Ruth's Hospitality Group Inc (RUTH) 2014 Q4 法說會逐字稿

Hello. Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Ruth's Hospitality Group Incorporated, fourth-quarter 2014 earnings conference call.

(Operator Instructions)

As a reminder, today's conference call is being recorded.

I would now like to turn the conference over to Mark Taylor, Vice President of Financial Planning and Analysis. Please go ahead, sir.

Thank you, Orlando, and good morning, everyone. Joining me on the call today is Michael O'Donnell, Chairman and Chief Executive Officer, and Arne Haak, Executive Vice President and Chief Financial Officer of Ruth's Hospitality Group.

Before we begin, I'd like to remind you that part of our discussion today will include forward-looking statements. These statements are not guarantees of our future performance and, therefore, undue reliance should not be placed upon them. We would like to refer you to the Investor Relations section of our website at rhgi.com, as well as the SEC's website, at sec.gov, for copies of today's earnings press release and our recent filings with the SEC for a more detailed discussion of the risks that could impact our future operating and financial results.

I would now like to turn the call over to our Chairman, President, and CEO, Mike O'Donnell.

Thanks, Mark, and thanks, to everyone, for joining us on the call today.

We are pleased to report our fourth-quarter results, highlighted by total restaurant sales growth of nearly 10%, which finished off another strong year for Ruth's Hospitality Group. It was a year where we some external challenges, both from the difficult weather we faced in the first quarter to a continued inflationary, cost environment. Even with those headwinds, our steadfast focus on improving the strength and consistency of the brand experience, along with the hard work of our people, allowed us to deliver another year of strong operating results and earnings growth.

I'd like to begin by discussing the priorities that we believe will maintain the strength of the brand and continue to drive shareholder value well into the future. Our first priority is maintaining a healthy core of Ruth's Chris Steak House restaurants. The sale of the Mitchell's restaurants, which closed on January 21 of this year, was a strategic decision that now allows us to focus all of our efforts on the Ruth's Chris Steak House brand.

50 years ago, our founder, Ruth Fertel, bought Chris's Steak House and started a legacy of success by delivering the highest-quality food, beverage, and service in a warm and inviting atmosphere. This is what we strive to replicate each and every day. As we look forward to the next 50 years, we continue to build upon these basic ideals and values, which are illustrated in our recent marketing campaign, This Is How It's Done.

As a part of our efforts to continually strengthen our competitive position, we have recently competed a comprehensive evaluation of all of our existing restaurants. This evaluation combined learnings from the successes of our recent restaurant openings, along with an assessment of how we align our building designs with our growth initiatives.

As a result of this exercise, we have developed a plan to enhance our base restaurants. This will be a three- to five-year initiative for us that will invest additional capital into our restaurants, ensuring that the Ruth's Chris Steak House experience stays relevant for our guests.

Our focus on food and service and hospitality is reflected in the fact that we achieved our 19th consecutive quarter of positive same-store sales growth during the fourth quarter of 2014. Our same-store sales at Company-owned restaurants increased 5% during the quarter, with the growth evenly split between traffic and check. This was strong performance on top of the 5.5% year-over-year comp growth in the fourth quarter of 2013.

We have historically been reluctant to use our pricing power to drive revenues and prefer to drive sales, first and foremost, through traffic. We know our average check often lies 10% to 30% below our competitors and believe this positioning gives us the ability to use pricing appropriately to protect margins.

In 2015, we expect continued pressure on food costs, along with increases in labor and healthcare. We view our pricing powers as strategic advantage and expect to use this in 2015 to a greater extent than we traditionally have in prior years.

Our second priority is thoughtful development. In the fourth quarter, we opened our second and third Company-owned restaurants of 2014. These opened in Gaithersburg, Maryland, and Marina del Rey, respectively.

We currently have two leases signed for 2015 openings. St. Petersburg, Florida, which we are very proud of, opened this past Monday, on February 9. And we currently expect to open a second Dallas, Texas, location, late in the second quarter.

