Ruth’s Hospitality Group, Inc. Q2 2008 Earnings Call Transcript

Ruth’s Hospitality Group, Inc. (RUTH)

Q2 2008 Earnings Call

August 5, 2008 4:30 pm ET

Executives

Robert M. Vincent - Chief Financial Officer & Executive Vice President

Robin P. Selati - Chairman

Geoffrey D. K. Stiles - Chief Operating Officer & Executive Vice President, Operations

Analysts

Nicole Miller – Piper Jaffray

Steven Kron – Goldman Sachs

Jason West – Deutsche Bank Securities

David Tarantino – Robert W. Baird & Co., Inc.

Jeffrey Omohundro - Wachovia Capital Markets, LLC

Bryan Elliott – Raymond James

Analyst for Steven Rees – J.P. Morgan

David Rainey – Akre Capital Management LLC

Presentation

Operator

Welcome to today’s Ruth’s Hospitality Group, Inc. second quarter 2008 earnings conference call. (Operator Instructions) Hosting today’s conference will be Rob Selati, Chairman of the Board; Bob Vincent, Chief Financial Officer; and Geoff Stiles, President of the Ruth’s Chris brand. I would now like to turn the conference over to Bob Vincent, Chief Financial Officer.

Robert M. Vincent

I need to remind everyone that part of our discussion today may include forward-looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them. We refer all of you to our recent filings with the SEC for a more detailed discussion for the risks that could impact future operating results and financial conditions.

I would now like to turn the call over to Rob.

Robin P. Selati

I’m Rob Selati, Chairman of the Board. Before Bob and Geoff discuss the quarter I wanted to take a few minutes to address the other press release we issued today. On behalf of the entire Board I’m very pleased to announce the hiring of Mike O’Donnell as the President and CEO of Ruth’s Hospitality Group. The Board had established a very high standard for the new CEO and conducted an extremely thorough search to find the individual who would meet this standard. Mike O’Donnell not only brings 25 years of highly relevant restaurant industry experience to the table but also a terrific track record of and reputation for exemplary leadership, team building, unquestionable integrity and consistently delivering shareholder value. Mike’s most recent leadership experience includes serving as the Chairman, CEO and President of Champps Entertainment. Mike led an operational turnaround at Champps that culminated in the successful sale of the business to Fox and Hound Restaurant Group. Prior to that Mike was the President and CEO of Sbarro which at the time was a family owned and operated business during Mike’s tenure as CEO there operating income doubled, international franchise expansion accelerated and the company which was highly leveraged at the time he joined realized a significant reduction in leverage. Mike’s tenure at Sbarro ultimately resulted in very significant value creation for the shareholders of Sbarro and he remains on the Board of the company today.

Prior to Sbarro, Mike was the President and CEO of new business at Outback Steakhouse. In this capacity he was responsible for all non-Outback Steakhouse brands including Carrabba’s, Roy’s, Fleming’s and Cheeseburger in Paradise. He presided over a successful operational turnaround at Carrabba’s as well as significant unit expansion at both Roy’s and Fleming’s. Mike’s experience base is highly relevant in many respects. He has been the CEO of two public companies, he has had meaningful experience with both company owned and franchise concepts and has a proven track record of working well with franchisees, a very important constituent at Ruth’s. Within his broad ranging sector experience he has had excellent experience presiding over both full service and upscale dining concepts as well as multiple brands. He’s had experience operating with a leveraged balance sheet and most importantly he has consistently demonstrated great leadership skills as he’s built and inspired the teams for which he’s been responsible.

We feel that Mike is inheriting two great brands as well as a terrific and dedicated existing team at Ruth’s Hospitality Group. We’re thrilled to have him on board and look forward to working with him to build value for our shareholders.

I’ll now turn it over to Bob.

Robert M. Vincent

Now moving to the second quarter, it is fairly clear that the environment for upscale dining is more challenging today than it has been in recent memory. This is reflected in our second quarter results. Our top line performance continues to be challenging and while we have actively managed the costs we can control the high fixed cost nature of our concept has had a negative impact on both margins and profitability. Overall traffic counts for the quarter were weak partly due to trends in our two largest markets, California and Florida which represent approximately 45% of our comp base and clearly remain challenged. Results in those markets for the most part were in line with Q1 results and negatively impacted our Q2 comps by approximately 2%. However the marketing initiatives that Geoff will speak to in a bit were encouraging particularly in the last few weeks of the quarter.

