Executives: Mark Taylor - VP, Financial Planning & Analysis Cheryl Henry - President and CEO Arne Haak - EVP and

CFO
Analysts: Fred Wightman - Citi Joshua Long - 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 2018 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the formal remarks, we will conduct a Q&A session. Instructions will be provided at this 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 Mr. Mark Taylor, Vice President of Financial Planning and Analysis. Please go ahead, sir.

Mark Taylor: Thank you, Braith [ph], and good morning everyone.

Joining me on the call today are Cheryl Henry, President 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 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 Chief Executive officer, Cheryl Henry.

Cheryl Henry: Thank you, Mark.

Good morning everyone, and thank you all for dialing in today. As many of you know, I've now been at Ruth's Chris for more than 11 years, and it's an honor to be chosen as the leader of this iconic 53-year-old brand. I am confident in our operational approach of executing in our restaurants at the highest level, and I am also committed to our successful total returns strategy. That strategy entails investing in organic growth, expanding at a measured pace and smartly returning capital to shareholders. I realize that on the surface this may sound fairly simple, however executing on those priorities every day takes a unified and coordinated effort from the ground up.

Let me expand. While I'll be spending more time with shareholders in the coming year, I also know that creating value starts with spending time with our restaurant teams. During the past six months, I have met with nearly all of our general managers and executive chefs across the country, and will do so again in the next six months. Their success is the absolute foundation of our brand, and everything else is built upon it. The food and presentation have to be perfect every single time.

The hospitality and attention to detail are critical, and our people have to be trained, ready, and motivated every night. These principles underlie the foundation of our brand. As I look towards 2019, that foundation is strong, and we will facilitate further unit expansion, innovation, and ultimately the return of capital to shareholders. With that, let's talk about the quarter. We're pleased with our results in the third quarter.

Total revenue grew 16.3%, and included strong performance across all three of our key revenue segments. Revenue growth was also aided on a year-over-year basis from the acquisition of our franchised Hawaiian restaurants late last year. During the quarter, comparable restaurant sales increased 3.7%, and traffic increased 1.5%. Both of these metrics again outperformed the Black Box Fine Dining Index. We did have the benefit from lapping of hurricane activity in the third quarter of last year.

However, excluding that benefit, we still had positive same-store sales growth. On the operating side, I am pleased to see our margins also rebound from the affects of the hurricanes last year. Restaurant-level margins grew by 400 basis points, and led to non-GAAP earnings per share of $0.13. We believe our results demonstrate the ongoing execution and focus of our teams. Our franchise partners also had a solid quarter, with comparable restaurant sales growth of 2%.

As many of you know, we have a long history of successful collaboration with our franchise partners, and they are a big part of the success that Ruth's has enjoyed over the years. This group of franchisees is incredibly excited about the Ruth's Chris Steakhouse brand, and I'm pleased to tell you that we are all well aligned on our vision for the brand's prospects, as well as the path to reach our potential. Let's turn now to development. As we near the conclusion of the integration of the Hawaiian restaurants, our attention is focused on prudent growth. And we have a number of exciting developments to share.

During the quarter, we opened a company-owned restaurant in Jersey City, New Jersey and our Paramus, New Jersey location is on track to open this month. In addition, our Reno, Nevada location, which will operate under a management agreement in partnership with Eldorado Resorts, will open in December, earlier than expected. Furthermore, we have two new company-operated restaurants to announce. We have signed leases for locations in Columbus, Ohio, which will open in 2019, as well as a lease for a new restaurant in Oklahoma City, expected to open in 2020. We continue to work on opportunities for additional restaurant openings for late 2019 as well as 2020.

Lastly, we will be relocating one of our restaurants in Washington, D.C. next year, which will allow us to upgrade the brand standards of the restaurant and elevate the overall guest experience. On the franchise side, our partners remain on track to open two restaurants this year. The first restaurant opened in Fort Wayne, Indiana, and the second is expected to open in Markham, Ontario during the fourth quarter. Additionally, subsequent to the end of the third quarter our franchisee in Panama City, Panama closed their restaurant after four years in operation.

