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Benihana Inc. (NASDAQ:BNHN)

F4Q08 Earnings Call

June 12, 2008 5:00 pm ET

Executives

Joel A. Schwartz – Chairman & Chief Executive Officer

Juan C. Garcia – President & Chief Operating Officer

Jose I. Ortega – Vice President & Chief Financial Officer

Analysts

[Brad Buddington] – Keybanc Capital Markets

Greg Ruedy – Stephens, Inc.

Michael Gallo – C.L. King & Associates, Inc.

Anton Brenner – Roth Capital Partners, LLC.

Matthew Hanson – Twin Cedars Investments

John Curdy – Principal Global Investors

Robert [Vowski] – OFI Institutional

Will Hamilton – SMH Capital

Operator

Welcome to the Benihana Inc fiscal fourth quarter and year end 2008 conference call. Our host today, Joel A. Schwartz, Chairman and Chief Executive Officer, Juan C. Garcia, President and Chief Operating Officer and Jose I. Ortega, Vice President and Chief Financial Officer. (Operator Instructions)

Statements in this conference concerning the company’s business outlook or future economic performance, anticipated profitability, revenues, expenses or other financial items together with other statements that are not historical facts are forward-looking statements as the term is defined under federal securities laws.

Forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from those stated in such statements. Such risks, uncertainties and factors included but are not limited to changes in customers’ tastes and preferences, acceptance of the company’s concepts and new locations, obtaining qualified personnel, industry exclusivity, fluctuation in customer demand, the seasonal nature of the business, fluctuations of commodity costs, the ability to complete construction of new units in a timely manner, obtaining governmental permits on a reasonably timely basis and general economic conditions as well as other risks detailed in the company’s filings with Securities & Exchange Commission.

I would now like to turn the floor over to Benihana’s Chairman and Chief Executive Officer, Joel Schwartz.

Joel A. Schwartz

I’ll start with a brief review of our fiscal year as well as comments on the current restaurant environment and then more importantly discuss our current initiatives in fiscal 2009. Afterwards, I’ll turn the call over to our president and chief operating officer Juan Garcia who will review our development activity. Jose Ortega, our vice president and CFO will conclude our formal remarks with the discussion of our fourth quarter financials as well as issue our fiscal 2009 guidance.

Fiscal 2008 can be best characterized as a year of tangible progress in revitalizing our core brand and ramping up growth of our restaurant portfolio as well as a period of formable economic challenges. Our new restaurants do continue to perform up to expectations and are being completed on a timely schedule as Juan will elaborate on shortly. We grew total revenues by 8.9% to a record $296.9 million including an overall comparable sales increase for the year of 2.4%. Excluding the additional operating week in fiscal 2007 last year which resulted in $5.5 million in restaurant sales total revenues increased 11.1% over the year ago period. Net income of $12.8 million which was below last year reflects our investment to the areas of both remodeling and new development as well as the numerous industry wide cost pressures. We’re proud to be recognized as the leader in Japanese theme and sushi dining and we do intend to remain in the enviable position for many years to come.

We added a total of 10 new restaurants to our portfolio during fiscal 2008 including three Teppanyaki, five Raw Sushi and two Haru and ended the year with a total of 87 company operated locations across our three brands. We’ve also completed 16 renovation projects through the end of March and we’ve got an additional four restaurants being remodeled at the fiscal year end. We intend to put this initiative behind us early in our fiscal fourth quarter of 2009.

As comparable sales across the casual and upscale dining markets suggest, the consumer has reined in their dinning expenditures as a result of diminished confidence in their own personal financial security. While our individual brands each has specific challenges based upon their geographic concentrations and year ago comparisons our general feeling is that comparable sales will remain soft as a result of traffic declines until the economic climate improves. We certainly welcome the federal stimulus package and the further lowering of federal interest rates by the reserve bank but we believe that these will take time to work their way through the economy. In addition, the spiraling price of gas will limit the benefit of the [inaudible] so we don’t think it would be prudent to over emphasize its potential as a near term catalyst.

I’ll let Jose delve in to the specific comparable sales data across our three brands but we do believe there are some noteworthy regional variances particularly at Benihana and Raw Sushi. South Florida and Southern California, Nevada and Arizona continue to be our slowest geographies and you’ll note that approximately 30% of our Benihana locations and 12 out of our 18 Raw Sushi locations are in these markets. You may recall that implicit in our comparable sales results for the fiscal fourth quarter were price increases we implemented last year. At Benihana we took about 7% in April of 2007 while at Haru and Raw Sushi we had raised prices about 3% in the July/August 2007 timeframe. In fiscal 2009 we will be taking minimal pricing at Benihana targeting several entrees along with modest pricing on our beverage offerings. Beverages represent approximately 17% of the restaurant sales mix and our selective pricing here is a consequence of our reviewing our drink offerings in comparison to our peers and realizing that we can maintain our competiveness and still implement slight increases to help modestly protect our margins. At Raw Sushi and at Haru, we’ll also be taking minimal pricing in the July/August timeframe in conjunction with our annual menu review. Similar to our Benihana concept however, our price increases will not be sufficient to fully protect our margins against a backdrop of rising costs.

