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Ruby Tuesday (NYSE:RT)

Q4 2012 Earnings Call

July 25, 2012 4:30 pm ET

Executives

Greg Ashley - Vice President of Finance

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

Michael O. Moore - Chief Financial Officer and Executive Vice President

Daniel P. Dillon - Senior Vice President of Brand Development

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

Analysts

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

Keith Siegner - Crédit Suisse AG, Research Division

Robert M. Derrington - Northcoast Research

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Peter Saleh - Telsey Advisory Group LLC

John Dravenstott - KeyBanc Capital Markets Inc., Research Division

Paul Simenauer

Rosemary Sisson

Operator

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

Greg Ashley

Thank you, Robin, and thanks to all of you for joining us this afternoon. With me today are Sandy Beall, Ruby Tuesday's Chairman and CEO; Michael Moore, our new Chief Financial Officer; Dan Dillon, Senior Vice President, Brand Development; and Kimberly Grant, Executive Vice President.

I would like to remind you that there will 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 first quarter fiscal year '13 earnings in early October.

Our fourth 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.

Our format today includes an overview of our fourth quarter and fiscal 2012 financial results, our fiscal 2013 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.

Samuel E. Beall

Thanks, Greg. I'd like to welcome all of you listening in this evening. Thank you for joining us on our fourth quarter earnings call. I will begin with a brief overview of our quarter and an update of our key value creation initiatives. Michael and Greg will provide the financial review and guidance outlook, then Dan will provide details on our marketing plans, and Kimberly will follow-up with an overview of our operations plans for Ruby Tuesday, as well as Lime Fresh and Marlin & Ray's.

As noted in our press release today, we reported a diluted loss per share of $0.09 for the fourth quarter or earnings per share of $0.21, excluding the various items noted in our press release. Our same-restaurant sales for the fourth quarter minus 4.6% or roughly in line with our expectations as we reduced the level of coupons on a year-over-year basis to get more in line with our quarterly projections going forward in order to eliminate a huge hurdle next year, while also continuing to test our television advertising strategy during the quarter.

Our earnings performance for the quarter on adjusted basis was slightly below our expectations due to unfavorable tax adjustments and higher healthcare costs and interest costs.

Fiscal '12 was a challenging year for us as the environment remained competitive, with a focus on value supported by heavy media levels by most of our competitors. However, we did make some key strategic decisions, which we believe have put our company in a better position going forward. First of all, we made good progress on our upgraded and focused brand position with television test, leveraging our free fresh-baked bread and our Garden Bar free with select entrées, which is a unique differentiator for us among our peers. We completed our marketing program testing in the fourth quarter, with the first quarter fiscal 2013 rollout of our -- what we think is a very good television marketing plan at spending levels more competitive with our peer group, coupled with a more balanced level of promotional spending.

While we still have more work to do on the marketing front, we are happy to report that our advertising continues to gain traction, and we estimate that our first quarter fiscal 2013 same-restaurant sales should be up approximately 2%. Dan will provide more details on this later in the call.

Second, we recently updated our annualized cost savings range to $40 million to $45 million or approximately $5 million higher than the previous quarters estimate. Approximately $8 million of these savings were realized in '12, and the remaining $32 million to $37 million will be realized in this fiscal year.

We plan to reinvest the majority of these total savings into our marketing programs, and we will continue to search for additional savings that do not erode the overall guest experience.

In addition to the cost savings noted above, we also closed 23 underperforming restaurants during the fourth quarter, which is expected to add $1.5 million to $2 million to EBITDA annually and slightly improve same-store sales also.

During the quarter, we acquired the Lime Fresh Mexican Grill concept for $24 million and have plans to grow this brand in the future, including 12 to 16 new company units this fiscal year and 20 plus, hopefully, plus-plus in the following year, fiscal '14. Contingent upon finding -- contingent upon site selection process in getting A sites. This is a very well-positioned, high-quality fast casual brand that offers good growth -- that offers very good growth potential and attractive potential cash-on-cash returns. Our current development strategy is focused on a few P1 markets, Florida, Washington, D.C., New York City area, as well as some other major market points up and down the East Coast.

Fourth, we made good progress on our conversion strategy with our fun, casual and high-value seafood conversion concept, Marlin & Ray's. This is our only conversion concept now, following the testing of other concepts over the last several years. And now we plan to add 5 to 7 new Marlin & Ray's in fiscal '13, as well as from scratch, ground up, to test the potential for a new unit growth in addition to converting Ruby Tuesday's. I'm very excited about that concept also.

Lastly, and very importantly, we recapitalized our balance sheet with a $250 million high-yield bond offering and revolver amendment that closed in early May, resulting in long-term debt capital that provides us with excellent flexibility. Michael will provide more details on this transaction shortly.

Speaking of Michael, we welcomed our new CFO, Michael Moore, to the company during the fourth quarter. As you recall in January, our prior CFO, Margie Duffy, announced her decision to retire at the end of the fiscal year. Margie had served in various accounting and finance capacities during her career, including CFO, for the last 10 years and was very instrumental in a number of key financial initiatives for the company, including leading the franchise partner acquisitions, Lime Fresh acquisition and equity and bond offerings. And we wish her much success in her future endeavors.