As described in our earnings release today for the second quarter ended June 29^th, 2008 we generated total revenues of $108.1 million which was 37.9% higher than last year’s $78.4 million. Company owned restaurant sales grew at 39.7% to $102.8 million from $73.6 million in the second quarter of 2007 largely due to a 59.7% growth in restaurant operating weeks for a total of 1,097. This included an additional 124 weeks at company owned Ruth’s Chris Steak House Restaurant in operation year-over-year in 286 additional operating weeks related to the Mitchell’s acquisition. Average weekly sales for all company owned Ruth’s Chris Steak House restaurants were $98.3 thousand in the second quarter compared to $107.3 thousand in the same period last year. Comparable restaurant sales at Ruth’s Chris Steak House decreased 7.1%. The average check increased by 2.1% driven by menu mix shifts and year-over-year pricing of approximately 2.5%. We also experienced a 9% reduction in entrees. Our comparable restaurant sales at Ruth’s Chris Steak House during last year’s quarter were down .4%.

With regard to our Mitchell’s acquisition we generated $23.1 million in restaurant sales from our new Fish Market and Steak House brands for the second quarter of 2008. We are combining the Fish Market and Steak House brands for purposes of both average weekly sales and operating weeks although the latter reflects less than 15% of both metrics. There were 286 Mitchell operating weeks included in our second quarter results this year and once again we will not consider Mitchell’s to be comparable until the end of the second quarter of 2009 at which point we have operated these locations for more than a full year. We therefore will only provide Mitchell’s average weekly sales in fiscal 2008 which for the second quarter were $80.8 thousand compared to $86.9 thousand in the second quarter of 2007.

Franchise income grew 2.1% to $3 million versus $2.9 million in the second quarter of 2007 due primarily to the net addition of seven franchise owned locations year-over-year. Domestic comparable franchise owned restaurant sales decreased 9.1% while international comparable franchise owned restaurant sales increased 4.1% which combined for a blended comparable franchise owned restaurant sales decrease of 7%. Other revenue was up 26.3% to $2.4 million from $1.9 million as a result of higher gift card breakage. Please note that we calculate breakage on an 18 month basis so therefore breakage recognized in Q2 of 08 reflected unredeemed gift cards purchased in Q4 of 2006.

In terms of our cost structure as a percentage of restaurant sales food and beverage costs decreased 110 basis points to 30.7% from 31.8% in the prior period. Favorable beef and seafood costs offset higher grocery and dairy costs through the period. Once again tenderloin prices have been favorable as we continue to purchase on the spot market with approximately 25% of our prime needs locked this year. We are constantly monitoring the market as it relates to our purchasing requirements and while it is difficult to time the market we are pleased with our position to date.

Restaurant operating expenses as a percentage of restaurant sales increased 380 basis points 50.2% from 46.4% in the prior year. The majority of this de-leveraging was due to weak comparable sales as many of these expenses are fixed. That being said we are actively focused on containing costs in our restaurant without compromising anything that touches the guest. Marketing and advertising costs were $4.8 million in the second quarter compared to $2.2 million in the prior year or 4.4% of total revenue versus 2.8%. As we detailed on our prior call we are raising our annual marketing expenditure this year by approximately 100 basis points in an effort to create more awareness for our brand and to promote a value oriented message to drive traffic. Geoff will discuss some of the specifics in a few minutes.

G&A costs as a percentage of total revenues increased by 210 basis points largely due to $1.4 million in severance costs related to the former CEO, $900,000 in FAS 123 R costs compared to $300,000 in the previous year along with $800,000 in incremental costs associated with the Mitchell’s acquisition. Operating income was $4.7 million compared to $9 million last year. Our net interest expense was $1.2 million in both periods however in the second quarter of this year we had an approximate $1.2 million mark-to-market non-cash benefit relating to an interest rate swap. Net income available to common shareholders for the quarter was $2.7 million or $0.11 per diluted share compared to $5.4 million or $0.23 per diluted share in the prior year. Our effective tax rate for the second quarter was 26% versus last year’s 32% rate. On an adjusted basis if we exclude the non-cash interest rate swap benefit this year as well as the CEO severance costs, adjusted diluted earnings per share were $0.12 in the second quarter of 2008.

I would now like to make a few comments regarding our balance sheet and reiterate some of what I said at an Investor conference in Boston a few weeks ago. Long term debt at quarter end was $179.8 million. Our leverage ratio at the end of the second quarter which is essentially total debt divided by adjusted LTM EBITDA as defined in our credit agreement was 3.25 times versus a covenant level of 3.5 times. Hence we were compliant from a covenant standpoint. As we also mentioned in calculating LTM EBITDA for covenant purposes we get to add back certain non-cash charges and we also get to treat the EBITDA from the Mitchell’s acquisition as if we had owned the business for a full trailing 12 month period at the time of the calculation.

