Mitchell's Fish Market were $63,900, compared to $65,500 in the prior year's fourth quarter. Comparable restaurant sales at Mitchell's Fish Market decreased 2.5% and consisted of an average check decrease of 3.4% and an entree increase of 0.9%. Mitchell's last menu price increase occurred before the Company acquired the brand in February of 2008. Franchise income was $3 million in both periods. Domestic comparable franchise-owned restaurant sales decreased 8.9%, while international comparable franchise-owned restaurant sales decreased 0.5%, which combined for a blended comparable franchise-owned restaurant sales decrease of 7.2%.

In terms of the our cost structure, as a percentage of restaurant sales, food and beverage costs decreased 340 basis points year-over-year in the fourth quarter. As Mike said earlier, favorable beef cost primarily drove most of the improvement. We currently have approximately 50% of our prime beef requirements locked for 2010 at slightly below our actual average cost in 2009. Restaurant operating expenses as a percentage of restaurant sales increased 70 basis points from the fourth quarter last year to 52.7%, as a result of the effect of fixed costs related to lower sales volumes. Marketing and advertising costs declined to $2.8 million as a percentage of total revenue increased 10 basis points to 3.2%. In absolute dollars, G&A increased $1.6 million compared to last year. The increase was driven by an additional $1.5 million in incentive compensation expense year-over-year. For the full year, G&A expenses were $23.8 million and were within our previously guided range.

For the period, our operating loss was $4.3 million, which compares to an operating loss of $82.1 million in the same quarter last year. Adjusting for certain charges in both years, the Company operating income was $5 million in the fourth quarter of 2009, compared to $4.3 million in 2008. Interest expense was $1.7 million for the fourth quarter, compared to interest expense of $3.4 million in the same period last year. In the fourth quarter of 2009, we recorded a favorable mark-to-market non-cash adjustment of $200,000 related to an interest rate swap agreement compared to a mark-to-market non-cash charge of $900,000 in the fourth quarter of 2008. Company's net loss was $2.7 million in the fourth quarter of 2009, or $0.11 per diluted share compared to a net loss of $60.7 million or $2.59 per diluted share in the fourth quarter of 2008. However, as Mike said earlier, excluding charges, net income was $2.5 million for the fourth quarter of 2009, or $0.11 per diluted share, compared to net income of $800,000 in the fourth quarter of 2008, or $0.04 per diluted share. In terms of our balance sheet, long-term debt as of December 27, was $125.5 million.

For the quarter, cash generated from operations, gift card sales, and a $9.7 million of net proceeds from the sale of our corporate headquarters, helped us reduce our debt by $23 million during the period. For the year, we reduced debt by $34.8 million, and we're compliant with all our loan covenants at the end of the fourth quarter. In terms of our leverage ratio, we finished this year at 3.28%, versus a maximum of 4.5% per our amended senior credit agreement. Given effect to the repayment of outstanding borrowings under the credit facility with the net proceeds from our recently financing transaction our pro forma leverage ratio is approximately 2 times.

In terms of our outlook for 2010, once again we will refrain from issuing any definitive annual earnings guidance but will offer the following outlook. There will be one to three franchise Ruth's Chris Steakhouse openings this year as well as one Company-operated Mitchell's Fish Market, which is expected to open late in the second quarter. On the cost side, food and beverage costs are projected to be between 29% and 30% of restaurant sales while our marketing spend is expected to be 3% to 3.5% of total revenue. G&A expenses are expected to be in the range of $22 million to $24 million. CapEx spending is projected at $7 million to $8 million, while our free cash flow is expected to be in the $18 million to $20 million range. I will now turn 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. Over the last 12 months our leadership teams have done an excellent job in modifying costs and operating efficiently. And with balance sheet improvements behind us, we intend to take that same focus to sales, where we believe we can improve greatly our performance. Although it will likely take some time, success in this area along with the sustainable cost reductions we have made since 2008 should give us significant operating leverage on any meaningful improvements and certainly into a significant recovery.

