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Executives

Greg Ashley - Vice President of Finance

Samuel E. Beall - Co-Founder, Executive Chairman, Chief Executive Officer and President

Marguerite N. Duffy - Chief Financial Officer, Senior Vice President and Principal Accounting Officer

Daniel P. Dillon - Senior Vice President of Brand Development

Kimberly M. Grant - Chief Operations Officer and Executive Vice President

Analysts

Keith Siegner - Crédit Suisse AG, Research Division

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

Ruby Tuesday (RT) Q3 2012 Earnings Call April 4, 2012 5:00 PM ET

Operator

Greetings, and welcome to the Ruby Tuesday, Inc. Third Quarter Fiscal Year 2012 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Greg Ashley, VP of Finance for Ruby Tuesday. Mr. Ashley, you may begin.

Greg Ashley

Thank you, Robin, and thanks to all of you for joining us this evening. With me today are Sandy Beall, Ruby Tuesday Chairman and CEO; Margie Duffy, our Chief Financial Officer; Dan Dillon, Senior Vice President, Brand development; and Kimberly Grant, Executive Vice President.

I would like to remind you that there are likely to be forward-looking statements in our comments, and I refer you to the note regarding forward-looking information in our press release and most recently filed Form 10-Q. We plan to release our fourth quarter fiscal '12 earnings in late July.

Our third quarter earnings were released today after the market closed, and a copy of our press release can be found on the Investor Relations section of our website at rubytuesday.com and is also available on Business Wire, FirstCall and other financial media outlets.

As usual, our format today includes the following: an overview of our third quarter financial results, our fiscal 2012 outlook and a review of our plans and strategies. At the conclusion of our prepared remarks, we will respond to your questions.

I will now turn the call over to Sandy Beall.

Samuel E. Beall

Thank you, Greg. I'd like to welcome all of you listening in this evening and thank you for joining us on our third quarter earnings call. I will begin with a brief overview of our quarter and an update of our key value creation initiatives. Margie and Greg will then provide a financial review and guidance update, and then Dan and Kimberly will provide additional detail on our marketing and operations plan.

As noted in our press release today, we reported diluted earnings per share of $0.07 or $0.18 per share excluding the impairment cost of the 25 to 27 underperforming restaurants we plan to close in the fourth quarter and final purchase price adjustments associated with the fiscal 2011 franchise partner acquisitions.

Our results, excluding impairment cost and purchase price adjustments, were ahead of our guidance range of $0.12 to $0.16 per share. Our continued focus on controlling costs enabled us to realize good profitability during the quarter, even with minus 5 same-restaurant sales for the quarter, primarily due to the double-digit year-over-year sales -- or not sales, but competitive ad spending with combined aggressive value for most of our competition.

During the quarter, we had several positive accomplishments including the following: first of all, we continue to make progress on our upgraded and focused brand position with television test, leveraging our Garden Bar that's free with select entrées, our free bread. Our Garden Bar is a unique differentiator for us among our peers.

At the start of our fourth quarter, we increased our television coverage to approximately 50% of the system, and we're pleased with the same-restaurant sales and traffic trends through the end of March, which has led us to accelerate our national rollout of television to 100% of the system on April 9.

Our March sales were the best sales results we've had this fiscal year by far, actually beating KNAPP-TRACK performance in the most recent weeks. This increased television coverage levels should enable us to see sales improvements in fiscal '13, and Dan will provide more details on this later in the call.

Second, we increased our annualized projected cost savings discussed last quarter and the quarter before from our cost savings initiative to a range of $35 million to $40 million or approximately $40 million higher than our previous estimates. The cost savings project has gone very well, needless to say, with significant savings in areas of procurement, occupancy, maintenance, utilities.

We plan on utilizing these savings primarily to fund our television marketing to drive awareness and trial of our brand. We're pleased that our cost savings have exceeded our original estimates, and we'll continue to search for additional savings that have no impact to the overall guest experience.