One of our primary corporate objectives at this time is to maximize free cash flow and to pay down debt in order to ensure maximum operating flexibility and to remove any risk related to debt covenant compliance going forward. There are a number of initiatives that we are undertaking to ensure this. First, given the difficult sales environment we have launched several cost cutting initiatives that we believe will not impact the quality of our guest experience and that are targeted to produce over $8 million of annualized savings. These savings which we expect will be fully realized in 2009 are in the areas of supply chain, G&A and restaurant level expenses. We expect to realize approximately $3 million of these savings during the balance of fiscal 2008.

Second, we are actively seeking to monetize some of the real estate assets on our balance sheet. As we announced earlier today we have executed a purchase and sale agreement for a sale leaseback transaction for five company owned restaurants. We expect to close this transaction in mid-September with net proceeds of approximately $16 million. We are also evaluating a sale leaseback of the company’s headquarters building but do not have any committed plans at this point.

Third, we have revised our development plans. We will now open five company owned Ruth’s Chris restaurants in fiscal 2008 versus previous guidance of six openings of which three openings have already taken place. Fresno, California our fourth will open next week and Barrington, Illinois is expected to open in the fourth quarter. In terms of our franchise development we expect to open six to eight franchise restaurants six of which have already opened. We have existing commitments to open three company owned Ruth’s Chris restaurants in 2009 and at this time we do not anticipate that we will open any more than that. We continue to be very optimistic about the expansion potential of Mitchell’s and do plan to open two Mitchell’s in 2009 although we do not have any signed leases at this point.

Given the corporate priority of maximizing free cash flow in this environment we are applying a very high level of scrutiny to every capital expenditure we make. That includes new restaurant spending where we are working hard on value engineering costs out of the build out as well as significant remodels. While we have not yet finalized our capital spending plans for 2009 we expect that the aggregate amount of capital expenditures in 2009 will be materially less than that in 2008 on an apples to apples basis, that is excluding the Mitchell’s acquisition.

Coming back to 2008 guidance we now expect comparable sales declines to be in the minus five range which is at the low end of our original range. We believe that the above mentioned cost cutting initiatives will largely offset the drop in earnings associated with the sale shortfall and as such at this time we still believe that we can deliver EPS from continuing operations within our original guidance range of $0.55 to $.60 excluding charges associated with our CEO transition. However if negative sales trends persist at the level we experienced in the first half or if cost savings do not materialize as quickly or as significantly as we expect we will likely come in below this range. We will update this guidance of the end of the third quarter.

I would like to reference one other item before I turn it over to Geoff Stiles. Every year end as part of the audit process we examine our existing base of restaurants for the purposes of determining whether or not any of our assets are impaired. As with any large restaurant company we believe that there are some risks at two to three of our underperforming restaurants if they were to continue to underperform could be deemed impaired. If this is the case we would be required to take a non-cash charge related to the impairment. Because we don’t know what the outcome will be at this point we have not reflected any of this in our guidance. We will be in a position to comment on the likelihood and magnitude of this when we announce our year end results.

With that let me turn the call over to Geoff Stiles, President of the Ruth’s Chris brand.

Geoffrey D. K. Stiles

I’d like to address our efforts to reenergize traffic and navigate through the current economic environment. First, we believe that our value oriented approach may well be the foundation to improve traffic trends and to return to a stable comp sales base and support our guidance previously stated. Our approach driven by menu initiatives is a response to our core guest desires and current fine dining trends. On June 2^nd of this year we rolled out our Summer Celebration with a bundled offer, two guests can dine for $89. This includes a variety of entrée choices and is a compelling proposition considering that our average check is normally in the mid-$70 range.

The effect of this offer has been relatively insignificant on our check average. The focus of the campaign is to promote our value oriented items which might sound ironic for an upscale dining brand but is the surest means to reach the special occasion diner today as special occasion dining within Ruth’s Chris is an important element of our business. While we are sensitive to those that suggest we are placing the premium nature of our brand at risk we do not think that is the case. This is simply a tactical move to spur traffic and due to menu engineering we can still drive very solid margins. We extensively tested the Summer Celebration in multiple markets beginning in late 2007 and found the results to be very positive. Beginning June 2^nd, 2008 and tracking the first eight weeks our system of restaurants are achieving parallel results we saw in testing. The results of this offering have been positive and we are examining the potential for continuing this promotion through September.