Finally, we are as dedicated as ever to the core values of our Company, great food and genuine hospitality, and we appreciate that even in difficult times Ruth's Chris Steakhouse is recognized and appreciated for its great service and sizzling steaks. Our franchisees remain the heart and soul of the brand, and we appreciate their commitment and partnership as we move forward. Mitchell's has now been a part of Ruth's hospitality for two full years, and its team has also demonstrated a similar passion for serving their guests. We continue to be impressed with their execution.

In addition, I would like to congratulate Kevin Toomy and Sam Tancredi. I have asked them both to take on the role of President of their respective brands. Kevin at Ruth's Chris. Sam at Mitchell's Fish Market. They both have done great work since joining 14 months ago, and we are fortunate to have such talented and experienced leaders on our team. I congratulate them and I thank them. With that, Operator, we'll open for questions.

Thank you, very much, sir. Ladies and gentlemen, today's question-and-answer session will be conducted electronically. (Operator Instructions). And we'll pause for a moment. We'll take our first question from Jason West with Deutsche Bank. Welcome Mr. West.

Yes, thanks, guys. Just a couple of things, One. You mentioned the January trends. You said, revenue down, low single digits. Did you mean same-store sales at Ruth's Chris, or were you referring to total company wide revenues? What was the number you were referring to there?

Good morning, Jason. We were referring to comparable sales at Ruth's Chris.

Okay. And at Mitchell's, similar trend, are you seeing maybe in positive territory now?

Again our policy is really not to comment on monthly sales trends, but having said that we're progressing nicely.

Okay. Great. And any thoughts on the outlook for restaurant operating expenses? You gave us some guidance on the food line. But do you expect at the current comp trend you are seeing to see continued deleverage on the other oplines, or do you expect you will be able to manage that to flat or better?

Well our expectation is we should see some improvement as the year progresses. We did a lot of things in 2009 and some of those initiatives were implemented at various times during the year. So on a fully annualized basis, we would expect to have some improve as we move forward.

Okay. And then last thing, just what should we think about as the new share count, right now or either what you think for the full year after the equity raise? And I'm assuming the preferred offer willing not be treated as converted. It will be treated as you just include the interest expense or the dividend expense there?

Well, in terms of the share count on a diluted basis at the end of the fiscal year, we're at approximately $23.7 million shares outstanding. The rights offering was about $10.2 million, and the preferred on an as-converted basis would be approximately $8.6 million. There's a calculation that has to be done vis-a-vis each quarter, whether the preferred is treated as converted. So again, we will be presenting that as our first quarter here closes, probably at the end of, obviously in May when we release our earnings.

Okay. Thanks a lot.

With two questions in queue, we'll take our next question from Jeff Omohundro from Wells Fargo Securities.

Thanks. Just a follow-up on that last question. Is there any visibility yet on whether the preferred would be calculated as converted or not?

Jeff, it's an accounting issue. So, we have to go through the process. We account for the pick charge then we calculate the outstanding before the conversion, then we add back the pick charge. And then go ahead and we recalculate based on on a conversion, including a conversion, and the most dilutive presentation is what we present.

Okay. My question really relates to the branding strategy shift that was discussed. As the year progresses, should we expect to see movement off of the three-course effort in terms of mix? And if so, how do you think check might progress through the year? And also, are there any plans to take pricing?

Jeff, thanks for the question. The movement away from $39.95 to $49.95 prefix for the most part in our advertising, I would suggest would have some declining effect on the mix. And I would say that that's probably, we're thinking that's probably somewhere in the 5% to 8% range in terms of the falloff. So, and that's okay, but, again because we're going to be back to a more branded message. So, I think that is probably the way that is going to go. In terms of pricing, we continue to evaluate where pricing is, as Bob said earlier, we haven't taken a price increase since March of 2008, we continue to look at it as things firm up and stay firm, then that possibility becomes more likely. But right now, we don't have any plans for that.

Okay. Thanks.

We'll take our next question from John Edmonds, with Edmonds White.

