Ruth's Hospitality Group Inc (RUTH) 2012 Q1 法說會逐字稿

Hello. Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Ruth's Hospitality Group, Inc. first quarter 2012 earnings conference call. (Operator Instructions). I would now like to turn the conference over to Mr. Chris Olson, Vice President of Finance Planning and Analysis. Please go ahead.

Thank you and good morning. Joining us on the call today are Mike O'Donnell, our Chairman and Chief Executive Officer and Arne Hawk, our Chief Financial Officer. 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 today's earnings press release and our recent filings with the SEC for a more detailed discussion of the risks that could impact future operating results and financial conditions. Finally, I would like to remind you 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 Mike O'Donnell, Chief Executive Officer of Ruth's Hospitality Group.

Thanks, Chris, and thank you all for joining us today. We are pleased to share with you an update on the first quarter results and other recent developments at Ruth's. We maintained our solid operating momentum, and are pleased to report our ninth quarter of traffic growth and solid improvement in our year-over-year earnings.

Looking at our first quarter results, comparable sales at Ruth's Chris Steak House increased 3.7%. The solid growth during the quarter came on top of a 5.2% increase in the prior year period and marks the eighth consecutive quarter of positive comparable sales for Company owned restaurants and our ninth straight quarter of traffic gains.

Entrees, which serve as a proxy for traffic, increased by 2.2% during the first quarter. This is also the fifth sequential quarter where traffic has increased against positive traffic in the prior year. Average check also increased1.5% for the period.

Our sales growth at Ruth's Chris was steady throughout the quarter, despite the negative impact of an earlier Lenten seasonthis year versus last year. Unlike the apparent broader restaurant industry trends, our sales growth in March was actually higher than February, despite an estimated 100 to 150 basis point decline in March comparable sales due to the shift of Lent.

The shift in the Lenten season we believe is also benefiting our April comparable sales. So far this month, our April comparable sales are in the solid middle single digits. While we are pleased with this trend, it's worth pointing out that we still have two-thirds of the current quarter ahead of us.

On a regional basis, Ruth's Chris two largest markets, Florida and California, continue to generate positive sales as they out perform the system average. Florida sales rose 6.6%, while California increased 6.8%. Across the entire Ruth's Chris portfolio of comparable Company locations, 49 restaurants or 79% reported positive comp sales during the first quarter.

Compared to the Knapp-Track benchmark index for the Steak House segment, Ruth's Chris comp sales of 3.7%, were 20 basis points better while traffic, which was up 2.2%, was one percentage point behind. While our traffic growth slowed versus Knapp-Track in the first quarter of 2012, we remained committed to our strategy of growing profits through traffic first and pricing second. In this challenging beef market and given our positive traffic trends, we do not see discounting or couponing as a good current tactic.

We continue to see strength in the three key customer segments. Private dining sales at Ruth's Chris Steak House, increased approximately 7.7% during the first quarter on top of last year's 15% growth. As we continue to benefit from interest in our catering business, use of professional satellite services and improved business environment.

Our Ruth's Chris franchise-owned domestic comparable restaurant sales increased 7.1% during the quarter, while international comparable franchise-owned restaurant sales increased 9.8%, resulting in a blendedincrease of 7.6%. This growth was comprised of 4.7% increase in traffic, and a 2.9% increase in the average check.

International franchise growth was positively impacted by a strong improvement in sales in Japan after last year's tsunami. Domestically, we experienced solid increases in our Hawaiian franchise locations, in part due to the rebound of Japanese tourism. In addition, the shift in the location of the Super Bowl from Dallas, a company market, to Indianapolis benefited our franchise location and subsequently hurt the Company.

In terms of Ruth's Chris brand, we expanded our Sizzle, Swizzle and Swirl Happy Hour premium bar menu during mid March, and it is now available in 38 Company locations. The menu, which features a number of high-end food and drink items for $7, delivers an incredible quality at an accessible price point in a way, that we believe, does not materially compete with our dining room and sales. While it is early, we believe this offering gives us an opportunity to not only drive incremental sales at the traditional happy hour, but also turn first-time guests into Ruth's Chris regulars.

We continue to be pleased with the contribution from our Ruth's Seasonal Classics. They are pre-fixed selections, which comprise 20% of our sales mix. We remain convinced that our diverse guest base appreciates the option of the pre-fixed classics, and that this strategy has supported our traffic growth while offering value to those customers who are seeking price certainty in their dining occasions.

