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Edited Transcript of RRGB earnings conference call or presentation 30-May-19 9:00pm GMT

Q1 2019 Red Robin Gourmet Burgers Inc Earnings Call

GREENWOOD VILLAGE Jun 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Red Robin Gourmet Burgers Inc earnings conference call or presentation Thursday, May 30, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Guy J. Constant

Red Robin Gourmet Burgers, Inc. - Executive VP & COO

* Jonathan A. Muhtar

Red Robin Gourmet Burgers, Inc. - Executive VP & Chief Concept Officer

* Lynn S. Schweinfurth

Red Robin Gourmet Burgers, Inc. - Executive VP, CFO & Principal Accounting Officer

* Pattye L. Moore

Red Robin Gourmet Burgers, Inc. - Interim President, CEO & Chairman

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Conference Call Participants

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* Alexander Russell Slagle

Jefferies LLC, Research Division - Equity Analyst

* Brian Michae Vaccaro

Raymond James & Associates, Inc., Research Division - VP

* Christopher Thomas O'Cull

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst

* Gregory Ryan Francfort

BofA Merrill Lynch, Research Division - Associate

* Jeffrey Daniel Farmer

Gordon Haskett Research Advisors - MD and Senior Analyst of Restaurants

* John Stephenson Glass

Morgan Stanley, Research Division - MD

* Jon Michael Tower

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Stephen Anderson

Maxim Group LLC, Research Division - Senior VP & Senior Equity Research Analyst

* William Everett Slabaugh

Stephens Inc., Research Division - MD

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Presentation

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Operator [1]

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Good afternoon, everyone, and welcome to the Red Robin Gourmet Burgers, Inc. First Quarter 2019 Earnings Call. Please note that today's call is being recorded. During the course of this conference call, management may make forward-looking statements about the company's business outlook and expectations. These forward-looking statements and all other statements that are not historical facts reflect management's beliefs and predictions as of today and, therefore, are subject to risks and uncertainties as described in the safe harbor discussion found in the company's SEC filings. During the call, the company will also discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles but are intended to illustrate an alternative measure of the company's operating performance that may be useful. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in the earnings release. The company has posted its fiscal first quarter 2019 earnings release and supplemental financial information related to the results on its website at www.redrobin.com in the Investors section

Now I would like to turn the call over to Red Robin's Interim CEO, Pattye Moore. Please go ahead, Pattye.

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Pattye L. Moore, Red Robin Gourmet Burgers, Inc. - Interim President, CEO & Chairman [2]

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Well, hello, everyone, and thank you for joining us. With me this afternoon are Lynn Schweinfurth, our Chief Financial Officer; and Guy Constant, Chief Operating Officer. Jonathan Muhtar, our Chief Concept Officer, is also with us to help answer questions you may have during the call.

I'm pleased to be speaking with all of you as Interim CEO. Let me start by saying that I continue to serve Red Robin with a real passion for this brand and this uniquely fun and welcoming environment, as well as for the casual dining industry.

To provide a bit of background about me, in addition to serving as the Director of Red Robin, I previously had a 12-year career at Sonic where I served in a number of senior management roles overseeing marketing, brand development, franchise relations, company store operations and as President and Board Member, during which time average unit volumes and profits more than doubled. I'm looking forward to bringing this experience to bear in this interim period as I support our executive team and our great team members across the organization to focus our efforts and return the business to sustainable growth and profitability.

As our financial results demonstrate, there is still much work to be done on the turnaround, and I can assure you we are moving with urgency. The Board has engaged The Elliott Group, which has deep experience in our industry, to assist in the CEO search and the Search Committee has already begun the interview process. At the same time, in the 9 weeks since I became Interim CEO, I've worked closely with the management team to narrow the list of critical initiatives and simplify our focus. We are actively working with The Cypress Group on refranchising and reassessing our real estate portfolio. And today, we announced the closure of 10 underperforming units. We have hired an experienced industry leader as our new VP of Consumer Insights and we are continuing our deep dive into all aspects of our business.

These efforts are designed to improve the customer experience, significantly improve cash flow, increase profitability and, ultimately, drive shareholder value. We are confident our initiatives will steadily improve our financial and operational process and that our search process will identify a leader who can accelerate this turnaround.

As we have outlined previously, we are very focused on 5 key strategic priorities: strengthening and stabilizing the dine-in business; continuing to build our off-premise and catering business; improving guest experiences and recapturing our gift of time; implementing digital platforms and technology solutions, and selectively refranchising and evaluating our real estate portfolio. Guy, Lynn and I will share specifics around these initiatives and the progress and positive momentum we are beginning to see.

With that, I'd like to turn the call over to Guy, who I want to remind you, took over full-time this Chief Operating role at the end of January. Guy is going to talk about one of our most important priorities, and that's returning the business to sustainable profitable growth by improving the dine-in experience for our guests. Guy?

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Guy J. Constant, Red Robin Gourmet Burgers, Inc. - Executive VP & COO [3]

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Thank you, Pattye, and good afternoon, everyone. As Pattye said, our first and foremost priority is stabilizing and strengthening the dine-in experience. In order to do so, we are focused on 4 primary areas for operations that will provide the needed focus we require to execute on our operational turnaround.

First is hire, train and retain. Improving the experience starts with hiring the right people, training them properly and being fully staffed as well as reducing turnover, particularly at the general manager level. Our operations leadership team is making real progress against these objectives. While broader industry turnover and staffing challenges have increased in Q1 overall, Red Robin experienced reductions in our hourly manager and general manager turnover from Q4 of 2018 to Q1 this year. And all are at better levels than the average for the casual dining industry. In fact, our manager and general manager turnover levels are closer to best-in-class than they are even to the average. We also have been able to bring our manager staffing levels to 96.8%, a meaningful improvement over where we ended 2018. Having better staffed restaurants and stable management teams is a very important part of any sustainable improvement in operational execution.

Next is manager front of house engagement. We know we can improve the overall guest experience, shorten wait times, reduce walkaways, have cleaner dining rooms, and effectively identify and resolve potential issues by continuously getting our managers on the dining room floor and at the host stand during peak hours. And our efforts are delivering results. Overall satisfaction scores improved throughout the first quarter, reversing a trend that saw a decline throughout 2018 to a low point at the end of Q4. Year-over-year, walkaways are down 4.2%, wait times are shorter, guest complaints on cleanliness and wait times have declined meaningfully, and guests have told us that they've seen marked improvements in problem resolution when there is an issue.

