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Executives

Joel A. Schwartz - Chairman and Chief Executive Officer

Juan C. Garcia - President, Chief Operating Officer

Jose I. Ortega - Chief Financial Officer, Vice President - Finance, Treasurer

Analysts

Anton Brenner - Roth Capital Partners LLC

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

Josh Nickel [ph] – Stephens Inc.

Robert Kazowski - OFI Institutional

Brad Ludington - Keybanc Capital Markets

Michael Woolavin [ph] - Sedody & Company

Will Hamilton – SMH Capital

Benihana Inc. (BNHN) F1Q09 Earnings Call August 27, 2008 5:00 PM ET

Operator

Welcome to the Benihana Inc. first quarter fiscal 2009 earnings conference call. Our hosts to day are Joel A. Schwartz, Chairman and Chief Executive Officer; Juan Garcia, President and Chief Operating Officer; and Jose I. Ortega, Vice President and Chief Financial Officer, (Operator Instructions).

Statements in this conference call 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 fact are forward-looking statements as the term is defined under Federal Security 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 include, but are not limited to, changes in customers tastes and preferences, acceptance of the companies concepts in new locations, obtaining qualified personnel, industry cycles, fluctuation in customer demand, the seasonal nature of the business, fluctuations of commodities costs, the ability to complete construction of new units in a timely manner, obtaining governmental permits on reasonably timely basis, and general economic conditions, as well as other risks detailed in the company’s filings with the Securities and Exchange Commission.

I would now like to turn the floor over to Benihana’s chairman and chief executive officer Joel Schwartz.

Joel Schwartz

I will start with a brief review of the quarter, but more importantly discuss what we are doing currently to spur sales as well as tackle or core structure in what remains a very difficult operating environment. Afterwards I will turn the call over to our president and chief operating officer Juan Garcia who will review our remodeling and development activities. Jose Ortega, our vice president and CFO will conclude our formal remarks with a discussion of our first quarter financials as well as reiterate our fiscal 2009 guidance. After that we will answer any of your questions.

Our first quarter performance underscores the current macro economic challenges as well as the importance of both our sales and cost cutting initiatives which I will talk about momentarily in restoring positive momentum to our business.

We grew total revenues by 5% to $94.5 billion, including an overall comparable sales decrease of 4.9%. Net income of $2.2 million, which was below last year, reflects primarily sales de-leveraging across much of our income statement. We would expect comparable sales to stay soft until economic conditions improve, particularly in the most affected regions of South Florida, Southern California, Nevada an Arizona, which encompasses for us 33of our 90 restaurants.

As you may also recall our top line efforts at Benihana teppanyaki are centered on creating value and we have been running a summer long promotion which ends this month that highlights our entry point entrée, the hibachi chicken and ends with hibachi rice and our ice cream dessert for a fixed price of $18.00. While the promotion did not turn the tide of negative guest counts that we’ve experienced over the last few quarters, we believe it enabled us to hold our ground in the face of competing programs from many of our restaurant peers.

If you have been to our Benihana website recently you may also have noticed that we have completely redesigned our site, making it easier to navigate, locate a nearby restaurant, get souvenir photos, and send a Benigram to a friend. This is only the first step in our efforts to enhance our communication of the Benihana story.

Beginning in September we are launching a new primarily web based marketing campaign which will emphasize the unique characteristics of our teppanyaki dining experience along with the value we offer our guests. This campaign is going to be supplemented with print, billboard, and radio.

Additionally, we are pleased to announce that we are showcasing our Benihana and our Haru brands at Madison Square Garden in New York City with visibility on both Seventh and Eighth avenue marquis signs along with the advertising on rangers and mix radio. There are an estimated two million people that pass by the signage every day including commuters on their way to and from Penn Station, which is directly below Madison Square Garden. This offers us a great opportunity to create mine share of our brands, which boasts a strong presence in the New York metropolitan area.

We are also using direct mail, including $10.00 gift cards in some locations to entice trial traffic as well as some of our other guests to visit us more frequently. We want to make it clear though that we are not employing mass coupon or discounting strategy at Benihana, which would dilute our brand image by rather making technical efforts in under performing markets to create a little more excitement around our entertainment and dining offering.

We also do seasonal beverage promotions with the intention of generating incremental alcohol sales. During the first fiscal quarter we ran our Mango Mojito beverage promotion and now we will be offering a Saké Sangria starting in September. At RA Sushi and Haru we are offering out expanded happy hour menus for both beverages and appetizers as we focus on opportunity to capture more guests in this day part.