We also have a Chef’s feature page in each and every menu which highlights daily offerings of appetizers, entrees and desserts. It also provides our culinary teams the flexibility to respond to the local demand of our guests. Despite being a large organization in many ways we still view ourselves as the neighborhood premium steak house restaurant and relish the entrepreneurial spirit that comes with thinking and acting like a small business. We’ve also created a program with about 50 of our vendors who coordinate a variety of different beverage initiatives such as wine tastings and wine dinners. Relative to this we’ve also been testing and are in the process of introducing to a couple of more restaurants our Prime Lights program which provides guests with a variety of smaller food tastings at the bar coupled with an expansive beverage selection. Younger guests in particular respond favorably to the dining in the bar versus traditional seating. In fact the fastest growing segment of our business is the 21 to 35 year old demographic which we consider to be our next generation of dedicated guests.

Another focus of our operating team is to develop greater sales through promoting and supporting private dining. We have just completed an upgrade of all company operated restaurants providing high speed Internet connectivity and in select locations video conferencing capabilities. We are supporting this portion of our business with the new collateral and a fresh marketing campaign targeted at meeting planners and business executives. We’ve seen a slight reduction of our private dining sales and our Q2 results are very consistent with Q1. We have also initiated a platform in our company restaurants created within our franchise system called Meet and Greet. This provides access to potential guests and has resulted in incremental private dining bookings as a result. On the marketing front we’ve recently initiated a relationship with American Express Membership Rewards. This program provides us with greater access to high end clientele as AmEx cardholders are both business and individual consumers. We’ve created a wonderful relationship with ESPN promoting Monday Night Football to luncheon programs with announcers, players and team ownership.

Our operating teams have been very effective at managing expenses at the restaurant level and yet ensuring that our guests receive the best quality service possible. We believe we have some opportunities t operate more efficiently without in any way compromising the quality of the guest experience and during the process of realizing those efficiencies. To that point we use a measurement system that relates the number of guests each week with the number of hours dedicated to serve these guests in each restaurant and I’m very pleased to report that we are consistent with levels provided today when compared to operational results over the last couple of years ensuring that the guest experience is as good as it always has been if not better today.

We completed three significant remodel projects earlier in the year in Tampa and Ponte Vedra, Florida and Northbrook, Illinois. As a result of these remodels these restaurants have shown improved sales over prior year. I should also add that the two restaurants we opened earlier this year in Fort Worth and New Orleans are off to an excellent start and are generating average weekly sales well above the system average.

With regards to Mitchell’s Fish Market the integration continues to go smoothly. We are testing a variety of marketing initiatives including email, print and local radio. We have seen positive results from these tests and are optimistic regarding the marketing plan and are seeing positive sales impacts from these initiatives implemented late in the second quarter. We feel great about the operating teams in Mitchell’s, they are very passionate about executing the Mitchell’s brand as we are at Ruth’s with the same commitment to core values, food quality and guest experience. We are actively pursuing the synergies of our two systems focusing closely on purchasing as that greatest opportunity. We consider the opportunities outlined to be significant.

In closing we are as dedicated as ever to the core values of our company, great food and genuine hospitality, our culture is deeply rooted in our teams and despite a tough economy morale remains solid. We are certainly not satisfied with our recent performance and have implemented the initiatives described with the intention of driving traffic and creating value for our guests. Above all we have two solid brands that have been time tested and can produce strong economic results over the long run.

At this point why don’t we open the lines up for questions?

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from Nicole Miller – Piper Jaffray.

Nicole Miller – Piper Jaffray

Bob, could we get the franchise same store sales please?

Robert M. Vincent

For the quarter the blended combined result was down 7%. That was composed of domestic down 9.1% and our international had a positive 4.1%.

Nicole Miller – Piper Jaffray

So franchise combined down 7%?

Robert M. Vincent

Correct.

Nicole Miller – Piper Jaffray

Domestic down 6% and franchise plus.

Robert M. Vincent

No, domestic was down 9% and the international franchise was a positive 4%.

Nicole Miller – Piper Jaffray

Were there any shares repurchased in the quarter? I believe there’s still $50 million authorized. Is that right?

Robert M. Vincent

That is correct and no, there were no shares repurchased during the quarter.

Nicole Miller – Piper Jaffray

The marketing expense, it was very clear you’ll do the 100 basis points that you’re allocating this year versus last year. In 09 should we use that same run rate as another additional 100 basis points or are you going to keep it flat to 08?

Robert M. Vincent

I think it’s too early, Nicole, to comment on that at this point. We’re just beginning our process for planning in 09.

Nicole Miller – Piper Jaffray

The cost of goods sales trend being down, is that sustainable in the back half? What’s implied in the guidance as it relates to cost of goods sold?

Robert M. Vincent

We believe that it’s certainly sustainable in the current quarter. Generally speaking historically the last six weeks of the year there’s some pressure on beef due to demand and so our folks think that we may have a little bit of pressure at the end of Q4 but don’t believe that it will be sustainable as we move into 2009.