In summary, we're proud of the results in the third quarter. We believe these results reflect the success of our total returns strategy, which is predicated on the strength of our brand and our people. As stewards of this iconic and authentic brand, it is our job to protect it, to evolve it, and to grow it. We are confident we will continue to do so going forward. With that, I'll turn this over to Arne to review our third quarter financials in detail.

Arne Haak: Thank you, Cheryl. For the third quarter, ended September 30, 2018, we reported net income of $3.6 million or $0.12 per diluted share. This compares to net income of $1.7 million or $0.05 per diluted share during the third quarter of 2017. Net income in the third quarter of 2018 included $400,000 in deal-related expenses associated with the acquisition of our Hawaiian franchisee, and an $80,000 income tax benefit related to the impact of discreet income tax items. Excluding these items as well as the results from discontinued operations, our non-GAAP diluted earnings per common share more than doubled to $0.13 compared to $0.06 in the third quarter of last year.

Total company-owned restaurant sales for the third quarter were $93.5 million, an increase of 17.7% over last year. The increase was driven by the contribution of our new restaurants, including those acquired in Hawaii, as well as by the 3.7% increase in comparable restaurant sales. As Cheryl mentioned, comparable restaurant sales in the quarter included approximately 150 to 200 basis points of tailwind from the lapping of the hurricanes last year, which resulted in 64 days of restaurant closures. Traffic in the quarter as measured by entrees was up 1.5%, and check was up 2.1%. Total operating weeks for all company-owned restaurants were 1,006, up 10.5% year-over-year, from 910 in the third quarter of last year.

This included an additional 78 operating weeks in the quarter from the acquisition of our Hawaii franchise restaurants. Total franchise comparable restaurant sales increased 2% year-over-year. Comparable sales in our domestic franchise restaurants were up 4% during the quarter, and comparable sales in our international franchise restaurants were down 6.7%. Franchise income in the third quarter was $4 million, down 4.5% versus the prior year. The decrease was driven by the acquisition of the Hawaiian restaurants, partially offset by the increase in comparable sales, and the reclassification of franchisee advertising contribution from marketing and advertising to franchise income.

Now, turning to our expenses, food and beverage costs as a percentage of restaurant sales decreased 360 basis points year-over-year, to 28.3%. This decrease was driven primarily by a 20.5% decrease in total beef cost, as well as by the 2.1% increase in average check. Beef deflation for the fourth quarter has slowed significantly from the trends we experienced in the third quarter. For the full-year we now expect beef deflation of 6% to 8%. For the quarter, our restaurant operating expenses as a percentage of restaurant sales decreased 53 basis points year-over-year to 53.1%.

The decrease in restaurant operating expenses as a percentage of restaurant sales was primarily due to lower benefit cost due to timing of quarterly healthcare claims as well as an increase in average check of 2.1%. Our G&A expenses as a percentage of total revenues 56 basis points year-over-year to 8.9%. This increase as a percentage of total revenue was primarily driven by increased performance based compensation and cost related to the integration of the recently acquired Hawaiian restaurants. Marketing and advertising cost as a percentage of total revenue increased 10 basis points to 3.9%. Pre-opening costs were $845,000 compared to $121,000 in the third quarter of 2017, driven by the timing of our new restaurant openings.

Income tax expenses declined from $1 million in the third quarter of 2017 to $700,000 million, largely as a result of the enactment of the Tax Cuts and Jobs Act. As a reminder, we are reinvesting approximately 20% to 30% of these tax savings into our core business in the form of brand, sales driving and people initiative. At the end of the third quarter of 2018, we had $54 million in debt outstanding. We did not repurchase any shares in the third quarter and ended with $44.7 million remaining under our previously announced $60 million share repurchase authorization. Finally, our broad of directors recently approved an $0.11 per share quarterly cash dividend which represents a 22% increase over the dividend paid in November 2017.

