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Executives

Daniel E. Pittard - President and Chief Executive Officer

Frank E. Henigman - Senior Vice President and Chief Financial Officer

Analysts

Ian Corydon - B. Riley & Company

Anton Brenner – Roth Capital Partners

Joe Altman – Kelly Capital

John Pinto – Brightleaf Capital

Rubio’s Restaurants, Inc. (RUBO) Q2 2008 Earnings Call August 6, 2008 5:00 PM ET

Operator

Good day ladies and gentlemen and welcome to the Second Quarter 2008 Rubio’s Earnings Conference Call. My name is Caresa and I will be your coordinator for today. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Dan Pittard, President and CEO.

Daniel E. Pittard

Good afternoon and thank you for joining us today. With me today is Frank Henigman, our Chief Financial Officer. We are here to review our Q2 and year-to-date results and our strategy for meeting the challenging business environment. I expect all you have already our earnings press release. I am pleased that we earned $335,000 this quarter, and especially pleased that our adjusted EBITDA is above the same quarter last year. Many of the cost-improvement initiatives we instituted in the first quarter produced good results.

I’ll turn it over to Frank, who will review the results and then I will return to give you an update on our strategy, given our fragile economy and comment on the progress we are making building our organizational capabilities.

Frank E. Henigman

Thank you and good afternoon.

I’ll start by reminding you that our discussion today includes forward-looking statements. These statements are based on certain assumptions made by Rubio’s based on historical trends, current conditions, expected future development, and other factors we believe to be appropriate in the circumstances. Risks and uncertainties may cause our actual results to differ materially from those projected in these forward-looking statements. You can find a discussion of these factors and more information about Rubio’s in our filings with the SEC. These forward-looking statements are made as of the date of this call and we assume no obligation to update these statements publicly, even if the information becomes available in the future.

With that out of the way, as Dan noted, we faced another challenging quarter in the restaurant industry in a quarter that was marked by continuing food-cost pressures, record low consumer-confidence measures, and a nation-wide concern over food safety. We are pleased to report that we did not have any salmonella-related issues in our supply chain or in our restaurants, however, we believe there was likely a residual impact to sales caused by consumer awareness of the issue.

We were able to navigate our way through the quarter profitably with net income of $335,000 as compared to $503,000 in net income for the same quarter last year. Earnings per diluted share was $0.03 for the quarter as compared to $0.05 in the second quarter of 2005. Key profitability drivers included reduced quarter-over-quarter labor costs resulting from our new labor management system and a favorable workers’ comp reserve adjustment combined with a 40 basis point reduction in food costs from our first quarter of 2008 results.

Adjusted EBITDA for the quarter improved 4.8% to $3.4 million versus $3.3 million for the prior year quarter. And year-to-date it declined 20.4% to $4.8 million versus $6.0 million. Notably non-cash share-based compensation expense was $361,000 for the second quarter and $710,000 year-to-date. Please see the calculation for adjusted EBITDA in today’s earnings release.

Second quarter revenues rose 4.9% to $45.1 million from $43.0 million in the prior year quarter. The quarter-over-quarter increase in revenue was driven by the impact of new stores opened in 2007 and 2008, offset by a 3.9% decrease in Q2 comp store sales. Average check for the quarter increased by 1.5% while transactions decreased by 5.3%. Year-to-date revenues were $87.3 million, which is a 3.9% increase from $84.0 million for the same time period last year. Year-to-date comp store sales decreased 3.6%.

As we mentioned on the first quarter call, we believe the current state of the economy and more specifically, the impact of higher fuel costs and the subprime mortgage crisis could cause us to lose some of our price-sensitive customers and experience reduced frequency with others. We continue to experience larger declines in transactions in our markets that have been the most affected by the sub-prime problem, including Sacramento, the Inland Empire region in California, and Phoenix. Additionally, we have tested running lower advertising levels in San Diego during the quarter and believe it negatively impacted sales.