Next is managing the shoulders to peak the peaks. By shifting the labor investment from overstaffed shoulder hours during the day to understaffed peak hours, we are able to improve throughput on our busiest shifts, thereby capturing the greater sales opportunity that is available during those peak times without having to make incremental investment in labor expense.

Our continued focus on staffing has yielded improved guest scores for taste of food, temperature of food, speed of service and execution of our bottomless promise during the first quarter.

And last is delivering on the promise of Maestro. This effort focuses our kitchen managers on the active coordination of the fast and accurate delivery of high-quality food at the proper temperature. And as an added benefit, ticket times have shown continuous improvement benefiting speed of service. We have also started to reduce our menu complexity while still providing guest the options they desire, and we have narrowed our culinary focus to concentrate on improving the consistency and quality of our core menu products. These include, of course, our gourmet burgers, chicken buns and, of course, our signature Bottomless Steak Fries. We look forward to updating all of you on the continued progress on these key priorities and their impact on operational execution over the coming weeks and months.

With that, I'll turn the call back over to Pattye.

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Pattye L. Moore, Red Robin Gourmet Burgers, Inc. - Interim President, CEO & Chairman [4]

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Thanks, Guy. I want to reiterate that an important theme through all the operations-focused efforts and an important learning from us from last year is making sure that we are setting our operators up for success as we implement operational changes and technology improvements. As we mentioned in the press release, our updated guidance reflects, among other reasons, a deliberate decision to delay the rollout of some restaurant-level technology to ensure that we're giving our operators the sufficient time to absorb the technology initiatives being implemented now and that we are able to maintain the momentum that Guy talked about that we're currently seeing in operations. Lynn will be talking about the updated guidance in more detail.

I'd also like to touch briefly on marketing efforts. The first half of the year is focused on our high-quality gourmet burger line featuring new products, including our Porkiyaki Burger and the latest in our Burger Master series, Zita's Chicky 'Cado. This product celebrates the talent of another of our heart of house restaurant cooks, Zita Martinez, who's been with us for over 19 years. Early results indicate that our featured items are outperforming expectations.

With respect to media and creative, first, I want to tell you that we've been pleased to see increased positive fan engagement from our social channels throughout the quarter. We're also in final development stage of a new omnichannel creative campaign, which will launch in July. The new campaign has tested very well with consumers, connecting on an emotional level and conveying what our guests love most about Red Robin. We are confident that this omnichannel campaign will help us elevate the conversation about our brand, both internally and with our guests. We also shifted media weight from the first quarter to the third quarter to ensure we were ready from an operations and staffing perspective and to solidify restaurant routines and processes in preparation for the new marketing campaign. And we will begin utilizing technology enhancements as they roll out late this year and into 2020 to better target and segment our 8.5 million Royalty members.

Finally, we are pleased to announce the hiring of a new Vice President of Consumer Insights and Loyalty, Cyrus Kelley, who joins us from Darden Restaurants. Cyrus and his team aim to greatly enhance our data and insights capability, which will guide all guest-facing activity going forward. So that's a brief update on our first priority, stabilizing dine-in operations.

Our second area of focus is to continue building off-premise and catering. Our total off-premise business is now mixing 11.6% of total revenues with a growth rate of 20.6% year-over-year at the end of the first quarter. We are also focused on continuing to improve the to-go experience by implementing improved operational processes and tools, and we are looking to increase our reach with additional third-party delivery partners.

Catering now represents 1.2% of company sales through the first quarter of 2019, or growth of 220% compared to last year. We believe catering continues to represent a big opportunity for us, essentially all incremental. We also believe it increases brand awareness and relevancy. In 2018, we built a strong foundation for catering that included building out our strategic leadership and infrastructure. We began adding sales team members supported by targeted marketing. In 2019, we are building on that momentum from the back half of 2018. We are continuing to enhance our sales team and focusing on building both local and national accounts.

Our third priority, which involves both the operations improvement that Guy talked about but also technology, is to improve the guest experience and recapture the Red Robin "Gift of Time" convenience as a differentiator, which simply means allowing customers the gift of getting in and out of our restaurants at their own pace. In addition to improving ticket times and reducing wait times, as Guy talked about, we are beginning to see customer satisfaction improvements on pace of experience. We are also looking forward to adding more improvements to speed up throughput with menu simplification and with technology investments that are beginning to rollout in the back half of the year.

Speaking of technology, our fourth priority is implementing digital platforms and technology solutions. We completed the rollout of headsets to our restaurants this month to enhance communication among our managers and certain team members. While this may seem like a minor point to some, it has allowed our operators to turn tables faster and to stay more engaged during a busy shift. Additionally, we expect to rollout portable POS terminals to our servers by the end of the third quarter. This will enable our team members to take an input and order at the table, improving not only accuracy but ticket times.

Our fifth and final area of focus is on selectively refranchising and real estate -- and assessing our real estate portfolio. As I mentioned earlier, The Cypress Group is helping us focus our refranchising efforts and work is well underway. Lynn will discuss this and our most recent assessment of our real estate portfolio, including our mall strategy. We believe that the momentum we are beginning to see will continue and lead to improved financial results and drive shareholder value. Thank you.

Now let me turn the call over to Lynn.

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Lynn S. Schweinfurth, Red Robin Gourmet Burgers, Inc. - Executive VP, CFO & Principal Accounting Officer [5]

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Thank you, Pattye, and good afternoon, everyone. Let me begin by first reinforcing the intensity of focus we share to transform our business and to deliver value to our shareholders. We are acting decisively to make changes in the business that will put us in a stronger position. We are also taking a disciplined approach to prioritizing and spending capital and G&A while strategically refining our portfolio through recent store closures and our enhanced refranchising program.

As I walk you through the Q1 highlights, please note that the quarter includes the first 4 periods or 16 weeks of our fiscal year.

Q1 total company revenues decreased 2.8% to $409.9 million, down $11.7 million from a year ago. Comparable restaurant sales declined 3.3%, driven by a 5.5% decline in guest traffic, partially offset by a 2.2% increase in average check. Overall, net pricing, after taking into account discounting, was 1.9%, while the 0.3% mix increase was driven by lower Tavern mix and higher entrée mix.