Now turning to our guidance, I'd like to provide our revised outlook based on current information for the full year of 2018 for some of our key financial metrics. Through the first three quarters of the year, our sales cadence has been running up 1.5% to 2% year-over-year. However, fourth to date comparable restaurant sales are currently running flat to prior year, primarily due to tougher comparisons from the strength of restaurant sales following the hurricane last year as well as the shift of restaurant week. We expect the fourth quarter this year to be once again seasonally our strongest revenue quarter in terms of sales dollars. However, as a result of last year's 53rd week, the timing of the New Year's Eve Holiday will provide a revenue headwind of approximately 150 to 200 basis points on the quarter.

Based on our current expectations of beef deflation in 2018 provided earlier in this call, we now expect our cost of goods sold to be in the range of 28.2% to 28.6% of restaurant sales. We now expect annual restaurant operating expenses to be between 48% and 48.6% of restaurant sales. As a reminder, the fourth quarter of 2017 included a 53rd week. And as a result, we expect to see a modest level of margin de-leveraging in this year's fourth quarter. We now expect marketing and advertising cost to be between 3.7% and 3.9%.

We now expect our G&A expenses to be between $34 million and $36 million, excluding Hawaii integration costs. We continue to expect our annual effective tax rate to be between 17% and 19%, excluding the impact of discrete income tax items. We expect capital expenditures to remain between $30 million and $32 million. We expect our fully diluted shares outstanding to now be between $30.3 million and $30.5 million shares, exclusive of any share repurchases under the Company's share repurchase program. With that, I'd now like to turn the call back to Braith for any questions that we might have.

Operator: Thank you, sir. [Operator Instructions] We can now take our first question from Greg Badishkanian from Citi. Please go ahead.

Fred Wightman: Hey, good morning. It's actually Fred Wightman on for Greg.

I just wanted to circle back on the quarter-to-date comps that you mentioned. Can you give us a sense for how 4Q progressed last year? I think that you mentioned there might have been some lingering impact from hurricanes. And then that 150 to 200 basis point headwind you discussed from the calendar shift, that's on a comp basis, correct?

Arne Haak: Correct. Good morning, Fred. So first of all, the progression last year was very strong in October.

October was the strongest month in the quarter last year in terms of year-over-year comparable sales. And so when we look at it kind of on a two-year basis October looks very normal. When we look through the restaurants that are kind of up and down, it is really the Florida restaurants that rebounded, and a lot of the restaurant weak activity that happens in Florida, in September, got pushed into October of last year. So overall, we feel pretty good about that. In terms of the comp sales on New Year's Eve, it is on a calendar comp.

But New Year's Eve obviously is a great time to celebrate at Ruth's Chris. And the good news is we'll still get it, it'll just come in 2019.

Fred Wightman: Great, thanks a lot.

Cheryl Henry: Fred, I would just add, through the year we've seen strength in all areas of our business. And so I think that helps as we look at Q4.

Some of the trends we've seen in Q3 in the private dining segment make us feel positive about the quarter.

Fred Wightman: Sure. No, I think that makes sense. Just touching on that quickly, have you guys any indications as far as holiday spend as we look ahead into the fourth quarter?

Cheryl Henry: Yes, I'll reiterate. I think the trends we've seen are positive, and so we expect -- we don't see anything that would allow us not to expect that to continue.

Fred Wightman: Okay, thanks. And then just finally, you guys have been pretty consistent with repurchases over the past few years, but this is sort of the second of three quarters where you haven't been in the market. Can you just give us an update on how you're thinking about that lever going forward?

Arne Haak: Sure. First of all, it's a board-level decision. And we present to our board kind of our thoughts on repurchases.

But we are actually actively looking for ways to invest our capital into high-return projects. So if we can build a new restaurant we would rather invest there. And this past year we have invested fairly strongly too in the Hawaii acquisition. So it is a board-level decision, and there will be ebbs and flows around it, but I believe our board is committed to our share repurchase program.

Fred Wightman: Great.

Thanks a lot.

Operator: Thank you. We can now take our next question from Joshua Long from Piper Jaffray. Please go ahead.

Joshua Long: Great, thank you for taking my question.

Wanted to see if you might be able to dig in to any sort of geographic trends that you saw during the quarter? And then also touch on the franchisee closure in Panama, if there's any additional color you could provide there in terms of how the brand performed and/or other opportunities to either stay in that market or how you're thinking about that?