Michael has been with the company now for almost 3 months. He's fully up and running in his new role. Michael brings over 20 years of experience as a public and private company CFO, with companies including Bloomingdale's, the Kato Corporation, Advanced Auto Parts and most recently with Sun Capital Partners. Michael's diverse financial and operational background, including previous responsibilities in areas in accounting and finance, SEC reporting, investor relations, strategic planning, information technology and real estate development will be -- will all be instrumental as we execute on our strategic plans.

We have a number of positive things going on, most important traction on our Ruby Tuesday same-store sales, and believe we have good plans to improve our sales and profitability going forward.

I'll now turn the call over to Michael to discuss our financial performance.

Michael O. Moore

Thank you, Sandy. I appreciate the introduction. I'm excited to have joined the Ruby Tuesday team and believe we have a lot of great opportunities ahead of us. I look forward to working with the senior management team and the board to execute on our strategic plans.

I'll review the quarter in detail, provide a high-level summary of the year, give an update on the year-end balance sheet, including our high-yield transactions, sale leaseback program, and then Greg will give our updated guidance for fiscal '13.

We recorded a fourth quarter diluted loss per share of $0.09 or diluted earnings per share of $0.21, excluding the following items: Goodwill impairment costs of $16.9 million, debt prepayment penalties in deferred loans fee write-offs related to the high-yield transaction of $4.8 million, retirement and severance costs of $4.4 million, restaurant closure cost of $3.8 million and Lime Fresh deferred development fee write-off of $1 million.

This compares to our prior year earnings per share of $0.21 or $0.25 on an adjusted basis. We have included a reconciliation of these non-GAAP adjustments and the related earnings per share impact on the Investor Relations page of the Ruby Tuesday website at rubytuesday.com.

Our earnings performance for the quarter, excluding the items noted above, was below our expectations, primarily due to unfavorable year-end tax adjustments, higher health plan costs and higher interest expense resulting from our high-yield bond offering.

Total revenue increased 2.9% from the prior year, primarily due to the 53rd week in fiscal '12, which favorably impacted total revenue by 6.4% during the quarter, partially offset by a negative 4.6% same-restaurant sales. During the quarter, we acquired 7 company-owned and 4 franchise restaurants through the Lime Fresh acquisition, in addition to opening 3 Lime Fresh restaurants. As of quarter ends, we had a total of 13 company-owned Lime Fresh restaurants and 4 franchise restaurants.

Subsequent to quarter end, we opened our 14th company-owned Lime Fresh location. During the quarter, we also opened 4 Marlin & Ray's seafood restaurants and now have 11 Marlin & Ray's locations open. We permanently closed 26 restaurants during the quarter, 23 of which were part of the planned closures announced last quarter, which is expected to increase EBITDA by $1.5 million to $2 million annually and slightly improve same-restaurant sales.

Franchise revenue decreased 3.4%, primarily due to a 7.3% decline in same-restaurant sales for domestic franchise restaurants. The restaurant-level operating margin was 18.8% for the quarter compared to 17.6% a year earlier, or an improvement of 120 basis points, primarily due to our supply chain cost savings initiatives.

As a result of our savings initiatives, we are operating a leaner our cost structure and are well-positioned to deliver attractive profit leverage and incremental revenue as our sales improve in the future.

Cost of goods sold was 27.2% of sales for the quarter versus 29.4% on the prior year or an improvement of 220 basis points. This decrease was due to cost savings negotiated with our primary food vendors as part of our cost savings program and lower promotional spending during the quarter. Labor cost as a percent of sales increased to 33.9%, up from 33.0% for the prior year, primarily due to loss leverage on lower same-restaurant sales, coupled with merit increases during the year and minimum wage increases at several states.

Other restaurant operating costs were unfavorable 10 basis points, primarily due to higher legal cost. SG&A expenses were 11.4% of sales versus 6.7% last year due to the severance and retirement costs I mentioned earlier and higher television advertising cost, a majority of which has been funded by supply chain savings.

Interest expense in the quarter increased to $7.8 million from $4.2 million or an increase of $3.6 million, primarily due to prepayment premiums on notes and mortgage debt that was paid off as part of the high-yield transaction, along with an increase in interest expense from the high-yield bonds.

Taxes for the quarter were a credit of $12.3 million due to a pretax loss, coupled with our FICA tip and work opportunity tax credits. For the full year of fiscal '12, revenues increased 4.8%, primarily due to a full year run rate of the franchise partnership acquisitions and the 53rd week, partially offset by a same-restaurant sale decrease of 4.5% at company-owned restaurants. We recorded a diluted loss per share of $0.00 or diluted earnings per share of $0.41, excluding the impact of the goodwill impairment cost, restaurant closure cost, debt prepayment penalties and deferred loan fee write-offs related to our high-yield transaction, retirement and severance cost and the Lime Fresh deferred development fee write-off.

This compares to prior year diluted earnings per share of $0.72 or a diluted earnings per share of $0.73 on an adjusted basis. Our restaurant operating margin was 6.2% compared with 17% with the decline primarily related to the loss of leverage on lower sales.

