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

Officer
Analysts: Brett Levy - Deutsche Bank Alex Slagle - Jefferies & Company Nicole Miller Regan - Piper Jaffray Brian Vaccaro - Raymond

James
Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Ruth's Hospitality Group's Third 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. 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, Eric, 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 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. I am pleased to see the hard work of our team members paying off resulting in an increase in both sales and pro forma earnings per share during the third quarter.

Our restaurant sales were up 5% and pro forma earnings per share were up 36% resulting in year-to-date pro forma earnings per share growth of 9%. Our third quarter has historically been our seasonally slowest, so it is gratifying to deliver these results. Several years ago we embarked on a strategy to focus exclusively on the Ruth Chris Steak House business to deliver a total return to our shareholders. We do this by maintaining a healthy core of restaurants investing wisely in growth and returning capital to investors. During the third quarter comparable traffic declined 1.5% offset by an increased average check of 3.6% resulting in a comparable store sales increase for company-owned restaurants of 2.1%.

As the average check increase was driven by the continued impact of our Ruth 2.0 menu items and a 2.3% in pricing on the menu. We have also seen continued improvement in our restaurant level margins as a result of declining food and operating cost offsetting increasing labor cost. And I'm pleased to report that year-to-date our restaurant level margins have now improved 50 basis points driven by beef inflation and solid execution by our team members managing labor costs in a tough regulatory environment. An important part of maintaining exceptional experience we provide our guests involves investing back into our restaurants. We've done this through our Ruth 2.0 initiative which contains components of menu enhancement and restaurant facility design.

We've completed the rollout of our menu refresh to all company-owned and domestic franchise restaurants earlier this year and we continue to make progress on our Ruth 2.0 remodel program. These three models are part of the multiyear initiative designed to enhance the guest experience and expand our operating capabilities. During the quarter we made progress on several remodels completing our New Orleans and Austin restaurants subsequent to the end of the quarter early in October. We are presently on track to complete 11 remodels over the course of 2016 and are currently planning on other six to eight in 2017. Opening a successful new company or restaurant continues to be the most impactful investment we can make.

During the quarter we opened a new Ruth Chris Steak House in El Paso, Texas. This restaurant keeping a large open bar and outdoor patio with beautiful views is off to a strong start and was profitable in its very first month of operations. Subsequent to the end of the third quarter, the company signed an agreement to operate a new restaurant in Tulsa, Oklahoma which is now expected to open in the first quarter of 2017. This restaurant will be located in the River Spirit Casino and as an operating agreement, similar to our Cherokee, North Carolina restaurant. New company-owned restaurants in Cleveland, Ohio and Waltham, Massachusetts restaurants remain on track for the first quarter of 2017.

Our franchisees who remain the heart and soul of our [indiscernible] are also investing in new restaurants. Subsequent to the end of the third quarter our franchised partners opened new restaurants in Odenton, Maryland and Greenville, South Carolina. This marks our third and final franchise owned restaurant opening in 2016 adding to Jakarta, Indonesia which opened in the first quarter. As a result of our recent opening in Odenton, our Maryland franchisee will be consolidating their two downtown Baltimore restaurants into one newly remodeled locations on Pier 5 in the inner harbor area. In addition to new restaurant openings from time to time we will relocate restaurants.

This is done in order to adapt to the changing market dynamics and to build new restaurants showcasing updated designs features which helps to track and retain guests. Our Huntsville, Alabama franchisee is a good example of that and I expect it to relocate the restaurant in the fourth quarter of this year. Finally, a franchised restaurant in Mississauga, Canada is scheduled for relocation during the first half of 2017. Our franchisees are also putting money back into their restaurants to remodel, upgrading to the Ruth 2.0 brand standards. Several of our franchisees in Hawaii, Atlanta, Indianapolis, Charlotte and as I mentioned previously Baltimore have also invested significant amounts of capital back into their restaurants.

By the end of 2016 our franchisees will have completed remodels on six to eight of their restaurants with more to come in 2017. In closing, our total shareholder return plan is focused on enhancing our operating and growing initiatives on returning excess capital to our shareholders. Turning towards third quarter, we repurchased $553, 000 shares of our common stock in addition to paying a dividend of $0.07 per share. This brings the total year-to-date share repurchases made to $2.5 million shares from $40 million. We are pleased to be able to say that the consistency of our business and the strength of our balance sheet has now enabled the return of over $100 million to our shareholders through repurchases and dividend payments since the beginning of 2014.