Nicole Miller – Piper Jaffray

I understand reiterating guidance has a lot to do with the cost savings but from a comp perspective I guess staying down five does really imply that there’s a little bit of improvement in July. Is that the case?

Robert M. Vincent

We won’t make any comments about on a go forward basis if you will but what the guidance does imply is that we will have improvement in the second half of the year over the first half of the year in part due to the easier comparisons but also in part to what we believe are very effective marketing initiatives that are in place.

Nicole Miller – Piper Jaffray

Also the debt to EBITDA ratio is extremely helpful. Can you give us what that was for the first quarter as well?

Robert M. Vincent

I believe it was 3 times.

Nicole Miller – Piper Jaffray

I did not catch, is Mr. Mike O’Donnell on this call, available for a question or should we save that for another time?

Robert M. Vincent

He is not on this call and certainly will be available at our next call.

Nicole Miller – Piper Jaffray

Rob, I don’t know if it’s okay to ask, in your intro you talked a little bit about Mike and what was in the press release and in your prepared comments? I just noticed quite a few times that he had sold prior concepts. I’m not sure that we should read anything into that. I certainly don’t want to so I just wanted to come out and ask if.

Robin P. Selati

No it’s a good question. I wouldn’t read anything into it, Nicole. We were trying to make the point that he’s consistently delivered shareholder value and those two instances happened to manifest itself in the form of a sale. But I wouldn’t read anything into that at all.

Operator

Your next question comes from Steven Kron – Goldman Sachs.

Steven Kron – Goldman Sachs.

Just a question back on the balance sheet as it relates to covenant testing, Bob. Is this testing I would assume done quarterly? Is that correct?

Robert M. Vincent

That is correct.

Steven Kron – Goldman Sachs.

If I got the numbers correct at 3.25 times but the breach point would be 3.5 times. I would assume that that remains consistent throughout the year. Is that right?

Robert M. Vincent

That is also correct.

Steven Kron – Goldman Sachs.

If I do quick math, am I in the ballpark to think that if on a rolling basis the EBITDA gets reduced by around $4 million or $5 million you’d be in and around that 3.5 times? I’m just trying to get a sense for degree of magnitude.

Robert M. Vincent

Obviously there are two components.

Steven Kron – Goldman Sachs.

I’m sorry, assuming that that doesn’t get paid down at all.

Robert M. Vincent

I would say if debt remained at $180 million call it EBITDA to your point would have to decline probably about 10%, 12% from current levels.

Steven Kron – Goldman Sachs.

How does the decision to monetize real estate play into that equation? It’s just getting those proceeds and paying down the debt, right?

Robert M. Vincent

As I said in my prepared remarks, yes. Our intent here is to take those proceeds and reduce some leverage to ensure that we have some operating flexibility as we move forward.

Steven Kron – Goldman Sachs.

As it relates to the guidance in the back half, it does just seem in the first half the earnings growth even backing out the one timers from this period, it looks like in the first half you’re down around 30% from an EPS perspective and to get back into that $0.55 to $0.60 range you’d need more of a flat back half. It didn’t seem as though $3 million from cost savings that you laid out would really get you there so is there anything else within the P&L from a year-over-year cycling standpoint that we should have in mind?

Robert M. Vincent

Steven, I don’t have the benefit of your calculations so I’m not sure I can respond. As we look at it and as we model it we think those savings as well as improved top line results even though they may not be positive but certainly would be improved over the current first half levels we think that is enough to get us to our guidance.

Steven Kron – Goldman Sachs.

Geoff this is for you as it relates to the Summer Celebration testing and the value oriented menu, you mentioned that there was really no negative mix shift on the check and it seems as though it’s $99 price point versus a single person more in the $70 + range. So I guess it begs the question is this really being bought? How could it not have that negative influence on the check? I’m just trying to reconcile that comment.

Geoffrey D. K. Stiles

Steven, first of all the offer is $89 and what we have found is a fairly heavy preference to the offer but what we’ve seen is incremental improvement on wine and some other additional elements of purchasing. I think that when you examine the structure of the offer it is one that individuals know what they’re going to spend before they come in the restaurant and then understand if they add what the result will be. We have seen a slight erosion on the check but it is depending upon the restaurant it varies a little bit.

Operator

Your next question comes from Jason West – Deutsche Bank Securities.

Jason West – Deutsche Bank Securities

I was wondering whenever the debt covenants are calculated is that based on the EBITDAR or the EBITDA? Just wondering how the sale leasebacks might affect the calculation.