Next, in today's press release, we announced a very positive announcement, and that's our plans to acquire the Lime Fresh Mexican Grill for $24 million purchase price. We're excited about this brand as it represents excellent new unit growth opportunity in the high-quality fast casual sector and has the potential to create extremely good returns given the lower capital needs, location and good EBITDA margin economics.

Acquisition opens up development opportunities for us all over the United States, in particular Florida, where the brand has realized much success to date, and the brand is also achieving same-store sales in the high single double -- low double-digit range for year-to-date this year. We tentatively have plans to add 20 Lime locations next year and 30 in fiscal 2014, with the speed of openings really being dictated by the site-selection process -- progress and being able to find high-quality A locations.

Additionally, we're very excited that John Kunkel, the Lime's founder, will be joining our Board of Directors following completion of the acquisition. John is a strong entrepreneur and operator with an in-depth knowledge of the fast -- of the high-quality fast casual sector, and his knowledge and experience will be instrumental as we grow the Lime brand going forward. Pleased to have John onboard.

Next, we're pleased with the progress we're making in monetizing some of our real estate through sale-leaseback transactions, which are helping validate the high value of our own real estate, while at the same time providing additional proceeds for short-term debt reduction. We're realizing attractive cap rates in the 7% range and expect to close on our original target of approximately $50 million of proceeds represented by approximately 25 locations by the end of Q1 '13.

In addition to sale-leaseback proceeds, given the current rate environment, we will continue to assess other debt financing options, which could provide us with additional balance sheet flexibility to grow and create value for our shareholders.

Today, we also announced plans to close 25 to 27 underperforming restaurants during our fourth quarter, which should lead to an estimated annual incremental EBITDA of approximately $1.5 million to $2 million, in addition to same-restaurant sales improvement of at least 0.5 point since 16 of the proposed closures are within 8 miles of another Ruby Tuesday restaurant.

A portion of these locations are our own properties that we plan on marketing for sale, which should help neutralize the cash impact of the closures after factoring in closing costs and lease settlements, so basically cash-neutral with a good positive impact to EBITDA and some to sales.

Finally, from a unit and revenue growth standpoint, we continue to make good progress with both our Lime Fresh and Marlin & Ray's brands. We opened 2 Lime Fresh locations during the quarter, one subsequent to quarter end, and we now have 4 locations open. We plan to open one location every 3 to 4 weeks over the remainder of the fiscal year, primarily in the Washington DC and Atlanta markets.

Marlin & Ray's, our seafood conversion brand, had 2 openings during quarter, one subsequent to the quarter end, and we now have 8 locations open. While still early, we're pleased with the sales results of Marlin & Ray's, and we continue to believe the brand position of fun, casual and high-value seafood is an opportunity, especially in underperforming assets. We anticipate to open 2 more locations this year and approximately 10 next year.

We have a number of positive things going on, a lot of positive things actually. And we believe, together, that they will result in improved sales and profitability over the balance of the calendar year. Our focus is really the next 6 months of this calendar year versus a 2- or 3-year period of time. Lots of positives we feel, and I'll now turn the call over to Margie to discuss our financial performance.

Marguerite N. Duffy

Thank you, Sandy. I'll review the quarter in detail, provide a high-level summary of our quarter-end balance sheet and sale-leaseback progress, and then Greg will give our updated guidance for the year.

We reported third quarter diluted earnings per share of $0.07 or $0.18 per share excluding the impairment costs of the 25 to 27 planned restaurant closings in the fourth quarter and final purchase price adjustments associated with the fiscal 2011 franchise partner acquisition. This is compared to diluted earnings per share of $0.25 for the prior year or $0.24 excluding the franchise partner accounting gain.

Our earnings for the quarter, excluding the impairment cost and final purchase price adjustments, were primarily driven by our continued focus on tight cost control and cost savings, which offset the cost leverage we lost in our lower same-restaurant sales during the quarter.

