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Edited Transcript of RUTH earnings conference call or presentation 10-Aug-18 12:30pm GMT

Q2 2018 Ruth's Hospitality Group Inc Earnings Call

HEATHROW Aug 10, 2018 (Thomson StreetEvents) -- Edited Transcript of Ruth's Hospitality Group Inc earnings conference call or presentation Friday, August 10, 2018 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark Taylor

Ruth's Hospitality Group, Inc. - VP, Financial Planning & Analysis

* Michael O'Donnell

Ruth's Hospitality Group, Inc. - Executive Chairman

* Cheryl Henry

Ruth's Hospitality Group, Inc. - President and CEO

* Arne Haak

Ruth's Hospitality Group, Inc. - CFO

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Conference Call Participants

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* Brian Vaccaro

Raymond James & Associates, Inc. - Analyst

* Joshua Long

Piper Jaffray & Co. - Analyst

* Andy Barish

Jefferies LLC - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Ruth's Hospitality Group second-quarter 2018 earnings conference call. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the conference over to Mark Taylor, Vice President of Financial Planning and Analysis. Please go ahead, sir.

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Mark Taylor, Ruth's Hospitality Group, Inc. - VP, Financial Planning & Analysis [2]

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Thank you, Tracy, and good morning, everyone. Joining me on the call today are Michael O'Donnell, our Executive Chairman; Cheryl Henry, our President and Chief Executive Officer; and Arne Haak, Executive Vice President and Chief Financial Officer.

Before we begin, I would like to remind you that part of our discussion today will include forward-looking statements. These statements are not guarantees of our future performance and therefore undue reliance should not be placed upon them. We would like to refer you to the investor relations section of our website at rhgi.com as well as the SEC's website at sec.gov for copies of today's earnings press release and our recent filings with the SEC for a more detailed discussion of the risks that could impact our future operating and financial results.

During this call, we will refer to adjusted earnings per share. This non-GAAP measurement was calculated by excluding certain items as well as losses from discontinued operations. We believe that this measure represents a useful internal measure of performance. You can find a reconciliation of adjusted earnings per share in our press release for today's call.

I would now like to turn the call over to our Executive Chairman, Mike O'Donnell.

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Michael O'Donnell, Ruth's Hospitality Group, Inc. - Executive Chairman [3]

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Thank you, Mark, and thank you all for joining us on this call this morning. We are pleased to announce second-quarter results which demonstrated a continuation of our momentum from the start of the year.

Highlights of the quarter include total revenue growth of 9.6%, net income growth of 22.6%, and non-GAAP diluted earnings per share growth of 26.6% to $0.32. All of the restaurants contributed to the revenue growth in the quarter, including our comp restaurants, non-comp restaurants, as well as the six Hawaiian restaurants we acquired in December.

We continue to be very pleased with the performance of our Hawaiian restaurants and they delivered sales and profit growth at or above our expectation. We are in the final stages of integration, and I am proud to note that there has been no turnover in the management teams of these restaurants.

We remain committed to being leaders in the fine dining steakhouse category, which we have achieved through our unrelenting focus on operational excellence. The Ruth's Chris Steak House experience is the foundation of our brand and is responsible for the consistency of our results over the years. This consistency allows us to execute our total return strategy, creating long-term value for all our stakeholders.

As we have discussed before, successful execution of this strategy is accomplished by investing in our core business, growing in a disciplined fashion, and returning capital to our investors. Our first priority will always be our core business and protecting the brand that so many have worked hard for over the last 50-plus years to create.

To strengthen the brand and evolve today's consumer -- and evolve with today's consumer, we continued our Ruth's 2.0 restaurant remodel efforts during this quarter, which both enhances the guest experience and allows us to expand our operating capabilities. We remain on track for seven to nine remodels in 2018. Furthermore, we are investing 20% to 30% of our 2018 tax savings into our core business in the form of brand, sales driving, and people initiatives.

The second priority of our strategy is growing the brand in a disciplined fashion, and we continue to work diligently to build our development pipeline. We expect to open two new restaurants during the balance of 2018: the first location will be in Jersey City, New Jersey, here in the third quarter and another in Paramus, New Jersey, in the fourth quarter.

