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Edited Transcript of DFRG earnings conference call or presentation 24-Feb-17 1:30pm GMT

Thomson Reuters StreetEvents

Q4 2016 Del Frisco's Restaurant Group Inc Earnings Call

Wichita Feb 24, 2017 (Thomson StreetEvents) -- Edited Transcript of Del Frisco's Restaurant Group Inc earnings conference call or presentation Friday, February 24, 2017 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Tom Pennison

Del Frisco's Restaurant Group, Inc. - CFO

* Norman Abdallah

Del Frisco's Restaurant Group, Inc. - CEO

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Conference Call Participants

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* Nicole Miller Regan

Piper Jaffray & Co. - Analyst

* Will Slabaugh

Stephens, Inc. - Analyst

* Brett Levy

Deutsche Bank - Analyst

* Jason West

Credit Suisse - Analyst

* Brian Vaccaro

Raymond James & Associates - Analyst

* Paul Westra

Stifel Nicolaus - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Del Frisco's Restaurant Group, Inc. fourth quarter 2016 earnings conference call. Today's conference is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session and instructions will be provided at that time for you to queue up for a question.

I would now like to turn the conference over to Tom Pennison, Chief Financial Officer. Please go ahead, sir.

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Tom Pennison, Del Frisco's Restaurant Group, Inc. - CFO [2]

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Thank you, Yolanda, and good morning, everyone. By now, you should have access to our earnings press release for the 16-week period ended December 27, 2016. If you have not already reviewed it, it may be found at our corporate website, www.dfrg.com under the Investor Relations section. Here with me today is Norman Abdallah, our Chief Executive Officer.

Before we begin, I would like to remind everyone that part of our discussion today will include forward-looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them. We refer you to today's earnings press release and our SEC filings for a more detailed discussion of the risk that could impact our future operating results and financial condition.

In addition, we will also be referring to restaurant-level EBITDA and adjusted net income this morning which are both non-GAAP measures. We have therefore provided a reconciliation of these measures in the earnings press release tables to the most directly comparable financial measure presented in accordance with GAAP.

With that introduction, I will start off with a high level financial review of the fourth quarter followed by additional commentary on the three individual brands. Afterwards, I will touch upon our guidance for 2017 before handing the call over to Norman.

For the 16-week period ended December 27, consolidated revenues increased 4.4% to $119.2 million from $114.1 million in the year ago period. We benefited from a net 15 additional operating weeks across our concepts as well as a blended 0.8% increase in comparable restaurant sales. Notably, the fourth quarter marked the first time that all three concepts generated positive comparable restaurant sales and this was despite a 110-basis point drag from our locations in the oil-challenged Houston market.

As shared in the past, we had thought rolling over the oil downturn which began in the back half of 2015 would have been accretive as it relates to year-over-year trends. But unfortunately, the weakness did affect in those in the [loads] restaurants did continue. And while we did not experience a bounce immediately after the election, our private dining sales did provide a strong close to the quarter.

Turning to our key cost line items on our P&L, total cost of sales as a percentage of revenue improved by 120 basis points to 27.8%, down from 29% in the year ago period, primarily due to continued favorability in beef cost, which fell approximately 6% on a year-over-year basis as well as the benefit of Del Frisco's Grille's growing weight on our overall restaurant portfolio.

Restaurant operating expenses as a percentage of revenues increased by 30 basis points to 46.3% from 46% in the year ago period, primarily due to higher occupancy costs driven by newer restaurants, some lease renewals and increased property taxes. Restaurant-level EBITDA increased 8.7% to $27.8 million in the fourth quarter from $25.6 million in the year ago period. While the margin increased 100 basis points to 23.4% versus 22.4% in the prior year.

General and administrative expenses increased to $9 million from $6.5 million in the prior year period and as a percentage of revenues increased to 7.5% from 5.7%. This increase was due in part to a $0.8 million in reorganizational severance cost related to the elimination of 8 positions as well as increased legal cost during the quarter.

GAAP net income was $7 million or $0.30 per diluted share, and this compared to prior year GAAP net income of $7.9 million or $0.36 per diluted share. Our GAAP net income included $0.9 million in lease termination cost, $0.8 million in reorganization severance charges and $0.6 million in impairment charges, which totaled $2.3 million on a pre-tax basis. The lease termination and impairment charges relate to costs associated with two Sullivan's locations we will close during 2017. Excluding these one-time items, adjusted net income was $8.6 million or $0.37 per diluted share, compared to adjusted net income of $8.3 million or $0.34 per diluted share during the prior year.

Moving to our individual brands and further detail, for Del Frisco's Double Eagle, revenues increased 5.2% to $58.4 million in the fourth quarter from $33.1 million in the year-ago period. This top line improvement was due to sales generated at new two non-comparable restaurants, our newest relocated location in uptown Dallas and our Orlando restaurant, along with a 0.1% increase in comparable restaurant sales. Comparable restaurant sales consisted of a 0.5% increase in average check that was partially offset by a 0.4% decrease in traffic. Note that our Houston Del Frisco's had a 130-basis point drag on comparable restaurant sales during the quarter given the small comparable base.

