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Ruth's Hospitality Group Inc (NASDAQ:RUTH)
Q1 2020 Earnings Call
May 8, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Ruth's Hospitality Group 2020 First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Arne Haak, Chief Financial Officer. Please go ahead, sir.

Arne G. Haak -- Executive Vice President and Chief Financial Officer

Thank you, Kevin, and good morning, everyone. Joining me today on the call is Cheryl Henry, our President and Chief Executive Officer. It's been a busy couple of months for everyone at Ruth's, and we're both glad to be able to spend some time with you this morning and share more about our business and its performance during this unprecedented time. Before we begin today, I'd like to first remind you that part of our discussion today will include forward-looking statements. These statements are not guarantees of our future performance, and therefore, undue reliance should not be placed upon them. We would also encourage you to refer to the Investor Relations section of our website at rhgi.com as well as the SEC's website at sec.gov. for copies of today's earnings press release and our recent filings with the SEC for a more detailed discussion of the risks that could impact our future operating and financial results. For those of you interested in our 10-Q filing, we expect this document to be filed later today.

During this call, we will also refer to adjusted earnings per share. This non-GAAP measurement was calculated by excluding certain items. We believe that this measure represents a useful internal measure of performance. You can find a reconciliation of adjusted earnings per share in our press release for today's call.

I would now like to turn the call over to the company's Chief Executive Officer, Cheryl Henry.

Cheryl Janet Henry -- President and Chief Executive Officer, Director

Thank you, Arne. Good morning, and thank you for joining us. We appreciate the time today and hope that everyone is staying safe and healthy as we continue to face this evolving crisis together. The past two months have been extraordinary. And while many words have been used to describe the pandemic and its effects, there's truly no way to capture the enormity of it. As we face the future, we build upon the dedication and resiliency of our team members, our franchise partners and our communities, which have been the foundation of our brand for 55 years. We have already seen this resiliency as we fortified our balance sheet; quickly transformed our business; and importantly, cared for our people.

In just two days, our teams transitioned from the experienced relationship-based dining room business we're known for to takeout and delivery in more than 2/3 of our company locations. This was an exceptional effort by an exceptional team, and I'm pleased to report that takeout and delivery sales have grown from the low single-digit percentage of prior year sales to over 16% of prior year sales in April. One reason we were able to pivot so quickly was an initiative we announced earlier in the year that we call Ruth's Anywhere. While originally intended to be an initiative to add customer convenience and expand Ruth's experience outside our main dining room, it has now evolved to include third-party delivery partners like Caviar, Postmates, Grubhub and Uber Eats. We have also launched online ordering and payment for company restaurants, streamlined menu choices and refined to-go packaging to be able to provide quality and reheating capabilities for delivering the sizzle at home.

Today, 56 of our 86 company-owned and managed restaurants are currently operating in takeout and/or delivery mode. On the franchise side of the business, 28 locations are open for takeout and delivery; 31 are closed; and in 14 locations, the dining rooms are open. As we transitioned from in-restaurant fine dining to take out and delivery, we also took necessary steps to solidify our balance sheet and reduce our cash burn. We drew down our entire credit facility, like many others in the industry, and suspended share repurchases as well as our quarterly cash dividend. We also paused all new restaurant construction and nonessential capital expenditures. We made the difficult decision to furlough a number of our team members and reduce salaries for all non-furloughed team members. An exception is our remaining teams in the restaurants, where we have maintained full salaries to support them during this time.

In addition, our entire executive team and Board of Directors have also either eliminated or significantly reduced their compensation. As a result of these combined efforts, our current cash burn rate for the remainder of the second quarter is expected to be approximately $2.4 million per week. With the initial phase essentially complete, we are now focused on the state-by-state reopening of our dining rooms. This is not a uniform process, so we are monitoring the situation closely. As of today, we are preparing to open 12 company-owned locations in mid-May, including restaurants in Florida, Tennessee and Texas, where restrictions have been lifted. The remainder will come in waves as restrictions are eased in other jurisdictions. What I can tell you is that our teams have done a tremendous amount of work to prepare for this moment. We are moving forward knowing that the safety of our team members and guests is paramount. This includes health and wellness protocols for all employees, including temperature checks, masks and other safety enhancements. And while keeping the experience and atmosphere as close to what our guests have grown to love, we have enhanced our already robust sanitation and food safety standards and have added several options to ensure our guests feel comfortable during their dining experience.

