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Ruby Tuesday, Inc. (NYSE:RT)

F4Q08 Earnings Call

July 9, 2008 5:00 pm ET

Executives

Steve Rockwell - Vice President, Finance

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

Samuel E. Beall - Chairman of the Board, President, Chief Executive Officer

Kimberly M. Grant - Executive Vice President

Mark Young - Senior Vice President, Marketing

Analysts

Christopher O’Cull - Suntrust Robinson Humphrey

Jeffrey Omohundro - Wachovia

Brad Ludington - Analyst

Joseph Buckley - Banc of America

Keith Siegner - Credit Suisse

Bryan Elliott - Raymond James

Thomas Forte - Telsey Advisory Group

Operator

Good afternoon. My name is TK and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Ruby Tuesday fourth quarter fiscal year 2008 earnings call. (Operator Instructions) I would now like to introduce Steve Rockwell, Vice President of Finance. Mr. Rockwell, you may begin your conference, sir.

Steve Rockwell

Thank you, TK and thanks to all of you for joining us this evening. With me today are Sandy Beall and Margie Duffy, the Chief Financial Officer. In addition, Kimberly Grant, our Executive VP of Operations and Mark Young, our Senior VP of Marketing are with us for the Q&A portion of the call.

I would like to remind you that there are likely to be forward-looking statements in our comments and I refer you to the note regarding forward-looking information in our press release and most recently filed Form 10-Q.

We plan to release first quarter FY09 earnings on October 8th and will hold a conference call at 5:00 Eastern Time that evening.

Our format today includes an overview of our fourth quarter and our fiscal 2008 financial results. We’ll also update you on our plans and strategies for FY09 and at the conclusion of our prepared remarks, we will have a question-and-answer session.

I will now turn the call over to Margie for the financial review.

Marguerite N. Duffy

Thank you, Steve and let me take this opportunity to welcome Steve Rockwell as our new Vice President of Finance. Many of you already know him as a Wall Street veteran. Steve will also be directing our investor relations department. Now let’s move ahead and look at our results. I’ll take a few minutes to touch on our fourth quarter and fiscal 2008 financial results, and our fiscal year 2009 financial plans. Then Sandy will update you on our business plans and initiatives.

As you saw in our release, we reported diluted earnings per share for the fourth quarter of $0.27. This was at the upper end of our implied guidance, primarily reflecting excellent control costs, cost control.

For the quarter, revenue decreased by 4.3%, driven by the 10.3% decline in same-restaurant sales, which was partially offset by a net of five new restaurants opened during the year and the acquisition of 36 franchise restaurants in the first and second quarters of fiscal 2008 respectively. Our restaurants opened in the last three years continue to perform with higher average restaurant volumes once they are open for both lunch and dinner.

Restaurant level margins were 19.4%, which was higher than our expectations although below the 23.3% restaurant margin in the prior year’s fourth quarter. Continuing the trend of the third quarter, we were able to raise the average check throughout the quarter without price increases and it actually was up $0.02 for the quarter. This enabled us to regain some of the lost leverage in the prior two quarters when check was down.

Food costs were a little below our expectations, primarily because of a couple of anticipated cost increases which were delayed, and we realized some savings from new procedures from using fry oil and a continued focus on waste control.

Labor costs were also below our initial expectations as training costs were lower due to lower-than-projected turnover, lower bonuses and manager cost, and favorable workers’ comp experience as we continue to see benefits from our ongoing programs in this area.

The other operating expense line was 180 basis points higher than the prior year. The bulk of this increase was due to higher rent from leased restaurants purchased from our franchisees and increased impairment charges, and a loss of leveraging of certain relatively fixed costs.

Equity and earnings of our franchisees came in essentially in line with our expectations. We are working closely with our franchise partners and in exchange for temporary fee reductions, we are asking them to focus on their accountability in order to improve their profitability, and we are seeing improvement.

G&A was higher than our expectations, primarily due to higher advertising expenses because of our decision to buy more cable TV spots in support of our fresh combinations triple prime campaign in April.

Interest expense was a little lower than we had expected due to the delay in signing the amendments to our credit facilities, which resulted in the higher rates being in effect for a shorter time than we had projected.

For the full year, restaurant level margins were 18.8% compared with 24% a year earlier. The decline is primarily the result of lost leverage from the drop in same-restaurant sales and our investments in higher quality menu items.

In looking at the balance sheet, we ended the quarter with book debt of $605 million and total funded debt, including capitalized leases, of approximately $900 million. As we noted in May, we amended the terms of our debt agreements with our lenders and modified our covenants. Details are available in our 8-K filed on May 22nd.