Del Frisco's restaurant-level EBITDA margin increased 140 basis points to 30.8% due primarily to lower cost of sales driven by favorable beef costs. For Sullivan's Steakhouse, revenues increased 0.6% to $26.2 million in the fourth quarter from $26 million in the year-ago period. This improvement in revenues was due to a 0.9% increase in comparable restaurant sales consisting of a 2.4% increase in traffic that was slightly offset by a 1.5% decrease in average check. I would note that one location was removed from the comparable base in Q4 as it was undergoing remodel activity that limited use of a significant portion of the restaurant.

During the last October, we celebrated Sullivan's 20th anniversary with several promotions such as a three-course meal for $35, 20 consecutive days of extended happy hour offerings, along with new food and wine pairings. These promotions drove higher traffic but with a lower overall average check. Sullivan's restaurant-level EBITDA margin did decrease by 190 basis points to 17.5% due primarily to higher occupancy as well as increased marketing advertising cost associated with the anniversary promotions.

For Del Frisco's Grille, revenues increased 6.2% to $34.6 million in the fourth quarter from $32.5 million in the year-ago period. This top line improvement was due to a net 16 additional operating weeks, as well as an increase in comparable restaurant sales. The fourth quarter marked the concept's first full quarter of positive comparable sales and through year-end, the grill has now generated five consecutive fiscal periods of positive comparable sales. We are encouraged that the constructive steps we have taken to improve the dining experience in execution over the past 18 months are beginning to play out in sales growth.

Comparable restaurant sales increased 2.1% driven by a 0.6% increase in traffic and a 1.5% increase in average check. There were 14 restaurants within the Grille comparable base in the fourth quarter out of a total of 23 restaurants. Del Frisco's Grille's restaurant-level EBITDA margin increased 220 basis points to 15.2% as we benefited from lower cost of sales, improvements in restaurant operating expenses and lower marketing and advertising cost.

Turning to our liquidity and balance sheet, as of December 27, we had cash and cash equivalents of approximately $14.6 million and no outstanding debt under our credit facility. During the fourth quarter, we repurchased 303,187 shares of outstanding stock for $4.8 million under the existing $25 million repurchase program, which as of year-end had $17.2 million remaining under our current authorization. Subsequent to year-end, our board of directors approved an increase in the remaining authorization to $50 million. We will continue putting our capital to work in the right way and do view share repurchases as an effective means to enhance value for our shareholders.

Turning to our annual guidance, we laid out various ranges in our earnings release issued earlier this morning based on current information for our 52-week period ended December 26, 2017. I will not be reviewing all the details but wanted to make mention of a few items. Specifically, our cautious stance on comparable restaurant sales reflects both the uncertain operating environment and our decision to eliminate lunch operating hours in seven Sullivan's Steakhouse locations. Additionally, we do not have any pricing planned to 2017 with a focus toward growing check through sales mix with enhanced offerings and reduced discounting.

I would also note that during the first quarter of 2017, we lost nine operating weeks related to one Sullivan's that had to be unexpectedly closed due to a fire that occurred on December 31. That location will reopen next week but will be excluded from the comparable base for the first quarter. We expect cost of sales to be favorable as a percentage of revenue versus 2016 due to lower expected beef costs year-over-year, the Grille's growing weight on our overall cost of sales as well as supply chain initiatives that we are currently working upon.

We do not expect much, if any, restaurant-level EBITDA and adjusted EBITDA margin growth relative to 2016. We are making significant investments this year and upgraded via touch points, technology, bringing on new talent and incurring various professional fees with the intension that they will provide a return and move our business forward. Most of these investments cannot be capitalized and therefore run through our P&L, some at the restaurant operating level and some at the G&A level.

The increase in our G&A range versus 2016 is solely the result of increased non-cash stock compensation costs as well as planned incentive compensation which was de minimis during 2016.

These increases were partially offset by a reduction in other ongoing G&A cost. Separate from G&A, we will incur approximately $3 million in consulting fees and related expenses for a Del Frisco's Grille engagement currently underway with Bain Consulting. Norman will explain the objectives of this project, but for modeling purposes, we expect $1.25 million in the first quarter, $1.5 million in the second quarter with the remainder in the third quarter. As these fees represent a one-time expense, we will be adjusting them out of adjusted net income. But in the aggregate, they amount to approximately $0.09 hit to GAAP diluted EPS.

Both the Del Frisco's Double Eagle in Plano, Texas and the Del Frisco's Grille in Downtown Manhattan were scheduled to open in the May-June timeframe. The Del Frisco's Grille in Westwood will now open in early 2018.