Turning to the balance sheet. Our book debt was $327 million, down from $345 million last year or a reduction of $18 million due to our focus on paying down debt. And we had $48 million in cash on our balance sheet at the end of the year from the high-yield bond offering proceeds and the sale leaseback transactions. Total funded debt to EBITDAR, the ratio pertinent to our loan covenants was 3.25 and provides us with 125 basis points of cushion on our loan covenants. These more flexible loan covenants are a result of our revolving credit facility amendment, which closed in tandem with our high-yield bond deal.

During the fourth quarter, we closed on a $250 million senior unsecured notes offering with an 8-year maturity priced at 7 5/8%. As a result of the transaction, we paid off $217 million of outstanding debt, reduced our revolver commitment size from $380 million to $200 million, negotiated more favorable covenants under our revolver, obtained attractive long-term interest rates, extended the maturity of the majority of our debt up to 8 years and built excess cash on our balance sheet. This transaction has provided us with greater financial flexibility, which will enable us to, one, continue to invest in the future by growing our Lime Fresh and Marlin & Ray's concepts; two, continue to reduce our debt and improve our leverage metrics; and three, opportunistically repurchase shares.

We believe this new capital structure provides good financial flexibility that will enable us to create value by executing on our long-term strategic plans. We appreciate the confidence that our new bondholders have on our strategy. In addition to the bond transaction, we continued to make good progress on our sale-leaseback strategy by closing on sale-leaseback transactions on 9 restaurants during the quarter, resulting in $19.9 million of gross proceeds. Subsequent to the end of the quarter, we closed sale-leaseback transactions on an additional 9 restaurants, resulting in $20.2 million of gross proceeds.

Today, we have completed sale-leaseback transactions on 19 restaurants, resulting in $42.5 million of gross proceeds, with cap rates of approximately 7%.

I will now turn the call over to Greg, who will go over our guidance for the year.

Greg Ashley

Thanks, Michael. Our guidance for fiscal '13 is as follows. We estimate same-restaurant sales for company-owned restaurants to be in the range of flat to up 2% for the year. For the year, we expect to open 12 to 16 Lime Fresh restaurants, as Sandy noted earlier. We plan to convert 5 to 7 company-owned restaurants of Marlin & Ray's. We plan to open 1 newly constructed Marlin & Ray's and closed 5 to 7 company-owned restaurants, which obviously exclude our conversions.

For the year, our franchisees expect to open 8 to 10 restaurants, up to 7 of which will be international and close 2 to 4 restaurants, of the 2 of which will be international. We expect our restaurant operating margins to improve approximately 100 to 150 basis points due to our cost savings initiatives, coupled with fixed cost leverage on incremental sales. A significant portion of our proteins are locked in the second fiscal quarter. And while we may have a little exposure in the back half of the year given the summer drought conditions, we do not currently anticipate the impact to be material at this time.

Our depreciation is estimated to be in the $62 million to $64 million range. Excluding our advertising expense, SG&A is targeted to decline by 6% to 10% from a year earlier, primarily due to lower consulting fees and other cost savings initiatives. Our advertising expense is estimated to increase 55% to 65% from a year earlier, primarily due to the incremental television advertising expense, which is largely funded by our cost savings initiatives.

Our interest expense is estimated to be in the $24 million to $26 million range by product of this high-yield transaction. Based on our lower pretax income, coupled with our FICA tip and other employment-related tax credits, we anticipate a net tax benefit of $5 million to $10 million for the year.

Our GAAP diluted earnings per share for the year are estimated to be in the $0.20 to $0.30 range. Excluding the impact of additional pension expense associated with the CEO's payout and new CEO transition-related expenses, our diluted earnings per share for the year are estimated to be in the $0.24 to $0.34 range. Our fully diluted weighted average shares outstanding are estimated to be approximately $63 million to $64 million for the year. Capital expenditures are expected to be $44 million to $50 million, and we estimate we will generate $20 million to $30 million of free cash flow during the year. This range is unfavorable to the fiscal 2012 free cash flow of $74 million due to an array of items, including higher interest expense, our CEO pension payout, higher capital expenditures, the impact of the 53rd week, the estimated lease reserves settlements from the closed restaurant in the fourth quarter, changes in working capital and slightly lower EBITDA.

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

Daniel P. Dillon

Thanks, Greg. During the fourth quarter, we completed our television and promotional marketing tests, which included changing our discount strategy in combination with various television media plans. Our negative sales for the quarter were primarily driven by a 32% reduction in our level of coupons during the quarter in order to get a lower quarterly run rate going forward, as Sandy noted earlier.

Based on the research and analytics of our marketing throughout fiscal year 2012, we believe we've developed a marketing plan for the year that should stabilize and begin to grow our traffic in same-restaurant sales. Our marketing plan is centered around 100% of our markets being covered on television for at least 8 weeks every quarter. With TV as a foundation, we've created an integrated marketing plan that includes digital advertising, social media, outdoor print and promotional offerings in high-quality distribution channels.

Our marketing message continues to promote our Fresh Endless Garden Bar and Fresh-baked Garlic Cheese Biscuits, both complementary with over 20 entrées starting at $9.99. We had plans to highlight various limited time offers throughout the year.