At Mitchell's Fish Market comparable sales were flat during the first quarter compared to a 2.7% decreasein the prior year. Both traffic and check were essentially flat year-over-year. Our $19.95, $24.95 and $29.95 pre-fixed menu options remain strong contributers to our sales mix as value propositions (inaudible -- technical difficulty) and comprise approximately 17% of sales.

Pete Beaudrault assumed the leadership of the Mitchell's concept in February, and we are pleased with his initial efforts on menu development and increasing our operational execution. Our marketing efforts at Mitchell's, are centered around increasing the awareness of the brand. With a smaller largely regionalized operating base, it is more difficult to use the same media leverage that we can use at Ruth's Chris. Our research helps direct our marketing focus to expose the brand to a wider group of consumers through the use of innovative local marketing efforts as well as online and social media opportunities.

Switching to real estate and development, we will be opening Ruth's Chris location in Harrah's Casino in Cherokee, North Carolina under a management agreement with the Eastern Band of Cherokee Indians in May of 2012. We have also executed a lease for the banks development in Cincinnati and are anticipating a November opening. We continue to work on evaluating new opportunities and our approach to new unit development remains disciplined and prudent with regard to capital deployment.

LOI negotiations continue on multiple sites. We have received Board approval to move from letter of intent stage to lease stage for two additional sites that would open in 2013, subject to successful conclusion of our lease negotiations. We look forward to announcing the specific locations when we have the signed leases.

Our franchise partners currently have six signed leases for future locations. In April, our franchise partners opened a second Ruth's Chris location in Dubai, and we expect two to four additional international franchise locations before the end of the year. In addition, we have an additional 13 commitments for future franchise restaurants over the next several years. We will continue to provide updates to you on our newly signed leases and on the franchise growth in our future quarterly calls.

In addition to the operational and development activity in the quarter, we also undertook two strategic initiatives to improve our capital structure that we believe will pay significant benefits going forward. In February, we successfully refinanced our credit facility resulting in an increased financial flexibility and lower borrowing costs. Additionally in March, we repurchased and retired our entire class of preferred shares, which had been owned by affiliates of Bruckmann, Rosser, and Sherrill.

These two transactions represent the significant financial progress our entire team has made during the last two years. We believe that these transactions position the Company for improved earnings and cash flow, while maintaining the balance sheet flexibility to continue to invest in our business and create long-term value for our share holders. With that, I would now like to turn the call over to Arne to take you through a more in-depth discussion of our financial results.

Thanks, Mike. For the first quarter ended March 25, 2012, we generated net income of $6.1 million compared to net income of $6.9 million last year. Our net income applicable to preferred and common shareholders was a loss of $30.3 million compared to $6.2 million last year. The net loss was directly related to the repurchase and retirement of the Company'sSeries A 10% convertible preferred stock that Mike just discussed. As we previously disclosed, the Company recorded a reduction in net income of $35.8 million to reflect the excess of the redemption value over the carrying value of the preferred shares redeemed.

In addition, the Company recorded approximately $665,000 net of tax and other nonrecurring items, largely related to the senior credit facility and the preferred stock redemption. In 2011's first quarter, the Company recorded a net benefit of approximately $681,000 net of tax, related to a one time restructuring reserve and a reduction of a discontinued operating charge.

Excluding the previous mentioned one time reductions to net income, our pro forma net income applicable to preferred and common shared holders was $6.2 million, or $0.15 per diluted share in the first quarter of 2012 compared to $5.5 million or $0.13 per diluted share in the first quarter of 2011. We have included a full schedule in our press release that reconciles our GAAP net income and earnings per share to this non-GAAP net income and earnings per share for the first quarter.

Total revenues during the first quarter of this year were $101 million, which represents an increase of $3.3 million or 3.4% compared to last year. Total Company-owned restaurant sales increased to $97.3 million or 3.3% compared to $94.2 million in the first quarter last year.

Average weekly sales for all Company-owned Ruth's Chris Steak House restaurants were approximately $94,800 in the first quarter compared to $91,000 in the same period last year. Average weekly sales at Mitchell's Fish Market were approximately $70,200, flat when compared to last year. Restaurant operating weeks were flat year-over-year and exclude operating weeks from discontinued operations.

Franchise income increased 13.1%to $3.5 million from $3.1 million last year due to improved sales and an increased number of franchise restaurants.