During the year, we will be also closing two Sullivan's. As discussed, we have already incurred related impairment and lease termination charges during Q4 of 2016, but we will have some incremental closing costs beginning in the second quarter. We will also be remodeling three Del Frisco's by the end of the third quarter and four Sullivan's by the end of the year.

With that, I will now turn the call over to Norman.

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Norman Abdallah, Del Frisco's Restaurant Group, Inc. - CEO [3]

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Thanks, Tom. And good morning, everyone. I am so pleased to be here and share our plans for 2017 and beyond. I am also looking forward to getting to know you all better over the coming months. Although I am still new to the CEO role, I have served on the Del Frisco's board for the last six years. This has, in turn, enabled me to move quickly in effecting positive change than somebody coming from the outside. Above all, let me say that having spent a great deal of time over the past several months visiting many of our restaurants, I have come away with a great respect for the deep culture around our team and around the guests. Having the right culture is critical in the hospitality business but so hard to build when it isn't there.

At the corporate level, we have established six overarching initiatives for this year. Number one, build discipline and accountability and measurement. Number two, differentiate and honor the brands. Number three, elevate the guest experience. Number four, enhance the team member journey. Number five, establish processes and communication. And number six, plan and implement a long term growth strategy.

Without going into specific details on all of these, let me touch upon some key items of interest to our shareholders. In January, we implemented an organizational alignment with dedicated management teams for each of our three concepts. We think this will help us do a better job in building accountability, differentiating the brands from each other and ensuring that each brand earns the right to grow while providing us with a appropriate rate of return.

We have so far announced two brand presidents but also have established head chefs, a lead event coordinator and dedicated training resources for each concept. Not having crossover is the best way to identify and protect respective brand pillars, brand cultures and brand voices so that we can grow our top line through comparable restaurant sales and development.

At Del Frisco's Double Eagle, we named Ray Risley as Brand President. Ray has been with us for 19 years, most recently as SVP of Ops for Del Frisco's Grille and was also VP of Ops for Sullivan's and ran the first New York and Dallas Del Frisco's Double Eagle years ago. He is a phenomenal operator and during his tenure as the leader has helped solidify the foundation of two of the three brands and create a positive momentum in each.

At Sullivan's, we hired Scott Smith as Brand President. Scott co-founded and was CEO of Day Star Restaurant Group, the parent company of Texas Land & Cattle and Lone Star Steakhouse and also served as SVP of Romano's Macaroni Grill. He has a deep understanding of restaurant brand positioning coupled with robust franchise experience which as I will explain more shortly will be beneficial to us in maximizing our returns of this concept.

At Del Frisco's Grille, we are near completion of our search process for the Brand President, and we will be able to name that individual by sometime in March. This person will have a marketing and strategic background to align with our great operators, as we look at the Grille and really understand how to move the concept forward over the next, one, three, and five years.

To that point, and as Tom mentioned earlier, we are in the process of a deep dive engagement with Bain Consulting on consumer research. Our goal is to really understand the emotional state of the consumer as they use Del Frisco's Grille today as well as making sure that we understand the share of wallet the consumer is using.

There are actually 24 different emotional states that a consumer has and we will do best by focusing on the top tier right corner of what we can do very, very well in addressing their needs. This project began in early January and should be wrapped up by the end of March. Although we will not be able to share of our findings for competitive reasons, they have been tasked with helping us ask and answer questions such as what are the highest priority growth opportunities for the Grille, by guest segment, by need state, by occasion and day park. How do we sharpen our focus on how to win? Aligns our target segments, occasion and need states to strengthen our competitive differentiation? How do we bring that positioning to life and deliver it on the front line? How do we develop the strategic pillars and key initiatives required to support the growth agenda as it relates to menu, pricing, marketing, guest experience, operations, business model, organization, technology and et cetera. And lastly, how do we then translate the strategy into a detailed roadmap and initiative plan?

The insights from this study will not only have positive implications for our existing restaurants, but will also be plugged into our real-estate model, so that we are even more disciplined in generating higher cash on cash returns.

We have also hired a technology consultant that just completed a strategic review of our technology platform. It is currently a lot more difficult than it should be for us to capture and then analyze various types of guest data. Better understanding spending activity will help us foster greater guest loyalty.

The other area of focus is automating more functions so that our managers can spend less time doing paperwork so they can attend to our team and our guests while providing additional tools that will enable them to manage the middle of the unit-level P&L from a proactive standpoint, rather than being reactive.

We have also engaged a consultant around supply chain distribution, someone that I have worked with in the past at several companies. In those cases, we typically saw about 250-basis-points improvement in cost of goods while approaching supply chain management a little bit differently. That is not to say we can accomplish that same level of savings here since we sell more protein, but still we already have visibility into savings and the supply chain and our distribution channels. Note that our cost of sales guidance discussed earlier is inclusive of our expected savings here.

