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Del Frisco's Restaurant Group, Inc. (NASDAQ:DFRG)

Q4 2012 Earnings Conference Call

February 21, 2013 08:30 AM ET

Executives

Thomas Pennison Jr. - Chief Financial Officer

Mark Mednansky - Chief Executive Officer

Jeff Carcara - Chief Operating Officer

Analysts

Jeff Farmer of Wells Fargo

Josh - Piper Jaffray

Paul Westra of Cowen & Co

Justin Marshall - Deutsche Bank

Jeff Omohundro - Davenport & Company

Operator

Good morning ladies and gentlemen, thank you for standing by. Welcome to the Del Frisco's Restaurant Group Incorporated Fourth Quarter 2012 Earnings Conference Call. Today’s call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions.

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

Thomas Pennison Jr.

Thank you, Sicilia. Good morning everyone and welcome to our fourth quarter earnings conference call. Everyone by now should have access to our earnings press release for the 16-week period in fiscal year ending December 25th, 2012. If you have not already reviewed it, it may be found on our corporate website at www.dfrg.com, under the Investor Relations section.

With me this morning is Mark Mednansky, our Chief Executive Officer; as well as Jeff Carcara, our Chief Operating Officer. Before we begin our formal remarks, I need to remind everyone that part of our discussion today may include forward-looking statements.

These statements are not guarantees of future performance and therefore, undue reliance should not be placed upon that. We refer all of you to today’s earnings press release and our recent filings with the SEC for a more detailed discussion of the risk that could impact our future operating results and financial condition.

In addition, we also will be referring to some non-GAAP financial measures this morning. We have therefore provided reconciliations on those measures in the earnings press release table through the most directly comparable financial measures presented in accordance with GAAP.

With that, I would like to turn the call over to Mark.

Mark Mednansky

Thank you very much, Tom, and good morning to everyone on the call today. As our financial results suggest, we ended the fourth quarter on strong footing, which allowed us to exceed the high end of the annual ranges, so we have previously provided to you for comparable sales growth and adjusted EBITDA margins.

From a sales standpoint, fourth quarter comparable restaurant sales growth of 2.7% was above our implied range and this was despite formidable year-end two-year stacked comparisons, along with some challenges presented by Hurricane Sandy. In fact, we now have 11 consecutive quarters of positive comparable sales growth.

Also notable on our comp metrics is that we had no additional pricing in the fourth quarter and that entrée growth and sales mix were primarily responsible for driving comp sales. Our last increase was in April of 2012 and was approximately 1%.

The fourth quarter is obviously critical to us reaching our full-year targets, because this is both the longest period at 16 weeks, as well as because it encompasses most of the Holiday season. While you can see the overall trends were strong, it is notable that our private dining sales were even stronger as they increased by 11.6%. Strength in this segment demonstrates us that we are driving more variance of our private dining capabilities, and that the resources we have invested in growing it, including hiring a corporate wide private dining sales person are now paying off.

In addition to top line benefits, which include higher check average per guest, it also generates higher margins compared to that of our regular dining guest, and that further strengthens our profitability. Of course, private dining is only one part of what we view as organic drivers for sales. Effective marketing, delivering outstanding dining experiences, table side I want to include, and our continued focus on average sales will continue to drive organic growth for us.

Now, my comments so far have centered on our comparable restaurants. Let me be clear that six of our non-comparable restaurants, opened at the end of the fourth quarter, are also performing exceedingly well as a group and are above their initial targets. They, like their most established counterparts, demonstrate to us that the customer demand for our next-generation Del Frisco's dining experience is strong, and in our company, opportunity to expand our footprint is very significant.

In October, we opened our fifth Del Frisco's Grille in the heart of Atlanta’s upscale bucket neighborhood. This is a great looking restaurant that features a vibrant patio and a balcony that overlooks Peachtree Street. As the Grille is a relatively new concept, we will continue to evolve the brand, but I will say that the Atlanta décor package is probably the closest to a true prototype for future growth of this concept. Its color package has worn with a casual elegance to it, and I encourage all of you to stop in when you are in the vicinity.

In December, we opened a Del Frisco’s Double Eagle Steak House in Chicago, and this is in a building that formally housed the Esquire movie theater. This landmark space is 24,000 square feet and features a 39-foot wine cellar and in a incredible balcony that overlooks Oak Street. This restaurant is truly stunning. The restaurant is within walking distance of some of Chicago’s finest hotels as well as its upscale Gold Coast neighborhood, and the reception and the sales that we are receiving in Chicago have been exceptional.

Solidifying our reputation as the next generation fine dining company goes beyond opening the latest and great restaurant in trendy, iconic location, but rather entails our entire portfolio remains fresh and great [ph]. We therefore invest heavily in our asset base to ensure that we can maintain contemporary designs that appeal to guests looking for a high-energy environment. In other words, our ongoing remodeling efforts are not limited to generating short-term pop in comparable sales growth, but rather in a growth for our broad-based positioning.