In terms of our cost structure, food and beverage costs, as a percentage of restaurants sales, increased 130 basis points year-over-year in the first quarterdriven by higher than anticipated increases in the non-contracted portion of our beef supply. Specifically, our beef costs were up 16% year-over-year during the quarter. We were able to offset this rise in beef costs through management of other operating expenses as well as higher traffic.

Restaurant operating expenses, as a percentage of restaurant sales, were 48.8%, a decrease of 40 basis points compared to last year. The decrease was a result of increased sales leverage, despite higher health insurance costs.

Marketing and advertising costs decreased to $1.7 millionfrom $2.9 million. As a percentage of total revenue, decreased by 130 basis points to 1.7%. The decrease was largely a timing difference, as well as the reduction in television production costs. We continue to expect to use television advertising for the Ruth's Chris brand, as we found our seven week TV advertising flight in the fourth quarter played an important role in driving increased enthusiasm and traffic.

G&A expenditures increased to $6.9 million from $5.9 million in the prior year. The increase was largely driven by higher legal fees which were related to our refinancing agreement and the repurchase of our preferred stock in addition to higher personnel costs related to growth and compliance.

At the end of the first quarter of 2012, the Company had $77 million in debt outstanding under its senior credit agreement, an increase of $55 million from $22 million at the end of the fourth quarter of 2011. The increase was due to the repurchase of the Company's Series A 10% convertible preferred stock during the quarter. Aside from the borrowing to fund the costs associated with the preferred stock repurchase and credit agreement, we repaid $6 million in debt during the quarter.

Based on our first quarter results, we are updating our guidelines for some of our key 2012 cost metrics. We expect our cost of goods sold to be within the range of 31.5% to 32.5% of restaurant sales for the year. This is based on projected beef inflation being up between 10% to 15% which is higher than our previous range of 5% to 8%. We currently have purchase agreements for beef representing approximately 30% of our needs through August of 2012 at a price that represents an approximate 7% increase compared to the prior year.

We continue to manage our restaurant operating expenses to be between 51% and 52% of restaurant sales. Our marketing and advertising spend is projected to remain between 3% and 3.5% of total revenue, and our G&A expenses are expected to be between $25 million to $26 million.

While we believe we have additional pricing power, we expect to be thoughtful and prudent with respect to future increases. For the second quarter, we have taken an approximately 1.5% price increase on our menus. With the current economic backdrop, it is still our strategy to focus on growing sales through traffic gains and maintaining our value orientation. As we have demonstrated, we will continue to evaluate additional menu engineering and pricing opportunities.

Our effective tax rate for the full year, is currently expected to be between 28% and 32%,and our CapEx spending for 2012 is projected to remain between $10 million and $12 million. With that, I'd now like to return the call to Mike.

Thanks, Arne. We remain pleased with the ongoing consistency of our sales and traffic gains at Ruth's, and the initial work being done by Pete Beaudrault and his team at Mitchell's. Our franchise system has never been healthier, as demonstrated by the strong first quarter sales results and their continued commitment to growth. They remain the heart and soul of our brand, and a key contributor to our future as an organization.

Our business continues to move in the right direction. Through the combined efforts of our entire team, we have made significant progress toward improving our profitability and capital structure. 2012 is off to a very is solid start, and we believe we are better positioned for earnings leverage and creating shareholder value going forward. Operator, I would now like to turn the call over for any questions.

Thank you very much. (Operator Instructions). Our first question today will come from Jason West, Deutsche Bank.

Good morning guys

Morning, Jason. I see you got up before Nicole today.

I guess so, I guess I'm not getting in there. A few things, Arne, on the legal fees and the G&A, are those comps in the $0.15 or are theybacked out of the $0.15?

The portion that is related to the repurchase of the preferred shares and the refinancing of our credit agreement, those are backed out of the $0.15. The other, just ongoing general business legal, is in the $0.15.

Okay. Just roughly, what was that number?

We've aggregated the number, the net of tax was $648,000. All these expenses that are kind of related. There's a write off of -- as we shrunk our credit facility, some banks came out so we had to write off their fees. There were some unamortized legal fees there as well, and then some of the ones that are in the P&L.

Okay. And then just could you give a sense of what the interest expense looks like going forward here, just so we have the modeling down?

The guidance I would give you is that you can project forward our debt paydown is likely to be similar to what we've done in the last couple years based on cash flow off of the business. I think you and I have talked about our loan is LIBOR-based spread, and based on where our leverage is it's about 2.5 points over LIBOR. So you can model it that way

Okay. Got it. And then, Mike, you mentioned the April numbers. I just want to clarify. You said solid mid single digits?