Capital expenditures for the year were $117 million. Of that amount, $60 million was for new restaurants and routine maintenance and $57 million was for our reimaging program. With our reimaging completed and new unit developments essentially on hold, capital expenditures will be substantially less in the future.

We generated excess operating free cash flow of $18 million in the quarter.

Now let’s turn to fiscal 2009. You saw in our press release our guidance is as follows: for the year, we expect same-restaurant sales to be down in the low to mid single digit range with sequential improvement throughout the year. Earnings per share is expected to be in the $0.50 to $0.70 range. We expect restaurant operating margins to be down marginally as higher labor and other operating expenses reflecting lost leverage from the lower sales are partially offset by lower food costs. Although we project food costs to be down for the year, we do expect them to be higher than in the fourth quarter.

Depreciation is projected in the $79 million to $83 million range, and SG&A is targeted to be down 10% to 15%. As part of our SG&A, our advertising budget is down nearly $18 million. Interest expense is projected to be up about 20% and the tax rate is assumed to be 10% to 20%. We expect to generate $90 million to $100 million of operating free cash flow for the year.

For the first quarter, we expect same-restaurant sales to be down in the 8% to 9% range.

Now I’ll turn the call over to Sandy for an update on our strategies and initiatives.

Samuel E. Beall

Thanks, Margie and welcome to everyone. As we begin today, I want to say that our teams and I continue to feel very good about the improvements to our brand and the execution of our communicate strategies. Fiscal 2008 was a very challenging year for us and for many other restaurant operators also. The environment was as difficult as I’ve ever seen it, with significant top line pressure resulting from industry over capacity and a strapped consumer, among many other things.

We also probably hurt ourselves by taking the eye off the ball when we remodeled approximately 650 company-owned restaurants in less than 12 months, as well as by losing some of our guests, we believe lower end guests who maybe felt less comfortable in our reimaged restaurants.

But as of this past quarter, our reimaging initiatives are totally behind us and we are seeing the benefits in guest ratings and some early signs of sales momentum. We can’t control the micro environment so I will limit my comments mainly to our own actions and strategies.

There are three main points I’ll make: first, our strategy, our strategic direction is sound; second, we are operating our company and restaurants very efficiently and controlling cost pretty well, I believe; and third, we are laser focused on improving our financial results, especially our balance sheet.

Margie has already talked about the results we hope to get in discussing our guidance. Our strategic direction now -- for the last several calls, I’ve talked about our four brand strategies -- uncompromising freshness and quality, gracious hospitality, five-star facilities and compelling value. These four-brand strategies are ingrained in our culture and the entire organization is focused on them. We’ve not wavered from these strategies and we believe they will drive our results in the future and for the long-term.

The first one, uncompromising freshness and quality; this was the first area of focus and we set out to upgrade the brand beginning with this item a couple of years ago. The food today is far better than it’s been in the 36 years that we’ve had the brand. Our focus on uncompromising freshness and quality starts with our premium beverage, premium pour program and continues throughout our menu, including our premium jumbo lump crab meat, our fresh proteins, which include natural hormone free chicken, fresh choice and prime burgers, and especially our garden bar, which is a significant point of differentiation for our concept, as it offers an abundance of high quality fresh produce plus it’s fast, it’s fresh, it’s healthy, and it’s very affordable. It’s a real value play for us.

Our second brand strategy is gracious hospitality. Service is better than it’s been in the history of Ruby’s. We’ve invested very heavily at the unit level in service, in server standards, including the appearance of our staff. We’ve rethought what our people should look like and how they should present themselves to and communicate, how they communicate with our guest. We’ve enhanced job benefits greatly and our servers are making more money and the average tip percentage is higher, another reflection of a job well done, we believe. And with all these upgrades and changes, our turnover continues to go down.

Over the last year, our focus has really been to change our team’s mindset, raising it from what we call bar/grill good to attaining high quality casual dining standards. We’ve invested very heavily in realigning our company culture towards this goal, throughout our management and team training programs. Our team talent is stronger and more stable than ever at both the hourly and management levels, our turnover is at record lows, our management turnover is approximately 20%, including all trainees, everybody from day one, which is a very good number. Our teams believe in our quality positioning and are proud to be part of it, and then furthermore hiring high quality casual dining leaders has never been easier. They come in, see the difference in our food, what our people look like, what the restaurants look like, and it’s easy to attract management from other high quality casual dining concepts.