Last year, we completed 11 renovations, including five in the fourth quarter. Some of these projects were cosmetic and defensive in nature, while some were more involved and geared towards positioning us to take local market share. The latter included several restaurants where we were able to add private dining seats as well as more patio seating. This effectively provides our guest more opportunities and options to dine with us.

During the fourth quarter, we made a very important addition to our team I would like to publicly acknowledge Jeff Carcara as the newest member of the DFRG family, having been named Chief Operating Officer this past November. Jeff is very much an accomplished leader in the restaurant operations and has held positions in increasing responsibility with some of this industry’s finest companies. He is an ideal fit for us, in leading and building successful teams, implementing innovative changes while still preserving our culture and then overseeing disciplined yet aggressive growth. We welcome Jeff to the team.

Before I turn the call back to Tom Pennison, who will share more about our fourth quarter results as well as discuss our 2013 outlook, it is important to provide some color on quarter-to-date sales trends. We are currently two-thirds to our 12-week first quarter, with overall comparable sales in the low-single digit negative range. Besides the obvious macro factors and fiscal uncertainty early in the quarter, we are lapping over a formidable positive 6.8% quarterly comparison from the prior year, and also added with the adverse weather in the north-east that was related to Nemo, which negatively impacted several of our highest grossing restaurants.

Although we are pleased with our Valentine’s week sales, we are not assuming just yet where we have fully passed the initial softness we experienced. Still, we are confident in attaining our 2013 outlook that Tom will share with you in just a few seconds. And with that, I will turn it over to Tom Pennison.

Thomas Pennison Jr.

Thank you, Mark. For our 16-week fourth quarter, our consolidated revenues increased 12.5% to $80.9 million from $71.9 million in the year-ago period. Our top line growth was a result of a 2.7% increase in total comparable restaurant sales, which lapped over comparable restaurant growth of 9.5% on a year-ago period, as well as the addition of 58 operating weeks versus the prior year. The additional operating weeks were related to the opening of four Del Frisco's Grille and one Del Frisco's since the beginning of the fourth quarter fiscal 2011.

As Mark alluded to, we estimate that Hurricane Sandy resulted in approximate $1.1 million impact to our revenues in the fourth quarter, as eight of our restaurants that were in the torrent’s path experienced disruptions and diminished sales. Factored in the loss sale of that were included in our comparable restaurant group, our comparable restaurant sales growth would have been approximately 130 basis points higher than the fourth quarter and approximately 46 basis points higher from fiscal 2012. Despite these loss sales, we were pleased to exceed the top end of our 2012 comparable restaurant sales guidance of 3.5% to 4% growth.

For Del Frisco's Double Eagle Steak House, revenues increased 8.3% to $43.4 million in the fourth quarter from $40.1 million in the year-ago period. This improvement was primarily due to a 5.9% increase in comparable restaurant sales, which was comprised of a 3.9% increase in average check and a 2% increase in entrée counts. This increase lapped over comparable restaurant sales growth of 10.3% in the prior-year fourth quarter. Operating weeks for Del Frisco’s were 148 compared to 144 in the fourth quarter of 2011, with the increase related to the December opening in Chicago.

For Sullivan's Steakhouse, revenues decreased slightly to $27.3 million in the fourth quarter from $27.6 million in the year-ago period. The 1.5% decrease in comparable restaurant sales was comprised of a 0.4% increase in average check and a 1.9% decrease in entrée counts. This decrease lapped over comparable restaurant sales growth of 8.6% during the prior-year fourth quarter. Operating weeks for both periods were 304.

Also in the fourth quarter, the Grille generated $10.2 million in revenues with 75 operating weeks versus $4.2 million with 21 operating weeks in the prior-year quarter. Last year at this time, we only had two locations open in New York City and Dallas whereas the fourth quarter of 2012, we benefited wholly or partially from Grille in New York City, Dallas, Phoenix, Washington D.C. and Atlanta.

In terms of our cost structure, cost of sales as a percentage of revenues decreased by 10 basis points to 30.4% from 30.5% during the year-ago period. Due to the natural hedge of our portfolio of concept, we were able to maintain stability in our overall cost of sales margin, despite the continued pressure in beef costs year-over-year. As a reminder, while all of our concepts serve steak and (inaudible), beef only accounted to 34% of our cost of sales in 2012. By concept, we experienced a 30 basis points increase to 30.8% for Del Frisco’s Double Eagle, which was able to offset a 40 basis points increase at Sullivan’s to 30.5%. Additionally, the lower cost of sales of 28.5% as a percentage of revenue at our Grille assisted in overall – offsetting overall cost increases, too.

