Red Robin Gourmet Burgers F2Q07 (Qtr End 7/15/07) Earnings Call Transcript

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Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB)

F2Q07 Earnings Call

August 16, 2007, 5:00 PM ET

Executives

Katherine L. Scherping - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Dennis Mullen - Chairman and Chief Executive Officer

Eric C. Houseman - President and Chief Operating Officer

Analysts

Jeffrey Omohundro - Wachovia Securities

Nicole Miller - Piper Jaffray

Jeff Farmer - CIBC World Markets

Matthew DiFrisco - Thomas Weisel Partners

Destin Tompkins - Morgan, Keegan

Conrad Lyon - FTN Midwest Securities

Ashley Reed Woodruff - Friedman, Billings, Ramsey

Steven Rees - JP Morgan

Jason Whitmer - Cleveland Research

Joe Fischer – Bear, Stearns

Michael Smith – Oppenheimer

Tom Lycat - Value Holdings

Presentation

Operator

Good morning and welcome to the Red Robin’s Second Quarter 2007 financial results conference call. At this time all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. It is now my pleasure to turn the floor over to your host, Ms. Katie Scherping, Chief Financial Officer of Red Robin.

Katherine L. Scherping - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Thanks Tom. Before I get started, I need to remind everyone that part of today's discussion, particularly but not limited to our outlook for 2007 and development expectations for 2008 will include forward-looking statements. These statements will include but not be limited to references to our earnings guidance, margins, new restaurant openings or NROs, trends, costs and administrative expenses and other expectations.

These statements are not guarantees of future performance. And therefore, investors should not place undue reliance on them. We refer all of you to our 10-K and our 10-Q filings with the SEC for a more detailed discussion of the risks that could impact our future operating results and financial condition.

I also want to inform our listeners that we will make some references to non-GAAP financial measures today during our call. You will find supplemental data in our press release on Schedule 1, which reconciles our non-GAAP measures to our GAAP results.

Now, I would like to turn the call over to Denny Mullen, Chairman and Chief Executive Officer. Denny?

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

Thanks Katie and thanks to all of you for joining us today. We also have Eric Houseman, our President and Chief Operating Officer with us. Eric and I will provide an update regarding various business initiatives while Katie will provide a financial review of the Second Quarter as well as talk about our annual guidance for 2007.

Before I talk about the earnings, I want to give you some highlights of what we have accomplished in the quarter. In April we launched our first national cable advertising campaign targeting adults 25 to 54 with families. The first flight ran for a total of six weeks from mid-April to the first week in June. In May we also initiated our Deal-Liciousness campaign on the Internet. We saw a great response from our customer base, both anecdotally from our comment cards and Internet response, as well as trend in positive guest counts for the first time in three quarters.

Considering the overall challenge in traffic trends of the casual dining industry during the same period, we triggered much of the positive traffic trends in Q2 to our media campaign and we were quite pleased with the results after six weeks on air. Building a national brand awareness takes time. Our second flight of cable TV began earlier this week and will continue on and off air until September 30, for a total of five weeks. We will be using the same series of commercials which focus on the brand as a whole and not on any specific promotions or discounts.

In June we closed on a $300 million amended credit facility we spoke about in last quarter’s call. On June 18, we used $44.3 million of this credit facility to fund the acquisition of 15 of the 17 existing restaurants owned by two of our California franchise partners. The remaining two existing restaurants were operated by us under management services agreements. In the third quarter, we have since (ph) acquired one of the managed restaurants and we also acquired the 18th restaurant that was under construction and which opened on July 16 for an additional cash payment of $4.6 million. The financial results of the 17 existing both owned and managed restaurants were included in our results for the last four weeks of the second quarter.

As a reminder, the 17 restaurants generated $56.3 million in revenue in 2006 according to our franchise parties. We are also pleased to report that in June we received a no-action letter from the SEC stating that the investigation into the company has been terminated. Another positive note, last week we successfully reached a memorandum of understanding with the plaintiffs in our previously announced wage and hour lawsuits filed in the State of California. The estimated settlement expense has been accrued in our quarter financial results an amount up to $1.65 million pre-tax charge or a $0.07 per diluted share after tax. With the closure of these lawsuits, other securities, class-action lawsuits and the SEC investigation, we feel all outstanding legal issues are behind us now.

We also announced yesterday that Pattye Moore will be joining in our Board of Directors. Pattye has been consulting with Red Robin over the past three years on brand development and most recently on the implementation of our national advertising campaign. She was with Sonic for over 12 years as Sonic grew from $900 million to over $3 billion in sales and from 1,100 restaurants to over 3,000 restaurants. We are very pleased and fortunate to have this seasoned restaurant executive on our Board.

From a development perspective we opened nine restaurants in the second quarter and supported the opening of two new franchise partner restaurants for a total of 11 new Red Robin restaurants during the 12-week period. We estimate that we have reduced construction cost by $150,000 per building for our 2007 units from the average cost of our early 2006 units, which cost us about $2.5 million. Excellent!

So far this year we have opened three restaurants with our new 5,600 sq. ft. design, which we estimate will further reduce construction cost by another $150,000 and improve our returns, although, these savings maybe somewhat offset by cost inflation.

The new design has the same seating capacity as our current prototype albeit with a better configuration of tables, a smaller more efficient kitchen and slightly smaller lobby. We have four more years with this design currently under construction. So far the feedback from our teams operating these restaurants had been quite positive and our 2008 development plan which I will speak to later on the call is expected to include units built with this new design.