With that, I'd now like to turn the call over to Arne to provide some more details about our third quarter results.

Arne Haak: Thank you, Mike. For the third quarter ended September 25, 2016 we reported net income of $3.6 million or $0.11 per diluted share compared to net income of $2.6 million or $0.08 per diluted share in the third quarter of 2015. Net income in the third quarter of 2016 included a $335,000 pretax benefit related to the settlement of disputed rent charges for our company-owned restaurant which was initially reserved for in the second quarter of this year. Excluding this benefit and income from discontinued operations, net income was $3.3 million or $0.10 per diluted share in the third quarter of 2016 compared to $2.6 million or $0.08 per diluted share in the third quarter of 2015.

Total company-owned restaurant sales for the third quarter were $78.8 million an increase of 4.7% from $75.2 million last year. The growth was driven by the contribution from new restaurants as well as by the 2.1% increase in comparable restaurant sales. Average weekly sales for company-owned restaurants were $89.8 thousand in the third quarter an increase of 2.4% compared to the $87.7 thousand in the third quarter of last year. Total operating weeks for company-owned restaurants were 177 in the third quarter up 2.2% year-over-year from 858 in the third quarter of 2015. Franchise income in the third quarter of 2016 was $3.9 million compared to $4 million in the third quarter of last year.

Total franchise comparable sales were up 1.1% year-over-year in the third quarter. Comparable sales in our domestic franchise restaurants were similar to that of our company-owned restaurants up 2.5% during the quarter while comparable sales in our international franchise restaurants declined by 4.9%. Broad weakness in our Asian markets continued to negatively affect our international comparable sales with foreign currency exchange rates having little to no impact on our results this quarter. Now turning to our costs, food and beverage cost as a percentage of restaurant sales improved by 140 basis points year-over-year to 30.1%, primarily driven by both 3.6% increase in average check and 6.3% decline in year-over-year beef cost. Year-to-date our beef costs are down 5%.

As we have noted, we have contracted roughly 50% of our beef supply for the remainder of the year at a savings of approximately 9% below year ago levels. As a result, we expect our beef cost deflation to be between 4% and 7% during the fourth quarter. If this occurs it would land our beef cost deflation for the full year in the 5% to 6% range. During the third quarter, our restaurant operations as a percentage of restaurant sales decreased 80 basis points year-over-year to 51.5%. Included in restaurant operating expenses is the previously noted $335,000 benefit from the settlement of the reserve that was last quarter per disputed rent charge.

Excluding this benefit, our restaurant operating expenses as a percentage of restaurant sales would have still decreased 40 basis points to 51.9%. Our G&A expenses as a percentage of total revenues improved by 50 basis points year-over-year to 8.8%, primarily driven by a decrease in performance based compensation. Preopening costs were $600,000 in the third quarter of 2016 compared to $100,000 in the third quarter of 2015. This was driven by our new restaurant opening in El Paso Texas as well as preopening rent costs on future restaurant openings. While we do not have any company-owned restaurants opening in the fourth quarter, we do expect higher year-over-year costs in the fourth quarter related to our early 2017 restaurant openings.

During the quarter, the company repurchased 553,000 shares of common stock under its current share repurchase program for approximately $8.3 million or an average price of $15.01 per share. At the end of the third quarter of 2016 we had $38 million in debt outstanding under our senior credit facility an increase of $8 million from the end of the second quarter of 2016. Finally, as Mike noted, subsequent to the end of the third quarter, our Board of Directors approved the payment of a quarterly cash dividend of $0.07 per share to shareholders. This represents a 17% year-over-year increase in our quarterly dividend. As we start the fourth quarter, our comparable sales are currently running slightly negative.

The primary driver of the sales decline has been due to lost sale days in our Florida restaurants as a result of hurricane Matthew. Approximately 20% of our system sales come from our Florida restaurants. Due to the uncertain track of the hurricane, we had 10 restaurants that were closed due the storm for a total of 19 days. We are thankful that our facilities and more importantly our people were all unharmed by the storm. In the last two weeks, our system wide comparable sales have been running up 1% to 2%.

Now, I'd like to reaffirm our outlook for the full year of 2016 for some of our key cost metrics and revise expectations for the full year share count as a result of our recent share repurchases. We continue to expect our costs of goods sold to be in the range of 29% to 31%. We expect restaurant operating expenses to remain between 47% and 49% of restaurant sales. We continue to expect our advertising cost to be between 2.9% and 3.1% of total revenues. We expect our G&A expenses to remain between $28.5 million and $30.5 million.