Quarter-over-quarter, the Grille ’s 28.5% cost of sales percentage represented a 130 basis points increase over the prior year due to certain expected operating inefficiencies at our three new Grille openings in the second half of 2012. Restaurant operating expenses as a percentage of revenue increased 80 basis points to 42.3% from 41.5%.

At the concept level, Del Frisco’s leveraged these operating expenses by 40 basis points on higher comparable restaurant sales, while Sullivan’s de-levered by 170 basis points due to sales volatility during the period, which negatively impacted waiver. Despite three relatively new Grille openings operating during the quarter, relative to the prior year, operating expenses, as a percentage, were 380 basis points lower. That said, they still exceed our normalized run rate percentage due to new opening inefficiencies.

For the quarter, marketing and advertising costs decreased $70,000 from a year ago, and as a percentage of revenue, decreased approximately 40 basis points to 1.9%. Taken together, restaurant level EBITDA increased 10.8% to $12.5 million in the fourth quarter, from $18.5 million in the year-ago period, while the margin decreased 30 basis points to 25.4% from 25.7% in the prior year.

Preopening costs increased to $2 million from $0.8 million, due primarily to costs incurred for one Del Frisco’s Grille opened in October and one Del Frisco’s Double Eagle opened in December. Preopening costs did run above our model for our Chicago Del Frisco’s opening, but it is also an above-model restaurant in both size and revenue expectations. Please note that preopening costs do include among other items non-cash straight line rent, which is incurred during the construction period and can proceed our restaurant opening by four to six months. During the fourth quarter, approximately $360,000 of the preopening costs represented non-cash straight line rent. General and administrative expenses during the period increased to $4.8 million from $3.1 million in the prior year. While this increased, approximately $652,000 was due to new public company expenses including stock compensation expense, with the remainder due to added headcount and infrastructure versus the prior year to support our growth. As a percentage of revenues, general and administrative expenses increased 140 basis points to 5.9% from 4.5% during the prior year.

Depreciation and amortization increased to $3 million from $2.3 million. As a percentage of revenues, this expense increased 60 basis points to 3.8% from 3.2%. This increase was due primarily to new development of the past 2 years as well as remodel and refresh expenditures in 2011 and 2012. Interest expenses in the quarter decreased to $73,000 from $1.4 million in the year ago period. This decrease is due primarily to a substantially well over average credit facility balance at lower average interest rate and lower debt issuance caused amortization.

On a GAAP basis, net income for the quarter was $7.6 million or $0.32 per diluted share and this compared to the prior net income of $7 million or $0.39 per diluted share on an adjusted basis, which up for the quarter only impacted to saturate. Net income was $7.5 million or $0.31 per diluted share compared to $7.7 million or $0.43 per diluted share in the fourth quarter of the previous year. Please note that in all of the afore mentioned calculations, the share base was $23.8 million in the fourth quarter of 2012 compared to $18 million in the fourth quarter of 2011,

Briefly related to highlights for the full year 2012 compared to fiscal 2011, our consolidated revenues increased 17% to $232.4 million from $198.6 million. Total comparable restaurant sales increased 4.2%, including an increase of 6.6% at Del Frisco and an increase of 1.2% at Sullivan. This was following a total comparable restaurant sales increase of 11.2% in 2011. Half the sales as a percentage of revenue maintained consistent at 30.6%. On a GAAP basis net income was $13.8 million or $0.57 per diluted share compared to a net income of $9 or $0.50 per diluted share in 2011. And on an adjusted basis net income was $19.3 million or $0.94 per diluted share compared to $14.1 million or $0.79 per diluted share in 2011. I encourage you to review the reconciliation table in the earnings press for further details as to how we arrive at these adjusted results.

In terms of our liquidity and balance sheet, as of December 25, 2012 we had cash and cash equivalent of approximately $10.8 million and no outstanding debt. As we mentioned during the last quarterly call, we expect to be able to finance our operations for at least the next several years including new restaurant development and maintenance capital through cash provided by operations and borrowing the variable under our credit facility.

Turning to our outlook, we are introducing guidance for the 53 week fiscal year 2013. Specifically, we expect total comparable restaurant sales to increase between 1.5% to 2.5% on a 52-week versus 52-week basis on top of the 4.2% gain, we achieved in 2012.

To briefly recap 2012, our quarterly comparable restaurant sales growth was 6.8% in the first quarter, 4.2% in the second quarter, 3.5% in Q3 and 2.7% in Q4. As our comparable sales are more challenging in the first half of the year as well as the soft Q1 start, that Mark mentioned, our 2013 comparable guidance anticipate stronger growth in the second half of the year than during the first half of the year. We will open 5 restaurants that will be spread pretty evenly through year with one opening at the end of each of the first, second and third quarters and 2 during the fourth quarter. This is up from the 4 to 5 range that we had guided to previously.