Additionally, we currently expect a management agreement restaurant in Reno, Nevada, to open early in the first quarter of 2019. This partnership with El Dorado Resorts will be our third casino location operating under a management agreement, similar to our successful restaurants in Tulsa, Oklahoma, and Cherokee, North Carolina. We also are actively negotiating leases for additional sites that meet our investment criteria for development as we build our real estate pipeline for 2019 and beyond.

Also supporting our growth efforts are our franchise partners, who continue to invest in the restaurants, and expect to open two locations in 2018. The first of these franchise locations opened quite successfully in Fort Wayne, Indiana, during the second quarter. And we currently expect the second to open in Markham, Ontario during the fourth quarter of this year.

The final component of our total return strategy is returning capital to our shareholders. To that end, our Board of Directors recently approved the payment of a quarterly cash dividend of $0.11 to shareholders, which is a 22% increase over the quarterly dividend paid in August of 2017.

Since the beginning of 2011, we have returned over $200 million to our shareholders in the form of dividend payments and share repurchases. And we continue to believe that our total return strategy is the best way to drive long-term shareholder value.

Now before I turn the call over, I'd like to briefly comment on our executive management transition which we announced in early June. Today, Cheryl Henry transitions from President and Chief Operating Officer to President and Chief Executive Officer and I will assume the role of Executive Chairman.

This transition is part of a multiyear planning process, and I couldn't be more pleased for Cheryl. During the 11 years that she has spent here at Ruth's, she has managed every commercial aspect of our business and is eminently qualified to lead this organization.

A clear strategic direction has been set for the Company. The Company is in excellent shape and much of our success can be directly attributed to the initiatives led and implemented by Cheryl and her team. I look forward to supporting Cheryl in my new role as Executive Chairman.

With that, I will now turn the call over to Cheryl, who will give some more color on our revenue performance before Arne provides detail on the second-quarter results. Madame CEO?

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Cheryl Henry, Ruth's Hospitality Group, Inc. - President and CEO [4]

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Thank you, Mike. Our restaurant operations team contributed a strong performance this quarter across all three of our key revenue segments. During the quarter, our special occasion business again drove comparable restaurant sales growth. We saw solid year-over-year sales growth on both Mother's Day and Father's Day as guests continue to choose Ruth's Chris when celebrating these special moments. We also experienced growth in our private dining and just-because segments.

This resulted in comparable sales growth of 1.3% against a 0.1% decline in traffic. As a reminder, we experienced a 70-basis-point headwind in the second quarter due to the timing of the Easter holiday. I am pleased to see that our traffic growth is significantly higher than the Black Box fine dining index.

Our franchise partners, who remain the heart and soul of our business, also had a solid quarter, with total franchise comp sales up 1.3%. While sales trends in our international markets were not as strong as those in the US, our partners saw improving comparable sales trends throughout the quarter.

As we look at the third quarter to date, our sales cadence remains consistent with the trends we've seen so far this year. Through this point in the third quarter, our comparable sales have been running flat to up low-single digits year over year.

With that, I'd like to turn the call over to Arne to go through our financial details.

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Arne Haak, Ruth's Hospitality Group, Inc. - CFO [5]

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Thank you, Cheryl. For the second quarter ended July 1, 2018, we reported net income of $9.6 million or $0.32 per diluted share. This compares to net income of $7.8 million or $0.25 per diluted share during the second quarter of 2017.

Net income in the second quarter of 2018 included $400,000 in deal-related expenses associated with the acquisition of our Hawaiian franchisee and a $300,000 income tax benefit related to the impact of discrete income tax items. Excluding these items, as well as the result from discontinued operations, our non-GAAP diluted earnings per common share were $0.32, up 26.6% compared to $0.25 in the second quarter of last year.

Total Company-owned restaurant sales for the second quarter were $103.5 million, an increase of 10% over last year. The increase was driven by the contribution from our new restaurants, including those acquired in Hawaii.

Total operating weeks for all Company-owned restaurants were 1,001, up 10% year over year from 910 in the second quarter of last year. This included an additional 78 operating weeks in the quarter from the acquisition of our Hawaii franchise restaurants.

Total franchise comparable sales increased 1.3% year over year. Comparable sales in our domestic franchise restaurants were up 3% during the quarter. And comparable sales in our international franchise restaurants were down 7%, largely driven by softness in our Asian restaurants and certain Canadian locations.