Cheryl Henry: Sure. So, as we looked across, and we mentioned that the performance against Black Box, it was pretty broad regionally, so we didn't necessarily see any areas that were underperforming, and I think I would say we talked about the shift given the hurricane. So Florida obviously had a pretty strong quarter as they came back versus last year. But broadly speaking, geographically, we saw positive trends throughout the United States. And on the Panama question, it's really a market issue there and some things in dynamics that are changing in the marketplace.

Joshua Long: Got it, thanks for that. Could you provide an update in terms of where we're at with remodels in some of the uses or ability to put some of that cash to work? I mean, obviously building high-returning stores is one of your priorities that you've talked about for quite a while, and you've also done a great job refreshing the asset base through remodels and either capacity expansions where available. So where does the portfolio sit now and kind of how do you think about the opportunity to put some dollars to work on the remodel side?

Cheryl Henry: Sure. So we talked earlier about doing between seven and nine this year. We're on track to complete eight.

We're looking at a similar number of seven to nine for next year as well. So this year, at the end, we'll have eight more completed. And that puts us right around 30 that we've completed to date.

Joshua Long: Great. And how do you think about the total opportunity to kind of address or touch those units, I mean with 30 done to date, have you gotten through many of the larger projects of a kind of balance across capacity expansion opportunities versus maybe light retouches? How do you think about kind of the mix of those dollars being spent?

Cheryl Henry: Right.

And so, we've talked before about the buckets, how we consider our remodels from capacity expansion to brand refresh. Where we sit now, we go through a filter process around how we prioritize the project. We have completed several larger ones. But we still have, as we look across what's left, I think we'll still touch each of those buckets from a standpoint of is there potential capacity, certainly on the brand side, and then maintenance as well. So I think we still have opportunities in all those buckets.

But I would say from a standpoint of prioritization we've hit some larger ones early.

Arne Haak: One last thing, Josh, to add to that, I think one of the things we've learned, and this would kind of fall into the maintenance category. As we've gone into some and opened up some of these California restaurants there's a lot of regulatory work that we end up doing that adds to kind of the cost of the remodel. So the California remodels have definitely been running a little bit higher per unit than what we've seen across the portfolio.

Joshua Long: Okay, thanks for that.

And last one for me, in terms of the COGS deflations on the quarter, a nice down 20% number, and then understand that maybe that moderates a little bit going forward. But curious how you're thinking about contracting the beef piece or the rest of your commodity basket and kind of how you're thinking about price going forward?

Arne Haak: Sure. I guess I'll take the contracting question, and I'll turn it over to Cheryl on price. We were really blessed this third quarter with really good prime supply. So if you remember, last year, there was a little bit of a contraction in the prime grading as we went through the summer and a lot of retail demand.

And we ended up with 10% or over 10% inflation in the third quarter of last year. This year, we still had good retail demand, but the prime grading has been running really high. I mean, it's been running north of 7%. And it's probably 20%-plus increase in supply over the summer. As we headed into the summer we could see that we had a pretty big increase in the supply of prime.

Not quite sure where that is going to go for next year. We'd love to see her keep grading this high, but we're focused on it. And we've tried to talk to people about contracting at these levels. I mean, some of these levels in the third quarter are the lowest they've been in five, six, seven years. And unfortunately nobody's really excited on the supply side because we extend that into 2019.

But we continue to look, but there haven't been any opportunities that we feel are compelling to signup for.

Cheryl Henry: On the price side, we have been and will continue to be what we call reluctant price [ph] as we look at, first, trying to build the sales through traffic. So we're currently just around 2% in price. We will look at it again. We're thoughtful about the process.

We look at a lot of inputs to try to decide what that looks like. And so as we get through the quarter and into next year we'll certainly revisit it and look for what the opportunity might be.

Joshua Long: Great, thank you.

Operator: [Operator Instructions] We'll now take our next question from Brian Vaccaro from Raymond James.

Brian Vaccaro: Thanks and good morning.

Could we start with the third quarter comps, and could you provide a little more color on how the different business segments performed during the period?