Now, let me review our recent and upcoming development activities. During the fourth quarter last year, we opened our Del Frisco's Double Eagle in Uptown Dallas and two Del Frisco's Grille in the Nashville area. One in the Gulch between downtown and Music Row and then in the suburb of Brentwood.

This year, we will be opening a Del Frisco's Double Eagle in Plano, Texas and a Del Frisco's Grille in Downtown Manhattan. However, the Del Frisco's Grille in Westwood, Massachusetts has now been pushed back to early Q1 2018 so that we can incorporate the learnings from our Bain Consulting project into this restaurant. Note that this particular location will also be our first true Grille of the future. It will feature a smaller footprint while still keeping the same number of seats and a new kitchen design tied to get in better productivity. This prototype also creates more real estate options at substantially reduced build-out costs.

Looking to 2018 and beyond, I would now like to articulate where we see our growth opportunities across all three concepts. At Del Frisco's Double Eagle, we have generally followed a pattern of opening about one location per year for the last several years. In 2018, we do expect that number to increase to about two openings, and actually are in the process of negotiating four separate LOIs. This is not to say that all four LOIs will come to fruition or that all four will be open next year. But we want to convey that we are going to be stepping on the gas in developing more restaurants for our flagship brand.

One of the LOIs that we are negotiating will be our first smaller Double Eagle prototype that will allow us to enter into new markets or open a second location in an existing market that we cannot have done in the past.

At Sullivan's, we intend to have a franchise -- refranchise program in place by the end of this year, spearheaded by our new Brand President, targeting small- to medium-tier markets. There will be little to no company development for this concept on a go-forward basis and we also move to close underperforming locations within a reasonable timeframe. This includes two restaurants this year, as Tom mentioned earlier, and possibly a few more over the next two years depending on circumstances at that time. Our intention as always is to allocate our capital resources properly to the most promising opportunities.

At Del Frisco's Grille, we intend to accelerate development going into 2018 but with continued acceleration over the next three to five years by targeting real estate that fits into the framework developed from our Bain project. We view the concept as a growth vehicle that can reach a multiple higher than where we stand today with a clear understanding of our target consumer and only slight adjustments to its current model.

I know that I have covered a lot of ground today, and I appreciate your patience and time. As a management team, we are focused on short- and long-term shareholder returns and making sure that we properly allocate our capital. We are very excited about all three concepts and the direction of where we are headed because we know we can take Del Frisco's Restaurant Group to the next level.

So, with that, operator, we will turn the call over to you as we open up the lines to any questions from our listeners.

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Questions and Answers

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Operator [1]

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Certainly. Thank you. (Operator Instructions) We will take our first question from Nicole Miller with Piper Jaffray. Please go ahead.

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Nicole Miller Regan, Piper Jaffray & Co. - Analyst [2]

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Thank you. Good morning. On your earlier prepared comments, Tom, I think you mentioned how you won't be taking much price and then eliminate some discounting to help improve comp. Can you talk a little bit of the latter element? How do you adjust discounting and remove that? Is it through the marketing message or is it through the menu itself?

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Norman Abdallah, Del Frisco's Restaurant Group, Inc. - CEO [3]

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Yes, Nicole. This is Norman. So, it will not be done through the menu. It will be done through our marketing message and different programs that we have run in the past. And some of these programs have been run year-over-year. And as we have dived into a return on these type of programs, we have not seen these programs gain traction. So, there will be other things that we will do to talk specifically to the consumer, and we will do that in different ways throughout all three brands.

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Nicole Miller Regan, Piper Jaffray & Co. - Analyst [4]

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That makes sense actually. Thank you. And then, you talked about a smaller Double Eagle. Can you talk more about that? And I guess what I would be interested in understanding is, let's say these new smaller Double Eagles get closed eventually to a Grille, how similar or dissimilar can you keep them when you are -- if you talk about shrinking a Double Eagle?

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Norman Abdallah, Del Frisco's Restaurant Group, Inc. - CEO [5]

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Yes. Sure. So, if you look at the Double Eagle and the market that we have in LOI and now, it is a market that has severe traffic issues in the market. And for us to go in with a flagship big box Double Eagle, 13,000 to 16,000 square feet, it will be very difficult for us to go into this market.

So, what we are doing is we are looking at this market and splitting the market into the big and bold build-out of a Double Eagle, the atmosphere, the menu, It will all be the same. But It will be done on a smarter footprint and we will take the learnings that we did with the project and the kitchen designer that we brought in to redesign the Del Frisco's Grille and bring that into the smaller footprint as well. So, we will still be able to maximize seat count in a smaller prototype, but do it through reengineering the size of the kitchen and reducing the overall square footage.

The smaller flagship Double Eagle will still be a Double Eagle, and there won't be any crossover into what we view as emotional states of the consumer when they are coming into a Grille versus the Double Eagle brand.