RA Sushi is currently featuring half price beverages and appetizers at certain locations during happy hour as well. Both of our sushi brands will continue their grass roots marketing pounding the pavement by reaching out to local businesses and hotel concierge’s while emphasizing the new menus.

We are continuing to do some radio spots for RA Sushi in a few select markets where we have some degree of media efficiency, such as Phoenix, as we have done in the past.

Finally we are emphasizing the Haru as the perfect menu for group functions such as corporate functions, dinners, and parties. Some of our locations have fantastic accommodations for events and think we can drive this profitable segment of our business with greater attention, which we intend to do.

At Haru we took pricing on our happy hour menu during the first fiscal quarter. In the fiscal second quarter we are looking at taking additional pricing with the new menu roll out at both Haru and RA Sushi. At Benihana teppanyaki we took no pricing during the first fiscal quarter, but are taking selective beverage pricing during the fiscal second quarter.

Across all three concepts we reserve the right though to revisit pricing through out the year as required. We don’t want to get overly aggressive here so as not to tarnish our brands in the eyes of consumers as being overly expensive and thereby unapproachable. Unfortunately, none of the prices increase taken so far will be sufficient to fully protect our margins against a backdrop of rising costs.

While we always look for improvements in our expense structure in the face of higher commodity costs and minimum wage increases we have also launched several new cost containment restaurants at the restaurant level and within our supply chain. We have examined our fixed and variable labor costs across all three bands in an effort to better align current sales trends with our laboring schedule. Reduce unnecessary overtime and leverage our regional managers to be more involved in the day-to-day operations. We are 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.

We are also evaluating our standard working capital practices, focusing in on inventory turns and vendor payment cycles. In short any and all expenses and cost items that can be controlled are under evaluation and we are making every effort to actively manage them. These practices should also help us limit the margin erosion caused by the down turn in comparable sales. In all we believe that we set the right course of action to navigate through a very difficult period of our company.

Our time-tested strategy of ensuring an outstanding guest experience through our dedication to food, service, and ambience is why Benihana has become such an iconic brand over the past 40+ years and we are as committed as ever to these core values. In the meantime we will stay focused on four-way

As Juan and Jose will discuss in a minute, we are mostly done with our remodeling program and already have in place the necessary resources at the corporate level to manage the current 90-restaurant base, as well as the additional 14 locations we currently have under development. Your will also notice that we have already begun to leverage our G&A.

We continue to be prudent with regards to new lease signings, as we fully understand that the operating environment will remain challenging for the foreseeable future and we don’t want to over extend ourselves. Our new development criteria are stricter than ever and we weigh every decision carefully before committing our financial resources to any projects.

Our culture is deeply rooted in our personnel and despite a tough economy morale does remain solid. We are certainly not satisfied with our recent performance and have implemented these action plans with the intention of turning the page on a difficult environment and creating more value for our guests. We will meet these challenges with the determination and fortitude that we always have employed in harder times. Above all we have three solid brands that can return compelling economic results over time and our long-term opportunities are as solid as ever.

At this time I will turn the call over to our COO Juan Garcia.

Juan Garcia

I will now review our current modeling and development activities. We realize that these ongoing efforts reflect a meaningful commitment of capital and maintain that we are using both our internally generated cash flow and credit facility judiciously in the best interest of our shareholders.

We have now completed the renovation of 20 older teppanyaki units and are determined to finish this project this fiscal year. Specifically our Cupertino, California, Denver, Colorado, and Houston, Texas, Teppanyaki restaurants reopened during the first fiscal quarter after their renovations were completed while our Newport Beach, California teppanyaki restaurant has since reopened during the fiscal second quarter.

Our city of Cupertino, California location also closed for remodeling this week and is currently the only location in our portfolio closed while undergoing revitalization. Construction of our Dearborn, Michigan facility, which is adjacent to our current restaurant, is progressing. As previously discussed this location will require minimal closure time once the new facility is completed.

In view of the current environment and particularly economic conditions on the ground in South Florida we have opted to postpone remodeling of our Benihana teppanyaki restaurants in Miami and Stewart. Instead they will be refurbished under our normal maintenance program over time. Again, we see no reason why we will not be finished with the revitalization program, as it currently stands, by next January.