On a GAAP basis we earned $0.29 per diluted share for the Second Quarter compared to $0.43 in the prior year. However, excluding one-time charges of $0.07 that we incurred related to our franchise acquisition, $0.01 in acquisition related integration expenses and $0.07 per diluted share in what we incurred in the settlement of the California wage and hour litigation, we would have earned $0.44 per diluted share in the quarter. Same-store sales increased 3.1% and after three consecutive quarters of negative guest counts we returned to positive traffic of 0.7% growth in the quarter.

We are encouraged by the positive impact of our media campaign head-on traffic and we continue to focus on the execution within four walls to deliver a great Red Robin guest experience.

With that I would like to turn the call to Eric.

Eric C. Houseman - President and Chief Operating Officer

Thanks Denny. Good afternoon everyone. In the Second Quarter of 2007 our comp store sales rose 3.1%, which consisted of a 2.4% price increase along with mix coupled with a 0.7% improvement in guest counts as Denny pointed out. For comparison purposes we posted a similar of 3.3% comp gain in the second quarter of 2006, which included a 2.4% increase from price and mix and a 0.9% increase in guest count. Our comparisons will get easier over the next two quarters as we left negative guest count trends and we hope to gain additional benefit from the national advertising second flight, which launched earlier this week.

You will recall that a restaurant enters the comparable base five full quarters after it opens. Our second quarter had 162 company-owned comparable restaurants out of the 240 total company-owned restaurants. The 13 acquired franchise restaurants in Washington will be added to the comp base beginning in the third quarter of 2007 while the 17 acquired franchise restaurants in California will be added to the comp base beginning in the third quarter of 2008.

Average weekly sales for the 162 restaurants in the comparable base was $65,553 during the second quarter of '07 compared to $63,568 for the same units last year. Average weekly sales for the 50 non-comparable restaurants was $59,979 during the second quarter of this year. That's up 2.8% compared to $58,330 for the 43 non-comparable restaurants in the second quarter last year. The total non-comp units weekly sales averaged 91.5% of total comparable unit sales during the Second Quarter. We attribute these results primary to the NRO normalization initiatives that we have recently implemented and the resulting strong opening sales averages we are seeing in our 2007 NRO class. Approximately 59% of our operating weeks from the non-comp restaurants in the Second Quarter of this year were from units in new markets. This is compared to 56% a year-ago. Our long-term model calls for restaurant margins in the 20-22% range and historically, it has taken new restaurants about three years to normalize to these levels.

In our experience, new restaurant margins generally are within the 10-15% range during the first year of opening, mid-teens the second year, and reaching 20% plus in their third year. Our recently implemented NRO initiative is designed to accelerate this process by maintaining as much of the honeymoon sales as possible and reaching more comp like profitability sooner than we would have experienced in the past. This is done through additional investments in leadership and training surrounding the opening and on-going support of a restaurant. Of course, these goals are predicated on selecting and retaining superior talent.

To ensure that we are identifying the right people, our selection process now uses key leadership traits identified among our most successful GMs to selecting developed leaders to take the reins of our new restaurants. Within the four walls of our restaurants, our improved training program redefines and strengthens our manager and hourly team member’s capabilities, like focusing on developing and measuring their proficiencies to increase their productivity and normalize margins sooner. These initiatives are incrementally costing us about 20% more in pre-opening cost per restaurant but are well worthy investment based on the improved opening sales we have experienced from this year’s opening class.

Similar to what Denny referenced, with regards to our advertising campaign, we are pleased with the performance we are seeing so far from an NRO initiative, and we believe it’s making a meaningful impact on our 2007 restaurant opening performance. Both of these initiatives are in the early stages of their influence on our business and while it’s too early to give detailed results of their respective impacts, the evidence we have seen gives us confidence that we are on the right track to drive the long-term performance and create both brand equity for our company and shareholder value for our investors.

With that I would like to turn it over to Katie, so she can review our financial results in more further detail.

Katherine L. Scherping - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Thanks Eric, now let’s talk about the results for the Second Quarter of 2007, which was a 12-week period. Total revenues for the Second Quarter of 2007, which consists of restaurant sales and franchise royalties, grew 31.5% to $178.6 million from $135.9 million last year. Restaurant sales grew 32.4% to $174.9 million from $132.1 million and consisted of $125.2 million in sales from our 162 comp-restaurants, $13.3 million from the acquired restaurants in Washington, $4.2 million from the four-weeks we owned the acquired California restaurant and $32.2 million in sales from our 50 non-comp restaurants.

Franchise, royalties and fees increased 1.1% in the Second Quarter to $3.7 million from $3.8 million. Last year we recognized royalty contributions from the 13 Washington restaurants of $435,000, as well as $406,000 in royalty contributions from the 17 California restaurants in the Second Quarter of 2006. The 86 comp restaurants in the US franchise system reported a 0.2% increase in same-store sales while the 18 comp restaurants in the Canadian franchise system reported a 2.9% increase in same store sales for the Second Quarter. Keep in mind that our 2007 restaurant level operating profit has been and will be impacted by an incremental 50 basis points in contributions to our National Advertising Fund.

Our restaurant level operating profit margin in the Second Quarter of 20% was 170 basis points lower than our 21.7% results for the prior year Second Quarter, but still within our long-term range of 20-22%. The variance is primarily attributed to an 80 basis point increase in cost-of-sale and a 110 basis point increase in operating expenses which includes the 50 basis points related to the National Marketing Fund for which there was no comparable last year.