Total revenue increased 1.8%, primarily due to the franchise partnership acquisitions during the previous fiscal year, offset by the 5% decline in same-restaurant sales. In addition to the Lime Fresh and Marlin & Ray's openings that Sandy mentioned earlier, we also permanently closed one restaurant and temporarily closed one restaurant in anticipation of conversion to Marlin & Ray's.

Franchise revenue decreased 28.5%, primarily due to the elimination of royalties from our franchise partnership restaurant, which were acquired in fiscal 2011, in addition to same-restaurant sales for domestic franchise restaurants, which decreased 5.8%.

The restaurant-level operating margin was 16.9% for the quarter, excluding the final purchase price adjustment associated with the prior year franchise partner acquisition; compared to 17% a year earlier, excluding the franchise acquisition gains and losses and guarantee charges in that year, or a decline of 10 basis points; primarily due to loss of leverage from the lower sales, offset by our cost savings initiatives in the area of procurement, as well as favorable year-over-year maintenance and utilities with the milder winter weather.

The comparable year-over-year restaurant-level margin is a strong testament to how lean we are operating as a company and how well positioned we are from a flow-through leverage standpoint when our sales improve in the future.

Cost of goods sold was 28.8% for the quarter versus 29.3% in the prior year. This decrease was primarily due to the cost savings negotiated with our food vendors as part of our cost savings program in addition to strong overall cost control.

Labor cost as a percent of restaurant sales increased to 34.6%, up from 33.5% the prior year, primarily due to the loss of leverage on lower same-restaurant sales, coupled with merit increases during the current year and minimum wage increases in several states.

Other restaurant operating costs were down 50 basis points, excluding current year and prior year third quarter franchise partner accounting gains and losses and prior year guarantee charges. The decrease was primarily due to reduction in utilities based on more favorable rates and a milder winter, lower maintenance cost with the milder weather and favorable year-over-year general liability cost.

SG&A expenses were 7.1% of sales for the quarter versus 5.8% in the prior year due to higher television advertising cost in the quarter, higher consulting fees primarily related to our cost control project and the loss of support service fee income from acquired franchise partnership, which historically offsets selling, general and administrative expenses.

Interest expense in the quarter increased to $3.9 million from $3.1 million due to the higher cost third-party debt, which was assumed as part of the franchise partnership acquisition. Our tax rate decreased largely due to the impact of tax credits recognized during the quarter on the lower pretax profit.

Turning to the balance sheet. Our book debt was $307 million, down from $359 million a year earlier due to our focus on prudently paying down debt in the short term until our sales trends improve. At the end of the quarter, our book debt to capital was 35%; our book debt to EBITDA was 2.75; and our total funded debt to EBITDAR, the ratio pertinent to our loan covenant, was 3.01, which provides us with almost 50 basis points cushion on our loan covenant.

We continue to make good progress on our sale-leaseback strategy. During the quarter, we closed on one sale-leaseback transaction, resulting in $2.3 million in gross proceeds, and subsequent to the end of the quarter, completed sale-leaseback transactions on another 8 properties, resulting in $17.5 million of gross proceeds. We are seeing attractive cap rates in the 7% range on the transactions we've closed to date, as well as the transactions that are in process, which should close over the next 1 to 2 quarters.

We continue to have a high interest from a number of potential buyers. Proceeds raised from our sale-leaseback transaction in tandem with our excess free cash flow will be used primarily for debt reduction and opportunistic share repurchase.

Turning to goodwill. Our accounting policy requires that we perform our test for impairment annually at the end of the third quarter or more often when needed. Based on testing performed, we have concluded that no impairment exists as of the end of our third quarter, although we will continue to evaluate market conditions going forward.

I'll now turn the call over to Greg to go over our guidance for the year.

Greg Ashley

Thanks, Margie. Our following guidance for the year is inclusive of the 53rd week impact. We estimate same-restaurant sales for company-owned restaurants to be in the range of down 4% to down 4.5% for the year.