Cheryl Henry: Sure. So as we think about it, now I'll talk generally through our business side and then our a la carte just because diners. We really saw strength and kind of steady strength through the quarter. Obviously, again, Florida had a good recovery especially in the private dining segment as last year impacted a lot of the business travel. But it was consistent in all segments.

And as you know, we've done a great deal of thinking about our revenue centers and separating efforts around private dining and group dining around wine dinners, and then we menu items in a la carte, as well as new programming in the bars. So we think we're seeing the results of that, and we like what we're seeing as far as the trends in each center.

Brian Vaccaro: Okay. And I guess if you isolate ex private dining or just thinking about the just because and the special occasion diner, curious if you're seeing if there's any read-throughs on how those customers are moving through the menu, if there's been any noticeable changes in Ruth's Classics mix or the higher-end items, anything to highlight there?

Cheryl Henry: We've seen some in the past. I think we talked in Q2 we saw a little bit of shift to classic, but not in Q3 necessarily.

I think that the idea of the geography in the restaurant and people moving into a bar for a full a la carte experience is something that we continue to see. But shift itself was in the menu, not in the quarter, no.

Brian Vaccaro: Okay. And Arne, could you disaggregate. I think you said average check up 2.1% in the quarter.

How much was the price versus mix there?

Arne Haak: We're running right around 2.2% in price, 2.2%, 2.3% was kind of the price number. So we had a fairly -- we didn't really have any negative mix. You remember earlier in the year, we talked about we had kind of had a kind of a revenue center shift there as we had some promotions in the bar, and we've lapped that in July. So that's where we were on price in the quarter.

Brian Vaccaro: Okay, perfect.

And then just one last topic for me, could we drill down on the other OpEx line for a second. And could you quantify then, I think you said there was a shift in the healthcare claims. Could you quantify that, but maybe also touch on any of the other moving line items there? What was wage inflation in the quarter, and anything else worth highlighting?

Arne Haak: Sure. So we're experiencing wage inflation just like everybody else, Brian. Overall, the wage inflation is running right around 5% this year for us as we look across all employees.

The minimum wage component of that is running around $1.2 million for the year. In terms of healthcare, I don't think we're going to call out the exact number on what it was. But generally the trend has been favorable for us just in terms of claim history for our people. So we're hopeful that that trend continues. We like that our people aren't experiencing -- you know, it can take one or two events and it can significantly change our profile.

But those are the two big things in the quarter that are kind of in the other line that are pressuring. And obviously, we're being helped by beef. I think the thing that really was pleasing to me, obviously last year we had a fair amount of margin compression in the third quarter around the hurricane. And the teams really rebounded well and came back. I mean, their plans had them doing it, but to make it happen it happened.

And so our operators have done a really good job of running their restaurants and growing sales.

Brian Vaccaro: All right, that's great. And then last one, just Cheryl, so a little view question I guess. But circling back just to the meetings over the last six months, I'm curious what the primary scenes or takeaways were from those meetings. Any new learnings or opportunities identified?

Cheryl Henry: It's interesting, one of my favorite thing to do is get out and in to the restaurants.

And really the purpose of that, Brian, is to make sure that the strategy that we have as a company is getting in to the restaurants when it's lived every day by the teams. And I will tell you, I go there think, well, let me inspire people, and I leave inspired. And I think just generally, we have amazing tenure. Everyone is talking about the labor market and what's happening and the tightness of the labor market. And when I go out and meet with the teams, it's amazing to me the commitment of the folks.

And really, it's inspiring when I leave. And I think it's great to be able to have that one-on-one time with them and ensure that we're aligned from the top of the organization all the way through the folks in the field on what our strategy is and how we approach it, and how we approach our guests and our shareholders. So just a good opportunity to get out, speak with them in person, and then ensure the organization is aligned.

Brian Vaccaro: All right, thank you. I'll pass it along.

Operator: Thank you. That will conclude our Q&A session today. I would like to turn it back to the management team for any additional or closing remarks.

Cheryl Henry: Thank you all very much for joining us this morning on the call. And we certainly look forward to speaking with you all again in our fourth quarter earnings conference call.

Have a great day.

Operator: Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.