While we can’t control the broader economic climate, what we can do and are doing is navigate through these times, accentuate our strengths and remain true to what has made us so successful and relevant in the dining public for so long. Since our inception at Benihana has always been about celebrating with friends and family, eating deliciously prepared fresh food and enjoying the performance of our legendary chefs. But, at the same time, it’s also emphasized the great value we offer our guests so that they dine with us as frequently as they would and feel good about their experience each and every time. We realize we cannot simply rest on our laurels and wait for external factors to drive positive guest count and comparable sales. We’ve therefore developed a summer long promotion with an emphasize on value. The promotion begin on May 19th and will end on August 31st but excludes Father’s Day which is this coming Sunday. Our focus highlights our entry point entrée, the hibachi chicken enhanced with the hibachi rice and our ice cream desert for a fixed price of $18. The promotion is running in nearly all corporate locations as well as several franchises and is being supported both online and offline media. Specifically, we’re doing spot radio in 11 major markets as well as outdoor banners in an additional seven cities. We’re also doing banner and newspaper magazine ads along with email blasts to get the word out and stimulate an extra push to dine with us.

We do want to make it clear that we’re not employee a coupon or mass discounting strategy at Benihani which would diluted our brand image. Rather, we are limiting our promotion to one entrée item now which we do not believe should detract from our image we look to convey to our guests. Both Raw Sushi and Haru have historically built their messaging around grassroots marketing, pounding the pavement by reaching out to local businesses and hotel concierges and we’ll continue this approach in fiscal 2009 as well. We will also do some radio spots for Raw Sushi in a few select markets where we have some degree of media efficiency such as Phoenix as we’ve done in the past. Marketing and advertising which is part of our G&A expenses is not expected to rise as a percentage of sales but we are being even more strategic with how we’re spending these dollars. At Haru we’re also working on several initiatives to encourage the use of our restaurants for group functions such as corporate functions, group dinners and parties. Some of our locations offer fantastic accommodations for events and think we can drive this highly profitable segment of our business with greater attention which we intend to do.

Despite industry headwinds, we anticipate that fiscal 2009 will be an exciting year for our company. Our investments in the remodeling program are mostly behind us and we are appropriately staffed to open both new locations as well as manage our larger restaurant base. We realize that the numerous costs pressures mostly at the restaurant level are going to impact our business this year and that we must approach our business in the context of both defending our margins and strengthening the value perception of a consumer compared to other dining options. While we talked about our emphasis on value earlier which addresses our top line, we’re also addressing our cost structure and continue to explore ways to take expenses out of the business without impacting the guest experience. Specifically, we’re pursuing opportunities to bring about greater purchasing synergies across all three of our brands in the areas of food and beverage, restaurant equipment and supplies and are devoting more resources to examining how we can facilitate it.

We know our industry is going through some tougher times but this company has been around for more than 40 years and has proven capable of adapting to conditions on the ground and the current environment should be no different. We know that if we stay true to our brand fundamentals and continue to offer a great Benihana experience across our three brands we will emerge stronger and more formable than before. All in all we are a strong, time tested, resilient company and one that can rise to any occasion.

Before I turn the call over to Juan our president and chief operating officer, I did want to mention that we recently finished our fourth annual [Mickey’s] week fundraiser at Raw Sushi where we donated proceeds from a special menu to the St. Jude’s Children Research Hospital. Through our efforts and the generosity of our guest we helped raise funds for this worthy organization, demonstrating our ongoing commitment to good corporate citizenship.

At this time let me turn the call over to our COO, Juan Garcia.

Juan C. Garcia

I would now like to discuss our current development activity. Overall, we are continuing to make progress in our nationwide expansion as well as our renovation of our older Teppanyaki units with a commitment to complete the remodeling project by next January. In fiscal 2008 alone we expanded our restaurant base by 10% year-over-year and when we complete the current roll out of restaurants and development, we will have expanded our current base by approximately 20%.

In our fiscal fourth quarter we opened a new Benihana Teppanyaki restaurant in Dulles, Virginia, our first location in the state and a welcome addition to our presence in the metro Baltimore, Washington DC market which now includes four restaurant locations across two brands. In Dearborn Michigan in the first quarter of fiscal 2009 we have begun construction of a new Teppanyaki restaurant adjacent to the existing location. The current Dearborn restaurant is still in operation but will be torn down upon the completion of the new restaurant. In California, our San Diego Teppanyaki restaurant reopened in February following its remodeling. In Texas, our Teppanyaki restaurants in Dallas and Houston both resumed operations following their remodeling. Dallas reopened in mid March during the fiscal fourth quarter of 2008 while Houston reopened in early May during the fiscal first quarter of 2009. In Colorado our Denver Teppanyaki restaurant will be reopening tonight now that its remodeling has been completed. Within the next 30 days we’ll be starting construction of our Teppanyaki restaurant in Memphis Tennessee which experienced a fire in February. We are working with our insurance company to process this claim. We are using this opportunity to rebuild the location from the ground up utilizing the expanded prototype design which includes four additional Teppanyaki tables.