Later I will discuss improvements in comp sales and transactions we’ve experienced since the July 15th introduction of our enhanced menu that included a price increase.

Average unit volumes for all restaurants are comp-store based with $1.018 million for the quarter. Restaurant operating margins were 16.9% for the second quarter as compared to 17% for the prior-year quarter as cost improvement initiative enabled us to absorb extraordinary cost pressures with no appreciable reduction in the metric and no menu-wide price increase since last October.

Year-to-date restaurant operating margins were 15.4% as compared to 16.2%. Cost of sales for the second quarter was 28.8% of restaurant sales as compared to 28.5% for the same quarter last year. Year-to-date cost of sales was 29% as compared to 28.6% for the same period last year.

The combination of last October’s price increase, a late Q2 price increase on our Taco Tuesday promotion, and significant management attention, including an overhaul of our recipe management system and improved operational cost control partially mitigated increased food and distribution costs.

We completed the previously announced roll out of our enhanced menu and price increase on July 15th, which is now mitigating continued food cost inflation pressure. Early results from this new menu roll out have shown a significant improvement in comp sales, a slight improvement in our comp transactions, and a very favorable response to our new items, such as our Grilled Gourmet Tacos, which Dan will talk more about later.

Restaurant labor decreased 31.3% of sales for the second quarter as compared to 32% for the same quarter last year. Year-to-date restaurant labor declined to 32.1% versus 32.6% for the same period last year. The 2008 second quarter and year-to-date attributable to the new labor management system and decreased workers’ comp reserves.

Our expectation is that the new labor management system will allow us to leverage the July 15th price increase more effectively than past increases, due to a change in the way hours are allocated to our stores.

Restaurant occupancy and other expenses were 23% of restaurant sales for the second quarter versus 22.5% for the same quarter last year. Year-to-date was 23.6% versus 22.6% for the same period last year. The increase of the percentage of restaurant sales was primarily due to deleveraging of the fixed costs that are included in this line item as well as higher advertising expenditures, common area maintenance charges on our leases, and credit card fees as the sales mix shifted towards credit cards.

G&A expenses were $4.5 million, or 9.9% of revenues in the second quarter of 2008 compared to $4.2 million, or 9.8% in the second quarter of 2007. Year-to-date G&A was 10.4% of revenues compared to 9.6% in 2007. The increase in 2008 is primarily due to the addition of senior executives, non-cash share-based comp, and higher legal costs.

As we discussed on last call, as part of a comprehensive adjustment of our cost structure, we reduced our corporate support staff by just over 10% at the end of April, which is expected to generate savings this year of over $300,000 and annualized savings of approximately $600,000. The impact of these reductions was neutral in the second quarter due to severance costs.

In addition, we have deferred projects, including those of a capital nature, and we have continued the freeze on the hiring of any additional physicians. As a result, our forecast for Q3 remains at $4.5 million-$4.7 million, including an anticipated non-cash charge of just over $200,000 related to share-based compensation forfeiture adjustments.

Q4 is expected to fully leverage the recent reductions and come in at about $4.2 million-$4.4 million.

Preopening expense decreased to $139,000 as compared to $150,000 as compared to $150,000 for the same quarter last year. On a year-to-date basis preopening expenses increased $358,000 in 2008, from $150,000 in 2007. Year-to-date increase in preopening expenses contributed to our heightened development effort in 2008, as we opened four new restaurants during the first quarter, five in the second quarter and two thus far in the third quarter, which puts us at 181 company-owned restaurants. We currently have two restaurants under construction.

We believe we are on track to open a total of 17 restaurants this year, just below our earlier guidance of 18, due to the cancellation of a project that was in a trade area with a growing number of foreclosures.

As of the end of Q2, the 19 new restaurants not yet in our comp base have average weekly sales that are 11.3% above their respective market averages. Of these restaurants, all but two were cash-flow positive in period 6 of Q2. If we exclude preopening charges, all but one of these was cash-flow positive. Given the economic environment, we are relatively pleased with the results.