For example, our dinner and line menus are available via a QR code for access on personal devices. We are offering new additional side options in addition to shareables, and we're offering opportunities for private feeding for small groups to experience menus such as our TasteMaker wine dinner until we can launch the program systemwide again. For our guests who prefer to have Ruth's at home, our online ordering, payment and curbside pickups will continue as it allows for a convenient and minimal contact experience. Our teams' service approach will also change. We will limit the number of people providing our renowned service to each table and certify them and enhance safety procedures. They are all excited to get back to work and serve our guests safely with the hospitality they have perfected over decades.

Finally, before I turn the call over to Arne, I want to express my extreme gratitude to the incredible group of team members and franchise partners with whom I have the privilege of serving. We have been in contact weekly with our franchise partners to ensure we are providing the support they need and to create a forum where we can learn from each other as we maintain takeout and delivery and ultimately transition back to our traditional dining room service. Our institutional knowledge will continue to build as we reopen, assess what works and what doesn't and get better with each guest experience across each jurisdiction. I'm pleased to say they are committed and determined to ensure we take the right steps to welcome our guests back as quickly and safely as possible. As many of you might know, I've worked with this company, this brand, our team members and franchisees for 13 years. Our team members are our number one asset, and I'm proud that we've been able to support them by covering the costs related to healthcare premiums and benefits during this time. I'm also proud of the support provided through the Ruth's fund, a fund that was established years ago and funded by our company and our team members themselves to help each other in crisis. We have been able to support more than 300 team members with grants to help sustain their families and emergency needs.

Lastly, I want to recognize both our company and franchise team members for their continued efforts in supporting their communities throughout this pandemic. Over the past few weeks, they have provided lunches for first responders and healthcare workers in Baltimore County, fed workers at the North Hudson County, New Jersey testing site and donated time preparing and handing out food for those who have followed on difficult times in Bonita Spring, Florida. These and other acts of kindness and generosity across the country are what inspire us every day.

With that, I would like to turn the call over to Arne.

Arne G. Haak -- Executive Vice President and Chief Financial Officer

Thank you, Cheryl. We were fortunate to enter the COVID-19 crisis in a solid financial position, including our balance sheet and operational foundation. Our pre-COVID-19 results for the first quarter were off to a solid start with comparable restaurant sales at company-owned restaurants up 2.2% year-over-year for the first two periods, with solid restaurant-level margins in the mid-20s. This was in line with our expectations around beef and labor inflation. Obviously, the impact of the COVID-19 virus dramatically affected March, with comparable sales down over 50% at company-owned restaurants with negative restaurant-level margins. This overall weakness accelerated in April as sales quarter-to-date are down 83.5% year-over-year in company-owned comparable restaurants that are open for business.

While we are encouraged to see takeout and delivery grow to nearly 20,000 per week per restaurant, these types of sale levels are not sustainable in the long term. Significantly reduced sales levels and uncertainty regarding the pace of economic recovery also impacted our evaluation of future restaurant-level cash flows. And as a result, we recorded $8.7 million in impairment charges for restaurant assets as well as for territory development rights at the end of the first quarter. And while we have worked to build our cash reserves, we've also moved to reduce our cash outflows where possible.