Results from our television advertising campaign and integrated marketing efforts will take time to build. But as Sandy noted earlier, we're excited that our current traffic and sales trends are estimated to result in same-restaurant sales of approximately 2% for the first quarter of fiscal year 2013, which will be our first positive sales in 6 quarters.

We're also pleased with the results of our new feature menu introduced at the beginning of March, which includes appetizers such as our Asian Chicken Lettuce Wrap, our Baja Chicken Tacos and Baja Chicken Quesadillas in addition to entrées, including our Jamaican Jerk Shrimp and Asiago Peppercorn Sirloin. These offerings are receiving strong preference and feedback from our guests, and we will continue to add boldly-flavored unique products like these to our menus throughout the fiscal year.

For the remainder of the year, our marketing focus will be on driving traffic by optimizing our mix at television and higher-end promotional offers, deploying new menu items that drive traffic by offering value and affordability to our guests, and continuing to leverage our consumer research, develop new programs and products.

Now Kimberly will provide details on operational initiatives for Ruby Tuesday, as well as Marlin & Ray's.

Kimberly M. Grant

Thank you, Dan. From an operation standpoint, we are excited about the year ahead as we prepare to execute on our operating plans. Our primary goals continue to center around the efforts to strengthen the Ruby Tuesday brand, as well as build a strong foundation for our 2 emerging concepts, Marlin & Ray's and Lime Fresh. First and foremost, we are focused on selecting, training and retaining the best operating teams in the industry. We know that operating our concepts with high levels of guest satisfaction starts with the quality of the teams we select, the effectiveness of our training programs and our ability to provide a great place to work for our teams.

We completed fiscal 2012 with approximately 100% hourly turnover and less than 24% management turnover, consistent with previous years and relatively low compared to our industry norms when you include all team members hired. Our goal going forward is to dramatically improve our short-term retention rates, so we can ultimately achieve hourly turnover levels well below 80%.

We know that high levels of retention, now that the management and hourly team levels results in higher levels of team member engagement that positively impacts our guests to a consistent and high-quality stunning experience across the brand.

Over the last 90 days, we have deployed a number of technology enhancements, including PeopleMatter, hire and learn and HotSchedule that show -- enable us to better select, train and retain our team. These tools greatly streamline the on-boarding process to help us maintain better levels of overall staffing in addition to providing our teams with industry-leading scheduling, training and communication technologies.

With respect to our overall guest satisfaction, we are excited about what our brand tracker external research is continuing to tell us from a consumer sentiments point. Since rolling out our new surprise and delight service initiatives in the spring, we continue to achieve scores that are the best in bar and grill, while continuing to close the gap versus specialty restaurants.

Based on our most recent research, our markets that are supported by television are scoring higher in both overall satisfaction and consistent experience across locations, which indicates we are performing well with both new and lapse guests.

Our internal guest satisfaction scores continue to remain at very strong levels as well. Approximately 73% of our guests rate their experience a 5 on a scale of 1-to-5 during the year, and 93% rated their experience either a 4 or 5.

Our operations priority for the year ahead is to maintain these high levels of guest satisfaction scores, as well as the drive new trial and frequency through our increased television advertising campaign. Consistently providing a high-quality guest experience in combination with our media presence, is a key factor that over time should enable us to improve our core traffic trends and lead to improved same-restaurant sales.

We have started this fiscal year with good momentum in both of our emerging concepts, Lime Fresh and Marlin & Ray's. Lime Fresh offers a differentiated dining experience with full service menu variety and quality, personalized service elements like refills and busing not normally found in most fast casual restaurants, while providing the speed and convenience that makes fast casual so successful today.

Our strategic priorities for Lime Fresh are to enhance the overall brand positioning and consumer appeal beyond South Florida, to create higher levels of brand awareness during the first month of operations for our new opening and to continue optimizing the overall operating model.

At Marlin & Ray's, we are encouraged by the opening performance of our most recent conversion restaurants. We continue to see average check levels, higher than the previous Ruby's location, primarily due to stronger appetizer, alcohol and dessert sales. As we look ahead for fiscal 2013, our operational focus areas for Marlin & Ray's center around utilizing research and consumer sentiments to drive our menu offering, adding regional features to create the feel of a local seafood restaurant, leveraging local store marketing tactics to increase brand awareness and drive trial and frequency, and lowering our food and labor costs to create more profit incrementality for this brand.

We are excited about all 3 of our key brands and believe we have good plans to deliver great food, great service in each of these 3 distinct operating environments.

I will now turn the call back over to Sandy for a wrap up.

Samuel E. Beall

Thank you, Kimberly. In closing, I want to comment briefly on a couple of recent announcements regarding Ruby Tuesday. The first is regarding my intention to retire from my position as Chairman of the Board, CEO and President, which was announced almost 2 months ago. As the founder of Ruby Tuesday, it's been a privilege to build the company from the ground up and lead this great brand over the past 40 years. However, I thought it was time to begin a new phase of my life after 40 years, given that we hopefully have a brand headed in the right direction evidenced by positive same-store sales.

We made significant accomplishments over the last several years that have positioned the brand for success in the future. Our Board of Directors has formed a committee that will oversee the search and selection process. I will continue to serve as Chairman and CEO and President until a successor is named, hopefully, later this year.