As I mentioned earlier, initial results from our enhanced menu rollout have shown a significant improvement in comps and sales. The third quarter comps through August 5, 2008, had negative 1.9%. Looking specifically at the period since July 15th, when we introduced the price increase, comps are positive 1.2%. We’re experiencing record high check averages with the new menu and thus far we have seen a slight improvement in further transactions.

With that, I will turn the call back to Dan.

Daniel E. Pittard

I am sure everyone on the call is well aware of the fragile economy we have and also that the impact on the sub-prime problem is not spread evenly across the country. Unfortunately, we’re in four of the five states hardest hit by the mortgage problem. One point I do want to make is that the impact is not even across the state, or even within a metro area where we operate. For example, Sacramento is one of the hardest hit metro area in the country with foreclosures on one in every 49 households in the second quarter of 2008, which is three and half times over the national average.

As we reported in our last call, we stopped worked on three sites located in communities on the edge of Sacramento that were growing very fast in 2007. And all these same communities were experiencing a high foreclosure rate and housing growth stopped quickly. Even though we took a $139,000 write off in Q1, we continue to believe we made the right decision as the housing problem has not improved in these communities.

We did proceed with opening a restaurant in a mature trade area in Sacramento where we were able to lease a prime location. The restaurant has been open for almost two months and weekly sales have climbed to $27,000, or an annual run rate of over $1.4 million. At this sales volume we will achieve well above a 20% after-tax cash return.

I make this point so that you understand that there are parts of California that are relatively unaffected by the sub-prime problem. Consequently, we continue to believe we have growth opportunities in our existing markets.

For our planning purposes we believe we must strive to make profits in a difficult economy through late 2009 and early 2010. We also expect there will be continued upward pressure on food costs but that we will be able to pass along these increases.

Further, we believe there will be growing interest in healthy foods from sustainable sources, as well as more requirements to be environmentally-friendly. We believe we had adjusted our strategies to not only address the weak economic conditions, but also capitalize on the trends of the industry.

With the weakening economy some of you may expect the growth in the fast casual segment will stop. The best information we have been able to obtain reveals that the growth rate may slow but the segment will continue to grow. The fast casual market is north of $16.0 billion, or was north of $16.0 billion in 2007. So even with small growth it is a very large market relative to Rubio’s size.

We expect to continue to have opportunities to grow profitably, however we realize that the financial services sector is in a very precarious situation and further declines in this industry could dramatically harm the economy.

Given the economic situation, let me review our strategy and explain why we expect to be profitable in difficult times and be extremely well positioned for an upturn in the economy. I will first review the strategy and then the organization we have assembled to successfully execute the strategy.

All effective strategies for consumer businesses start with a rich understanding of the targeted guests the company wants to build its business around. In our case, we have completed extensive research to understand our targeted guests and their preferences. Our core guests are 25-49 years of age, above average income and education, are health-conscious and crave delicious, flavorful foods. We specifically target those occasions when they have limited time for a meal or snack, 10-30 minutes, and expect to pay $6-$10 for a meal. Also, we target those times when they want to pick up a meal for consumption at the home or office. Some of the adults in the 25-49 age group bring children with them so we seek to provide attractive offerings for the children as well.

Our strategy to win with our targeted segment is to number one, create delicious Baja-inspired foods with unique, flavorable taste derived from a perfect blend of spices for the respective proteins. Number two, position the brand around Beach Mex and add online advertising and promotions as well as expanded local store marketing. Number three, grow off-premise business with best-in-class packaging, online, and text ordering, as well as delivery in select trade areas. Four, focus growth of new units of mature, above average income trade areas and close restaurants at the end of their leases in lower income trade areas that are underperforming. Number five, maintain tight cost controls and achieve economies of scale with growth.