In addition to the actions Cheryl mentioned earlier, we are also conducting a thorough review of our fixed costs, including rent expense at all of our restaurant locations. We've been in regular contact with all our landlords about abatements and lease modifications, and we expect that they will partner with us during this difficult time. That said, we may have to close up to 10 company-owned locations if we are unable to recalibrate our operating and occupancy costs. Cheryl also mentioned an expected weekly cash burn rate for the remainder of the quarter of roughly $2.4 million. I wanted to add some further detail that this includes reopening costs, onetime COVID-19 expenses and partial rent. If our dining rooms are unable to reopen, we estimate that our average weekly cash burn would be less than $2 million per week. To add a bit more color to our liquidity discussion, in addition to drawing down the remaining availability on our $120 million credit facility, we also exercised the accordion feature, which added an additional $30 million to our cash balance. In the past week, we have also secured an amendment to our credit facility that waives our financial covenants through the fourth quarter, further relaxes our leverage covenant restrictions through the remainder of 2021 and adds a monthly liquidity covenant. An important component of this amendment is that our leverage and fixed charge covenant measures in 2021 will be based on annualized 2021 results and not include our 2020 performance.

As a result of these activities, we had $70.8 million in cash at the end of the first quarter. And as of May 4, we had approximately $62.5 million of cash on hand. So while we are pleased with our liquidity position and cash management efforts, we continue to engage in discussions with various parties to explore financing alternatives to further strengthen the company. Later today, we plan to file our 10-Q. And in addition, we will file a shelf registration statement for up to $75 million. This will permit us to access the capital markets and further enhance our finances in an uncertain environment.

With that, I'd now like to turn the call back to Kevin for any questions that you may have.

Questions and Answers:

Operator

[Operator Instructions] Our first question today is coming from Andy Barish from Jefferies. Your line is now live.

Andy Barish -- Jefferies -- Analyst

Yeah, good morning guys, Hope you're all well. Quick question on the you mentioned the negative 50%. Just trying to kind of rightsize on where you breakeven at the unit level in terms of either same-store sales or average unit volumes, Arne.

Arne G. Haak -- Executive Vice President and Chief Financial Officer

Sure, Andy. It's still dynamic, and I think we're certainly transitioning our business to and every week trying to get a little bit better at how we manage our operating cash flow. But at the unit level, if you think about restaurant-level margin, you probably need to be somewhere north of 40% of last year's sales. And in terms of cash burn at the enterprise level, so when you include G&A and marketing, you probably need to be somewhere north of 50% of last year's sales. Does that help?

Andy Barish -- Jefferies -- Analyst

Yes, very helpful. And can you give us a quick sense, although probably not so quick on supply chain and the beef markets and, obviously, everything going on there, where you see that playing out?

Cheryl Janet Henry -- President and Chief Executive Officer, Director

Yes. I think Arne's spent a good time this week on looking at that, Andy. And obviously, you're seeing the things that we're seeing. The good news is, right now, we're not having issues as we reopen these restaurants. We'll let Arne go into a little bit more detail as we look to the next few months.

Arne G. Haak -- Executive Vice President and Chief Financial Officer

Andy, right now, the kind of bottleneck on beef supply is really at the harvest facilities. And from the data we've seen so far, it's like 30% to 40% down from where they normally are and until it gets back by about 90%. So it gets from that 60%, 70% up to 90%, you're going to see some volatility here in supply. This isn't just unique for us. I think it's all proteins, as you see it. It's not just beef, it's chicken, it's pork. And so we're seeing a lot of volatility. If I give you an example of raw product costs on fillets, we normally run kind of $9, between $9 mid-$9 to $10 a pound raw product. We've seen as low as $5 in some weeks early on in this crisis and to more than $10. So we continue to monitor it. We have some contingency plans in place to help manage it. But so far, as Cheryl said, we're glad we haven't seen any disruptions yet.

Cheryl Janet Henry -- President and Chief Executive Officer, Director

And to the grading, just give him a little update on grading.

Arne G. Haak -- Executive Vice President and Chief Financial Officer

Yes, I guess, one more point Cheryl's mentioning on the grading. As channel backup and feedlots, typically, tends to help the grading, and we've seen that so far. We're running the gradings running up close to 10% right now, and so that could help a little bit more on supply as well. So far, so good, and we'll keep our eyes on it.

Andy Barish -- Jefferies -- Analyst

Thanks guys.

Arne G. Haak -- Executive Vice President and Chief Financial Officer

Be well thanks, Andy.

Cheryl Janet Henry -- President and Chief Executive Officer, Director

Thank you.

