Executives: Mark Taylor - VP of Financial Planning and Analysis Michael O'Donnell - Chairman and Chief Executive Officer Arne Haak - Chief Financial Officer Cheryl Henry - President and Chief Operating

Officer
Analysts: Brett Levy - Deutsche Bank Brian Vaccaro - Raymond James Andy Barish -

Jefferies
Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Ruth's Hospitality Group first quarter 2017 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 your question.

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. Mark Taylor : Thank you, Lauren, and good morning, everyone. Joining me on the call today is Michael O'Donnell, Chairman and Chief Executive Officer; Arne Haak, Executive Vice President and Chief Financial Officer; as well as Cheryl Henry, President and Chief Operating 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 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 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 and CEO, Mike O'Donnell. Michael O'Donnell : Thanks, Mark, and thank you all for joining us on the call this morning. We’re pleased to start the year off with another quarter of solid operating results, including total revenue growth of 3.6% and pro forma earnings per share growth of 4%. Our results continue to be driven by successful execution against our total return strategy.

The strength of our brand and our proven business model allow us to invest in our core business and to grow our system in a thoughtful manner, all while returning excess capital to our shareholder. During the first quarter, comparable store sales increased 0.7%, driven by 2.4% increase in average check, partially offset by 1.7% decrease in traffic. The increase in average check continues to be driven not only by menu pricing of 1.2%, but also by positive mix changes from our Ruth 2.0 menu items and other offerings. Arne will walk through the specifics in a few minutes, but we are pleased with our performance despite a quarterly shift of the Easter holiday and a shift of Valentine's Day to a Tuesday, which accounts for the majority of the traffic decline in the quarter. We remain committed to growing our business in a disciplined and thoughtful fashion.

We continue to believe that the most impactful investment we can make is the opening of a successful new company-owned restaurant as evidenced by our strong unit-level economics and investment returns. So far this year, we have opened three new restaurants, one in Waltham, Massachusetts, one in Cleveland, Ohio and one in Tulsa, Oklahoma. Our Tulsa restaurant is in partnership with the River Spirit Casino, which is under a contractual agreement similar to our Cherokee, North Carolina restaurant. All three of these new restaurants are performing very well. We have one more restaurant slated to open this year in suburban Denver, Colorado, which will be our second location in the Denver market.

This will open during the fourth quarter. We are pleased that 2017 is on pace to be our busiest year for company-owned development since 2008. Our franchisees, who remain the heart and the soul of our business, are also investing alongside us in new locations and the restaurant remodels and are experiencing increased sales on these investments. In the back half of this year, our franchise partners expect to open one new restaurant in China, which will be the second location in that country. They’ll also open a new restaurant in Kauai, the first restaurant on that island and our sixth in the State of Hawaii.

Our franchise partners will also relocate their restaurant in Mississauga, Canada in the third quarter. In summary, we remain committed to being leaders in the fine dining steakhouse category and our strong brand and business model has allowed us to pay down debt and increasing dividend and return excess capital to shareholders, while continuing to grow our core business. I’m pleased to report that our Board of Directors recently approved the payment of a quarterly cash dividend of $0.09 to shareholders, a 29% increase over the quarterly dividend paid in May 2016. Since the beginning of 2014, we have returned over $100 million to our shareholders in the form of dividend payments and share repurchases and we continue to believe that our total return strategy is the best way for us to drive long-term shareholder value. Next, I would like to update you on our internal organizational plan.

Several years ago, we put in motion plans that would solidify our executive team, with deep levels of strategic and operational leadership. The strength of our team is driven by our process to identify key talent within our organization and ensuring we have strong levels of bench strength for our leadership roles. Kevin Toomy, current President and Chief Operating Officer of Ruth's Chris Steak House, has announced his plans to retire at the end of June 2018. A nine-year veteran of the company, Kevin has demonstrated exemplary operational leadership, defined by consistency in execution, and has been instrumental in the success of the Ruth's Chris Steak House brand during his tenure. Kevin is the finest operational executive I've ever worked with or have known.

I will miss him greatly, but I understand his desire to spend more time with his new wife, Catherine [ph], and to spend time with his budding equestrian young daughter, Jane, as she continues to work on all of the skills it takes for her to be a successful horsewoman. Kevin will remain in his current role until September of this year, after which he will continue to be actively engaged with the company on special projects until he retires in 2018. With the transition to his new role, I am pleased to announce three additional internal promotions to our leadership team. Rik Jenkins will be promoted to vice president of operations after his success as a regional vice president for the past six years. In his new role, Rik will be responsible for the overall leadership of the field restaurant operations, with the regional vice presidents reporting directly to him.