We believe we have made considerable progress in executing this strategy and I will review the progress in each area and discuss adjustments we have made to address the challenges of the weak and fragile economy.

Our first key strategy is to create delicious Baja-inspired foods with unique and flavorable taste. Over the last two years we have enhanced and re-introduced previous items and created new one. These include Enchiladas with a new fire-roasted sauce, Langostino Lobster, Crispy Shrimp with mango salsa, Blackened Mahi Mahi, Grilled Salmon, Wrapped Saladas, which are essentially salads wrapped in tortillas, Carnitas Rajas, Grilled Veggie Burritos, and Grilled Gourmet Tacos.

In addition, we have half a dozen new products in various stages of testing. These products have several common attributes beyond wonderful taste. The builds are difficult to duplicate on an assembly line kitchen so some of the key competitors will be challenged to match these items. Many are sea foods and we also think it will be a challenge for some competitors to match.

Our food and beverage team has selected and tested numerous combinations of spices to optimize the flavors or each protein and type of build, burritos, tacos, salads, and quesadillas.

We have added a number of these items to our menu on a full time basis. With these new products we have come a long way to meeting our key objective of creating a wide range of delicious, unique products beyond our world famous Fish Taco. As a result, we believe we can increase the frequency of guest visits, attract new guests, and increase the average check.

Our second key strategy is to position the brand around Beach Mex and add online advertising and promotions as well as expanded local store marketing. Let me describe the logic for the Beach Mex positioning. As I am sure everyone on the call knows, Rubio’s started with the Fish Taco and we have had strength in seafood since then. Many of our new items, the Blackened Mahi Mahi, the Grilled Salmon, the Langostino Lobster, and the Grilled Shrimp are seafood.

We wanted a branding position that would allow us to capture our strength with seafood and also include other land-based proteins that our targeted guests might like to grill on the beach. Our research shows that the Beach Mex positioning captures both and is an effective way for us to differentiate from other fresh Mexican grills. Beach Mex is fresh, flavorful, the best ingredients the planet has to offer. It is simple preparations but complex taste. It is healthier but it is completely soul-satisfying. Remember the great times you had on the beach? Over time we hope Beach Mex will prompt our guest to recall memories of delicious food and wonderful times on the beach.

With this great line up of food, how do we effectively communicate to our targeted guests? Where we have sufficient number of units, we use radio and occasionally TV advertising. But many of our targeted guests are online and are texting, at least with their kids. Thus we want to leverage the Internet. We have enhanced and re-launched our website, initiated online ordering, online advertising and will be testing text ordering in the coming months.

Finally, we have expanded our local store marketing, especially in those markets where we have low store penetration. As we noted in our last call, we recognize that even some of our higher-income guests are feeling pinched, especially in those communities hit hard with sub-prime problems. Therefore, we discussed a two-prong promotion strategy where we would offer valued priced products at the lower end of our price range under the name Beach Shack Special.

In parallel, we also promote delicious unique items like our new Grilled Gourmet Tacos at the upper end of our price range. Consequently we have tested several promotions including dollar Fish Tacos every day after 2:30 pm and two Fish Tacos for $3.00. Similarly we have promoted five items, each for $5.00, including the use of supporting radio ads in our broadcast market.

After evaluating the results, we concluded we would continue to offer Beach Shack Specials on our manager’s specials boards with value pricing between $5.00-$7.00.

Our third strategy is to grow off-premise business with best-in-class packaging, online and text ordering, as well as delivery in select trade areas. As we have noted in several of our calls, we believe we can achieve an average of $100,000 per restaurant in off-premise sales. We currently have a number of restaurants above this level.

Since announcing this goal we have rolled out our large order-to-go program, branded Rubio’s A-Go-Go. We developed what we believe is the best-in-class packaging and online ordering. Our A-Go-Go package has the highest insulation factor of any material that can be recycled.