Now our five star facilities -- when we set out to transform our brand a couple of years ago, the initial focus has to be on step one, and that was improving food; step two was then service quality. During this last year, we finally got to reimaging really the restaurant, and we remodeled virtually all the company-owned restaurants to bring the atmosphere up to a level consistent with our food and service. We eliminated the Tiffany lamps and roller-skates on the walls, replacing them with more contemporary fixtures and commissioned artwork. We upgraded our tables, our chairs, our glassware, plateware, silverware. For those who have not seen the new look, go to our website to see pictures of it at rubytuesday.com or better yet, go visit one of our fresh new Ruby Tuesday’s.

We now have a completely integrated high quality brand with consistency among its key elements of food service and the restaurant’s look and feel. This is very, very important and you have to keep in mind it’s only been in place for a few months now. We just completed our remodeling as of fourth quarter.

Prior to reimaging, a guest could have felt a disconnect between the server’s appearance, food quality, and presentation, or the atmosphere of the restaurant. As of the fourth quarter, they are all in harmony and this has already resulted in our high satisfaction levels ever.

Let me talk about the last strategy now, compelling value -- it is our fourth brand strategy and it’s one that’s really crucial, especially in today’s environment, more important than ever. We define value, and our guests indicate that this is their definition also, as the value of the total experience of eating at a Ruby Tuesday, and that combines food, food quality, service, restaurant atmosphere, and of course, price.

Many of our traditional competitors are defining value today principally as price and they have heavily promoted lower priced menu offerings. Their strategy combined with large advertising budgets has allowed them to be very effective in driving guest traffic, much better than us for sure, over the short term. But we believe our strategies of upgrading, improving, and differentiating our brand into a newer, fresher, more relevant concept will be very effective for us in building sustainable, long-term customer loyalty long-term.

We do offer everyday value for those guests who are on a tight budget. Nearly half of our menu items are priced from $6.99 to $10, and our check average is still only in the $12 range, so we definitely have value and our value scores support that.

The repositioning of our brand from a customer perspective is working out the way we envisioned it. In particular, our guests like our restaurants better than they ever have. Every quarter approximately 135,000 guests rate various attributes of our restaurants on a one to five scale, with five being the best. Our top two boxes represent those customers who rate us a four or a five. Either one of those scores is outstanding and they definitely plan to revisit our restaurants.

Our scores in virtually every category are at record levels. For example, our top two overall box rating is 91. Actually, our top box rating I think right now is over 60, so both are very, very good. Our food is a big hit. Our top two box rating is 93 on taste and flavor, 95 on freshness, and our service was rated a top two box, a four or five again, but at 90% by our guests, with very high marks for menu knowledge, attentiveness, and friendliness. Value is also up; it’s 88% of our guests in these economic times are rating value a four or a five. I think that’s very good, and that’s up from the high 70s six months ago.

Let me summarize by saying you’re doing something right when over 90% of your guests also, 90%, tell you that they intend to come back and they intend to recommend our restaurant, our brand to their friends.

The soundness of our strategy is also indicated by the fact that our customer base is changing. We hear this from our managers in the field that say their customer base is better than it’s ever been. We also see it in our research numbers. For example, it is becoming a little more affluent, which is what we wanted, with 44% of our customers having income greater than $75,000 compared with 38% three years ago. It’s also a little older, with nearly a third over 51 years old, up from a quarter three years ago. This is right in line with [objective] national demographic changes and exactly what we wanted when we started off repositioning, upgrading our brand.

We are getting operating results from our repositioning that again has only been complete for a quarter now. I keep saying that but it takes -- you know, when we first started our plan, we said it would be a three to five year journey and we are still on that journey. We are well-positioned for the future and have minimal capital needs, which is key for remodelings or anything else. We’re set to go, we’re set to just generate a lot of cash in the next couple of years.

The second topic to cover is that we are controlling our costs well and operating our restaurants in the company efficiently. At the restaurant level, our operating margin was down 3.9 percentage points in the fourth quarter year over year. This compares with year to year declines of 6.6% and 7.6% in the third and second quarters respectively, so we’ve had really dramatic improvement. We’ve tightened our operating and corporate expenses considerably and are adapting to the lowered sales environment that we expect will last a while, at least until the restaurant supply decreases and demand increases, as the consumer has more money over time.

Our improvement in Q3 and Q4, and hopefully more in the future, is a result of a relentless focus on reducing cost without sacrificing quality. We’ve examined how and why we do everything and have had very good success in reducing the cost of doing business while keeping quality up and value up.

Part of our focus on cost relates to food. As we said in our guidance, we currently expect food cost to be down slightly in fiscal year 2009 compared with last year. However, we do expect them to be up relative to the level in the fourth quarter.