Operator

Our next question today is coming from Nicole Miller from Piper Sandler. your line is now live.

Nicole Miller -- Piper Sandler -- Analyst

Thank you. Good morning. In the stores that you have been reopening the dining rooms, that is, in those locations, what kind of capacity is mandated that you're returning to? And then as guests come in, what how much of that capacity is being utilized?

Cheryl Janet Henry -- President and Chief Executive Officer, Director

Yes. Thanks, Nicole, for the question. By the way, I thought of you when I talked about all the delivery we have now. So right now, the restaurants that are open are in franchise locations. And as we expected, and I think other companies are probably seeing, the demand is different by market and so is the capacity restrictions by jurisdiction. So some of them have 25%, some are at 50%. I spoke with one of our franchisees last night. Last night was his first night opening, and he had already reached capacity at 50% and expects to be there for the next three nights. So again, I think it's really specific to the type of market, conventions and those types of markets that are very business heavy travels may scale slower. And I think we believe some of the suburban markets may move a bit faster to reach capacity. So we're looking at it on a market-by-market basis. And our first group on the company side will open next Friday.

Arne G. Haak -- Executive Vice President and Chief Financial Officer

Nicole, one more thing to add. One of the things that actually kind of helps us a little bit against this capacity constraint is the seasonality of the business. We're coming into kind of our slowest quarter here in the third quarter. If you look at average weekly sales, we're probably 20% lower than like the fourth quarter when we are we do face some capacity restraints. So that should help us a little bit, and we'd like to have the problem of having so much demand that we can't manage the capacity.

Cheryl Janet Henry -- President and Chief Executive Officer, Director

Yes. And as we think about kind of day of week on that as well in some of these markets where we might hit up against capacity, I give the team a great deal of credit for being entrepreneurial and creative in thinking about things like outdoor dining rooms in markets where we have an opportunity to potentially build and experience outside as well as partnering when we're in hotel locations or other locations that have extra space. And so those are all under review as we open market by market to give us some added capacity for those nights where we may need it.

Nicole Miller -- Piper Sandler -- Analyst

Excellent. And then I was thinking about the service comment, Cheryl, earlier, and it is going to be different. And we've been hearing a lot of things about "I would have the menu on my own device or check out on my own device." And maybe you could share the tactics there. But also the strategy just behind then, your service team is going to become more brand ambassadors than not that they were ever pure execution to begin with. But can you share a little bit more about what it looks like to be a brand ambassador in the future?

Cheryl Janet Henry -- President and Chief Executive Officer, Director

Sure. We've always we have amazing teams in the restaurants that have delivered hospitality for decades. The tenure of the team is amazing. And I think this really calls on them to be best at what they do best. And that is really understanding what's making the guests comfortable and enhancing the experience. So there's no question, you're going to have some of those additional sanitations in between table trends, etc. But really where we're calling upon our team is to understand how to make the guest comfortable through this through all these enhanced procedures. So when there aren't restrictions on tables on where people can sit as well as checking into the restaurant, for example, we are able to be mobile and go outside and greet guests so that they might feel more comfortable. And often, we talk about kind of how many people are touching each table or greeting each guest at the table and delivering different levels of service. We've really streamlined that until we get to a point where guests are feeling more comfortable, understand the experience and the changes. So we're really calling on our teams to read we talk about reading the guests, reading the experience they want and being able to deliver that personalized experience to them.

Nicole Miller -- Piper Sandler -- Analyst

Thank you very much.

Cheryl Janet Henry -- President and Chief Executive Officer, Director

Invest of luck. Thank you.

Operator

[Operator Instructions] Our next question is coming from Brian Vaccaro from Raymond James. your line is now live.

Brian Vaccaro -- Raymond James -- Analyst

Thanks and good morning and I hope everyone's well. I wanted to ask about the recent sales trends, if I could, and April down to the 80s. Could you give some perspective on just how that's trended through the quarter? Maybe what the last week or two look like? And also a little more color on how the third-party delivery channel is building for you?