As of today, we have ongoing renovation projects in our Newport Beach and Cupertino California locations. Both of these projects are expected to be completed in the next few weeks. We also closed a Benihana Teppanyaki restaurant in Turtle Creek Texas in January when its leased expired. There are currently eight Benihana Teppanyaki restaurants under development in Coral Springs Florida, Orlando Florida, Chicago Illinois, Westford Massachusetts, Meadowland New Jersey, Columbus Ohio, Plymouth Meeting, Pennsylvania and Plano Texas. With regards to Haru, we do not have any specific development plans at this time but are evaluating sites that meet our development guidelines. In addition to our current footprint in New York City, Philadelphia and Boston, we have expanded our site selection to include the Mid Atlantic region. We also recently opened two Raw Sushi restaurants, one at the end of the fiscal fourth quarter 2008 and one in the fiscal first quarter of 2009.

Our new Plano Raw Sushi which opened in March is located in the Shops at Legacy, a retail shopping center situation in the heart of the Legacy Business Park which is home to over 20 corporations and employees more than 50,000 people. Our new Pembroke Pines Florida Raw Sushi which opened in May is located in the Shops at Pembroke Gardens, an upscale 400,000 square foot lifestyle center off Interstate 75 and Pines Boulevard. We are very pleased with the performance of our six most recent Raw Sushi openings which are all meeting our exceeding our expectations. In particular, our Pembroke Pines location is off to a very strong start in a generally soft Florida market and is averaging weekly sales, at least so far in the top tier of all Raw Sushi locations. There are currently seven Raw Sushi restaurants under development in Chino Hills California, Huntington Beach California, Orlando Florida, South Miami Florida, Leawood Kansas, Westford Massachusetts and Houston Texas.

We realize that our industry is facing many challenges this year and we must stay focused on improving our execution in the face of a higher cost structure and a more cautious consumer. As experienced operators we have lived through numerous economic cycles and have always emerged stronger and more engaged with our customers than before. While we have tactical initiatives in place now to spur traffic we can also see beyond this immediate situation to appreciate our long term opportunity. From where we stand today we are as determined as ever to reach our potential. In the last year we have invested in our people, assets and systems. We now have the corporate infrastructure to develop, manage and grow a larger restaurant base in a discipline way while leveraging down our G&A as gross sales increase. We have gained a lot of strength in our operating teams this year and our commitment to increasing execution and guest experience. This strength also positions us well not only to meet our current challenges but to take advantage of whatever economic sales opportunities may be presented as well.

I would now like to turn the call over to Jose Ortega to discuss our financials in further detail as well as issue our financial outlook for the new fiscal year.

Jose I. Ortega

I’m going to review our financials for the fourth quarter as well as issue our annual guidance for fiscal 2009. On the top line we delivered total revenue of $70.2 million for the 12 week period which was 2% lower than the year ago 13 week period including franchise fees and royalties which were up about 10.5% to approximately $.4 million for quarter. During fiscal 2007 we realized an additional 75 store operating weeks during the fourth fiscal quarter as a result of a 53 week fiscal year. Excluding the additional operating week in fiscal 2007 which resulted in $5.5 million in restaurant sales, total revenues increased 6.2% over the fourth quarter year ago. There were a total of 971 store operating weeks in the fourth fiscal quarter 2008 compared to 975 store operating weeks in the fiscal fourth quarter 2007. That would be 900 store operating weeks excluding the additional week in the fourth quarter last year.

Total restaurant sales were $69.8 million which was also 2% lower than last year. The year-over-year comparison comprised of $6.5 million from new units offset by $1.3 million due to lower comparable sales, $.8 million of sales loss from units permanently closed, $.3 million net related to temporary closures in the current year and of course, $5.5 million in sales because of the extra week last year. From a purely fiscal standpoint that is 12 weeks versus 13 weeks last year, Benihana Teppanyaki total sales decreased for the quarter by 5.6% to $49.6 million. Haru’s total sales increased 8.5% to $8.6 million and Raw Sushi sales increased 7.5% to $11.7 million. Companywide, on a 12 week comparable basis, comparable restaurant sales were down 2.2% against a formable year ago comparison of 5.7%. Within our three concepts, comparable restaurant sales were down .6% at Benihana Teppanyaki, down 8.4% at Raw Sushi and down 2.9% at Haru.