Mark will discuss our development in more detail shortly. We expect cost to sales as a percentage of consolidated revenues was between 30.8% to 31.2%, which considers low double digit deep inflation as well as our earn ability to manage the following item. We also anticipate our annual restaurant level EBITDA to be between 22.8% to 22.3% of consolidated revenue. On a general administrative side we are expecting to be between $17 and $18 million and this is inclusive of non-cash stock compensation expense.

We anticipate an effective tax rate of approximately 30% to 32% and we are estimating our total capital expenditures growth before tenant allowances are between $27 and $29 million, however net of tenant allowances, cash capital expenditures are expected to be between $24 and $26 million. The 2013, with all this together, we expect our earnings per diluted share to be between $0.92 and $0.96 utilizing an estimated annual weighted average diluted common share base of approximately $23.9 million. Definitive increase in weighted average shares from the $20.4 million in 2012, of course related to the addition of shares sold in our IPO. Also. please be aware that the Boston Del Frisco will have a first full quarter in our comp base in the first quarter of 2013, bringing our Del Frisco’s comp base to 9. It’s unfortunately at different times to experience Nemo. Also the New York City Del Frisco’s growth will have its first full quarter in our comp base in the second quarter.

With that I’ll now turn the call back to Mark.

Mark Mednansky

Thanks Tom. Before we take your questions in Q&A, let me leave you with a few following thoughts. We have an incredible team at Del Frisco’s restaurant group who care deeply about operating exceptional restaurants and strengthening our brand that their collected efforts and dedication to executing our business strategy, the basis for how we intend to grow long term EPF in the 18% to 20% and thereby enhance value for our shareholders. In the two quarters since we began reporting our performance as a public Company. I think they have proven the strength of our model both in terms of lapping our own prior success as well as increasing both restaurant level EBITDA and overall profitability. I applaud each and every one of them for their efforts. As mentioned earlier in addition to our 2012 new openings our team also completed several renovations including adding private dining space and more patio seating.

In some cases, these new patios have not yet been utilized due to this past winter season. These added seats along with other plan promotions will provide for strong drivers to organic growth in 2013 and give us confidence in our ability to deliver on the expectations that we have shared with you. As a growth company, we have an exciting pipeline of openings this year and I’ll take you through them now.

Next month we’ll open a Grille e in Houston. Houston is a market we already have a Del Frisco’s and a Sullivan’s that is the beauty of the Grille e, in that you can complement existing restaurants within our portfolio or it can serve as a scout, going into new markets before we commence some later point with a higher priced Del Frisco’s Double Eagle. With that in mind at the end of the second quarter we will open a Grille e in Santa Monica, California and then at the close of the third quarter we’ll add a Grille e in Palm Beach, Florida. Finally, in the fourth quarter we are going to open Grille in Fort Worth and Southlake, Texas.

Well, we will not discuss 2014 and beyond in detail. I will say that we have great visibility and already have several sign leases as we expand our presence in both new and existing markets. We will not chase growth for its own sake. We do recognize that our brands have name recognition that far exceeds our clearance footprint and we can comfortably expand our base at a 10% annual rate or more. We are targeting at least the 25% cash-on-cash return after pre-opening expenses.

We are sought out by developers and landlords because of the cache that our brands bring to their projects which in turn allows us to be very selective in choosing the very best location. While our near term development is concentrated on the Grille e. All three of our concepts together target a much broader customer base than just fine dining and provide us with tremendous white space opportunity both in absolute terms and when compared to other fine dining concepts. So, with that we appreciate you joining us this morning and we’re now available to answer any questions you might have.

Operator, please open the lines for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we’ll go first to Jeff Farmer of Wells Fargo.

Jeff Farmer of Wells Fargo

Good morning. How are you?

Mark Mednansky

Hi Jeff, how are you today?

Jeff Farmer – Wells Fargo

Good. You did touch on this, so just looking for a little bit more color in terms of what is going on out there, generally speaking, not only sort of polished and fine dining, but getting into the world of casual dining. So, no surprise to anyone on this call about recent weeks obviously the combination of higher payroll taxes to late tax refunds among other things resulted in some mid-to-high single digit same-store sales declines, really from late January and to the middle of February at least in terms of what we know up-to-date. I am just curious, it is sort of a different demographic for your concepts, but are they as influenced by these tropic headwinds as the lower end or the casual dining consumers?

Mark Mednansky

Well Jeff, great question, this is Mark. Somewhat, we have three different brands and we typically serve the upscale guests, but there is some differences between the guests we see at Sullivan’s and there is at Del Frisco’s and I think at the Sullivan’s brand, you see a little more of control, people are controlled by the economy, but this going to the first quarter and historically this company does not like to talk about excuses, but just painting reality for you.