Robert M. Vincent

It’s an EBITDA calculation.

Jason West – Deutsche Bank Securities

The new lease debt would not go against you on the leasebacks?

Robert M. Vincent

No, what would happen is that would be operating rents which would be a charge against EBITDA but we would have a corresponding offset in depreciation.

Jason West – Deutsche Bank Securities

Just wondering what the practical implications would be if you were to trip the covenant at some point this year? Obviously a lot of concern out there about that but have you talked to the banks about their willingness to work with you and let business continue as is, just any sense of what the implications may be if that were to happen? Maybe people are making too big a deal out of it, it’s tough to tell here.

Robert M. Vincent

I think people are making too big of a deal out of it but that’s my own personal view. I think in reality we have a very strong relationship with our bank group and they know that we are working very diligently on managing cash and challenging all of the things that we do here and I think that if the timing of this sale leaseback transaction were to slip I think it’s only going to slip slightly. It’s not a case where it’s not going to get done. I think that based on our relationship with our bank group, the Madison Dearborn Partnership, with our lenders, the fact that we’re in the market, we’ve executed a purchase and sale agreement, it’s not a question of if it gets done, it’s just when it gets done. I feel that very confident that if timing were to slip for any reason we would be able to come to an outcome with our bank group that would work for us.

Jason West – Deutsche Bank Securities

A separate question on the beef side, I was a little surprised at the optimism that you continue to run a favorable rate there given what we’ve seen in the wholesale market. I know it’s been a bit volatile lately but it seems like a lot of other people are complaining about higher costs recently but you guys seem to feel like you’re still getting pretty favorable numbers in the spot market. Just curious what’s different about your buying situation?

Geoffrey D. K. Stiles

What we have seen is that there is increased competition and demand for the choice market but not so much in the prime market and we have not seen the pressures in prime. As a matter of fact we’ve seen the yield in the prime market at some of the highest rates that it’s been over the last three to five years.

Operator

Your next question comes from David Tarantino – Robert W. Baird & Co., Inc.

David Tarantino – Robert W. Baird & Co., Inc.

Question on the expense savings, could you talk about or elaborate on what you’re doing there to generate that $8 million?

Robert M. Vincent

As we said it comes from three areas, supply chain and specifically there we are working on a new national produce program which we think will have some benefit. We are also starting to realize some synergies with the Mitchell’s acquisition on the purchasing side and we also have a new distribution program which we think will end up being favorable to us year-over-year. On the G&A side we’ve made some changes in terms of corporate support to really fit what we think the new development schedule is likely to be. Clearly we had built up over the last few years in anticipation of driving new unit development probably in the double digit range and as I mentioned earlier in our remarks we’re held five units this year, three units next year. A little slower than what has taken place in the past two years. We’ve made some adjustments in our support relative to a more moderate growth plan.

On the restaurant side I think it’s again related to growth. We had a lot of managers on the bench, if you will, to support a ramp up of growth and through attrition some of those folks have moved on and there’s really no need with a slower growth plan in place to backfill those. We think some of that stuff will come through at the restaurant level. It’s a combination of all those kind of activities just to give you a feel for some of the things that will produce those savings.

David Tarantino – Robert W. Baird & Co., Inc.

Just a follow up to that, do you view the slower growth here as a transitory issue given the environment and that you would return to faster growth when the environment normalizes? Or is this more of a permanent shift to a slower growth profile?

Robert M. Vincent

David, I don’t think I’d want to speculate on that at this point. I think clearly the environment is influencing our thinking at the moment but obviously we’re going to have new leadership on board and I think collectively the management team with new leadership and the Board will really evaluate and think about how we manage this thing as we get into late 09, 10 and 11.

Robin P. Selati

I don’t think there is any fundamental change in the view of the Board or the management team as t the magnitude of the expansion potential for either of these brands. I think our view is that it’s just prudent to do what we’re doing in this environment.

David Tarantino – Robert W. Baird & Co., Inc.

Bob, one question on the guidance, back to the comps guidance for the back half, it looks like getting down 5% for the year would require something like down low single digits in the back half and is that the improvement from down 7%? Is that really being driven by the marketing initiatives or the comparison? I know you mentioned both but are you seeing that kind of lift in the marketing initiative?

Robert M. Vincent

David, again I don’t want to provide any forward guidance but again we are encouraged. Both Geoff in his remarks as well as in mine suggest that we have seen improvement and again as I mentioned to Nicole the fact that we do have some easier comparisons and we have some significant marketing initiatives in place for the balance of the year and we believe that we’ve seen very effective results from those initiatives even though it’s early but yes, it does give us the encouragement that we think we can bring in the guidance.

