Good morning, everyone, and welcome to the Red Robin Gourmet Burgers, Inc., Second Quarter 2019 Earnings Call.Please note that today's call is being recorded. During the course of this conference call, management may make forward-looking statements about the Company's business outlook and expectations. These forward-looking statements and all other statements that are not historical facts reflect management's beliefs and predictions as of today, and therefore, are subject to risks and uncertainties as described in the safe harbor discussion found in the Company's SEC filings.During the call, the Company will also discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles, but are intended to illustrate an alternative measure of the Company's operating performance that may be useful. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in the earnings release. The Company has posted its fiscal second quarter 2019 earnings release and supplemental financial information related to the results on its website at www.redrobin.com in the Investors Section.Now, I would like to turn the call over to Red Robin's Interim CEO, Pattye Moore. You may begin, Ms. Moore.

Good morning and thank you for joining us. With me this morning are Lynn Schweinfurth, our Chief Financial Officer; and Guy Constant, our Chief Operations Officer; Jonathan Muhtar, our Chief Concept Officer, is also with us to help answer questions you may have during our call today.Before we begin our review of Red Robin's second quarter results, I wanted to comment on our recent Board refresh. We recently named three casual dining veterans to our Board of Directors. I'm really pleased to welcome Tom Conforti, an accomplished retail executive who was most recently CFO for Wyndham Worldwide. Previously, Tom was CFO at Dine Brands, where he led the acquisition of Applebee's and the change in IHOP's franchising model. He also has held leadership positions at the Walt Disney Company.G.J. Hart is a seasoned food and beverage executive with more than three decades in the industry and is currently CEO of Torchy's Tacos. He previously led California Pizza Kitchen's turnaround as the brand CEO, and prior to that was President of Texas Roadhouse.And David Pace, who also has more than 30 years of leadership experience in food, beverage, retail and consumer products. Most recently, he was CEO of Jamba Juice and previously held leadership positions at Bloomin' Brands, Starbucks and YUM! Brands.These talented industry leaders bring to Red Robin deep restaurant and retail expertise and strong track records working with public companies, enhancing shareholder value. We are excited and proud to have them on the Red Robin team.Now, turning to our second quarter performance. As you know, we announced that Q2 had the best same-store sales performance in the past five quarters with sequential improvement from Q1. We are gaining traction on our turnaround efforts and we are seeing very encouraging signs of that momentum accelerating in early Q3.In addition, our…

Thank you, Pattye and good morning everyone. As Pattye mentioned our first and foremost priority is stabilizing and strengthening the dine-in business. In order to do so, we are focused on four key areas for operations that we communicate consistently and measure religiously. First is hire, training and retainment. As we discussed last quarter improving the dine-in guest experience starts with hiring the right people, training them properly and being fully staffed, particularly at the General Manager level. Our operations leadership and HR teams have made real progress against these objectives.At the outset of 2019, we were short over 100 managers across our system. At the end of the second quarter, our manager staffing level was 99.4%. We were short approximately 30 managers and our manager turnover numbers continue to improve and are approaching best in class levels. With stable and more fully staffed management teams comes a better experience for our team numbers and this has been apparent in the progress we've made in our hourly turnover numbers, which have improved throughout 2019. This is in sharp contrast to the continued deterioration in industry turnover and staffing metrics. Our hourly turnover numbers ended the second quarter better than casual dining industry averages and have continued to improve into the third quarter. These important leading indicators are critical to building the engagement of our team members, a key component of any sustained improvement in operational execution.Next is manager front-of-house engagement. We know we can improve the overall guest experience, deliver better wait times, reduce walkaways, improve our cleanliness and effectively identify and resolve potential problems by establishing a better presence over our managers on the dining room floor and by having managers at the host end during peak hours. This focus has begun to deliver results. Overall guest satisfaction which…

