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Executives

Jim Gilbertson – CFO

Rob Doran – CEO

Steve Wagenheim – President

Granite City Food & Brewery Ltd. (OTCPK:GCFB) Q1 2013 Earnings Call May 14, 2013 11:00 AM ET

Operator

Ladies and gentlemen thank you for standing by and welcome to the First Quarter 2013 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions) Your speaker for today is Mr. Jim Gilbertson, Chief Financial Officer. Please go ahead sir.

Jim Gilbertson

Thank you. Good morning and welcome to Granite City Food & Brewery’s first quarter 2013 conference call. This is Jim Gilbertson, the Chief Financial Officer and with me today is Rob Doran, CEO and Steve Wagenheim, the founder of Granite City Food & Brewery. Thanks for taking the time to listen to our calls. For the agenda today Rob will provide you some opening comments and highlights, Steve will discuss the store level operations, I will then review our first quarter 2013 financial results in more detail and Rob will provide final closing comments. We will then open up the call for Q&A.

By now everyone should have access to the first quarter press release, which we released last night. Our release includes non-GAAP earnings reconciliation schedule that we refer to during the call but first let us cover the required Safe Harbor Statement. Please note that throughout our call this morning, we will be presenting certain forward-looking statements of expected future performance including expectations regarding anticipated sales, operating margins, expenses and other matters. These forward-looking statements reflect our expectations and are based on currently available data. However actual results are subject to future risks and uncertainties, which could materially affect our performance.

We undertake no obligation to update any such forward-looking statements and we wish to advice you that risks and uncertainties that could affect our actual performance are set forth in the cautionary statements contained within our Annual Report on Form 10-K that was filed with the Securities and Exchange Commission on March 20, 2013.

We will reference certain non-GAAP financial measures in our call this morning such as restaurant-level and company-wide EBITDA, adjusted EBITDA to restaurant-level income before occupancy or IBO. Reconciliations of these non-GAAP financial measures to GAAP financial measures are included in our press release, which is available on our website. The non-GAAP schedule breaks out the performance of our comparable restaurants, which included 26 Granite City restaurants. At this point, we are not including Cadillac Ranch restaurants in our comp growth.

With that housekeeping out of the way, I’m going to turn the call over to Rob Doran, our Chief Executive Officer.

Rob Doran

Thanks, Jim. As you can see from the results of the press release, we finished 2012 strong and we started the New Year even stronger. What is really gratifying is to see our same-store sales figures continue to pace ahead of the industry. We offer a great value proposition with our great food and service at a restaurant at a reasonable price and times where the economy is still a bit shaky it appears that the customers continuing to look for value clearly we are delivering on that front. The result of giving the customer what they want is that Granite City continues to drive revenues reporting a 22.4% increase in the first quarter revenues compared to the prior year while the Cadillac Ranch Group has solid performance even in the face of our Indianapolis store having to compete against the Super Bowl weekend in the first quarter of 2012. The Granite City concept knocked the leather of the ball during the first quarter.

In 2013, we have an extra week of sales due to the timing of the calendar but even adjusting for that week, the Granite City restaurants had a same store sales increase of 3% during the first quarter compared to the Knapp-Track industry results of a negative 29% that puts Granite City nearly four points greater than the industry. Over the past several years, Granite City has consistently beat the industry average of same store sales by about 2%. These recent results really make us feel good about the concept and how it is holding up with our consumers.

Outside of the comps, we also had tremendous performance by our new prototypes in Troy, Michigan and Franklin, Tennessee, which I would like to take a few moments to talk about. While Franklin is only a couple of months old, Troy has been opened a full year. In the restaurant industry, you are always looking for the honeymoon period to end once the new store has been opened for a period of time. To-date, we have not seen the end of the honeymoon period for Troy.

The restaurant continues to see strong sales in everyday part with revenues being generated through the bar, the restaurant, a closed patio and through our private dining rooms. It is meeting and exceeding our expectations on a daily basis. We also feel that the restaurant has more upside as its Sunday Brunch continues to pickup stream and is moving closer to the sales and guest volumes of some of our better stores during that day part.