Operator

Your next question comes from Jeffrey Omohundro - Wachovia Capital Markets, LLC

Jeffrey Omohundro - Wachovia Capital Markets, LLC

First I was wondering if you could talk through your thinking around pricing currently at Ruth’s Chris and how that meshes with the value oriented strategy?

Robin P. Selati

I think the pricing strategy that we have tried to maintain in the past has been somewhat consistent in parallels and inflationary rates. I think we’re being a little more conservative than perhaps we have been in the past being that we are making every effort to create value for our guests but I do feel that there is some elasticity in the proteins and we will be revisiting that later in the year to understand whether it’s necessary and to what degree we feel there is flexibilities with each and every item.

Jeffrey Omohundro - Wachovia Capital Markets, LLC

When we look at Mitchell’s in an average weekly sales, there were some remarks made about marketing spending, I wonder if you could perhaps give us a little bit more insight into traffic building initiatives to that concept and also an update on your experiences around turnover, management and labor at Mitchell’s?

Robin P. Selati

Let me address the turnover first. We have seen no up tick over where they have been previously in both hourly and management and I think that the stability in the teams really is very solid and the morale appears to be very good as well.

Jeffrey Omohundro - Wachovia Capital Markets, LLC

Then on traffic building?

Robin P. Selati

The traffic building, we have three basic fundamentals. We have email, print and radio. We’ve been testing those extensively and have found good pretty good traction within certainly print and radio and I’m not really able to share because the results are still trickling in as it’s something we’ve really been testing heavily here over the last probably six or eight weeks and I can’t really quantify them yet. But I can share that we’ve been pleased with the investment and the return we’re getting on it.

Jeffrey Omohundro - Wachovia Capital Markets, LLC

Congratulations to the Board and Rob in moving in such timely fashion in replacing Craig. I look forward to hearing from Mike in the near future.

Operator

Your next question comes from Bryan Elliott – Raymond James.

Bryan Elliott – Raymond James

First, Bob, I want to clarify the understanding on the sale leaseback accounting. It’s structured in a way that you’re highly confident that it’s not going to be capitalized and therefore is just going to be operating rent on the income statement?

Robert M. Vincent

Yes, Bryan, we have obviously been working with our third party accounting folks to make sure that we’re compliant with the rules for operating lease treatment and we do believe that that will be the case.

Bryan Elliott – Raymond James

Obviously proceeds pay down debt and we don’t get any of the new lease debt counted against debt for covenant purposes?

Robert M. Vincent

As I said earlier we will once the transaction closes have operating rents which will be [inaudible].

Bryan Elliott – Raymond James

Yes, against EBITDA but as far as the denominator we get to reduce the denominator by the proceeds and there’s going to be no add back for any capitalized rent or anything like that?

Robert M. Vincent

Absolutely correct.

Bryan Elliott – Raymond James

That would without question then widen the range. You had an earlier question about how much room you have on EBITDA. That would significantly widen that range that you would have as far as EBITDA deterioration in this environment going forward?

Robert M. Vincent

Just on the debt side itself those proceeds would reduce the leverage ratio by approximately 30 to 35 basis points.

Bryan Elliott – Raymond James

Thinking about ‘09 and the reduced growth, as you’re negotiating deals and looking at situations has the environment changed and the pressure is on developers, etc. resulted in any fundamental change on what we should expect from tenant improvement allowances and therefore any change pending in out-of-pocket costs to open a typical unit?

Robert M. Vincent

Two things, Bryan, one is that the deals that we’re opening in ‘09 were negotiated anywhere from six to 18 months ago. So those deals were done and there’s no re-trading, if you will. But I do think what is important is that we are really scrutinizing our investment costs and we do believe that through value engineering as well as some efficiencies that have been picked up as we’ve gone through this process we do think that we will be able to reduce or improve our investment, whatever way you want to look at it. But nonetheless bring down that side of the equation so that even in a challenging environment from a sales point of view, we still think we’ll be able to generate very strong ROR returns on our new development in ‘09.

Bryan Elliott – Raymond James

I know you’ve given us some data in the past about the reduction and square footage investment cost in new units and I believe we got down to around $300 a foot, is that a good number to use at this point over the next year and half or so or do you think you can get some more out through the engineering? It sounds like you might be able to get some more out?

Robert M. Vincent

We’re hopeful but I don’t want to speculate at this point.

Operator

Your next question comes from Analyst for Steven Rees – J.P. Morgan.