Dine-in sales were down 5.5%, partially offset by off-premise growth. Off-premise growth continues to be meaningful and rose 20.6% in Q1. Off-premise now represents 11.6% of total food and beverage sales. Traffic at enclosed mall locations, representing 76 restaurants in our system, continued to perform worse than the balance of our company-owned locations by approximately 300 basis points. As we've previously disclosed, we experienced severe winter weather that we estimate negatively impacted Q1 sales by approximately 80 to 100 basis points.

Q1 restaurant-level operating margins were 18.3%, down 170 basis points versus a year ago, driven by the following factors: cost of sales of 23.4% was favorable 40 basis points versus a year ago, due primarily to favorable food waste, as measured by actual versus theoretical performance and lower tavern mix; restaurant labor costs of 35.7% were unfavorable 120 basis points versus a year ago, due primarily to higher wage rates, increased management headcount associated with our focus on being fully staffed to provide quality execution and sales deleverage. Other operating costs increased 60 basis points to 13.9%, due primarily to increases in third-party delivery fees and equipment repairs and maintenance.

Occupancy costs increased 30 basis points to 8.7%, due primarily to sales deleverage. G&A costs increased 50 basis points to 7.3% of total revenues, due primarily to increases in professional services and travel-related expenses associated with training managers related to our focus on fully staffed -- on being fully staffed to provide quality execution and higher salaries, partially offset by lower incentive and equity-based compensation.

Selling expenses increased 20 basis points to 4.4% of total revenues, due primarily to project-related spending. Preopening costs decreased $0.8 million, due primarily to the suspension of restaurant openings for the foreseeable future as we continue to work on improving our 4-wall economics. Net interest expense and other was $0.2 million lower versus the prior year, due primarily to a gain in our deferred compensation planned assets. Our weighted average interest rate was 5%.

Our effective tax rate was 291% benefit and better than the prior year, due primarily to lower income. During the quarter, we recognized other charges of $2.4 million, due primarily to executive transition costs and cost associated with previously closed locations. Q1 adjusted EBITDA was $34.3 million as compared to $42.4 million in Q1 2018. Q1 adjusted earnings per diluted share were $0.19 as compared to $0.69 in Q1 2018.

Now turning to the balance sheet. We invested $10.2 million in CapEx in Q1, which is primarily related to facilities and improvements and investments in information technology. We ended the quarter with $23 million in cash and cash equivalents. Our lease-adjusted leverage ratio was 4.23x, and we were in compliance with all debt covenants.

During the quarter, we paid down $10 million on our revolving credit facility resulting in the quarter and the outstanding debt balance of $183.4 million, in addition to letters of credit outstanding of $7.4 million. We also bought back approximately 31,200 shares for a total of approximately $1 million. This is consistent with our initial goal of offsetting the dilutive effect of our equity compensation program over the course of 4 quarters as we utilize cash flow primarily to reinvest in our business and to reduce debt while we return the business to sustainable growth.

Let me turn next to the fifth key strategic priority, selectively refranchising and reassessing our portfolio. In our press release today, we announced that we will be closing 10 locations, including 7 enclosed mall locations. These restaurants have an average unit volume, or AUV, of $1.8 million and, in Q1, generated a total of $4.5 million in restaurant revenue. Pretax operating losses for these restaurants in Q1 totaled $0.9 million, including an immaterial amount of depreciation expense.

All related leases allow us to go dark, and we will pursue all sublease and lease termination options as quickly as possible. We also continue to focus on improving the financial performance of other underperforming mall and non-mall locations through negotiated rent concessions, catering and targeted marketing and sales building strategies for restaurants once they improve their operations.

As Pattye noted, we have engaged The Cypress Group to help facilitate our refranchising program. We have been diligently working with them to refine our process, related financial, real estate and other transaction-related materials, our restaurant portfolio strategy, buyer sourcing and next steps. We will continue to pursue the markets, which includes approximately 100 existing Red Robin locations previously targeted, along with any other locations that we determine to be viable geographies for future refranchising purposes.

Turning to our 2019 expectations. We have recently made the decision to delay or defer certain items so we can focus on improving our operational execution and dine-in guest experience through better pacing the field initiative. We understand that last year we rolled out too much at once to our operators, and we learned a lot from that experience. Based on that learning and our desire to capitalize on the momentum that we are beginning to see with improved operational execution, we are taking a very disciplined approach. We are beginning to see improvements in core business KPIs being driven by execution against this specific plan. And while there is more work to do, we believe we will build a strong foundation for a brighter future. We continue to expect an improving trajectory of comp store sales in the back half of 2019.

More specifically, we are expecting comparable sales of down 1% to up 1%, lower than previous guidance due to lower dine-in sales, partially offset by higher off-premise sales. Third-party delivery sales are expected to increase due to higher organic growth, added delivery coverage to more restaurants and added service partners. We have reduced our selling, general and administrative expenses from $160 million to $154 million to $156 million to $159 million as we identified opportunities to reduce spending while sustained focus on delivering our 2019 objectives.

We have also shifted to adjusted EBITDA and adjusted earnings per diluted share guidance to exclude various nonrecurring charges, including executive transition, restaurant closures, certain professional fees and impairment. We now expect adjusted EBITDA of $117 million to -- we now expect adjusted EBITDA of $107 million to $117 million.

In addition to the pacing the field initiative, we are expecting a continuation of higher wage inflation than what we originally expected and are proactively addressing these cost pressures through programs to reduce turnover and better manage wages at a market level to mitigate the impact of a competitive labor environment.

Lastly, the increase of third-party delivery sales, while still profitable, include incremental commission costs that will impact flow-through on the sales category. We are expecting adjusted earnings per diluted share of $1.14 to $1.77, which includes the positive impact associated with an estimated tax benefit of $0.73 to $0.96. These updated ranges include both the benefit of the 10 restaurant closures. They do not, however, currently reflect the impact of any refranchising transactions.

We have also lowered our 2019 capital expenditures range to $44 million to $55 million,(sic -- see presentation slides "$45 million to $55 million") which is down from earlier expectations of $50 million to $60 million. This lowered range still primarily consists of facilities improvements, technology and other investments, and reflects the delay of some elements of restaurant and guest technology. And as Pattye mentioned, we have just rolled out headsets to the field to help us better achieve the "Gift of Time" for our guests, and handheld POS terminals will be completely rolled out by August.