Secondly, we are spending a lot of time to ensure that we have the right CEO in place as I leave the company, as well as the right Board of Directors composition to support and help grow the company. We believe that change is generally good, and the new long-term CEO in tandem with the board that offers a combination of past history and fresh thinking for the future, positions our company to create good value. In our 8-K filing today, it was announced that Dr. Donald Ratajczak and Claire Arnold will retire from the board after the October annual meeting when their term ends.

Additionally, we announced that Jimmy Haslam will retire from the board, effective immediately, in order to focus on his professional efforts as President and CEO of Pilot Travel Centers. And Steve Barkurn will also resign from the board after the October annual meeting.

I'd like to thank Don, Claire, Jimmy and Steve for their contributions and counsel as members of the board and wish them the very best as they move forward. The board is currently assessing independent director candidates with significant retail restaurant and financial experience, and we hope to have 2 new independent board members in place by the fall.

As we look back on fiscal '12, it was a challenging year for Ruby Tuesday, in particular, on the sales front. But we have accomplished a lot during the year and are in a much better position as a company to create value longer term. As we begin fiscal year '13, we're focused on several key initiatives, which will build upon the groundwork we laid over the past year, and those are, increasing same-restaurant sales at Ruby Tuesday brand. You got to have the same-restaurant sales this year and every year consistently. Two, gearing up to grow our fast casual brand Lime Fresh which we're very excited about. Growing our Marlin & Ray's value-oriented seafood concept, and we are excited about that potential also. If we can do all that, of course, growing EBITDA, earnings per share and free cash flow through growth, sales leverage and tight cost controls and maintaining a strong balance sheet and allocating capital to maximize returns.

While we don't expect any help from the overall economy, economic environment, we to believe we have solid and prudent plans in place to create value in this environment and are excited about the future of Ruby Tuesday's, as well as our growth brands Lime Fresh and Marlin & Ray's.

With that, I'll open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Jeff Former with Wells Fargo.

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

From a promotional standpoint, I'm really just looking to find out what changed between the fourth quarter to the first quarter in terms of what's driving that same-store sales acceleration? You did have a lot of TV advertising in place going back to the spring. I think by April, you had introduced TV to almost 100% in the system. So I do see the easier comparison, but in terms of something else that might have driven that pretty material acceleration between the fourth quarter and the first couple of months of the first quarter, any detail would be helpful.

Samuel E. Beall

Sure. The primary driver of the fourth quarter decline was related to traffic declines associated with a 32% reduction in coupon redemptions. And that 32% was a reduction versus the prior fourth quarter. What we're seeing in the first quarter is coupon redemptions comparable to the first quarter a year ago, coupled with national television is driving increased traffic and ultimately increased sales.

Michael O. Moore

I think in addition to that also, we did a lot -- third and fourth quarter, most the fourth quarter, there was a lot of testing going on. And we think we have much more effective even promotional and new ways to distribute coupons, and that's added a big leap in June and July also.

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

Okay. So again, as the new guy to the store, I'm trying to get my hands around this. So essentially in the fourth quarter, I understand that you had a big reduction in couponing. Then you moved in the first quarter and essentially you brought the couponing back. So I guess, my understanding was that...

Samuel E. Beall

What we're trying to do in the fourth quarter was reduce it to where we felt comfortable on an annual run rate going forward for each quarter this year. So we didn't create another hurdle. I mean, last year was a throw out. I mean, it was a bad year. We didn't want to create another bad situation, so we reduced it in fourth quarter. And we were testing also some new direct mail and some other things...

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

Okay, so just let me ask this in a different way. So if you think about FY '13, the next 12 months as an entire year versus the FY '12, what percent couponing do you expect to see in '13 versus '12? I mean, how sizable a reduction you expect to see in couponing over the full year relative to the prior year?

Michael O. Moore

There's 2 numbers that are important. One is the reduction in coupons spend and the other is a reduction in coupon redemptions. Coupon spend reduction will be roughly 20%. Coupon redemption will be roughly 9%. So what that says is we're spending less but maintaining the same level of coupon redemptions by using better vehicle, more incremental traffic-driving vehicles to deliver those incentives.

Samuel E. Beall

We're getting more out of our coupons, and we're getting more out of our television in the first quarter.

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

Okay. And then just final question on this as it relates to advertising. You guys have talked about this in the past, but in terms of expectation for TV advertising dollars FY '13 versus FY '12, what's the updated thinking there?

Samuel E. Beall

We're running roughly a budget of about $50 million in '13 versus last year, which was a testing year of about $24 million.

Operator

Our next question comes from the line of Keith Siegner with Crédit Suisse.

Keith Siegner - Crédit Suisse AG, Research Division

I missed the beginning of the call, so I apologize if you went over this. Thinking through the cost saves and the opportunity there, and I'm sure you went through this a little bit, again, I apologize. How much of the cost save can you get out of G&A, say, over the next couple of years? And then to bring that into a broader question, as you think through G&A over the next couple of years, spending this money to stabilize sales trends, figuring out what the right level of advertising is, getting rid of the consulting contracts for other sales initiatives. How should we think about G&A over the next couple of years just either in dollars or in percent of sales? Like, how does this transition over the next couple of years play out in G&A?