For the year, we expect to convert 8 to 10 lower performing company-owned restaurants to other high-quality casual dining concepts, most notably Marlin & Ray's. We anticipate closing 31 to 33 company-owned restaurants, excluding conversions, open one Truffles Grill and open 6 to 8 Lime Fresh Mexican restaurants. Please keep in mind that approximately 25 to 27 of the company-owned restaurant closures are related to the underperforming units that we plan to close during the fourth quarter.

For the year, our franchisees expect to open 6 to 8 restaurants, up to 5 of which will be international where we're starting to build some good momentum going forward. And we anticipate the international franchisees to close 18 to 20 restaurants -- or excuse me, franchisees to close 18 to 20 restaurants, up to 14 of which will be international.

Nine of the international closures are related to the cancellation of our franchise agreement in India where we are currently seeking a new partner. We expect restaurant operating margins to decline slightly with the negative impact of lower same-restaurant sales, offset by fixed cost leverage from the 53rd week in addition to our cost savings initiatives Sandy mentioned earlier. The majority of our proteins and seafood are contracted through the end of the calendar 2012, and our commodity exposure is minimal.

Depreciation is estimated to be in the $65 million to $67 million range. SG&A expense is targeted to be up approximately 25% to 30% from a year earlier, primarily due to incremental television advertising expense, coupled with the loss of fee income from the acquired franchise partnerships, which historically offset our SG&A expenses.

Our interest expense is estimated to be in the $16 million to $18 million range. The effective tax rate is estimated to be flat to down 10%, excluding the impact of the impairment and exit costs related to the planned closure of the underperforming restaurants and franchise partner acquisition accounting gains that we noted earlier. Additionally, we continue to benefit from FICA Tip and other employment-related tax credits as well.

Our GAAP diluted earnings per share for the year are estimated to be in the $0.27 to $0.32 range including the impact of impairment costs related to the planned closure of the underperforming restaurants and franchise partner acquisition accounting gains incurred in the third quarter, as well as anticipated net lease related and other closing costs of $6 million to $10 million in the fourth quarter. Excluding the impact of these items, our diluted earnings per share for the year are estimated to be in the $0.43 to $0.48 range.

Our fully diluted weighted average shares outstanding are estimated to be approximately 63 million to 64 million for the year. And our capital expenditures are estimated to be $35 million to $37 million, and we estimate we will generate $75 million to $85 million of free cash flow during the year, which is a strong free cash flow position, given our sales for the year.

I will now turn the call over to Dan to give an update on our sales and brand building programs.

Daniel P. Dillon

Thank you, Greg. As Sandy mentioned earlier, during the third quarter, we continued testing our value-oriented offerings through television in 11 spot markets, representing about 20% of our system sales. The ads featured our Endless Fresh Garden Bar and fresh-baked garlic cheese biscuits included with selected entrées at a starting price of $9.99. Based on the test market results seen in both Q2 and Q3, we added television to another 30% of the system at the beginning of March, bringing the total TV coverage to approximately 50% of our system.

While we're disappointed in our system-wide same-restaurant sales for the third quarter, we are encouraged by the positive results in our TV test markets in Q3, and especially in the first month of the fourth quarter. The non-TV market sales results for the third quarter were impacted by double-digit year-over-year competitive ad spend increases which -- with very aggressive promotional discounting.

In our TV markets in Q3 and in the newly added markets in March, we were able to more effectively compete, driving positive same sales and traffic while reducing couponing. We firmly believe that our television advertising can generate awareness and trial of our brand, and coupled with the outstanding dining experience provided in our restaurant will lead to stabilization of traffic and same-restaurant sales growth in the future throughout the entire system. Based on our recent TV market results, as Sandy mentioned, we will be expanding our TV to 100% of our system beginning April 9.