Before I close, let me recognize the efforts of a collaborative organization that has rallied behind our 5 areas of strategic focus, driving visible improvements in our business. We believe continued operational progress will translate into ongoing improvement in guest satisfaction. And in conjunction with a focused and impactful marketing, core product focus and technology enhancements, we can successfully improve the trajectory of our business results.

With that, I will turn the call back over to Pattye.

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Pattye L. Moore, Red Robin Gourmet Burgers, Inc. - Interim President, CEO & Chairman [6]

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Thank you, Lynn. Let me wrap up by reiterating that the entire Red Robin team is acting with urgency on the 5 key priorities that are critical to this turnaround. Within those priorities, we have narrowed the focus to the critical few initiatives that will have the most impact in stabilizing the business. I believe that we will show progress every quarter, but it is going to take time to get to where we need to be in improving our operational and financial performance. But I am very energized by the progress we are beginning to see in the dine-in business and across all of the initiative. I am proud of the focus and determination of our team members, and I am confident we are focused on the right things and now moving in the right direction.

Thank you for your interest in Red Robin. And now we would be happy to take any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will take our first question from Gregory Francfort with Bank of America.

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Gregory Ryan Francfort, BofA Merrill Lynch, Research Division - Associate [2]

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Just maybe one -- on that tax benefit comment you put in the guidance, is that a one-time tax benefit or is that just quantifying the overall where you expect, I guess, the tax rate to be for the year?

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Lynn S. Schweinfurth, Red Robin Gourmet Burgers, Inc. - Executive VP, CFO & Principal Accounting Officer [3]

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It's the latter, Greg.

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Gregory Ryan Francfort, BofA Merrill Lynch, Research Division - Associate [4]

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Oh, got it. Okay. And then just on the improvement in second half comps, are you seeing -- you talk a lot about traction you're seeing in the guest metrics. Are you seeing an improvement in sales where you're running so far this quarter? Or is this more of an expectation that with some added marketing in the third quarter and some changes to the business and maybe a little bit better industry dynamic in the back half of the year, that you're going to see a lift in sales that can get you into the full year guidance range? Or are you seeing evidence of that playing out so far in the second quarter?

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Lynn S. Schweinfurth, Red Robin Gourmet Burgers, Inc. - Executive VP, CFO & Principal Accounting Officer [5]

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Well, what I would say is we have seen some sequential improvement in May. However, we're still early in our turnaround, but we do have initiatives and items that we addressed during our prepared remarks that we believe will drive the business with improving trajectory in the second half of the year.

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Gregory Ryan Francfort, BofA Merrill Lynch, Research Division - Associate [6]

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Got it. And then maybe I'll sneak one last one in. Just around the management headcount, I think, you made a comment about increasing or investing back in the -- to management headcount. When did that change go into effect? And what were you seeing in the business that sort of prompted that move or that change in terms of how you're running the operational model of the stores?

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Guy J. Constant, Red Robin Gourmet Burgers, Inc. - Executive VP & COO [7]

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Oh, yes, Greg, this is Guy. So that change was added to the budget and is part of the overall expected performance in 2019, which was an investment in us getting to higher staffing levels at the management level within the restaurant. We, like many other organizations, have been battling staffing challenges for some time. And we've been kind of leveling out and been at the same point for quite a while so we made a conscious effort at the start of 2019 to say that we wanted to get to better manager staffing levels, and we've seen that progress happen throughout the first quarter.

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Operator [8]

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We will now take our next question from Will Slabaugh with Stephens Inc.

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William Everett Slabaugh, Stephens Inc., Research Division - MD [9]

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You're doing better on average on many of the metrics that you mentioned earlier and in fact, improving in a number of them. So I was hoping to take a step back and talk about where you see the key issues that maybe drove sales below your expectations in the first quarter and where the confidence comes that those are going to improve as the year goes along.

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Lynn S. Schweinfurth, Red Robin Gourmet Burgers, Inc. - Executive VP, CFO & Principal Accounting Officer [10]

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Well, I'll start and then, Pattye and Guy, if you want to chime in. I think we are in the beginning stages of improving our operational execution. And so it does take time for that to really impact the guest experience and increase the next visit. And so I think that's part of the reason behind why we're seeing a slow beginning to the year.

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Pattye L. Moore, Red Robin Gourmet Burgers, Inc. - Interim President, CEO & Chairman [11]

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Yes. And I would just add that, again, it all starts with the guest experience and improving the customer experience, and the return of sales and return of customers won't happen in a straight line. But we do have marketing initiatives that, as we talked about, will kick off in the second half of the year. And we are continuing to see the improvements in the operations being fully staffed, reducing turnover. But those will not all happen in a straight line.

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William Everett Slabaugh, Stephens Inc., Research Division - MD [12]

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If I can just follow up on value. We didn't talk much about that or you guys didn't talk much about that in your prepared comments. Can you talk about your approach to value during the first quarter and how you're thinking about that for the rest of the year? I know after the fourth quarter, you talked a bit about the $10 initiative versus, more historically, consistent focus on the Tavern platform. So if you could go into any additional thoughts around that or, just in general, how you plan to address value.

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Pattye L. Moore, Red Robin Gourmet Burgers, Inc. - Interim President, CEO & Chairman [13]

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I'm going to ask Jonathan Muhtar to address that for you.

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Jonathan A. Muhtar, Red Robin Gourmet Burgers, Inc. - Executive VP & Chief Concept Officer [14]

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Yes, thanks. Yes, so we did make a pivot in the first quarter away from featuring our $6.99 Tavern as our primary message out there externally with guests and moved toward focusing on our core gourmet line. And we're pleased with what we saw there. We do -- I've mentioned, we did also feature our $10 bundle in local markets and we were pleased with the results there as well. But going forward into the second quarter, we are continuing our national focus on a full-priced gourmet burger without a value offer and featuring that $10 gourmet bundle more at the local level. In terms of the new campaign that's going to be launching in the third quarter, we're not commenting on the value message associated with that, but it will communicate our great value to our guests, which exists across our entire menu.

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Operator [15]

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We will now take our next question from Alex Slagle with Jefferies.