As for Franklin, the sales figures continue to get stronger every week and we feel that there is a lot of momentum left in the patio and the catering side of that restaurant. The patio has just begun to open up after experiencing a rough graining spring and we are just beginning to coordinate with the adjacent hotel to begin picking up a lot of their catering business. At present, these two restaurants are averaging over $6 million in sales per year per store that gives us a great feel of satisfaction knowing that our site selection process is strong that the look and feel of the prototype fits with our customers and that we are executing in a manner that is satisfying to our guests.

We feel, we have a winter with our prototype again we are excited about the next two, which will be going up later this summer and fall. The new restaurants are also delivering a nice mix of 71% food and 25% or 29% alcohol. Our bars are more contemporary and have become more of a social bar rather than just a waiting bar. As most of you know, little higher mix of the bar business is a great driver of our profits.

We do not intend to get away from our diner house routes but the mix, but the mix we are at with our prototype stores is right where we would like it to be. On the operational side of the business both concepts continue to remain strong despite concerns with commodity price issues going into the year, we have managed through that issue and the overall cost of revenue while up slightly are still being well managed. On the area, where we continue to see great success is on the labor side of our business. Over the last six to nine months, we continue to shift more responsibility to our AMs and our Assisted Managers and they have done a remarkable job taking on the responsibility and helping us to lower our overall labor cost.

As well, we are continuing to see month-over-month consistent results or bottom line with the Granite City restaurants running at a range of 24% to25% of income before occupancy as a percentage of sales in Cadillac Ranch, at a range of 27% to 28% of income before occupancy. Consistent performance allows us to plan our business more thoughtfully. We can focus on the future and what changes we need to make moving forward to continue to improve the guest experience and drive more profits to the bottom line. As an example, we recently rolled out a new menu that Steve is going to discuss. As part of that project, we had a number of changes on the menu some of which were riskier than others but once we could make because we know our team will be consistent with the execution of these changes.

Our revenue growth – growth is continuing to help in our G&A cost as a percentage of revenue decreased four points compared to the prior year first quarter. In that vein, we continue to focus on efficiency and I can tell you that between all of our employees both corporate and restaurant level, we are running at a high rate of efficiencies on a per revenue basis and on an adjusted EBITDA basis than we ever had in the history of the company. Our employees rather key to our success and the efficiency they are working at while maintaining our core concepts are especially gratifying.

The combination of greater revenues and a high level of efficiency are also producing a greater level of adjusted EBIT and the past quarter generated $2.2 million of adjusted EBITDA compared to $1.6 million in the prior year quarter an increase of nearly 38% on a year-over-year basis. This is extremely important given our growth plans for the future.

As we have discussed previously, we will be opening two more restaurants this year with one in downtown Indianapolis, Indiana and the other in the suburb o Cleveland, Ohio. Looking out further, we are hopeful of opening four to five restaurants in 2014 with a continual increase in successive years. The combination of our cash flowing business, strong alliance with our board and shareholders and a solid banking relationship with our partners of Fifth Third Bank help to make the future look bright relative to our growth plans.

Finally, I want to speak briefly about our move from the NASDAQ market to the over the counter market. Unfortunately as a growing restaurant concept, each restaurant brings with it a onetime expense of opening the new restaurant along with depreciation and amortization associated with the new restaurant once that is opened both items that push against our net income and shareholder equity. As a company, we tend to put a lot of money into our pre-opening expenses to make sure that the customer has a great experience from the first time they enter the store. We rely on word of mouth since the customer spends very little money I’m sorry, we rely on word of mouth since the company spends very little money on traditional media advertising. The pre-opening expenses, is a one-time event but we feel that some of the most important dollars spent to ensure the success of our restaurant.

Since we have fallen below the shareholder equity threshold, mandated by NASDAQ, we were hopeful that they would give us more time to open more of our prototypes especially given the huge success we are seeing with the current restaurants. When they decline to do so, while they decline to do so I want to ensure you that we will continue to work to great valve for every shareholder in the company. We feel, which we feel is defined more by our EBITDA and shareholders equity dollar figure.

By staying on the over the counter market, we will continue to maintain a high standard of disclosure and remain in an environment, where we can tell a great story of growth and value for current and future shareholders. To that extent, we feel this is a good time to begin telling our Granite City story and recently we are able to do so at the R.W. Baird 2013 Growth Stock Conference. Granite City is shaping up to be a great story and the value of Granite City is defined by the concept itself as well as by our EBITDA that can be generated as we grow. We will be realized as the investing public becomes more aware of who we are.