We have grown our off-premise sales from an average of $25,000 to over $45,000 to date. We are testing delivery in several locations with high concentration of offices and will roll out in selected markets as appropriate.

Our fourth key strategy is to focus growth of new units in mature trade areas with above average income and close restaurants in lower-income trade areas. As we have noted in earlier calls, when we have a restaurant in a higher-income trade area with a prime location, our unit economics are very attractive, certainly above our cost of capital. We have 123 restaurants in our comp base with sales above $800,000. Assuming a $600,000 investment, the average cash-on-cash return would be 23%. For units above $1.2 million the return would be 36%.

Since the fast casual segment is growing, we have a great opportunity to open profitable restaurants. And we announced ambitious growth plans last year to open 18-20 restaurants in 2008 and 30-40 in 2009. Further, as we expected, we are seeing prime sites and great [inaudible] that we wouldn’t have seen except for the weak economy. And many sites are available for 10%-25% below what the market was a year ago and below what they will likely cost when the economy turns up.

Many of us know people who have accumulated substantial wealth by investing in real estate during a recession. We would like to take advantage of this situation by securing prime locations from very attractive terms. We have developed a number of tools to help us achieve a high batting average for site selection. These include the Buckston Real Estate Model that helps us identify those trade areas where a high percentage of our targeted guests reside.

We have also been careful to check on the number of foreclosed houses in the trade area. However, I am mindful that some of our shareholders are concerned that with the fragile economy we should slow down and our switch to franchising. Since our last earnings call there have been a number of developments, particularly in the financial services sector that have demonstrated the economic situation is very fragile.

I am sure you are all aware of these, including the volubility of Freddie Mac and Fannie Mae as well as concerns with the strength of several of the largest financial institutions in the U.S. Of course, the failure of one of these institutions could severely deepen and extend the recession. Therefore, we will keep some powder dry and slow the rate of growth in new stores next year until there is clear visibility on the economy. More specifically, we have over 30 sites on our radar screen for next year but we will limit the number of commitments we make until there is more visibility on how the financial and housing sectors will perform.

Regarding franchising, we took a hard look at franchising when I arrived and decided the time was not right to proceed with a franchising initiative. Our Board and management team includes executives who have extensive franchising experience. We all know the joys and pains of franchising. In our experience, it is not prudent to embark on a franchising effort when a company is making a major shift in strategy.

Moreover, you only want to proceed when you have a proven, very attractive unit economics with the new strategy so you can attract the top franchisees. With the addition of the new products we have developed, a strengthened team and processes, we will again assess whether franchising could significantly increase shareholder value.

As I noted in earlier calls, we expect to close around a dozen restaurants over the next four years. The balance of the restaurants with AEVs below $800,000 will be operated for attractive cash-on-cash return.

Our fifth key strategy is to maintain tight cost controls, especially in light of the weak economy. We have evaluated every element of the P&L to find cost savings. We announced in our last call that we have reduced our G&A costs. As Frank noted, we have realized positive improvements from our upgraded labor management system and comprehensive new cost review.

Looking forward, we have actions in place that should reduce our energy costs, which is the third highest expense for our restaurants. We have a number of smaller cost-saving initiatives under way. We are expanding the number of suppliers in most all product categories and are following the futures market to determine if we should hedge or negotiate long-term contracts.

At this point most of our suppliers are reluctant to sign year-long contracts for 2009. We are also completing menu thoughts and portion engineering. To contain capital costs, we have completed [inaudible] engineering of our restaurant design which will likely result in avoiding increases in cost for new units. We expect our 2009 units to be between $575,000-$625,000, despite cost increases for some equipment.

In summary, our strategy to win with our targeted segment is to one, create delicious Baja-inspired foods with unique flavorful taste from a perfect blend of spices for the respective protein. Two, position the brand around Beach Mex and add online advertising promotion as well as expanded local store marketing. Number three, grow off-premise businesses with best-in-class packaging, online and text ordering, as well as delivery in select trade areas. Number four, focus growth of new units in mature above-average-income trade areas, and close restaurants at the end of their leases in lower-income trade areas that are underperforming. Number five, maintain tight cost controls and achieve economies of scale.