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Alexander Russell Slagle, Jefferies LLC, Research Division - Equity Analyst [16]

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One was a clarification on the mall units. I missed the comments on the lease exit flexibility, it sounds like there will be 66 remaining mall locations after these 10 are closed. And if you could just clarify sort of what portion -- either have the leases terminating or some flexibility for you to be able to get out of those if you need to?

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Lynn S. Schweinfurth, Red Robin Gourmet Burgers, Inc. - Executive VP, CFO & Principal Accounting Officer [17]

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Well, I -- you are correct, there are 66 remaining mall locations, but not all mall locations are bad locations. So there is a subset of malls that we're continuing to work with our landlords to try and achieve some rent concessions. And then in other cases, we may just naturally exit upon the expiration of the term. But we will proactively look at exiting those locations that make sense to do so.

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Alexander Russell Slagle, Jefferies LLC, Research Division - Equity Analyst [18]

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Okay. And then on the refranchising, I don't know if there's some granularity you could provide. Just sort of what's changed since we first started talking about this at the Analyst Day and how to think about potential range of scenarios, how it might impact the P&L and priorities for use of proceeds?

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Lynn S. Schweinfurth, Red Robin Gourmet Burgers, Inc. - Executive VP, CFO & Principal Accounting Officer [19]

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Well, I would say we have recently engaged The Cyprus Group. I won't go back a couple of years, but we've engaged with this group, we've been developing packages related to transactions. We're working with them on our portfolio evaluation in case we want to think about our portfolio a little bit differently. So we're making good progress along those lines and we'll be meeting with them and having a more strategic meeting so that we can make some progress and hopefully report in the coming months.

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Operator [20]

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We will now take our next question from John Glass with Morgan Stanley.

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John Stephenson Glass, Morgan Stanley, Research Division - MD [21]

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First, if I could just come back to this pivot away from value or a different way of looking at value. So I think you were dialing it back in the fourth quarter when you said you were more focused on premium or full-priced burgers or premium whatever it was. Why -- what gives you the confidence that's the right strategy when you're direct peers seem to still be focused on that? Or are they pulling back on that and that's giving you some headroom to pivot away from that? Do you think some of the decline in traffic incrementally this quarter did have to do with the fact that you'd be pulled back on emphasizing the Tavern Double for example?

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Jonathan A. Muhtar, Red Robin Gourmet Burgers, Inc. - Executive VP & Chief Concept Officer [22]

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So to be clear, in the fourth quarter, we did still feature the Tavern Double. We -- the messaging was changed a bit from the previous quarter. So that was a shift that took place in Q1. There's multiple ways that we communicate value to our guests. We're confident that with the current strategy, we're doing a good job of that, and that's the feedback we've been getting from our guests. Our Royalty program plays a big role as well. And so we're continuing to use that and we're enhancing our capabilities there so that will become even more powerful for us. As the year goes on and we'll be leveraging that even more.

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John Stephenson Glass, Morgan Stanley, Research Division - MD [23]

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Okay. And then, secondly, on the menu -- you talked about menu simplification. Is that something you're testing now or you've done? Or how sweeping or broad is the initiative to simplify the menu as a way to improve speed of service?

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Jonathan A. Muhtar, Red Robin Gourmet Burgers, Inc. - Executive VP & Chief Concept Officer [24]

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Yes, sure. I can chime in and invite Guy as well if you have anything to add my comments. But menu simplification is something that we have been focused on over the past couple of years, and we've been following a consistent process of testing in markets and then rolling out the kind of the winning initiatives nationally. And so over the past couple of years, we've reduced our menu by about 10% on that, and then we have some more simplification being rolled out later this year in the second half of the year where we're moving a few more items that tested well for us.

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John Stephenson Glass, Morgan Stanley, Research Division - MD [25]

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Okay. And then just two maybe more store-related questions. Are the closures this quarter a result of an entire portfolio review and you found that just 10 needed to be closed? Or is this the first of it's a rolling kind of review process and you think over time there's probably more that need to be closed, you just haven't identified those specific stores yet?

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Lynn S. Schweinfurth, Red Robin Gourmet Burgers, Inc. - Executive VP, CFO & Principal Accounting Officer [26]

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Well, I think it's more of a rolling review process. We are continuing to negotiate with landlords so, hopefully, we can come to an agreement with them on some of the locations that were borderline most recently, right?

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Pattye L. Moore, Red Robin Gourmet Burgers, Inc. - Interim President, CEO & Chairman [27]

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And as Lynn commented, The Cypress Group is just in, and they've been reviewing things and we're looking forward to sitting down with them and going over their review in the coming days.

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John Stephenson Glass, Morgan Stanley, Research Division - MD [28]

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Okay. And just last question for me. I think last quarter, you got the question about the profitability or what the margin structure would look like in the stores you're contemplating refranchising. And sometimes companies going through refranchising do sort of hold that out as if we were to take those stores out of the base today, here's how much better or different our margin structure would be. Do you have that figure? Could you provide what you think maybe the profitability of the business would look like without those 100 stores?

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Lynn S. Schweinfurth, Red Robin Gourmet Burgers, Inc. - Executive VP, CFO & Principal Accounting Officer [29]

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Well, because it's a little bit influxed currently, I'm going to hold off providing that information but it's certainly something we'll consider in the future as we refine the portfolio strategy.

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Operator [30]

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We'll take our next question from Chris O'Cull with Stifel.

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Christopher Thomas O'Cull, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [31]

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Lynn, I apologize if I missed it, but did you say what hourly wage inflation was during the quarter and what you expect it to be for the year?

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Lynn S. Schweinfurth, Red Robin Gourmet Burgers, Inc. - Executive VP, CFO & Principal Accounting Officer [32]

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I don't believe I did. Wage inflation was 5.5% in the first quarter, and we do expect that to continue that wage inflation through most of the balance of the year, with the caveat that we are trying to proactively address wages and try to get the inflation factor down on a go-forward basis.

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Christopher Thomas O'Cull, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [33]

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And is that the hourly wage inflation or the total wage inflation for the restaurants?

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Lynn S. Schweinfurth, Red Robin Gourmet Burgers, Inc. - Executive VP, CFO & Principal Accounting Officer [34]

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It's the hourly wage inflation.