In terms of costs, food and beverage cost were 23.9% of restaurant sales during the fourth quarter of fiscal 2008 which were 60 basis points lower than the comparable period in the prior year. In the face of higher commodity cost, we did benefit from the pricing we took last year which we will now roll over in the first quarter of fiscal 09. We have purchased contracts for certain commodities that can be as long as 12 months in duration, fixing purchase prices during the contract period. In January, we renewed our beef contract for the next 12 months with a roughly 3.5% increase in average costs. On seafood our existing contracts for shrimp and lobster have been extended to the end of the calendar year with some favorability. Chicken however, is purchased on the spot market. Once again, our overall outlook for commodities is an increase in the 3% to 4% range. The minimal additional pricing which we will start taking in the second fiscal quarter is being done to help protect our margins while limiting the additional stress we may be placing on the consumer. The focus will be on opportunities available to us on individual items as opposed to across the board increases. It is certainly a balancing act between our shareholders and the needs of our guests and we’re doing our utmost to be responsive to both parties.

Labor and related costs were 34.7% of restaurant sales which was 50 basis points higher compared to the fourth quarter last year. Lower comparable sales, higher salaries as well as ongoing cost associated with our remodeling program were the primary drivers of the variance. Other restaurant expenses were up 110 basis points to 8.4% compared to the previous year. I’m not going to delve in to the line-by-line details of some of the smaller items at the restaurant level but we did realize a 70 basis point pressure on a year-over-year basis related to supplies and utilities. Depreciation and amortization was 5.9% of restaurant sales which was 160 basis points higher than the same period last year. This includes approximately $.3 million net in additional depreciation expense incurred in the quarter related to shorting the [inaudible] for those restaurants affected by our ongoing rejuvenation program. We had a total of $2.4 million in accelerated depreciation costs for fiscal 2008.

Taking these together we generated $9.7 million in restaurant operating profit compared to $2.1 million in the same period last year with margins decreasing 310 basis points to 13.9% of restaurant sales. Restaurant opening costs were approximately $.8 million compared to $.5 million last year as we made preparation for recently opened restaurants as well as for the other locations that we will be opening over the next few months. Marketing, general and administrative expenses were 9.8% of restaurant sales and 110 basis points higher on a year-over-year basis mostly due to costs associated with additional personnel in the areas of operations, real estate, construction, human resources and information technology. These investments in infrastructure are focused on supporting all of our expansion but particularly at our sushi concepts. Along with hiring these resources to support our growth, we also brought on several people to identify opportunities where we can take costs out of the business such as leveraging our purchasing power across all three brands. We now believe we’re fully staffed at the corporate level and have all key positions filled. Additionally, during the quarter the company recognized a reserve of $400,000 on a note receivable from a franchisee.

Net income was $2.9 million in the fourth quarter of fiscal 2008 versus $4.1 million in the same period of the prior year. We realized a tax benefit of $23 million net during the quarter compared to last year when we realized $2 million in tax expense. The decrease in taxes was primarily caused by decreasing taxable income between periods as well as the favorable resolution of certain tax items during the quarter. Diluted earnings per share were $0.17 on a base of 17.3 million shares equivalents compared to $0.23 in the prior year on a base of 17.4 million shares and equivalents.

Our balance sheet remains strong. We had approximately $1.7 million of cash and together with our strong operating cash flows and $75 million credit facility, our cash needs are sufficiently covered. Our current borrowings against our credit facility are roughly $17 million at the end of the fiscal year. CapEx for the quarter was approximately $12.8 million including $5.8 million for new units, $6.3 million for remodeling projects and another $.7 million for other maintenance CapEx. For the full year, CapEx was approximately $56 million.

Next I’d like to issue our guidance for fiscal 2009. Now that we’re beginning to wrap up the remodeling program we feel more comfortable offering more definitive financial guidance for the year. Like many other restaurant companies, we have decided to communicate an annual range for earnings in addition to other noteworthy items that will affect our outlook. I do want to remind everyone that our fiscal first quarter is a 16 week period which ends on July 20th and that fiscal 2009 is a 52 week year, similar to fiscal 2008.

Now, in terms of guidance we look for total restaurant sales of $313 to $318 million and 4,500 to 4,600 in total restaurant operating weeks including the effect of 90 to 115 gross operating weeks that are expected to be loss due to remodels. The opening of four Benihana Teppanyaki restaurants and seven Raw Sushi restaurants, as South Miami Raw Sushi is expected to open in the next several weeks followed by our Chino Hills California Raw Sushi in the summer. The balance of our new restaurant openings will be in the third and fourth quarters of the fiscal year. The completion of our renovation program by next January for a total of 24 Benihana Teppanyaki remodels. We currently have three locations undergoing renovation. The locations are currently closed and one that remains operational while construction is ongoing adjacent to the existing structure. Related to our remodeling program is half a million in accelerated depreciation costs which we will incur in the first half of the year. Capital expenditures will total approximately $60 million. As discussed before cash from operations of over $30 million per year. We expect to draw on our available line of credit and end up with approximately $50 million in outstanding debt by the end of the year. Diluted earnings per share of between $0.60 and $0.65 per share and diluted common shares outstanding are estimated to be approximately $17.2 million shares.