We continue to expect an effective tax rate of 32% to 34%. We expect our capital expenditures to remain between $28 million and $30 million. And lastly, we now expect our full-year fully diluted outstanding to be between 32 million and 32.5 million shares, exclusive of any share repurchase under the company's recently announced share repurchase programs. With that, I'd now like to turn the call over for any questions that we might have.

Operator: Thank you.

[Operator Instructions] And we'll take our first question from Brett Levy with Deutsche Bank.

Brett Levy: Good morning, gentlemen.

Arne Haak: Good morning, Brett.

Brett Levy: Can you share a little bit more on you are seeing from the consumer regions and thoughts on 2017 pricing and which in fact regions I mean beyond Florida, obviously you've given us some color on that?

Arne Haak: Sure, I think it's pretty consistent drumbeat all you setting it around 2% comp sales if you take out holidays and shifts of these certain things like that. The one thing I'd tell you the segment, the business-to-business segment is still positive.

It is still gapping positive higher than our sales, but it is, you can tell it is slowing down, it is not gapping, it is positive as it was earlier this year or certainly not as positive as it was a year ago. So I think you can see kind of, we joke about it internally as a CFO effect that people are, from a business perspective are slowing down a little bit in terms of what they're doing in our restaurants for that segment of the business. I think the second question was about the regions. It's I think very much the same thing. Florida, aside from that week of the storm is doing, California is doing well, those are our two biggest segments of the business.

Where you are seeing pockets of weakness, I don’t think it is so surprising, Texas is not getting worse, but it's still not as strong as it is a used to be. And I think the DC area I would also call out and you know during the election season that's not necessarily surprising as well. I think third question was around price, and in terms of price we have currently just under about under 2% like 17 for the fourth quarter. Next year we currently only have, it's less than 1% in price on the menu right now. Obviously that's a decision we make as we go on and we look at our costs and we look at what's happening with traffic.

Broadly speaking, we've always shared that we on a normal basis we like to be between 1% and 2%. It is historically where we've been on price, but the last few years we've been a little bit higher than that. We haven't decided what we're going to do yet, but that's kind of what we have on the books today. From here on now we'd still be just under 1% on price for next year.

Brett Levy: And just one followup on the CFO effect comment, what are you seeing so far in holiday bookings?

Arne Haak: The holiday bookings actually look very good in terms of special occasion.

I mean for Christmas and Thanksgiving has become a very strong day for us. In terms of the holiday parties and all the private, it is still early, but you know the early indications are good.

Brett Levy: Thank you.

Operator: The next question is from Alex Slagle with Jefferies.

Alex Slagle: Thanks.

Congrats guys, a tough environment out there. I want t get on your cost of goods any initial view on the basket inflation for 2017 at this point?

Arne Haak: Sure Alex. You know, we haven’t issued any kind of formal guidance yet on 2017. I think we're still sorting through it. But as we break, as we kind of break down the supply and demand, I think, I guess first of all I would start with the back had two years now price deflation for us.

We had 4% last year and we're running 5, it is going to be 5% to 6% this year. Overall, I think the supply of cattle looks pretty good. We're not quite sure if the prime grading in the supply of prime beef or where that's headed yet. And so, I think we're in terms of supply and I would tell you too, I think the middle meat which is what we want, the deflation there will probably trail kind of the end cuts or what you're seeing in ground beef. So I think we're in kind of a good part of the cycle.

I'm not sure if we're going to get the same kind of deflation that we've gotten in the last two years, but I think we're working through that. I think from the demand side of the of the price equation on beef, we're always kind of keeping our eye open to see what happens in retail or other restaurants. In terms of does prime get cheaper, do more people go to buy it, because the reality is you can't make more prime beef. So overall, I guess we're feeling modestly positive about it and hope to share more with you when we do our call in January.

Alex Slagle: Great.

And then maybe you could talk to the degree of competitive discounting you've seen in recent months any changes there and maybe your outlook for that as we head out to the fourth quarter?
Michael O'Donnell: Yes, Alex, this is Mike. Yes, I mean we continue to see a number of our competitors using additional as I talked about poor category [indiscernible] things when the time offers and discounting bounce back sort of opportunities. We have continued not to do those things. And you know that's what we're going to say.

Alex Slagle: Thank you.