Analyst for Steven Rees – J.P. Morgan

I had a question on your marketing and advertising expenses recorded in the second quarter. I guess I was a little bit surprised to see that jump on a year-on-year basis in basis points but that your comps stayed similar to the first quarter despite the easier comparison. I would just like to look in in the second quarter how marketing and advertising may have benefited the second quarter and whether there may have been a timing issue of money that was recorded in the second quarter that may in fact see the air in the third for example.

Robert M. Vincent

Yes, John, I think you hit it. It’s a timing issue. In terms of our Summer Celebration promotion it really was launched on June 2 so the second quarter we had basically 27 days of benefit. The promotion will run through September or into early September so clearly we’re going to have a benefit of call it 60, 65 days here over the third quarter but we had to because of the accounting rules. The production costs have to be expensed when incurred. We probably had 60% of the spend for promoting this program booked in the second quarter against as I say only about a third of the benefit. So there is clearly a timing difference that you can see there.

Analyst for Steven Rees – J.P. Morgan

Secondly, could you say the fiscal ‘08 CapEx and how much of that cap is for new units?

Robert M. Vincent

I think in our previous guidance we had indicated that CapEx was going to be between $125 million and $130 million for ‘08 of which $92 million of that was directly related to the Mitchell’s acquisition which closed in February of ‘08. I don’t know that we’ve really provided any break down of the non-acquisition capital vis-à-vis new units vis-à-vis maintenance cap –vis-à-vis remodels.

Operator

Your next question comes from David Rainey – Akre Capital Management LLC.

David Rainey – Akre Capital Management LLC

Just curious about the tax rate in the quarter, if there’s anything special going on? It looks like it was 5 or 6 percentage points below where it would normally come in.

Robert M. Vincent

No, simply unfortunately with the results as they are we have lower pre-tax earnings and the credit that all restaurant companies enjoy is this FICA tip tax credit and that has stayed constant. Actually it’s grown for us with the Mitchell’s acquisition. So we have a larger credit that’s going against a smaller base, if you will, and that’s really the main driver of the reduction in the effective tax rate.

David Rainey – Akre Capital Management LLC

One other question about long term debt and the covenants, can you tell us what the quarterly adjusted EBITDA number was that you would use for covenant purposes? I’ve calculated $9.2 million of EBITDA in the quarter but how would that number be adjusted for bank purposes?

Robert M. Vincent

There are a lot of what I would say standard non-cash add backs. Clearly $123 million ops is an add back. In this particular case where we had severance costs that is an eligible add back. Those are an example of a couple of things that we can bring back into the calculation.

David Rainey – Akre Capital Management LLC

Can you tell us what the number was for the quarter?

Robert M. Vincent

I think you can do the calculation. I gave you the leverage ratio for the quarter and you know what debt is, so I think you can pretty much back into the calculation.

Operator

Your next question comes from Bryan Elliott – Raymond James.

Bryan Elliott – Raymond James

Just a clarification on that last question, too, I believe. Is pre-opening an add back as well?

Robert M. Vincent

No, it is not, Bryan.

Bryan Elliott – Raymond James

Also what was CapEx in Q2?

Robert M. Vincent

I believe it was $10 million but if you give me a minute, I will make sure that that’s accurate.

Bryan Elliott – Raymond James

Is there any reason why given I think a little bit of push out in expansion for this year, I’m just looking at my, yes, we’re pushing one unit out. Can you give us some help in updating or some help in modifying the CapEx guidance? Would it be correct just to take a unit out or is there something more complex maybe happening?

Robert M. Vincent

First of all it was $10 million for the second quarter and I think on a year-to-date basis it’s $21 million. I think that second half as I said earlier in a response to a question, that $125 million to $130 million was our total for the year. Back out $92 million for the Mitchell’s acquisition and then the $21 million that we’ve spent to date and you have a range of the second half.

Bryan Elliott – Raymond James

From prior guidance which had six new units we’re not going to see a change by pushing the one unit out because I guess it’s.

Robert M. Vincent

I think we already did that. I think the original guidance was $125 million to $135 million.

Operator

Your next question comes from Jason West – Deutsche Bank Securities.

Jason West – Deutsche Bank Securities

Just two quick follow ups, one what tax rate should we be using over the second half of the year? And two, I believe I just want to confirm that the expense savings number you guys are targeting for the second half is $3 million. I thought someone else may have said $8 million but I want to confirm that.

Robert M. Vincent

In terms of the effective tax rate for the balance of the year we are projecting it to be about 28%. In terms of the savings you got both numbers but just to clarify, $3 million is expected to be realized in 2008 and then full annualization in 2009 would be the $8 million total.

Operator

At this time we have no further questions.

Robert M. Vincent

We would like to thank all for sharing this with us and thank you for your interest. Look forward to speaking to you again next quarter.

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