Great, thank you, Guy and good morning everyone. While there is still more to achieve, we are encouraged by our improving guest and operations metrics and the improving trajectory we are seeing in our comp store sales trends. Comparable restaurant revenues declined 1.5%, an improvement from the first quarter down 3.3%. The Q2 decline was driven by 6.4% decline in guest traffic, partially offset by a 4.9% increase in average check. Overall, net pricing after taking into account discounting was 2.6% while the 2.3% mix increase was driven by lower Tavern mix and higher Entrées and Finest mix.In Q2 we deliberately moved away from promoting five Tavern burgers at 6.99 and instead featured our higher margin gourmet line through our Burger Master series. This program had the added benefit of showcasing the talent of real cooks from our restaurants. We believe this shift negatively impacted our traffic in the short-term but positively impacted our mix and gross margins.Turning to our quarterly results. Q2 total company revenue decreased 2.3% to $308 million, down $7.4 million from a year ago. Dine-in sales were down 4.3%, partially offset by off premise traffic. Traffic at enclosed mall locations now representing 66 restaurants in our system as a result of closing seven mall locations in Q2 continue to perform worse than the balance of our company owned locations by approximately 300 basis points. That been said, our AUV for enclosed mall locations currently sits at $3 million, slightly higher than non-mall locations. However, these locations are less profitable with margins that are 500 basis points worse than non-mall locations, primarily due to higher occupancy cost.On a positive note, off premise growth continues to be meaningful and rose 25.7% in Q2 and now represents 12.5% of total food and beverage sales. Q2 restaurant level operating margin…

Thank you, Lynn. I'd like to close by saying what a privilege it is to work with the Red Robin team members in our restaurants and home office. I am so proud of their significant efforts, their collaboration and their perseverance in turning around the business. And as I said earlier, I am very encouraged by the improvements that we are seeing across the board in the business.Before we begin our Q&A, I want to note that the purpose of today's call is to discuss our Q2 operational and financial results. And we ask that you focus questions on these topics. And now we would be happy to take any questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question today is from the line of Gregory Francfort with Bank of America. Please proceed with your question.

I just had two questions. One, on the comments on the start to the third quarter, can you tell us what that was going up against and kind of what the comparison is as you move through the quarter? And then the other question I had is just on the mix in the quarter. And I guess most of that was probably driven by the lower kind of value focus. And do you expect the mix to stay at the 230 basis points going forward or should we expect that to kind of temper as you move through the year? Thank you.

Well, we are lapping a softer period of last year in the third quarter. So we are seeing the benefits of that comparison. But we also are seeing momentum, we believe combining both the operations execution and our new marketing campaign. The PPA increase we've seen is a result of the change in the promotional strategy and we do anticipate a continuation of the positive effect on PPA as we move forward through the quarter.

And then maybe just on the manager staffing levels, can you just go into a little bit more detail on what happened in terms of why that slipped and then what you've done to kind of build that back up recently?

Well, there's nothing really fancy about what we're doing Greg, it's just focusing on making sure that we put the right people in place and stop the churn and moving people around. We've found as would be the case with most casual diners, that the highest correlated factor to good performance in a restaurant is the tenure of the General Manager in that restaurant. And so a big focus for us not only just to get staffed but also to reduce the amount of churn that we have within our restaurants.

Our next question is from the line of Alex Slagle with Jefferies. Please proceed with your question.

Thank you. Good to see the improving trends in the business. Just another follow-up on that quarter-to-date improvement in same store sales that you've seen -- is that, I guess coming from a better sequential improvement in traffic or check and then also how much of that is related to the higher media spend year-over-year and then you've created do you think?

There's positive momentum in terms of guest traffic and we do believe that our new campaign is helping to garner this improvement in our comp store sales trajectory.

And then the Tavern double mix, have you mentioned the percentage of sales that is in the second quarter?

In the second quarter, Tavern was a little below 10% mix, which is down considerably versus prior quarters, which we had I think 16% to 17% mix last year. So it's come down considerably.

Okay. And if there are any other dynamics or metrics you could provide to us, just to give us an idea of how this value strategy and the discounting levels impacting traffic and how that's sort of offset by all the improved operational and guest experience levels you're seeing, just any metrics in terms of the magnitude of these factors?