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Christopher Thomas O'Cull, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [35]

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Okay. And then this is a follow-up on labor cost. It look like the labor cost dollars spend per operating week was relatively flat year-over-year. So what was the dollar offset or where were the opportunities you realized to offset that higher wage?

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Guy J. Constant, Red Robin Gourmet Burgers, Inc. - Executive VP & COO [36]

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I'm not sure I understand your question, Chris. Can you repeat it?

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Christopher Thomas O'Cull, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [37]

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If you just look at the dollar per operating week that was spent in terms of labor cost per operating week, it looked like it was relatively flat year-over-year. And so I'm just trying to understand was it just a reduction in hours because of the declining in traffic or were there other changes, like management structure to the stores that helped offset that hourly wage inflation?

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Guy J. Constant, Red Robin Gourmet Burgers, Inc. - Executive VP & COO [38]

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In fact, as we talked about earlier, Chris, we're more staffed at the manager level than we were before. So that actually would have been a drag in the other direction? No, I think some of the earlier points that Lynn made about the composition of sales coming with more PPA this year and less traffic, where last year it came with more traffic and less PPA. Most labor models, understandably, base the hours that you assign the restaurant on the traffic levels, and the traffic levels are down. So we're not using as many labor hours in the restaurant as we would have in an environment where PPA was not up as much as it is.

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Christopher Thomas O'Cull, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [39]

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Okay. Fair enough. And then, Guy, can you give us some color on what changes were the most impactful in terms of improving staffing levels and retention?

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Guy J. Constant, Red Robin Gourmet Burgers, Inc. - Executive VP & COO [40]

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Well, staffing is something that you always hear restaurant companies talk about. It's a constant battle that you're working on, especially in this tougher labor environment to deal with staffing. But what we said is that it's not a problem that we want to see continue, and so we have to make a conscious effort to make a change in how we approach it. And it comes on a lot of different levels, but starting by getting your managers as staffed as we have is certainly benefiting that. But giving real prescriptive tools to our managers to help them to get to a higher staffing level. Peaking the peaks is, of course, driving them to higher staffing levels because you need more people to peak out those peak hours. And then, obviously, that gives you more people available to staff the remainder of the shifts during the week. But we basically said is it's going to be very hard for us to execute on what we're doing in the restaurant, particularly at the very good productivity we have versus most of casual dining if we're not able to get as fully staffed as we are. And so it was a conscious change, a conscious difference in how we approach staffing to make sure that we bent the curve and made a real difference in where we've been for some time.

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Christopher Thomas O'Cull, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [41]

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Okay. That's helpful. And then, Lynn, can you give us a breakdown on the CapEx budget for this year, maybe a little bit more detail on how much is maintenance and any other items...

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Lynn S. Schweinfurth, Red Robin Gourmet Burgers, Inc. - Executive VP, CFO & Principal Accounting Officer [42]

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Yes, as we said -- yes, our expectation for the current year is $45 million to $55 million. I think around $30 million represents ongoing systems capital, maintenance as well as restaurant maintenance and the balance are really some of our discrete projects.

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Operator [43]

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We'll take our next question from Jeff Farmer with Gordon Haskett.

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Jeffrey Daniel Farmer, Gordon Haskett Research Advisors - MD and Senior Analyst of Restaurants [44]

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Great. Just one more labor question. I think last year, you guys delivered 8% to 9% improvement in that labor productivity metric. Do you expect to see any carryover benefit into '19 from those efforts?

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Guy J. Constant, Red Robin Gourmet Burgers, Inc. - Executive VP & COO [45]

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No, we expect to be pretty flat. In fact, it was down a little bit in the first quarter. And some of that is sales-driven, Jeff, because, of course, while hourly labor is generally considered to be variable and it is mostly, there's just some hourly labor you need to open the restaurant, to close the restaurant on a regular basis. So if your sales are down, you lose a little bit of leverage on that. But no. Yes, on the backs of 8%, 9%, 10% productivity, which we saw last year, we're expecting the productivity to be flattish to maybe slightly down, but still very good to where we were before we started the effort last year to improve our productivity.

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Jeffrey Daniel Farmer, Gordon Haskett Research Advisors - MD and Senior Analyst of Restaurants [46]

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Okay. Then different topic. What's the casual dining sector performance assumption that you guys have embedded, for lack of a better word, in you're down 1% to up 1% sales for guidance for '19. What are you expecting to see from the casual dining sector over the next 7 months or so?

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Lynn S. Schweinfurth, Red Robin Gourmet Burgers, Inc. - Executive VP, CFO & Principal Accounting Officer [47]

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Well, there's the casual dining sector and then there's our business. And so what I probably just really focus on is our expectation for our business, which is in a different place than I think the casual dining index. And again, while we're in the early stages of a turnaround, we do have the items that we've already talked about on the call that we believe will start to build a positive trajectory as we get to the end of this year and then into 2020.

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Jeffrey Daniel Farmer, Gordon Haskett Research Advisors - MD and Senior Analyst of Restaurants [48]

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Okay. And just last question. I appreciate that you guys do not provide operating cash flow guidance, but a lot of investors on this [name] are focused on free cash flow. So again, understanding you don't provide the operating cash flow guidance, is there any reason to think that it would not directionally trend with the lowered EBITDA guidance?

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Lynn S. Schweinfurth, Red Robin Gourmet Burgers, Inc. - Executive VP, CFO & Principal Accounting Officer [49]

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I'm not sure I understand the question, but we will have, I think, sizable cash flow being generated this year, which we intend to greatly spend on our investments as well as paying down our debt.

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Operator [50]

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We will take our next question from Stephen Anderson with Maxim Group.

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Stephen Anderson, Maxim Group LLC, Research Division - Senior VP & Senior Equity Research Analyst [51]

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Okay. Just want to ask

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your -- basically, your -- the time...

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Jonathan A. Muhtar, Red Robin Gourmet Burgers, Inc. - Executive VP & Chief Concept Officer [52]

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We're very sorry about that. Can you just restart your question? The line cut out in tiniest, but very sorry about that.

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Stephen Anderson, Maxim Group LLC, Research Division - Senior VP & Senior Equity Research Analyst [53]

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Okay. Going to the comp question, you saw -- you mentioned you expect comps to essentially turn positive by second half of the year. But what do you think are really the drivers? You mentioned maybe pivoting away from the Tavern Doubles, but what do you see? Do you see anything specific like an increase in the Red Robin's Finest or what else do you see specifically that gives you the confidence? Or is it something you see in traffic that gives you the confidence that maybe that guest is coming back? You've mentioned, Guy, also about the decrease in walkaways. And is this a trend you're seeing continuing into the second quarter?