We have also started reconstruction of our Benihana teppanyaki restaurant in Memphis, Tennessee, which suffered a fire in the fiscal fourth quarter of last year and are using this opportunity to rebuild that location from the ground up with our expanded prototype design which includes four additional Benihana teppanyaki tables.

On the development front we are also making headway with our new Benihana teppanyaki and RA Sushi expansion and note that even in a tough economic environment our most recent openings are generating strong volumes and healthy returns, further justifying our initial investments. We note that average, weekly, sales volumes at both of these brands decrease at a lower percentage than the comparable sales volume which points to the relative out performance of our newer units. As a point of reference RA Sushi locations in Pembroke Pines, Florida, South Miami, Florida, and Plano, Texas are far exceeding their respective system average weekly volume.

We recently opened three RA Sushi restaurants as previously mentioned, two in the fiscal first quarter and one in the fiscal second quarter. Our new RA Sushi in Pembroke Pines, Florida, 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. Our new RA Sushi restaurant in South Miami, Florida, which opened in June, is located in a popular dining and nightlife destination for South Floridians encompassing a varied and eclectic collection of restaurants and bars.

Finally the RA Sushi restaurant in Chino Hills, California opened in July and is located in the shops at Chino Hills, a new mixed-use lifestyle retail center that features a roster of more than 60 merchants and creates a vibrant open-air lifestyle shopping experience for the community.

Also, we are in the early development stages of a new RA Sushi restaurant in Atlanta, Georgia. The restaurant will be located in the midtown area of Atlanta on the corner of Crescent Avenue and Eleventh Street in the new Celic [ph] Enterprises development through out the midtown project.

Midtown is Atlanta’s most eclectic and exciting scene featuring world-renowned closer and arts venues like the Woodruff Art Center, the High Museum, and the legendary Fox Theatre. Midtown is also home of leading law firms, Fortune 500 companies, and the area’s most cutting edge businesses.

I would like to talk for a moment on our real estate selection for RA Sushi. It is fair to say that we are maturing into our site selection process and have learned a lot from our earlier units as to what works best for the brand. We have always said lifestyle centers are a sweet spot for RA Sushi, but it really depends on the co-tenancy of not only the other restaurants, but retailers as well. In Baltimore, for example, we entered a smaller market and the restaurant made a splash at the West Coast hip and edgy concept that made its way East.

The Pembroke Pines restaurant, although located in an economically challenged part of the country is in a market which is very underdeveloped in terms of restaurants and is thus doing very well.

In both cases we were able to bring something different to these areas and our guests appreciate that.

Overall, there are currently eight Benihana restaurants and six RA Sushi restaurants under development and while we do not have any specific development plans for Haru, we are evaluating additional sites in the Northeast as well as the mid-Atlantic region.

I should also add that in the past few months we have seen a greater willingness on the part of developers to negotiate lease terms and we are being careful to ensure that we can secure the best deals in what is becoming a tenants market. We continue to evaluate opportunities as they present themselves. As you may recall, lease signing took place between 15 and 18 months ahead of restaurant opening; so even if we were to sign additional leases over the next few months, in all likelihood these locations will be opening well into economic recovery.

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

Jose Ortega

I am going to review our financials for the first quarter as well as update our annual guidance for the year.

On the top line we delivered total revenue of $94.5 million for the period, which was 5% higher than the year ago, including franchise fees and royalties, which were essentially flat at $0.5 million for the quarter. There were a total of 1,348 store operating weeks in the fiscal first quarter of 2009 compared to 1,219 store operating weeks in the fiscal first quarter of 2008.

Total restaurant sales were $93.9 million which was 5.1% higher than last year. The year-over-year comparison comprised of $10.1 million of sales from new units offset by a decrease of $4.1 million due to lower comparable sales, $0.9 million in sales lost from units permanently closed, and $0.6 million net related to temporary closures in the current year.

Benihana teppanyaki total sales decreased for the quarter by 2% to $64.2 million, Haru’s total sales increased 14.3% to $11.9 million and RA Sushi sales increased 32.4% to $17.8 million.

Company wide comparable restaurant sales were down 4.9% while within our three concepts comparable restaurant sales were down 3.4% at Benihana teppanyaki, down 9.1% RA Sushi and down 7.5% at Haru.

In terms of costs food and beverage costs were 24.1% of restaurant sales during the first quarter, which were 60 basis points higher than the comparable period in the prior year. You may recall that we have already lapped the 7% price increase taken at Benihana teppanyaki from the fiscal first quarter of 2008, while RA Sushi and Haru are still benefiting from a 3% price increase taken during the fiscal second quarter last year.