Franchise income in the second quarter was $4.5 million, up 4.7% versus the prior year. The increase in franchise income was driven by an increase in comparable sales, the reclassification of franchisee advertising contributions from marketing and advertising to franchise income, as well as the recognition of $100,000 in franchise development and site-specific fees. Our franchise income was also reduced by $400,000 as a result of the acquisition of our Hawaii restaurants.

Now turning to our costs, food and beverage costs as a percentage of restaurant sales decreased 180 basis points year over year to 28.1%. This decrease was primarily driven by a 10% decrease in total beef costs as well as by a 1.4% increase in average check.

Last summer's beef prices were driven to record-high levels due to increased retail demand for prime beef. This year, we have not experienced increased retail demand. And as a result, we now expect full-year beef deflation of 1% to 4%. We currently expect this deflation to be the highest in the third quarter before returning to more normal levels in the fourth quarter.

For the quarter, our restaurant operating expenses as a percentage of restaurant sales increased 50 basis points year over year to 48.3%. The increase was primarily driven by an increase in occupancy expenses as a result of the acquisition of our Hawaiian restaurants.

Our G&A expenses as a percentage of total revenues were up 40 basis points year over year at 8.5%. The increase as a percentage of total revenues was also largely driven by additional costs related to the integration of the recently acquired Hawaiian restaurants.

Marketing and advertising costs as a percentage of total revenues increased 80 basis points to 4.2%. The increase was primarily attributable to the previously discussed accounting and revenue recognition changes of franchise marketing contributions as well as a planned increase in advertising spending. Preopening costs were $272,000 compared to $173,000 in the second quarter of 2017, driven by the timing of new restaurant openings.

Income tax expense declined from $3.6 million in the second quarter of 2017 to $1.8 million, largely as a result of the enactment of the Tax Cuts and Jobs Act. As Mike mentioned during his remarks, we are reinvesting approximately 20% to 30% of these tax savings into our core business in the form of brand, sales driving, and people initiatives.

During the quarter, we repurchased just over 224,000 shares of common stock for $5.9 million or $26.46 per share. At the end of the second quarter, we had $44.7 million outstanding under our previously announced $60 million share repurchase authorization. We ended the quarter with $50 million in debt outstanding, up $7 million from the previous quarter, largely driven by increased capital expenditures as well as the timing of share repurchases.

Now turning to our guidance, I'd like to provide our revised outlook based on current information for the full year of 2018 for some of our key financial metrics. As Cheryl has shared with you previously, we are pleased with the current cadence of our calendar-comparable sales so far in the third quarter.

As a reminder, the 53rd week in 2017 will have a minimal impact on our third-quarter sales. We expect the fourth quarter this year to once again be our strongest revenue quarter, but as a result of last year's 53rd week, the timing of the New Year's Eve holiday will provide a revenue headwind that we currently estimate will exceed $3 million in the fourth quarter.

Based on our current expectations of beef deflation in 2018 provided earlier in this call, we now expect our cost of goods sold to be in the range of 28% to 30% of restaurant sales. We continue to expect restaurant operating expenses to be between 47% and 49% of restaurant sales. We continue to expect marketing and advertising costs to be between 3.8% and 4%.

We now expect G&A expenses to be between $33 million and $35 million, excluding Hawaii integration costs. We now expect our annual effective tax rate to be between 17% and 19%, excluding the impact of discrete income tax items.

We currently expect our capital expenditures to be between $30 million and $32 million and could grow depending on the timing of additional new unit openings. We continue to expect our fully diluted shares outstanding to be between 30.5 million and 31 million shares, exclusive of any share repurchases under the Company's share repurchase program.

With that, I'd now like to turn the call over to Tracy for any questions that we might have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Brian Vaccaro, Raymond James.

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Brian Vaccaro, Raymond James & Associates, Inc. - Analyst [2]

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Good morning and thanks for taking my questions. Wanted to start out with the sales performance during the quarter. And it's encouraging to see your traffic share gains accelerate in the period.

Was wondering first if you could quantify the out-performance versus the Black Box high-end segment that you called out. And then what do you think is driving that out-performance? It does seem that some competitors maybe have pulled back on discounting. Do you think that is reinforcing your value positioning or any other dynamics worth highlighting?