In addition to the advertising at the beginning of March, we introduced a new menu to the entire system featuring 7 new menu items with bold flavor profiles, items like Asiago Peppercorn Steak, Cajun Jambalaya Pasta, Jerk Chicken and Lettuce Wraps. We also introduced a new feature menu highlighting some of our new chef-inspired specials. All new items are seeing strong preference and consumer feedback. As we said previously, we're committed to continually researching and developing new menu items with the goal of keeping our menu up-to-date and contemporary.

Our social media platform continues to grow also. Our So Connected email club now has approximately 2.6 million members, and we currently have approximately 790,000 fans on Facebook. This subscriber base provides a great tool for communicating with our consumers about what's new at Ruby Tuesday, fielding suggestions and recommendations and providing rewards and incentives to our most engaged users.

In Q3, we confirmed several of our test initiatives and programs were effective at driving sales and traffic. Our Q4 marketing efforts will be focused on expanding these initiatives system-wide, validating further ideas that are still in test and researching and developing new programs and products.

Now I'll turn it over to Kimberly to give you more information about operations.

Kimberly M. Grant

Thank you, Dan. From an operation standpoint, our primary goal is to achieve positive same-restaurant sales, and everything that we are doing right now is focused on strengthening our brand, consistently operating at a high-quality casual dining level and building and retaining best-in-class teams.

Our team is focused every day on ensuring that we are consistently delivering on our promise to provide a $25 dinner experience for $15. As a result, we have continued to see momentum and improvement in our external brand tracker research scores over the last 3 years. Our overall satisfaction top box scores are significantly higher than all of bar and grill and only slightly lower than casual dining, and we continue to close the gap.

Additionally, our consistent experience across locations, which is a key measurement to ensure we get a return on our television marketing effort, is now 6 points higher than all of bar and grill and even with casual dining. When guests visit our restaurant today, we know, through our external research, they are consistently experiencing a better Ruby Tuesday than ever before, which is critical for us to gain share in both lapsed and non-users of our brand.

We are proud of our team talent as we have focused on selecting, training and retaining the best. During the third quarter, we hired almost 3 out of every 4 managers externally, with a continued focus on hiring talent from high-quality casual dining competitors. Our strong team talent and our low management turnover are key in our goal of providing a consistent and high-quality guest experience across the Ruby Tuesday brand.

We are on track to achieve approximately 100% hourly team turnover for the year, a very good number for our industry, although our aspirational goal is to reduce our key turnover to less than 80% by investing in and developing new benefit and process enhancement programs that should enable us to increase our short-term retention rate.

Additionally, our management turnover is projected to be approximately 22% for the year, which is very strong for the dining industry, and when combined with our very low hourly team turnover noted earlier, it should result in positive impact to the guest experience over time.

As Dan mentioned earlier, we've been engaged in numerous sales driving marketing tests across the country. During the second quarter, we began implementing new service enhancements to the guest experience, including upgrading our uniforms to a more polished look and adding a number of new surprise-and-delight service initiatives such as fresh grated Parmesan cheese on our pasta table side.

In our third quarter, we rolled this program out system-wide, and guest response has been very positive. And over time, this should further enable us to improve our solid Guest Satisfaction Scores.

Year-to-date, nearly 93% of our guests rate their experience a 4 or a 5, and 73% of our guests rating their experience a 5 on a 1-to-5 scale, with continued low levels of guests rating their experience in the bottom 2 boxes.

Our solid internal and external Guest Satisfaction Scores are a result of the numerous operational investments we have made in our brand over the last 3 years and the high execution levels from all of our restaurant team members throughout the brand.

Our focus on driving trial and traffic through ramped up media-focused marketing efforts and consistently providing a high-quality guest experience is the key combination that will enable us to improve our core traffic trends and lead to improved same-restaurant sales over time.

We continue to make good operational progress in both our Lime and Marlin & Ray's brands. Our Lime locations are currently slightly skewing heavier at lunch in traffic as we expected with a good average check, and we continue to focus on creating higher levels of brand awareness during the first month of operation.