We will now open up the call to questions and answers.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from [Brad Buddington] – Keybanc Capital Markets.

[Brad Buddington] – Keybanc Capital Markets

I just got a question on your guidance, I know you’re not providing same store sales guidance but do you have sort of negative same store sales for the full year baked in to that guidance on revenues?

Jose I. Ortega

The guidance does include negative same store sales for the duration of the year and then that’s offset by increasing sales from the new units coming on.

[Brad Buddington] – Keybanc Capital Markets

And beyond that, just on the other operating expenses, I know you didn’t go in to the line items, one that was significantly off for our model, that we were low on is when you go in to the other operating the other category, is there any color on what drove that one up so much year-over-year?

Jose I. Ortega

There were a number of miscellaneous items that were individually 10 to 20 basis points. There was no significant item that jumped out. Utilities which we didn’t mention before did go up during the quarter and a good portion of that again is related to the decreasing comparable sales in the period and the loss of leveraging on that.

Operator

Your next question comes from Greg Ruedy – Stephens, Inc.

Greg Ruedy – Stephens, Inc.

I guess I’ll take another shot at the same store sales. When I look at 60% to 65% guidance, my math tells me that we’re looking at mid negative to high single digit negative comps. Is that in the ballpark?

Jose I. Ortega

We won’t get in to a specific range. Again, we do have negative comps built in to the model for the balance of the year. It’s not the high single digits Greg, we’re more in the mid.

Greg Ruedy – Stephens, Inc.

Using some back of the envelope math, I have your existing [inaudible] performing at $10 to $15,000 per week higher than the units that are not in the comp base. How much of that is just from opening in markets that have the tough macro versus just opening soft and needing to ramp? And, what kind of ramp are you looking at?

Juan C. Garcia

Greg, as you know, it’s hard to pinpoint. Pembroke Pines opened in a really soft market which is South Florida but in an area where it is very under restaurant. Then you take Plano in Dallas, we’re the first one to open in the center, we’ve ramped up and we’ve been positive every single week since it opened and we’re now very pleased with the results. It’s hard to gage from one to the next depending on where we open and what the status of the center is.

Greg Ruedy – Stephens, Inc.

I’ll follow up with a real estate question then, are you beginning to see some improvement in terms that are offered as you’re out there looking for new sites? And, any of the projects that you do have signed, concerns that they’ll get delayed? Or, are there any things that keep you up at night when you look at achieving some of your growth objectives?

Juan C. Garcia

We have seen a more willingness to negotiate with some of the existing developers. I think it’s starting to turn in to more of a tenant market. Having said that, the deals that we are contemplating doing right now is we’ve gone back before we’ve signed any new leases we’re really scrutinizing the terms of those deals. So, we’re pretty pleased with the fact that we’ve been able to gain some efficiencies there in our negotiations. The problem is in the development of Raw Sushi is that the developers, some of the centers have been pushed back due to construction delays. I don’t think it’s been finance, it’s been more of a construction delay.

Jose I. Ortega

Quite a bit, some as much as one or two but some as much as close to a year.

Operator

Your next question comes from Michael Gallo – C.L. King & Associates, Inc.

Michael Gallo – C.L. King & Associates, Inc.

A question I have is on the development side of the business, I was wondering given the weak environment which you are seeing which certainly based on your guidance you don’t expect to improve much, if at all, for the remainder of the year. I was wondering why not pull back the development more significantly or is there something that you’re seeing out of the new units that gives you the confidence to want to spend the kind of capital that it looks like you are going to spend this year?

Juan C. Garcia

Michael, as I said on the call earlier, we’re so pleased with the results we’ve seen of the last six Raw Sushi’s that we’ve opened, they have all met or are exceeding our expectations. We’ve had really good acceptance with all six of them. Additionally, the Benihana Teppanyaki concept, the new prototype has been so well received that we’re really encouraged and we think we can gain market share and we’re healthy. Those units while we’re faced with economic challenges, we’re still profitable. We’re really encouraged with the results so far.

Michael Gallo – C.L. King & Associates, Inc.

The second question I have, I just want to take another stab at is the other restaurant operating line. I know Jose mentioned utilities but utilities is broken out separately and still that other restaurant operating line took a big jump on a year-over-year basis. So, I wanted to just come back to that again, just understand even if it was a number of different factors that went up a little bit, I want to understand what was going up? Should we expect that kind of level of other operating expense as a percentage of sales going forward?

Juan C. Garcia

Again, what you see is miscellaneous items such as cleaning and sanitation bumping up, telephone charges bumping up, some administrative charges, the rate of some of the local amortizing dollars being spent. And again, it points to the loss of leveraging at those markets with the decreasing sales for the quarter. Individually, there’s nothing individually that jumps out and the major items we discussed already.