Labor costs declined 20 basis points year-over-year. Our cost-of-sales were negatively impacted by 80 basis points this quarter by higher cost in most of our food and beverage categories. Please note that we took a 0.9% price increase in late April in conjunction with our new menu roll-out as we rolled off our April 2006 price increase of 1.5%.

We have and continue to see increased food cost in many categories and in response to those rising food costs as well as other cost threats we are planning to take a 2.9% price increase in early September to protect our margin. Our labor cost were down 20 basis points to 34.4% of restaurant revenue. As we expected we did face the impact of higher minimum wage rates year-over-year along with higher labor cost from our new restaurant opening, representing an increase of about 20 basis points over the last year.

The primary offset to these increases was about of 60 basis point decrease year-over-year, attributed to reductions in our workers’ compensation and health and welfare insurance cost, which we have experienced all year. The remaining 20 basis points of labor decline were primarily from labor of fixed wages. Please note that the recent federal minimum wage increase had only a nominal effect in our hourly cost structure since we operate in states where the state minimum exceeds the federal minimum. However, many state minimum wages are now indexed to inflation, so we expect they will rise annually in tandem with the CPI or some other (inaudible). We expect to experience pressure from our increasing cost of labor into 2008.

The 110 basis point increase in our other operating cost is 16.4% of restaurant revenue this quarter compared to a year ago, is primarily the result of incremental cost of our marketing and advertising spending as well as high utilities and higher travel costs for trainers post opening for our new restaurant.

As we continue to fund our marketing efforts we expect to see continued margin reduction for the full year of about 50 basis point and higher energy and travel cost will most likely continue to put pressure on our margin. General and administrative expenses improved 50 basis points year-over-year. Our G&A expense increased about 23% over last year slower than our 31.5% top-line growth. Included in the G&A expense in the second quarter of this year is about $200,000 in pre-tax expenses related to the integration of the California acquisition or penny per share after tax. We are expecting to achieve up to 50 basis points of leverage in G&A for the full year this year.

Our pre-opening expense in the Second Quarter 2007 was $2.6 million compared to $1.9 million last year, up 10 basis points on a percentage basis. Our pre-opening cost typically represents cost incurred approximately six weeks prior to restaurant opening with the majority of the costing incurred in the final two weeks. We opened eight restaurants in the Second Quarter of last year and nine in the Second Quarter this year. The Second Quarter of 2007 pre-opening expense included $2 million of cost incurred for the nine restaurants we opened in the second quarter this year and about $600,000 of pre-opening cost incurred in the Second Quarter this year for restaurants that we have opened in the Third Quarter of this year.

We are now budgeting $280,000 per unit, which is up 20% from last year and reflects the extra effort to ensure our NRO starts strong and stays strong. Net interest expense rose $1.9 million from $0.9 million last year. Our interest expense increase reflected increased borrowing to fund both our growth and two franchise acquisitions, but was somewhat offset by lower average interest rate this year.

In order to throw up our tax effective rate for the year to 31% we recorded an effective tax rate in the Second Quarter of 29.4% compared to 33.4% in the Second Quarter last year. We expect the full year 2007 effective tax rate to be approximately 31%. Net income for the Second Quarter was $4.9 million or $0.29 per diluted share on a GAAP basis compared to net income of $7.2 million of $0.43 last year.

The current quarter includes $1.61 million in pre-tax reacquired franchise cost related to the California acquisition or $0.07 after tax, $200,000 in pre-tax acquisition related integration expenses or penny per share after share and finally $1.65 million of pre-tax charges or about $0.07 per diluted share after tax for the California wage and hour legal settlement that Denny referenced earlier in the call. Excluding these three one-time charges in the quarter, our earning per diluted share would have been $0.44 in the quarter and $0.89 year-to-date. We also incurred $1.8 million of pre-tax stock compensation expense or $0.07 per diluted share after tax in the Second Quarter of 2007 and $1.4 million of pre-tax stock compensation or $0.5 per diluted share after tax in the Second Quarter of 2006.

For the 12-week Third Quarter we have already open all five new restaurants that we expected to open in the period. Our franchises are expected to open one-to-two new franchise restaurants in the Third Quarter. For the full year we are expecting to open 25 or 26 new company-owned units while our franchises are expected to open 14 or 15 new restaurants. As a reminder, we still expect that the operating weeks from new units opened in new markets will represent about 60% of our non-comparable operating weeks in 2007. For the Full Year 2007, which is a 52-week fiscal period we anticipate revenues of $760 million to $772 million, inclusive of our recent California franchise acquisition, and we still expect comparable restaurant sales to increase approximately 2.0-3.5%.

We have essentially kept our full-year EPS guidance the same; however, taking into account the acquisition related accretion and expenses, as well as the legal settlement expense our GAAP-basis net income is expected to be between $1.65 and a $1.76 per diluted share. Our 2007 GAAP EPS reflects the estimated $0.05-0.06 accretion from the California franchise equitation, the one-time charges of $0.07 per diluted share related to the reacquired franchise costs, a $0.01 per diluted share charge related to acquisition related integration expenses, and $0.07 per diluted share charge related to the California litigation settlement. Also included in our Full Year 2007 EPS guidance is $0.28-0.30 per diluted share for stock compensation expense.

Please note, that implicit in the assumptions we have provided in our guidance is an expectation for improvement and comparable restaurant comp-store sales concentrated in the Second Half of the year as comparison not only are easier but we also expect to continue to improve guest traffic in response to our advertising campaign.

As I mentioned on our last call, we took a price increase early in the Second Quarter of about 0.9% as we rolled off our April 2006 increase of 1.5%. In early September we plan to take an increase of 2.9% and we will roll off a 1% increase we took last October and a 0.4% increase we took last December in the Forth Quarter.