Rik has been with Ruth's for 27 years, rising through the operational ranks as well as serving 17 years in franchise operations. Additionally, Susan Mirdamadi will be promoted to Senior Vice President and Chief Services Officer. In addition to providing vision and leadership on our information technology department, in her new role Susan will also have oversight of our brand development, brand marketing and beverage and culinary development teams. Susan is currently our Chief Information Officer and has 25 years of leadership experience, 17 being in the restaurant industry where she has used her IT and field operations background to drive numerous strategic initiatives for field operations and corporate functions. Susan uniquely has spent time, leading efforts in field operations and has been a great success as a chief information officer.

We have a unique opportunity to put Susan’s understanding of the field to take on additional responsibility that will support Rik in driving our guest experience, our sales, traffic and profits. Pete Beaudrault has been named Vice President of Franchise Operations and Development. Pete has more than 20 years of experience in executive level management, international business development and operations in the restaurant industry. He has held several key leadership positions, including President and Chief Operating Officer of Mitchell's Fish Market, President and Chief Executive Officer and Chairman of Sbarro, President and Chief Executive Officer of the Hard Rock Café International, Inc. Susan, Rik and Pete will continue to work closely with Kevin through his retirement in 2018 and will report to Cheryl Henry, president and COO, who nears the completion of her first year as President and Chief Operating Officer of Ruth's Hospitality Group, Inc., and has realized continued success in her results-driven dedication to the advancement of the brand.

Cheryl’s strategic leadership continues to drive consistency in our performance and delivery on our commitments to our shareholder, team members, franchise partners and our guests. It is with great pride that I announce these internal promotions and look forward to continue to work with this executive team, including Cheryl, the President and COO, the CFO, Arne, Susan, who remains our Chief Information Officer as well as now taking on the responsibility of the Chief Service Officer, focused on operational excellence and execution of our total return strategy, which includes now Rik, ongoing support from Kevin, Pete Beaudrault who is the Vice President of Franchising. We’ve got a great group of people to continue the work that’s been done over the last nine years and I’m happy to continue to lead this. With that, I now turn the call over to Arne to provide more detail on first-quarter results.

Arne Haak: Thank you, Mike.

For the first quarter ended March 26, 2017, we reported net income of $11 million or $0.35 per diluted share compared to net income of $10.8 million or $0.33 per diluted share in the prior period, the first quarter of 2016. Net income in the first quarter of 2017 included a $247,000 benefit related to certain discrete income tax items. Excluding this benefit, the loss from discontinued operations and restaurant closure costs in 2016, net income was $10.8 million or $0.35 per diluted share in the first quarter of 2017 compared to $11 million or $0.33 per diluted share in the prior period. Total company-owned restaurant sales for the first quarter were $99.5 million, an increase of 3.7% from $95.9 million last year, primarily driven by the contribution from our new restaurants, as well as by the 0.7% increase in comparable restaurant sales. As we mentioned on our last call, the calendar shift of Easter from the first quarter of 2016 into the second quarter of 2017 negatively impacted first-quarter comparable restaurant sales by approximately 70 basis points.

Additionally, the quarter was negatively impacted by approximately 50 basis points over the course of the Valentine’s week. This was due to the shift of the holiday to a less desirable Tuesday this year from a more desirable Sunday last year. Please note the timing of Easter has positively impacted our second quarter trends to date. To this point in the quarter, our sales are currently running up low-single digits led by improving traffic trends. Average weekly sales for company-owned restaurants were $111,000 in the first quarter, flat with the $111,000 in the first quarter of last year.

Total operating weeks for company-owned restaurants were 895 in the first quarter, up 3.5% year-over-year from 865 in the first quarter of 2016. Franchise income in the first quarter of 2017 was $4.4 million compared to $4.5 million in the prior period. This decrease was driven by the timing of development fees recorded during the first quarter of 2016. Total franchise comparable sales were up 3.6% year-over-year in the first quarter of 2017. While comparable sales in our domestic franchise restaurants were up 3.9% during the quarter, comparable sales in our international franchise restaurants were up 2.1%.

