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Ignite Restaurant Group, Inc. (NASDAQ:IRG)

Acquisition of Romano’s Macaroni Grill Conference Call

February 6, 2013 5:00 PM ET

Executives

Michael Dixon SVP and CFO

Ray Blanchette – President and CEO

Analysts

Nicole Miller Regan – Piper Jaffray

Keith Siegner – Credit Suisse

Chris O’Cull – KeyBanc

Jonathan Komp – Robert W Baird

Brian Vaccaro – Raymond James

Operator

Good afternoon, everyone, and welcome to the Ignite Restaurant Group Conference Call. Today’s call is being recorded. A replay will be available starting today for those who cannot attend this live event.

Before I turn this call over to management, I would like to note for you that portions of this call deal with forward-looking information. These statements reflect management’s expectations for the future. The company’s actual results may differ materially from these expectations. Management refers all of you to today’s press release and the company’s recent filings with the SEC for a more detailed discussion of the risks that could impact future operating results and financial condition.

On the call today we have Ray Blanchette, President and Chief Executive Officer of the company and Michael Dixon, Senior Vice President and Chief Financial Officer.

At this time, for opening remarks, I would like to turn the call over to Michael Dixon, Senior Vice President and Chief Financial Officer of Ignite Restaurant Group. Please go ahead, sir.

Michael Dixon

Thank you, operator. Good afternoon, and thank you for joining us today. Before we get started, I just wanted to remind everyone there is a brief presentation available on the Investors section of our website at igniterestaurant.com that we’ll use for a part of our discussion today. So please access our website and download the presentation as Ray will be walking through those slides in just a minute.

With that said, our agenda for the call will be as follows. Ray will provide an overview of our announced transaction. And then I will discuss the financial impact and provide some additional guidance. We should have plenty of time at the end for questions. But we’d like to finish up in about an hour. So with that, I’d like to turn the call over to Ray, our President and Chief Executive Officer.

Ray Blanchette

Great. Thanks, Mike. And thanks to everyone on the phone for joining us today on such short notice. Obviously, we’re very excited to talk with you today about our purchase of Romano’s Macaroni Grill and share with you our vision for this brand.

We’re thrilled to welcome the Mac Grill team into the Ignite family, and we’re looking forward to tackling the opportunities that this acquisition presents for us. Mike and I were in Daytona this week for our annual General Managers conference, so after the release went out, we announced this deal to our entire Ignite team. And I wish everyone could have seen their excitement over this deal. Like me, they understand the opportunities that a great brand like Macaroni Grill can provide Ignite and all of its employees.

Due to the scheduling of our GM conference, Mike and I will be traveling most of the day tomorrow, but we’ll have some time available tonight after the call for follow-up. We can also make time available on Friday. But we appreciate everyone’s flexibility on that. It’s just inconvenient timing.

I think that the discussion around our vision for Romano’s Macaroni Grill is best served by walking through some visuals. As Mike mentioned, we posted the presentation on our website. So with that, I’ll start with slide one.

And slide one deals directly with the strategic rationale for this acquisition. As noted in the release, we’ve agreed to purchase Romano’s Macaroni Grill for $55 million in an all-cash deal. This brand operates in the high growth, polished casual segment. And, quite frankly, from my perspective, Macaroni Grill is a pioneer in this segment. But it’s the same place that we compete with Joe’s Crab Shack and Brick House Tavern + Tap. It takes Ignite to nearly $1 billion in revenue overnight. And while we aren’t making the purchase just to be a larger company, there are definitely economies of scale that we fully expect to realize.

The thing that gives us the greatest confidence is that we’ve done this before. In many ways, Mac Grill feels a lot like Joe’s Crab Shack four years ago. We built this playbook. We executed the strategy in the past. And we’re extremely confident that we can do this again. A very nice side benefit is the incredible real estate that comes along with this deal. And as you would expect, there are significant opportunities for G&A leverage. And I’ll talk more about each of these topics in the next few pages.

So if you turn to page two, you see some nice imagery of interior shots and exterior shots of a couple of Mac Grills and one of their signature items in the centerpiece. Mac Grill’s brand, and I’m sure all of you are familiar with, it’s been around since 1988, generated nearly $500 million in system-wide sales in 2012. So these are currently about $2.1 million. But nearly all of them are generating positive restaurant level cash flows. Approximately 70% of the sales come from dinner, and north of 80% of the revenues are generated from food sales. So, sort of a traditional dinner house kind of model, if you will.

So if you turn to page three, I want to share with you really some visual imagery of how we’re thinking about Macaroni Grill. And to be candid, I love this brand. I’m very excited to have an opportunity to work with it. I’ve got with some of our marketing folks, and we crafted sort of a positioning statement, if you will. I’ll just read it to you, the way we envision it.

A visits to Macaroni Grill is truly an affordable indulgence – from our hand-crafted fresh pastas with seasonal ingredients to our slow-cooked rich meats born from our chef’s inspiration and imagination. Wine on every table gives our guests permission to relax and unwind while polished and professional service transforms their everyday meal into an elegant escape. So come on, let us feed you like family and drink with you like old friends.