Correct.

Could you just give us a general update on how you guys are feeling about your consumer? I know the last couple of years we've seen a bit of a lull in the summer. I know it's hard to predict, but it had a little bit of choppiness sounds like in the quarter. Maybe February's a little soft and then March was a nice pickup, April's going well. So it doesn't feel like things have changed too much for you guys consumer-wise, if I'm read reading that right.

I think Jason, we've talked before about the three different buckets of business that we have,those things, special occasion, inbusiness and then the people that really just use us on a real frequent basis. All of those businesses still remain solid. And as I said in the first quarter, we saw some things and did we pick up some weather-shift stuff early in the year? Probably.

The Lenten shift has an impact of February and March to some degree. But March was strong for us and good for us, and April seems to be doing very well. Our biggest challenge is we want to continue, obviously on the sales side, and we think we have the right things in place to do that and it's loaded a little bit towards the back end.

If you remember, we were up over 7% in the fourth quarter last year. So we need to look forward to that.

But having said that, I'm encouraged by what's taking place and encouraged by the activity that our restaurants are taking on a local basis that are driving sales. I think we're not dependent completely on what's going on outside of it, althoughobviously it has an impact. I think the private dining work we've done, the catering work we've done that continues to grow very nicely and that will help us offset any bumpiness.

Great. Thanks, guys.

Thank you, Jason.

Our next question will come from Nicole Miller, Piper Jaffray.

Nicole, I can't believe you let Jason get in front of you.

I know. Good morning, everyone.

Good morning.

Three quick ones. When you talked about April comp trends, can you speak to us about the remainder of the quarter and do comparisons year-over-year get easier, or more difficult?

Well, we normally don't go into a great deal of detail on that, but Q2 for us last year was a very strong quarter. We were up 5.8%. Our April finishes this Sunday. It looks very good and it's solid mid digits. So Mitchell's business remains in a flat position.

I'm encouraged by what we're seeing. We've got, again, the challenges that come up as business normally slows down a little bit post-Mother's Day, and then we see our AUV's drop. But, I'm very encouraged by what we're seeing.

In your prepared comments I heard something about professional satellite services. I lost track of what that comment was related to. Could you cover that again?

Yeah, sure, Nicole. A number of years ago we introduced a satellite capability to all of our restaurants. In multiple cities we allocated to individual restaurants, and not necessarily the entire city, but also Mitchell's Fish Market and into our franchise restaurant.

So that allows for someone to have a simulcast opportunity, or to have a tape situation where they're sending a signal out to our restaurants and we are hosting the party, so to speak. Some of that presentation is done at night in our private dining room and some of it is actually taken on full-day training opportunities in our restaurants.

We're very encouraged and the outside vendor has provided the capital to give us the equipmentand we jointly market it. So we have a lot of effort going on right there.

Okay. Got you. And on the beef cost side. I am just curious, QSR is requiring more beef trimmings these days because they're changing the mix of what's in the patty. Does that impact the cost of the beef that you use in any way, or why are beef prices still so high?

Well, a simple answer to beef prices is supply and demand. Does that have an impact on us? Not directly, no.

What directly is having an impact on us is the amount of cattle available for kill is the fact that the farmers and the ranchers believe (inaudible -- technical difficulty) if this were the packers at this point. They're not killing as many cattle because they hoping that prices go even higher. So we are not really effected by what goes on in the trimming side of things.

Okay, thanks.

Thank you, Nicole.

Bart Glenn with D.A. Davidson is next.

Thank you. Just one quick question in terms of the share count on a going forward basis. You provided guidance. I assume that's the average for the year, but could you just help us with some thoughts on what the diluted share count might be on forward going quarters.

Sure, Bart. This is Arne. That is for the quarters going forward, so that is the second, third and fourth. It's actually is not a good approximate for the year. We'll have the first 75 days of the BRS shares being accounted for.

Yes. I just wanted to clarify that it wasn't an average for the year.

Yes. It is not the year. Those are the quarters.

Could you just talk a little bit about the difference trend in Company versus franchise comps. I think you alluded to this when you mentioned the strength in international.

Couple things, Bart. One, strength in international obviously is significantly smaller than the domestic side. And the domestic there is significant shift in Hawaii is that has gotten a lot stronger as the Japanese tourism has come back. Some 40% of what goes on in the sales in Hawaii, which is typically high volume restaurants, is effected by Japanese tourism. That has a big impact.