During the quarter, the franchise system experienced similar trends to the company restaurants, but were augmented by the impact of the relocation and remodel of a few restaurants. Now, turning to our costs, food and beverage costs as a percentage of restaurant sales improved by 90 basis points year-over-year to 28.7%, driven by a 2.4% increase in average check, combined with a 1.4% decrease in year-over-year beef costs. As we expected, after having benefited from material beef cost deflation throughout 2016, we’ve begun to see that benefit moderate. We continue to expect roughly flattish beef costs for the full year 2017 as deflation on fillet cut is being offset by modest inflationary pressure on fine cuts. For the quarter, our restaurant operating expenses as a percentage of restaurant sales decreased 10 basis points year-over-year to 45.7%.

This decrease was driven primarily by lower year-over-year healthcare claims. Our G&A expenses, as a percentage of total revenues, increased 20 basis points year-over-year to 7.7%, primarily driven by an increase in performance-based compensation. Marketing and advertising costs, as a percentage of total revenue, increased 40 basis points to 2.3%. This increase was driven by a shift in marketing spend across the quarters. While our marketing mix remains dynamic, we expect higher year-over-year marketing spend during the second quarter and our marketing expense to be fairly evenly distributed across the remaining quarters.

Pre-opening costs were $1.2 million compared to $400,000 in the first quarter of 2016, driven by the three new restaurants opened during the quarter of this year versus no new company openings in the prior periods. In addition to returning capital through a quarterly dividend, we repaid $11 million in debt under our senior credit facility during the quarter. We ended with $14 million outstanding at the end of the first quarter of 2017. During the quarter, we did not repurchase any shares under our current share repurchase program. At the end of the first quarter, we had just under $27 million outstanding under our previously announced $60 million share repurchase authorization.

Finally, I’d like to reaffirm our outlook for the full year of 2017 for all the key metrics presented last quarter. The details of this guidance can be found in our earnings release earlier this morning. With that, I’d now like to turn the call back over to Mike. Michael O'Donnell: Thank you, Arne. And thank you all again for being on the call this morning.

Before we open the line up for questions, here are some key areas that we are excited about as we closed the first quarter of 2017. First, we had three new restaurants open here in the quarter, with all of them performing at or above our expectations, with the fourth opening later in the year. Secondly, even with labor headwinds, restaurant-level margins in the first quarter were the highest we’ve had in ten years. Additionally, our restaurants continue to generate excess levels of cash and our ability to return capital has never been stronger. And finally, our people.

I’m pleased to welcome Susan, Rik, and Pete to elevated positions in the company. They will only augment an already strong leadership team. With that line, I’d now like to turn the call over for any questions we might have.

Operator: Thank you. [Operator Instructions] Our first question comes from Brett Levy with Deutsche Bank.

Brett Levy: Good morning. Would you be able to share a little bit more on what you’re seeing across the competitive landscape? Are there any pockets of regional strength or weakness? And, Mike, would you be willing to share a little bit more on what you’re seeing between your segments, between business and Just Because? Thank you. Michael O'Donnell: Yeah, sure. I’ll start by saying that the business across our segments has been relatively stable and we feel pretty good about it. Our private dining business and our bar business has continued to sort of lead the way.

So, we feel very good – the bar business is kind of an indicator of our Just Because folks. Private dining is really an indicator of our business piece. So, in that regard, I would say that those businesses are stronger – are just sort of – and even though we had shifts in Easter and in Valentine’s Day, the days themselves continued to perform incredibly well. So, our special occasion business has been very strong. We’ve seen some interesting things taking place in places like in our a la carte business.

Based on the fact that we count entrées as a proxy for traffic, we see more people splitting steaks than we ever have before. So, there is some dynamic taking place there. We attribute that to the baby boomer actually getting older. So, I think things across the board are really – on a relative basis, really pretty good. And as we said, traffic has come up nicely in the second quarter as have sales.

So, after we got through that shift, we’re feeling pretty bullish about all our segments. Did I answer your question, Brett?

Brett Levy: Yes, thank you. And the regional performances, anything on the competitive landscape you’re seeing?
Michael O'Donnell: Well, we’re seeing – on a competitive basis – I don’t know that there is a competitive component. We still see some weaknesses in Texas and oil markets, but that’s starting to recover. Our stronger performing markets have historically been in California and Florida fortunately for us because that’s where we have such a high concentration of restaurants.