At Marlin & Ray's, we continue to see average check levels higher than Ruby's, primarily due to stronger appetizer and dessert sales, in addition to a higher alcohol mix. We continue to focus on driving traffic through a variety of brand promotions at Marlin & Ray's.

Now as we prepare for growth, we are excited to be offering great opportunities to our teams by leveraging our strong foundation of long tenured operators, along with the exceptional external talent we are on-boarding every day.

I will now turn things back over to Sandy for a wrap-up.

Samuel E. Beall

Thanks, Kimberly. We continue to remain very excited about our brand. Although this has been a disappointing year for us both in sales and profits, we made a number of investments and decisions that we think prepare us for the next year and will have strategically positioned us for a better future, including the following: first, ramping up our television markets to be more competitive with our peers. We think that's critically important, and we feel good about where we are on that.

Second, identifying cost savings of $40 million basically to help us fund the television to be able to market like our peer group and thus, hopefully achieve sales -- same-restaurant sales like our peer group.

Third, acquiring Lime Fresh, which is an exciting, high-quality fast casual concept that we plan to aggressively grow in value in the future and then we think can create a lot of value for us in the future also.

Next, we have completed a series of sale-leaseback transactions to validate our overall real estate value, in addition to providing extra proceeds for debt reduction, CapEx, et cetera.

And last, announcing the plans to close 25 to 27 underperforming restaurants. It strengthens our brand portfolio. It will lead to increased EBITDA, as well as some improvement to same-store sales and overall return and strengthening of the brand.

We're focused on a strong finish to the fiscal year, ending with more -- we hope with more momentum than we started so that we go into '13 with solid momentum and hopefully get back on track from a sales and profit standpoint. We feel good about our 3-year strategic plans, which are centered on continued improvement in Ruby Tuesday's comps, aggressive new unit growth of Lime, strategic opening of Marlin & Ray's conversions and continued leveraging of our strong free cash flow and strong balance sheet with maximum flexibility to support all of these initiatives as we move forward.

And with that, I'll open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Keith Siegner with Crédit Suisse.

Keith Siegner - Crédit Suisse AG, Research Division

I just have -- I want to start off with 2 questions around SG&A. It's been a really volatile line item of late swinging around EPS. And one -- the first of the 2 questions is, what consultants are you paying right now? What's the run rate in total for dollar spent on various consultants? I mean, we've had everything from Opera, dunnhumby and others and now Alix. Like what's the amount being spent right now? How much of the 2012 total G&A is that? What's the outlook for that piece for next year? Are we getting close to the end of some of that spend? Can that tail off? What's that first?

Samuel E. Beall

Well, I think we are finished with it, other than maybe less than $0.25 million-type stuff as of this quarter. Third quarter was a big item for us. And with Alix alone, Margie, it was, what, probably $3 million just in Q3 alone. But we're going to get good payback on that so those expenses we have in Q3, we feel good about it.

Keith Siegner - Crédit Suisse AG, Research Division

So looking onto fiscal '13, total consultants spend...

Samuel E. Beall

We don't have any consultants other than our normal marketing consultants that we have year after year after year.

Keith Siegner - Crédit Suisse AG, Research Division

And so it's down how much on a year-over-year basis in fiscal '13?

Samuel E. Beall

For fiscal '12 -- really for fiscal '12, only real consulting we had was Alix, and I think we will have paid them what -- I'm not supposed to say. Anyway, more than $3.5 million.

Keith Siegner - Crédit Suisse AG, Research Division

Okay. So then the second question is, how do we think about overall G&A levels for fiscal '13 in dollars? I mean, I think I've definitely had this a little bit too late and wrong in my model. We get a full year uptick here. Fourth quarter is going to look really high. Like -- at least preliminary, how should we think about SG&A dollars for fiscal '13?

Samuel E. Beall

Margie, do you have the model?

Marguerite N. Duffy

I think what we do put in there is increased advertising. And so I think because we do plan to increase advertising next year, I do think it's at least going to be comparable year-over-year.

Samuel E. Beall

Or be up on it.

