Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today’s Ruth’s Hospitality Group 2019 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 call 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.

Mark Taylor: Thank you, Sherry, 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: Good morning everyone and thank you for joining us on the call today. The fourth quarter of 2019 marked the end to another year of strong results at Ruth’s Chris Steak House.

For the period, our revenues grew in excess of 6% and earnings grew 3%, despite double-digit beef inflation. All revenue centers were positive in the quarter as well led by the strength of our special occasion business. Looking back at the full year of 2019, I am proud of all the team accomplished. We grew our same-store sales, our total revenues and our EPS, marking our 10th consecutive year of sales and earnings growth. We successfully integrated three new franchise locations into the company system and opened two new company-operated restaurants.

We also continued our evolution of the brand through remodels, enhanced experiences and compelling product offerings for our guests. Overall, our performance remains consistent due to the focus on operational excellence in our restaurants, and I’d like to thank our team members and franchisees for the incredible work they do each day. Our ongoing focus is to evolve and grow our iconic brand. We've done work to better understand our guests, demographics and their evolving needs and behaviors. What we have concluded is twofold.

First, we need to amplify the guest experience by elevating what has worked for us in the past, the traditional steak house business. And second, we need to create additional ways to experience Ruth through increased variety. Let me touch on a couple ways we are doing that. Many of you know our TasteMaker program, which is our wine dinner series that was started more than five years ago. Now, we are leveraging this TasteMaker brand equity throughout our restaurant revenue centers.

If guests want TasteMaker wine dinner experience for a special event in a private dining room, we will curate it for them. If guests love one of the TasteMaker wines, it’s available on our wine list or in the bar through unique pairings and engagement. Our guests can now purchase a gift card to a TasteMaker dinner or even purchase a pass to all TasteMaker dinners in 2020. We believe highlighting the TasteMaker brand in unique ways offers an elevated experience to our guests Secondly, in late 2019, we launched the new bar experience. Over the past five years we have physically expanded or upgraded many of our bars as part of the Ruth's 2.0 remodel initiative.

This past year we introduced a new bar experience that includes new menu and employee training to address our guests’ desire for variety, including new products and price points. Early results of the program, which is in test currently in about a third of our restaurants, have been positive. We continue to evaluate, incorporate feedback from our guests and operations teams and look forward to future rollouts this year. The last initiative that I will discuss is our digital strategy. There is no doubt that technology has played and will continue to play an increasing role in our industry.

However, the nature of our high-touch hospitality-driven brand requires us to be very deliberate in how we introduce it into our business. When we evaluate these with technology, we want to ensure that it reduces friction, enhances the guest experience in an authentic way or increases the productivity of our team. To that end, we've recently launched Gifted Experiences our e-commerce site and our off-premise Ruth’s Anywhere program, which includes sites to go online ordering and delivery in 21 markets. Now that I’ve discussed how the brand is evolving, let me turn to how we grow it. In the fourth quarter, we opened two new restaurants; one is Columbus, Ohio and one in Somerville, Massachusetts.

We are pleased with the early results in both locations. Already in 2020, we have opened one new location in Washington DC which replaced a previous DC location whose lease expired and was closed at the end of 2019. We currently expect to open three more restaurants in 2020, bringing the full year total to four. Restaurants to open later this year include Short Hills, New Jersey and Worcester, Massachusetts in the third quarter and Melville, New York on Long Island in the fourth quarter. We will also relocate one restaurant in Winter Park, Florida in the fourth quarter of the year.

In January, we announced the signing of a new lease for a restaurant in Aventura, Florida and today I am pleased to announce another new location on Long Island, our second restaurant lease signed in our newly acquired territories. For 2021, we now expect to open four company-owned restaurants which include Lake Grove, Long Island; Aventura, Florida; Long Beach, California; and Oklahoma City, Oklahoma. On the franchise side of the business, our partners expect to open one new restaurant in the first half of 2020 in the Philippines. We continue to actively work on additional development opportunities and will provide updates on lease signings as they occur. The last topic I’d like to touch upon is the return of excess capital to our shareholders.

During the year, we returned $41.4 million to shareholders including dividend payments of 15.6 million and share repurchases of 25.8 million. Since 2011, we have returned over $270 million to our shareholders. This was accomplished while continuing to invest in our core, driving our AUVs from 4.5 million to 5.6 million and growing our base of company restaurants, expanding from 63 to 83 locations. We are incredibly proud of this accomplishment and believe that our focus on protecting, evolving and growing our brand will allow us to continue to create long-term shareholder value for the execution of our total return strategy. With that, I’ll turn it over to Arne to review our fourth quarter financial results in more details.