We believe that opening three to five Company-owned restaurants per year, for a mid- to high-single-digit growth rate is the right pace for us. And we are currently working on additional opportunities for late 2015 and beyond.

Turning to the franchise side of the business, our franchisee opened our fourth restaurant in Taiwan, in the fourth quarter, further strengthening our presence in Asia. Our franchise partners have also been active in relocating restaurants. In both Indianapolis and suburban Atlanta, our franchisees have completed a dramatic relocation of the restaurants, which reflects the Company's new-brand standards while adding significant private dining space.

We remain unique in the high-end space, with just over 50% of our restaurants owned by franchisees and nearly $16 million in annual franchise revenues. Our franchisees remain the heart and soul of our business. They will be key partners in our growth, and we will continue to lead the charge of our international expansion.

We now have 30 franchisees worldwide, operating 57 restaurants domestically and 20 internationally, in 11 different countries. Our franchisees are set to open four locations in 2015, and we have 11 commitments for the next 3 years.

Our third priority in creating long-term value is returning capital to our shareholders. Thanks to the strong cash flow generated by our restaurants and our franchisees, combined with a strong, yet flexible balance sheet, we were able to fund sustainable growth while returning excess capital in a disciplined manner.

In conjunction with the sale of Mitchell's restaurants, we announced a new, $50 million share purchase program during the fourth quarter to replace the previous $30 million authorization. We repurchased approximately 377,000 shares under this newly increased authorization during the fourth quarter. This brings our total repurchases for 2014 to 1.2 million shares, or $15.4 million.

Additionally, the Board of Directors has approved a 20% increase to our quarterly cash dividend, which now stands at $0.06 per share. As part of our balanced, total-return approach, we have returned over $200 million to shareholders since 2010 through debt repayments, share buybacks, and cash dividend payments.

I'd now like to turn the call over to Arne, who will provide details on the fourth quarter and our 2015 outlook.

Thanks, Mike.

Before we get started, I want to remind everyone that due to the sale of the Mitchell's restaurants, which we completed on January 21, the operating results for Mitchell's have been re-classified to discontinued operations. In the following discussion, discontinued operations are excluded, unless otherwise stated. On January 27, we filed the current report on Form 8-K, containing un-audited, pro forma, consolidated financial statements, giving effect to the sale of substantially all of the assets related to the Mitchell's restaurants.

For the fourth quarter ending December 28, 2014, we reported net income from continuing operations of a $8.9 million, or $0.26 per diluted share, on a base of 35 million diluted shares. This compares to net income from continuing operations of $6 million, or $0.17 per diluted share, in the fourth quarter of 2013.

During the fourth quarter last year, we changed from the delayed method to the preferable redemption method for recognizing gift card, breakage revenue. The resulting cumulative effect of the change in estimate and the change in accounting principle was recorded in the fourth quarter of 2013 and reduced other operating income by $2.1 million. Excluding this adjustment and income from discontinued operations, our non-GAAP, diluted earnings per common share was $0.23, an increase of 15%, year over year, compared to $0.20 in the fourth quarter of 2013.

In the fourth quarter, total Company-owned restaurant sales were $93.1 million, an increase of 9.9% from $84.7 million last year. This growth was driven by a 5% increase in comparable restaurant sales, which consisted of a 2.5% increase in traffic and a 2.5% increase in average check. The fourth quarter marked our 19th consecutive quarter of positive same-store sales and our 20th consecutive quarter of positive traffic growth.

We're pleased to note that the positive trends we saw in the fourth quarter have continued, as the first-quarter 2015 comparable sales to date are positive in the mid-single-digit range. As a reminder, the first quarter of 2014 faced severe winter weather throughout much of the country and impacted Ruth's Chris Steak House sales by over $1 million in the quarter.

Average weekly sales for Company-owned restaurants were approximately $112,200 in the fourth quarter, an increase of 4.5% compared to the $107,300 in the fourth quarter 2013. Total operating weeks for Company-owned restaurant were 836 in the fourth quarter, up 5.4%, year over year, from 793 in the fourth quarter of 2014.