We have fixed contracts on our largest items through at least the end of the calendar year; in many cases, beyond. Beef, as an example, our largest commodity item, is contracted through February of ’09 and we are in the process of extending that through the end of calendar ’09. Chicken, I think we have that one almost locked even longer. Ribs are contracted through February ’09, Jumbo Crab through July of ’09. So we feel as though we’re in pretty good shape there.

We are aware of the pressures on commodities. We are working very hard every way we can find to keep the food cost down so we don’t have to raise prices, from negotiating with additional vendors, being very tough on our contract negotiations, no one wants to lose business right now, looking at alternative suppliers, looking at new menu products that have lower food costs. We are looking at everything that we can very tenaciously.

Finally, we are highly focused on improving our financial results. The first priority, of course, is sales; that drives financial results, especially when you have good cost control, which we do. We have to drive sales. As I said at the outset, there are early signs that our trends are improving. It’s very premature to make a definitive statement here but it does feel a little bit better.

In the fourth quarter, five percentage points and nearly half of our entire decline in same-restaurant sales were confined to four southern states -- Florida, Virginia, Georgia, and Tennessee. Naturally, we’re directing a lot of our sales building efforts in those markets, but four states are half of our entire decline. Keep in mind we don’t have a check or its minimal check increased at all for the fourth quarter, so we are talking about traffic also.

We do feel good about our plans and we have I think solid plans to address our sales efforts, even though we are spending less total money on advertising. I’m not going to go into a lot of detail for competitive reasons but we are approaching the margin from two directions; internally and externally. Internally, we have developed a focused marketing approach program that will support our external advertising efforts throughout the year and will include a reintroduction of the Ruby Tuesday brand.

Our second priority is to continue to look for ways to lower the cost of business; third, naturally we’re focusing on profitability and maximizing cash flow, each of which is an outgrowth of the first two, which is primarily sales. Finally, we’re intent on improving our balance sheet. If we do the previous ones I talked about, the balance sheet will continue getting in better shape. We’re projecting to generate over $100 million free cash flow, which means we’ll have $100 million less debt at the end of next year, which is substantial. In the future with an improved capital structure, we plan on returning excess capital to our shareholders again, just as we have in the past.

In conclusion, I want to reemphasize a couple of points; first, our guests definitely recognize our improved operations and are giving us the highest food service and value ratings ever. We are on the right track.

Second, we have no distractions facing us this year, the first in probably 10 -- as far back as I can remember. We have nothing new. We have a minor menu rolling out at the end of August, very minor changes at all but it’s just a solid year of executing, executing, and continuing to improve our services scores and just focused on financial results.

Our teams will be able to devote 100% of their time and efforts to doing these couple of items. That’s very, very important though -- focus, focus, focus, no distractions. Third, we are completely focused on increasing cash flow and strengthening our balance sheet. We’ll do this through continuing to offer guests great value, driving sales, making the restaurant level margins and managing corporate expenses down as much as we can.

I think we are in a good position to create value during very difficult times. But as bad as it’s been for us, I feel very good about the fact that we’ve made major, major investments over the last year that probably a lot of other brands will have to go through over time and for that, I’m glad they are behind us and we are well-positioned for the future.

Thanks for joining us. At this time, I’ll open the call up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Chris O’Cull.

Christopher O’Cull - Suntrust Robinson Humphrey

Sandy, given the improvement you are seeing in these guest satisfaction scores, it appears the comp issue relates really to getting lapsed users to try the new Ruby Tuesday. In light of that, why reduce the advertising investment for ’09?

Samuel E. Beall

We’re reducing it substantially. I think it’s -- we gave them out, didn’t we, Steven? About $18 million? One, I don’t -- advertising gets a return; it doesn’t get a complete return. We’re more focused on cash flow.

With that said though, Chris, I think it’s important to say that we have a very good plan. If you’ll notice last year, we spent a lot of money in the first half of the year and we’ll just spend more of our money in a concentrated period of time, because you are right; we need to let people know that Ruby Tuesday is different. I think that’s the number one goal and I think we have the money to fund that.

And if things went really well, we may want to advertise more later. We can always invest more but right now, to achieve the $100 million in free cash flow, to achieve the sales that we are talking about, the earnings we are talking about, we think that’s all we need to spend.

Christopher O’Cull - Suntrust Robinson Humphrey

Okay. When you look at some of the programs you are planning for ’09, the marketing programs, would you characterize the communication more as a call to action or brand building?

Samuel E. Beall

Both.

Christopher O’Cull - Suntrust Robinson Humphrey

Okay.

Samuel E. Beall

[Easy] answer, isn’t it?