Now, I’ll turn the call over to Steve.

Steve Wagenheim

Thank you, Rob. Good morning everyone. As Rob discussed Q1, 2013 was a better quarter for Granite City. We were busy on many fronts. From a development standpoint, we opened our second new prototype restaurant in Franklin, Tennessee, which is an upscale suburb of Nashville. Additionally we were working diligently to add to our new store development pipeline and we have been using both our new stores in Troy, Michigan and Franklin, Tennessee to showcase the new Granite City to developers, landowners and brokers from around the country. I can tell you that all of these people, who have been kicking the tires of these new stores, are large.

From an operational side perspective, we accomplished many significant initiatives this past quarter including rolling out a new menu. Two we continue to install new technology in our restaurants so we can again improve efficiencies. Three, our training department is creating new learning tools to promote consistency of operations. And four, our marketing department is executing a plan to connect us with our local markets while simultaneously using social media to promote our food beverage and brand.

So, you can see, we are thrilled with our Q1 accomplishments because as we continue to raise the bar in every aspect of our business by continuing to add tools and systems to make us more efficient, we are also achieving outstanding financial result both from a sales and store level EBITDA perspective.

Let me drilldown on some of the initiatives and illustrate the positive effect they are having on the company. Let me start with the new menu. I’m really excited about this new menu that we rolled out last Wednesday it took many people from across all departments to pull off this extensive new menu. We deleted 19 items. We added 14 new items not including (site) and modified 47 other menu items at some fashion. We added lighter flair to our menu. We have gluten-free options and we added two broth-based soups. We also took some of the old cheesy classics and updated them by enhancing flavor profiles and a compliment.

All-in-all, we modified, changed or created 132 new recipes. Let me give an overview of what we did, our team analyzed each menu item and using a product mix evaluation, we deleted slow moving items and added items that tested and sold well in our specials program. Here are some of the new items we added, our roasted beet salad with candy beets, mandarin oranges, spiced corns, red onions goat cheese spinach and romaine finished with a mandarin orange vinaigrette, of the deep center cut sirloin, coffee bean, barbecue ribs which is phenomenal.

My personal favorites the Tuscan Pomodoro and we created a bacon tomato avocado grilled cheese melt on a multigrain sourdough. This one is a good example have taken a comfort food item and upgrading it in to a phenomenal iconic items. This is already a huge flavor for us. We added a few new menu categories such as small plates, which includes five new plates each priced at $7.95 and they look and taste incredible some small plates include glazed ribs, roasted red pepper hummus, sliders in our (inaudible) meatballs which will be an iconic item for us. I’m really excited about these items as they are great power foods ensuring plates that pair well with our handcrafted beers and signature drinks. We added a section called cocktails which features spirited drinks without spirits, items in this category will allow our guests to enjoy a handcrafted refreshing drink that is alcohol-free and uniquely flavored such as the blueberry mint lemonade or cucumber ginger fizz, these drinks are priced at $3.99 each.

Finally we added several lunch menu items that are value drivers and priced between 7 and 9 bucks. So lot of work went in to this and I just want to thank a few people and departments for a job well done. I want to thank our Culinary team led by Corporate Chef Rob Fair and our Regional Chef James for the amazing new menu items that are featured in this latest menu version. I want to thank Michelle Mason and his staff for all their support materials that go along with the new menu from recipe steps and training materials to new menu items descriptions of placement strategies.

Thank you to our IT department, who has to facilitate the integration of new menu items with our technology. Thanks to (inaudible) of our Marketing Department for all the support during this process. Thank you to Jeff Dean and our DOs our multiunit partners for helping in the screening and testing process as well as my fellow leadership team members, we all gain weight on this rollout as we spend a lot of time tasting these menu items and constantly modifying them until they were perfect. I know our guests would truly love this menu.

On another front, technology we are currently rolling out inventory software program that tracks our product is in moves through all phases of our business. Our program will attract our wallet greens from delivery to storage prep and production all the way to the final plate presentation by isolating product movements through the various stages of operations we strengthen our ability to identifying control our food and liquor product cost. From a training perspective we have been very busy our training department has created several outstanding training tools during the first quarter including training videos for new recipes, chef features and limited time offer selections. This powerful training tool give our bartenders crap a production crew a visual on how to build recipes, final menu items and signature cocktails. This is a valuable tool to manage product consistency.

