Executives: Mark Taylor - VP Financial Planning and Analysis Michael O'Donnell - CEO Arne Haak -

CFO
Analysts: Brett Levy - Deutsche Bank Brian Vaccaro - Raymond

James
Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Ruth's Hospitality Group, Inc, First Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference 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.

Mark Taylor: Thank you, Rochelle, 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. 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.

During this call, we will refer to adjusted earnings per share. This non-GAAP measurement was calculated by excluding certain unusual and nonrecurring items as well as losses from discontinued operations. We believe that this measure represents a useful internal measure of performance. You can find a reconciliation of adjusted earnings per share in our press release for today's call. I would now like to turn the call over to our Chairman, President, and CEO, Mike O'Donnell.

Michael O'Donnell : Thanks, Mark, and thank you all for joining us on the call today. I'm pleased to share with you today our first quarter performance. Our comparable-store sales were up 3.1% for the quarter, and our adjusted earnings growth of 6.9% significantly outpaced our revenue growth. Our success is a direct result of the hard work and dedication of our team members as well as our franchise partners, who remain the heart and soul of our brand. Together we have worked hard to execute against a straightforward plan to provide returns to our long term shareholders.

Our plan is to grow our core restaurant performance; to be disciplined in our investment decisions and initiatives, so they provide meaningful returns; and finally, we augment our performance with dividends and repurchases of stock, and by paying down our debt. During the first quarter, our total revenues grew 4.7%, reflecting continued same store sales growth and new restaurant openings during the past year. Adjusted earnings per share increased 6.9% for the quarter, driven by sales growth and supplemented by our ongoing share repurchase program. Comparable store sales growth in the first quarter at 3.1% was consistently positive across the three months during the period. We also saw a return to positive traffic growth of 90 basis points year-over-year.

One of the most meaningful investments we can make is in the creation of a successful new restaurant. Last year we opened two new Company restaurants and three new franchise restaurants. I'm excited to share that 2016 we expect to open four new Company restaurants, and our franchisees are expected to open three new restaurants and relocate two. Of the four Company owned locations we expect to open in 2016, our Albuquerque, New Mexico, restaurant is scheduled to open next month; followed by El Paso, Texas, in the third quarter; and restaurants in Cleveland, Ohio, and Waltham, Massachusetts, during the fourth quarter. Our franchisees continue to invest in our brand.

Our partners opened one restaurant during the quarter in Jakarta, Indonesia, and they signed leases for two more restaurants that will open in 2016, one in Odenton, Maryland, expected to open in the third quarter; and one in Greenville, South Carolina, expected in the fourth. As we have historically done with both our Company and franchise restaurants, we look to relocate restaurants from time to time as trade areas change and markets shift. These relocations allow us to adapt to changing market dynamics and build new restaurants up to Ruth's 2.0 standards. This year we expect our franchisees to relocate two of their existing restaurants. Our franchisee in Philadelphia, Pennsylvania, is currently scheduled to relocate its restaurant late in the second quarter; while our Huntsville, Alabama, franchisee is currently expected to relocate their restaurant in the fourth quarter.

The relocation of our Mississauga, Canada, restaurant has now been moved to the first half of 2017. We also made progress on our restaurant remodel program during the quarter. As we have discussed, the remodel program is a three to five year initiative tied to Ruth's 2.0 and is designed to engage our guests and expand our operating capabilities. We completed another five remodels during the quarter and remain on track to complete 8 to 10 over the course of the year. Another tactic to support our restaurant performance is our Ruth's 2.0 menu refresh.

We began rolling out our new menu items and premium offerings in 2015 and have completed of rollout in all of our Company locations in the first quarter. During the first quarter, roughly two thirds of our domestic franchise restaurants added these menu items, and we expect the domestic franchise rollout to be completed in the second quarter. These offerings appeal to both our loyal customers as well as to the next generation of guests and are showing preference levels higher than the menu items that they replaced. Our restaurant teams have executed this rollout with high level of quality and service and no additional operational complexities, and we thank them. The third component of our plan is to complement our organic initiatives with a return of capital.

During the first quarter, we increased our dividend by 17% and repurchased $11.7 million of our stock at an average price of $15.92. Since the beginning of 2014, we have now repurchased shares with more than $50 million at an average price of $14.67 and returned over $17 million to our investors in the form of dividends. Furthermore, I am pleased to announce today that our Board of Directors has authorized a new $60 million share repurchase plan. So with solid business and a balance sheet that has just $8 million in debt, we believe that we are well positioned to support all of the long term shareholder initiatives I have outlined here today. With that, I'd like to now turn the call over to Arne to provide some more details on the first quarter.