Christopher O’Cull - Suntrust Robinson Humphrey

Well, when you think about reintroducing the brand, will that be food focused, call to action type of messages? Or will --

Samuel E. Beall

You know, we’ll see. I mean, I don’t want to talk about -- we’ve got good plans. I think reintroducing the brand, you know, we’ll do that this fall some time, late fall probably, or something, and I think it will be effective. I think marketing has put together a good program that can get attention and get the message across to the consumer and can help entice people who haven’t been there for years and years and years. I don’t think it’s just a last year thing; it’s people going back maybe five, 10 years who just want a fresh or a different experience than the sameness that’s in the bar/grill segment of casual dining.

Christopher O’Cull - Suntrust Robinson Humphrey

Okay. Let me move on to a question on cost control; you know, Margie, we’ve seen some pretty good improvements quarter to quarter in the restaurant level costs. Has there been any significant changes to maybe the service model or any other factors, like new tools for waste management or better waste control at the food -- maybe food cost control to cause this kind of improvement in the year-over-year performance?

Marguerite N. Duffy

I definitely to think that. Kimberly, do you wan to address?

Kimberly M. Grant

Yeah, I’d be happy to. We take a standpoint with costs savings is that we cannot cut anything or change anything that will affect the guest experience in any way, shape, or form, so exactly one of the things you mention, we look for opportunities, whether it be the number of times you have trash picked up at a location or being more efficient with managing our fry oil. We focus on cost savings initiatives that only contribute to quality or don’t impact the guest in any way, shape, or form and we’re having some great success with those things.

Samuel E. Beall

There are other savings too, you know. We stopped growing the concept and we don’t have any new programs and that allows us -- we’ve been able to -- some are field G&A. You know, we went down to like three or four units per field director, as an example. You know, today we’re moving that up to six and we’ll be able to get -- we’re at 5.5 right now. We’ll be able to get to six or seven here over the next couple of years, because we just have our focus on the existing units and we don’t have the programs.

So as we keep digging and digging and digging, which you have to in these times, I’m sure everybody in the rest of the business is, it’s easy to find a bunch of money.

Christopher O’Cull - Suntrust Robinson Humphrey

The --

Samuel E. Beall

Another key one is just lowering turnover. I mean, every time you lower a point of turnover, just for hourlies, it’s close to $0.5 million, so that helps too.

Christopher O’Cull - Suntrust Robinson Humphrey

Okay, and I guess has the -- I mean, it sounds like the servers are making more money. Is that a function of the change in the service model, maybe more runners?

Samuel E. Beall

Yeah, and I think it’s why our service scores are up, our value scores are up. Value is so related to service especially, but it’s definitely up. Tip percentage is up close to 19%, right?

Marguerite N. Duffy

Eighteen-and-three-quarters.

Samuel E. Beall

18.75% now, but yes, I think it’s the new service system that we put in last fall.

Christopher O’Cull - Suntrust Robinson Humphrey

Okay, great and one last question, Margie -- what’s your plan for CapEx for fiscal ’09?

Samuel E. Beall

20-25.

Marguerite N. Duffy

Approximately $25 million.

Christopher O’Cull - Suntrust Robinson Humphrey

Great. Thanks.

Operator

The next question comes from the line of Jeff Omohundro.

Jeffrey Omohundro - Wachovia

I guess first, could you address or discuss with us, what are the sales trends that you are seeing at those reimaged units that were reimaged early on in this process? How have they performed since that, or across this period?

Samuel E. Beall

I haven’t look at that this quarter. I did look at that last quarter, Jeff. I think you are talking about those first 50 or something we did. I think they were about a -- they were a point better but they were definitely trending better than the rest of the system, but that’s only 50 restaurants. I don’t know if I mentioned it last time or not, so it was a little bit better.

You know, if you pull out those southern markets and then look at our traffic, where our traffic is, our northern markets are definitely outperforming the south significantly. You know, half of all of -- you know, we’re Eastern United States based; 55% of our markets are in the South and if you separate and take those four states out and you look at our traffic counts, which is the same as sales right now, there’s not much difference between us and a lot of people out there.

Jeffrey Omohundro - Wachovia

Another question along the lines of marketing and this pull-back in spending; for the remaining amount, and if you remind us what that remaining amount is, that would be helpful, but will it be spent in similar ways in terms of the TV? Or will you be integrating any other media in order to try and leverage your spending a little better?

Samuel E. Beall

It’s mostly -- it’s very similar to what we did last year. We talked to you about the pillars of being a television, you have some print, you have the internal marketing plan and then you have your menus and promotions, et cetera. And so the dollars are shifting some, and the total dollars are about 40 -- is that about right, Margie, $40 million?

Marguerite N. Duffy

Yes.