In addition to the uncertainty, people shocked about their payable taxes which I think is a short term deal. I really think that once people get used to it, they’ll open up their wallet, that’s what I have seen in my past, in the 35 years I have been in the industry. There’s a little hesitation and then they move forward. (inaudible) was accounted for basically 100 basis points or more in the first quarter. We lost to Super Bowl in one of our cities that was over $100,000 in sales loss. Road closures in front of one of my highest indexing Sullivan’s in the country for the entire first quarter and then we closed that on one of our range sites. One of our night clubs in one of our restaurants on January 2, that will open in 2 weeks, the road will open in 2 weeks, so we’ve had some other headwinds here in Q1.

That is kind of down the thrust, if you look at a 28 store comp base. You have these individual stores that can have specially when they are high indexing is of course the North East as visited Boston, just entered days which had most loss operating days to Nemo and that is our second highest indexing restaurant, but the positive side which gives us confidence as we look forward is we have a lot of individual items that impacted our small base in the first quarter, that are really not any system wide issues that will change around for us as we go forward. And as we continue to add restaurants 5 in 2013, that will start to mitigate those individual situations.

Jeff Farmer – Wells Fargo

Okay, and then just one quick follow up in the same ballpark. Again just going back over the last 18 months, there’s been several more governmental issues that has kept people – (inaudible) factor at home, just away from restaurants going back to the debt ceiling debate in August of 11, just more recently with the election tax debate, fiscal cliff overhang. Things like that, it was keeping consumers out of at least casual dining restaurant. So, just the same question as your experienced in the last 18 months been similar and again as we had into something like the cluster type event in coming weeks, coming months, any thoughts on how things like that impact your top line and your traffic?

Mark Mednansky

Well, Jeff I’ll start with that, this is Mark. You know I don’t think we’re affected as much by that with the guests that we serve throughout the three concepts and there is some initial shock, there is some initial pull back but we’re usually the segment that comes out of it quickly, affected last. Our guests have the assets to get through these tough spots and if you look at our performance year-over-year, lapping strong numbers. You’ll see that really we had a great ’12, a strong ’11 and we’re confident in our outlook for ’13.

Jeff Farmer – Wells Fargo

Right, thank you.

Mark Mednansky

Thank you Jeff.

Operator

And our next question comes from Nicole Miller Regan of Piper Jaffray.

Josh - Piper Jaffray

This is Josh on for Nicole. Thanks for taking my question and good morning gentlemen. Wanted to circle back to the portfolio approach that you talk about as you manage your cards profile, but that’s had some great success, keeping cards flat, if not even showing a little bit of leverage but, as you start to build out your new units and, is there an opportunity to leverage that portfolio concepts among the development community? Are you seeing, would you expect an opportunity for developers to gravitate towards you because you offer all of this different experiences from a high end dining perspective?

Mark Mednansky

Josh, Mark again. Good morning by the way. We absolutely see that, one of the reasons we built the Grille e, so we already had great name recognition with Sullivan and Del Frisco’s. Developers and landlords wanted us in their sites for those two brands. But to grow a Del Frisco’s and grow a Sullivan’s we needed 900,000 sq ft up to 24,000 sq ft. and both those concepts, though we have some restaurants that have strong lunch sales, are primarily dinner houses. What the Grille e gives us is a brand, as the smaller footprint, it is able to bring in high-end guests, but not make them spend as much money and it also delivers a very strong lunch day part and in some cases a brunch or a breakfast date part. So, we think now we have three branches are very attractive and I can tell you that our two real estate Vice Presidents are very busy on the road checking out opportunities that are brought to us by developers and landlords across the country.

Josh - Piper Jaffray

Great, thank you that is very helpful and then secondarily and maybe this one is for Jeff. Welcome aboard Jeff. Looking forward to talking with you, as you bring your experience from the industry on the operating side, can be a great team, may be if you could talk about the items that you’re working on and maybe with your on-boarding process looks like or what you expect to be working on over the next year, that would be helpful.

Jeff Carcara

Great. Thanks Josh. Good morning everybody, so far the on-boarding process has been great, learning the culture at DFRG has been pretty impressive overall. The culture here is extremely strong, the team is strong, they are focused. I had been nothing but impressed with how the team has been operating the restaurant.

Over the next year, there is several things I am working on, obviously growth is a big part of our future and the Del Frisco’s Grille brand is something I am focusing on right now. The new restaurant opening process is something that we’re looking at and looking to make it more productive, bring the cost efficiencies stronger for the opening process and then bringing the inefficiencies down quicker after the restaurants are open. So, that has been a huge focus right out of the gate and another big focus is developing the brand, with growth we need strong people and while we have great internal candidates presently, we need more. We need few to develop our brands so that we can have these restaurants filled with great operators to continue the success we’ve already seen in the past years here at the Company. So, those are two big buckets I am working on right now among other things.