Arne Haak: Thank you, Mike. For the first quarter ended March 27, 2016, we reported income of $10.8 million or $0.33 per diluted share compared to net income of $10.4 million or $0.30 per diluted share in the first quarter of 2015. Net income in the first quarter of 2016 included a $200,000 after tax charge related to the closure costs for our Columbus Ohio restaurant, which we closed after 17 years due to changing market dynamics. In the first quarter, total Company owned restaurant sales were $95.9 million, an increase of 4.2% from $92.1 million last year. The growth was driven predominantly by a 3.1% increase in comparable restaurant sales, which consisted of a 2.2% increase in average check and a 0.9% increase in traffic.

We are pleased that both are comparable traffic and sales were positive in each month of the quarter. The shift of the Easter holiday from the second quarter in 2015 to the first quarter of 2016 did contribute approximately 70 basis points to our comparable sales. The Easter holiday shift has also affected our comparable sales trends to date in the second quarter. Comparable sales trends for the quarter to date are currently running flat year over year. Average weekly sales for Company owned restaurants were $110.9 thousand, in the first quarter an increase of 2.6% compared to the $108.1 thousand in the first quarter of last year.

Total operating weeks for Company owned restaurants were 865 in the first quarter, up 1.5% year-over-year from 852 in the first quarter of 2015. Franchise income was $4.5 million in the first quarter of 2016, up 11.9% from $4 million in the first quarter of last year. Total franchise comparable sales were up 0.8% year over year in the first quarter. Comparable sales in our domestic franchise restaurants were up 2.9% during the quarter, while comparable sales in our international franchise restaurants declined by 7.9%. International comparable sales continue to be negatively impacted by a stronger US dollar and traffic weakness in Asia as well as in the Canadian oil markets.

Excluding the impact of foreign currency translation, total comparable sales would have increased 1.9%. Now turning to our costs. Food and beverage cost as a percentage of restaurant sales decreased by 87 basis points year-over-year to 29.6%. This improvement was driven by lower beef costs, combined with a 2.2% increase in the average check. During the quarter, our overall beef costs were down 4.6% year over year.

While we are continuing to benefit from lower beef costs, the growth in the percentage of cattle that grade prime slowed during the first quarter. We continue to expect 2% to 4% beef cost deflation for the full year. However, our quarter to date beef costs are currently running flat year over year. During the first quarter, our restaurant operating expenses as a percentage of restaurant sales increased 49 basis points year over year to 45.8%. The increase was primarily driven by higher labor and benefit costs.

Our G&A expenses as a percentage of total revenues increased by 90 basis points year-over-year to 7.5%, primarily driven by a previously announced investment in people as well as an increase in stock based compensation expense that was awarded in 2015. At the end of the first quarter, we had $8 million in debt outstanding under our senior credit facility. Finally, subsequent to the end of the first quarter, our Board of Directors approved the payment of a quarterly cash dividend of $0.07 to shareholders. This dividend will be paid on May 26, 2016, to common shareholders of record as of the close of business on May 12, 2016. Now I'd like to update our outlook for the full year of 2016 for some of our key cost metrics.

We continue to expect our cost of goods sold to be in the range of 29.5% to 31.5% of restaurant sales. We continue to expect restaurant operating expenses to range between 47% and 49% of restaurant sales. We continue to expect marketing and advertising costs to be 2.9% to 3.1% of total revenue. We continue to expect our G&A expenses to be between $29 million and $31 million. We continue to expect an effective tax rate of 32% to 34%, and we continue to expect capital expenditures to be between $28 million and $30 million.

Lastly, we now expect our fully diluted shares outstanding to be between 33 million and 33.6 million shares, exclusive of any share purchases under the Company's recently announced share repurchase program. With that, Rochelle, I'd now like to turn the call over for any questions that we might have.

Operator: Thank you. [Operator Instructions] And our first question we’ll hear from Brett Levy with Deutsche Bank.

Brett Levy: If you guys could do me a favor and just talk a little bit about the sales environment, what you're seeing on the competitive side, as well as any pockets of strength or weakness? And also, just how should we be thinking about the G&A spend going forward? Does it start to normalize in 2Q, or should we continue to assume some modest acceleration from what it's been running prior to your stock based comp changes?
Michael O'Donnell : Okay.

So the first question, I guess, sales, kind of some more color around sales during the quarter. I think it was a good quarter. 3.1% is pretty good. We did get helped by Easter a little bit. In terms of pockets of weakness, I think it's still kind of the same cadence.

You're seeing weakness in oil markets that have very large contributions from oil in their economies; and also in some of the major cities, where you have tourism and a stronger dollar. It's still, has been a little bit weaker. But overall, I think it's been a pretty consistent, positive quarter for all of us, for all of our restaurants. The holidays were good. Every one of our holidays, whether it was New Year's Eve, Valentine's weekend, or Easter, they were all good and we're looking forward, I think, to the second quarter and Mother's Day, Father's Day, and to continue going on.