Collectively, these five strategies should give Rubio’s a competitive advantage in a growing segment. For our targeted guests, we intend to beat the QSRs with better quality food, beat the casual dining restaurants with lower prices enabled by the lower cost structure, beat the other fast casuals with delicious unique flavors and varieties that are challenging to replicate.

The winning strategy requires an organization who can successfully execute it. Therefore, I will now review how we have strengthened the organization so we can execute the strategy.

The capabilities of an organization or a combination of the team’s individual skills as well as the systems, reporting structure, and shared values. We have focused in building the skills in two primary ways. First we have installed scalable systems to gain economies with scale from growth. These systems facilitate tight cost controls, provide effective management of increasing complexity from growth, result in lower G&A as a percent of sales.

Some examples include, the new labor management system, the food recipe management system, an upgraded accounting system, an automated lease-management system, new website with online ordering, Buckston’s Real Estate Model, corporate governance, risk management and compliance system. Later this year we will complete the outsourcing of our payroll system. While these systems have required both operating and capital expenses, we believe they will provide a very attractive pay off for the shareholders.

Secondly, I am a strong believer that you can’t make a company better than the senior team. Therefore, we have recruited a strong leader in each function and we have high-graded the organization, both at the corporate headquarters and in the field. We reduced staffing where productivity gains could be achieved. We have a very experienced team whose experience includes working at Taco Bell, Banero, Chipolte, Frito Lay, Shell, Merrill Lynch, and McKenzie. I believe the team is quite capable of executing the growth strategy we have established.

In summary, we believe Rubio’s has a bright future. We believe we have developed a winning strategy. Where we have a prime location in an upscale trade area we have very attractive store economics. We have assembled a capable team and we have made adjustments to address the weak economy. Further, we are well positioned to benefit from an upturn in the economy.

We are now ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ian Corydon with B. Riley & Company.

Ian Corydon - B. Riley & Company

I just have a couple of questions. The workers’ comp adjustment in the quarter, could you just talk about how many dollars that was or basically what that represented.

Frank E. Henigman

It was $200,000 and it was represented about four-tenths in cost.

Ian Corydon - B. Riley & Company

And on advertising, I think you mentioned that lower advertising in San Diego hurt sales but that your overall advertising costs for the quarter were up. Could you just clarify and then talk about what the advertising plan is for the rest of the year?

Daniel E. Pittard

We wanted to test and see if we could keep the same sales level with lower rates in San Diego and that didn’t work out. But we’ve invested in advertising in other parts of the other geographic areas that we operate in. For the balance of the year, we’re going to keep the advertising strong in San Diego and so we will stay at about the same percentage that we’ve been running for the balance of the year.

Ian Corydon - B. Riley & Company

And what was the magnitude of the July 15th price increase?

Daniel E. Pittard

It depends on the mix. What we tried to do was move prices on items that were unique and not move prices much on items that were not so unique. And so our price increase was around 4%. If you figure in the mix, depending on what the mix, they could go as high as 8%. And we are getting arousing response from our Grilled Gourmet Tacos and new items and they are running a high percentage of the mix. So that is moving check up quite a bit.

Ian Corydon - B. Riley & Company

And just to clarify, since July 15th your comp is up +1.2% and did you say transactions were up slightly as well?

Frank E. Henigman

The transactions decline has lessened a little bit. We didn’t see a further decline in transactions, we saw a slight improvement, although we still are in -5% territory on transactions. And you know, 1.2% positive since July 15th overall comps.

Operator

Your next question comes from Tony Brenner with Roth Capital Partners.

Anton Brenner – Roth Capital Partners

A couple of questions. Is there a difference, a significant disparity, in sales trends in the distressed areas, Sacramento and the Inland Empire in Phoenix, versus other broad market areas?