We reiterate our commitment to maintaining our restaurant margins over the long term at 20-22% and to gain G&A leverage over time. Keep in mind that our national advertising campaign is impacting our margins by an incremental 50 Basis Points from March forward to fund our portion of the 1% contribution to the National Advertising Fund. Taking into the account the success of our cost reduction initiatives in our new building, our 2007 CapEx should be around $75-85 million of which roughly 12-15% is for ongoing maintenance. Now, with that I’ll turn the call back over to Denny.

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

Thanks Katie; let me just briefly summarize our observations from the Second Quarter. Our national advertising campaign helped drive positive traffic in the Second Quarter after being on air for six weeks from mid July to early June. We look forward to seeing the results of the next flight [ph] that started this week and will end September 30.

We understand that it will take a long time to build our brand and we will be carefully considering our 2008 media strategy and we will share that with you on the Third Quarter Earnings Call in November. Our new restaurant opening initiatives are improving our initial sales volumes above and beyond the volumes we have seen in the same time period for the last several years. We are achieving these impressive results in both new and existing markets and we are cautiously optimistic that these initiatives will help us retain more of these high-sales volumes.

Our new prototype development has delivered this cost-savings we had hoped to achieve and has provided us with a very functional building with the same sales volume capacity to improve our Return on Invested Capital. We are anticipating that about 75% of our units in 2008 will be built with this new design. In addition, we are considering more real-estate options and we have several ‘n-cap’ [ph] locations in our development pipeline for 2008 which are typically lower cost to build than a free-standing unit.

Given, the favorable results of our initiatives today, the Board has approved accelerating the development of our restaurants and continuing to build our brand nationally. We expect to open between 30 and 33 new company-owned units next year with over half of the 2008 new restaurant offerings coming from existing markets.

Finally, we announce today that our Board of Directors has authorized the company to repurchase up to $50 million in the company’s stock. We have now entered into an accelerated stock buyback program at this time, but we may repurchase shares opportunistically from time to time at stock prices that would be accretive to earnings.

So, in summary, although we are in the early stages of implementation we are pleased with the progress we are making in our operational, marketing, and development initiatives. We would like to thank all the great team members for their efforts in the Second Quarter and look forward to updating you on the results during our next call. With that operator we are ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We will take our first question from Jeff Omohundro with Wachovia.

Jeffrey Omohundro - Wachovia Securities

Thanks, my first question; on that 2008 real estate decision to step-up the growth, I wondered if you could talk about how the real-estate pipeline looks right now in terms of secured sites, how the quality of the sites look to you at this time and I think you said -- I didn’t quite catch it about what the percentage of new markets would be in that 2008 outlook say relative to the 2007?

Katherine L. Scherping - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Well, I will start with your last question first Jeff. The new markets in 2008 are expected to be less than half. We will have more than half in existing markets.

Eric C. Houseman - President and Chief Operating Officer

The real estate pipeline, keep in mind when we did a slowdown, or so called slowdown in 2007 from the 32 units that we did in 2006 down to 25 to 26 in 2007 we pushed the number of units at that time into 2008. So, the pipeline is in very good shape with obviously we believe very high quality units, somewhere to what we have been opening in 2007, so we don’t anticipate any problems with the pipeline.

Jeffrey Omohundro - Wachovia Securities

Very good, and then my other question is about this price increase that will be coming in September of 2.9%; will that be in association with a menu update or do you envision just a reprint with higher pricing?

Eric C. Houseman - President and Chief Operating Officer

Jeff, it is just going to be a same old menu, just new pricing.

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

Same old menu that we just rolled out in April.

Katherine L. Scherping - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Yeah, in April.

Jeffrey Omohundro - Wachovia Securities

Then finally on the commodity outlook I guess your update on the contracts were the balance of 2007 and what are you thinking about 2008?

Eric C. Houseman - President and Chief Operating Officer

Well, Jeff right now we have a contract on poultry fries, bread, and seafood pretty much till the November, December of 2008.

Katherine L. Scherping - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

All these contracts are until 2008.

Eric C. Houseman - President and Chief Operating Officer

Great point Katie; poultry is actually at the same price for this year as well as for the remainder of 2008 and then obviously hamburger we buy on the spot market and then oil, cheese, and dressings on futures.

Jeffrey Omohundro - Wachovia Securities

Great thanks.

Operator

We will take our next question from Nicole Miller with Piper Jaffray.

Nicole Miller - Piper Jaffray

Good afternoon.

Eric C. Houseman - President and Chief Operating Officer

Hi, Nicole.

Nicole Miller - Piper Jaffray

I just wanted to clarify something in development. First, if you say half-existing markets that leads us to we believe half and developing markets and do we at this point distinguish, like, developing meaning going into markets where there are not penetrated but -- I guess my ultimate question is are you actually going into a new market and putting stores where there aren’t any stores in 2008?

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

Well, again the definition of new markets, I think we have talked about before -- if we go into one particular town, I could pick one in 2008, it may have one unit in it, but it will be in a continuous state or it could even be in a continuous county and still be considered a new market if it doesn’t have another restaurant within 30 miles or it hasn’t been there a couple of years. So, predominantly and it’s no different from the 2007 development schedule in new markets where we continue to penetrate. There aren’t a whole lot of markets or a whole lot of states that we are not in at this point where there is a good population base.

Nicole Miller - Piper Jaffray

So, this thing with the other half is that it’s fair to understand that you are going to go back and back so where you have been going in 2007.