You talked a little bit about obviously the cost-cutting that you have put in. And you have also talked about you should have tremendous kind of operating leverage if and when same-stores really start to turn for you. Is there any kind of metric or sensitivity you can kind of give us to help us understand kind of the incremental margins as comps start to turn positive for you? How much you think of every dollar you think you can bring to the operating margin line?

Well, as a fundamental equation, I would say that incremental sales dollars in a perfect world would generate somewhere between 35%, call it 30% to 40% of incremental margin with no change in the fixed-cost structure.

Okay.

So I think that's probably a rule of thumb that you can look at.

And just to think about that, does that mean when you are talking about the change in the sales dollars, does that just mean the incremental change as you become less negative? Or does that actually mean you have to turn positive at Ruth's? Because it sounds like you are positive at Mitchell's, but obviously Ruth's drives the bus.

It is really about sales dollars. That's how you really should be thinking about it.

Okay. Got it. So now that we're getting incrementally less negative, that means sales dollars are going up. And we should be thinking about that you should be somewhere in that runway of driving $0.35 to $0.40 of every dollar kind of to the bottom line.

Well, again, that's theoretical.

Yes.

Okay. Okay. Great. Hey, thank you so much.

Thank you.

Our next question is from Keith Fleishman with Litmus Capital.

Hi. In the free cash flow guidance that you gave, does that include the interest from the convertible, or does that excludes that?

It includes the interest for the convertible. Though, in terms of full disclosure here, it's 10% coupon and it can be paid either in cash or pick. And we do have some limitations on the cash piece of that, but it is included in the guidance.

But then if we sort of treat that in our minds as fully converted, then we can add a couple million back to free cash flow.

Correct.

Thank you very much.

Our next question system from Brian Elliott with Raymond James.

Thank you, good morning. Just an accounting question. We had a restatement of the top line, and wondered if you have filed historical adjustments for modeling purposes on a quarterly basis or if you are planning on doing that, or if you might have that available after the call?

Good morning, Brian. Yes, we will have the breakout from historical basis when we file our 10K, probably within the next couple of weeks.

Thank you.

Our next question is a follow-up question by Jason West of Deutsche Bank.

Yes, thanks, just a couple of follow-ups. One on the mention, you just said the mix impact from moving away from the classics of 5% to 8%. What exactly were you referring to there? I'm assuming it would be a positive mix impact as you get back to more full price items.

Yes, Jason, I mean, at least when I look at this, we had said before that our $39.95, $49.95 our prefix offering had grown to 30% of revenue.

Yes.

So what I'm saying is if we walk away from the advertising, although it is still very strongly seated and when we have gone in to darker periods or not been advertising, we have seen a drop-off in the 5% to 8% range. So that's where the drop-off would be, and we should see a corresponding pickup of 1% or 2% on the guest check average.

Okay. Okay. So the 5% to 8% would be the drop-off in traffic or the mix of the classics?

Mix of the classics.

Okay. Got it. And, so but as of the current quarter, you have still been pushing that promotion as normal?

No, we actually go completely dark advertising in January. We started again in February.

Okay. That's helpful. And then just the last follow-up on the last question around the restatements, exactly what was that restatement for? I can't recall what you guys have said on that in the past. And were there any closures in the fourth quarter across the system, either at Mitchell's or Ruth's?

Well, the first question, Jason is it was really a reclassification, not really a restatement. And we simply just took the sales discounting or offsets if you will, and brought them up above from an operating expense, and treated them as a reduction of those sales. In terms of your second question, no, we have had no closures in either Ruth's and/or Mitchell's.

Okay. Thanks, guys.

It appears there are no further questions at that time. Mr. O'Donnell, I would like to turn the conference back over to you for any additional or closing remarks.

Thank you all for joining us today. As always it is a great day to go out and eat fish or steak. Thank you very much.

Ladies and gentlemen, that does conclude today's Ruth's Hospitality Group Incorporated fourth quarter 2009 earnings conference. We thank you for your participation.