From a marketing perspective we rolled out an LSM Local Store Marketing program in Q1. This is a program that allows us to connect to build relationships in the communities in which we operate. We assign these store representative connect with local businesses, hotels, churches and schools. We have an LSM program in 17 of our stores and we would fully be represented by all stores by June 1st. Another initiative that this department did was to run an internal contest to drive our email address space and we increased it by over 10% in Q1 by increasing our guest reach by a 11,000 guests. Lastly, we are aggressively using social media to promote our food beverages and overall branding.

Our last operational area of discussion to tell you about is this year’s field focus. This year’s staying for our managers and partners is the – to increase our reach and frequency in order to increase our sales we need to provide more to our guest so they spend more and want to visit more the results show our field operators embrace this team in Q1 with strong same-store sales growth.

Let me give you an overview of our Franklin, Tennessee opening which occurred in early February. We opened our new prototype in upscale community a 11 miles south of Nashville. Our new prototype restaurant is attached to a Drury Plaza Hotel which is Drury’s upscale lodging brand. We are servicing hotel guests who love our upscale look and our – and of course our menu without leaving the hotel. In addition we get our food events at the hometown for the goods that are staying there. But because we have a freestanding image next to the hotel we maintain our own identity which the largest open very strong with solid community involvement. We are averaging a $110,000 a week in sales with a food to liquor mix of 70 food, 30 beverage.

My strongest observation that I want to share about this new restaurant is the broad customer base from around the country that is being generated from the hotel that literally met people from all over the world. So while we are enjoying strong acceptance in the community our ability to brand GC nationally will be tremendous. Our staff is literally talking to people from across the country, who are trying GC for the first time and they absolutely robust. I personally have received many emails they ask to me when we’re coming to Alabama, Fremont, New York, Colorado, Texas and Maryland. Our new prototype continues to be well received and is incredibly comfortable yet upscale look along with a great food and service are again producing extraordinary unit revenues. This strong opening is particularly noteworthy in Franklin, Tennessee because Franklin is a marketplace that offers every brand in casual dining.

Lastly, we continue to follow our real estate development strategy for 2013 by looking for infield opportunities for our 2014 openings. We have an incredible sight in these site area of Louisville, Kentucky that has the right mix of day time office, high-end residential and daily needs retail right at that site. So we are excited about this 2014 opportunity. We are under process of finalizing deals in some of our existing markets so I’m not going to specifically mention sites or submarkets what I can tell you that the site attributes that are prevalent in Troy and Franklin are as robust in the new sites we are finalizing for 2014. The opening schedule for the rest of the years is follows, the open at Downtown Indy in July 2013 and we open in the East side of Cleveland at a very prestige that’s a very prestigious legacy village lifestyle center in October of this year. I am thrilled with the caliber of sites we are obtaining and I am excited about the buzz we are generating within the real estate industry.

The leadership team will attend next week, the annual real estate convention called ICSC and we heard there is a hut. And we head there as the hut commodity for developers and mall operators. There is a lot of excitement about the Granite City new prototype and we are talking to a lot of people in the real estate industry about further Granite City opportunities. Thank you very much.

I now like to pass it on to Jim Gilbertson.

Jim Gilbertson

Thanks, Steve. As you’ve seen here we started off 2013 with great results on a most satisfying items with the fact that we had over 50% store level EBITDA flow through on revenues that exceeded our internal expectations. Now the Cadillac Ranch Group had a solid first quarter, the majority of the flow through came from the Granite City restaurants. Our better than the industry same-store sales in the Granite City restaurants up above the sales at these units and our operational teams were able to execute in a manner that produce solid bottom-line results. I’d also like to note the Cadillac Ranch financials we’re also confidently configures that included the benefit of a large amount of business from the Super Bowl at our Downtown Indianapolis location in 2012.

The first quarter net sales have increased $6.4 million to $35 or 22.4% in the first quarter of 2013 compared to net sales of $28.6 million in the first quarter of 2012. The quarter benefited from the addition of week in our fiscal quarter as well as three additional occasion in operation of the first quarter 2013 compared to first quarter of 2012. Adjusting for the additional week in 2013 quarter, Granite City same store sales were up 3% compared to Granite City same store sales were down 1%. Overall the casual dining entry was down 0.9% in the first quarter based on Knapp-Track information.

