Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Ruth's Hospitality Group 2018 Fourth Quarter 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, Marguerite, 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 like to now turn the call over to our Chief Executive officer, Cheryl Henry.

Cheryl Henry: Good morning everyone and thank you all for joining us on the call. The fourth quarter marks a fitting end to another year of strong results for our team at Ruth’s Chris Steak House.

As you will see, there are a lot of moving parts in the quarter. This includes one less operating week and the loss of the New Year’s Eve holiday, which Arne will walk you through shortly. Excluding the loss of the New Year’s Eve holiday, revenue growth was positive across all three of our key segments led by the strength of our special occasion business. The Thanksgiving, Christmas Eve and Christmas day holidays were each up year-over-year. Our comparable restaurant sales accelerated in the back half of the quarter.

After adjusting for the loss of New Year’s Eve holiday, our comparable sales growth for the quarter would have increased 1.4% after starting out flat in October. We continued to outperform the Black Box Fine Dining Index for both sales and traffic and our pleased with both our performance and the performance of our franchisees who also had a strong quarter. On the operating side, our team members continue to execute in our restaurants at the highest level with the focus on operational excellence and enhancing the guest experience. I am proud of these efforts, particularly their focus on pleasing our guests while diligently managing margins. Their dedication drove the highest annual restaurant level margins we have had in over 10 years.

The ongoing consistency of our operations combined with the acquisition of the Hawaii restaurants, beef deflation and tax savings generated double-digit adjusted EPS growth in the quarter to $0.50 per share. Let’s now turn to development. During the quarter, we accelerated the opening of two company restaurants that were originally targeted for opening in the first quarter of this year; the first in Paramus, New Jersey and the second in Reno, Nevada which operates under a management agreement. Additionally, we closed one restaurant late in the fourth quarter in Washington DC, which was at the end of its lease term. Looking ahead to 2019, we have a strong pipeline of new restaurant development plans.

This includes today’s announcement of a new lease for a restaurant in Somerville, Massachusetts, which we expect to open in the fourth quarter of this year. We now expect to open new restaurants in Columbus, Ohio; Washington DC and Somerville, Massachusetts in the second half of 2019. We also have a lease for a new restaurant in Oklahoma City that we expect to open in 2020. And we continue to work on opportunities for additional restaurant openings. On the franchise side, our partners opened one new restaurant in the fourth quarter in Markham, Ontario.

For 2019, our partners are currently expected to open two new restaurants; one in China during the first half of the year and one in St. George, Utah in the second half of the year. Looking back at 2018, I am extremely proud of all the team has accomplished this year. We seamlessly integrated our six Hawaiian franchise locations, opening three new company-operated and two new franchise restaurants. In addition, 2018 marked our ninth consecutive year of comparable restaurant sales and earnings growth, including full year revenue of 9% and adjusted EPS of 27%.

This success continues to be driven by our operational approach of executing in our restaurants at the highest level, and I’d like to thank our team members and franchisees for the incredible work they do each day. Lastly, I think it’s worth noting that in 2018 we invested over 30 million in CapEx back into our core business and still returned over 41 million back to shareholders in the form of dividends, share repurchases and debt paydowns. We believe these results reflect our success of our total return strategy which is predicated on the strength of our brand and our people and a disciplined approach to capital allocation. With that, I’ll turn it over to Arne to review the details of our fourth quarter and full year financials.

Arne Haak: Thank you, Cheryl.

For the 13-week fourth quarter ended December 30, 2018, we reported net income of $14.9 million or $0.49 per diluted share compared to net income of $9.6 million or $0.31 per diluted share during the 14-week fourth quarter of 2017. Net income in the fourth quarter of 2018 included $250,000 in expenses associated with the acquisition of our Hawaiian franchisee. Net income in the fourth quarter of 2017 included a $3.9 million non-cash charge related to the impairment of assets at one restaurant location, $600,000 in expenses associated with the acquisition of our Hawaiian franchisee and discrete income tax charge of $1.2 million primarily related to the reduction of deferred tax assets from the Tax Cuts and Jobs Act. Excluding these expenses, as well as the results from discontinued operations, our non-GAAP diluted earnings per common share were up 12.5% to $0.50 compared to $0.44 in the fourth quarter of last year. Total company-owned restaurants sales for the fourth quarter of 2018 were $120 million compared to $117.4 million in 2017.