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Pattye L. Moore, Red Robin Gourmet Burgers, Inc. - Interim President, CEO & Chairman [54]

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Well, this is Pattye. One thing we continue to see an increase in off-premise sales, as I think Lynn mentioned. We are leaning into more third-party delivery, as well as catering continues to grow. And then, Jonathan, if you want to add any color on as the dine-in business improves and as you turn on marketing.

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Jonathan A. Muhtar, Red Robin Gourmet Burgers, Inc. - Executive VP & Chief Concept Officer [55]

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Yes. I think in addition to that off-premise growth, we're looking at both some PPA improvements with the mix and the focus on some of those more premium items, but also traffic improvements through the year with the new campaign and highlighting those things that our guests know and love about our brand, building off of those improved service experiences that they will be having throughout the year that we expect.

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Lynn S. Schweinfurth, Red Robin Gourmet Burgers, Inc. - Executive VP, CFO & Principal Accounting Officer [56]

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And then as it relates to some of the technology investments we're rolling out to the field, some of those investments should improve throughput, which we think will have an added benefit, in addition to the improved quality of execution.

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Stephen Anderson, Maxim Group LLC, Research Division - Senior VP & Senior Equity Research Analyst [57]

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Now that technology improving, you're talking about the server POS specifically as in leading to throughput improvement?

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Lynn S. Schweinfurth, Red Robin Gourmet Burgers, Inc. - Executive VP, CFO & Principal Accounting Officer [58]

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That's correct. Because the servers will actually take the order at the table and it will immediately be fired into the kitchen, which speeds up the experience.

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Stephen Anderson, Maxim Group LLC, Research Division - Senior VP & Senior Equity Research Analyst [59]

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Now have you allocated any kind of expense associated with the rollout of POS -- with the POS system that specifically [will add to] labor?

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Guy J. Constant, Red Robin Gourmet Burgers, Inc. - Executive VP & COO [60]

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No, Stephen, we should be able to utilize the new server technology at existing labor levels. I expect it will help it, we think, be a lot more efficient and provide a better guest experience, and as Lynn mentioned, throughput. So during those peak periods in those restaurants that are running good volumes, we should be able to improve the number of guests that we're able to accommodate, but the server handheld's helping us do that.

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Operator [61]

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(Operator Instructions) We will take our next question from Brian Vaccaro with Raymond James.

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Brian Michae Vaccaro, Raymond James & Associates, Inc., Research Division - VP [62]

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Just wanted to go back to the server handhelds and maybe if you could share a little bit more about the expected benefits or what you saw in tests as it relates to ticket times, average server station sizes or any other productivity benefits you'd be willing to quantify? And then, also, can you just confirm that that is expected to be rolled out to all company units by the end of the third quarter?

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Guy J. Constant, Red Robin Gourmet Burgers, Inc. - Executive VP & COO [63]

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So hey, Brian, this is Guy. So we expect to roll them up by the end of the year. We're hopeful that we're able to do that by the end of the third quarter but say solidly that we expect it to be a 2019 rollout, the system. While I wouldn't want to get into the specifics of the benefits because it is a two-stage rollout that we're contemplating. There's the technology itself and then there's what we can do with the labor and support model inside the restaurant after the technology is rolled out. But as you might imagine, just on the surface, Lynn made the reference to better pacing of items to the kitchen. That's a huge benefit, as many of you who have watched the industry for some time may understand that often servers take multiple orders while they're out on the floor, and then return to the point-of-sale system and enter them all at one time, which then, of course, overwhelms the kitchen. By having a server handheld, we're able to pace the orders to the kitchen and, as a result, get much more effective delivery in the kitchen, which should help on all those other metrics that we've talked about.

And then as the servers become more proficient with the technology model, and this leans into comments that both Pattye and Lynn have made about how we want to be really careful when we rollout things to operations, that we do it in a way that they're successfully rolled out before we move on to the next initiative, we can then look at the support model that would allow servers to take on larger table stations and provide an even better guest experience and what that could provide for us at that time. But we're not ready at this point to comment on what that might be specifically.

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Brian Michae Vaccaro, Raymond James & Associates, Inc., Research Division - VP [64]

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Okay. And shifting to the closed units, and I just wanted to ask first a numbers question. Lynn, the $0.9 million loss on those units, is that after, or I guess, burdened with selling costs, the 4%, 4.5% of sales?

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Lynn S. Schweinfurth, Red Robin Gourmet Burgers, Inc. - Executive VP, CFO & Principal Accounting Officer [65]

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No, no, it's not. Those are the operating losses.

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Brian Michae Vaccaro, Raymond James & Associates, Inc., Research Division - VP [66]

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Okay, okay. So that's pre-advertising. Okay. And maybe we could take a step back and maybe just level set how the group of mall units are performing versus non-mall units. I heard the comp commentary in your prepared remarks. But could you high-level the -- I guess, we'll have 66 or 68 left, but maybe high-level where the AUVs and store level EBITDA and is relative to the non-mall units, maybe on the 4 months or trailing 12, whatever you might have handy.

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Lynn S. Schweinfurth, Red Robin Gourmet Burgers, Inc. - Executive VP, CFO & Principal Accounting Officer [67]

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Yes. We quantified, I believe, in the opening remarks that traffic was down 300 basis points versus the non-mall locations. We'll have 66 mall locations after we close the 10 that we talked about. Overall, AUVs, I think, are in the neighborhood of 1.9, give or take, so they are lower performing in some cases. And so those are the ones that we're focused on.

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Brian Michae Vaccaro, Raymond James & Associates, Inc., Research Division - VP [68]

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Okay. Just to be clear, the -- that's the 66, the total 66, the AUV on those 66 is 1.9?

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Guy J. Constant, Red Robin Gourmet Burgers, Inc. - Executive VP & COO [69]

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Those are the closed locations.

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Lynn S. Schweinfurth, Red Robin Gourmet Burgers, Inc. - Executive VP, CFO & Principal Accounting Officer [70]

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Those were the closed locations.