So turning to slide four, and as I noted, Macaroni Grill at this stage in its life cycle feels a lot like Joe’s from four years ago. We’re obviously very successful in proving the Joe’s brand and believe we can apply a similar playbook towards Macaroni Grill. As you see on slide four, we’ve broken down the strategic opportunities that we see exist at Macaroni Grill and their relationship to our success at Joe’s in four key areas: the menu, marketing, service and real estate.

And I’ll highlight a few points on each. As you look at the menu in Joe’s Crab Shack, we really tried to identify sort of what’s the brand’s reason for being, what’s the fundamental truth? We see a similar opportunity in Macaroni Grill to accelerate innovation, things like center plate proteins and expanded pastas and braised meats. And I’ll go into more detail. Certainly wine at every table.

From a marketing perspective, when we got to Joe’s, Joe’s was advertising on network television in regional markets. When you look at the Macaroni Grill situation today, that’s essentially the exact same thing. When they run a TV flight, they currently cover about 54% of their restaurants on television. By migrating this to a national cable platform and giving the entire brand the opportunity to benefit from a continuity plan on television, we believe that we can create a positive impact. We’ll also shift the emphasis from a discounting strategy to more of an innovation strategy. At Ignite, we’re strong believers that new product news is a stronger call to action than discounting, and we tend to deliver that.

From a service perspective, I really see Macaroni Grill as a premium brand. You think about in the Joe’s business, it was really about establishing the right culture and getting the right initiatives that were consistent with how guests thought about the brand or where we wanted to take the brand. And in Macaroni Grill, I really see it as having the ability to deliver a fine Italian dining experience for Middle America. And we’re going to look at the way we greet people, the way we serve them when they’re in the business and elevate some of the key touch points in the service cycle.

And then lastly, with real estate, I created Brick House in 2008 as a portfolio, to create the ability to leverage under-utilized real estate or low performers and fix portfolio problems. And so we’ve been aggressive portfolio managers at Ignite for several years now. Bringing in the Macaroni Grill business gives us additional opportunity to convert under-performers into Joe’s and Brick House if they don’t respond to the top three, so we can, actually increase the trajectory of our existing businesses. But we certainly expect to simultaneously elevate the AUV in the Mac Grill existing brand.

So if you turn to page five, I just want to paint a picture here. As I mentioned, in Joe’s it was pretty easy. We said crab is our middle name. Well here Romano’s Macaroni Grill, I think it’s similarly easy around a positioning that macaroni is your middle name. So we really can build out from the center there. We’re looking to bring in additional bone-in meats, grilled meats, oven-roasted meats, to really plus-up the menu, if you will. And we see pasta as a key differentiator. So you’re creating sort of that traditional Italian chophouse feel. And again, enabling people to trade into that, not forcing them to trade into that.

The wine at the table nucleus, and this is something the current management has reintroduced. It’s one of the hallmarks. If you go out and you talk to people about Macaroni Grill and what they remember about Macaroni Grill, invariably someone’s going to talk about the jug of wine that was on the table. And, over time, that sort of fell away from the business. We think it’s really important to bring that back to the nucleus. And maybe to do it in a more unique way. And you see a carafe, kind of a unique Italian carafe, there. It might be something along those lines as we’re thinking about ways to just reintroduce so that it hits every guest, every time with no excuses, no exceptions.

If we flip to page six, as we continue talking about the menu evolution, and this is going to look a lot like Joe’s, right. You guys remember when we introduced steampots and you saw the impact that had on sales. We’re thinking about these braiser pots with slow cooked, these rich meats, roasted lamb shank, chicken cacciatore prepared in the pizza oven, osso bucco, lots of gravy, served with a great big bowl of fresh pasta on the side so the guest is digging all the particulars out of their pan and into their pasta. Again, it’s a way for us to offer a more premium experience without divorcing our current customers. We’ll bring them with us.

You think back to Joe’s, if you like to use Joe’s for fried shrimp, the friend shrimp on our menu costs $0.30 more than it did six years ago. All right. But you see what’s happened in terms of menu mix shift in the importance to Crab, we see that happening in Macaroni Grill. We’re going to expand the pasta category, make it more interesting, more robust, but simultaneously offer the guest an opportunity that they’re having a big night out to trade into something a little more substantial.

Think like Brick House on the next point, innovating by introducing daily kitchen specials. If you go to a Brick House on a Wednesday, you’ll see guests lined up before we open the door because that’s chicken pot pie day. It really brightens that freshness halo and starts to influence guests’ behavior and the frequency of usage. And we think that’s a big opportunity for us at Macaroni Grill.

Moving on to page seven, leveraging the open kitchen design, the one thing I’ll say, I love the design of a Macaroni Grill. I think there’s a great sense of arrival. Those of you that have heard me talk about restaurant design before, you know I love open sight lines. They’ve got a lot of open sight lines. It’s one of the reasons that they convert very easily and very nicely into a Joe’s or Brick House because our prototypes really pull in some of those same sort of features. But I look at that open kitchen as a way to create energy in a dining room, the smells, the flashes that we want to really make that feel like an Italian marketplace. And keep in mind I’m talking about a lot of things. These changes will be staged in over time while working with the management team that we have there and really getting everyone rallied around this new sense of purpose in a common direction.