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

Yes very definitely. More of the Tennessee’ and Alabama’s, North Carolina’s, South Carolina’s where we have been opening.

Katherine L. Scherping - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

And we have got Southern Colorado, and Arizona and California as well

Eric C. Houseman - President and Chief Operating Officer

And Washington.

Katherine L. Scherping - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

(Inaudible) markets for a long time.

Nicole Miller - Piper Jaffray

So, it is some backfilling of other the developing of new markets?

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

Yes.

Nicole Miller - Piper Jaffray

Okay, and then of the 30 to 35, how many of those are signed leases or Letters of Intent?

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

30 to 33, I don’t have that in front of me but I am sure all of them are signed letters of intent and many of them are under construction at this point.

Nicole Miller - Piper Jaffray

Okay, I just want to go back to the Fourth Quarter pricing Katie, I know you are saying 2.9% in September; you developed 5.3% for that month and then is it 1.5% you roll off in October and 1.5% in December?

Katherine L. Scherping - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

1% in October and then about 0.5% in December.

Nicole Miller - Piper Jaffray

1% in October and 0.5% in December. So, you will be running on what -- it’s about 3.5% less Third Quarter and what does it come out to be in the Fourth Quarter, about 3%?

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

Weighted average is the will be about the same.

Katherine L. Scherping - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Weighted average is about the same because September has only got really one full month in the quarter and Third Quarter.

Nicole Miller - Piper Jaffray

Okay, so you will be running in about 3.5% in the back half of the year.

Katherine L. Scherping - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Yeah between 3.0% and 3.5%, I think.

Nicole Miller - Piper Jaffray

Okay, can you talk just about the California impact? Are you seeing anything there and specifically I guess both in current results and then development plans for 2008. How much of that stems from inability to not go into California?

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

You mean because of the acquisition of the California (inaudible).

Nicole Miller - Piper Jaffray

Yes.

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

You know, not a whole lot of money in that territory yet because again the development takes 18 months to 2 years and we have disclosed on it not too long ago, I mean we did open the one in Fresno but that was under construction that we bought from them but we are actively looking in California and all markets and we have some other area restrictions done at San Diego that we have eliminated so we can do some more things down in that are too.

Eric C. Houseman - President and Chief Operating Officer

And then in regard to the first par of your question Nichole, we have said that we will break out or we will talk about when there are regional differences in what we call the big tree and right now we are not seeing any differences that are material.

Nicole Miller - Piper Jaffray

On advertising side, with this next flight in August and September are there any new commercials and have any networks being added?

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

I think I said it’s the same commercials that we did before, they started running on Monday, there are actually like Sunday on a movie and they will run through September.

Nicole Miller - Piper Jaffray

Same networks?

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

Oh yeah, same network, same type of programs, same target.

Nicole Miller - Piper Jaffray

Okay, and basically Dan can you just walk us through what either the same-store sales are so far in the third quarter or just qualitatively what the traffic trends look like; how it is picked up or how you are monitoring that in between the traffic, the TV. periods.

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

As consistent with our policy we don’t talk about mid-period traffics; we just started again TV, we will know a whole lot more as we continue to build throughout the quarter as we move into Third Quarter call.

Nicole Miller - Piper Jaffray

Is it fair to say if we look at July results if there was no advertising specifically that traffic was so positive?

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

Yeah we are not going to talk about July specifically; we obviously -- TV went off air in the first part of June. So, we were dark until last Monday or we had no paid media promotions and that was up against last year where we were running radio and some direct mail, but other than that we are happy with where we are in this process.

Nicole Miller - Piper Jaffray

Thank you very much.

Operator

We’ll take our next question from Jeff Farmer, with CIBC World Markets.

Jeff Farmer - CIBC World Markets

Great, thank you, I wanted to follow-up on some of them development questions. It has been more than a year since you last talked about this, but at one time you were pointing to a 17%, 20% long-term company-owned unit growth rate and it looks like in 2008 you are pointing to a 13% growth rate or so. So, is that closer to what we should expect in longer-term, that 13% rate?

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

No, it is just what we are comfortable with committing for 2008 at this point.

Katherine L. Scherping - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

It is exactly 20% higher than what we did this year and that’s how we always calculated -- our long-term growth was based on the number of restaurants done each year. We’ll increase that number going forward, so that is how we have always calculated it in the past, so you can look at the 30-33 guidance from were we are this year to next year, it is still about 20%.

Jeff Farmer - CIBC World Markets

Okay, and then just a little bit more color on the NRO normalcy efforts. I definitely understand the increased training, you efforts to measure proficiency, but I think you guys have also brought on seasoned restaurant-level managers to work with some of the restaurant managers of the NRO unit during the honeymoon phase, is that correct?

Eric C. Houseman - President and Chief Operating Officer

Yeah, Jeff we have done a couple of things; in terms of our selection program we have really stepped that focus up with our benchmark to determining the right leadership and characteristics and we are also attempting to get a year out and are achieving that and identifying the GAM’s and the KAM’s that are Red Robin Seasoned veterans that have been in the system and performing for at least a year. And obviously, if we had to open up a new restaurant with a brand new manager to Red Robin then yes we will support them with a seasoned Red Robin General Manager, but that’s the last thing we want to do; we want to open up all of our restaurants with seasoned GM and leaders.

Jeff Farmer - CIBC World Markets

Got it, and then just as a follow-up to that, are you doing this both in established as well as new markets?

Eric C. Houseman - President and Chief Operating Officer

Correct.