Arne Haak: Thank you, Cheryl. For the fourth quarter ended December 29, 2019, we reported GAAP net income of $14.5 million or $0.50 per diluted share compared to net income of $14.9 million or $0.49 per diluted share during the fourth quarter of 2018. Net income in the fourth quarter of 2019 included a $124,000 in expenses associated with the previously completed acquisition of the three restaurants from our Philadelphia and Long Island franchisee, and $374,000 in closure costs associated with accelerating the closure of a restaurant in Washington DC. Net income in the fourth quarter of 2018 included $250,000 in expenses associated with the acquisition of six restaurants from our Hawaiian franchisee. Excluding these adjustments as well as the results from discontinued operations and certain discrete income tax items, our non-GAAP diluted earnings per common share were $0.52 in the fourth quarter of 2019 compared to $0.50 in the fourth quarter of 2018.

Year-over-year, company-owned restaurant sales growth accelerated to 5.9% in the fourth quarter from 120 million in 2018 to 127.1 million in 2019. The increase year-over-year was driven by new restaurants, a recent franchise acquisition and a 1.4% increase in comparable restaurant sales. Traffic during the quarter, as measured by entrées, decreased 0.5% compared to last year while average check increased 1.8%. Our sales were positive in all three months of the quarter. Our holiday business was particularly strong, up 7% for Thanksgiving, 8% for Christmas Eve and 12% for Christmas Day.

This helped offset the loss of a week of holiday dining in early December due to the late Thanksgiving. It is important to note that the continued improvement to sales cadence since April, which has now continued into the first quarter of this year, early 2020 quarter-to-date sales trends are currently running up in the low-single digit range. Franchise income in the fourth quarter was flat year-over-year at $5 million. Total franchise comparable sales increased 1.2% during the quarter, driven by domestic franchise restaurants which were up 1.7% and slightly offset by our international franchise restaurants which were down 1.7%. Other operating income for the quarter was $2.9 million, up 39% from 2.1 million in 2018.

The year-over-year increase was driven by the higher contributions from our restaurants operating under a management agreement as well as increased gift card breakage income. Now, turning to our expenses, food and beverage costs as a percentage of restaurant sales increased 215 basis points year-over-year to 29.8%. The increase was driven by an 18% increase in total beef cost and was higher than we had guided to on our previous earnings call. Restaurant operating expenses as a percentage of restaurant sales increased approximately 45 basis points year-over-year to 46.2%, primarily due to higher labor and occupancy expenses. Marketing and advertising costs as a percentage of total revenues decreased approximately 35 basis points to 3.3%.

The decrease as a percentage of total revenues was primarily driven by the planned shift in marketing tactics across the periods. G&A expenses as a percentage of total revenues were down approximately 165 basis points year-over-year to 6.4%. The decrease as a percentage of total revenues was primarily driven by cost management initiatives and lower performance-based compensation. During the quarter, we repurchased 208,000 shares for approximately $5.2 million for an average price of $25.11. This brought our 2019 repurchase totals to 1.1 million shares or $25.8 million with an average purchase price of $22.48 per share.

At the end of the fourth quarter, the company had $64 million in debt outstanding under its senior credit facility, which is down $19 million from the third quarter of 2019. Subsequent to the end of the fourth quarter, our Board of Directors has approved a $0.15 per share quarterly cash dividend which represents a 15% increase over the dividend paid in March of 2019. Now, turning to our guidance, I’d like to provide our outlook based on our current information for the full year of 2020 for some of our key financial metrics. Our 2019 beef inflation accelerated in the back half of the year and we expect this to continue in the first half of 2020 in the range of 5% to 10%. We expect modest beef deflation in the back half of the year.

And for the full year, we expect beef inflation to be between 2% and 4% primarily driven by continued retail demand for prime cuts. Based on our current expectations for beef inflation, we expect our cost of goods sold to be in the range of 28% to 30% of restaurant sales. Annual restaurant operating expenses are expected to be between 48% and 50% of restaurant sales, marketing and advertising costs to be between 3.1% and 3.4%. We expect G&A expenses to be between $35 million and $36 million. And we expect our annual effective tax rate to be between 17% and 19%, excluding the impact of discrete income tax items.