When we look at media, as I mentioned in the onset here, I think there’s a big opportunity to move, repurpose these media dollars towards national cable. We’ve actually, our Chief Marketing Officer has already built a continuity plan for Romano’s Macaroni Grill seasonal. It’s really with sort of four key pillars built around the seasons. And when we scale that up, it looks like there would actually be a net savings relative to what they anticipated spending on their current AOP while also simultaneously increasing the number of weeks that we would be on air. So this is more of a continuity plan.

One other thing, a brand like Macaroni Grill where it has the ability to sustain the weight of its own national marketing plan means that it’s completely in our control to maintain relevance and top of mind awareness. And that’s how we’re thinking. Because this brand has the ability to spend that money on television, we can keep this brand top of mind in the guests’ mind. We can also use marketing as the vehicle to be aspirational and lead the brand forward.

So if you go to page eight, you’ll see as we talk a little more about this service and what we’re talking about, sort of that traditional Italian greeting, big larger-than-life welcome into the business. I think there are tools that we can use now and technologies that we can leverage where we capture the guest’s name upon arrival so that we’re then communicating that to the server and using their name throughout the course of the experience.

Our professional servers are clearly over-trained and taught to ultimately become food evangelists. As we bring them along with us on this food exploration, we want them to be the point of contact and the ones that go out and evangelize about the business.

Fostering this sort of sommelier experience. I think there is, while current management has really done a nice job moving the wine forward, I think we can take a quantum leap from where we are to really blow that up and focus on those $30 to $50 bottles of wine. But then also enable folks to trade into once again a more premium experience with sort of a methodology that anytime someone orders a bottle of wine $50 or above that we automatically decant at the table. And sort of create that polished steakhouse feel for, again, for Middle America, at that $50 price point.

I think that’s a touch that we can offer that, again, speaks to how we envision Macaroni Grill being positioned and competing. And when I think about what’s going on in the consumer dynamic today where it’s the 80 million millennials that are coming into the marketplace with an enormously high food IQ. They know quality. They understand service. They’ve been raised in restaurants and with the Food Network. So they’re going to demand this level of service, and they’re not going to expect to pay a significant premium for it. And then you look at the boomers on the other side, which have tremendous disposable income, are craving, their palate has evolved along with everyone else’s. And so this is just a unique space that I’m excited to be in.

So if you go to page nine, I’ll talk about the real estate. As I mentioned, this is really unbelievable, quite frankly. This slide tells it all. But it’s a credit, in my opinion, to Brinker, the Brinker team of years past. They picked quality locations. They negotiated favorable leases. We couldn’t replicate this stuff today. There’s just not enough activity in the commercial real estate market for us to go out and recreate what they’ve done. These locations generally are at the signalized corner or the power center with the movie theater behind it and all the retail support. These are high-quality locations. And when you break it down, literally 84% of the portfolio is in the top 50 DMAs in the country.

This is where we’re looking for real estate anyway. And you look at the geographic breakdown, it mirrors Joe’s Crab Shack between Texas, California, and Florida. Those are our three biggest markets as well. And then you look at their presence to the mid-Atlantic and up into the Northeast, and these are the markets that we’re growing in. So there’s a real natural overlay there. And then lastly, on this real estate, you’ve got an average of close to 23 years of control on these properties which is, it’s just incredible.

Moving on to page 10, just to reiterate the strength of the operations and the real estate, it’s telling to look at the unit level cash flows of the business. Despite some significant declines in AUVs over the past five years, all but seven of the locations are still cash flowing positive at the restaurant level. And our expectation in Ignite Restaurant Group and you talk to any general manager that works for us, they can articulate this. We expect every restaurant to positively contribute at the restaurant level profit line. And that will not change with the acquisition of Romano’s Macaroni Grill.

So if you flip to page 11, with the addition of Macaroni Grill, we now have the opportunity to expand our existing real estate portfolio strategy, as I mentioned earlier. The fact that sites and box characteristics closely match those for Joe’s and Brick House it gives us flexibility. Keep in mind again when we designed both the Joe’s prototype and the Brick House prototype, we designed it with conversions in mind. So we’re bringing in a massive portfolio of real estate and given ourselves a lot of strategic alternatives. And, in addition, where it makes sense converting a Macaroni Grill to Joe’s or Brick House and we can also save $500,000 of build-out costs. And prior to this deal, we’ve already converted a Macaroni Grill into a Joe’s Crab Shack and realized those savings. So we’ve quantified that. We know it’s for real.

So with that being said, I hope you can, you’re picking up here on the phone my enthusiasm for this deal. And while we’ve got a lot of work ahead of us, and we’ve got a track record here. And we believe we have the team, the passion to deliver some very nice results. So with that, let me turn it over to Mike to walk you through the financial impacts.