Jeff Farmer - CIBC World Markets

And you expect to continue to do this out to ‘08 and ‘09?

Eric C. Houseman - President and Chief Operating Officer

That is the bench strength plan.

Jeff Farmer - CIBC World Markets

Okay. Thank you guys.

Eric C. Houseman - President and Chief Operating Officer

Thanks.

Operator

We’ll take your next question from Matt DiFrisco with Thomas Weisel Partners.

Matthew DiFrisco - Thomas Weisel Partners

Hi, I just wanted to ask about the promotional environment you are seeing out there now and should we read into, I guess, the continuation of meaningful price increases that you still feel as evident by your positive traffic that you can take price here, and/or are you seeing the acceleration of maybe possible competitive pressures from the more generic foreign grills such as Your Chilies, Ruby Tuesday’s, Applebee’s, how do you contend against that and what are you seeing out there right now?

Dennis B. Mullen - Chairman and Chief Executive Officer

That has a lot of questions which we don’t could have the answer to everything that you are asking. We thing we have pricing power, we reluctantly raise prices to maintain margins. We have talked before on where we think we are on a perspective of pricing and we monitor closely what some of the others, that you mentioned, have taken in pricing. So, we still think we are in good shape, although, we are always nervous about pricing and the environment is what it is out there.

Eric C. Houseman - President and Chief Operating Officer

And in terms of little more color, Matt, both the franchise acquisitions that we made over the last 12 months, the franchise in Washington as well as the franchise in LA and Fresno, both currently have menu pricings above our highest peer across the country and are experiencing positive same-store sales.

Matthew DiFrisco - Thomas Weisel Partners

And that was going to be my next question. Do you see any disparity between the regions? I know (inaudible) so I did California and July was soft. Are you pretty much well balanced in that 3.1% in 2Q?

Dennis B. Mullen - Chairman and Chief Executive Officer

Oh, with the balance in terms of the sales? Yes. Yes we are. We have no reason at this point to call our California or any other markets like some others have mentioned.

Matthew DiFrisco - Thomas Weisel Partners

Okay. Great, thanks.

Operator

We will take your next question from Destin Tompkins with Morgan Keegan.

Destin Tompkins - Morgan, Keegan

Thanks. Good afternoon. My first question is just a clarification on the percent of development in ‘08 that’s going to come from the smaller prototype to 5600 sq. ft. prototype, was that 75%?

Dennis B. Mullen - Chairman and Chief Executive Officer

70%.

Destin Tompkins - Morgan, Keegan

Okay. So, I guess we should assume that based on the three you’ve opened so far you feel confident enough to increase that percentage in 2008?

Dennis B. Mullen - Chairman and Chief Executive Officer

We have 400 constructions of them.

Destin Tompkins - Morgan, Keegan

Okay. Additionally, as we look at the addition of Pattye Moore to the Board, should we expect that she would remain fairly involved with the evolution of the advertising strategy?

Dennis B. Mullen - Chairman and Chief Executive Officer

Oh, yes. Yes, she will.

Destin Tompkins - Morgan, Keegan

That’s good, thanks.

Dennis B. Mullen - Chairman and Chief Executive Officer

Okay, Destin.

Eric C. Houseman - President and Chief Operating Officer

You probably want to know about the Black and (inaudible) Burger that is coming up in the fall promo event?

Operator

We will take your next question from Conrad Lyon with FTN Midwest.

Conrad Lyon - FTN Midwest Securities

Hey, good afternoon everyone. There is a question for you Katie. I am not sure if you have spoken to this, did you give any indication of what your diluted shares might be for ‘07?

Katherine L. Scherping - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Our diluted shares for ’07, if you will hang on for a second or you got another question, I will look it up for you.

Conrad Lyon - FTN Midwest Securities

Okay. And part of that question is getting out if you are going to bake-in any type of repurchases into the number?

Katherine L. Scherping - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

We have got 16,814,000 at the end of the Second Quarter weighted average, and for the year it won’t materially change by sixteen eightish and depending on it if there is any buyback certainly that would take that number down, but we have not put any of that in our guidance expectation at this point.

Conrad Lyon - FTN Midwest Securities

Okay, great. In terms of your development schedule for 2008, I am sure if you talked about this as well, but percentage of mall based versus non-mall based?

Katherine L. Scherping - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

About 80-20 currently and next year…

Dennis B. Mullen - Chairman and Chief Executive Officer

It could be in that same 80-20 range. It depends at the tail end if we -- in California where it will be little bit more expensive, we are looking more and more in malls and our acquisition that we did with Top Robin there, predominantly mall based units.

Conrad Lyon - FTN Midwest Securities

Yeah, yes, right. Okay. Let me shift over to your advertising, the spots, I mean, this next flight, is it going to be in the same spots that you are running?

Dennis B. Mullen - Chairman and Chief Executive Officer

Yes, exactly the same.

Conrad Lyon - FTN Midwest Securities

Okay.

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

Exactly, as you saw in the first flight.

Conrad Lyon - FTN Midwest Securities

Okay. I meant congratulations on that. It sounds like you guys did pretty well. I thought there might be some little trial and error going forward, but it sounds like you guys are doing well there. Okay, in terms of maybe competition here, has the competitive set changed at all for you, I know there are some questions about chilies here, but what brand would you say keeps you up most at night?

Eric C. Houseman - President and Chief Operating Officer

Red Robin, she was in the four walls and taking care of guests. We look inside out and we can’t change what the competitors do and we can only impact what we do.