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Cheryl Henry, Ruth's Hospitality Group, Inc. - President and CEO [3]

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Brian, thanks for the question. You asked about the index and the out-performance. As we look at it, we quantify it just over 200 basis points from the traffic side. And I think to your question about is this less discounting, more discounting, we've seen probably an increase in promotional activity from competitors, especially through June and July.

I will tell you, and Mike mentioned it, I cannot stress the importance of executing the brand experience. And Mike also talked about the investments we are making around development and retention of our employees and ensuring that we are executing on that experience every time.

And Arne mentioned the strength in all of the segments of the business. So I think some of the initiatives that we have been working on and talking about are kicking in. The continued focus on execution from the ops teams. Again, I can't say that I've seen a lessening of promotions, if you will, from the competitive set. But that's something I think that as we look through the year, we will probably continue to see.

Arne, I don't know if --

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Brian Vaccaro, Raymond James & Associates, Inc. - Analyst [4]

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Okay, that's helpful. Thank you. And also curious, just thinking about the industry environment within the high-end space, is there any evidence that changes in the tax law around deductibility for certain entertainment expenses, any evidence that that is having an impact on your business?

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Cheryl Henry, Ruth's Hospitality Group, Inc. - President and CEO [5]

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No. We are aware of it, but we haven't really seen any indication that that's having an impact.

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Brian Vaccaro, Raymond James & Associates, Inc. - Analyst [6]

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Okay, okay. And if I could just shift gears, couple on the food cost line. Arne, thanks for the beef deflation comment in the second quarter. What was the overall deflation on the basket in the quarter?

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Arne Haak, Ruth's Hospitality Group, Inc. - CFO [7]

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In the quarter, we were running down around 3% for the quarter.

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Brian Vaccaro, Raymond James & Associates, Inc. - Analyst [8]

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Okay, okay. And in terms of the updated annual COGS guidance, what does that assume in terms of deflation on the overall basket? You were specific about beef, which was helpful. But are there some other items we should be cognizant of? And could you help us with the overall basket deflation expectation?

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Arne Haak, Ruth's Hospitality Group, Inc. - CFO [9]

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Yes, sure. You know, the overall basket, I think we are clear, I think, in the trough right now the best deflation that we are going to see. For the full year, we have actually been experiencing some pressure on some seafood items. And obviously, the tariff situation can be dynamic there as well.

So I don't know that we are prepared to give you, like, an overall COGS basket deflation, but this is probably the strongest it's going to be in terms of the quarters here in the second and third quarters.

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Brian Vaccaro, Raymond James & Associates, Inc. - Analyst [10]

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Okay, okay. And last one, just on the COGS ratio, taking into account how high and different the comparisons are, if you will, third-quarter COGS ratio versus fourth quarter. Are there any discrete items that we should keep in mind that might cause the COGS ratio third quarter versus fourth quarter to be materially different? Or is it reasonable to assume sort of a more stable COGS ratio sequentially moving forward? Thank you.

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Arne Haak, Ruth's Hospitality Group, Inc. - CFO [11]

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You know, Brian, I can't think of anything in terms of the COGS ratio that's unique to the third quarter other than the normal seasonality of sales. I guess we are here in Florida; we are always hopeful that the hurricane season stays benign. And we had a fairly active season. We had 20% of our restaurants in September of last year impacted by hurricanes and so we are hopeful that that would not repeat itself.

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Brian Vaccaro, Raymond James & Associates, Inc. - Analyst [12]

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All right. I will pass it along. Thank you.

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Operator [13]

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Joshua Long, Piper Jaffray.

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Joshua Long, Piper Jaffray & Co. - Analyst [14]

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Great, thank you for taking my questions. Congratulations, Cheryl, on your transition. I imagine the answer is going to be a lot more of the same consistent execution and focus on the brand going forward.

But curious on as you go through this transition, what your kind of first order of business or how you are going to be focusing on the brands in your new role?

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Cheryl Henry, Ruth's Hospitality Group, Inc. - President and CEO [15]

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Sure, thanks for the question. I was thinking about it and I was pretty sure someone would ask me what the next 90 to 100 days looked like. And I'm fortunate that I have 11 years here, so they do look kind of -- as we sat as the senior team for the past years and set the strategy out, they look very similar. I think Mike stated we have our strategy; we have the team to implement it. And so my sole focus is making sure we do that.