Mark Mednansky

Josh, it is Mark again. The team is really excited with Jeff in his short time with us. One of the reasons we selected Jeff was we thought, Tom and I both felt he was a perfect fit for the culture, but yet he has had his strong experiences outside of our company and bringing in new fresh ideas and he is already making impact on the new store openings, getting out some of the inefficiencies at a faster rate, but in addition to that, this is a fresh set of eyes that is working together with me in our operations team.

Now, looking at the Sullivan’s brand and adding a little freshness to it. We have some plan refreshes throughout the country, more on that later, but I am excited about what Jeff brings to the table at Del Frisko’s Restaurant Group.

Josh - Piper Jaffray

Great, thank you (inaudible) and jump back in the queue.

Mark Mednansky

Thank you, our best in the call.

Operator

And we’ll bring our next question from Paul Westra of Cowen & Co.

Paul Westra of Cowen & Co

Great, good morning. Just getting back a little bit to the first quarter comp. Sort of trends, I mean I guess any more color maybe you can [ph]expose a little bit. I am trying to get to the underlying number obviously and lot of ups and downs and impacts from the storms and is there any way to give us some maybe little more color about -- there is a larger than normal percentage of stores that are in fact comping positive or maybe the excluding maybe FEMA Nemo was about 100 basis points, if there any…

Mark Mednansky

Beginning of the quarter Josh it was pretty widespread, let us cross the board coast-to-coast. I’d really think everyone just was taken back just for a few short weeks. We started to see, it coming back and the Nemo head, and that put us back and I think we’ve been very conservative in the number that affected us in Nemo. Last week was Valentine’s weekend. Valentines week makes up a big percentage of sales for the quarter. We had a very strong Valentine’s week and what encourages us when we see that -- does that tells us that guest who want to dine with us choose us in those important holiday occasions and buy that, we know that they will return to us. As you know Bob, Tom and I have always been very conservative in our plans, but we’re still not done with the quarter, but right now the trends that we’ve seen through the quarter. We think they will slightly improve with our pick up is more definitely as Tom said in the back half of the year when we are going over softer comps and after planned promotions and some of these added seats that we’ve talked about that we quickly added last year plus we have more development going on this year.

We are adding more seats in some of our locations in Q1 and Q2 of 2013.

Paul Westra of Cowen & Co

Qualitatively is it right to state that maybe early mid January was actually little stronger than earlier mid February excluding Nemo, you saw the softness earlier?

Thomas Pennison Jr.

Westra, this is Tom. We saw as Mark alluded, the first ever week we were pretty soft across the board, we saw a rebound, we are feeling better that we’ve recaptured that. Then we got hit with Nemo, which was pretty dramatic and that impacted our definitely our two highest indexing restaurants as well as others, not only for including some closed days and as well as some softness thereafter, which created a pretty good hole there just from the one-time events. And Mark alluded to the other items that were in there that you always feel best, but we’re seeing some Valentine’s Day obviously an improvement. But as we alluded to Valentine’s Day we expected to be strong. Our Valentine’s Day was stronger than prior year, so that is encouraging and then it was seen as positive, but we had the highest indexing part of the period being with Valentine’s Day at the quarter. So, we now have four weeks left or a quarter to make up for Nemo and these other individual events, so that we are for Q1 we are conservative as Mark alluded to in his remarks was that low single digit negative trend that we saw and once again you know with that in the first quarter we are very confident with the turnaround which is why we have the top end of our range at 2.5% for the year, we have to bring that back because of the individual event that is really driving that in our first quarter.

Paul Westra of Cowen & Co

As Boston comes in and New York grow later, all things being equal, of course excluding Nemo, would you expect those addition to the comp base is just optically to help or to hurt the comp base.

Thomas Pennison Jr.

Boston absolutely was going to be a creative force and as I alluded to even Jeff, Boston is probably the city that was impacted the worse by Nemo right as we came into our comp base. So, that which would have been a fantastic addition and we expected to be an addition thereafter as they are coming back positive after a Nemo although it is slow as people get (inaudible) that has been positive as well as our New York Grille would be positive to our comp base today and we expect that to be a positive story as we go forward because it has locations.

Paul Westra of Cowen & Co

Great and then a question on your obviously you have it up 20 to 60 basis points for the year. What is going to be the mixed impact roughly and then commentary on your double digit beef comp – or cost outlook, how much is that going to be variable with how much you have locked in and we continue to…

Thomas Pennison Jr.