Additionally our discounts in Granite City’s stores for the first quarter 2013 were down 2% compared to the casual dining industry, which was down 2.2% according to Knapp-Track. Total cost of sales before occupancy was $26.3 million in the first quarter or 75.3% of sales compared to prior year first quarter cost of sales before occupancy of $21.2 million or 74.3% of sales. The increase in the cost of the percentage of sales is primarily from marketing, training and maintenance repair. For the quarter Granite City cost of sales before occupancy was 76% and Cadillac Ranch cost of sales dropped to 72.2%. Overall first quarter restaurant-level IBOs increased $8.6 million or 24.7% as a percent of sales compared to $7.3 million or 25.7 in the prior year first quarter. For concepts restaurant-level during the quarter of Granite City restaurants generating a 24% IBOs as a percent of sales and Cadillac Ranch restaurants generating 27.8% IBO as a percent of sales.

Again our Downtown Indianapolis Cadillac Ranch restaurant benefited from the prior year quarter due to Super Bowl that was held in Indianapolis in February of last year causing Cadillac Ranch open centers to be at a higher level than generally expected. The 27.8% we saw in the first quarter of this year is well within the range in which we typically would expect to see that concept perform.

General and administrative expenses were $2.8 million or 7.9% of sales during the quarter compared to $2.5 million or 8.9% in the prior year quarter. The decrease as a percentage of revenue was due to a higher revenue provided by new locations and additional fiscal week in 2013. In the first quarter 2013 we incurred approximately a 158,000 of consulting expense related to a restaurant site we discontinue pursuing. Pre-opening expenses of 406,000 in the first quarter 2013 were primarily related to the opening of our Franklin restaurant of such expenses trailing 234,000 in the first quarter 2012 related primarily to the Troy restaurant we opened in May of last year.

Non-cash construction period of rent of 54,000 related to the restaurant we planned to open in Indianapolis in the end of later this year closing pre-opening expenses in the first quarter of 2013. Depreciation and amortization for the quarter was $2 million which is $1 million – $1.8 million in the prior year quarter. Net interest expense for the quarter was $1.2 million compared to $1.3 million in comparable period 2012. Net loss for the first quarter 2013 was $448,000. Net loss per share of $0.08 compared to a loss of $1.2 million per share loss of $0.30 in the first quarter 2012.

Our adjusted EBITDA for the quarter, which reflects all leases as operating leases so that the expense runs through the P&L is $2.2 million for the quarter compared to $1.6 million for the prior year first quarter. For the quarter on a weighted average basis 8.1 million shares were outstanding compared to 4.8 million shares in the prior year quarter. The increase in shares was as low of the sale of 3.1 million shares of our common stock to CDP in June 2012. On the balance sheet company ended the quarter with$2 million of cash on books compared to $2.6 million at the end of 2012. The decrease in cash was primarily related to the purchase assets related to the Franklin, Tennessee restaurant we’d opened in February, and the Indianapolis restaurant is currently constructing and planned to open this summer.

Both the companies did not use large any additional funds from line of credit in the first quarter of 2013. The company list to maintain a cash balance to meet weekly working capital needs we’ll pay down the line of credit during periods when we are not utilizing cash for growth. Total assets was $71.3 million at April 2nd 2013 compared to $71.8 million at the end of fiscal year 2012. Total liabilities remained at $70.3 million from the end of fiscal year 2012 at the end of the first quarter 2013. Well we continue to pay down our debt and capital leases we incurred additional liability with the addition of the Franklin capital lease.

We’re pleased with the start of the New Year and hope to continue the momentum throughout the remainder of 2013. As such we continue to hold with our revenue guidance of approximately $130 million to $140 million and adjusted EBITDA guidance which reflects all leases as operating leases so that the expense runs through to P&L of $8.5 million to $9.5 million this year.

With that let me turn the conference call back to Rob.

Rob Doran

As you can see from the Steve’s and Jim’s comments, we had a great year and part of the team, part of the Cadillac Ranch team as well. So, with that operator I’ll open the line to any questions that are maybe a – people may have. Are you there operator?

Question-and-Answer Session

Operator

(Operator Instructions) And there are no audio questions at this time.

Rob Doran

Thank you, operator. We’ll close our call.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference call. You may now disconnect your lines.

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