Well what we like, Alex, about what we're seeing is, we believe that this uptick we're seeing or improvement that we're seeing is more sustainable and it's longer term in nature. You recall, in 2017, when we saw the improvement in traffic, a lot of that was with the specific price point, national media heavy focus on Tavern, which of course did attract traffic, but it comes at lower profitability levels, and perhaps attracts a little more deal chasers. What we feel like we have today is the partnership of all the departments, as Pattye mentioned earlier, focused on this longer term, stable operational metrics, a message that we have on air that we feel leans into exactly what makes Red Robin special. There's connection around the table, particularly for middle class household income families. That focus, we believe, is one that's more sustainable than trying to get on media with a call to action on a lower price point national message.

Got it. Thank you.

Thank you. Our next question is coming from the line of Will Slabaugh with Stephens. Please proceed with your questions.

Thank you. I wonder if you talk a little bit more about how you're thinking about your value platforms today. In the past we have talked a lot about the Tavern platform at $6.99 and it sounds like that's being deemphasized at least somewhat. And then more recently, you talked about the potential of a test at $10, so I wonder if you could give an update there? And then just at the same time most of your peers are kind of bundling meals around that $10 or slightly above price point. So I was wondering how you see Red Robin fitting into that landscape from a value platform standpoint?

Yes, absolutely. This is Jonathan. I can chime in on that. So, you know, kind of building off of Guy's comments, what we hear from our guests is that value really starts with great product and experience, and those are measured against the price paid, and we have an attractive positioning in the market. We are lower priced. Our average check is lower than our casual dining competitors and so as we improve the experience and the products that we're delivering to our guest, that we believe that is going to really pay off an increased value perception from our guests. At the same time, we get high marks for our bottomless promise. So we're leaning in there. This is something that we've had for over 20 years. But there's upside on awareness based on our research. But our guests that are aware of it love it. So we're leaning in harder there, featuring our bottomless promise with our new advertising campaign. And then finally, what I'd say is, our loyalty program continues to work really powerfully for us and we're just enhancing our capabilities there. And that's where we can go out with these segment offers to our guests as well. The $10 bundle on a local basis has done well for us. It performed well again in the second quarter. So we're looking at that on a selective basis for markets where we feel like it's a good fit, and to be specific there in terms of the market focus strategy, we're focusing now more on our markets where we have those high OSAT scores and we're delivering that great experience for our guests, so that we can really start to get that feedback loop with guest, that visitation, frequency where we're performing well and that's been a great incentive for our field as well. They upped their performance, they're getting more of that marketing support and we get that virtuous cycle going.

Got it. And then just a follow-up there, how we should be thinking about traffic, given the current strategy, obviously you gave up a little bit of more traffic than you had in the past as you sort of realigned some strategy this quarter around value. Should we think about traffic being in a similar range? And then obviously you're implying better results going forward to moving up commensurately. But I wonder if we should be expecting fairly soft traffic in the coming quarters as you sort of -- we see this strategy play out?

Yeah, I'll chime in there. I think we do expect traffic to still be a little bit soft in the third quarter, but we do also expect it to improve and as we get out to the fourth quarter, as you know, we had a discount messaging last year and so that did have an impact in the fourth quarter that we believe will impact our traffic. However, it will positively impact our PPA.

Okay, thank you.

Our next question is from the line of Peter Saleh with BTIG. Please proceed with your questions.

Great, thanks. Guy, I want to come back to the labor turnover commentary. Just give us a little bit more color on the hourly labor turnover. Where does that stand this quarter? And is just the first quarter that you've seen an improvement or it's been an ongoing trend more recently?

It's been an ongoing trend since really the end of 2018, Peter. So, we've steadily seen our trailing 13 period hourly turnover decline. We've seen it decline at the Manager and the General Manager level too. It's declined more quickly at the General Manager and Manager level because that's where we focused our attention first, because our view on that is that the hourly turnover follows, having lowered Manager and General Manager turnover, we can get stability at the lead positions in the restaurant, that will help us reduce hourly turnover. So, we're starting to see that gain even some more momentum now on the hourly turnover side. But as I mentioned on my comments, we're close to best in class levels on General Manager and Manager turnover. We're better than industry averages on hourly turnover, not as close to best-in-class levels, but we feel like we're on our way.