Operator: [Operator Instructions] And we'll go next to Nicole Miller with Piper Jaffray. Nicole

Miller Regan: Thank you, good morning. Could you talk about special occasion versus regular users versus corporate dining? I believe last quarter you said special occasion and regulars were stable. Could you give us an update?
Michael O'Donnell: Yes, Nicole, this is Mike, good morning. And pretty much what you just said is what I will say again.

I mean, our dining just because customers are offset with occasion customers have remained solid. You know as Arne said earlier what we are referring to as whole section of our private dining has been fully backed, not completely. Sometimes the society or the groups have come down and so that's – it's still up as Arne said earlier it is up over our customer sales run rate, but just not as strong as it has been. Nicole

Miller Regan: Do you expect that to change seasonally going into holiday or that you would still see the same trends in the fourth quarter, how should we think about that?
Michael O'Donnell: You know, Nicole, I think we're seeing, where we're seeing some pull back is really on pharmaceutical and some of the financial groups that would book sort of large groups and bringing the public in and feeding them while they are presenting their products. And I don’t know that that's going to start in the fourth quarter.

But you know, seasonally that doesn’t isn’t all that strong for us in the month of December and late November. So I think we expect that we're going to see solid private dining bookings in catering and those things as we have historically in the fourth quarter. Nicole

Miller Regan: And then just a last quickly, and can you give us an update on alcohol mix trend?
Michael O'Donnell: Sure, Nicole. They are really flat, so both the mix and in terms of the costs or the components, so there are no big changes going on there. Nicole

Miller Regan: Thank you.

Michael O'Donnell: It's all right, Nicole.

Operator: And the next question is from Brian Vaccaro with Raymond James.

Brian Vaccaro: Hey, good morning guys. I just had a couple of quick ones, clarifications. On the quarter-to-date Arne, I think you said system comps were up 1% to 2%.

Just wanted to confirm that's the U.S. comp for the quarter-to-date and not international?

Arne Haak: Yes, all our comps – all our company stores are in the United States. I think we just wanted to call out, but that wasn’t just Florida. Actually Florida has rebounded and is doing pretty well after the storm. So since this I said it was running up 1 to 2.

Brian Vaccaro: Right, I thought you said system comps. I was thinking you were talking about U.S. company franchise. So when you say up one to two, that's your company comps in the last couple of weeks are up 1 to 2?

Arne Haak: Yep.

Brian Vaccaro: Okay, great.

On the other OpEx line it is the source of pressure all year in a similar comp range. So it looks like you managed that line pretty effectively. Provide some color on that line and maybe touch on labor cost trends specifically?

Arne Haak: Sure, Brian. In terms of our restaurant operations I think they are doing a fabulous job. Every restaurant, including Ruth's Chris is facing increased labor costs whether it is wage, whether it's in wage inflation because unemployment is low or whether it's because of just cost of healthcare, providing healthcare to your employees.

That being said, I think they are very focused on their businesses. They understand where these pressures are and they see that their margins are actually getting better this year I think is just tremendous. And so I couldn’t be prouder of what our team is doing. And I hate to say it is just a lot of singles and doubles. There's no one big magical thing other than these guys are pretty relentless and going through their P&Ls, understanding their businesses and managing them as well as they can.

Brian Vaccaro: All right, fair enough. And then just a last one from me, just thinking around the balance sheet obviously still very conservative, it's only around the half a ton of leverage. I was curious how you 're thinking about the optimal capital structure, their targeted leverage ratio either on a debt to EBITDA or lease adjusted basis, you have in mind?
Michael O'Donnell: No, I don’t think we have any firm targets. What we want to have is really reported strong balance sheet and we think that's great for our business to have. If we have good investments for the money we don’t mind using leverage to put it to work, whether it is building a new restaurant, whether it is part of what the board decides they want to do in terms of the share repurchase program.

I think we'd like to be flexible. But we're not trying to manage to a fixed target by a certain point in time, but I think you'll see us, at the end of last year we had no debt. If you look back over the last four or five years, you’ve seen us be anywhere between where we are today we've got a ton of leverage to nearly I think if you go back to 2012 nearly two times. So I think you'll see us move in that range depending on what the opportunities are and where we think there's good uses for our capital.

Brian Vaccaro: All right, thank you.

Michael O'Donnell: All right.

Operator: And with no questions left in the queue, I'd like to turn the call back to Mr. O'Donnell for any additional remarks. Michael O'Donnell: Thank you all very much for joining us this morning on the call and as always it's a great day to eat steak.

Operator: This concludes today's call.

Thank you for your participation. You may now disconnect.