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Nicole Miller Regan, Piper Jaffray & Co. - Analyst [6]

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Thank you.

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Norman Abdallah, Del Frisco's Restaurant Group, Inc. - CEO [7]

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You bet. Thank you, Nicole.

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Operator [8]

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We will take our next question from Will Slabaugh with Stephens. Please go ahead.

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Will Slabaugh, Stephens, Inc. - Analyst [9]

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Yes. Thanks guys. Wanted to ask a little more about the recent openings. You mentioned Nashville. You mentioned the Double Eagle relo in Dallas. So just curious, your initial thoughts on what you are seeing out of all three of those?

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Tom Pennison, Del Frisco's Restaurant Group, Inc. - CFO [10]

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So I will touch down with the Double Eagle. Year-over-year, we saw a significant improvement over the old site. As we spoke on prior calls, we anticipated the new location on an annual basis to probably be about $4 million more in revenue than the prior site. And today, we are very confident in that number that we have spoken to before, so we have been very pleased with the Double Eagle that is in uptown Dallas. We have equally seen the two Grilles in the Nashville area perform well. We do have one that performs better than the other just from an average weekly sales but that is also what we anticipated in our modeling.

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Will Slabaugh, Stephens, Inc. - Analyst [11]

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Got it. And then on the Sullivan's side, curious, a couple of things there. So, you are moving lunch from a few stores. Can you talk about kind of what led to that update on the current thinking around Sullivan's, if you do not mind, in terms of how you feel like it fits in, kind of what the broader company and then any sort of other plans going forward that you are contemplating, if you are willing to share those?

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Tom Pennison, Del Frisco's Restaurant Group, Inc. - CFO [12]

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So, as we look to the future of Sullivan's, we are very focused on each concept has to earn the right to grow and there are, as we look to franchising Sullivan's in the future, it is also important to demonstrate and show the strength that this concept does have. Now, a steakhouse, especially a high-end steakhouse, there are certain geographic locations and really markets you are in where lunch can make sense. But we had several locations where we were opening for lunch but the lunch was not profitable.

So, as we evaluated it and one of the things that we have been doing is evaluating our entire portfolio of restaurants, we identified seven locations where being open and operating for lunch was actually a drag to restaurant-level EBITDA, and that if we closed lunch -- when I say close lunch, we are really speaking to ala carte lunch. We will always operate for private dining events and special events especially around the holidays, we backed -- we will still do that, but that it would be an improvement to the margins and from a EBITDA basis, in some cases accretive by closing for lunch in these locations.

Additionally, we had a few locations that from a margin standpoint and in one case specifically, it is just been a bad site since it opened for Sullivan's, while it had been breakeven for a while, it is just not worth the continued operation. And that is one of the sites we will be leaving here in 2017.

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Norman Abdallah, Del Frisco's Restaurant Group, Inc. - CEO [13]

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Yes. And, Will, as you look at -- Tom commented on the steakhouse segment and if you look at -- as we continued to do work around our brand pillars, and voice and architecture, going back to Sullivan's original roots, was a lively night out. And if you look at our highest performing Sullivan's out there, they are in markets where the guests come in and celebrate an evening basically from start to finish. So, really focusing in on that as we go and not only target the box and what we are doing with this concept, but as we look to the growth model towards the back end of the year on a franchise and refranchise program and how we will target certain markets and certain areas to be able to launch our franchise program into.

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Will Slabaugh, Stephens, Inc. - Analyst [14]

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Got it. Thank you.

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Tom Pennison, Del Frisco's Restaurant Group, Inc. - CFO [15]

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Thanks, Will.

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Operator [16]

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Thank you. Our next question will come from Brett Levy with Deutsche Bank. Please go ahead.

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Brett Levy, Deutsche Bank - Analyst [17]

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Good morning. Continuing on with your last comment about the franchising and the refranchising, and I understand it is early, but can you give us a little bit more in terms of how much of the system do you think it would be? What kind of royalty structure you would be looking at? Are these going to be above, in line, below average margin units? And how are you thinking about the G&A support? And then, I have just a couple of questions on the Grille. Thanks.

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Norman Abdallah, Del Frisco's Restaurant Group, Inc. - CEO [18]

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Yes. So, Brett, as far as the franchise, again, we are still working on the entire model right now. We will complete that, call it in the next six months and start everything on the back half of the year. We have done some early analysis on it, but with my experience in the franchise world, both domestically and internationally, and having a board that we have with three of our board members have heavy experience, we are spending some time on this to make sure that we really get it right. The franchise model, as you know, is a very capitalized model to be able to grow business and the royalty stream that we will take with that and find the right partners to bring the brand forward, all that work is being done right now. So, we will have that up and running completed within the next six months. As we complete that, we will be able to share more.