The increase was driven by the contribution from our new restaurants including those acquired in Hawaii. Our fourth quarter company-owned restaurant sales were also negatively impacted by approximately $8 million as a result of last year’s 53rd week and the shift of the New Year’s Eve holiday. Company-owned comparable restaurant sales decreased 0.1% during the fourth quarter. Comparable restaurant sales and traffic in the quarter included an approximately 150 basis point headwind from the loss of the New Year’s Eve holiday. Traffic in the quarter as measured by entrees was down 2.5% and check was up 2.5%.

Adjusting for the loss of New Year’s Eve, comp restaurant sales would have been up approximately 1.4% in the quarter. Total franchise comparable restaurant sales increased 1.1% year-over-year. Comparable sales in our domestic franchise restaurants were up 2.1% during the quarter and comparable sales in our international franchise restaurants were down 3.9%. Franchise income in the fourth quarter was $5 million, up 7.1% versus the prior year. The increase in franchise income was driven by 1.1% increase in comparable franchise restaurant sales as well as the change in accounting from the new revenue recognition standard and the contribution from new restaurant openings.

Now turning to our expenses, food and beverage costs as a percentage of restaurant sales decreased 160 basis points year-over-year to 27.7%. This decrease was primarily driven by a 6.4% decrease in total beef cost, as well as by the 2.5% increase in average check. For the quarter, our restaurant operating expenses as a percentage of restaurant sales increased 110 basis points year-over-year to 45.8%. The increase in restaurant operating expenses as a percentage of restaurant sales was primarily due to the loss of sales leverage from the extra week in the fourth quarter of 2017 as well as the planned increase in occupancy-related expenses. Our G&A expenses as a percentage of total revenues were up 40 basis points year-over-year to 8%.

This increase as a percentage of total revenues was primarily driven by the loss of sales leverage from the extra week in the fourth quarter 2017 as well as an increase in performance-based compensation and cost related to the integration of the Hawaiian restaurants. Marketing and advertising costs as a percentage of total revenues increased 80 basis points to 3.7%. Income tax expenses declined from $6 million in the fourth quarter of 2017 to $3.4 million, largely as a result of the enactment of the Tax Cuts and Jobs Act. As a reminder, we reinvested approximately 20% to 30% of these tax savings into our core business in the form of brand, sales driving and people initiatives. During the fourth quarter, we repurchased approximately 464,000 shares for $12.6 million at an average price of $27.12 per share.

At the end of the fourth quarter of 2018, we had $41 million in debt outstanding. Additionally, subsequent to the end of the fourth quarter, our Board of Directors approved a $0.13 per share quarterly cash dividend which represents an 18% increase over the dividend paid in March of 2018. Now, I’d like to provide our outlook based on current information for the full year of 2019 for some of our key financial metrics. Because of last year’s extra week, New Year’s Eve, traditionally a strong day for us, was pushed from the fourth quarter of 2018 into the first quarter of 2019. As a result of the shift, comp sales in the first quarter of 2019 have been positively impacted by approximately 150 basis points.

In addition, the Easter holiday will shift back into the second quarter in 2019 from the first quarter in 2018. We believe that first quarter comparable sales last year benefitted by approximately 70 basis points due to the shift of Easter. Aside from the benefits of the New Year’s Eve holiday, we have seen some early headwinds from unusual winter weather in the northern parts of the country as well as the shift of the Super Bowl from a company market in Minneapolis to a franchise market in Atlanta. Excluding the impact of New Year’s Eve and weather, our comp sales and traffic would be running up low-single digits. For the cost of goods sold, we see an uncertain year in terms of beef prices.

In 2018, we expected beef prices to be up and ultimately we saw full year deflation of 8% driven by prime cuts which were down 14.5%. This volatility was driven by the improved supply of overall beef and record high prime grading percentages. Although the supply of prime beef continues to remain at historically high levels, retail demand is expected to continue resulting in modest beef inflation for 2019. We currently expect total beef inflation to accelerate through the year and to average 3% to 4% for the full year. We expect our cost of goods sold to be in the range of 28% to 30% of restaurant sales.