Conrad Lyon - FTN Midwest Securities

Okay, fair enough. Let me ask you then. In terms of the macro environment, is there any one that creates a little bit of a drag for you guys, is it the stalled [ph] gas prices, interest rates, sub prime [ph], any worries there?

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

No, I mean we read the paper and we experience all the paranoia, if you will, just like it was today in the market. We are concerned about all that. We were very concerned about this when we raised prices. That’s why we monitor what others had done in the marketplace and how we felt about our pricing power. Commodities, we have talked about on our last call and everybody in the industry is talking about it on this call. We think we have covered it, both commodities and it was the price increase.

Conrad Lyon - FTN Midwest Securities

Okay, alright. Fair enough, thank you very much.

Operator

We’ll take our next question from Ashley Woodruff with Friedman, Billings, Ramsey.

Ashley Reed Woodruff - Friedman, Billings, Ramsey

The question is on advertising, as you said you have done all brand advertising this year and not promotions, or promoting a specific item. As look at 2008, is that under consideration to tweak that somewhat?

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

Well, it’s always under consideration, but as you said, we haven’t, we want to make a finalization we need to see how the next flight goes, we will be doing creative briefs, talking to our franchise partners and develop in that as we go into the late fall.

Ashley Reed Woodruff - Friedman, Billings, Ramsey

Okay, and then on the sales impact, have you seen a material difference in I guess improved performance in new market versus existing markets for the advertising or has it kind of affected them all the same?

Katherine L. Scherping - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

I don’t think. We saw our non-comps increase 91.5% of our comp store base, so that’s a good indication that we are starting to see some impact there, and we are almost equal in existing and new markets as a percentage of cormp. So, we are starting to see those new markets catching up and that could be part of the media, it could be some of the other initiatives we have got going on that are in the non-comp based model. So, it is hard to bifurcate that into what exactly is causing that improvement, we are seeing some improvement.

Ashley Reed Woodruff - Friedman, Billings, Ramsey

Then on commodities, chicken costs, I believe you did have a contract at fall of 2007 favorably, and now you said, you have extended to 2008. Help think about the little bit of that favorability in 2007 in order to extend the contract?

Eric C. Houseman - President and Chief Operating Officer

Yes.

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

Let me try to give you a short story and we can take it offline. We had a contract. As everybody knows corn prices went over $4. This is the supply that we have dealt with for years and years and years. They came to us and said we are getting killed as we did in 2005, and in 2006 when it went the other way they worked with us so we worked with them and we took an increase in chicken. So, we were, where we were probably flat Katie before, flat to 1% favorable early on, and we are probably 10%, 15% unfavorable at this point.

Katherine L. Scherping - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

It will blend about 2.9% threat to the full year.

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

We monitor corn prices and obviously if corn drops dramatically, we will be going down to talk to them to go the other direction.

Ashley Reed Woodruff - Friedman, Billings, Ramsey

Okay, and then on the Hamburger, what was the inflation you saw on Hamburger meet this quarter and what are you expecting for the Second Half?

Eric C. Houseman - President and Chief Operating Officer

It’s about 15%.

Ashley Reed Woodruff - Friedman, Billings, Ramsey

15% in the Second Quarter and Second Half or…

Eric C. Houseman - President and Chief Operating Officer

Yes.

Ashley Reed Woodruff - Friedman, Billings, Ramsey

Okay, Alright thank you, that’s all.

Operator

We will take our next question from Steven Rees from JP Morgan.

Steven Rees - JP Morgan

I wanted to ask about the franchise same-store sales that are positive 0.2 [ph], obviously lower than the company system and why you think that the domestic franchise needs aren’t benefiting to the same extent that the company’s stores from advertising?

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

There are a couple of factors; the franchisees certainly have their own pricing model which we don’t control so that could have some factor. Any other thing to keep in mind is that the larger franchisees are in Ohio and Pennsylvania which have been markets that have been strained. Michigan is our largest franchisee at this point, in terms of the US. So, those are the factors to consider, but they have had good experience with the television also.

Steven Rees - JP Morgan

Do you have an initial sense on the franchisee development for 2008?

Katherine L. Scherping - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Franchise development for 2008 I think we got is 14…

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

13-15.

Katherine L. Scherping - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

13-15, okay.

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

They will end up in that same range this year, so they are continuing to develop and build.

Steven Rees - JP Morgan

Okay and then Katie do you have a CapEx estimate for 2008?

Katherine L. Scherping - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Not specifically, not at this time.

Steven Rees - JP Morgan

Okay, great, thank you.

Operator

We will go next to Jason Whitmer with Cleveland Research.

Jason Whitmer - Cleveland Research

Hi! Good evening! Katie, can you refresh my memory in terms of some of those restaurants that opened ‘n’ number of quarters ago I think it was late 2005, it should be rolling into the comp base, I remember they (inaudible) early on and had an impact, I am sure they are non-comp restaurants, but are they impacting the -- I think that’s into the comp base, is there any kind of material impact there in the overall system.

Katherine L. Scherping - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

There is an impact from bringing those restaurants into the comp base in the Second Quarter. We saw about a $1,000 AUV impact in the quarter from those restaurants downward.

Jason Whitmer - Cleveland Research

Okay, I don’t know if I might have missed it before, is there any expectation on the franchise restaurants like it added to the comp base in the Third Quarter, any material swing there?

Katherine L. Scherping - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

They generated 85,600 AUV in the Second Quarter of 2007, so for 13 restaurants against a total comp of a 160 -- it will be 175 plus comp units next quarter, you can do the math on the weighting average of that.

Jason Whitmer - Cleveland Research

Okay, that’s all, thank you.