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Brett Levy, Deutsche Bank - Analyst [19]

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And on the Grille, you have pushed back the opening into 2018 for your Grille of the future, but you have also talked about a move to accelerate the expansion. How much time are you going to give the Massachusetts unit before you step on the gas or are you going to, once ground's broken you are already moving forward with the others or are you going to take some time to learn from the changes and how it is being received by the customer? Thank you.

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Norman Abdallah, Del Frisco's Restaurant Group, Inc. - CEO [20]

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Yes. You bet. So, the reason why we delayed Massachusetts, it could have opened in the fourth quarter, but as we complete the strategic road map for the Grille of the future, we want to layer that into the Boston restaurant. There are sites that we are targeting now that we have enough data on the key components of the Grille that are really working well for us right now. And management again has spent about a year and a half on the Grille of the future and implementing some very impactful initiatives into our current Grilles that were showing very good returns.

As Tom talked about, we are seeing six periods of positive comp store sales out of that brand. So, it will be a development plan where we know some early findings on where to go as we go into 2018 and we have put out LOIs in the country. The acceleration will start to come on the back half of 2018, working with our real estate team to take the data that we have not only learned from Bain and how to target, but then some of the key touch points as we move forward on the Grille as well.

And again, the Grille's foundation, it is taking the consumer emotional state and really targeting some menu development, touch points in that emotional state and how we continue to talk to the consumer moving forward, and then we will have the data to lay into our real estate model as early as the next couple of months. So, that'll help us from the real estate perspective as we target different markets.

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Brett Levy, Deutsche Bank - Analyst [21]

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And finally, if you had to quartile your units, there are roughly 2,000 Grilles right now, how do the bottom quartile look in terms of performance? You used to talk about it from a client's perspective. How would you categorize the bottom quartile? Thanks.

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Tom Pennison, Del Frisco's Restaurant Group, Inc. - CFO [22]

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Right now, the bottom quartile is more class-driven. We are seeing great strength on what we used to refer to as a core openings in 2015 and 2016. We still have some softness in our class of 2014, which but has been improving. It is still today, as we look to the overall margins of the Grille concept, is where the significant drag is to the concept. But once again, it has been improving.

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Operator [23]

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Thank you. We will take our next question from Jason West with Credit Suisse. Please go ahead.

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Jason West, Credit Suisse - Analyst [24]

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Yes. Thanks, guys. I guess on the comp outlook that you guys provided, you said you are running positive year-to-date, but you are guiding to kind of flattish for the year. Just can you talk a bit about what you are thinking there? And maybe we have heard some companies saying that January was good, but February has kind of fallen off. I do not know if maybe you have seen that and that is kind of causing you to be a little more cautious.

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Tom Pennison, Del Frisco's Restaurant Group, Inc. - CFO [25]

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So, a few things as we look to our comp guidance. First and foremost, some of the lower guidance relates to a reduction of the lunch sales for Sullivan's. So, from a pure year-over-year, there'll be a reduction. And if you look at it from when we do it just to quantify that, it is like $1.3 million of revenue coming out of the Sullivan's concept, which is not being pulled out of the comp. So, some of that drag to the overall comp range comes from that reduction of lunch.

Beyond that, to your comment as far as what we are seeing so far this year, overall, the first quarter, if you take one week out of it, which happens to be the week when Valentine's Day took place, we definitely were at the -- above the top end of our range. However, we definitely saw a negative impact to the fiscal week that had the Valentine's Day shift when it was a Sunday to a Tuesday, as well as that week also included some challenging weather in the northeast that impacted some of our restaurants.

But as we look to just the greater macro environment and once again, when we look at that comp, timing to launch as well as, I alluded to, we have four remodels we are doing and also both in Sullivan's as well as some in Del's, which sometimes that can negatively impact the comps. We do not always pull, we only pull it out of the comp base if significant parts of the restaurant closed and in some of the work we have done this year that won't always be the case.

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Norman Abdallah, Del Frisco's Restaurant Group, Inc. - CEO [26]

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Yes, and the other thing too is as we move away from discounting across the three brands and start to change the brand voice and how we speak to the consumers, the great things about the Company is the majority of the dollar spend are through digital are already in the Company. How we target that digital will be a little bit differently and track the return on invested capital that we use on our advertising dollars. So, some of that is built in as we continued to build the messaging and start to execute the new plan as we get into Q2 and Q3. And then, we will start to see some pick-up as we go into Q4.

So, anytime that you go down this path, you are very cautious as you move forward with it, but from my past experience, I have seen an increase in top line as you get through your third, fourth quarter as you are starting to do this. So, some of that was built into the plan.

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Jason West, Credit Suisse - Analyst [27]

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Okay. Got it. And then on the Sullivan's, it sounds like we are not going to see activity on refranchising until maybe later this year. Can you confirm that? And then, how many units are we talking about that would be in the small to medium markets? At what percent of the base there are we looking at?

