Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Ruth's Hospitality Group Third 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 questions.

As a reminder, today's conference is being recorded. I'd now like to turn the conference over to Mr. Mark Taylor, Vice President of Financial Planning and Analysis. Please go ahead, sir.

Mark Taylor: Thank you, Shannon, and good morning everyone.

Joining us on the call today is Michael O'Donnell, Chairman and Chief Executive Officer, who is calling in from Honolulu, Hawaii. Arne Haak, Executive Vice President and Chief Financial Officer, as well as Cheryl Henry, President and Chief Operating Officer, are here with me in Winter Park, Florida. 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 Web-site at rhgi.com as well as the SEC's Web-site 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, Mike O'Donnell.

Michael P. O'Donnell: Thanks, Mark, and thank you all for joining us on the call this morning. As you have probably seen in our earnings release, our third quarter was a challenging one with results reflecting both the impact of hurricanes Harvey, Irma and Maria, as well as the return of double-digit beef inflation. While these storms had a significant impact on our restaurants and created challenges for our people, I am pleased to announce that all team members are safe and accounted for and all restaurants are back open and at full capacity. At a high level, third quarter total revenues increased 1.7% to $85.2 million and earnings per share in the quarter were $0.06.

Comparable restaurant sales decreased 1.6%, driven by a 1.5% decrease in traffic and a 0.1% decrease in average check. These results, while disappointing, were significantly influenced by the hurricanes and Arne will quantify the impact to this further in his remarks. More importantly, I am pleased to report that traffic trends are positive so far for the fourth quarter and are driving sales, which are now running up in the low to mid single-digit range. While our third quarter results do not reflect the long-term consistency of our business, I'm proud of our team's focus on operational excellence despite these external challenges. It is this focus that forms the foundation of our brand's growth and together with a steady cash flow generated by our proven business model enables us to continue to invest in our business, grow our footprint selectively, and return excess capital to our shareholders in this and any business environment.

This total return strategy is predicated on both returning capital to shareholders, while continuing to invest in our core business, which includes the building of successful new restaurants and the opportunistic acquisition of franchisees. With that, I am pleased to announce that we have been presented with a great opportunity to acquire six Hawaiian locations from our long-time franchise partner, Desert Island Restaurants, and their respective LLCs that operate each of these stores. This market began with one restaurant in Honolulu in 1989 and under the leadership of our franchisee, Randy Schoch, has admirably grown this successful collection of six award-winning restaurants. Their success has led their restaurant group to produce above-average sales levels and strong restaurant-level margins in what is a very competitive tourist-driven market. Randy and his team have built an impressive group of restaurants, leveraging our founder Ruth Fertel's successful recipe, sizzling prime steaks and legendary hospitality, and combine them with the aloha spirit of Hawaii.

Today I am excited to welcome their people and look forward to working with Randy and his team as we learn from each other's success. This acquisition includes all Hawaiian restaurants, all six Hawaiian restaurants, including the restaurant in [kauai] [ph] that just opened this week, as well as the area development rights for the balance of Hawaii. We expect this transaction to close no later than the end of the first quarter of 2018 and to be accretive to our earnings. Since 2011, we've complemented our organic growth by returning over $215 million to shareholders, while growing our revenues 35% and nearly doubling our earnings. Subsequent to the end of the third quarter, our Board announced a new $60 million share repurchase program, and in addition, a $0.09 quarterly dividend.

The heart and soul of our business remain our franchise partners who continue to invest alongside us, both in new restaurants and in remodels. In summary, our standing as a leader in the fine dining steakhouse category has positioned us to deliver on our total return strategy. We continue to believe that the successful execution of this strategy is the best way to create enduring value for our shareholders. With that, I'll turn the call over to Arne to provide more detail on the third quarter results. Arne G.