Great. And then any comments you guys can provide on the refranchising initiative that we've been talking about. It feels like for a couple of years now and I know that goes hand-in-hand with the search for a new CEO.

I'll just comment on it. We do continue to have discussions with interested parties, but as I've said in my opening remarks, we expect a new CEO to come in and work with the management team, review the Cypress report, and then develop a go-forward strategy.

Thank you. The next question is from the line of Chris O'Cull with Stifel. Please proceed with your questions.

Good morning. I don't know if this is for Guy or Lynn, but you know, the company has a history of shifting promotional strategies from value to premium back to value with the pendulum swinging between traffic and margins. So I guess my question is, why will this time be different or maybe what initiatives have you tested that really gives you confidence traffic can improve with less focus on the Tavern double value platform?

Hi, this is Jonathan. I'll jump in on that. So as we developed our new campaign, we spoke to consumers quite a bit, did ethnography research, spent a lot of time with our guests. And so our current strategy is really based on what we've heard from them. We do know, as we've shared, that our service experience had slipped over the past year or so. And they encouraged us to focus on that. That's what they love most about our brand. They love the great experience they have at Red Robin over great food and the connections that they make with each other. And so that kind of reminding them of what they know and love about Red Robin is very motivating to them and then the value stems from that experience, it stems from the great product. As I said, we do have a lower check point. The other thing I'd say about Tavern and the mix of our burgers, is that we feel like we have a good balance, we haven't abandoned it. As Lynn said, it's still about 9% of our mix. So we have that great Tavern for those who are looking for that lower price point, $6.99, $7.99, we have that available. We also have our Finest line available at those higher price points, and the bulk of our range is in that middle gourmet section of our menu. So, we're still offering a great value for our guests across our menu.

Okay. This is Pattye. Let me just add two things to that. One is, as Jonathan said, we do see opportunities in the local markets as they improve their operations and guest experiences to give them additional marketing to lean in, and then we believe our real opportunity is with our 8.5 million Royalty members to do targeted and specific offers to them based on the specific customer group. And that's our real opportunity to deliver an additional value message.

I apologize if I missed this, but did you say whether you expect selling expense to be up year over-year in the second half of the year or how should that look? I guess Lynn, in the back half of the year compared to the first?

Yes, I don't believe we said so, but I'm happy to answer the question. We are planning to be up year-over-year in the third quarter in terms of our media spend and the media spend is certainly helping to introduce our new campaign and helping to build the momentum we believe we'll see through the balance of the year. Media spend will be a little bit down year-over-year in the fourth quarter, but fairly comparable.

And then for the full year, would it be fairly comparable?

Yes for the full year, I think we're going to be down just a little bit year-over-year.

Great. Thank you.

Our next question is from the line of Stephen Anderson of Maxim Group. Please proceed with your question.

Good morning. And why don't you clarify some of the comments you made about potentially taking more of the delivery, taking that more in-house. Do you have in mind how many restaurants you would like to do that at? And what kind of capital improvements or any capital purchases you may like say like for extra delivery trucks you would need to make all this happen?

Well, actually, can you just repeat the question, please?

Yes, so why don't you clarify a comment you made about maybe taking some of the delivery, maybe taking more of that more in-house, because you mentioned about having more ownership of the data on customers that you may see to the third-party delivery providers. But wanted to ask what kind of CapEx requirements you would need to make that happen and in how many locations?

Well, we are currently testing the program. The capital allocation for that isn't a great amount. I think where we're spending more capital as we think about going into next year is really in the lobby of our restaurants and helping to facilitate -- allowing those delivery drivers to come in and efficiently pick up the meals with which they're delivering.

This is Pattye. Let me clarify. When we talk about last mile delivery, we're not talking about doing self-delivery with our own drivers. We're talking about contracting with a third-party, so that it is a seamless -- the customer goes to our website, they order from our website, they then get it delivered by one of the third parties. But we retain the customer data. We can get them in the Royalty program. And so it's something that other concepts are working on as well, and they call it last mile. So it's not self-delivery, but Red Robin controls most of the process.