Samuel E. Beall

Spend of advertising?

Michael O. Moore

Yes. I mean, Keith, net of advertising, you're looking at kind of $60-ish million number in fiscal '13. And that's down 5% to 10% over '12 predominantly due to the consulting fee reduction that you noted. I don't know that we expect that number to scale materially, which is quite honestly why we broke out the TV advertising component from our G&A, because that's really the portion that you should see growth in this year and potentially next.

Operator

Our next question comes from the line of Robert Derrington with Northcoast Research.

Robert M. Derrington - Northcoast Research

Sandy, could you help us, or I guess, maybe, Dan, you talked about the different buckets, which by which couponing spend will be reduced, both I guess the 20% reduction in spend, a 9% reduction in redemption, but what about the actual discount or value that you offer? For example, during this first quarter, I think you had a buy one get one 50% off, as opposed to a true buy one get one, right?

Samuel E. Beall

Probably the coupon reduction is probably, I think, more like 25% or 26%.

Kimberly M. Grant

In dollars.

Samuel E. Beall

In dollars. About 80 to 60.

Kimberly M. Grant

22, 24.

Michael O. Moore

For the quarter.

Samuel E. Beall

Oh, for the quarter. Yes, so we are changing the value structure of our coupons and found that we're getting -- actually, sometimes even better redemption rates on different offerings. So the buy one, get one 50% off, offer actually redeems almost as well as the buy one, get one. So there's a significant cost savings there for us. Our coupon -- average coupon redemption amount dropping from about 950 to about 850 -- 825 to 850 right now in the first quarter. And it is primarily a function of using offers that are as appealing, but it cost us less money to redeem.

Robert M. Derrington - Northcoast Research

The envelopes, the distribution of this coupon different than what you've typically done?

Samuel E. Beall

It is. We used -- we leveraged direct mail.

Daniel P. Dillon

Some is, some isn't.

Samuel E. Beall

Yes, we leveraged direct mail, which was a new vehicle for us that has proven to be significantly more incremental than some of our other vehicles. But we've also, over the last year, really been testing to understand the incrementality of all the component distribution channels, and we're really optimizing that mix on an ongoing basis to get better at it. And it is, in fact, that's why you're seeing a reduction in spending and not as much a reduction in coupons redeemed.

Daniel P. Dillon

What I'm excited about, Bob, I think -- I mean, after really working on coupons, coupons returns in all last year, after having them for several years, I think we all feel very good about -- we've got a right mix. We understand couponing and returns very well now. And I think that our coupon spend at about $15 million a quarter is in line with other chains. It's not exorbitant. I think it's a reasonable amount, and it's a good investment.

Robert M. Derrington - Northcoast Research

Can you give us -- one other question, if I may. Can you give us some kind of an update on kind of where you stand in the search process? How far down the road you are?

Samuel E. Beall

Well, we're about -- let's see, we're about probably 1.5 months down the road. We have our profile. We have our list of potential candidates out there. And now we're moving to the next phase, which is beginning -- we'll start talking to people soon.

Robert M. Derrington - Northcoast Research

And what exactly are you hiring or -- excuse me, are you doing a search for both a CEO and a Chairman? Or how should we understand kind of the -- you were a lot of hands, Sandy.

Samuel E. Beall

No, our Chairman will -- and we already knows who that is. It's in 8-K? Okay. Matt Drapkin will become the Chairman when I leave. He becomes Lead Director in October and then he'll become Chairman when I leave or actually, Lead Director in July, I guess. He's a great guy. He'll be a great Chairman. He's got the time to spend on it, and he's a good fellow. And then we'll be hiring just for the CEO position.

Robert M. Derrington - Northcoast Research

Well, just personally, Sandy, we're going to miss you.

Samuel E. Beall

Well, thank you, Bob. I'm not going that far.

Operator

Our next question comes from the line of Joe Buckley with Bank of America Merrill Lynch.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Sandy, just kind of following on a similar line, counting you, it looks like 5 to 9 board members are going to be new. CEO is new. Just provide a little bit of prospective around the whole thing? It's obviously pretty dramatic change.

Samuel E. Beall

It is, Joe. I mean, it is. But I think, we hope, knock on wood, that we've turned the corner and that the new CEO will come in. I mean, our goal and how we feel right now based on the guidance we gave you in the first quarter is that from a sales standpoint, we turned a corner. And it'll be more pleasant going forward than spending the last year or 2. I think that's the right time to bring somebody in where they have some winds behind their sail instead of trouble. And I think that the board members we have staying on are very solid. I don't think we need 8 old board members. And with our ages and so forth, I mean, I really pushed this. It's getting the right board in place to help the new CEO and help the management team. I mean, it's a lot of change. But I think it's better doing it at one time and be done with it and move on.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. And just a question on same-store sales. Obviously, we have the quarterly number and the first quarter off to a much better start. Did comps get better as the May quarter progressed, or what do you think triggered the return to the positive comps here in the first quarter?

Samuel E. Beall

I think the execution of the marketing plan they've been testing last year. We have the right mix of TV and the right dollar mix of coupons and the right type of coupon out there and the blend of it. Anything you have there, Michael?