Michael Dixon

Thanks, Ray. Let me start by saying that I share Ray’s excitement over this deal. We’ve got a lot of work ahead of us, but it’s really the kind of work you get excited about because we really are excited about what we think we can do with this business.

So let me take a look at the numbers we presented in the press release, and I’ll give you a little bit more guidance. I recognize that we haven’t given much guidance on our fiscal 2013 prior to this announcement, so I’m using this forum to both give some details on Ignite’s base business plus describe the impact of the acquisition of Mac Grill.

But let me set a guideline here. From an ongoing guidance policy perspective, our objective post this transaction will be to provide results and projections with regard to store counts, revenues and comparable sales by concept. Margin guidance will continue on a combined basis. However, as the Mac Grill business is new to us and you as well, I want to give some margin guidance on this call for the IRG base business and some restaurant-level profit guidance on the Mac Grill business separately. So I’m hopeful that this will help you start building your models for those of you that are interested in doing that.

So let me begin with the store counts and new store development. As we previously announced, we plan to open as many as 16 restaurants in 2013, including one conversion of a Joe’s location into a Brick House and one conversion of a Brick House into a Joe’s. We’ll get a couple of these stores open in the first quarter with the remainder spread pretty equally over the next three quarters.

At this point, we’re not planning on much movement in the Mac Grill units in fiscal 2013. Now you’ll notice on the press release, we showed a negative three because it is possible that a few locations may close as there are some leases expiring. But we’ll not make any concrete decisions until we fully evaluate these sites and get a bit more clarity on whether we can or really want to extend these leases.

On the revenue front, we gave some ranges in the release for the fiscal year. So let me add a little bit of color to that. For the Joe’s and Brick House brands, we are projecting comp store growth of approximately 1%. This is reflective of what we saw in late Q4 2012 as well as the fact that we’re lapping some pretty strong comps from the past two years. And for context, we’re lapping about a 15.2% compounded two-year comp in Q1 alone.

The Mac Grill units will become part of our financial statements post closing. Right now we’re projecting that to be sometime late in the second quarter, late mid second quarter. So as noted in the release, we project Mac Grill revenues for the back half of the year to be about $180 million to $190 million. And that includes about $1.4 million in franchise fees. And for context, this represents about a 0.7% increase in their comparable restaurant sales.

On the margin side, let me walk you through the existing IRG business first, then give some preliminary thoughts on the Mac Grill restaurant level profits.

For the existing Ignite business, cost of sales is projected in the 31.1% to 31.3% range with some slightly favorable seafood prices, offset by increases in some of the other food categories. Labor costs will be about 27.3% to 27.5%. And occupancy costs should be come in at about 7.5% to 7.6%. Other expenses look to be about 17% to 17.2%, which gets us to a restaurant-level profit in the 16.4% to 16.8% range if you take a median in each of those ranges I gave you.

Depreciation and amortization on the base Ignite business is projected at about 4.2%. Now this includes the impact from our revised accounting policies related to a deferred rent and capitalization.

Shifting to the restaurant level margins on the Mac Grill business, we’re basing our assumptions off their prior-year run rates with relatively few efficiencies baked in for fiscal 2013, and also trying to line up their results to agree with our P&L format.

As of now, we’re projecting fiscal 2013 restaurant level margins for the Mac Grill units of about 6%. Of course, we’ll update this as we get more involved in the operations. But clearly we see this as an area of opportunity in the longer run.

So based on an asset valuation of $55 million, depreciation and amortization for Mac Grill is expected to be in the 1.5% range. And I’ll revisit this topic in just a minute.

On the G&A side, we anticipate realizing some nice synergies, but do not really expect to have them all from day one. Our full year estimate of G&A is about 6.1% to 6.3% of revenue.

Pre-opening expenses are pegged at $350,000 to $375,000 per location, or about $5.7 million for 2013. And I’ll just highlight this number also includes the deferred rent associated with these new stores.

We mentioned the credit upsizing in earnings release that we used to pay for this transaction. So after just completing a very favorable refinancing of our credit facility in Q4 of 2012, we were able to work with our existing banks to add a $50 million term loan on top of the existing $100 million revolver. The term loan will require scheduled payments, including principal amortization over five years. The revised facility, credit facility bears interest between 1.25% to and 4.25% over LIBOR, with no LIBOR floor. Today, we have $45 million drawn on the existing revolver facility and expect to have approximately $105 million outstanding upon close of the transaction. We’ll also access the revolver for additional capital as needed to support the new store growth.

We’re assuming an effective tax rate of 27.5% for fiscal 2013 and using a weighted average share count of approximately 25.6 million.

So just a couple important margin items related to the transaction. Not included in the information I just gave, we expect acquisition-related costs to be approximately $8 million. This number includes estimated accounting, legal, bank costs associated with the deal, as well as estimates for relocations, severance, retention bonuses and other integration-related costs. Of the $8 million, approximately $7 million will be expensed in 2013 and the remaining $1.5 million or so – $1 million to $1.5 million will be amortized over the term of the credit facility.