Well, as far as today’s outlook, in the fourth quarter we did not see the significant increase that prior to their term with advertise which we are very pleased today, there is a lot of focus given where the herds are whether the expectation is significant increases this year. Now, around that 10% is what a lot of the [ph]purveyors in the industry (inaudible) been seeing, we have not experienced it to that extent and we have historically experienced a lower increase than our peer set in those discussions. We are still very excited and it is one of the many reasons as we have the full year impact of the Grilles that we opened in 2012 as well as for many reasons including cost of sales pressures were focused on Grilles at 2013. We feel it is a great opportunity for us to maintain ourselves back to the lower side of that range. However, it is one of the various – we want to make sure we have grown if we did see the pressures that are anticipated there. Like in the past, because of that natural hedge we did not have any of our beef walked in until long term contract. Additionally, one of the things we have held for ourselves, we did not what to feel in many areas that, we are in a good position and we have not done a significant pricing over the last 2 years I think unlike from our other counterpart, we’ve only had one pricing and really the last 14 months that has taken place as Mark alluded to in April 2012 and we’ve kind of hallowed on that just waiting to see that significant spike of pricing. We felt their pricing power available to is that we haven’t taken due share. So, we did see obviously we did see a 10% spike which we have not seen yet. We’ll consider some of their pricing, but I think we are in good shape to continue to manage to keep that differential relatively flat or just slightly up, but – there is some run there from the standpoint, it is worse than anyone expect. (inaudible) if you go back and look at our numbers historically, you’ll see that this team is always been able to control costs to sales. We’re flexible, we’re nimble. We react quickly and because of our culture in way we look at profitability. We are always able to take anything they have thrown at us with price increases.

One of the items just as a last point of that, Paul, is that built in to that cost of sales is we normally did experience when we are opening new restaurants some inefficiencies with cost of sales. For example, we just opened Chicago at the end of the year, Chicago, on the Del Frisco’s side, it’s still a new opening as well as the Grille – we have seen, the Grille has taken a little while where really 100 basis points to 150 basis points differentially inefficiencies. This is an area where we have an opportunity that we will plan and model that based on our historical trends. As Jeff has alluded to, that’s an area to the extent we can improve on our process, some additional upside as we manage throughout the year.

Paul Westra of Cowen & Co

Great. And the last question, if you were going to take a price with the safest, you will sort that April timeframe I guess?

Mark Mednansky

Paul, we have not set a date certainly on price increase. We are looking right now at a few things, but we will take price sometime in 2013. We just haven’t decided when. We will look at commodity cost first and then make decisions later in the year on that.

Paul Westra of Cowen & Co

Great, thank you.

Mark Mednansky

Thanks Paul.

Operator

We will take our next question from Justin Marshall of Deutsche Bank.

Justin Marshall - Deutsche Bank

Hi, thanks. I am on for Jason West. Just had a quick question again about the quarter-to-date comps. Were they negative at both brands and if you maybe can speak to the magnitude of just which one was more negative, whether it was the Del Frisco’s or Sullivan's? And secondly, you are trying to strip out some of the weather impact or some of these other one-time items. Were they, would we say probably positive? And then, I have a follow-up.

Thomas Pennison Jr.

Our Del Frisco’s Double Eagle performed better than the Sullivan’s in the first quarter. And on a year-to-date basis, we continue to be relatively flat there. Obviously, if you add back the impact of the storm, as Mark listed, it’s over 100% [ph] basis point differentials. That said, with the magnitude of, Mark alluded to, that mid-single – that low-single digit negative and we define low-single digit in that 1% to 2% negative range is what we were dealing with there on a blended, with Del Frisco’s performing better than the Sullivan’s did.

Justin Marshall - Deutsche Bank

Okay. But both are still negative I guess?

Mark Mednansky

So, Del Frisco’s is basically flat. In fact at both concepts early on, Del Frisco’s right now is basically flat, little positive, and Sullivan’s is low-single digit negative at this point.

Justin Marshall - Deutsche Bank

Okay. And then, just a follow-up on the beef question, can you talk maybe a little bit about how you guys see the pressure from commodity inflation playing throughout the year, assuming probably more pressure in the back half or in the first half, just what your thoughts are on that?

Mark Mednansky

If you look at this time last year, everyone was talking about the immense pressure we were having in Q4 of ’12, which didn’t materialize. But we do expect because of the lack of numbers in the herds right now, some pressure in the back half. But a lot of that is contingent upon sales across country, not only our company but some of our competition. So, we are pretty confident from the way we buy beef, the way we stay on top of the market, the way that we are fast and nimble in short-term buys, the way our chef on a weekly basis is going to adjust the sales mix through specials and through promotions, we are going to be able to maintain the range that Tom guided you on earlier. And again, if you look at our long-term history, you will see we have been able to produce it year after year, and finally, as Tom said, we still have that pricing bullet left in our gun, and we are extremely confident we will be able to hit those numbers that Tom talked about for full-year guidance.

Thomas Pennison Jr.