Haak: Thank you, Mike. For the third quarter ended September 24, 2017, we reported net income of $1.7 million, or $0.05 per diluted share, compared to net income of $3.6 million or $0.11 per diluted share during the third quarter of 2016. Net income in the third quarter of 2016 included a non-recurring $335,000 benefit related to the settlement of disputed rent charges. Excluding this item and the loss from discontinued operations, net income in the third quarter of 2017 was $1.8 million, or $0.06 per diluted share, compared to $3.3 million or $0.10 per diluted share in the prior year period. Total Company-owned restaurant sales for the third quarter were $79.4 million, an increase of 0.9% from $78.8 million last year.

The increase was driven by the contribution from our new restaurants and offset by a 1.6% decrease in comparable restaurant sales. As Mike mentioned, sales were negatively impacted by hurricanes during the quarter. These storms impacted 15 out of our 70 total Company-owned restaurants, over 20% of our system. This resulted in a total of 64 days of restaurant closures as well as significant weakness ahead of and behind the storms, as local communities were evacuated or preparing for the impact. This created a drag on sales of 150 to 200 basis points in the quarter and a $0.01 to $0.02 impact on earnings per share.

Excluding the impact of the hurricanes, we estimate comparable restaurant sales would have been flat to up low single-digits for the quarter and the cadence would have been fairly consistent across all three periods. Average weekly sales for Company-owned restaurants were $87,300 in the third quarter, down 2.8% from the $89,800 in the third quarter of last year. Total operating weeks for Company-owned restaurants were 910, up 3.8% year-over-year from 877 in the third quarter of 2016. Franchise income in the second quarter was $4.2 million, up 7.4% from $3.9 million in the year ago period. Total franchise comparable sales were up 2.2% year-over-year.

Comparable sales in our domestic franchise restaurants were up 2.2% during the quarter, and comparable sales in our international franchise restaurants were up 1.8%. Excluding the impact of foreign currency exchange rates on our international sales, international comparable sales were up 0.4% and total franchise comparable sales were up 1.9%. The franchise community was also negatively impacted by hurricanes Harvey, Irma and Maria. Although the impact on franchise royalties was immaterial through the quarter, our franchisee in Puerto Rico experienced significant storm damage and has permanently closed one of their two restaurant locations. Now, turning to our costs, food and beverage costs as a percentage of restaurant sales increased 175 basis points year-over-year to 31.9%.

This increase was driven by a 10.9% increase in total beef costs. The increase in prices was particularly strong on Prime cuts in the third quarter and was driven by increased retail demand. Prices have eased in the fourth quarter and we are currently locked on 50% of our filet needs for the remainder of the year. We now expect beef costs for the full year to be up approximately 4%. As a result of this beef inflation, we have added a modest price increase during the fourth quarter, and now expect to carry roughly a 2% increase in the fourth quarter.

For the quarter, our restaurant operating expenses as a percentage of restaurant sales increased 210 basis points year-over-year to 53.6%. The increase was primarily due to storm related inefficiencies and resulting sales deleveraging. The timing of healthcare claims as well as the lapping of the impact of the $335,000 benefit in the third quarter of 2016 related to the settlement of disputed rent charges also contributed to the variance. Our G&A expenses as a percentage of total revenues decreased 40 basis points year-over-year to 8.3%, primarily driven by a decrease in performance-based compensation. Marketing and advertising costs as a percentage of total revenues increased 70 basis points to 3.8%.

As expected, our marketing expense in the third quarter was similar to that in the second quarter, and while our marketing mix remains dynamic, we expect our fourth quarter to be in line with the amounts spent in the third quarter. Pre-opening costs were $100,000, compared to $600,000 in the third quarter of 2016, driven by the timing of new restaurant openings. On the development front, our last Company-operated opening of the year is currently scheduled to occur in December in the Tech Center of suburban Denver, Colorado. As previously announced, we have a signed lease for a new Company-owned location in Jersey City, New Jersey, which we expect to open in the second half of 2018. We continue to aggressively work on additional sites for both late 2018 and 2019.

We will announce these once the leases have been signed. On the franchise side of development, in October our franchisee opened one new restaurant in Chengdu, China, the capital of the Sichuan province with a population of over 10 million. During the fourth quarter, our franchise partners will relocate the restaurant in Mississauga, Canada and our Indianapolis franchisee currently expects to open a new location in Fort Wayne, Indiana in 2018. During the third quarter, the Company also repurchased 319,000 shares of common stock for $6.1 million, or $19.13 per share. As Mike mentioned this morning, we also announced a new $60 million share repurchase authorization.