Franchise income in the fourth quarter increased $4.4 million, up 4.7%, year over year, from $4.2 million in the fourth quarter of 2013. The increase was driven by a 3.2% increase in comparable franchise restaurant sales, as well as by new franchise unit developments during the last 12 months.

Other operating income increased to $1.4 million in the fourth quarter, up from negative $1.3 million in the fourth quarter last year. As I mentioned previously, the change in accounting for gift cards was recorded in the fourth quarter of last year. All in all, fourth-quarter, total revenues increased 12.9%, year over year, to $98.9 million.

Turning to our cost structure, food and beverage cost, as a percentage of restaurant sales, increased 72 basis points, year over year, to 31.8%. The increase is driven primarily by higher beef, seafood, and dairy costs.

Beef costs were up approximately 5%, year over year, in the fourth quarter. While current beef inflation is modest, we expect increased inflation in the latter part of this year. At this point, we are currently expecting beef inflation for the full year to be in the range of 5% to 8%, year over year, and currently, we do not have any of our beef needs locked in.

Restaurant operating expenses, as a percentage of restaurant sales, increased 36 basis points, year over year, to 45.6%. The increase was driven by higher labor and benefit costs.

Marketing and advertising costs, as a percentage of total revenues, increased 69 basis points, year over year, to 4.5%. This increase was due to a planned timing shift in quarterly advertising spend. For the full year, marketing and advertising costs, as a percentage of total revenues, remains flat at 2.9%.

Our G&A expenses decreased by approximately $900,000, to $6.9 million, from $7.8 million in the fourth quarter of 2014. The decline was driven, largely, by lower variable performance-based compensation. As a percentage of total revenues, G&A expenses improved 190 basis points, year over year, to 7%.

As Mike mentioned, the Board of Directors recently approved a 20% increase in the quarterly cash dividend to $0.06 per share. This dividend will be paid on March 12, 2015 to common shareholders of record, as of the close of business on February 26, 2015.

Lastly, at the end of the fourth quarter, the Company's outstanding debt under its senior credit agreement was $13 million, down from the $30 million outstanding at the end of the third quarter. Overall, we reduced debt outstanding by a total of $6 million during 2014, while opening three new restaurants, acquiring a franchise location, increasing our dividend, and buying back over $15 million worth of our outstanding shares.

Now, I'd like -- now, looking ahead to 2015, I'd like to provide some guidelines for some of our key cost metrics. Overall, we expect our cost of goods sold to be the range of 31.5% to 33.5% of restaurant sales. We expect restaurant operating expenses to range between 47% and 49% of restaurant sales.

Marketing and advertising costs are expected to be 2.9% to 3.1% of total revenues. G&A expenses are expected to be between $25 million and $27 million. We expect our effective tax rate to be between 31% and 34%.

Capital expenditures in 2015 are projected to be between $20 million and $23 million, reflecting two new Company-owned stores and an enhanced capital plan that aligns with our financial operating and brand initiatives. Lastly, we expect our fully diluted shares outstanding to be between 34.7 million to 35.4 million shares, exclusive of any share repurchases under the Company's previously announced share repurchase program.

With that, Orlando, I'd now like to turn the call over for any questions that we might have.

(Operator Instructions)

Joshua Long, Piper Jaffray.

Great. Good morning.

I wanted to see if we might be able to talk about some of the dynamics in fourth quarter that probably showed up at the top line, specifically around the private party and holiday dining period. I would imagine that you had very strong results there, with a lot of the initiatives and efforts you put in place over the last several years. But just wanted to see if you could provide some high-level comments around that, and then I have a follow-up.

I would say, Josh, that we had, as you described it, a very strong holiday season, both in private dining -- our Thanksgiving and Christmas openings, which are now in our third and fourth year, continue to do very well. We really saw solid performance across all of our buckets of business, really -- our B2B business, our private dining business, and our a la carte business. So it was, all in all, a very good, solid revenue quarter.

Great. Thank you.

