Executives: Mark Taylor – Vice President Financial Planning & Analysis Michael O'Donnell - Chairman & Chief Executive Officer Arne Haak – Executive Vice President & Chief Financial Officer Cheryl Henry – President & Chief Operating

Officer
Analysts: Andy Barish – Jefferies Joshua Long – Piper Jaffray Brett Levy – Deutsche

Bank
Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Ruth's Hospitality Group, Incorporated Second Quarter 2016 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 and instructions will be provided at that time for you to queue up for questions. 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, Christie, 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; and 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 today 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 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, Michael O'Donnell. Michael O'Donnell: Thanks, Mark, and thank you all for joining us this morning. We were pleased with another quarter of top line and comparable store sales growth but we were disappointed with slower revenue growth rate and higher year-over-year labor cost put pressure on our bottom line resulting adjusted earnings per share of $0.22. While we continue to navigate through a tough economic environment, I'm very pleased to have a talented team in place to take great pride in caring for our guest's every day.

This operational focus has contributed significantly to the long term consistency of our results, as well as the strength of the brand. Our total return plan starts with a focus on maintaining a consistency of our core operations and includes disciplined investment into our restaurants and long term capital decisions with regard to our free cash flow. This approach combined with our strong balance sheet gives us flexibility to enhance shareholder value even when external environment is not optimal. Our comparable store sales for company-owned restaurants increased 1.5% during the second quarter and were positive in all three periods. Our results in the quarter were negatively impacted approximately 70 basis points as a result of these two shifting to the first quarter of 2016 compared to the second quarter in 2015.

Comparable traffic decreased 2.1% on a year-to-date basis. Our comparable sales have increased 2.3% and reflected 0.5% decrease in traffic and a 2.9% increase in average traffic. Through this point in the third quarter, our comparable sales remained positive in a low single digit range. We are pleased with the success of sales growth during Mother's Day and Father's Day in the second quarter, each of these holidays not only showed year-over-year growth but grew at a rate faster than our overall comparable sales for the quarter. These special occasions remain an important way in which we engage with our guests and maintain our brand positioning without resorting to discounting.

As part of our Ruth 2.0 initiative we have now completed the roll out of our menu refresh to all domestic franchise restaurants. As a reminder, we completed the roll out to all of our company-owned locations during the first quarter. This refreshed menu which features the number of new premium offerings continues to receive higher preference level compared to menu items it replaced and is driving approximately 100 basis points of additional check expansion. Our company franchise owned restaurant teams executed the roll out with a highest level of quality and service without adding additional operating complexity. We also made progress in our Ruth 2.0 restaurant remodel program during the quarter.

Each remodel is thought as a three to five year initiative designed to enhance our guest experience and expand our operating capabilities. During the quarter we completed remodels in Tysons Corner, Virginia and in Memphis, Tennessee bringing the total number completed in 2016 to seven. We remain on-track to complete eight to ten remodels over the course in 2016. The strength of our brand continues to drive strong free cash flows. After ensuring that our core business remains healthy we look to deploy our capital in a thoughtful manner and one of the most meaningful investments we can make where the access cash flow is yielding a successful new restaurant.

During the quarter we opened a new Ruth's Chris Steak House in Albuquerque, New Mexico and we will open a new restaurant in El Paso, Texas during the third quarter of 2016. Looking forward we have decided to shift our plan to new restaurants in Cleveland, Ohio and Waltham, Massachusetts to the first quarter of 2017 rather than creating additional operational pressure by opening two new company restaurants during the peak holiday season. Our franchisees also continue to investment in our brand. We expect our franchise partners to open new restaurants in Odenton, Maryland and Greenville, South Carolina during the fourth quarter of this year. In addition to new restaurant openings, restaurant relocations allow us to adapt to changing market dynamics till new restaurants are up to the 2.0 standards and help to catch new guests with buildings that are aligned with our current revenue centers.