And the second thing while it sounds sort of odd, but there is, I would say, a $400,000 swing between us having Super Bowl in one market and it shifting to the franchises. We're thrilled that it has such a positive impact on the system in total, but it went from the Company side to the franchise side. Which we're thrilled. They did an fabulous job in Indianapolis in their two restaurants. Previously we had restaurants in Fort Worth and Dallas that were impacted by it. So kind of a switch, and that accounts for the majority of the switch.

All right that's very helpful. And then just one other questions in terms of the timing of the price increase. How much would the April trends have benefited from the 1.5% price increase?

We took the price increase, right, approximately April 1.

Yes. Got you.

So I think it depend as we'll do analysis towards the end of the month to determine how much of it we've actually seen in terms of the actual pickup or how much there has been movement around the menu. But thankfully we have seen continued traffic increase, and so that's really the big driver of what's taking place

Thanks guys

Thank you

(Operator Instructions). Next we hear from Andy Barish with Jefferies.

Good morning, guys. Just dovetailing on the price. How did you implement that latest price increase, and you're running about two and a half of price now, or did you actually roll over some pricing?

No. We're running right about 1.5% and we did this selectively on certain beef products basically. We continued to have a move on the pre-fix side of the classics. So that stayed in place. So we went from $39.95 to $40.95, so we're rolling over that.

Okay and then you made a comment on -- I think I heard it on Arne's remarks in the marketing side of things that TV with the success of cable last year will be part of the plan this year. Can you give us a little more color maybe timing wise, or thoughts there?

Not to give all our competitors a chance to work with us.

Yes.

But we will be similar in what we did last year. And last year we were in the market for seven weeks. We've said this, so I'll just rehash it for you. We were in the market for seven weeks in advance of the holiday season.

Yes. Okay. And then on a couple of the cost items -- well actually one in particular. On the ongoing health insurance expense in the operating expense line. As I recall, that kicked up last year in the back half of the year. Is my recollection correct? Do you start seeing some of those claim amounts normalize a little bit, or when does that lapse?

Andy, this is Arne, and you're recollection is correct. We saw an increase in the number of large claims. Certainly a small number, but a significant increase in large claims last year.

That's been factored into plan for this year. It's been a little bit better than what we thought going into the year, but it's still up pretty significantly versus last year. We are doing some work. Our renewal is mid-year, so we're trying to look for some things that perhaps we can do to manage it in the back half of the year. The growth as slowed, but it's still nowhere near where it was in the last quarter.

Andy, part of what you need -- we like to think about this -- and just for your edification. One, on a relative basis our costs have been below where our peer groups have been and still are not exceeding that. They're just going up for us on an independent basis.

But we do offer substantial health care benefits to our long-time employees. And that's particularly important because we are talking about people that have been with the Company for in excess of ten years are eligible for certain full-time benefits at a greatly reduced number of hours given the fact that we are only open for dinner.

But those core people that have been with us for ten-plus years that are working in the front of the house with us that are servers, that are bartenders and folks in the back of the house that have done such a great job for us for such a long time have really helped build this business. So we're highly sensitive in terms of making sure that we continue to provide them with the kind of health care benefits that makes this a career, not just a stop along the way.

I appreciate that. And then one other thought. It didn't appear to show up in the Florida comps which obviously were very strong, but did you -- I know it's probably hard to call out, but given how mild the winter was, would you characterize the season in Florida as little softer? Meaning not as many people felt the need to get out of the cold and snowy Northeast or Midwest. Yet you still put up some pretty terrific comp numbers in Florida.

Andy, I've read that in a number of other reports where there didn't seem to be the traffic. I would suggest that our traffic was very good obviously by what we reported. In addition I want to give the guys in the field full credit. They're working hard on outside catering events and private dining. Things that generate our own traffic, and we are going to continue to do that. But I would tell you that we did not see the fall off that others in other segments of the restaurant space have reported.

Thanks, guys.

And our next question will come from [Bryan Picarro] with Raymond James.

Thanks. All mine have been answered.

That was easy.

At this time we have no questions in the queue. I will now turn the conference back over to Mr. Michael O'Donnell for any closing or additional remarks.

Thank you very much for participating in this morning's conference, and remember that today is a perfect today to experience our Sizzle, Swizzle and Swirl Happy Hour at Ruth's Chris and then enjoy a great meal at either Mitchell's Fish Market pr Ruth's Chris Steak House. Thank you all.

And that does conclude today's conference call. Thank you for your participation.

Thank you.