Michael O. Moore

No. I think the immediate effects of reducing coupons are what we're trying to balance with the effects of television to take longer to build. And getting that model right, so that we're positively impacting sales in the short term and building the long term is what we worked on all last year. And I think that's what you're seeing in the first quarter and why we're bullish on first quarter sales is that we think we've got that model right now.

Samuel E. Beall

And I think combined with that, we've had some very effective food promotions. The salad bar, the free salad bad, the bread, the $9.99, et cetera, is very powerful. We've got a good, strong powerful win coming on in September.

Michael O. Moore

The other part of that, not going too deep into it is that the weight levels that we're using and 50% of our system required 4 to 6 weeks of ad stock to build. And then we're seeing that ad stock to take effect at the beginning of June because we were on for 6 weeks in the fourth quarter. So part of it now is just a buildup for ad stock momentum was now having an effect and starting to change people's behavior.

Operator

Our next question is a follow-up question from the line of Jeff Farmer with Wells Fargo.

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

Actually, just going back to Joe's question and you touched on this. But it looks like if you go back to early 3Q, about 20% of the market was receiving some form of TV advertising. I'm just curious how this group, which has had advertising in place for essentially 3 quarters, how have their comps compared to those markets have or probably only recently seen TV advertising? So, said differently, how does the efficacy build? Is it material? Is there really something to talk about there?

Michael O. Moore

The build across -- there's actually 3 groups. There's the initial test group, there's a second group that we added in March, and then there's the 50% of the system that we added in April. We're seeing actually better results in the second group, but they were markets that were significantly bigger markets with more density of restaurants. But all the markets quarter-to-date are up in sales, 3%, 4%, 5%, and help in -- the TV is having a different effect in each of those different clusters because of the makeup of the stores that are in them. So the first group of markets were not a representative set of the system, they were just a test set.

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

Okay. And then final question, can you just give us a sense of the Lime Fresh volumes in and outside of Florida? I know Florida you were talking about, I think, it was maybe 1/8, some big volumes. But what does it look like in other parts of the country that probably don't have quite as high volume?

Samuel E. Beall

It's mixed because of our location strategy, opening A, Bs and Cs before we bought it. We shifted more to A locations since we own the brand now, we're committed to it. So they're anywhere from, gosh, 20,000 a week to 35,000 a week. And our best ones are opening here soon. Our best one in August probably will be 2.5 million. So it's too early to tell. And we feel very good about it, but it's...

Kimberly M. Grant

Early.

Samuel E. Beall

Yes, it's early.

Operator

Our next question comes from the line of Peter Saleh with Telsey Advisory Group.

Peter Saleh - Telsey Advisory Group LLC

Great. So just one point of clarification. Did 100% of the restaurants in the fiscal fourth quarter have TV advertising?

Samuel E. Beall

It did starting in the middle of April, but they had different levels of advertising. So they had ad advertising but at different weights.

Michael O. Moore

We're still testing to create the plan for first quarter and going forward, right.

John Dravenstott - KeyBanc Capital Markets Inc., Research Division

Okay, so the weights will be dramatically increased in 2013?

Daniel P. Dillon

Not dramatically increased. The number of weeks on air continuously is where one of the changes is and our media strategy. But the weights, we figured out what the optimal rate level is to have an effect.

John Dravenstott - KeyBanc Capital Markets Inc., Research Division

Okay. And how are you measuring the returns that you're getting on those dollars spent?

Michael O. Moore

Several ways, primarily through a marketing mix analysis that measures ROI and incrementality.

John Dravenstott - KeyBanc Capital Markets Inc., Research Division

Okay. I mean, just the last question, can you just give a little bit more color on the commodity outlook for both the first half and the second half of the year?

Samuel E. Beall

First half is pretty low, we're 90%-plus locked in all the way through the first half of the year. In the back half of the year, there's some exposure. We're very good at this. We think the maximum exposure is like $6 million. I think we've got $4.5 million of that built into our models. So we've got more than $1.5 million exposure at the max. And it probably won't be that. So we're in pretty good shape. And that's primarily due to corn, I think, and what animals you feed corn to.

Operator

Our last question for today is a follow-up question from the line of Keith Siegner with Crédit Suisse.

Keith Siegner - Crédit Suisse AG, Research Division

I just have some follow-ups on Lime Fresh to start with. Now that it's becoming a bigger source for your capital, opening 12 to 16 units. Now that you own it completely. How is the units that have been opened more than 12 months doing in terms of same-store sales? What are those trends? And at least in terms of targets for the new units that you're opening, I know you just said you're appointing 1 for August that you expect big sales. How do we think about unit economics at least for plan? Understanding that they might vary from plant. But like what is expected sales to investment ratio and what that of cash-on-cash returns are built into the plan for accelerating capital deployment to this concept?

Samuel E. Beall

Okay. Sales and investment ratio will be 2x plus. Unit level margin's 22.5%, investments only $750,000.

Kimberly M. Grant

Same-restaurant sales right now are positive, and they're comparable with the industry.

Keith Siegner - Crédit Suisse AG, Research Division

What was the margin number, I'm sorry, I missed it.

Kimberly M. Grant

22.5%. Targeted, targeted.