In terms of the G&A, you know, it's a bit tricky in kind of modeling the G&A. And I think a lot of the investor community may have had, this may be a variance point for them versus what they were expecting. Our guidance this year was flat to what our G&A was last year and the components of our G&A are people, but there are two variable components. One is stock based compensation, and another one of them is bonus. So if you look at our initial guidance year-over-year, our initial guidance was up over 10%.

So I think that this is what we expected. We're on track. In terms of the year-over-year increase, this is, unless our financial performance accelerates, this is going to be the largest year-over-year increase in terms of G&A for the quarter, the way the world looks to us today. Does that answer your question around G&A, Brett?

Brett Levy: Yes, that's helpful. And then if you could just give us a wage rate inflation type number, and what you're seeing in terms of turnover and the battle for scarce labor? Thank you.

Michael O'Donnell: Sure. You know, I don't know that we've seen a big change in what the turnover is in our restaurants that's worth commenting on. In terms of the wage rate inflation, I think we've highlighted that before. It's about $1.3 million, $1.5 million in terms of dollars year over year just around minimum wage alone and you see it, you know, it's different in different parts of the country, certainly some of the Pacific Northwest, New York City, New York State are some of the places that have the highest increases in inflation.

Operator: [Operator Instruction] Next we move to Brian Vaccaro with Raymond James.

Brian Vaccaro: Can you provide a little more color on the increase in advertising in the quarter? Just maybe touch on the message, what type of advertising? Was it successful?

Arne Haak: Brian, this is Arne. Cheryl is remote with us today and listening in, so I'll take this one for you. There wasn't a big change in advertising other than there's been some investment in research. We are doing largely digital advertising. We're not doing any TV advertising right now.

We are doing research, and we also launched a new website here in the quarter. But this is, there wasn't really a surprise for us in terms of our marketing spend. This is really, we are on plan for what we're doing for the quarter and for the year.

Brian Vaccaro: Yes, yes. Saw that in the guidance.

All right, thanks for that color. Shifting gears a bit, Arne, saw that you got little more aggressive on the buyback, funded with a little bit of the draw on the revolver; follows several years of steady debt paydown to where you are debt free at the end of 2015. So I guess the

question is: has there been any, even a modest shift in how you or the Board views debt, just given the sustained momentum in the business and strong cash flows? And are you now comfortable carrying maybe a modest amount of debt on a go forward basis? Or is this just more sort of opportunistic buyback, and you still expect basically a debt free balance sheet going forward?
Michael O'Donnell: Brett, this is Mike O'Donnell. I think that the Board's position has remained the same and our strategy, as I stated, I mean, we like the notion of paying down our debt; and we also like the notion of paying out increasing dividends and buying back shares. So it's some balance in there.

And some of this becomes timing in terms of how much, you also noticed that we have a lot of restaurants in development, so some of that than puts a little more lean on the cash. So it could easily move up or down, you know, this $8 million, based on the aggressiveness that, as you pointed out, the share we purchase on top of remodels and some other things. I don't think that we're looking to say, okay, geez, all right; now we're going to start taking 1 or 2 times or 2.5 times a turn of leverage or something like that. This is just sort of working through our working capital. If it's at zero, if it's at $10 million, it would not be significant to us.\

Brian Vaccaro: Yes, yes.

Okay. Understood. Just two quick ones, if I could, just model nitpick. On the G&A, Arne, you mentioned in the press release the higher stock comp. What was stock comp in the quarter? Do you have that handy?

Arne Haak: I don't, we can follow up with you.

The increase in stock comp year over year is about $500,000 in the quarter. But I don't have that [indiscernible] at my fingertips. The other half, you know, we announced we are in transition on a couple of divisions. We have a new General Counsel; we are transitioning that. We have a Chief People Officer.

We have a new Board member. All of those also contributed, as we are transitioning those roles to the increase in the first quarter. But we announced those back in January.

Brian Vaccaro: Right, right. Okay.

And then last one for me. I noticed in the press release, and you

mentioned it: the restaurant closure costs. It's a small number, but where were those on the P&L? Was that embedded in other operating costs?

Arne Haak: Yes. About half of the basis point increase there was Columbus. And so that's one that, we had one of two properties that we own outright and it's currently being marketed.

We started marketing it here in the second quarter and so if we can sell it, there may be a small gain that comes through back later in the year.

Operator: [Operator Instruction] At this time, there are no further questions. I would like to turn the call back over to Mr. Mike O'Donnell for any additional or closing remarks. Michael O'Donnell : Thanks, everybody.

I appreciate your interest and ongoing support and as always, it's a great day to go out and eat steak. Thanks.

Operator: And that will conclude today's call. We thank you for your participation.