And Justin, as I was looking at from my modeling standpoint, as Mark alluded to, really on the beef side, the pressure would be heavier on the second half of the year, but at the same time, that’s also where I have the greatest contribution so far of my Grille, which still have that 200 to 250 basis points favorability. So, that Grille becomes a much larger, compounded of the pie of our portfolio, which will at that time, we will see the significant potential increases in beef. We are also having the best mix for our sales to maintain that consistency in the tail end of the year. Clearly, we focus with beef – it’s actually for non-beef items that we are seeing more of challenge with some of the produce items we have been dealing with, much more so than beef.

Mark Mednansky

So, by the end of the year, Justin, we will have 10 Del Frisco’s Grilles and that concept most definitely helps mitigate some of the cost pressures we have in the commodities basket.

Justin Marshall - Deutsche Bank

Thanks.

Mark Mednansky

Thank you.

Operator

(Operator Instructions) We will go next to Jeff Omohundro of Davenport & Company.

Jeff Omohundro - Davenport & Company

Thanks. Just another question on the commodities side, when you look at the non-beef items, the three non-beef items, what’s your thinking embedded in the cost of sales outlook? That’s my first question.

Mark Mednansky

Well, I will start with it, Jeff, it’s Mark, good morning. When you are talking non-beef, when you are talking produce and dairy, let’s take those first, and seafoods, those three different brackets really allow creative chefs and general managers the ability to influence the cost of sales. Those are the items that we use for daily specials, whether it’s vegetable specials, entrée specials, appetizer specials, those are the items that we stay on, on a daily basis. The communication in this company between chefs and general managers concerning commodity costs is tremendous. Weekly conference calls we have talking about items that we are preparing, about the products, from the certain purveyors we buy from, that does allow us to control those costs at a better rate. The other thing is our menus are inexpensive to print, our menus are flexible. We are able to turn on a dime within a two to three-week period, we can change out menus across this company if we need to, whether it’s taking off a product, adding products, or if we need to raise prices. So, again, if you look at the track record, this team can control costs when it comes to commodities.

Thomas Pennison Jr.

Jeff, one thing I would like to add, and great to hear you, Jeff. Hope we have done well. They are very different environment for me than past is that the focus of the kitchen here is we do have executive chef, we don’t have kitchen managers. And as a mindset that I have seen in that, clearly like many restaurants, you have a core menu, but the flexibility that exists in our concept for a chef special have been improved by our executive chef, our corporate chef as marked to the communication. The amount of (inaudible) are getting copied on all the emails at our company, but special, that literally if certain items are up today or produce or different pieces, there’s new specials that different ones that our executive chef have come up to take advantage to save costs to use less of a higher-priced item, more of something that we have better pricing and they are sharing with all of their fellow chefs, and they do any specials every single day in our restaurant as opposed to a monthly, like national type promotion. And then obviously, they are always good with – this team is managed well, and I think that’s been the success of the consistency of cost of sales that Del Frisco’s has been able to accomplish over the year.

Mark Mednansky

Finally, this Grille concept really is a testing ground for us. So, we have been able to test products, get great results from guests as far as favorability. And we still happen to have low food costs, and we can take, adapt a recipe from the Grille and utilize it, and we are utilizing some products, whether it be at Sullivan’s or at Del Frisco’s.

Jeff Omohundro - Davenport & Company

Thanks. And on the second question, and thanks for the details on the Q1 quarter-to-date. When you look at the consumer behavior of the guests in the restaurants through Q1, are you seeing much in the way of mix or preference shift? And does it vary by concept? Thanks.

Mark Mednansky

No. Really there hasn’t been. Back in 2008 and 2009, we definitely saw it. I mean, it affected our company. They weren’t buying as much mine, they weren’t buying many appetizers, side dishes, they were trading down. I have seen that today. Especially at the Del Frisco’s brand, there has been really no change. The Grille has been chugging along since the first when we opened, strong, strong check average, strong wine sales, no problem. I think with the Sullivan’s brand, you get a little more price uncertainty with our guests, and you will see people beginning when they are uncertain, maybe trim down a little on what they pay for wine or for appetizers, but our check average right now is strong at all three brands. Tom, would you agree with that?

Thomas Pennison Jr.

We haven’t seen a degradation in the check average from most of the restaurants.

Jeff Omohundro - Davenport & Company

Very good, thanks.

Mark Mednansky

Thank you.

Operator

And with no further questions in queue, I would like to turn the conference back over to Mark Mednansky for any additional or closing remarks.

Mark Mednansky

Thank you very much. We thank all of you for your interest in our company. We look forward to our next call with you and we look forward to seeing you out in our restaurants over the next quarter. Thanks and have a great morning.

Operator

This does conclude today’s conference. Again, we appreciate your participation.

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