I've talked probably over the last year about the idea that we live in more of a constant state of evolution to meet the consumer demand. So there will be more to come and more to talk about us we start rolling things into the system. But again, the focus on the total return strategy and working with this great team to continue doing what we've been doing.

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Michael O'Donnell, Ruth's Hospitality Group, Inc. - Executive Chairman [16]

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I have expectations she is going to do a better job than I did.

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Cheryl Henry, Ruth's Hospitality Group, Inc. - President and CEO [17]

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Thanks, Mike.

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Joshua Long, Piper Jaffray & Co. - Analyst [18]

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No, that definitely makes sense. And shifting gears to the remodels, nice to see that seven to nine are still on track. Curious what you have learned as you've gone through this.

I know we've talked over multiple conference calls that there's always a variety of packages that you can put in place and across the different systems. Because every unit might need something slightly different. And so curious on how you are seeing that progression roll out.

And then if you can remind us where we are in terms of touching all of the different units in the system. Trying to get a sense of what the remodel opportunity might look like for 2019.

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Cheryl Henry, Ruth's Hospitality Group, Inc. - President and CEO [19]

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Sure. I will take a bit of it and then I will turn it to Arne. So I think when we started talking about this program of remodel, we kind of had buckets or categories of different remodels, from adding capacity to really bringing them up to the brand 2.0 to changing VARS.

And I think the early ones we have done, so to your question about how many will you have done at this point, we are close to 28 or 29 and continue to look at between 7 and 10 a year until we are through the system. I think the ones that we have identified as having opportunity around capacity, we've seen them pull through on that expectation.

The others around brand are doing what we expected them to do. And it really is about maintaining the consistency of the sales and being relevant to our guests.

Arne, if you want to weigh in a little bit on expected capital and how that looks going forward.

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Arne Haak, Ruth's Hospitality Group, Inc. - CFO [20]

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You know, Josh, I think it's going to be a fairly consistent-sized piece of our CapEx as we go forward by year. We have kind of targeted that. The capacity -- as Cheryl mentioned, the capacity -- when there are opportunities to add capacity, those provide the best returns, as it really provides a catalyst to grow sales. There is not a lot of those and each one is a case-by-case situation.

So I think we feel good about it. We have a good understanding of what the money needs to do for us and it's been delivering it. And going way back to Brian's question, I think continuing to consistently invest in the brand may be what is driving some of the traffic gains as well.

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Joshua Long, Piper Jaffray & Co. - Analyst [21]

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Absolutely. Thank you for that. Curious on the 20% to 30% of the tax savings are going to be reinvested. If you could remind us kind of how you are using those. I know you mentioned brand, sales driving, and people retention.

But anything more specific you could add? Or maybe looking at it differently, how many -- does that touch the entire system? Is that going to be used strategically in certain parts of the portfolio? Just trying to get a sense around how those dollars would be rolled out and spread across your portfolio.

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Arne Haak, Ruth's Hospitality Group, Inc. - CFO [22]

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I think -- it's a great question, like where are they. And they are kind of sprinkled. Some of them are in the restaurant line. So there is some very targeted people initiatives, like we have key people that we think are important and we are doing some things with them.

We also have some broader initiatives at the restaurant level as well that -- because we think that's also very important. Some of it is also in marketing and then some of it is also in the G&A line. So those are the three places where you are kind of seeing the money.

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Joshua Long, Piper Jaffray & Co. - Analyst [23]

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Got it, thank you. And then last one for me. In terms of just thinking about the disparity between the franchise same-store sales, the domestic has been pretty strong, obviously. And then the international, it seems like we have been talking about the Asian and Canadian softness here for a little while.

If you can remind us what is driving that, if it is just more macro concerns or if there may be some pointed issues in some of those markets that would be worth noting. And then anything that we might lap over as we go through the back half of 2018 or into 2019 that we should just keep on the radar to be aware of.

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Michael O'Donnell, Ruth's Hospitality Group, Inc. - Executive Chairman [24]

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Yes, this is Mike. You know, there's been some -- I think we've talked about it before, but geopolitical issues that have been affecting Asia, particularly Taiwan and Hong Kong. China has changed some of their tourism rules and regulations and it has not been as robust.