Annual pre-opening costs should be between $3 million and $3.5 million based on the timing of new restaurant openings. Capital expenditures are expected to be between $43 million and $45 million. Depreciation expense is expected to be between $23 million and $25 million. We expect our fully diluted shares outstanding to be between 28.8 million and 29.3 million shares exclusive of any share repurchases under the company’s share repurchase program. With that, I’d now like to turn back to Cheryl for some closing remarks.

Cheryl Henry: Thank you, Arne. In closing, I’m excited about the opportunities to grow and evolve our brand. I’m confident in the sales-driving initiatives we have in place and in our ability to evolve the different needs of our guests, while maintaining our core strengths and our operational focus. Our total returns strategy has worked very well for us over the past decade and will continue to create value for our shareholders in the long run. With that, I’d now like to turn the call back to Sherry for any questions you may have.

Operator: Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions]. Our first question is from Brian Vaccaro with Raymond James. Please proceed.

Brian Vaccaro: Thank you and good morning. Just a couple of details for me. On the fourth quarter comps, Arne, what was menu pricing within that and what level of pricing do you expect to maintain in 2020?

Arne Haak: Sure, Brian. For the quarter, we were around 2.2% in the fourth quarter. We have a similar amount of price on the menu for the first quarter of this year.

Brian Vaccaro: Okay. And on the commodities side I think you said beef was up 19%, if I heard correctly. Can you fill us in on what are you seeing in terms of inflation on other key categories within the basket in the fourth quarter?

Arne Haak: The other places that we’re seeing pressure, there’s a little bit of pressure on seafood cost, particularly lobster and there’s some pressure as well on produce cost as well.

Brian Vaccaro: Okay. And in terms of your 2020 outlook – actually on the fourth quarter, what was the total inflation on the basket? Do you have that number handy?

Arne Haak: I do.

One second here. The total inflation for the basket in the quarter was 8.9%.

Brian Vaccaro: Okay, great. And then on the outlook for 2020, I appreciate the color on beef, but what are you seeing in the other areas of the basket, whether it be seafood, any update on what’s going on in the wine market? I know that’s a big item that’s typically stable for you, but any color on the rest of the basket will be helpful embedded in that 2020 outlook? Thank you.

Arne Haak: Yes, I think it’s kind of a continuation of – a little bit of the fourth quarter themes.

We shared with you around beef. Lobster is expected to be pretty inflationary this year. And from a dollar perspective, we expect that to be meaningful. And then there’s a little bit of pressure on produce. We’re not really seeing anything material at this point on our wine cost.

Brian Vaccaro: Okay. And have you – I think your contract on the tenderloin side rolled off maybe in February. Any update on this contract you may have been able to enter into as we go into 2020?

Arne Haak: No new information on locks [ph] to share at this point.

Brian Vaccaro: All right. Thank you.

I’ll pass it on.

Operator: Our next question is from Andy Barish with Jefferies. Please proceed.

Andy Barish: Yes, two quick questions. Can you give us kind of a sense on the enhanced experience initiatives in the bar program? Are you expecting any additional labor, training costs as you look at that rolling out through 2020?

Cheryl Henry: Yes.

So, Andy, it shouldn’t impact that. The good news is, in our restaurants we’re constantly doing training and development of the employees. So this kind of rolls into that as we rollout new items along the way. But we do anticipate as we take the operational and get feedback around the new bar programs specifically and make some changes that we’ll start rolling that out into additional restaurants.

Andy Barish: Thanks.

And then CapEx, Arne, looks like it’s ramping up. Can you give us a little more color on what’s going on there? Is it some of the '21 development that’s leaking into '20 CapEx, or how should we think about that number?

Arne Haak: So, it’s really about new units development, Andy, that’s driving that CapEx. That’s the majority of it. We’re probably going to run about $30 million total between that building the new units that Cheryl announced and also the relocation of our Winter Park restaurant as well. So we have a relocation in the front part of the year in Washington DC that’s going really well and we have another one in the back part of the year.

But that’s the biggest change as you look at our CapEx and think about it is around the real estate pipeline. And of course there’s a little bit more coming to. I think this is about as good as we’ve been on our pipeline this far in advance had four already for 2021.

Andy Barish: Thank you.

Arne Haak: Thanks, Andy.

Operator: [Operator Instructions]. Our next question is from Joshua Long with Piper Sandler. Please proceed.

Joshua Long: Great. Thanks for taking my question.