Samuel E. Beall

It’s about $40 million for the year, kind of the franchise portion. So it’s shift around some but I think what’s important -- we spent so much time last year testing different TV, once we got into the fall. And our advertising in the winter, the advertising we just finished about two weeks ago, which was the mini [Treo], the one we did in the spring were all pretty effective ads for us, and we also spent a vast amount of time last winter testing different promotions, so we’re not just throwing money away on promotions. We know where we get our returns, so I know what we’ll do this year will be much more effective. It may not make up $18 million but it will be effective, more effective than the past.

Jeffrey Omohundro - Wachovia

Thank you.

Operator

The next question comes from the line of Brad Ludington.

Brad Ludington - Analyst

Good afternoon. I just had a couple of quick questions; well, first off on the performance of new openings, not the reimages. I remember we saw nearly a year ago one of your newer units in Knoxville, I believe, that was -- seemed to be just full every night and outperforming the system without being opened at lunch. Has that trend continued with new unit openings?

Samuel E. Beall

We have -- I think we said in our conference call or something that our new units that are open for lunch and dinner are still definitely outperforming the system, so they are doing well. We have had a mixed bag, I think. I mean, I’ll tell you this; we’ve had some soft openings in the last year. We didn’t open that many but we opened 18 restaurants, I think, 19 restaurants. But we’ve also had some great openings, too. But we are definitely opening them for dinner only and then we assess it and we open some of them up and some of them were still dinner only. So that’s a much brighter spot than our same-store sales for last year, for sure. But I’m not -- but I wouldn’t say we’re getting a great return off of it. I don’t think anybody -- well, I don’t think we have, anyway, in the last year, which is the reason we pulled back. It’s challenging.

Brad Ludington - Analyst

And then on the four new units for this year, are those -- given that two of them are falling out of ’08, are those weighted mostly to the front half of the year?

Samuel E. Beall

The two will be in the first quarter and then the other two, I don’t know -- when are they, Kimberly?

Kimberly M. Grant

One second quarter, one third quarter.

Samuel E. Beall

Okay, and those are two that had the least required openings that we just couldn’t -- you know, it wasn’t prudent to not open them.

Brad Ludington - Analyst

Okay, and then last question, looking over the revised debt covenants, it doesn’t appear that the dividend -- that you’ll be able to pay the dividend this August. Has that been decided by the board, or --

Samuel E. Beall

I think we’ve tried to be crystal clear. I don’t know how clear -- well, never mind. You’re exactly right. We won’t be paying the dividend and we’ve tried to be very clear on that in the Qs, in the 8-K, et cetera. I thought we made that clear about six months ago, but must not have done it as well as we thought.

Brad Ludington - Analyst

All right, well, thank you very much.

Operator

The next question comes from the line of Joe Buckley.

Joseph Buckley - Banc of America

A couple of questions on the cost side; so the food cost range as a percent of sales that you are giving us is pretty narrow. You know, the fourth quarter was 27.1. You’re saying it won’t be that good but it will be less than the 27.5 I think for the full year. I guess I’m saying how high is your confidence on that? I mean, there’s certain items I’m assuming that you can’t contract for and even some of your contracts expire with three or four months left in the full year. How confident do you feel about that tight a range on the food cost guidance?

Samuel E. Beall

First of all, I don’t know of anything we don’t contract for, to be honest with you. I mean, Joe, we’re at 95% or something, so we contract down to pickles -- I mean, everything, so we know what the costs are. If you said -- I mean, I would think we feel -- the only thing that could change that is if we change something on the menu that would drive food cost up maybe to try to get a higher check to offer better value. That’s about -- or if there was a supply issue or something, but you know, what, one- to two-tenths maybe, Margie, is the tolerance on that maybe?

Marguerite N. Duffy

Yes, I agree.

Samuel E. Beall

But we feel pretty good about it, so say one to two points, tenths of a point.

Joseph Buckley - Banc of America

And is there any price included in that assumption or that projection?

Samuel E. Beall

Price of what?

Joseph Buckley - Banc of America

Are you taking any prices up on the menu?

Samuel E. Beall

Well you know, this last year we were basically flat. We’ll have a price increase in second quarter because we had such a -- it was so bad last quarter. But for the year, I still think we will have a check increase, yes. I think we will have -- if I had to guess for the year, we’d probably have a half point to a point on price increase, Joe, for the whole year.

Marguerite N. Duffy

You mean check increase.

Samuel E. Beall

I’m sorry, I’m saying price increase right now, and then I think we’ll get a -- I hope throughout the year we’ll get another point to point-and-a-half on check. Would you say that’s predictable, Mark? That’s what we are projecting.