Daniel E. Pittard

Yes, there is. And it’s even down to three areas. I was trying to illustrate that. You can actually be in one of the metro areas that overall has been hit hard by sub-prime but there are trade areas that haven’t been affected very much by the sub-prime. It tends to be trade areas hit the hardest are the ones where there were new homes built and purchased over the last three years are hit the hardest. Because apparently almost those loans were sub-prime loans. And you have very high forfeiture or foreclosure rates in those communities.

Anton Brenner – Roth Capital Partners

If you took all of those communities away, would same store sales still be slightly negative?

Frank E. Henigman

They would.

Daniel E. Pittard

They would, so far. If you took them away since the July 15th, I would have to go back and check that but my guess is you would be pretty close to positive with that group.

Anton Brenner – Roth Capital Partners

Those new Grilled Gourmet Tacos are really good.

Daniel E. Pittard

Thank you. What we are most excited about is we are seeing a lot of repeat business. People have got to have them again.

Anton Brenner – Roth Capital Partners

With respect to new store expansion in 2009, what now then is a good number?

Daniel E. Pittard

I knew you were going to ask this question and I wish I could give you a firm answer, but if the economy stays like it is now, in other words, we don’t have another major shoe drop, a major financial institution failure that rattles the economy, then I think we will be in the 20-30 range. If we have more severe problems then we will be at the lower end of the range. We do have, lined up, 8-10 units to open in the first quarter, but we’re going to keep our powder dry for another month or two before we lock in all those, to give as much visibility as we can to what is going to happen, primarily with the financial sector and its impact on housing.

Anton Brenner – Roth Capital Partners

In addition to that are you seeing any problems with respect to the construction of new shopping centers and malls which would relate to the availability or the desirability in case they can’t fill up with attractive tenants as you shop for new properties?

Daniel E. Pittard

Well, starting last fall, and then with increasing pace, we have stopped looking at any new green site. The only things we are looking at are in redevelopment in mature markets or taking over space that had been occupied typically by another type of retailer. An example would be, we are negotiating on a space in Menlo Park on El Camino Real and previously it had been a Blockbuster. And the building has been torn down and they’re rebuilding it and we’re in line to get the space where a Blockbuster had been.

Anton Brenner – Roth Capital Partners

So most of the 20-30 would be conversions?

Daniel E. Pittard

Yes.

Operator

Your next question comes from Joe Altman with Kelly Capital.

Joe Altman – Kelly Capital

I did notice the sales increase, cost of labor, cost of sales, but the line item that grew at the fastest clip was the G&A and it looks like you’re still spending about $18.0 million a year on G&A. Can you break down that figure so we get a better feel of what components comprised that $18.0 million and what specifically is causing that number to increase?

Daniel E. Pittard

Let me respond to the increase. The increase is directly related to bringing on two senior executives at the end of last year and the cost of their coming on board, their stock options and their relocation package. And that’s what bumped up the spending from, particularly the end of last year, but from last year.

Frank E. Henigman

But the lion’s share of the $18.0 million, $1.3 million of it is going to be roughly non-cash share-based comp. The lion’s share of it is head-count related. Without going into specific numbers for every line item, legal takes up in the neighborhood of $1.0 million, travel and entertainment is about $0.5 million. Outside services, such as our auditors, our SEC counsel, other costs being public recorder, are in the range of about $1.5 million. Those are the big items.

Joe Altman – Kelly Capital

And I’m assuming all those numbers are annual, correct?

Frank E. Henigman

Yes.

Joe Altman – Kelly Capital

So the non-cash share-based comp is about a little over $1.0 million, the legal is $1.0 million, $1.5 million for being public, that gets you to about $5.0 million of the $18.0 million. How much of it is head-count related outside of an actual Rubio’s unit location?