During the quarter, our franchisee in Philadelphia, Pennsylvania completed the successful relocation of its restaurant to the Sonesta Hotel in the heart of Center City, Philadelphia. Our Huntsville, Alabama franchisee is expected to relocate their restaurant in the fourth quarter of this year and a franchisee restaurant in Mississauga, Canada is scheduled for the relocation during the first half of 2017. The third component of our total return play calls for us to augment our operating and growth initiatives with the return of excess capital to our shareholders. During the second quarter we paid $0.07 per share dividend and also repurchased 1.2 million shares of stock. This was the largest share repurchase in a single quarter since we brought back all of our convertible preferred stock for $60 million in the first quarter of 2012.

The strength of our business has allowed us to return more than $90 million to our shareholders in the form of repurchases and dividends since the beginning of 2014. Finally, earlier this week we announced the promotion of Cheryl Henry into the position of President and Chief Operating Officer of Ruth's Hospitality Group. I look forward to continuing to work alongside of Cheryl and the rest of the leadership team as we grow the Ruth's Chris Steak House brand. With that, I'll now turn the call over to Arne.

Arne Haak: Thank you, Mike.

The second quarter ended June 26, 2016. We reported income of $6.9 million or $0.21 per diluted share compared to net income of $7.5 million or $0.22 per diluted share in the second quarter of 2015. Net income in the second quarter of 2016 was negatively impacted by a non-recurring $465,000 charge related to accrual for disputed rent charges from 2006 to 2015 or at least a company restaurant. This was partially offset by $99,000 gain related to the sale of our Columbus Ohio restaurant. Total Company owned restaurant sales for the second quarter were $87.2 million and increase of 1.7% from $85.8 million last year.

The growth was driven predominantly by the 1.5 % increase in comparable restaurant sales which consisted of a 3.7% increase in average check, and offset by 2.1% decrease in traffic. As we shared with you earlier this year our rate of total revenue growth -- largely due to the timing of our new restaurant openings in the closure of our Columbus restaurant, after 17 years in the market. Average weekly sales for company owned restaurants were $101,000.1 in the second quarter increase of 1.1% compared with $100,000 in the second quarter of last year. Total operating weeks for company owned restaurants were 863 in the second quarter up 0.6% year-over-year 858 in the second quarter 2015. Franchising come in the second quarter 2016 with $4 million compared to $4.1million in the second quarter of last year.

The decrease in franchise income was due primarily to development fees that related to the opening of new restaurants 2015. Total franchise comparable sales were down 0.3% year-over-year in the second quarter. Comparable sales in our domestic franchise restaurants were up 2.4% during the quarter, while comparable sales in our international franchise restaurants declined by 11.5%. Similar to last quarter the strong U.S. dollar coupled with traffic weakness in Asia and the Canadian oil markets continue to negatively affect our international comparable sales.

Excluding the impact of foreign currency translation international comparable sales would have still decreased 8.8%. Now turning to our costs food and beverage costs as a percentage of restaurant sales improved by 90 basis points year-over-year 29.6%. Driven by a 5% decline in year-over-year beef costs combined with a 3.7% increase in the average check. On the year-to-date basis our beef costs are down 4.7%. Additionally we have contracted roughly 50% of our beef supply for the second half of the year at a savings of approximately 9% below year ago levels.

As a result we now expect between 3.5% to 5.5% beef cost depletion for the full year. During the second quarter our restaurant operating expenses as a percentage of restaurant sales increased 180 basis points nearly year 48.8%. This increase was primarily due to higher labor costs and minimum wage increases, and the timing of healthcare related expenses in the quarter as well as the non-recurring $465,000 charge related to the acquittal of disputed rent charges. Our G&A expenses as a percentage of total revenues increased by 60 basis points year-over-year to 7.6%, during the quarter the company we purchased 1.2 million shares of common stock under current share repurchase program for approximately $20 million, or an average price of $16.78 per share. At the end of the second quarter we had roughly $30 million in debt outstanding under our credibility largely as a result of share purchases.

Finally, as Mike noted subsequent to the end of the second quarter our Board of Directors approved the payment of a quarterly cash dividend of $0.7 to shareholders. This dividend will be paid on august 25, 2016 to common shareholders of record as of the close of business on august 11, 2016. This represented 17% year-over-year increase in our quarterly dividend. Now I would like to update our outlook for the full year 2016 for some of our key cost metrics. We now expect our cost of goods sold to be in the range of 29% to 31 % of restaurants sales.