As Joel mentioned, Haru took some pricing on its happy hour menu in the fiscal first quarter 2009. Both Haru and RA Sushi will be taking pricing on their September menu rollouts while Benihana teppanyaki is taking pricing on its beverages during the second quarter, which will have a nominal effect on overall results. We are slowly trying to protect margins without putting too much additional stress on the consumer.

To review, we have purchase contracts for certain commodities that can be as long as 12 months in duration fixing purchase prices during the contract period. As previously discussed, our beef contract includes a roughly 3.5% increase in average costs and expires at the end of December 2008.

On seafood, our existing contract for shrimp continues to the end of the calendar year with some favorability, while lobster continues through the end of the fiscal year, also with additional favorability. Chicken, however, is purchased on the spot market.

Labor and related costs were 35.8% of restaurant sales, which was 240 basis points higher compared to the first quarter last year. Lower comparable sales, higher salaries due to minimum wage increases, additional medical insurance and workers compensation claims, and to a lesser extent new store inefficiencies and ongoing costs associated with the remodeling program were the primary drivers of the variance.

As Joel discussed, we have devoted a lot of attention to labor cost management as we work to manage both our salary and hourly employees in the face of softer sales trends. We are reducing total hours across all restaurant personnel as appropriate. Regional store managers are continuing to monitor all schedules to ensure the utmost efficiency. Currently, at certain locations, open management positions are not being back filled. Regional managers have also been used as part of store labor where these vacant positions exist.

As we stand today, in the fiscal second quarter, we continue to cut labor schedules while being cautious not to cross the lines sacrificing customer service. That being said, we know further resolutions to labor and labor modeling will be necessary.

To round out the major cost drivers at the restaurant level, utilities were up 40 basis points to 2.9% of restaurant sales due to higher energy costs as well as sales de-leveraging. Other restaurant expenses were up 40 basis points to 7.6% compared to the previous year and this is net of business interruption proceeds totaling $500,000.00 which were recognized during the quarter. The business interruption proceeds are related to the Memphis location which was destroyed by a fire during the fourth quarter of fiscal 2008.

Depreciation and amortization was up 40 basis points to 5.9% of restaurant sales and includes approximately $400,000.00 net in additional depreciation related to shortened useful lives for those restaurants affected by our ongoing rejuvenation program. The remaining $100,000.00 of accelerated depreciation will be incurred in the fiscal second quarter. Taking these together we generated $12.4 million in restaurant operating profit compared to $15.7 million in the same period last year with margins decreasing 440 basis points to 13.2% of restaurant sales. When compared sequentially, however, restaurant operating profit margins continued to experience the same pressures experienced by the company during the fourth quarter of fiscal 2008.

Restaurant opening costs were approximately $700,000.00 and comparable to the prior year quarter as we made preparation for the recently opened RA Sushi restaurants as well as for other Benihana teppanyaki and RA Sushi locations that we will be opening over the next few months.

Marketing general and administrative expenses were 9.3% of restaurant sales and 80 basis points lower on a year-over-year basis. As we said last quarter, we believe we are fully staffed at the corporate level and have all key positions filled and given our total sales growth, we are able to begin leveraging our corporate infrastructure across a wider restaurant base. We also benefited from reductions in travel compared to the year ago quarter.

Net income was $2.2 million in the first quarter of fiscal 2009 versus $4.2 million in the same period in the prior year. Our effective tax rate of 35% was lower than 36.2% in the prior year quarter. Our effective tax rate was favorably impacted by increasing tax credits on lower taxable income during the quarter.

Diluted earnings per share were $0.12 on a base of 18.6 million shares and equivalents compared to $0.25 in the prior year on a base of 17 million shares and equivalents. We had approximately $1.8 million in cash and together with our strong operating cash flows and $75 million credit facility, our cash needs are sufficiently covered. Our current borrowings against the credit facility are roughly $27.2 million at the end of the fiscal period.

CapEx for the quarter was approximately $17 million including approximately $7 million from new units, $9 million for remodeling projects and another $800,000.00 for other maintenance CapEx.

Now I would like to update our guidance for the 52-week fiscal 2009.

We are reiterating our restaurant sales expectations of $313 to $318 million and $4,500 to $4,600 in total restaurant operating weeks including the effect of 60 to 85 gross operating weeks that are expected to be lost due to the remodels.

