Texas Roadhouse, Inc. (TXRH) Q2 2016 Earnings Report, Transcript and Summary

Good evening, everyone, and welcome to Texas Roadhouse Second Quarter Earnings Conference Call. Today's call is being recorded. All participants are now in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. I would now like to introduce Scott Colosi, President and Chief Financial Officer. You may begin. Scott Matthew Colosi - President & Chief Financial Officer: Thank you very much, Rebecca, and good evening, everybody. By now you should have access to our earnings release for the second quarter ended June 28, 2016. It may also be found on our website at texasroadhouse.com in the Investors section. Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them. We also refer all of you to our earnings release and our recent filings with the SEC for a more detailed discussion of the relevant factors that could cause actual results to differ materially from those forward-looking statements. In addition, we may refer to non-GAAP measures. If applicable, reconciliations of the non-GAAP measures to the GAAP information can be found under the Investors section of our website. On the call with me today is Kent Taylor, our Founder and Chief Executive Officer; and Tonya Robinson, our Head of Financial Reporting and Investor Relations. Following our remarks, we will open the call for questions. Now I'd like to turn the call over to Kent. Wayne Kent Taylor - Founder, Chairman & Chief Executive Officer: Thanks, Scott, and good evening, everyone. We are pleased with our results so far this year including double-digit revenue growth, higher restaurant margins, and strong diluted earnings per share growth. For the second quarter of 2016, solid comparable restaurant sales growth and an increase in restaurant margins led to a 58% increase in diluted earnings per share. Comparable sales growth of 4.5% and commodity deflation of approximately 6.8% paved the way for significant margin expansion compared to the prior year. Our top-line momentum continued in July with comparable sales up approximately 3.7%. While this is a bit of a slowdown from early 2016, we are encouraged to see continued positive traffic growth along with solid comp sales trends on a two-year and three-year basis. On the development front, we have opened 14 company-owned restaurants so far this year, and we remain on track to open 16-plus restaurants on the back half of 2016. The 30 stores include at least eight Bubba's 33s. We are also building our pipeline of openings for both 2017 and 2018. Although, it is too early to give specific guidance on 2017, we expect to experience continued food cost deflation again next year along with continued labor inflation. As always, we remain committed to protecting our everyday value positioning and will be conservative when it comes to taking any price increases. We will provide more specific information on these items on next quarter's call. I want to say thank you to all of our team members who make Legendary Food and Legendary Service happen in our restaurants each and every day. As always, our consistent execution on this front and our focus on keeping it simple will continue to drive our success. We also continue to tell our folks to turn-on their TV and Internet newsfeeds less so they continue to stay positive in this increasingly negative media world. So if all of you all listening out there want to escape the negativity in the world, please visit us soon. You will leave with a happy belly and a smiling face. Now Tonya will walk you through our financial update.