I wanted to see how much, if any, CapEx is really earmarked for some of these experience amplifications you’ve talked about, Cheryl? I think as we talked about before, a lot of these have been done in a pretty thoughtful way like you do all of your other initiatives. But just curious on what kind of dollars we’re putting against that? And then as we think about that new bar experience that’s in a third of the restaurants now, can you remind us what your thoughts are there in terms of testing before expanding out to a larger part of the portfolio?

Cheryl Henry: Sure. Thanks, Josh, for the question. So on your first question, I think you asked, is there a significant impact to CapEx in regard to roll out? There really isn’t. There’s some new small ware that will go into the restaurants as part of the enhanced kind of dining table experience.

It’s to support some of the new menu items, but not significant in that number overall. And then as far as – I think Andy asked a similar question around is there costs that are rolling into the restaurants? As we do kind of the R&D on these, that’s something that’s put into the marketing budget. So as we think about marketing more as a brand function than we do necessarily just for advertising, and so a lot of those costs are dedicated out of that fund, so not necessarily incremental in the year.

Joshua Long: Great. Thank you.

And then as you think about gaining more experience with the bar test, you’re in a third of the restaurants now. Is that something you would expect to expand here in 2020? Do you want to let it marinate a little bit longer and maybe think about that more as a 2021 opportunity?

Cheryl Henry: Yes. So I think you’ll probably see it spread both years. We are – as you know and you’d stated, we are cautious as to roll out new programs because our number one focus is on the operational foundation of the business. So we don’t want to impact that in any way.

So we do a good deal of tests and we go over longer period of time to make sure we, one, for the operators that they can manage through the new program and it’s working for them. And then two, that the guests ultimately – it’s resonating with them and it’s behaving the way we expect it to. So, probably a little bit more tests with this first group that we’re in, some potential tweaks to the program and then future rollouts towards the back half of the year.

Joshua Long: Great. Thank you.

Would you also be able to provide an update on the off-premise strategy? You mentioned a couple opportunities there, whether it’s through delivery or maybe some of the sides-to-go program. But what are you thinking there and what’s the appetite for giving that Ruth's experience both in-store but then also supplementing it with some off-premise occasions over the course of the year?

Cheryl Henry: Yes, great question, Josh. So delivery for us probably is not going to be as meaningful as it is for other brands. The big part of Ruth's is that it’s kind of the in-restaurant experience. Having said that, we’ve had a lot of these what I would call revenue lines come at the request of guests.

So our sides-to-go program actually is something that’s been in our system. We do every year around the holidays where people say, okay, I’ll make the protein, but I love your sweet potato casserole and I love your creamed spinach, so how can I get that? And so what we’ve done is use technology to take that online. So it’s really about added convenience to the guests and then a way for us to increase share of life, so you can have roots in the holidays, whether you’re in our restaurant or at your house, that’s wonderful for us. It's a connection with the brand. So I don’t necessarily put a significant meaningful sales number on it.

At this point, what I would say is it’s part of our overall package of how do we increase guest awareness of us and how do we keep them tied and build that relationship with them going forward. And right now we’re in – we are in delivery. We have a couple of partners in that. It’s in 21 restaurants. I would not say it’s something that will go everywhere throughout the system, but there is a possibility for expansion in certain markets as the guests demand.

Joshua Long: Great. Thank you. And then last one for me. You mentioned the comps to date here in 1Q being up in that low-single digit range, which is very encouraging given the strong comparison from the prior year. As I look back at my notes I think 1Q '19 had a nice benefit from New Year's Eve shift into that 1Q '19 period.

Can you remind us anything else that we might be lapping over from last year and then provide any comment on what you think might be driving this increased momentum here into the first quarter as well?

Cheryl Henry: Yes. So I think that was the big one from last year. As you mentioned, we had the New Year's Eve shift, so we are comping over that. It seems – so if you go back 10 months, I think we had a fairly – I think if we had concern in the year, it was towards the April timeframe of last year. And since that point, we’ve been encouraged that things have been moving in a more positive direction, and I really think what we’re seeing now is a continuation of that.

We have increased some of the marketing initiatives and new brand campaigns. I can’t quantify that at this point, but we’re excited about that and look to that to continue that momentum.

Joshua Long: Great. Thank you.

Operator: We have reached the end of our question-and-answer session.

I would like to turn the conference back over to Cheryl Henry for closing remarks.

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

Operator: Thank you.

This concludes today’s conference. You may disconnect your lines at this time and thank you for your participation.