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Guy J. Constant, Red Robin Gourmet Burgers, Inc. - Executive VP & COO [71]

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Those are the closed ones.

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Lynn S. Schweinfurth, Red Robin Gourmet Burgers, Inc. - Executive VP, CFO & Principal Accounting Officer [72]

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Yes.

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Guy J. Constant, Red Robin Gourmet Burgers, Inc. - Executive VP & COO [73]

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Right.

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Brian Michae Vaccaro, Raymond James & Associates, Inc., Research Division - VP [74]

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Do you have it for the rest of the ones that are -- the 66 or perhaps off-line you could provide that?

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Lynn S. Schweinfurth, Red Robin Gourmet Burgers, Inc. - Executive VP, CFO & Principal Accounting Officer [75]

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Well, we'll think about providing that on a go-forward basis, Brian.

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Brian Michae Vaccaro, Raymond James & Associates, Inc., Research Division - VP [76]

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Okay. All right. Understood. And then...

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Guy J. Constant, Red Robin Gourmet Burgers, Inc. - Executive VP & COO [77]

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Historically, Brian, though, when we have talked about that historically now, obviously, in the past few quarters, mall performance has been poor. But historically, when we've referred to that, the average unit volumes were not dramatically different at malls than they were in the rest of the system. But occupancy levels and costs were much higher so the profitability was much poorer at mall locations. But that comment was 9 to 12 months ago. In the past 3 quarters, mall comps, as you know, from following our calls, have been poorer than non-mall comps. So that gap is -- because there's been a little gap that was there before.

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Brian Michae Vaccaro, Raymond James & Associates, Inc., Research Division - VP [78]

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Okay. Great. And then, just two last quick numbers questions for me. You said off-premise, I think, was 11.6% of sales. How much of that was the third-party delivery?

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Lynn S. Schweinfurth, Red Robin Gourmet Burgers, Inc. - Executive VP, CFO & Principal Accounting Officer [79]

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About 3 percentage points.

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Brian Michae Vaccaro, Raymond James & Associates, Inc., Research Division - VP [80]

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Okay. Great. And then on the G&A guidance, I just wanted to confirm, or the SG&A guidance, the selling cost. Your old guidance had selling at $64 million. Any change to that in the new guidance?

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Lynn S. Schweinfurth, Red Robin Gourmet Burgers, Inc. - Executive VP, CFO & Principal Accounting Officer [81]

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Right now, we're expecting it to be about the same.

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Operator [82]

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We will now take our next question from Jon Tower with Wells Fargo.

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Jon Michael Tower, Wells Fargo Securities, LLC, Research Division - Senior Analyst [83]

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Great. Just on the traffic side of the equation, it's been, I think, 5 quarters now of sequential deceleration in traffic. And given that you do have a loyalty database of 8.5 million members, is there anything you can discern from where that traffic is going?

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Pattye L. Moore, Red Robin Gourmet Burgers, Inc. - Interim President, CEO & Chairman [84]

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The -- no, I mean, one of the technology enhancements that we're putting in later -- beginning later in the year and into next year is to better be able to segment and target and talk to our Royalty members. So we will continue to get better at that data analytics. But at this time, we don't have an answer on that.

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Jon Michael Tower, Wells Fargo Securities, LLC, Research Division - Senior Analyst [85]

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Okay. And then just switching to commodity expectations for the year. Obviously, pork is rising and there's fear in the market that that's going to have an impact on the rest of the protein structure. So what's embedded for commodity cost for the balance of '19?

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Lynn S. Schweinfurth, Red Robin Gourmet Burgers, Inc. - Executive VP, CFO & Principal Accounting Officer [86]

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Yes, we do expect, as a percent of restaurant sales, to still be favorable this year compared to last year. And right now, our pricing is roughly 2% for the company.

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Jon Michael Tower, Wells Fargo Securities, LLC, Research Division - Senior Analyst [87]

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And how much is locked?

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Lynn S. Schweinfurth, Red Robin Gourmet Burgers, Inc. - Executive VP, CFO & Principal Accounting Officer [88]

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There is about 80% of our commodities are locked in. That's not for the entirety of the year, in some cases. So in the middle of the year, we will look at additional contracts for forward-looking periods.

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Jon Michael Tower, Wells Fargo Securities, LLC, Research Division - Senior Analyst [89]

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Okay. And then, just lastly, in the marketing spend. I know it sounds like it's evolving quite a bit -- or not the spend. But yes, I guess, the spend going into omnichannel versus traditional. Are you also thinking about spending more dollars year-over-year? Or are you allocating more towards higher TRPs relative to quarters in years past? Just kind of curious to flesh that out a little bit more.

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Jonathan A. Muhtar, Red Robin Gourmet Burgers, Inc. - Executive VP & Chief Concept Officer [90]

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Yes. Overall, we're not looking at any significant change in spend year-over-year in total. We are -- we have, as mentioned, shifted some dollars from the first quarter to the third quarter. Second and fourth right now, our plan to be about consistent year-over-year. We also have made some additional investment and shift into digital and social, and we've actually been really pleased with the engagement levels that we've seen, which have grown significantly in the first quarter of the year through those channels.

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Operator [91]

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We will take our last question from Stephen Anderson with Maxim Group.

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Stephen Anderson, Maxim Group LLC, Research Division - Senior VP & Senior Equity Research Analyst [92]

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Just a follow-up question to something you have in the 10-K report about your owned properties and associates of the number -- the 37 restaurants that you own [the rights] including the real estate is a good number to still go by or if there's anything you've asked the consulting group that you may look at when you're evaluating those properties?

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Lynn S. Schweinfurth, Red Robin Gourmet Burgers, Inc. - Executive VP, CFO & Principal Accounting Officer [93]

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Well, if we're refranchising some of those owned properties, we will offer to sell the properties along with the refranchising transaction, if that's your question.

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Stephen Anderson, Maxim Group LLC, Research Division - Senior VP & Senior Equity Research Analyst [94]

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Yes, it is. Yes.

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Operator [95]

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It appears there are no further questions at this time, I'd like to turn the call back over to Pattye Moore for any additional or closing remarks.

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Pattye L. Moore, Red Robin Gourmet Burgers, Inc. - Interim President, CEO & Chairman [96]

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All right. Thanks again, everyone, for joining us today. We look forward to sharing our second quarter results with you in August. Thank you.