One sort of big unknown at this time is the impact of purchase accounting on the reported results. In accordance with Accounting Standard Codification 820, we are required to have a third-party valuation of the assets being acquired. Now to the extent that valuation exceeds the $55 million we paid for the business, we’re going to end up recognizing a gain upon a closing and increased depreciation and amortization expense over the following years.

In addition, noncash occupancy expense could also change from expectations based on lease valuation and effective lease life determined during purchase accounting. I don’t want to speculate on where that valuation will land, but it could have a meaningful impact on reported net income for fiscal 2013 and beyond. So we’re really just getting that valuation underway and we expect that to be completed within the next couple of months, and then we’ll be able to give a little more visibility to that.

Finally, as we mentioned in the release, we believe the true positive impact to our business will be more apparent in fiscal 2014, as we expect to see a greater than 40% EPS increase in fiscal 2014, EPS over projected 2013 sort of post-transaction projections, excluding transaction costs, as the Macaroni Grill business becomes fully integrated into the Ignite business.

One last bit of housekeeping before we open up for questions. We plan to release our fourth quarter earnings during the week of March 11th, and so we’ll give more information on prior-year results, and at that time, we may have some more information on the Mac Grill business as well. Now, I recognize that’s a lot of data, but hopefully it’s enough to give you some insight into how we view the impact of this acquisition in fiscal 2013, and, as I mentioned earlier, enough to get your models started.

So, at this time, I would like to open up the call to questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll go first to Nicole Miller Regan with Piper Jaffray. Please go ahead.

Nicole Miller Regan – Piper Jaffray

Thanks. Good afternoon. I wanted to understand, I think it’s just well – it’s very clear in 2013 what growth is going to look like. Can you talk to us about the big-term, long-term picture? So would you be growing Macaroni Grill at some point? If and well when the evolution and improvements take hold, and if that’s the case, when would you start to look to sign leases for Mac Grills?

Ray Blanchette

Well, thanks, Nicole. This is Ray. First of all, we are very committed and very bullish on Macaroni Grill. I think there is certainly the potential to grow units significantly in the out years. Initially what you can probably expect is to see as you saw in the models some contraction as we convert some of the under performers into one of our two growth concepts. And we build a platform for growth. But we fully intend to build that platform for Macaroni Grill, and we see it growing in the future. I can’t project exactly how long that’ll be, right, but we clearly believe that this brand – I would venture to say at this point when we haven’t quantified all the real estate, but I can comfortably say it could at least double in size.

Nicole Miller Regan – Piper Jaffray

And just one other quick one on growth, the underperforming Mac Grills that you could convert to Joe’s Crab Shack or Brick House, why are they underperforming? And what is it that – why is it that those two concepts would work better? I assume it’s obviously good location and something off with the brand, but can you give us any metrics and ideas of how that could play out and why?

Ray Blanchette

Yes. What you saw in the chart that we showed you, it’s a very tight group. When you look at the restaurant level profit. The good news about having a tight group is it’s really easy to shift that to the right when you start getting some traction on the top line. I mean their underperformance, quite frankly it’s shocking to me at a $2.1 million AUV on a system this size to only have literally a handful of restaurants that aren’t positively contributing. So we’re starting from a very good place here. And as we implement our menu, marketing and operational initiatives and really recreate that energy in this business, get the employees excited and managers excited about new guests, new eyeballs seeing the advertising and leading the brand to a new place, that’s going to lift this system.

Certainly our plan is to lift the entire system. If you think back when we first started this, we created Brick House because Joe’s was in a similar situation. As the Joe’s business recovered, we very quickly stopped converting Joe’s as our primary vehicle for Brick House and started using other folks’ assets because the Joe’s brand was in a full-on recovery and once those restaurants are positively contributing we’d rather just let that play itself out.

Nicole Miller Regan – Piper Jaffray

That’s helpful and a good point about only seven stores on the base. So that’s helpful. I’ll jump back in the queue. Thank you.

Ray Blanchette

Thank you.

Operator

We’ll take the next question from Keith Siegner with Credit Suisse.

Ray Blanchette

Hey, Keith.

Keith Siegner – Credit Suisse

Hey. Ray, one of the things that I think has been so compelling about the Brick House and Joe’s story thus far has been this differentiated concept. Very defendable niche. I think Joe’s is the perfect example, right. There really is no one else who builds their center of the plate offering around crab. It truly is a key differentiator. Brick House, there really is no national competitor doing sort of that gastro-pub kind of style. Both those concepts fit so nicely into that niche. Pasta as a key differentiator seems a little tougher for me to understand. When you talk about, how does this fit into a differentiated, defendable niche? Or is it just slightly different? I guess what I’m struggling with is, it feels like there’s a lot more competition already where you want to take this brand than the other two. Just maybe help me think about how it fits into that set of buckets. Thanks.