And then, looking forward, it sounds like you might be on the lower end of taking -- as far as utilizing menu price this year, just given some of the pressures you'll be facing. And then also, carrying that up with the 5% to 8% inflation on the beef side. Curious if there's an opportunity to lock that -- you had mentioned that you're not locked now -- but really, just trying to reconcile both maintaining and supporting the value side of it to the consumer, but then, also, maybe locking in some visibility on the cost side, as you go through 2015.

Sure, Josh. This is Arne.

Right now, the beef environment is fairly benign. We expect that it would be higher, later in the year.

The challenge we face, as we've shared with you before, is that we buy prime beef, and it's the top 2% to 3% of cattle. So it's not something we can -- a price risk we can manage through the buying of contracts. We need to contract with our suppliers, and right now, I think the supplier appetite is not at a price point that we would say is attractive for us to lock in.

But we're active in the market. We look at it all the time, and if the opportunity presents itself and typically, they present later -- early in the second quarter -- if the opportunity is there, we'll take advantage of it. If we have to continue to buy at the market, I think we're very comfortable doing that, as well.

On the check side for the quarter -- the 2.5% check -- how much menu price did you have in the fourth quarter?

It was right around in-line with our check increase.

Okay.

And then, thinking about today three- to five-year plan around food service hospitality, it sounds like you've completed that initial program. And obviously, you have a long runway of initiatives [trying] to work with, but what kind of initial CapEx associated with it?

Or what kind of timing on the rollout would we expect to see as we're out in the restaurants and interfacing with the brand? Over what time frame should we be seeing those initiatives start to show up?

Well, we're getting started right now. We have planned to begin work on 15 restaurants this year. If you redeploy -- you look at the capital we were deploying at Mitchell's, some of that, instead of deploying it at Mitchell's, now we're deploying it back, focusing on the Ruth's Chris restaurants.

We expect -- I don't think all 15 will get done this year, but we'll begin to work on 15. And I think it's a dynamic process. And we're going to -- as we continue to go forward, we're going to look at, well, what are the returns are we getting? How do we tweak? How do we manage?

But I think we've put some of the more -- it's a good mix of both financial, which is we're expanding capacity, adding the ability to increase sales from operational. How do we improve efficiencies? Back to the brand, how do we keep the brand standard current so it doesn't get stale and it still resonates with consumers? So we're going to balance it between those three.

We'll try and do -- we're going to start work on 15. We probably won't finish all 15.

And in terms of the dollars around CapEx, it's mid- to high-single-digit in the millions of dollars. So somewhere between, I would say, $6 million to $10 million is probably what we'll spend in that area, this year.

Great. That's helpful.

And then, last one for me. The Ruth's Chris brand has some very memorable and important milestones that it's approaching. I'm curious about how that might work its way into the marketing this year and just your ever-evolving interface with the consumer via media, whether that's TV, social media, et cetera. I'm just trying to think about that as you go through the year, as well.

I think, Josh, we're very proud of the fact that we're 50 years old. And we're even more proud of the fact that we think there's at least another 50 years in front of us.

I think that, from a consumer standpoint, what they care about is that there's great food and service in the restaurant, not how old we are. Probably, you'll see more noise in a public relations atmosphere, maybe some more on digital, around our 50th anniversary.

We will do a fair amount of celebrating internally. Because we think that's really where -- it's very important. Our franchisees are very proud of its. And we look forward to celebrating the actual anniversary date.

You could probably see -- or expect to see, or hope to see -- some more noise around that in the springtime, more in a public relations setting.

Understood. Thanks so much.

Thank you.

(Operator Instructions)

Andy Barish, Jefferies.

Good morning, guys. A couple of things. I'll do them one at a time.

On the unit growth on the Company side, it sounds like you may be able to sneak one more in, in addition to the two leases. Am I reading into that correctly for 2015? And then, how does the evaluation of smaller markets for Company-owned growth start to play in, over the next couple of years?

Andy, Mike. Thanks, and good morning.

Yes. We do think we have a very good chance of getting one in, in the fourth quarter, which, obviously, will not have the biggest effect. It will be more expense than it will be income, probably. But to the extent that we can get it open, we will.