Joseph Buckley - Banc of America

Okay, so [inaudible] actual price increase and then some check benefit from just not being as aggressive with the combinations as you were a year ago.

Samuel E. Beall

Correct.

Joseph Buckley - Banc of America

Okay. And then a question on the labor side; you talked a little bit about the servers. How has income been trending for the store managers? Are you paying bonuses, even with the sales numbers down as significantly as they are?

Samuel E. Beall

We’ve been paying bonuses for the last two years. I mean, the bonuses aren’t high but I think it’s important also, our turnover is the lowest it’s -- I mean, it’s very good. We’ve done some other things instead of paying bonuses. We give free health insurance for our all of our managers. We put that in this last year. That’s actually costing us a couple million dollars.

Marguerite N. Duffy

But we also took up base salary.

Samuel E. Beall

We took up base salaries and then we’ve also -- we have a, I mean, we don’t talk a lot about it but we have a managing partner plan where they go to another level of base salary, I think about $10,000 more. They get health club, they get other perks. You know, it’s the crème-de-la-crème I guess and we keep adding more and more people to that. But we have what percent of our system on that now, Kimberly?

Kimberly M. Grant

We have 150 general managers doing the partner program.

Samuel E. Beall

So we have 22% on that, so there are other ways to compensate them and reward them, but I think we are doing an effective overall job, evidenced by the turnover and our satisfaction rates with our team members. But we -- the way Kimberly operates it too is if somebody is performing great, you know, just blown out of the box and [making a bonus] they take care of them too, I think even at a disastrous year this year, we have $1 million plugged in just for base bonus money at the field level. So we don’t think that’s an issue because of the other initiatives we put in.

Joseph Buckley - Banc of America

Okay. Sandy, next question; Bennigan’s, there’s been a lot in the news about their financial condition. Are you seeing them close a lot of restaurants?

Samuel E. Beall

Kimberly, tell him what you see around the country on just different closings.

Kimberly M. Grant

Specifically on Bennigan’s, I’ve only heard of a couple in our markets that have closed, but it’s a daily occurrence where you either have a franchisee from different brands that are either filing for bankruptcy or closing the doors without notice. It’s a common occurrence all throughout the country. We’ve actually established a plan in place for when restaurants close because it’s happening so frequently, so that we can effectively try to capture as much of the sales as we possibly can.

Samuel E. Beall

But you are seeing the process, you know, just in the last 90 days, where they are closing. Here in Knoxville, I think there are about five restaurants that they called off on the news that had closed going down the main west Knoxville strip kind of thing. There was a Johnny Carino’s that I saw, a big box.

Kimberly M. Grant

Chili’s out west in Seattle and Portland closed very rapidly. A lot of mom-and-pop restaurants in different markets throughout the country as well.

Samuel E. Beall

And I hope we see a lot -- needless to say, I hope we see a lot of that and I think we will over the next year, which is good.

Joseph Buckley - Banc of America

Okay. Thank you.

Operator

The next question comes from the line of Keith Siegner.

Keith Siegner - Credit Suisse

Just a quick question on the franchise unit growth; I mean, there have been a lot of announcements recently about development agreements that you’ve been signing, both domestically and abroad, which is very encouraging. And I think you gave guidance in the press release for 20 openings for 2009. Can you just give us a sense of like where is the pipeline right now? How many units under agreement and any other details on that pipeline, if you have them?

Samuel E. Beall

I don’t even know under agreement, because I think that’s child’s play. I mean, you just -- I think internationally, we could open 10 a year. I bet we have -- I am sure there are 50 or 60 or 80 under agreement out there, but that doesn’t mean anything.

Marguerite N. Duffy

Our goal is at 20 to 30 a year over the next five years.

Samuel E. Beall

International is very strong. We have a lot of people that want to open the restaurants. We are very strong in the Mideast. I personally went over the opening schedule of the 20 and it can be 19 to 21. I mean, it’s very solid.

Domestically, we’ve had some new sign-up out west. I mean, I feel better about the international markets than the divesting markets because of all the consumer issues here.

Keith Siegner - Credit Suisse

Have there been any adjustments to initial franchise fees, royalty rates?

Samuel E. Beall

No, definitely not.

Keith Siegner - Credit Suisse

What about temporary waivers on the royalties? I know there was a comment in --

Samuel E. Beall

Well, we’ve always done that. I mean, if you’ve listened to our calls before, we’ll give away $3 million to $5 million easily and have probably for the last three or four years to our franchise partners anyway that are good partners.

Keith Siegner - Credit Suisse

Okay.

Samuel E. Beall

And I’m sure we’ll continue to do that.