Frank E. Henigman

Field management is going to run approximately $3.0 million of that, if that’s what you’re asking. So of the 80 or so head count that we have in our G&A, roughly two dozen of them are field management and that’s about $3.0 million. $3.0 million-$3.5 million.

Joe Altman – Kelly Capital

Did the company tap its new credit facility?

Frank E. Henigman

No we didn’t. All we did was we had a letter of credit with Bank of America for $3.0 million that was cash collateralized. We replaced that with a letter of credit under the new credit facility that doesn’t require collateral. So we freed up $3.0 million cash. And used $3.0 million in capacity on the $20.0 million line. So in a sense we did tap the line but we don’t have any funded debt, if you will.

Operator

Your next question comes from John Pinto with Brightleaf Capital.

John Pinto – Brightleaf Capital

Can you do the calculation for me in terms of what type of comps, it sounds like you should be able to leverage labor on a negative comp. What type of number are we looking at for the rest of this year? Or am I off on thinking of it that way?

Frank E. Henigman

For labor as a percent of sales?

John Pinto – Brightleaf Capital

Yes.

Frank E. Henigman

It really depends on how we comp so it’s hard to say.

John Pinto – Brightleaf Capital

Were any of the efficiencies or cuts you made within the four walls, on the labor side?

Daniel E. Pittard

The new model has much tighter labor allocations and we worked, actually, to help our general managers make sure they do the optimum schedule for their respective restaurants. So it’s more across the board tightening on that relative to their volume and mix, the types of items that they are making that we tightened up that’s left an improvement as opposed to one specific thing that we did across all restaurants.

John Pinto – Brightleaf Capital

I guess what I’m trying to understand is in terms of, are the labor efficiencies within the four walls such that before we take into account what you’ve done in corporate or the field, that you can lever labor at a flat comp or a negative comp?

Frank E. Henigman

I think we can at a flat comp. The key change in labor management system, there were a number of them that were more subtle, but the key change was that the stores don’t get allocated hours for an increase in check. Under the old system they actually did because there was sort of a built in algorithm that some of the check came from mix. To the extent that you have a pure price increase that’s not mix-shift related, you’re not going to get any more hours. What we’re seeing is a combination of mix-shift and price increase, so we probably will see the stores get some more hours, but if the 4% pure price holds that would be leveragable, entirely.

John Pinto – Brightleaf Capital

We had talked about it, other retailers have moved to allocating hours on units or transactions instead of price, instead of dollars. And so I guess if that’s the case, somewhere in that mix flat you should be able to comp and then obviously whatever you’ve done in corporate and field will then also flow through for the rest of the year.

Going back into a growth mode, are there any other additional SG&A savings we just haven’t seen yet because they are phased in over time, or basically have we seen everything we’re going to get now and we can model it going forward. But are there any things that are going to have a latent effect?

Daniel E. Pittard

John, did you hear Franks’ comments on, we will have an adjustment on what we have to charge for long-term incentive plan. And, frankly, it’s a forfeiture rate that’s in the calculation. And if I’m here whenever my anniversary comes up, the forfeiture rate goes down and so the charge goes up, and that’s the mathematical calculation we have to live with.

Frank E. Henigman

It’s a FAS 123-R accounting result.

Daniel E. Pittard

We looked at every way possible to avoid that. So that’s going to hit in the third quarter but in the fourth quarter you should see we get the real benefits of the G&A changes we made.

Frank E. Henigman

And my hopes are that we will be in the lower end of the ranges that I provided.

Operator

There are no further questions in queue.

Daniel E. Pittard

Thanks everyone for listening. I hope you share our enthusiasm for Rubio’s. We are trying to balance the recognition we’re in one of the toughest times in decades and find a way through it and find a way through it to be profitable and be really well positioned for an up turn in the economy. So we look forward to talking to you on the next call.

Operator

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

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Source: Rubio’s Restaurants, Inc. Q2 2008 Earnings Call Transcript
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