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

We will break it out then too.

Jason Whitmer - Cleveland Research

Oh yeah, thank you.

Operator

We will go next to Jeff Fischer with Bear Stearns.

Joe Fischer – Bear, Stearns

Hi! It’s Joe Fischer I am calling in for Joe Buckley. I was curious as to where you see, what price level you see the share purchased being accretive?

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

At this point we don’t have any comment on that, we just got it approved last week and we will be running models and looking at it.

Joe Fischer – Bear, Stearns

Okay, and on advertising, how many more advertising windows will there be this year, will it be one more after this current one?

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

This is the last one that’s contracted for.

Joe Fischer – Bear, Stearns

Okay, so that you have to revisit that I guess.

Eric C. Houseman - President and Chief Operating Officer

In terms of major media.

Joe Fischer – Bear, Stearns

Okay.

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

In terms of television, we can always revisit it.

Joe Fischer – Bear, Stearns

Definitely! One final clarification, on the new unit investment cost, did you say it was $2.5 million in 2006 on average.

Katherine L. Scherping - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

It was about $2.5 million yeah.

Joe Fischer – Bear, Stearns

Then 2007 was a $150,000 less.

Katherine L. Scherping - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

The construction or -- yeah I was talking to construction.

Joe Fischer – Bear, Stearns

Yeah, what is it going to cost in 2007?

Katherine L. Scherping - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Yeah, but (inaudible) in 2006 to about a $2.5 million average and we have saved a $150,000 off of that so we are in the two three’s right now and then as we built the 2007 prototype that will be another $150,000.

Joe Fischer – Bear, Stearns

Okay, perfect, thank you.

Operator

We will take our next question from Mike Smith with Oppenheimer.

Michael Smith – Oppenheimer

Good afternoon! A real quick question, what is the cost of that line of credit that you had.

Katherine L. Scherping - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

The cost to line of credit.

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

What the interest rate is?

Michael Smith – Oppenheimer

Yeah.

Katherine L. Scherping - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Oh, it’s LIBOR plus 75 Basis Points right now.

Michael Smith – Oppenheimer

Okay, thanks.

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

We are real happy to have gotten that done.

Katherine L. Scherping - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

We have the ability to log one, three, six month LIBOR (inaudible) the majority of our LIBOR right now is locked up till mid December.

Michael Smith – Oppenheimer

Thanks!

Operator

We will take our next question, it’s actually a follow-up from Matt DiFrisco with Thomas Weisel Partners.

Matt DiFrisco - Thomas Weisel Partners

Hi! Thank you very much. I just want to know in this environment with the improvement of your new stores and everything. If you guys are encouraged now enough to maybe look to sign-up some new area development agreements and get some new franchisees on board?

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

Actually no, there’s been a little change in that, if we wanted to expand our franchise territory we would do it as we have been -- announced on the last quarter with our existing partners.

Matt DiFrisco - Thomas Weisel Partners

Okay, so you would add to them which would also be not adding new relationships but expanding the development pipeline?

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

Right, with existing relationships.

Matt DiFrisco - Thomas Weisel Partners

Okay. Where do we stand and can you refresh us on your history with how frequently you might go to revisit upping or renegotiating franchised agreements such as Sonic in this space right now is going through a process of raising the royalty rates and updating their franchise agreements with the existing franchisees? When was the last time you have done that and what is your philosophy on that?

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

About, like never; and that philosophy is that we signed a deal with these guys to go back to them now and say we wanted more in terms of royalties would be disingenuous I would guess. What we have done last year when we initiated the National Marketing Fund is we went to all the franchise partners and asked them to contribute 1% to the National Marketing Fund. To the extent that we feel like it is appropriate to increase the National Marketing Fund we would go to the partners and ask them and if they would do it again. But that would be the only area where we would go to our partners and ask for more.

Matt DiFrisco - Thomas Weisel Partners

Excellent, thanks.

Operator

Our final question today comes from Tom Lycat [ph] with Value Holdings.

Tom Lycat - Value Holdings

Hi, can you repeat the CapEx guidance for this year, with the maintenance part of it too?

Katherine L. Scherping - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

$75-85 million, 12-15% of maintenance.

Tom Lycat - Value Holdings

Also, a final question on competition; I noticed that McDonalds is now rolling out some new premium burgers. I know you all don’t consider yourself fast-food, but do you have any sort of guess on that might affect you competitively, if at all?

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

No.

Tom Lycat - Value Holdings

No guess, or it won’t affect you?

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

No guess.

Tom Lycat - Value Holdings

Were you aware of this, because this was not on a press release; I think it was (inaudible) actually.

Eric C. Houseman - President and Chief Operating Officer

You know, we have seen it in their test markets.

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

But you can’t get the Red Robin experience and our team-member experience; the value the Bottomless Fries etc. that you can get in a Red Robin’s. So, I mean as Eric said earlier, we are aware of it, but we have got to be concerned on what we are doing inside our own four walls.

Tom Lycat - Value Holdings

Alright, great, thanks.

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

Thank you.

Operator

Mr. Mullen that was our final question; I will turn the call back over to you for closing remarks.

Dennis B. Mullen - Executive Chairman and Chief Executive Officer

Okay, well thank you all for joining us. As many of you know our core values are Honor, Integrity, Seeking Knowledge, and Having Fun and with that Red Robins.

Eric C. Houseman - President and Chief Operating Officer

Talk to you on the next conference call.

Katherine L. Scherping - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Bye.

Operator

This does conclude today's conference call. We appreciate your participation. You may disconnect at this time.

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