Ray Blanchette

Yes, absolutely. You know I think, when I think about Macaroni Grill, when I look at Macaroni Grill and I look at the quality of these restaurants, the sight lines, the atmosphere, it competes in a massive segment, all right. When you compete in Italian you’re, the veto vote almost goes away. Right. I mean I can’t imagine walking up to any group of my friends saying hey, you want to go out and have Italian food tonight and somebody says ah no I hate Italian. You know, I mean it’s one of those really massive segments.

Like I mean Brick House, is going to compete in this next generation bar and grill segment, which is there will be competitors. And we’re not concerned about competitors coming into the space because it’s such a massive space. And this is, when you think about these polished casual sort of experiences and what you’re able to do with food within the four walls and the way we’re going to execute, it gives me great comfort. I mean love the idea of competing in the Italian segment. It’s massive. And I think there’s a very big opportunity here.

Keith Siegner – Credit Suisse

Okay. Thanks. I’ll get back in the queue as well.

Operator

We’ll hear next from Chris O’Cull with KeyBanc.

Chris O’Cull – KeyBanc

Thanks. Good afternoon, guys.

Ray Blanchette

Hey, Chris.

Chris O’Cull – KeyBanc

Hey, Ray, how would you characterize the condition of the restaurants? You talked a lot about the locations. But what about the physical conditions of the boxes? And maybe even talk about when the chain completed its last remodel cycle.

Ray Blanchette

Yes. Well, just recently. The team that’s in there now has really already begun a lot of the work that I just articulated. What we want to do is bring our resources to bear to accelerate that. But the front of the house is in very good shape. These are great looking restaurants. They’ve recently done table and chair remodels and freshened up the dining room. So I think the physical assets themselves, the box, is sort of timeless. That feel that Phil Romano designed back in 1988 is still very relevant today. Because the way people can decorate that dining room, it has a great energy. With the displayed kitchen, again we think there are things we can do to clean up the sight lines.

But in terms of having to make a significant CapEx investment, under Golden Gate’s ownership, they’ve been reinvesting back into the business. We have line of sight to the maintenance CapEx that they spent over the last couple of years. It’s consistent with what we see in Ignite. So there’s no red flags for us there. These aren’t neglected boxes. This isn’t a disconnected management team. We get the sense that this is a very engaged management team that’s working hard within the brand today.

Chris O’Cull – KeyBanc

Great. Thanks. And then it’s my impression that Macaroni Grill, and maybe it’s just in the DMA that I’m located in, but it’s my impression they’ve been pretty heavy users of coupons and discounting the past few years. Do you think that this will make it difficult to improve sales without negatively affecting traffic over the next, maybe the next 12 months or so?

Ray Blanchette

No, because we’re going to offset it with eyeballs, Chris. When you look at the marketing plan that we’re putting together, we’ll come out of the blocks firing, quite frankly. We’ll heavy up the front side of the marketing calendar with a freshened position. We think this brand lends itself to more of a premium positioning in the marketplace and we are definitely not discounters. You know that about us. We don’t like that. I don’t think discounting is a strong call to action. I think it just – it’s a sea of sameness. It gets lumped together. So we will get away from discounting very quickly, but we’ll replace that with all the new eyeballs and the big piece of the business that’s never seen any advertising.

Chris O’Cull – KeyBanc

Is that true though as the system – has Macaroni Grill been heavy users of coupons in the past year or two?

Ray Blanchette

Yes. We look at their discounts line and we think it’s...

Michael Dixon

There was a ramp up certainly in the last few years...

Ray Blanchette

There was a ramp up the last couple years and we don’t agree with that strategy.

Chris O’Cull – KeyBanc

Agreed. And then how much of the margin issue do you think is related to sales versus just inefficiency in the restaurants?

Ray Blanchette

It’s sales. It’s sales. Again, this is a management team that’s been working – we’re walking into a business with a lot of good systems. They have new point-of-sale systems in their restaurants. They have labor forecasting tools. They have a lot of the current up-to-date systems. I think they just recently went to HotSchedules, which we’re on in our two brands. It’s the way you communicate with the young workforce that we have today. So again this is a brand – the last couple years when they turned off TV advertising that’s what really accelerated the sales decline. And I know in academia that’s how people recommend you do it, but in practicality and I think now with the benefit of hindsight they probably would have handled it differently. And you have to build the airplane in the air.

But once you turn off television you don’t just lose those sales by not being top of mind anymore, but the resounding impact in the restaurant when suddenly your servers are making less money and your cooks aren’t getting their hours it can affect morale and that’s why we think it’s really important to re-energize these businesses. Get money back in people’s pockets, getting the energy level back up and that will flow through to the guest experience and we’ve seen it happen. We believe very strongly in that rationale. But again they turned it off and they’ve been doing a lot work on their positioning and on their menu and again not things that we disagree with. We think in most cases they’re working on the right things, they just created a problem for themselves that’s really difficult to stick-handle through without the support of a national campaign.

Chris O’Cull – KeyBanc

Great. And then just one last one, and I understand if you can’t answer this, but is there going to be a Concept President, and if so, who is it?

Ray Blanchette

We have a new organizational design that hasn’t been rolled-out. Quite frankly, we haven’t met all the folks at Macaroni Grill yet, so we’re anxious to do that first. So I’ll just leave it at that.