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Tom Pennison, Del Frisco's Restaurant Group, Inc. - CFO [28]

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First of all, we would not anticipate any impact to 2018. Most of the work this year will be in preparation for that franchising. But as far as the works in 2017 --

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Norman Abdallah, Del Frisco's Restaurant Group, Inc. - CEO [29]

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Right.

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Tom Pennison, Del Frisco's Restaurant Group, Inc. - CFO [30]

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But as far as the impact of refranchising that would be in 2018. So, from that standpoint, as Norman spoke to earlier, we are still working through those details as far as the number of markets and the count. So we do view it as a means to grow Sullivan's at a much greater rate than what it has been over the last five years, for sure.

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Jason West, Credit Suisse - Analyst [31]

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So, you would request development deals when you refranchise?

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Norman Abdallah, Del Frisco's Restaurant Group, Inc. - CEO [32]

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That would be correct.

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Jason West, Credit Suisse - Analyst [33]

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Okay. And then just one final one, on the consulting fees you guys are pulling out for this year, does that encompass all the different add-on consultants and advisers and things that you brought in or is that just for Bain. And I guess I am trying to understand, is there any other expenses like that that are left in the guidance that maybe can go away for next year?

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Tom Pennison, Del Frisco's Restaurant Group, Inc. - CFO [34]

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What is being pulled out is solely for the Bain project, the work we are doing, whether it be the purchasing consultant or technology consultant, that is all in the G&A. That is not being pulled out.

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Jason West, Credit Suisse - Analyst [35]

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Okay. Thank you.

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Operator [36]

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We will go now to Brian Vaccaro with Raymond James. Please go ahead.

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Brian Vaccaro, Raymond James & Associates - Analyst [37]

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Thank you, and good morning. Just a quick follow up on the comp guidance. I just wanted to confirm that the elimination of lunch at Sullivan's, that has occurred already, is that right, in those seven locations?

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Tom Pennison, Del Frisco's Restaurant Group, Inc. - CFO [38]

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That is not correct. We anticipate it to happen in Q2. It has not taken place yet.

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Brian Vaccaro, Raymond James & Associates - Analyst [39]

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Okay. So, it is going to happen in Q2 and its $1.3 million impact for the year over that basically three-quarter period.

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Tom Pennison, Del Frisco's Restaurant Group, Inc. - CFO [40]

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Correct.

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Brian Vaccaro, Raymond James & Associates - Analyst [41]

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Okay. All right. Thank you. On the food cost outlook, Tom, do you still expect to see sort of flat to down 1% on the basket in 2017?

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Tom Pennison, Del Frisco's Restaurant Group, Inc. - CFO [42]

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On the overall basket, we anticipate to, probably between, I would call it flat to down 2%. There are some initiatives we have as we focus to -- as we mentioned with no pricing in place this year, with focusing on some premier offerings, there is going to be some additional offerings we are focusing on that will increase the penny profits, but from a percentage, we will offset that some. So, as we bridge from where we were in 2016 to 2017, we are seeing definitely some improvements on the commodities, but some of that when you are just solely looking at it as a percentage, we will be giving back on the sales mix.

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Brian Vaccaro, Raymond James & Associates - Analyst [43]

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Okay. And sticking with food cost, can you provide some qualitative color on the supply chain savings that you are talking about, Norman, and think you can achieve this year? And maybe just quantify how much in terms of savings you have embedded in your guidance for 2017?

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Norman Abdallah, Del Frisco's Restaurant Group, Inc. - CEO [44]

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Yes. Sure. So, I will let Tom talk about how much of the savings to the back half of the year that we have been embedded. But there is always -- when you come in to a company, you want to focus on the top 20% of the spend, and that is usually 80% of the total spend, or 80% of the items that are in the restaurant. So, there is three key levers that we'd look towards already.

One of the biggest levers is just redoing our entire supply chain management through our distribution network and we are closing in on that. We should have that done within the next 30 days, and when you do that, it usually takes about a quarter to quarter and a half to get it rolled out throughout the entire system. So, that is the biggest lever right now. It doesn't affect the guest at all. It is going in and just reshaping how we distribute goods into our restaurants.

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Tom Pennison, Del Frisco's Restaurant Group, Inc. - CFO [45]

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And what the greatest benefit this, with the work done already, we anticipate call it $700,000 to $750,000; however, that is more on an annual basis, but this will more impact Q4. So, as we look to it, call it a $300,000 to $400,000 impact potentially.

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Brian Vaccaro, Raymond James & Associates - Analyst [46]

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All right. That is helpful. And then just last one from me. What the labor cost outlook look like into 2017? What are you expecting in terms of overall wage inflation?

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Tom Pennison, Del Frisco's Restaurant Group, Inc. - CFO [47]

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As we look to 2017, it is kind of a factor from an entire company. Obviously, there is certain parts of the country that drive this. But assuming no price increase, it is about a 35-basis-point negative impact on the entire company's revenue which we have other initiatives in place that will offset some of that impact.