We currently expect our annual restaurant operating expenses to be between 48% and 50% of restaurant sales. We expect our marketing and advertising costs to be between 3.4% and 3.6% of total revenues. While marketing and advertising costs will be down slightly over 2018 for the full year, we expect a slight increase in year-over-year marketing spend in the first quarter as we continue to focus our tactics in investments. We expect our G&A expenses to be between $35 million and $36 million. We expect our annual effective tax rate to be between 17% and 19%, excluding the impact of discrete income tax items.

We expect our capital expenditures to be between $30 million and $32 million and depreciation expense to be between $19.5 million to $21.5 million. We expect our full diluted shares outstanding to now between 30 million and 30.5 million shares exclusive of any additional share repurchases under the company’s share repurchase program. With that, I’d now like to turn the call back to Cheryl for some closing remarks.

Cheryl Henry: Thank you, Arne. We have built a strong foundation over the last 54 years through an intense focus on operational excellence and an amazing group of people.

This focus has generated broad appeal across generations and demographics resulting in incredible brand loyalty. While operational excellence remains the cornerstone of our strategic efforts, we continue to search for ways to evolve our brand and increase our connection with our guests. We set clear directions on our innovation efforts with any new initiatives needing to deliver at least one of three things; reducing friction for our guests, enhancing the guest experience while creating efficiencies to improve productivity for our team. With those criteria in mind, we are continually looking at a number of potential opportunities that we will update you on as the year progresses. As I look ahead to 2019 and the future, I am excited about the opportunities to grow and evolve our iconic brand building upon this strong foundation and to create shareholder value through our total return strategy.

With that, I’d now like to turn the call back to Marguerite for any questions you may have.

Operator: Thank you. [Operator Instructions]. We can now take our first question from Nicole Miller from Piper Jaffray. Please go ahead.

Nicole

Miller Regan: Thank you. Good morning and thank you for the update. I had two questions. The first is, could you frame up the industry and I’m thinking specifically as you talk about your growth objectives for this year? It’s a great pipeline and some are in major cities and some are in just relatively smaller cities. So how do you frame up the competition just overall in the industry? And then as you go into those smaller cities, are you the first entrance or are there other of your peers there? Thanks.

Cheryl Henry: Hi, Nicole. So I believe you’re talking about specifically development, so I think we’ve talked in the past about our ability just given the strength of the brand and the broad awareness of the brand to be able to go into smaller markets and I think those are the markets that you’re referencing. Generally, we look at smaller markets. There maybe one or two independents that have been in the marketplace, but generally from a more national brand standpoint. There’s an opportunity to be the first one in.

So that’s certainly part of the attractiveness of our smaller market strategy. From the larger markets, that has been kind of our traditional development, especially on the company side over the years. And I think given the environment around development and constructing costs, we’ve said before we are patient. We look for the right sites. We won’t just do it because it’s there.

We want to make sure we’re hitting all of our return hurdles on that. And so I think that if there’s a way to look at them differently, one is kind of what we think about as our standard marketplace where there may be competitors whether they’re independent or existing national brands but then smaller markets where there’s an opportunity to be the first ones in. Nicole

Miller Regan: That’s helpful. Thank you. And then the second is wanting to talk over beef cost a little bit more.

I wanted to make sure I understood the 3% to 4%, is that just beef inflation or was that the overall basket? And if it’s just beef, how about the overall basket? And then it seems right now any price you have really and this would be true across industry’s asset labor. And so if beef does inflate, do we just think either as an industry in total or for ourselves specifically that margins go down or prices will go up to cover? Thanks.

Arne Haak: Sure, Nicole. Let me take the beef question first of all and then I’ll turn it over to Cheryl to talk about how we think about price and margins. So in terms of beef that was just for beef inflation.

And I think we do see, because we have beef inflation, that we likely will have some modest inflation in the food basket this year. We don’t see it snapping back all the way to where it was two years ago. Like we don’t see us giving all of those the benefit we got from beef last year back. But we certainly see I think as we go through the year and particularly when you get passed kind of March, April that we’re likely to see some inflation there. So let me turn it over to Cheryl for the second part of the question.