Michael Dixon

But I will say Chris, I think, and Ray I’m sure will chime in now that even during this process to date, it’s really been a small group of us focused on getting this deal done. The operations team of our existing Joe’s and Brick House brands continue to focus exclusively on those brands, and when we think about the organizational structure going forward, we’re going to make sure that those resources are there so we keep those brands as strong as they’ve been.

Ray Blanchette

Yes. That’s a good point. We are not planning on pulling anybody from Joe’s or Brick House to Macaroni Grill.

Chris O’Cull – KeyBanc

Right. That’s very helpful. Thanks, guys.

Operator

(Operator Instructions) We’ll take a follow-up question from Nicole Miller Regan. Please go ahead.

Ray Blanchette

Hey, Nicole.

Nicole Miller Regan – Piper Jaffray

Thanks. Just had to get the mute off, there. So I might not be looking apples to apples. But Mike, on slide 10, the bottom chart, does that reconcile with the 6% restaurant level profit margin you’re seeing to look forward for Mac Grill this year? Because I didn’t average these numbers out, but certainly they’re a little bit higher than 6%, right?

Michael Dixon

Just to be careful. If you look at the footnote there, that’s cash rent restaurant level profit and excludes marketing expenses. I didn’t actually do the exercise you’re talking about, but, yes, it probably would be higher than the 6% as a result.

Nicole Miller Regan – Piper Jaffray

Okay. I did not read that. My apologies.

Michael Dixon

No worries.

Nicole Miller Regan – Piper Jaffray

And for the comp by concept guidance, looking at the core Joe’s Crab Shack and Brick House being 1% for the year, and you talked – I don’t remember who said it, but in the prepared comments you said that was kind of a, you know, peaking off of the trajectory of where you ended the year. Is that also fair to – can we assess that that’s the trend so far in this first quarter, or are you going to start off lower and build?

Michael Dixon

Well I think – I don’t want to give quarter-by-quarter guidance, but that’s the average, the 1% is the average for the full-year. I did point out that we’re comping a 15.2% two-year comp in Q1. So, yes, I’d expect it to be a little lower in Q1.

Nicole Miller Regan – Piper Jaffray

Okay. That’s it. Thank you.

Michael Dixon

Thank you, Nicole.

Operator

We’ll hear next from Jonathan Komp with Robert W Baird.

Jonathan Komp – Robert W Baird

Hi. Thanks. It’s Jon Komp calling in for David Tarantino. Just kind of a two-part broader strategic question. You did touch on a few of these, but I wanted to ask you once more. Just kind of broadly speaking, as you’re thinking about having three brands in the portfolio, first, can you maybe discuss why it makes sense to include a third brand, given that you have a pretty substantial growth and opportunities for the other two already?

And then, secondly, can you talk a little bit more about why you’re comfortable from a timing perspective bringing in a third brand? Obviously, you worked through some transitional issues at the end of last year and Mike Dixon, you know, Mike just coming on board more recently. Can you talk about from kind a managing-the-business standpoint why you feel comfortable bringing a third brand at this point?

Ray Blanchette

Yes, absolutely. I think anyone that participated in the road show knows we alluded to that before that we always felt that we designed Ignite with a leverageable infrastructure. This opportunity was brought to us, and we love the brand, quite frankly. We know that we have an organizational design that’s not going to distract from our core brands, that we can take those back-office systems that we have in Ignite and leverage them across the third brand seamlessly. And that’s clearly the intent. So for us, this opportunity now to be able to get this international brand at this price is just an opportunity that we believe is going to be very beneficial to our shareholders.

And from a timing perspective, Mike’s onboarding has been seamless. And obviously he’s an enormous talent, of bringing in to strengthen what’s already a very good team at Ignite. And then, as I mentioned, brand management is a separate issue. And the Macaroni Grill brand management will be distinct as is the Joe’s and as Is Brick House Tavern + Tap.

Jonathan Komp – Robert W Baird

Okay thanks. That’s helpful perspective. Then Mike, maybe just a couple of questions. Just looking at the profitability of the Macaroni Grill concept, you gave a couple of the pieces here, but a little hard to tell, so maybe I’ll ask. If you look at 2013 and exclude any of the one-time acquisition-related costs and also exclude any potential purchase and accounting adjustments that you mentioned, would Macaroni Grill be accretive or dilutive to the overall earnings base for 2013 on that basis?

Michael Dixon

I think if you do the math, you’ll find that it’s slightly dilutive in 2013, and I think that’s a function of two things really. Us picking it up for just a half year and there is some seasonality to the Mac Grill business. And so we’re picking it up on the back half when it’s a little bit of their slower sales. But two, Ray made some good comments about our marketing approach. We’ve also included an assumption in there that we’re going to throw a little extra marketing dollars in there to kind of juice this thing out of the gate. And that will have an impact because we’re only getting that impact for the back half of the year. We’re just, we’re not getting a full year’s worth of revenue to offset it. So we kind of expect it to be slightly dilutive in fiscal 2013.