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Brian Vaccaro, Raymond James & Associates - Analyst [48]

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All right. That is helpful. I will pass it along. Thank you.

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Operator [49]

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We will take our next call from Paul Westra with Stifel. Please go ahead.

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Paul Westra, Stifel Nicolaus - Analyst [50]

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Great. Thank you and good morning. Just a couple of question. First on marketing. Maybe if you guys can give us some examples of perhaps where you expect spending to be sort of changed, maybe more digital maybe more and something less on the other and maybe answer -- you expect to spend more or less or about the same as a percentage of sales? And then maybe lastly, how are you going to distribute the marketing spend between brands, will it be a top down or bottom up process?

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Tom Pennison, Del Frisco's Restaurant Group, Inc. - CFO [51]

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So, first off, as a percentage of sales, we anticipate maintaining relatively consistent. That said, the percentage of working dollars, in our spend, we anticipate to be greater than what is been historically. Our new Chief Marketing Officer has definitely made some strides on defining some things that we will do differently, but still working through some of those models.

Clearly, digital and alternatives to not as much radio or any type of TV, which we have tried some cable TV in the past, but really focusing, I think the digital will still be a strong component. But one of the areas, even separate from the medium used, is having the right messaging and utilizing communications that will actually impact our consumer, which I think that is been an opportunity for us.

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Norman Abdallah, Del Frisco's Restaurant Group, Inc. - CEO [52]

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Right, Paul. And then, to answer the individual comp, those each comps, that is treated differently. So as we look at the total marketing dollars that we are going to allocate across the brands, we really do not look at a percent basis. It is more looking at the individual plans that we will implement into the brands. And we have put in some controls when I talk about the accountability of processes, we have put in some processes in place across all three brands to make sure that the marketing spend that we are doing is the most effective. And, as Tom discussed, really leaning more and having more dollars that are working dollars versus nonworking dollars.

And if you look at the dollar investment that we are making, it is really getting the touch points in the critical keys lined up to be able to send this proper type of messaging. We are also putting in some measurement on every single program that we have put out so we can track the return on the invested spend for marketing dollars that we spend. And we have brought some of the marketing out of the local restaurants back into here where we have a team that will be able to manage it more effectively and then also make sure that the messaging is controlled and resonates with our brand statements across all three brands.

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Paul Westra, Stifel Nicolaus - Analyst [53]

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Great. That is helpful. And then, maybe one last question, maybe I think a follow up to Brett's comments or questions on the development of the Grille. Trying to figure out the learnings from Bain being plugged in and the speed at which you can get that done, maybe what percentage of the Grille develop in 2018? Are sites you already have, maybe, approved? And you are convinced enough regardless of the incremental Bain learnings that they are going to be great sites. Maybe, what percentage of these development, maybe, in 2018, 2019 will be sort of brand new LOIs?

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Tom Pennison, Del Frisco's Restaurant Group, Inc. - CFO [54]

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So, right now, we only have -- we have obviously the Westwood location that we already spoke to, which will be in 2018. We anticipate in 2018 to probably call it a two to three Grille locations, which most of those are LOIs. We have not executed leases yet on those, but we definitely are in the works with several locations in 2018. And then where we will see further acceleration is more so in 2019 and beyond. But we will have more Grille openings in 2018 than we have in 2017.

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Norman Abdallah, Del Frisco's Restaurant Group, Inc. - CEO [55]

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And if you think about it, Paul, from areas where -- going back to the quartile question, Manhattan, DFW areas where we already have very solid Grilles, it is looking at 2018 from that perspective. And then, of course, the Westwood opening where we have two Grilles in the Boston DMA, and we will have our third one that we are opening in Westwood.

So, really focusing the real estate team on those type of markets for 2018 as we continue to put the Bain learnings into effect. And then, as we get into 2019, that is where you will see the development pick up.

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Paul Westra, Stifel Nicolaus - Analyst [56]

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Great. That makes sense. Thank you.

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Operator [57]

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That will conclude our question-and-answer session for today. At this time, I would like to turn the conference back over to management for any additional or closing remarks.

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Norman Abdallah, Del Frisco's Restaurant Group, Inc. - CEO [58]

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Thank you very much. And again, thank you for your time. And as I am spending time in this company on a day-to-day instead of the board level, the biggest takeaway, and I have talked about this at ICR, is just the phenomenal culture and the operators that we have in this company. Out of all the brands and companies that I have been with over my career, this is the best operating team within the four walls of our restaurants that I have ever worked with. So, that is really built the foundation of the Company and we are looking to leverage that over the years to come. So, thank you very much for your time, and, again, I look forward to getting to know you all in the near future. Take care.

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Tom Pennison, Del Frisco's Restaurant Group, Inc. - CFO [59]

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Thank you, all.

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Operator [60]

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That will conclude today's conference. Thank you all once again for your participation.