Samuel E. Beall

And we're not there yet, but we think we'll be there this year. That's what we should do.

Keith Siegner - Crédit Suisse AG, Research Division

Okay. Then the last question I have is just thinking about your comp guidance for the year and what's happening in first quarter. I mean, it sounds like you've finally got the mix of advertising and coupons together the way you want it with the program running, you've seen some improved momentum here. The compares don't get harder. In fact, they actually get, like, slightly easier. You're doing 2% now. The guidance is for flat to plus 2%. If this is -- momentum is all building, help me understand the flat to 2% guidance?

Samuel E. Beall

Well, I think this is not even the end of July. And we feel good about June and July for these 2 months. And I don't think we should get overconfident about this, I mean, about where we are right now. I think by the time we get to second quarter, hopefully, we will feel like you think we should feel, which is even better about same-restaurant sales. But I think it's still a time to be pretty conservative. We've had a lot of good competitors out there. It's a tough market. And what other people do affects our sales also, as what we do affects theirs.

Operator

We do have another person in the queue. Our next question comes from the line of Carla Casella with JPMorgan.

Paul Simenauer

This is Paul Simenauer on for Carla Casella. I just 1 quick question. It looks like you guys had a bankruptcy for one of your franchisees earlier. And I'm just wondering -- I understand that most of your restaurants are company-owned, but that kind of speaks to the health of your business right now. And what makes you think that you guys are just about to turn the corner?

Samuel E. Beall

Well, okay, frankly, the people, I won't say who they are, but were they're in Illinois, Chicago area, they had a tough time for a long time because they're undercapitalized, too much leverage, et cetera. We've got a good -- there's a good operator up there. He's actually doing pretty well. And actually since filing bankruptcy and get his debt in line, he's in better in shape than he's been probably in last 5 or 6 years. So what are sales, Kimber, give me an idea what is running same-store sales?

Kimberly M. Grant

Slightly behind company.

Samuel E. Beall

Slightly behind company. So he's in pretty good shape. And actually we'll get more fees out of next year than we've gotten in the last 2 or 3 years. Isn't that right, Greg?

Greg Ashley

Yes, yes. He's a phenomenal operator now in the business, decidedly over-leveraged. Another thing to keep in mind as the full refurb that we've had at the company, they have not had. So they're in a competitive disadvantage in the marketplace, because they didn't have the capital to put in the business. So we hope that they can kind of work through some type of restructuring come out. But another thing to keep in mind, they're not receiving any benefit of TV left either. So it's their leverage profile, which I'm not going to go into, is not even remotely close to where we are. And their health is not reflective of ours.

Samuel E. Beall

But actually, he's in better shape now than he's been. And he'll probably have a good little company. What else? Anybody?

Operator

Our next question comes from the line of Rosemary Sisson with Lazard Capital Markets.

Rosemary Sisson

I just had a couple of questions as follow ups. Most of them -- this is kind of details. I think you referred to EBITDA, but you actually haven't said the number. I'm sure there are reasons why you haven't. But I wanted to make sure that I'm looking at it directly with add-backs that need to be for onetime expenses, as well as noncash, but I can't really see right now. My numbers show that you did about $42 million in adjusted EBITDA in the fourth quarter of last year. And I'm getting to like a $34 million number for this year, is that right?

Michael O. Moore

That is spot on this year. And I'll have last year's, but that seem to be actually accurate. But here are Q4 adjusted numbers are right there.

Rosemary Sisson

Okay, good. And also I just wondered if you could talk a little bit about traffic versus ticket in this first couple of months? I know it's early, but in terms of the 2% guidance, how much of that is traffic versus check?

Greg Ashley

Traffic's flat for the quarter, and check's up slightly.

Rosemary Sisson

Okay. All right. So that then implies then that people are actually buying, trading up, like the new people who are coming in? Your new customers maybe driven by the TV advertising or buying higher-priced entrées and whatnot, or is that too big of a jump?

Greg Ashley

Well reduction, it's decline in promotion. Essentially that, yes.

Samuel E. Beall

They haven't had positive traffic. I mean, we have not had a lot of traffic in quarter-on-quarter traffic since like 2008. Because we don't have price right now, we're not taking price increases. And so you got to get it the old fashion way in traffic.

Rosemary Sisson

Right. And you must be taking -- I mean, do you feel like you're taking share from anyone specifically, or is it hard to tell?

Samuel E. Beall

We do see in our data that we are taking share from the casual dining category.

Rosemary Sisson

That's good. Okay. And was there any other sort of onetime cost in the SG&A number? I mean, the severance and whatnot?

Michael O. Moore

No, that was -- we listed them as all add-backs. That explains them.

Samuel E. Beall

Kimber was just telling me -- actually, this is kind of exciting for us, but this is the first time in a long, long time, we have positive lunch traffic, dinner traffic, weekend traffic and weekday traffic. So I think our marketing sale strategy and operation strategy and our repositioning strategy, maybe, are finally clicking in a bit since we've been able to start talking about it on the air. Anyway, we knock on wood, we hope it is.

We thank you all for joining us today. If you have any questions, call -- give Greg a call. And thanks for your help and support.

Operator

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.

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