We will be opening four Benihana teppanyaki restaurants and seven RA Sushi restaurants this fiscal year of which we have already opened three RA Sushi’s in Pembroke Pines, South Miami, and Chino Hills. The balance of our new restaurant openings will be in the third and fourth quarters.

We currently have two remodeling projects underway in the city of Industry, California and Dearborn, Michigan, having reopened our Newport Beach, California location less than two weeks ago. As Juan mentioned, we have decided to postpone remodeling projects on two Benihana teppanyaki locations in Miami and Stewart, Florida. We therefore should be able to complete our renovation program by next January for a total of 22 Benihana teppanyaki remodels.

Relating to our remodeling program is $500,000.00 in accelerated depreciation costs of which we will incur the remaining $100,000 in the fiscal second quarter, as I mentioned earlier.

Capital expenditures will now total approximately $47 million which is down from our original expectation of $60 million. The reduced scope of our remodeling program lessens our CapEx budget with the balance related to construction delays at two new Benihana restaurants and one RA Sushi scheduled to open in fiscal 2010. For various reasons the respective developers will not be able to turn over the sites to us as quickly as originally planned. Note that our fiscal 2009 openings are projected to open in the timetable we have already laid out, subject to minor alterations.

As discussed before with cash flow from operations of over $30 million per year, we expect to draw on our available line of credit, however with our reduced capital expenditures we now project a debt balance of $35 to $38 million by the end of the year which is down from $50 million previously forecasted.

Diluted earnings per share are still expected to be between $0.60 and $0.65 and diluted common shares outstanding are now estimated to be approximately 18.3 million shares.

Thank you for your time today and we will be happy to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Anton Brenner - Roth Capital Partners. LLC.

Anton Brenner - Roth Capital Partners LLC

Joel mentioned that you are being prudent; I think was the word he used in signing new site leases. I wondered if you could explain exactly what that means. Does that mean you plan to slow your expansion in 2010 and beyond or does it mean something else?

Joel Schwartz

Well it means to probably keep pace where we are, because the strategy of our site selection, especially recently, has proven to be correct because these new units are doing better than they anticipated, but to do more than an opportunity, but to really look at the area and study it, it might slow down that that we had projected eight, nine a year to something less than that, but we are going to still look very, very hard, prudently, at the new sites that come up and be sure that the money allocated to new restaurants is being spent wisely.

Juan Garcia

To supplement that, as we have gone out on road shows before, Jose, and Joel, and I, we have always said that we wanted to open X number and then increase that number every year by approximately two RA Sushi’s and all that. I think what we are saying is that we feel confident with the level of development that we’ve been experiencing in fiscal ’08 and ’09 to about 10-11 units, that right around between 9 and 11 units a year.

Anton Brenner - Roth Capital Partners LLC

And to keep it at that level in other words?

Juan Garcia

Yes.

Anton Brenner - Roth Capital Partners LLC

The sequential increase in the fully diluted shares outstanding in the first quarter reflects option awards that were made?

Juan Garcia

No the incremental shares in the diluted shares calculation is reflective of the current market price of the stock. The preferred shares are redeemable in June 20, 2014 at the then current market price, if it is not converted previously at the fixed price of $12.67 and the accounting rules have you take into account the most dilutive calculation possible, even though the redemption is not slated for 2014, we are required to include the current price in the calculations; so that is where the additional shares came from.

Anton Brenner - Roth Capital Partners LLC

So in forecasting a lower number of average diluted shares for the full year, what assumption are you making?

Juan Garcia

The 18.3 versus the 18.6?

Anton Brenner - Roth Capital Partners LLC

Correct.

Juan Garcia

The 18.3 is on par with where the stock was trading recently around just under $7.00.

Operator

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

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

My question is on the capital allocation. First I applaud the reduction in the capital in May of this year. Given a couple of the RA’s, I guess West Palm and Corona come to mind, that were recently opened are, I understand, underperforming your expectations. I was wondering what you are doing to improve performance in those locations and what you have learned out of that experience.

Two, given that your stock currently trades at roughly half of the cost to open new units, why not slow down the unit growth even more significantly. I know you are directionally signaling some slow down from the prior expectation, but why not slow it down more to at least approximate operating cash flow as opposed to continuing to build into the credit facility to open units when it seems like the track record over the last year as you have accelerated has been somewhat mixed.

Juan Garcia

I want to supplement that. Corona we have been open there about two years and Palm Beach about two years as well and I will tell you that Corona we always thought was going to be a slow grower for us and what’s happened in Corona is that the developers pulled back phase 2 and phase 3 over what was supposed to go there.