Joel A. Schwartz

Just on that line, in the fourth quarter we did try a cleaning and sanitation program which was a lot more comprehensive than we’ve done in our California units just on a trial basis. We didn’t see the effects of it so it’s something we’re not continuing going forward. We’re going to go back to the drawing board as far as the maintenance of our Teppanyaki units.

Juan C. Garcia

So that there was some there, and administrative costs were really impacted with some of the travel that was necessitated in some of the remodeled units. As we closed them we had to transfer those employees to other units and that’s embedded in that line.

Michael Gallo – C.L. King & Associates, Inc.

Then final question, I was wondering if you could give us any further clarity on what you expect the total impact of the remodeling to have on fiscal 09 from loss restaurant operating profits as well as other expenses. I know you mentioned a depreciation item but I was wondering if you could just give us a flavor for what you expect some of those other items be it absorbing additional employee costs or just loss restaurant operating profits.

Juan C. Garcia

Well, in terms of the ongoing expenses associated with the remodeling program, the total number of loss weeks continues to decrease as the program winds down. As a result the amount of efficiencies will continue to decrease. During all of fiscal 07, ongoing expenses at closed restaurants approximated $2 million, in 08 it was about $1.5 million, so that number should continue to move down again, as the inefficiencies associated with this come to an end. Then, as I mentioned before, on the accelerated depreciation, its only half a million dollars to be taken this year and the program will be coming to an end in January.

Joel A. Schwartz

If I could interject as well Michael, I think what we are seeing is we’re going to continue to see some pressures there in the first part of the year as we complete these two, you know we have four closed at year end and as we reopen those in the first quarter, that will leave us four to do, one of them is Dearborn which is just a matter of tearing down the building and transferring the employees with minimal impact on the operating expenses. And those three that are left are in markets in which we have other restaurant so we’re thinking that we can gain some leveraging off of what we’ve seen in 08 and 07 and the impact won’t be as great.

Michael Gallo – C.L. King & Associates, Inc.

With Denver opening today, is it 18 that are complete now?

Joel A. Schwartz

That’s correct, with Denver opening it will be 18 and our Cupertino and Newport Beach restaurant hope to reopen before the end of first quarter.

Operator

Your next question comes from Anton Brenner – Roth Capital Partners, LLC.

Anton Brenner – Roth Capital Partners, LLC.

A couple of questions, what was the accelerated depreciation figure for fiscal 2008?

Jose I. Ortega

The total accelerated depreciation for fiscal 08 was $2.4 million of which $.3 was in Q4.

Anton Brenner – Roth Capital Partners, LLC.

And do you have a CapEx number for 2008?

Jose I. Ortega

The CapEx number for the year just ended totaled about $56 million.

Anton Brenner – Roth Capital Partners, LLC.

On the remodeled stores, as they reopened, are you still experiencing a double digit increase in average weekly sales?

Juan C. Garcia

As a basket, the stores that have come out of the remodeling are towards the lower end of that 10% to 20% bump as a basket. Individually, obviously we have stores operating in depressed markets in Southern California and South Florida and those economic pressures are real so that does impact the bumps that we’re looking for coming out of the program. Having said that, we still are very positive on the results of the program which will set us up for continued competition for many years to come.

Anton Brenner – Roth Capital Partners, LLC.

My last question, just circling back to comparable unit sales, looking at the increase in operating weeks that you’ve projected, just taking the midpoint of that, you’ve got about 10.5% additional operating weeks lined up in fiscal 2009 but taking a optimistic end of your restaurant sales estimate you’re implying that average weekly sales decline by about 2.5% and given to favorable impact of the remodeling program, as Joel suggested, that implies a 4% or 5% decline in comps for the year which is an acceleration from what you just saw in the fourth quarter even though comparisons as we get past the first quarter of 09 become significantly easier to work against. I wonder what the rationalization for that is?

Juan C. Garcia

Well Tony, for the quarter in terms of starting in to fiscal 09 we are lapping over the significant pricing we took at the beginning of the year. In terms of comparable check for the period, comparable check for the period was up about 6.6% for the system for the quarter and it was offset roughly by negative traffic of 7.6%. So, we continue to have negative traffic going in to fiscal 09 but the comp that is baked in to the estimate for the following year, for fiscal 09 is all traffic because what we’ve said before is the pricing we’re looking to take is not aggressive, it’s a nominal increase to help with the margins.

Anton Brenner – Roth Capital Partners, LLC.

You’re implying that you’re not even going to look at pricing again until the first quarter of fiscal 2010.

Juan C. Garcia

We reserve the right to revisit pricing later on in the year. We will continue to monitor it as the economic conditions change but again, what we’ve discussed in the past is given the current pressure on the consumer, to overly increase prices in the short term could cause a loss of customers in the long term. Having said that, the nominal price increases that Joel and Jose described earlier are going to go into effect at the beginning of the second quarter, second fiscal quarter.