Marguerite N. Duffy

No, but at least comparable.

Keith Siegner - Crédit Suisse AG, Research Division

In dollars. Okay.

Operator

[Operator Instructions] Our next question comes from the line of Bryan Elliott with Raymond James.

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

I wanted to see if maybe you could take a shot at helping us just aggregate kind of the sales -- the impact of discounting essentially. Obviously, the discounting, then the couponing, that was the prior strategy, affected the P&L in different ways than the comp decline. So maybe can you try and help us understand sort of on a net basis what's happening through the sales line, and then more importantly, maybe to profitability if you kind of isolate that change? I don't know if that's easy to do or not but...

Samuel E. Beall

Bryan, that's not easy to do. It would be better for you to call Greg on that. That would be a 20-minute conversation probably.

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

All right. Well, let me ask you this and try another approach. So we kind of started this transition in the third quarter. We're going to be -- for much of the fourth quarter have full advertising across the system, and we're going to have that assuming going forward. So we're going to have 3 quarters of sort of full advertising against a, call it, a full couponing and discounting strategy. At what point would be...

Samuel E. Beall

I think we have -- for this year, we'll only have one quarter of full advertising. The previous couple of quarters had about 18% of our units, if I remember right. And then -- but going forward, we'll have -- we anticipate about 1/2 of the promotion, the coupon expense that we spent in the past, but nationwide national television to the tune of $45 million to $50 million.

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

I guess at what point would you -- without getting into, I guess, the math of the -- or what point or what kind of comp level is needed when we're in full advertising mode, when we're comparing against the discounting and couponing strategy? Where's the breakeven point from an EBITDA or cash flow -- or well, it's EBITDA because the advertising is in SG&A. Does it require 2%, 3%, 4% comp, or is it breakeven kind of comp?

Samuel E. Beall

I mean, I think what you're saying where can we start growing margins and EPS, et cetera, again, isn't that your real question?

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

Yes.

Samuel E. Beall

On what level of comp? If we're flat on -- if we are at even -- if we're flat on comp next year, mathematically, we should have a respectable year.

Marguerite N. Duffy

Right. Because we'll have more of a full year of the cost savings in next fiscal year.

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

I guess I'm trying to strip out that impact I guess as well, though that's unfair because that's what'll pay for the advertising. All right. I'll get with Greg tomorrow probably when I'm back in the office on that. Next question would be help me understand a bit the -- where this cost saving is coming from. You always run a pretty lean...

Samuel E. Beall

We did, and it's good. What we learned on that -- we always have a saying, don't confuse habits with the wisdom. There's always a different, better way. And even though we're darn good on -- we always felt we're good on that, we found another like ballpark $25 million in the procurement area. We found -- and especially in unit level maintenance, we found some real opportunity there, utilities. We found -- those are the big buckets.

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

But the supply chain, was that...

Samuel E. Beall

The supply chain was a what?

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

Was it like consolidating distribution centers and just relooking at the state-of-the-art of logistics?

Samuel E. Beall

No. It's primarily just getting concessions from vendors, primarily. And we buy what $300 million or $400 million worth of food, so -- $400 million of food, so we got about, what, $24 million maybe in food and $4 million and beverage and so forth.

Kimberly M. Grant

Then $11 million in repair and maintenance, waste and utilities.

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

Is that part of the contract you announced the other day?

Kimberly M. Grant

Yes.

Samuel E. Beall

Yes.

Operator

That is all the time we have for questions today. I would now like to turn the floor back to management for closing comments.

Samuel E. Beall

Just want to thank you for joining us, and please give...

Marguerite N. Duffy

I do want to add that SG&A will be up about $10 million year-over-year.

Samuel E. Beall

$10 million because of the advertising. Yes, okay. If you have any other questions, please give Greg a call, and thanks for listening in. Bye.

Operator

Ladies and gentlemen, today's conference has concluded. You may disconnect your lines at this time. Thank you for your participation.

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