In the meantime, I think our sales volume has reached a plateau there and we are starting a small positive increase in same store sales at that location. We are very actively doing a lot of grass roots in that particular restaurant. We have changed our outdoor seating to become more friendly for maybe just getting people to come in and to drinks. We have done some patio seating there as opposed to just tables.

In Palm Beach we have been heavily affected by the economic downturn and I can tell you that the parking has been an issue at that center and they are adding two floors to the parking garage. So when we mentioned that those stores have been slow, those are about two years old. The most recent seven which includes Baltimore, Lombard, Tustin, Chino Hills, Pembroke South Miami, Plano, Texas that are doing extremely well and I think what we have learned, when we say lifestyle like I mentioned on the call, it is a sweet hurrah, it really depends on the co-tendency like in Pembroke Gardens. The restaurant co-tenancy is really good, but the retailer’s co-tenancy is not very good.

So I think we have learned a lot from those earlier sites and just performance out of the last seven, we are really pleased and those are performing at our above average units [ph]. But, we are very closely evaluating potential sites. We are using all tools available to us. We believe we have now a formula in place to evaluate sites, I think that’s what we have been using for the last about ten sites, so we are really encouraged with the direction that our site selection is going.

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

Just again to come back to the same capital locations, Joel made a point to mention the more prudent evaluation of the allocation of capital on the call. Again, just reconcile for me the decision to continue to open additional units when again it seems that your stock trades at less than half the replacement cost or the cost of opening a new unit; why not just buy your stock back instead?

Juan Garcia

I can tell you right now that the stores that we’re opening today are leases that were signed 15 to 18 months ago. As a matter of fact the next one that we’re going to open, RA Sushi in Huntington Beach was signed about five years ago. We have to go forward and open the existing [inaudible] that we have on the development. We are very careful and being a lot more selective and aggressively negotiating our lease terms on any new potential deals. I think we have an opportunity to gain market share as we go into these highly economical challenged locations in Southern Californian and South Florida and how well the concept has been received, I think we have an opportunity to gain market share that way.

Operator

Your next question comes from Greg Ruedy of Stephens Inc.

Josh Nickel [ph] – Stephens Inc.

This is actually Josh Nickel for Greg. I was wondering if you could update us on how the various mediums of advertising have been performing for you guys lately and how we can think about advertising as a percentage of sales going forward for fiscal ’09.

Joel Schwartz

Advertising as a percentage of sales is roughly 2.75% of sales and that’s blended across the different concepts as I will have additional advertising when we are penetrating a new market as we have done with some of the RA Sushi’s when we opened up Baltimore and it’s a new location for us as well as well as Plano, Texas and the view with the new campaign is to take advantage of different mediums where you can reach as many people as possible in the most cost efficient manner. By doing so we are going to take greater advantage of the internet, which as we have mentioned over the past quarter or so, is an area that we are looking to exploit to a greater degree.

Josh Nickel [ph] – Stephens Inc.

Do you guys have an update for us on how some of those recent sales initiatives have been performing across the couple different brands?

Jose Ortega

Well as Joel mentioned on the call the Hibachi summer treat promotion, what it did is I think it’s just held traffic not to lose any customers and give something back to our existing customers, making sure that we didn’t lose any more customers than we could afford at that time and I think we’re also saying that we’re really pleased with some of the traction that the happy hour promotions have undertaken at both Haru an RA is specifically at Haru we have expanded our after café hours at Park Avenue from three to five and have been a little bit more aggressive with our happy hour times to gain some of those customers.

Josh Nickel [ph] – Stephens Inc.

Given your recent perspective on development and just the fact that development overall seems to be slowing down, does this give you guys a better opportunity to maybe think about relocating some of the units that would have been considered for remodels or something going forward seeing as how everything seems to be slowing down?

Jose Ortega

The remodels, like we said, we are practically done with those two, the remodels, and as far as any of the units that we would remodel, I think we are pretty happy with all of our locations. We don’t have any locations that we are considering closing.

Joel Schwartz

To that we, take for instance South Miami is one of the better locations in the entire chain and so we don’t have any plans to relocate that.

Josh Nickel [ph] – Stephens Inc.

You mentioned on the call in your discussion about some of the new cost containments initiatives you are working on about trying to leverage more regional manager supervision or interaction at the restaurant level. Could you touch a little bit more on that for me?