Northeast has done well. Then we’ve got some weather impacts here and there, but we are not going to talk about weather because it happens every year. So, I would say that there is no one place that I’d say, oh, boy, that’s terrible.

Brett Levy: Thank you.

Operator: Our next question comes from Brian Vaccaro with Raymond James.

Brian Vaccaro: Good morning and thank you for taking my questions. I wanted to start on the comps. And, Arne, you mentioned quarter-to-date being up low single digits. And just wanted to confirm, that does include the benefit of the Easter shift? And if it does, is that benefit sort of in that 150 basis point range on the quarter-to-date?

Arne Haak: Yeah. Brian, it does include the benefit of Easter.

And I think even stepping aside from Easter, you kind of smooth it all out. The year is running kind of at a very consistent pace. There are pluses and minuses on Valentine’s Day, pluses and minuses on the timing of Easter. But it feels like a very consistent pace for the whole year-to-date as you look at it today. I think the thing that we are probably most encouraged by is what’s happening on traffic.

We’ve had traffic flat to down a little bit for now like two years. That seems to be slowing a little bit. It’s still slightly negative, but it seems to be moving in the right direction. And I think when you add the backdrop of what Mike said about people sharing more entrées, our 16-ounce strip steak with no bone in it, that’s a big piece of meat. I think we feel pretty good about the direction the traffic is heading as well.

Brian Vaccaro: Okay, great. That’s helpful. On the company comps, specifically, can you comment on how the Ruth 2.0 remodel units are performing relative to the rest of the system? Are they having a significant impact on the reported comps? And then, were there any 2.0 remodels completed in Q1?

Cheryl Henry: Hi, Brian. This is Cheryl. Yes, so we actually completed two restaurants – Fort Lauderdale and Coral Gables in our Florida market in the quarter.

And we are anticipating approximately seven to nine more in the year, so we look forward to that. I would say there’s different types of remodels. I think we socket them somewhat in expansion, so certainly we see when we expand our capacity we see the needed sales lift to accompany that investment. And then, on the brand side, we like what we’re seeing so far. It’s early.

We started this program probably about a year-and-a-half ago. It takes some time to get these projects done. But I would say early signs are positive that consumers are reacting to the larger bars we can create and the new atmosphere we can create in these remodels.

Arne Haak: Brian, I’ll tell you – it is – as Cheryl said, it is contributing, I think, as we expected. The best, as Cheryl said, comes from the capacity, but I think we’re pleased with it.

We continue to invest in it. We think this is the right thing for our brand in terms of the use of capital.

Brian Vaccaro: All right. Very helpful. And then, just last one for me, one quick one on the margin side.

The other OpEx line continued to see some very good cost trends there. I know you mentioned the lower healthcare claims. Was that versus an unusually high level of claims last year or sort of an unusually low level this year? And then, can you also comment on what your year-on-year wage inflation was in the quarter?

Arne Haak: Sure, Brian. In terms of the healthcare costs, it was maybe slightly elevated last year. There is always some cyclicality there in that.

But I don’t think feel like we’re unusually high last year or unusually low. So, I think we’re pleased – Mark Taylor and his teams have spent a lot of time on education and making sure people understand their options around healthcare. We want our people to be healthy. In terms of the – I think we’ve quantified the minimum wage effect. It’s a little bit over $1 million a year in terms of wage inflation.

Overall, depending on the market, you’re probably running somewhere from probably 3% to 5% in terms of rate inflation.

Brian Vaccaro: Okay. And just looking at it on sort of a per operating week basis, that other OpEx line, sort of flattish by my math, it would seem, year-on-year with the wage inflation you talked about. Are there any productivity initiatives and anything quantifiable that you are doing in the restaurants to sort of drive incremental savings that are noteworthy?

Arne Haak: There is no like formal program other than the things that Mike talked about with Kevin and Rik and Susan. I think everybody recognizes the whole industry is facing a labor headwind.

And they work tirelessly to manage their business and their margins and understand their P&Ls and their costs. So, I would tip my hat to the operations team on the great job that they do in terms of managing their expense, but this is not like we have this one-time program that we are doing to offset our business…
Michael O'Donnell: I’d like to say this. We have always had a labor management plan that matches what I’ve forecast on a per day, per shift basis to the amount of hours that are allocated. And so, restaurant go up or go down without sacrificing anything to our guests. And we follow that rather religiously.