Keith Siegner - Credit Suisse

A second question; I just was wondering if you could give us a little bit of background, maybe some understanding behind what type of macro is driving the same-store sales guidance for the year, just so we can get an understanding of what the -- you know, what it might lead to either upside or downside. I’m just trying to get an understanding of what is underlying that guidance.

Samuel E. Beall

[Same as June].

Keith Siegner - Credit Suisse

Okay, fair enough.

Samuel E. Beall

Yeah, I mean, the way the consumer felt last month when we were doing it, if it [gets worse]. Like I told my son, he was talking about what a great deal restaurant stocks are and I said well, if gas goes to $5, they won’t be for a while. I mean, it just depends on those external variables but based on the way we felt in June, that’s how we set the goals.

Keith Siegner - Credit Suisse

Okay, that’s actually helpful. One last question; with the CapEx guidance and with the unit openings that you did give, does that include the second Wok Hay?

Samuel E. Beall

What’s Wok Hay?

Keith Siegner - Credit Suisse

Your Asian concept.

Samuel E. Beall

Oh, yeah, that little thing. I forgot about it. It’s -- we’re not opening a second one. We’re converting a Ruby’s here in this market where we have four together and it wasn’t doing well.

Keith Siegner - Credit Suisse

Okay, but is that counted as one of the --

Samuel E. Beall

We’re not growing -- to make it clear, and I said this when we have it, it’s a little local concept that’s cute. We’re learning some stuff from the size of it. I’ve been there twice, I think. It’s nothing to talk about.

Keith Siegner - Credit Suisse

Okay. Thank you.

Operator

(Operator Instructions) The next question comes from the line of Bryan Elliott.

Bryan Elliott - Raymond James

Good afternoon. I just wanted to explore a bit the geographic dispersion of results that you mentioned a couple of times, Sandy. Are they consistent with some of the scores that you’ve referenced or the --

Samuel E. Beall

No, Florida as an example, it has the highest guest satisfaction score we have in the country and it represents 1.7%, Kimberly, of our entire same-store sales decline. Florida is the worst state for sure.

Bryan Elliott - Raymond James

Which state was that? I was speaking over you.

Samuel E. Beall

Florida, your state.

Bryan Elliott - Raymond James

Oh, okay.

Samuel E. Beall

Or Raymond James’ state, rather.

Bryan Elliott - Raymond James

Florida.

Samuel E. Beall

Yeah. But then Georgia is right behind it. And what we see is closer to the larger cities, you see you have less impact than as you spread out, and that’s true pretty much across the country but yeah, it’s Florida, Georgia, Tennessee, Virginia.

Bryan Elliott - Raymond James

And those are some of your older markets, and would it be wrong to think about the sort of trade area demographics as being a big contributor to that in the types of locations that you went into, you know, eight, 10, 12 years ago?

Kimberly M. Grant

I’ll answer that a little bit. We actually are seeing in some of the oldest locations, which include malls, malls are performing better than the freestanding restaurants and there are malls in these I guess earlier established markets.

Samuel E. Beall

Strip centers are too, and both of those things indicate that people are -- you know, they are driving to shop and eat or whatever. They are trying to save some gas, I think.

Florida is not one of our older markets. Florida probably has more newer restaurants in it than probably any place else in the south and it’s the worst, so I don’t think so, Bryan.

Bryan Elliott - Raymond James

Okay, well, from what a lot of people tell me, pretty much everyone in the state of Florida is going to be bankrupt and homeless in a few months, so it should hit bottom at that point.

Samuel E. Beall

Well, that’s encouraging, yeah.

Bryan Elliott - Raymond James

All right, thanks.

Steve Rockwell

I think we have time for one more question.

Operator

The next question comes from the line of Thomas Forte.

Thomas Forte - Telsey Advisory Group

Telsey Advisory Group. I had two questions; one was to the extent that you are monitoring usage of your new customer base so your more affluent customer, are you seeing differences in repeat usage trends versus your old customer?

Samuel E. Beall

I can’t answer that one. I mean, I don’t have that. We do a food -- on a food study, which is where we track use of frequency, we don’t know whether it’s new or an old. I wish I could. Sorry. What’s the second question?

Thomas Forte - Telsey Advisory Group

The second question is when I look at the trends of performance on a month-by-month basis, do you think you saw any benefit in May from the stimulus checks?

Samuel E. Beall

I don’t know. We don’t think we did, but we could have. If so, it was marginal.

All right, we thank you all for joining us today. If you have any questions, give us a call. Holler at Steve or anybody else around here. Have a good day.

Operator

This concludes today’s conference call. You may now disconnect.

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