Cheryl Henry: To your question on price, we’ve seen years in the past where we had inflation both on the labor side as well as on the beef side. Traditionally our price target we talk about between 1% and 3%, we haven’t had to go outside of that. We have price plan just slightly under 2% for the year. And I think there’s certainly opportunity there. We take it reluctantly.

But if there’s an opportunity, we will take it if we need to. I will say I give the teams at the restaurant level an enormous amount of credit. They have become experts at understanding the balance between managing margins, managing labor but also understanding that it’s the quality we experience that brings guests back and drives the top line. And so that’s our first and foremost focus is not necessarily cutting labor understanding, but delivering on top line, delivering on the guest experience, driving the top line and be able to leverage that against some of the cost inflation. Nicole

Miller Regan: Thank you.

Operator: Thank you. [Operator Instructions]. We can now take our next question from Andy Barish from Jefferies. Please go ahead.

Andrew Barish: I’m sorry, I was muted there.

Good morning. On the composition of the same-store sales, it looked like menu mix actually turned positive in the fourth quarter if I’m assuming pricing was around 2 as well in the 4Q after kind of a year of some negative mix with the bar program and things like that. Was there something going on there that changed during the 4Q?

Cheryl Henry: No, Andy. I think you said it, at the beginning of the year we had some mix going on just with the bar program. We started to see that settle out in the back half of Q3 and I think we saw that kind of flowing through in Q4.

And so we were slightly over 2 and picked up right about that. Arne, do you have anything to add?

Arne Haak: Andy, I think we did round trip the middle of the year what Cheryl talked about. I think the other thing that we’re kind of seeing is the consumer, particularly on special occasion days, is doing really well. Those days or the comp sales we set a record last year and we beat it again this year and you see people spending a little bit more as well on those special occasions more than what you have in terms of price on the menu.

Cheryl Henry: That’s a good point.

On the holidays you’re getting not just the traffic feet but also around the check and some of those things people are willing to move around the menu.

Andrew Barish: It makes sense. And just early on for '19, anything we should realize on mix shift or should we kind of think about that as sort of flattening out as it’s generally been over a longer period of time?

Arne Haak: We hope for the second. It’s always – we’ve tried to be very thoughtful about how we put in price and then when we put it in, we know what we’re going to get and if we’re taking any traffic risk, if we’re pushing any particular item moving. But we think – we generally get what we put in there aside from any big programs.

But there’s nothing currently that we think is disruptive to mix.

Andrew Barish: Okay. And then actually on the restaurant operating expense line, I was a little surprised on occupancy was – I think you mentioned it was intentional increases or expected to continue. I don’t get the sense that’s from new openings at higher rents shifting just given there aren’t a ton of those. But is that Hawaii or what’s driving the occupancy increases and is that expected to continue? And I guess why no mention of the labor if comps were kind of flattish and labor has been inflating 3%, 4%? Was that just a line item you guys did a particularly good job on this quarter and what do we expect for wage inflation in '19 please?

Arne Haak: So there’s kind of two questions there.

First on the occupancy and then we can talk a little bit about the labor. First, on the occupancy, your intuition is right. A big piece of that is Hawaii. There is a little bit of an underlying – some upward pressure as we – some of our longer lease restaurants are – as we have to go and renegotiate a new term. You’re seeing a little bit of that.

And the newer restaurants right now are coming in probably at the high end of – if you look at the range of what we pay for rent in terms of occupancy as a percentage of sales. Going into 2019 and if you’ve heard a couple other people talk about this, we’ll see a little pressure on that line as well but it’s not entirely big. It’s maybe $0.01 a share from the new lease standard. So that’s kind of the – there’s a couple different moving pieces there, but the biggest one last year was Hawaii. In terms of labor, we didn’t really call it out.

It’s kind of been going on for several years. As we’re going through our planning, it’s like this is another year, it’s going to be kind of 3% to 5%. 3%, 4% is kind of the goalpost that we’ve been. In 2018, I think the team did a really nice job and their productivity actually picked up a little bit on a full year basis. So it’s just one of those things that we have to keep managing and we keep pushing on.

And so at the restaurant level, we certainly – if things play out the way we think they will in terms of food costs and labor, we’re probably going to face some pressure there. And it’s certainly very manageable. It’s not big. And if you look at kind of the rest of our guidance, you’ll see we’re kind of scaling back some other things. Marketing’s a little lower, G&A should be a little bit lower as a percentage of sales and we’re trying to manage the overall margin as well.