Joel Schwartz

Yes that specifically at both of our sushi concepts we are instead of targeting four managers at each of their locations, specifically in Haru for example where we have a lot of stores clustered, we have reduced the management staff to three and we are having the regional manager fill in in some of the different restaurants through out the week.

Josh Nickel [ph] – Stephens Inc.

It seems like a lot of the non-comp RA’s are putting our much higher volumes. Going forward what kind of difficulty do you guys see as far as reaccelerating the overall RA comps especially in the back half of the year.

Juan Garcia

I think as we start to comp, Jose you can probably speak to this, as we start to comp against last years third and fourth quarter, the comp trends become easier starting in Q3 and so we are looking for the sales trends to flatten out towards the back half of the year.

Having said that, we are subject to the market conditions in play in those areas and as we discussed before, RA specifically, the legacy units are concentrated in Arizona and some of the earlier expansion units are in Southern California, so we are subject to some of the economic conditions in those regions. Primarily the hardest hit area that we’re seeing right now is Arizona.

Operator

Your next question comes from Robert Kazowski with OFI Institutional.

Robert Kazowski - OFI Institutional

I was wondering if you could give us a little color on the traffic versus mix breakdown in the quarter, especially in light of the lower cost of the chicken entrée.

Joel Schwartz

In terms of traffic trends, as we mentioned, we took no pricing at teppanyaki during the quarter and we are actually lapping last years price increases so the comparable sales for the period were primarily driven by the traffic counts which were down about -3-7. In Haru they weren’t lapping over their price increases from last year, because they put those in place at the beginning of Q2 so they did have favorability in their average check during the first quarter. RA was favorable on the average check, roughly 1.5% and traffic was down close to 11% and Haru we were benefiting from the price increase taken at the beginning of Q2 last year and then they also put in place some additional pricing on the happy hour menu during Q1, so their average check was up actually almost 7% and Haru’s traffic was down over 11% in the quarter.

Robert Kazowski - OFI Institutional

Do you have any thoughts or theories on why Haru’s traffic is so weak right now?

Juan Garcia

Haru, being predominantly located in New York, has been impacted by everything that’s happening there in terms of how the financial institutions are being impacted and the traffic that comes from those businesses. Specifically the Park Avenue location is located near the Bear Sterns building and that was one of our major clients as a source of delivery and we are starting to pick those up as I think JP Morgan has moved in.

Robert Kazowski - OFI Institutional

What were some of the thoughts behind the remodeling of those two locations? Was it strictly a capital allocation decision, like in light of the tough economic times?

Juan Garcia

Yes, that is a primary driver of that decision.

Operator

Your next question comes from Brad Ludington with Keybanc Capital Markets.

Brad Ludington - Keybanc Capital Markets

To follow up on the Haru traffic question, can you quantify is there a decline in same store sales in traffic due primarily to delivery, I mean is the dine in traffic staying fairly constant?

Jose Ortega

Another thing that I failed to mention before, the Park Avenue location, the sidewalk café, was closed for about four weeks this year compared to last year due to that the building was doing some major renovations to the building so we could not open the outdoor café.

The delivery business in the first quarter, that reopened and we are fully operational there, but it has been pretty consistent on the delivery side. I think it has been pretty consistent on the dining side; it is a little bit more on the delivery side as people have pulled back and the economic conditions. Some of the firms have pulled back on their ordering.

Brad Ludington - Keybanc Capital Markets

You mentioned that you are going to take some level of price increase here in the second quarter for RA, Haru and teppanyaki. Do you know what level of price increase you are planning on taking in the second quarter?

Jose Ortega

The pricing will not be similar to what was done previously, which was in general an across the board increase during fiscal ’08 at the different concepts. The increase will be more selective in nature depending on different items that afford the opportunity to raise prices. I think on average what you will find is the average check will increase by 1 to 1.5%.

Brad Ludington - Keybanc Capital Markets

And that is across all brand, 1 to 1.5%?

Jose Ortega

That is blended across brands. Because for example at Benny Hanna, where the pricing that is going to be taken now in Q2 is specifically on the beverage menu, beverages are less than 20% of sales on the Benny Hanna concept so even a significant increase there if you were to do 4 to 5% would average out to about 1% or less.

Brad Ludington - Keybanc Capital Markets

When you said the CapEx for the first quarter I was having some trouble with my phone; what was that number again?