And Canada has had some challenges around certain things that had to do with the oil business for a while. And I think that they will recover a little bit faster than the Asian restaurants will. Although, I am not saying that our Asian franchisee Stan Ko is a fabulous franchisee and a great businessman and is doing a great job in weathering these softer sales. And continuing to build restaurants and continuing to invest back into his business.

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Joshua Long, Piper Jaffray & Co. - Analyst [25]

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Great, thank you for that. I will pass it along.

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Operator [26]

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(Operator Instructions) Andy Barish, Jefferies.

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Andy Barish, Jefferies LLC - Analyst [27]

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Good morning. Hey, Arne, is there a difference in the calendar in fiscal -- I'm not sure if I may have missed that -- same-store sales number this quarter?

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Arne Haak, Ruth's Hospitality Group, Inc. - CFO [28]

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Nothing really from a 53rd week, other than the Easter shift, which we called out, which was 70 bps on the quarter.

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Andy Barish, Jefferies LLC - Analyst [29]

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Okay. And then on the domestic franchises sales running higher than the Company-owned, is there sort of more remodel effort going on in the franchise system as well? And maybe Cheryl can give a sense of where the franchisees stand in terms of kind of modernization of their restaurants?

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Cheryl Henry, Ruth's Hospitality Group, Inc. - President and CEO [30]

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Sure. Let me -- and I will turn to Arne in just a second. But we looked at the quarter for the franchisees. I think it's a couple of things. There is some additional price -- the traffic is somewhat in line; there's some price in there. And then there are four or five restaurants, and to your point, a couple of remodels that are performing well for our franchisees.

They are, I would say, more aligned as they go forward and through their remodels. I know Mike can speak to you. He was just up in Savannah and saw a fantastic remodel. They are really investing back more and bought into 2.0, so we are really glad to see that.

And Arne, I don't know if you have anything you want to add.

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Arne Haak, Ruth's Hospitality Group, Inc. - CFO [31]

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Yes, the only other thing to chime in on that, Puerto Rico is rebounding very nicely after a very difficult last year. And the second thing is that, as Cheryl said, the remodels -- the restaurants, when we look at the domestic franchisees that have the biggest growth in sales and traffic, they are ones that have invested in remodels.

And particularly the ones that have -- there's a couple of them that had some capacity opportunities. And those are, as we said, they are paying off as well. I think they are a little earlier in the innings of remodel, so there is some good runway there as well.

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Andy Barish, Jefferies LLC - Analyst [32]

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Great. And then just finally on the price mix in the 2Q.

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Arne Haak, Ruth's Hospitality Group, Inc. - CFO [33]

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Sure. In terms of the mix, I think we are really pleased. All three -- Cheryl mentioned in her comments, all three of our segments as we look at had positive sales. The bar, private dining, and business are kind of growing a little bit faster.

In the restaurant revenue center, we got a little bit of mix shift and I don't think it's anything particularly concerning. We are seeing a little bit higher preference on the Ruth's Classics, but still -- but it's still in line kind of with historical norm, just moving a little bit. We have just a little bit over 2% in price across the whole restaurant.

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Andy Barish, Jefferies LLC - Analyst [34]

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Thank you.

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Operator [35]

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There are no further questions. I would now like to turn it back to the hosts for any additional or closing remarks.

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Michael O'Donnell, Ruth's Hospitality Group, Inc. - Executive Chairman [36]

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Okay, thank you. Thank you all very much for joining us this morning on the call. This is my last time hosting this call as Cheryl will be assuming these responsibilities going forward.

I want to take a moment to thank all of you for your interest, your dialogue, and your thoughtful approach over the past 10 years. And for getting up on Friday morning each quarter to talk to us. It has been a great 10 years and I thank you all for your engagement.

For the last time signing off these calls, I will leave you with: it's a great day to go out and eat steak at Ruth's Chris. And as the great Captain Kirk of Star Trek fame would have said: Cheryl, you have the con.

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Cheryl Henry, Ruth's Hospitality Group, Inc. - President and CEO [37]

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Thanks, Mike.

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Operator [38]

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This concludes today's call. Thank you for your participation, ladies and gentlemen. You may now disconnect.