What you know about us historically is we have incredibly low turnover. And then the low turnover we have, the higher trained teammates that we have, the better they are able to handle the fluctuation in sales. And so, it doesn’t surprise me actually that we continue to manage up and manage down when the sales go in that direction. As I said, Kevin has done an unbelievable job. The good news, he’s passed that skills – those skills onto Rik and all the other RVPs.

And my managers do a great job.

Brian Vaccaro: All right. That’s great. I’ll pass along. Thank you very much.

Michael O'Donnell: Thank you.

Operator: [Operator Instructions]. We’ll take our next question from Andy Barish with Jefferies.

Andy Barish: Good morning, folks. And congrats to everybody getting promoted in the organization.

That’s exciting stuff. Just a question on kind of the newer segments of the business, if you could help us out, and it’s within the context of overall margins. On 2.0 and bar programs, gross margin wise, how do you look at those segments? Are they better gross margins than the typical a la carte steak sales? Just wondering how you kind of think about that as overall restaurant-level margins start to move pretty close or maybe even above the peak levels of 23% restaurant-level margins that you saw back pre-recession, pre your time – this team’s time there.

Arne Haak: Sure, Andy. I think why don’t I start with some of the math and then Cheryl can kind of talk more to the program design.

But, overall, the 2.0 menu was designed in partnership both with culinary operations and from the financial side that it would be balanced. And so, in terms of the margins, as a blended group, there is a mixture. But, overall, I would say they are fairly consistent with what we took off the menu. Some of them – some of the Tomahawk steak, for example, has a kind of a lower gross margin, but a higher – much higher contribution around it in terms of dollar contribution. So, overall, it is – I would tell you – they are broadly flat, but Cheryl can talk to you a little bit more about the individual components.

Cheryl Henry: Andy, I think as we looked at our menu offerings and innovating and offering consumers different opportunities to dine with us, the intent really around price point and margins was, how do I have different size specification. So, to your point, in the bar, [indiscernible]. We are in the middle of refresh of that. It’s been very successful for us and our guests really like it and have a great affinity for it. And then, to the Ruth 2.0, which offered some guests an opportunity when they wanted to go to a little bigger, bigger unchecked, bigger on the experience.

So, really, the intent of the programs is to have an offering that kind of comes across that spectrum for the guests, and so there are different opportunities here. Michael O'Donnell: Andy, when a lot of the 2.0 items like the – if you’re buying the Tomahawk, you’re probably staying around. You’re going to be [indiscernible] mode. You’re buying more size. You’re having a bigger celebration, a bigger party.

And so, I don’t want to say it’s a lot sweeter because it’s not. What Arne says is true, the returns on that is fabulous, the margin may be a little less. But on the ancillary items that then get bought in those groups, which we just see to be a growing – the total check to be growing contributes to a margin increase.

Andy Barish: And how do you think about kind of overall restaurant level profitability and the balance of kind of value with the guests as you approach those 23% sort of store level margins. Michael O'Donnell: I’m not sure I understand the question completely.

But we’re going to put forward – as we say in the sizzle, which is the document that governs us, we’re going to make sure that our teammates have a great time and we’re going to make sure that our guests have a great experience and we’re going to do the best we can to get the best returns we can for our shareholders. So, to the extent that we continue to refine our execution and the field continues to do that, if we take modest price, add offerings, do the best job we can on the purchasing side, we think the margins should go up.

Arne Haak: Andy, I would tell you, I think Cheryl and the marketing and culinary team and operations have done a great job of kind of providing a broad menu. And it’s been kind of been our approach. We don’t do a lot of consumer facing discounting.

But there is value on the menu. There is opportunities to celebrate. And we work very hard at making sure we have what we believe are the right offerings for customers who want value, for customers who want to celebrate or if they are for a business dinner. So, I think we feel pretty good and it feels like a good balanced offering right now.

Andy Barish: Nicely done.

Thank you very much.

Operator: And that concludes today’s question-and-answer session. At this time, I will turn the conference back to Michael O’Donnell for any additional or closing remarks. Michael O'Donnell: Thank you all for joining us on the call today. And as always, it’s a great day to go out and eat steak at Ruth’s Chris.

Thank you.

Operator: And that does conclude today’s conference. We thank you for your participation.