Thanks, Kent, and good evening, everyone. For the second quarter of 2016, net income increased 59% over the prior year to $33.6 million or $0.47 per diluted share. Revenue growth of 11.9% during the quarter was driven by an 8.4% increase in store weeks and a 3.7% increase in average unit volume. For the quarter, comparable restaurant sales increased 4.5% comprised of 2.9% traffic growth and a 1.6% increase in average check. Comps during the second quarter were positively impacted by approximately 50 basis points due to the shift of the Easter holiday from April last year to March this year. By month, comparable sales increased 5.3%, 6.4% and 2% for our April, May and June periods respectively. As Kent mentioned, comp sales for the first four weeks of the third quarter are up approximately 3.7%. This does include a benefit from the timing of the July 4, holiday as it fell on a Monday this year as compared to a Saturday in the prior year. We estimate this shift positively impacted July's 3.7% comp by 100 basis points to 150 basis points. We experienced another quarter of restaurant margin expansion with margins increasing 302 basis points over the prior year period to 19.2%. Once again cost of sales led our improvement as it was down 330 basis points, driven by the benefit of approximately 6.8% of food cost deflation. Other operating costs were also lower by 13 basis points as the benefit from average unit volume growth, lower utility costs and lower general liability insurance were partially offset by higher gift card fees. Partially offsetting the cost of sales and other operating cost decreases was a 42-basis point increase in labor driven by wage rate inflation of approximately 3.5% along with higher turnover. Below restaurant margins, depreciation expense increased $3.4 million in the quarter versus last year and increased 28 basis points as a percentage of revenue to 4%. G&A costs were up $3.1 million in the quarter and were essentially flat as a percentage of revenue versus the same period last year. Costs associated with our managing partner conference held in Miami in April were approximately $1 million higher than last year. Pre-opening costs decreased $0.5 million on a year-over-year basis primarily due to fewer restaurant openings this quarter compared to the prior year period. And finally, our tax rate for the quarter came in at 30.2% compared to 29.7% last year. Our balance sheet remained strong, as we ended the quarter with $95 million in cash and $51 million in debt. Through the first half of 2016, we have generated $114 million in cash flow from operations, incurred capital expenditures of $69 million and increased our debt by $25 million. We also used $25 million to pay dividends and $4 million to repurchase stock. As a result, our cash balance is $36 million higher compared to year end 2015. For the full year 2016, we now expect commodity deflation of 2.5% to 3% compared to our original guidance of 1% to 2%. We are currently locked on price for approximately 70% of our commodity basket for the remainder of the year. One housekeeping note; we do anticipate that December sales will be negatively impacted by Christmas Eve falling on a Saturday this year, as compared to a Thursday in 2015. Now I'll turn the call over to Scott for final comments. Scott Matthew Colosi - President & Chief Financial Officer: Thanks, Tonya. We're pleased with our momentum through the first half of the year, particularly as it relates to restaurant margins. Commodity deflation has certainly been the biggest contributor in addition to the benefit of sales growth. Looking at development, while our newer restaurants continue to open strong, their post-honeymoon sales are a bit below our existing restaurants. Historically, this is more of the rule than the exception, and even with higher development costs, our internal rates of return are still projected to be in the mid-teens range. With regards to development costs, we're looking hard at both Texas Roadhouse and Bubba's to ensure we maintain our disciplined approach as it relates to new store development. On the technology front, we've started testing our new mobile app in our Houston market. This app includes the ability to get on our Call Ahead wait list, Pay-at-the-table and Order To-Go Online. We're encouraged by the positive feedback so far and expect to see it in more markets as early as the end of 2016. At the end of the day our continued focus on our four wall execution and our commitment to balancing the short-term pressures and long-term positioning of the brand continues to serve us well. Combined with our commitment to returning excess capital to shareholders, we remain very confident in our ability to create long-term shareholder value for many years to come. Well that concludes our prepared remarks, so Rebecca, please open the line for questions.

And your first question will come from Brett Levy with Deutsche Bank.

Good afternoon. If you could do us a favor and provide us a little bit more insight into what you're seeing on the competitive landscape, whether that's versus your competitors, what you're hearing from the customers, seeing from the customers? And, I guess, we'll start with that. Scott Matthew Colosi - President & Chief Financial Officer: Hey, Brett, this is Scott. I think what we're seeing is a similar amount of competitive price point activity. We don't have a specific measure of that as it relates to all the markets that we operate in, specifically. There are some national reports that talk about that, but of course those don't necessarily lineup with every single one of our restaurants. From our perspective, we seem to be seeing just more of the same. I wouldn't necessarily say a demonstrable amount more nor demonstrable amount less.

And can you provide us with any regionality, anything you're seeing in one region versus the other whether it's from your perspective, or what you're seeing from the competition? Thanks. Scott Matthew Colosi - President & Chief Financial Officer: Our sales have been pretty consistent across the country. Like many concepts, we do have a few markets in Texas that seem to be under-performing relative to the oil markets, but beyond that we're generally pretty consistent almost all over the country.

Thank you.

And next, we'll hear from Will Slabaugh with Stephens, Incorporated.