This new authorization replaces the previous $60 million program announced in April of 2016, which had only $12 million of capacity remaining. At the end of the third quarter, we had $30 million in debt outstanding under our senior credit facility, up $9 million from the end of the second quarter. However, we have since paid down an additional $7 million to this point in the fourth quarter, leaving our debt balance today at $23 million. Now I'd like to update our outlook for the full year of 2017 for some of our key cost metrics. We continue to expect our cost of goods sold to be in the range of 29% to 31% of restaurant sales.

We expect restaurant operating expenses to remain between 47% and 49% of restaurant sales. We continue to expect marketing and advertising costs to be 2.9% to 3.1% of total revenues. We expect G&A expenses to remain between $32 million and $34 million. We continue to expect an effective tax rate of 31% to 34%. We now expect capital expenditures to be between $20 million and $23 million.

Lastly, we now expect our fully diluted shares outstanding to be between 31 million and 31.2 million shares, exclusive of any share repurchases under the Company's share repurchase program. Before we turn the call over for questions, I'd also like to give some preliminary insight on the effect of the acquisition of the Hawaiian restaurants on 2018. These are a great group of restaurants. In 2016, these five restaurants produced nearly $32 million in sales and as a result $1.6 million in royalty revenues to RHGI. To-date in 2017, the group has experienced both sales and traffic growth.

Due to the higher cost of doing business in Hawaii, the average menu price is higher than those in our mainland restaurants. This, combined with a tourist-driven economy, results in average checks that are roughly 25% higher than our current system average. With that, Shannon, I'd now like to turn the call over for any questions that we might have.

Operator: [Operator Instructions] Our first question will come from Andy Barish of Jefferies.

Andy Barish: Good morning, Mike.

I know it's early where you are, since it's early here, but aloha. I've been there during earnings calls, not a ton of fun always. But can you give us just maybe a little peek on the margin profile in Hawaii? Do the higher menu prices kind of bring margins in line with the corporate averages or how do we think about that last piece of the puzzle?
Arne G. Haak: Andy, this is Arne. Go ahead, Mike.

Michael P. O'Donnell: Thank you. Andy, the margins in – the sales and AUVs and margins in Hawaii are quite good and would be in line with where the Company is. Arne G. Haak: Andy, I'd just add one thing to that.

I think, two, as you go down out of the restaurant level, given the remoteness and kind of the unique dynamics of the market, there is fairly consistent and maybe even a little bit higher indexing spend on marketing in those restaurants today than what we do normally at a level. And then of course it kind of brings a unique G&A profile because of its remote nature. So there's probably not as much leverage there on G&A as you get out of the restaurant level margins.

Andy Barish: Okay, helpful. And then on Company and I guess franchise pipeline for new stores as long as we are looking at that, I know you guys have been quite disciplined on that front, but we are trying to pick things up, does the Hawaii acquisition and integration maybe cause 2018 unit growth to only be that one or maybe two that you have got in the pipeline right now?
Arne G.

Haak: Andy, this is Arne. I think as we look at our pipeline for next year, I guess your question started with franchise pipeline, so franchise continues I think uninterrupted. There was no franchise development planned. As we look at our own development, we are still looking, we are still working. Obviously, the front half of the year we are working on integration, but there are still opportunities that we are working on for 2018 and 2019.

Operator: Our next question will come from Joshua Long of Piper Jaffray.

Joshua Long: Excited to hear about the layering in of the Hawaii stories. Given that G&A nature I think you mentioned, Arne, are there some investments or other things needed to kind of get to the point where we can layer these into the system or just curious what kind of investments outside of the actual acquisition would be needed to support layering these into the overall store profile on the Company side?
Michael P. O'Donnell: This is Mike. Let me talk about this.