Andrew Barish: Thank you.

Arne Haak: Sure.

Cheryl Henry: Thanks, Andy.

Operator: We can now take our next question from Brian Vaccaro from Raymond James. Please go ahead.

Brian Vaccaro: Hi. Good morning and thank you. Arne, just back to that comment on the lease standard, the change in lease accounting rules I think you said about a net $0.01 headwind. Could you walk through how that will flow through the model into '19?

Arne Haak: It will show up in the first quarter and we’re going to lose the gain on sale leasebacks that we’ve been amortizing into lease expense. That is not – we don’t have a lot of recent sale leasebacks, but it’s kind of throughout the full year.

Brian Vaccaro: Okay, all right. I certainly understand that dynamic. Okay. And on the marketing and advertising, I wanted to ask. It looks like you increased the spend in the fourth quarter with reinvesting some of the tax savings spend coming down a little bit in '19 as a percent of sales.

I guess could you comment on how the broader marketing strategy performed versus expectations in '18 and how you might be adjusting tactics heading into '19 whether they be where you’re spending, just how you’re communicating with the guests?

Cheryl Henry: Hi, Brian. So I won’t give a full playbook on our marketing plan and our tactics. What I’ll say is 2018 was the year we talked about making an investment. It was more along the lines of building foundational things for initiatives that we want to do in the future. So whether that be a new e-commerce site that we invested in that allows us now to sell experiences versus just gift cards and that’s something we’ll be looking at.

And so types of investments were really in 2018. I think what you’ll see is kind of a shift back to, okay, let’s get some of those now in place. Let’s go test them and roll them in, in addition to kind of our traditional approach that we use for digital email, et cetera.

Brian Vaccaro: Okay. And Arne back to the fourth quarter comp, sorry if I missed this, but the average check you said was up 2.5.

How much pricing was in the menu in the fourth quarter and how are you approaching pricing or thinking about pricing into '19 given the certain labor backdrop that you had mentioned before?

Cheryl Henry: Yes, so pricing was just under – right about 2.3%, 2.4% in the fourth quarter. As we look towards '19, I mentioned to Nicole where for the year looking just under 2% right now. And again, as we go through the year that’s something we do on a regular basis is review opportunities, being reluctant pricers. But if there is an opportunity to take it and we need to do that, we will do that.

Arne Haak: The first quarter price is around 2.2, Brian.

Brian Vaccaro: Okay, great. And then just last one I wanted to ask you about labor and Andy was asking about the wage inflation. But can you help us just put in context what was wage inflation in '18 and what does wage inflation look like in '19?

Arne Haak: They’re pretty similar numbers. It was just under 4% for us. In '18 we think kind of the goalpost are 3% to 5%.

And about half of that inflation is coming from minimum wage.

Brian Vaccaro: Okay, great. And sticking with that theme, the last one for me, can you give us an update on turnover at both the manager and hourly level, sort of maybe where that absolute level is and how is that compared to 12 or 18 – over the last 12 to 18 months? And any initiatives that are currently in the works or playing through '19 to hopefully drive retention going forward? And that’s it for me. Thank you.

Cheryl Henry: Thanks, Brian.

Sure. So we talk about frequently our turnover, it’s something we invest in from a standpoint of developing our people and providing benefits for them as well as some of the initiatives that we talked about taking our tax savings and investing in retention efforts around our people. Those are ongoing. Our turnover at the management level is well below in the fine dining category as it is for the hourly as well. And again, it’s something we invest for years.

So I realize the labor market is getting tighter and become quite a topic for everyone. Because of the level of our service and the level of what we produce for our guests, people have always been an important investment for us. And so that continues every year. And whether again that’s a form of training, education, development opportunities for the team or actual retention efforts that are more on the monetary side.

Brian Vaccaro: Thank you.

Operator: That concludes today’s Q&A session. I would now like to turn the call back to the host for any additional or closing remarks.

Cheryl Henry: Again, thank you all for joining us on the call this morning and I look forward to speaking with you all in the near future. Have a great day.

Operator: Thank you.

That concludes today’s conference. Thank you for your participation, ladies and gentlemen. You may now disconnect.