Jonathan Komp – Robert W Baird

Okay. Thank you. And then just one more on the Ignite, the core Ignite concept and the 1% comps target that you outlined for 2013 for the standalone business. Just looking at that, I know you’ve had some pretty difficult comparisons for a while and obviously the comp trend in the back half of last year was a little bit slower. But in the past you clearly have cycled multiple years of tough comparisons fairly well, and you also seemingly have some pretty interesting marketing and menu initiatives lined up. So I guess, recognizing that it’s very early in the year, can you talk a little bit more why 1% comps for the full year is the right way to think about it?

Michael Dixon

I mean, everything you say is true. I mean, I think we’re hopefully being a little conservative here, but it’s based on sort of macro, not just our business, but macro industry. Some of the issues that I think folks are seeing right out of the gate with the elimination of the sales tax holiday. I think there’s a little less disposable income. So I think we’re just taking our best shot, kind of factoring in all those macro elements, as well as what we’ve seen in our business. So at the end of the day I agree with you on our marketing plan and some of the things we’ve got rolling out, which kind of balance out. We’ve averaged, we’ve come up with what I think is a reasonable conservative average for comp sales for the year.

Jonathan Komp – Robert W Baird

Okay. That’s all I have. Thank you.

Michael Dixon

Thank you.

Operator

Our next question comes from Brian Vaccaro with Raymond James.

Brian Vaccaro – Raymond James

Hey good afternoon, guys. I had a couple of quick questions for you. Back to the core IRG, where you’re showing the $510 million to $520 million and some questions on the comps. But I wanted to ask a little bit about what you’re expecting in terms of new unit performance next year on the core IRG brand, both brands, and just talk a little bit, is it just that you’re being conservative here? And I mean, that’s been pretty evident that we’ve seen some strong out performance versus the overall system obviously in the comp base. But can you just talk to that a little bit, please?

Michael Dixon

Specifically what, the performance of the new units?

Brian Vaccaro – Raymond James

Yes. And just what your assumptions are there. Are we still expecting to be opening units in that $4.5 million, $5 million range? And it just seemed like the $510 million to $520 million was a little bit below what I would have expected if we were going to be layering in those higher volume stores.

Michael Dixon

Yes and I think our expectation on these longer term was that these stores start to come in $3 million, $3.9 million-ish. And so I think we’re baking that in as our plan. Although some of the recent openings have been better than that.

Brian Vaccaro – Raymond James

Right.

Michael Dixon

So really we’re modeling closer to what we think the pro forma should be for these new units and hopefully that will make for some out performance. I also think as we laid out the new units, I said they’re spread pretty evenly over the quarter. I think when I thought about it from a modeling perspective, I was a little more conservative and pushed them back into the back half of the year. So fewer new weeks as we go.

Brian Vaccaro – Raymond James

Sure, sure. Okay. That’s really good color. Last thing I wanted to ask real quick just is on the seasonality of the Mac Grill business. You mentioned that in a previous question. But can you give a little bit more color on that? I think historically we haven’t had a whole lot of data on the Mac Grill business, but there was a period in 2007 or 2008 and it seemed like it was fairly even with maybe the biggest quarter being that third quarter in terms of average weekly sales. And so maybe could you just give a little color on how that may have changed over the last five years? And what the actual seasonality, if you’ve drove down to that level at this point?

Ray Blanchette

Yes, I can probably offer, this is Ray. I can probably offer some color there. The Macaroni Grill, while not nearly as seasonal as the Joe’s Crab Shack business, it counter indexes, which is another thing that we like about this brand fitting into Ignite, because it does sort of strengthen and stabilize cash flows throughout the year for us. But again it doesn’t index nearly as heavily. It’s not a seasonal model like a Joe’s Crab Shack, but summertime is slightly less busy. And they’re busiest, their third quarter obviously is the traditional first quarter, so when you look at their historical numbers that’s probably what you’re referring to, that this is a busy time of year leading into the summer. The summer softens a bit. Everyone in casual dining slows in September and then you see a ramp back from October through December with December being a higher indexing period and Mac Grill sort of mirrors that more traditional polished casual seasonality.

Brian Vaccaro – Raymond James

Okay. All right, that makes sense. All right, thanks, guys. Congratulations.

Ray Blanchette

Thank you.

Operator

And that does conclude our question-and-answer session. I’ll now turn the call back over to management for any additional or closing comments.

Ray Blanchette

Well, with that I just want to again thanks to everyone for joining us on such short notice. As you can see, we look forward to adding Macaroni Grill to the Ignite family. We’re excited not only about the opportunity that it brings our business, but also the opportunity it provides to add shareholder value over time. Mike and I will be available tonight for follow-on conversations and then we’ll have some time Friday morning if anyone has time that they’d like to request, just please deal with Fitzhugh Taylor at ICR, and we’ll be happy to make time for you. So thanks, everyone, for your time.

Michael Dixon

Thank you.

Operator

Ladies and gentlemen, that does conclude today’s conference. We thank you for your participation.

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