Cheryl Janet Henry -- President and Chief Executive Officer, Director

Sure. I'll start, and then, Arne, if you want to add in. So I think our biggest drop and not surprising, you've seen it from many different companies that, that happened really in mid-March, and that was a very sharp drop as we were closing stores and transitioning to off-premise only. And then really from late March, I'd say, through April, the trends have been fairly steady. We had a big push around Easter, which is not surprising. A lot of folks spend their holidays and special occasions with us. So that was a good indicator to see that people were still willing to make that investment in those special occasions. The last couple of weeks, I'd say, I think it's actually probably looking forward to the next couple of weeks as more dining rooms open up in each market. We may start to see some trends back to dining room visitation versus off-premise, but I will also say that I think in certain markets, the off-premise may stay fairly strong for a while.

Brian Vaccaro -- Raymond James -- Analyst

Okay, great. And back to the reopening, I understand it will come in ways. But based on what's been announced by states and different localities, what's a reasonable expectation as to how many company and franchised units in the U.S. might be able to reopen, say, by the end of the second quarter?

Cheryl Janet Henry -- President and Chief Executive Officer, Director

Yes. It is difficult, Brian. I think even we saw that a state will open and then a municipality will extend and not allow to reopen. So it's very difficult to guess at this time. As we look at I'll give you the next couple of weeks, and I probably won't be able to go beyond that. I would say anywhere from 20 to 30 on the company side. Again, it's Mississippi opened, but Biloxi has delayed further. So we continue to monitor those. We'll open when we get the notification. The ops team and the HR team have done a fantastic job staying in touch with our people, having supply ready and being able to move fairly quickly.

Arne G. Haak -- Executive Vice President and Chief Financial Officer

Brian, from a state or geography perspective, if you think about it, our largest concentration is California. So that's one that we want to stay attuned to. And that appears to be coming in phases as well. And Florida is number two. Hawaii is probably number three, and that one is probably one of the slower ones. And then the last big concentration of real estate for us is probably like the Mid-Atlantic and the New York, New Jersey area. So I think we think about those different regions and think about how they're coming online. And actually, a phased roll in is actually helpful as opposed to trying to open 80% of the system within a couple of weeks.

Brian Vaccaro -- Raymond James -- Analyst

Yes. Yes. That makes sense. On the weekly burn rate, if I can just ask quickly on that. What just wanted to ask on rent and G&A. Arne, can you give an update on rent? Did you pay rent in March and April? Or what percent of rent is being paid and is sort of embedded in that burn rate? And also what's the weekly G&A run rate? I know you tend to make some difficult decisions throughout the organization like a lot of other companies have, but what does the weekly G&A burn rate look like today?

Arne G. Haak -- Executive Vice President and Chief Financial Officer

Sure. I'll start with rent. April is a partial rent. There's some partial rent payments, but for the most part, we've held those payments as we have discussions with our landlords. And in terms of G&A, I don't have the whole basket in front of me. But in terms of the biggest bucket of it is around people. And we've with the furloughs and the pay cuts, we're down to under a couple hundred thousand dollars a week right now in G&A on that front.

Brian Vaccaro -- Raymond James -- Analyst

Okay, great. Thank you,

Arne G. Haak -- Executive Vice President and Chief Financial Officer

Has gone OK, thanks.

Operator

Thank you. We've reached end of our question-and-answer session. I'd now like to turn the floor back over to management for any further or closing comments.

Cheryl Janet Henry -- President and Chief Executive Officer, Director

Again, thank you all for joining us this morning on the call. As you can imagine, our brand has lived through many challenges over 55 years, and we've always endured on the strength of our people. We were well positioned coming into this crisis, and I'm confident that together, we can emerge on the other side even stronger as a brand and more connected to our customers. I look forward to speaking with you all again soon. Stay safe. Thank you.

Operator

[Operator Closing Remarks].

Duration: 26 minutes

Call participants:

Arne G. Haak -- Executive Vice President and Chief Financial Officer

Cheryl Janet Henry -- President and Chief Executive Officer, Director

Andy Barish -- Jefferies -- Analyst

Nicole Miller -- Piper Sandler -- Analyst

Brian Vaccaro -- Raymond James -- Analyst

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