Hawaii has done, I think I can say, an incredible job, as did Randy Schoch. It's uniqueness of the tourist business here and the way that Randy has set this business up, we have some additional personnel who are involved in marketing, human resources, et cetera, I think in order for us to be successful in integrating these restaurants, we don't intend to interrupt what is already here. As I think I said in my earlier comments, we will enjoy learning from each other's success, and we have a lot of learning that we get to do as a result of this. We actually have some things that we think we can expand, that they do here tourism-wise that we can expand into other parts of our business. So, we are going to move in a way that determines effectively what we need to have here to support it.

I mean, as is evidenced by the fact I'm on a call at 2 o'clock in the morning, this is a little further away from home than we are used to. So, as we go through this, we will see and find the appropriate level of G&A and that we'll continue to support these successful restaurants.

Joshua Long: Understood. Thanks for that. On the inflation or cost of goods side, you called out beef being up 4%.

I was curious if you could give us a little bit more color in terms of how that might break down by cuts and is there any opportunity to maybe have that 50% that you have locked now tick up a little bit, or do you feel good with where you're at in terms of that contracting?
Arne G. Haak: Sure, Josh. This is Arne again. So, as we look at it by cut, it's actually been a really interesting third quarter and going into the fourth quarter. We talked about the inflation being 10.9% for the quarter.

That was comprised of filets being actually down 2% and Prime cuts being up over 20%. So, there was tremendous retail demand for rib-eyes and bone-in rib-eyes and it really put a lot of pressure on the business in the third quarter. In the fourth quarter, we see more modest inflation. We certainly, right now I don't think we see double-digit inflation on the rib-eyes but there will be inflation on many of the Prime cuts. That's kind of what we are expecting and we are expecting kind of flattish trends on filets.

Just to highlight too, when we talk about the lock-in, the filets represent about half of our volume. So, when we have locked half of our filets, it's really about 25% of the volume that is under contract right now. We'll continue to look at it. I think we are comfortable being at the market and we just keep an eye on it and see how it's going. But if there are opportunities, of course we'll look at it and consider them as well.

Joshua Long: Great. Thank you for that. And then just kind of more of a housekeeping one for me, to clarify on the recent repurchase authorization, is everything remaining on that? The shares that you repurchased during the quarter, they fall under the prior share repurchase authorization?
Arne G. Haak: No, we have a fresh $60 million share repurchase authorization. So, none of that has been used yet.

Joshua Long: Understood. Thank you.

Operator: Our next question will come from Brett Levy of Deutsche Bank.

Brett Levy: Good morning to Florida. I don't know, good morning, good evening, how should I address you, Mike.

Michael P. O'Donnell: It's good early morning.

Brett Levy: So, first question is, why do you think now is the right time to make two significant capital moves? Obviously, the refranchising makes perfect sense, that's an opportunistic. But what are you seeing right now that gives you confidence, given the volatility we've been seeing in this quarter and in retail in general? And then also, on these refranchised units, are these in full 2.0, is there any other investment, just following on with what Joshua was asking, that needs to be made to the units?
Michael P. O'Donnell: I guess let me – we are not refranchising, we are buying the restaurants in Hawaii to be clear.

Brett Levy: Sorry, yes. Sorry. Michael P. O'Donnell: Look, I think that the third quarter for us is a complete anomaly, if you go back X number of years. We can't control, I can't control beef prices and I can't control hurricanes.

I certainly wouldn't have to be on a call at 2 o'clock in the morning. So, I mean we have a very solid business that produces a substantial amount of cash that we've been able to reinvest and continue to provide value to the shareholders. The opportunity to acquire these six great restaurants here in Hawaii only adds to that. So, the timing of this is really not something that we view. We view the opportunity to add these restaurants to the Company's portfolio as just simply great, and the notion that something outside externally is causing a problem is nothing to us.

If you look again, you look at the strength of our balance sheet, you look at the strength of our cash flow and you look at this opportunity, it presents we think just an excellent and an accretive and highly positive investment. Can I say any more about it for you how excited I am about it!