Operator

Your next question is from Matthew Hanson – Twin Cedars Investments.

Matthew Hanson – Twin Cedars Investments

A quick question, what signals are you looking for specifically other than just traffic and checks to really signal a consumer turnaround here in the US? The broader macroeconomic things that you guys are keeping your eyes on in particular?

Juan C. Garcia

Well, I mean we watch all the same indicators that everybody else is looking at. We look at the price of fuel on the consumer, we look at the price of commodities and the impact on the consumer in terms of what they’re paying for their groceries. We’re looking at labor data to see how that’s impacting the individuals and so we monitor all the same factors that everybody else is looking at.

Joel A. Schwartz

We also look at consumer confidence index and as you know, that is at an all time low. That has a lot to do with people’s psyche.

Matthew Hanson – Twin Cedars Investments

And that’s leading in to my next question here. Do you use that as a leading indicator for pricing sensitivity? And, if you saw that data turnaround, is that what you’re basing price increases on?

Juan C. Garcia

Partly.

Joel A. Schwartz

Sure that weighs in to any decision with pricing.

Juan C. Garcia

All of the data that we’re seeing now is that the consumer is really being challenged and the most important thing you can do for the long run, we really run the company for the long run. I haven’t been here for so long, we want to make sure that we don’t lose – you’re not increasing your customer counts today but we want to make sure that with every customer that is coming in the door we’re able to service them and service them well and we’re able to keep them.

Joel A. Schwartz

Appreciate the customer we have by catering to him, making him want to come back quicker. Benihana has a return rate, we want to increase that return rate just by treating them well and you’re not going to do that any other way than hospitality and that’s been drummed in to us by what’s going on in the industry and we’re drumming that in to all of our employees and training.

Juan C. Garcia

I can tell you as we drew up our fiscal 2009 annual plan, top of the list and top of mind is three things; guest satisfaction, guest satisfaction; and guest satisfaction and that is our focus in 2009.

Matthew Hanson – Twin Cedars Investments

Then final question, it sounds like in terms of remodels and new locations you guys are still focusing heavily on states that are still fairly hard hit by the economy, California and Florida. The rational there for continuing to focus on those states?

Juan C. Garcia

Unfortunately, these deals are done anywhere between 15 to 18 months ahead of restaurant opening so these are deals we had worked on and signed, as you go back through our press releases that were done about 12 to 18 months last year. Right now we’re obviously not concentrating on Florida or Southern California. The new deals that we’re looking at we’re concentrating where the economy seems to be holding up a little bit better which is Texas, Mid Atlantic, the Atlanta areas as well.

Joel A. Schwartz

But, after saying that, I will tell you that the last five, six restaurants that we did open in California and South Florida have proven to be very good choices for us.

Operator

Your next question comes from John Curdy – Principal Global Investors.

John Curdy – Principal Global Investors

I was wondering if you could break out your capital spending budget for the upcoming year in terms of the remodeling of the four Teppanyaki's, the new store opening and you know, like maintenance and IT CapEx, that type of thing?

Jose I. Ortega

John, I don’t have that detail in front of me but I would be happy to follow up with that information.

Operator

Your next question comes from Robert [Vowski] – OFI Institutional.

Robert [Vowski] – OFI Institutional

I was wondering, you mentioned that the last six Raw Sushi’s, I guess you’re encouraged for their performance and I was wondering if there were any kind of common characteristics amongst them that makes them kind of perform better than maybe the earlier group?

Juan C. Garcia

I think as we’re maturing in to our site selection process we’ve learned a lot from our earlier units and what seems to work best for Raw Sushi. What we’ve seen, in Baltimore let’s say, we’ve got in to sort of a smaller market, it made us flash, where a lot of press that we’ve gotten is we’re West Coast, hip and fun and edgy, makes its way east. The Pembroke Gardens location is serving an area of the country where it’s economically challenged but it’s very under restaurant. We’re able to bring something different to these areas, we’re really focusing on the night life component of the business for Raw Sushi and we’re being a lot more selective with our lifestyle centers. We’ve always said lifestyle centers are a sweet spot for Raw but it really depends on the co-tenancy of not only restaurants but the retailer as well. So, I think we’ve learned a lot from our earlier restaurants to what works and what doesn’t work.

Robert [Vowski] – OFI Institutional

As you look across the country, do you have any idea how big the addressable market is?

Juan C. Garcia

We’re saying that we can do 100 plus units.

Robert [Vowski] – OFI Institutional

Then I was also wondering I guess for the system in general, could you compare the traffic trends in California, Nevada, Florida, Arizona compared to outside those regions?

Juan C. Garcia

We don’t go in to the specifics but those three regions have been the ones hardest hit in terms of traffic counts for our system. We’ve had positive traffic trends for example in the Texas area and in other parts of the Midwest, but those areas have had the softest traffic trends of all.