We expect the restaurant operating expenses to remain between 47% and 49% of restaurants sales. We continue to expect marketing and advertising costs to be 2.9% to 3.1% of total revenues. We now expect G&A expenses to be between $28.5 million to $30.5 million. We continue to expect an effective tax rate of 32% to the 34%. We expect capital expenditures to remain between $28 million and $30 million.

Lastly, we now expect are fully diluted shares outstanding to be between 32.5 million shares and 33 million shares exclusive of any share repurchases under the company's recently announced share repurchase program. With that Christy 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 is from Andy Barish with Jefferies.

Andy Barish: Good morning.

I guess it's a political season do you have a sort of first 100 day plan as you look at the business in your new role that you might want to share with us?

Cheryl Henry: Thanks Andy for the question, it is political season, as I think about that last 9 years of working with this iconic brand talented management team. I think the strategy Mike shared during his talk is really right on and so we'll continue with that Andy. I will say as we look to the success of initiatives such as Ruth's 2.0 both on the menu, as well as within the remodeled, that is another path we'll continue down in the development of our people really looking to drive the comp store level sales that we've committed to in our strategy. In addition, Mike talked about our focus on Ruth restaurant growth so for my team that will be headed and look forward to working with everyone here for continued future success.

Andy Barish: Great congrats.

And then just one other quick one, Mike on -- you know on the customer segmentation you noted special occasions were strong are you I -- I know you don't do a regular kind of customer segmentation work but are you seeing kind of signs of the higher and you know sort of Business Travel Center, a little bit of a slow down at this point?
Michael O'Donnell: Yes Andy, I think we're seeing sort of a bit of a modest slowdown than all other segment, I mean so for instance we talk about private dining which is often a Proxy for what's going on with Business Travel Center, it is still quite robust, it's just not -- it's really robust as it has been. So yes, the answer is there are declines, yes, but as it's going away not at all -- our seasonal slow business or our Happy Hour business remains very solid. I think our biggest challenged area is really pure Ala Carte, and some of that is a mix just because people some of that mix of our aspirational people, but we're seeing some more challenges in that sort of particular piece of our business than anywhere else.

Andy Barish: Thank you.

Operator: [Operator instructions] And we'll take our next question from Joshua Long with Piper Jaffray.

Joshua Long: Great, thank you. Ms. Cheryl, you might be able to give us some sense of forward looking promotions -- 3Q is typically more seasonally slow period of the year but you've got some interesting initiatives that you've been placing and working on over the last several quarters. So I was curious if you just kind of give us sense for how you're looking at 3Q and then anything if point us to in terms of 4Q as you ran up the year from promotion to marketing focus perspective?

Cheryl Henry: Sure. We continue to focus on -- as you know we have our very popular Sizzle [ph] program so we continue to offer that as well as refreshing our classics, which is our [ph] menu, we do that three times a year so it's always new news in the quarter to talk about as we launch into our new menu.

We're also looking at a promotion the next week or so, around Fulay & Rozay [ph] so that's exciting for us for the month of August and September. And then working on some additional menu refresh item with success to Ruth's 2.0, we're continuing that evolution so more to come on that. Michael O'Donnell: Josh this is Mike, I think you know exactly what Cheryl said, but we sort of -- we have stayed the course in terms of -- there are positioning, we've not been aggressive discounting people, that's not what we've done, we're just continuing to focus on the operating side of the business. The calendar has a sort of typical cadence to it as you're describing, yes, the third quarter is a little slower. We've got wine dinners that we continue to do, we've got local activities at restaurant by restaurant level that we continue to do.

And probably if we've stepped up anything -- it's really been a lot more local. And we give our restaurants the freedom to have their own wine dinners, and have certain night events that we found have been very successful, and we call that having a very scrappy attitude. So we're going to mix in something like Fulay & Rozay [ph] and continue to focus on being as good as we can be at running the restaurants.

Joshua Long: I appreciate that color, thank you. Arne, as we think about talks and the opportunity for beef contracts -- and that beef -- it looks like you had some good visibility into the back half of the year.

Is that the right number or are you looking to maybe contract more or less or maybe play the stock market a little bit more in terms of just where beef prices have been, just curious on what your outlook there is? And then in terms of anything else I might ask if that may or may not be contracted but you're seeing some trends going either way that are outside of what you're seeing in beef?