Brett Levy: No, it sounds great. And just are these all in the most recent format or will there be additional capital investments that need to be made to the store level?
Michael P. O'Donnell: They are in various – they are great restaurants and they are in various stages of remodel, and we have accounted for that in our acquisition to make sure that there is substantial amount of capital available to do that. Particularly restaurants in Honolulu and Waikiki are very much up to speed.

Some of the outer-island restaurants, we will probably have some investment in 2018. But by and large, Randy has done a fabulous job, his teams have done a fabulous job at maintaining these restaurants and reinvesting back in his business.

Brett Levy: And Arne, one for you, can't let you get off the hook. Can you give us any early looks on what you're thinking in terms of 2018 beef inflation?
Arne G. Haak: Brett, I don't know that our crystal ball goes that far.

I don't think we saw 23% inflation coming on Prime cuts this summer, or to Josh's related question, we would have gone back and locked some of the beef opportunities we had for the third quarter that seemed very expensive at the time when we looked at them. But I guess if I take a broad look at the question from kind of a supply and demand perspective, I think the supply backdrop remains pretty good. This overall supply of cattle is still growing, so that's good. The grading of Prime beef is running continuous to set new record highs. So that's very good.

I think that gives us all confidence about the supply side of the inflation question. On the demand side, I think we just went through a quarter where this is what it looks like when retailers who haven't showcased beef for a long time make the decision to showcase it. Prime beef is a byproduct. You can't make more Prime beef. And so, we can't move away from it.

A retailer can move in and move out. And so, if there is increased demand, the only way to solve the demand outstripping supply is through price. And so, I guess that just gives us pause. I don't know how successful the retail promotions were at Prime beef. I mean, rib-eye prices were higher than they've been in probably as long as we've been tracking them here under my watch in the last seven years.

So, I guess we are mindful of the disruption of retail demand, but we feel pretty good about the supply backdrop.

Operator: Our next question will come from Brian Vaccaro of Raymond James.

Brian Vaccaro: You mentioned that the quarter-to-date comps have improved, and I'm just curious if you are seeing a pretty broad improvement there sequentially or has that been concentrated sort of in areas recovering from the hurricanes? I know you have a big exposure to Florida. And if it's more of the former, could you provide some more perspective on just what you are seeing regionally across different customer segments? That would be helpful. Michael P.

O'Donnell: Sure, Brian. I think we are pleased to say that it's pretty broad-based. Florida seems to have come back, but it's more than just a Florida recovery story. All the regions are running positive. So we look at it on a geographic basis.

And when we look at it from like a revenue center mix within the restaurant, whether it's a-la-carte dining or private dining, all those segments too are running up as well. So, we are pleased with it and glad to see it come back after a tough third quarter.

Brian Vaccaro: Yes, all right, thank you. And sorry if I missed it, Arne, the third quarter comps, can you just aggregate the price versus mix?
Arne G. Haak: Sure.

We actually had some fairly significant negative mix. I believe we are about 1.5 point of check was the increase and we had a 0.1% decrease in average check. So, a lot of that has to do with the mix of business and then the hurricanes as well. I would tell you, in the fourth quarter so far we are seeing, I guess if I had to speak broadly, in the restaurant revenue center, we are seeing check matching what we have in terms of menu price. The one place we are seeing a little bit of negative mix shift is in the bar but we're seeing growing sales, and that's around the menu refresh we did this summer on the Happy Hour menu items, the Sizzle Swizzle Swirl menu items.

And so there is some mix change going on there, but overall sales are growing and it's being driven by traffic, and so we are very happy with that mix change.

Brian Vaccaro: Okay. And sorry, my phone cut out when you said what mix was for the third quarter. Sorry about that. Arne G.

Haak: Sure. So, we had about 1.7% of price in the third quarter and our check was down 0.1%, so we had negative mix of about 1.8%.

Brian Vaccaro: Certainly. Okay, thank you. On the food costs side, you said that you see beef up 4% for the year.

Can you provide some color on what you are seeing in the rest of the basket?
Arne G. Haak: So, I think the rest of the basket, there is always puts and takes, but aside from I think some – there is a little bit of pressure on seafood. I think overall it's within the bounds of what we can manage in terms of price. There is no other big moving pieces or parts that are of concern to us in terms of the restaurant level margin.