Robert [Vowski] – OFI Institutional

So it’s far to say that kind of the rest of the country might have been closer to 0% and its dragged down kind of by these outliers.

Juan C. Garcia

Yes.

Robert [Vowski] – OFI Institutional

Then also, two last questions, is this G&A level sustainable for the rest of the year? Or is it what we should be using for our model?

Juan C. Garcia

Again, in terms of the G&A there was, we ended up for the year about 9.5%. In there was a charge for the $400,000 on a receivable that we set up a reserve for which won’t repeat next year. In terms of where we expect to end the year, we are looking to begin to leverage G&A towards the end of the year. The extent of leveraging the infrastructure we’ve put in place is dependent though on the sales increases next year, or the extent of sale increases next year.

Robert [Vowski] – OFI Institutional

Then finally what was cash flow from operations for the year?

Jose I. Ortega

Cash flows from operations was on an EBITDA basis approximately $35 million, off the statement of cash flows with changes in working capital it was about $28 million.

Operator

Your next question comes from [Brad Buddington] – Keybanc Capital Markets

[Brad Buddington] – Keybanc Capital Markets

First off, the change in the lunch menu where you took it off for the weekends, that occurred at the beginning of first quarter 08, is that correct?

Juan C. Garcia

Yes.

[Brad Buddington] – Keybanc Capital Markets

There have been a few companies that have said they’ve seen some stabilization in California and Florida, not improvement, it’s still negative but at least it’s not getting any worse. Have you guys seen anything similar to that, that you can comment on?

Juan C. Garcia

I would say that we are sort of in that range where we haven’t seen it worsening but we haven’t seen an improvement. So, we’ve sort of leveled off a little bit.

[Brad Buddington] – Keybanc Capital Markets

Then looking at the hibachi chicken promo, have you seen any kind of early signs that that could provide any sort of lift or benefit?

Juan C. Garcia

You know we only have two weeks of data so far and not all the advertising I think got ramped up at the beginning of the two weeks so it’s really too early to comment. It’s too choppy to report and give you any indication and we don’t want to mislead you.

[Brad Buddington] – Keybanc Capital Markets

Then one last question, just kind of on cost structure, if it’s possible to kind of take out the impact of the negative same store sales, when you look at a lot of the Raw Sushi locations like up here in Plano, opening up in a kind of early stage in the lifestyle center, it looks like a great location but it looks like there’s still a lot of construction going around it. Does the potential slower business in the early stages kind of hit the cost structure of Raw Sushi? Is that bringing in a higher cost structure than traditionally we’ve seen with Raw?

Juan C. Garcia

No, not really. I think the Raw Sushi operators, they have their business model very well defined and we ramp up pretty quickly as far as our cost control and our commodities, our food costs and beverage costs. Labor does take a little bit longer to run in to place and to ramp up but for the most part the unit starts to perform I would say between three to four months, both labor and the food cost of sales are pretty much in line.

Operator

Your next question comes from Anton Brenner – Roth Capital Partners, LLC.

Anton Brenner – Roth Capital Partners, LLC.

What happened with taxes in the fourth quarter?

Jose I. Ortega

Well, two things, as fourth quarter income decreased, that decreasing income and you had increasing tax credits so you had favorability as you adjust for that from the end of the year. Also, we had certain uncertain tax positions that had been identified at the beginning of the year which were resolved and as a result we had certain items turning around and providing favorability in the quarter. So, that’s how come we ended up with an effective tax rate of about 28.5% for the year.

Anton Brenner – Roth Capital Partners, LLC.

For 09 the tax rate 35% or so rate?

Operator

Your next question is from Will Hamilton – SMH Capital.

Will Hamilton – SMH Capital

Juan, I just have a question on the Benihana and I think you gave some guidance for Raw Sushi in the openings but could you give us a bit more guidance on the four Benihana locations as to the timing of those openings?

Juan C. Garcia

Those four Benihana’s will open in the third and fourth fiscal quarter of 09.

Will Hamilton – SMH Capital

Even Plymouth as well you’re saying?

Juan C. Garcia

Yes. Plymouth we just got our building permit this week so we’re starting construction now. It’s a 20 week construction time period.

Will Hamilton – SMH Capital

Then Jose, do you have any indication as to the size of the insurance claim that you should get from the Memphis fire and maybe any timing to that and whether that factors in to –

Jose I. Ortega

We won’t comment on the insurance claim until it’s settled. No loss has been recognized in the fiscal year just ended or anticipated. But, we’ll provide that additional information when it comes about.

Operator

That does conclude the question and answer session today. At this time Mr. Schwartz we’ll turn the conference back over to you for any additional or closing remarks.

Joel A. Schwartz

I want to thank everybody for joining us today. We’ll speak to you soon. Again, thanks for supporting Benihana.

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Source: Benihana Inc. F4Q08 (Quarter End 03/30/008) Earnings Call Transcript
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