Arne Haak: Sure, Josh. I think we've talked a lot about we are now in year two of deflation in terms of beef costs. Last year we saw deflation on our prime cuts in large part due to the increase in the percentage of the herd that created primes so that caused an increase in the supply of prime. We've kind of been very transparent about talking about that and watching that, the increase in grading has helped but it is not growing anymore. So our opportunities around contracting have probably been more around Fulays and that's where we're seeing the deflation right now, in that part of the meat basket.

The prime cuts are the piece that are not contracted right now. And those are probably not going to see as much deflation as of what we'll see on the Fulays which was contracted. So I think that's kind of our outlook there in terms of beef but it's shifting out to an overall supply of cattle story versus an increase in the percentage of prime. The rest of the basket is largely in control, there is some puts and takes around some seafood, some specific seafood items that we use but there is no material headwinds, it's still a tailwind for us here in terms of our commodity outlook for the rest of the year.

Joshua Long: Understood, thank you.

And in terms of your share repurchase, I'm curious if you had kind of what in the -- if the share account wanted at the end of the quarter, kind of as we get in to Q3?

Arne Haak: I think we've incorporated that into our guidance. So the share count obviously is weighted what you see as of the end of the second quarter, I believe incorporate it into our guidance because there are increases in share counts as well as part of the equity compensation plans.

Joshua Long: Got it, thank you.

Operator: And our next question comes from Brett Levy with Deutsche Bank.

Brett Levy: Good morning, everyone.

If you could do me a favor -- if you would be willing to share a little bit more into mentality from what Andy's question was with respect to what you're saying on either the mix of high-end product from the 2.0 or what you're seeing on the classics? In addition to that, just give us a little bit sense on where your wage rate inflation was? What you're expecting to be at for the remainder of the year?
Michael O'Donnell: Okay. I think as I said earlier, the 2.0 for the most part has items that are more in a premium level, both in stakes and seafood towers. I mean we've seen an increase in in those that have replaced items and we've seen an increase in those and we've seen about 100 basis points in expansion. So I guess Brett I would say that the higher end of our consumer and the business -- I'm not sure that was -- are not backing up at all. Then I think our continued -- we continue to see good and similar results to the 20% range of our Ruth Classics and it's sort of the middle part as I described earlier the Ala Carte diner that is really the weaker part of the segment.

And in terms of wage inflation, I'll turn it over Arne.

Arne Haak: Sure, Brett. I think wage inflation is pretty much as we had expected. I think we shared with you earlier this year number, it's about $1.4 million and if you -- if they are kind of tracking along, we expect that to continue through the rest of the year, and that's probably a constant drumbeat we're going to have as continued it. So that and I think in the second quarter as well we had a little bit of pressure from healthcare claims, nothing unusual up, it was such a great year if you remember we had some really great claims, quarters; we're now back more to kind of a normal cadence in terms of that part of our business.

Brett Levy: Thank you. Would you also be able to share any positive strength or outsized weakness in terms of the regional performances?

Arne Haak: I think it's still the same kind of cadence, Brett. I mean that the oil market as we called out for our franchisees; Texas, I think you're hearing from everybody is challenged, some of the major metropolitan areas, the urban parts of -- the urban locations; those -- like New York and Chicago are down a little bit more than some of the suburban locations. But other than that I think it feels very consistent. Florida has been good, California has being good.

Overall, I think we're pleased with how we're holding up relatively, I think on an absolute basis, we want more.

Brett Levy: Thank you very much. Michael O'Donnell: I can tell you this Brett, it will be like Ala Carte if you like.

Operator: And we have no further questions at this time. I'd like to turn conference back over to Michael O'Donnell for any additional or closing remarks.

Michael O'Donnell: Christy, thank you very much. And I thank everybody for joining us on the call today. It would be remise if I did not thank our talented restaurant operators for their absolute excellence and outstanding execution, and our franchise partners who remain the heart and soul of our business. So to all of you as always it's a great day to go out and eat steak. Thank you.

Operator: And that will conclude today's call. Thank you for your participation. You may now disconnect.