Brian Vaccaro: And so, a fairly wide range sort of embedded in your annual COGS guidance, and from what I heard it sounds like you expect around 3% beef inflation in the fourth quarter.

You said you took a little more pricing, and I sort of arrived at the dead center of your annual COGS guidance for the year. Does that sound reasonable or am I missing something there?
Arne G. Haak: I think it sounds reasonable. It sounds like you're at the dead center of the guidance point.

Brian Vaccaro: Fair enough.

And then on the Hawaii acquisition, I wanted to ask about the funding of the transaction. I know you have a strong balance sheet and free cash flow profile, with all the new repurchase authorization obviously, and I guess is the message there that you are comfortable drawing into and sustaining a little higher revolver balance while also sustaining an ongoing level of share repo?
Arne G. Haak: Sure, Brian. We have a $90 million revolver and we have a $50 million accordion. So if we need additional capacity, we have the ability to go if we think there are good investment opportunities for us to use our balance sheet and take on leverage to pursue those opportunities.

I think we are very comfortable with the level of debt with this transaction. We plan on financing it through debt on our credit line. We are very comfortable with that level of debt and we don't think it inhibits us from looking at other things, whether it's development or share repurchase or dividend, at all. I think, as Mike said, this is why we keep a strong, healthy balance sheet, this is why we have the flexibility in our credit line, and certainly even if you add this up, by the time we get through the holidays and all the cash flow that that produces, you are certainly looking probably at less than 1x leverage. And so, I think we can all go to sleep and sleep very well with that kind of balance sheet.

Brian Vaccaro: Yes, okay. And then just last one, can you quantify the annual EPS accretion you expect from the transaction?
Arne G. Haak: We are not prepared to give you any guidance yet in terms of it. I think we gave you a lot of data points between the kind of sales and as you work through margins, what it contributed in terms of franchise royalties, I think you can kind of come up with a pretty good range. We have done a lot of due diligence on this.

I mean the team has worked really hard in I think a fairly short amount of time. I will tell you, that was one of the highlights of this quarter. As we get to work with each other on integration and understand the subtleties, if there is a meaningful change from what we told you today, we'll certainly update you in January.

Brian Vaccaro: All right, fair enough. And then the Investor Day in Hawaii, when can I put that on my calendar?
Arne G.

Haak: Mike is having one now. No, I'm just kidding. Michael P. O'Donnell: Yes, if you can get here in the next 15 minutes, you can have it right now.

Brian Vaccaro: Fantastic.

All right, thanks guys.

Operator: And we'll take a follow-up question from Andy Barish of Jefferies.

Andy Barish: Wondering if you dug into the October trends on some of those evenings where there are presidential debates and stuff. Might be a little too granular, but just wondering if last year's compare, there was some weird stuff going on. And then just secondly on the check average kind of flattening out or going negative, I mean I'm looking more on recent quarters as well as the current quarter, I know there is noise in this quarter, but does that beg the question of kind of looking at 3.0 or something as sort of the next evolution of Ruth's Chris on the whiteboard?
Michael P.

O'Donnell: So Andy, I think I'll turn it over to Cheryl on the 3.0. There is a little bit of a shift of the Jewish holidays, as well there is some debate noise as well, but it's not jumping out at us as any singular 'oh wow, here came a really big day, where did that come from'. Cheryl is working on 3.0, 4.0, 5.0, and let me let her talk a little bit about how she feels what the check means about that and where we're going with that.

Cheryl Henry: I think, Andy, we continuously went after the initial rollout of the menu and the design. We kind of continued our work on that and looking at, okay, so what's next for us, and that's an ongoing process everywhere from potential in the restaurants around design, continued work around the floor plan, to service and how that might look.

So, more to come.

Operator: It does appear we have no further questions at this time. I'll turn the conference back over to Mr. O'Donnell for any additional or closing remarks. Michael P.

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 across the U.S. and here in Hawaii. Thank you.

Operator: And that does conclude today's teleconference. Thank you all for your participation.