Thank you.

[Operator Instructions] The next question comes from the line of Brian Vaccaro with Raymond James. Please proceed with your questions.

Thank you and good morning. Just wanted to circle back on the second quarter comps and some of the details there. So second quarter pricing, Lynn, what was gross versus net? How much pricing did you take in the quarter and what are your expectations on menu pricing specifically in the second half?

Okay. So menu pricing in the second quarter, I think we said was at 2.6% for the second quarter. And then we'll be lapping some pricing that we took in the prior year. We took 1% in P11 last year and so for the second half of the year, we'll be closer to about 1.8% in pricing. So that'll bring the year to about a little over 2% for the full year.

Okay, and you said the 2.6% was net, was gross, you know, 2.9% or 3% then given kind of historical discount impact on pricing?

Yes, the gross was 4.9%.

Gross was 4.9%. Okay. And circling back to quarter to date, you mentioned that the traffic has improved sequentially, but I think you also said there is an easier compare. I guess, so we're on the same page, would you be willing to provide traffic and trek within that down 10 basis points quarter to date? And if not, maybe comments on sort of what you're seeing from a two-year traffic perspective compared to where you were in Q2?

Yes, our Q3 traffic on a two-year basis is trending fairly similar. We did have a promotional item in the second quarter of last year. So that did further negatively impacted the second quarter results. But absent that effect, we are seeing a continuation in Q2. I did want to clarify, so on a net sales basis we've got pricing of 2.6% for the current quarter, and then our menu mix was 2.3%. So that was that 4.5% that I mentioned earlier.

Right, and I was asking purely about net versus gross just in pricing ex, but we can follow up offline. That's fine. Moving on, I guess to the server handheld rollout…

Brian, both net and gross are the same.

Okay, great. On the server handhelds, if I could just ask one more, I think you've mentioned a third of the units. Could you talk about sort of the guest SAT scores and the throughput that you're seeing in those units? Are you seeing an outsized lift relative to the rest of the system? And then maybe comment on any efficiencies or labor cost savings you're seeing from the server handhelds? Thank you.

Brian, it's Guy. It's a little early I think, to weigh in on where we are with the handhelds. Where we think we'll see the benefit though is we do think we'll have better server attentiveness because our servers will be able to stay on the floor more as opposed to having to go back to the point-of-sale system to enter the order. We think we'll waive the kitchen less frequently. So as you would be aware, sometimes servers will take multiple orders before they go back to the PoS and enter them all at once. Of course, when they have a handheld, they place the order as they get it, which helps pace the kitchen, allow them to execute better as well. We're not anticipating making further labor productivity changes around the servers. We feel like our labor productivity is already high compared to the rest of the industry and so we feel like these, in addition to some other things we've done, are tools to help us execute better and that are contributing to these improved guest satisfaction scores that you're seeing.

Thank you. Our final question this morning comes from the line of Stephen Anderson with Maxim Group. Please proceed with your question.

Yeah, it's just as a follow-up question as you start to think about maybe a year or two out, with regards to potentially a new prototype. So, I just want to ask if you've seen -- done any progress into a new model that maybe might have a little bit less dine-in and more of an off-premise component?

Stephen, this is Guy. I'll respond to that. As you would know, Stephen, following the industry for a long time, the most expensive part of the building is the kitchen. Building the dine-in and sort of revenue generation areas is actually the least expensive part of the building. So, I don't think in a new prototype we'll be looking to reduce the amount of dine-in. But we certainly would look for ways to improve our ability to execute on the off-premise business. You know, it's 12.5% right now, depending on who you listen to, those percentage numbers could go higher, just based on what's happening in the industry, and the popularity of off-premise. So I think as we think about a new building, we need to think about how we could handle an off-premise mix that might be considerably higher than what it is today.

Thank you. I'll now turn the floor back to Ms. Moore for closing remarks.

All right. Thanks again everyone for joining us today. And we look forward to sharing our third quarter results with you in November. Thank you.

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.