In terms of small market, we're really starting to see a lot more opportunities. In fact, the restaurant that, I hope, the next time we're talking we'll talk about -- that would be at the end -- is in a small market. So we think that small market, on a going-forward basis, could be 50% of what we develop.

Okay.

And then, on the remodel or retouches, can you give us a little bit more color? I know you've gone through and done the major remodels over the last handful of years. But what's the emphasis of this refresh program that you're talking about now?

I think, Andy, there's a number of things. And you're correct. We have been investing a substantial amount over the last (inaudible).

We continue to look at opportunities where we can add capacity. So that if we can add a private dining room, if we can additional seats at a or expand the bar, that becomes a priority for us. The things that we've been learning from our new restaurants and the success of those restaurants gives us some indication about where we think we need to be, in terms of the design, look, and feel.

Also, some operational improvements that you won't see -- [it's, in fact, in] the kitchen, where we've been able to redesign some of the way that systems work. Kevin Toomy has done a fabulous job in that regard, and therefore, increased more efficiency.

I think you're going to see -- and what Arne was talking, in the 15 restaurants -- is you're going to see a continuation of those kinds of things. And bringing into play some of the things we're learning and we've learned, all the way from back in our first significant endeavor within Portland and up to and including what we've just done recently in St. Pete.

So we're starting to see some of the things that have happened, there, that we've done that we would like to put into place in those 15 restaurants identified. And then, we'll go to the next 15 restaurants and go to the next 15 restaurants. So that's the story.

And where are the franchisees along that continuum? Are they starting to look at some of the things you guys have been doing, as well, and putting some capital to work?

Andy, that's a great question. And a happy to say, yes. When I was talking about these dramatic relocations, they're really -- I mean, Indianapolis and Atlanta -- and the balance of franchise communities is investing and starting to step up their investments. But these two, in particular -- and just very recent -- were really dramatic and are spot on with what we've been doing in St. Pete and what we did in Marina del Rey.

So it's really very exciting. And it's balanced that we've had a number of meetings around that. And one of the meetings was actually in the Indianapolis restaurant with all the franchisees. And I think you could easily say there's a great deal of interest in following along.

Okay. And then just one more, and I'll turn it over to others.

On pricing, I just want make sure, it sounds like that -- you've been judicious in the past, at less than 2%. It sounds like this year, we should expect 2% plus for realized menu price increases.

Yes. Well, we hope for realized menu. But what we have put in place, Andy, is probably the high end of the 2%s in the front half of the year. And then, it falls off. But it's certainly averaging more -- as we stand today -- more than 2%.

So we are solidly higher. If I look at our business plan against what we've done the last several years, we're probably planning, as of right now, 75 to 100 basis points higher than what we've typically done, which is, I think, a fairly significant change for us, from that perspective. And as we've talked about with you at your conference at ICR, I think it's just a reality of the inflation you saw all across the food basket last year and labor and healthcare.

Right. Okay. Thanks, guys.

(Operator Instructions)

Megan Yang, Raymond James.

Hi, guys. It's Megan, on for Brian Vaccaro.

So what's the ending cash balance for last quarter? And also, if you could give some color on how you plan on using the proceeds from Mitchell's -- is it all going to Ruth's, or do you have any other initiatives or any other plans in the pipeline?

The ending cash balance was $4.3 million. And I don't know, Mike, if you want to--

Megan, as we've said, when we sold the Mitchell's business, we increased our share repurchase plan to $50 million. In addition, as Arne described, our CapEx expenditures for the year -- we're going to be spending some increased capital on the 15 restaurants we talked about, building new restaurants. We'll continue to pay back pay down debt, buy back shares, and pay our dividend.

Okay. Thank you.

Thanks, Megan.

There are no additional questions in the queue. I would like to turn the conference back to Mike O'Donnell for any additional or closing remarks.

Thank you, everybody, for joining us this morning on the call. It's always a great day to go out and eat steak, particularly if you don't already have your Valentine's Day reservations. Happy Valentine's Day, to everybody. Thanks.

Ladies and gentleman, that does conclude our conference for today. We think you for your participation.