Jose Ortega

CapEx was roughly $17 million. It was about $7 million for new units, $9 million for the various remodeling projects and about $800,000 for maintenance CapEx.

Brad Ludington - Keybanc Capital Markets

On having the regional managers at Haru and some at RA, so the fourth manager at some of those locations is there any concern that it will take too much focus away from the regional manager duties?

Jose Ortega

No that initiative is primarily for Haru and since we don’t have any new restaurants on the development right now we are going back to basics with Haru and we have the ability to fill in for that fourth manager. Given the decrease in sales as well, we are able to leverage that position.

Operator

Your next question comes from Michael Woolavin [ph] with Sedody & Company.

Michael Woolavin [ph] with Sedody & Company

I want to touch on those cost savings initiatives a little bit here. How much of that did we see in the first quarter and what kind of an impact did that show or is this just going to be a second quarter moving forward initiative?

Jose Ortega

It really began to impact Q2 going forward. We started implementing those during Q1. I’m not sure we are ready to commit to a dollar amount at the moment for you, but we are looking at the initiatives encompass changes in operations, possible changes in operations as to how we source commodities as well as how food is prepared in the back of the house and we are also looking for additional synergies across the three concepts and possibly looking into contracting additional items that historically we have not contracted to be able to leverage the purchasing power on different items.

Michael Woolavin [ph] with Sedody & Company

So it would be fair to say here that we are still not going to see the full impact of that here in the second quarter?

Jose Ortega

The full impact I would say not.

Michael Woolavin [ph] with Sedody & Company

With maintaining the top and the bottom line guidance that you had given out last quarter, with the same store sales trends still going to be soft as you guys said, I guess you guys are looking for the leverage really on the G&A line, is that where you guys think you are benefiting the most off of this decline in sales here?

Juan Garcia

In terms of the sales forecast a couple of items, given the changes in term of some of the items with the delaying or the postponing the remodeling of those two locations we are going to have additional sales picking up from Stewart and from Samurai. You will have some ROB benefit there because the stores will not be idle as originally contemplated and you will have contributing stores. We have not changed the overall sales forecast because given some of the challenges of making sure that we get all the operating weeks we originally contemplated on the new units, we still fall within the original sales guidance on the operating weeks that we put out originally.

We are looking to improve ROB margins in general and we are going to continue to work on leveraging G&A.

Joel Schwartz

And specifically we are targeting the two big drivers, which are your commodity costs, your cost of sales, cost of goods, and our labor line.

Michael Woolavin [ph] with Sedody & Company

So with keeping those two stores open, does that imply here a reduction in what you think your sales trends are going to be from the fourth quarter in keeping the same restaurant sales?

Jose Ortega

I didn’t understand the question, that we have lower sales forecasted in Q4?

Michael Woolavin [ph] with Sedody & Company

No for the full year, your guidance on restaurants sales remain the same even though you are going to have those extra operating weeks from those two stores.

Jose Ortega

There are unknowns associated with the hard opening of the new stores being developed, so when you factor it all in together, we still fell within the range we originally forecasted.

Operator

Your last question comes from Will Hamilton with SMH Capital.

Will Hamilton – SMH Capital

Jose you mentioned something about the insurance claim and I missed that. Can you repeat that, where that fell and what was the impact?

Jose Ortega

During the quarter we recognized $500,000.00 of business interruption proceeds and that is the full claim for the business interruption on the Memphis location and that was recognized with in the other line in the ROP category at the stores.

Will Hamilton – SMH Capital

Energy costs were up I guess how you expected, but with natural gas now back down and some easing of other energy costs, has that improved more recently or are you still seeing some pressure there?

Jose Ortega

There is still some pressure. Where possible we have contracted some of the utilities where it is allowed by our regulators, but even some of those contracts when they come up they have been at higher rates. You then have on top of that the fact that you have just the overall sales de-leveraging in terms of what you are realizing at those stores with the softer sales.

Juan Garcia

You have to remember, Will, I think the easing of the prices that you just mentioned started to happen in August in our second quarter, so it’s too early to tell on those yet.

Will Hamilton – SMH Capital

I was wondering if you could tell us what percentage of your occupancy, your rent rates, are tied to sales for the stores?

Juan Garcia

We can get back to you on that one. I don’t think we have that readily available right now.

Joel Schwartz

I want to thank everybody for joining us today and we will speak to you soon. Thank you.

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Source: Benihana Inc. F1Q09 (Qtr End 07/20/08) Earnings Call Transcript
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