Thanks, guys. I want to ask on Bubba's, if you could give us an update on the latest and greatest on what you're seeing there in terms of volumes, profitability, anything you'd be willing to share. And then, I know you mentioned that the number of openings likely increases next year. I'm curious if there's anything else you can say around that and if not, if that might impact, how many Texas Roadhouses you plan to open next year? Wayne Kent Taylor - Founder, Chairman & Chief Executive Officer: I'll let Scott start with that then I'll chime in afterwards. Scott Matthew Colosi - President & Chief Financial Officer: So from a sales perspective for Bubba's, the results have been a little bit mixed meaning we've had a number of locations doing really strong sales. We've had some locations doing okay sales, no locations doing bad sales. So, that's somewhat encouraging for us. The margin performance of Bubba's has been outstanding and so the overall return picture for Bubba's looks pretty good. From that standpoint, we opened store 11 this past Monday, and I'll turn it over to Kent to kind of take it from there where we're going forward with Bubba's. Wayne Kent Taylor - Founder, Chairman & Chief Executive Officer: Sure. This is Kent. Yeah. The latest store we opened in Clarksville is our new smaller, prototype at 7,700 square feet versus the 8,900 square feet and its sales are as strong as – for one week only obviously, as we have had some of our better stores so, very encouraged with that meaning that it's going to cost less money to build and we've found that the kitchen can generate the same volume through. So, we're very pleased with that and as it relates to next year I can say, we'll probably open more than we opened this year, but we don't know that number yet.

And just a quick follow-up, if you think that might impact the number of Roadhouses that you plan to open next year at all? Wayne Kent Taylor - Founder, Chairman & Chief Executive Officer: This is Kent. I would say, we're going to open as many Roadhouses as we're going to open anyway and then the extra icing on the cake would be just opening a few more Bubba's.

Great. Thank you.

Moving on we'll hear from David Tarantino with Baird. David E. Tarantino - Robert W. Baird & Co., Inc. (Broker): Hi. Good afternoon. I want to come back to the sales trends you've been seeing more recently, in June and July. It seems like you have seen a slower same-store sales growth trend. So, I was just curious to know what you think is driving that forward trend in your business and if you're seeing any changes in how consumers are using the brand that might explain what's going on in the most recent couple of months. Wayne Kent Taylor - Founder, Chairman & Chief Executive Officer: Hi. This is Kent. I'll kind of start it out and let Scott jump on it. When you look at same-store sales for a two-year basis knowing that we're rolling over some higher comps, I mean, we were 12.6% over two years in quarter two, 13.5% in quarter one then you go back to quarter four we are 11.5% and then before that, 12.8%. So, I think a portion of that is just rolling over some strong comps and I'll let Scott take it from here. Scott Matthew Colosi - President & Chief Financial Officer: Hey, David. I think, as far as if you're looking at the most recent two-year trends or even the most recent one-year numbers for us, 2% in June and 3.7% in July is definitely lower for us from what we've been experiencing. We don't have the answer. We can only speculate. I can tell you in our case we're not operating any differently. And so, we've got the same labor staffing, we've got the same food quality; we've got the same aggressive price points. We're more focused and driven as ever on our local store marketing efforts. We continue to bump out restaurants. We continue to spend a lot of money on remodeling restaurants, refurbishing restaurants, buying extra parking. So we are still growing traffic, but I think anything about why as an industry or anybody specifically, why sales might be tailing off I think is speculation; everything from is it related to there being a big shooting on TV every other day seems like to the conventions, to the next thing we'll be talking about the Olympics coming up in Rio. I don't know, but it's not making us think there's anything wrong with our model or that we need to do anything differently, at least currently. That might change if there was really anything different in the economy, i.e., unemployment started going up or something like that, but until we see something like that, I think we're pretty confident, we'll continue to be able to grow a little bit of traffic. Wayne Kent Taylor - Founder, Chairman & Chief Executive Officer: And with our traffic down at 2% in June, but yet up 3.7% in July. Go figure it. David E. Tarantino - Robert W. Baird & Co., Inc. (Broker): Right. And just a follow-up, Scott, I appreciate that you don't want to react to just a couple months of sales and still pretty solid sales on a relative basis, but I think that one of you made a comment about being conservative in your pricing approach. And I was just wondering what the comment was supposed to be signaling? And if that was a change versus your overall approach, because you've been pretty conservative in the past? Scott Matthew Colosi - President & Chief Financial Officer: David, this is Scott. I would just tell you it says that we don't take anything for granted in our business. So, we've had a lot of success in growing comp sales now, I think we're five years or six years in a row, something like that, since the depths of the recession. I think our thing, is we just don't take anything for granted. So, we're expecting to have more food cost deflation next year. We will have a certain amount of labor pressure whether it be from just a general where we've seen tightening of the labor market and inflation in wage rates in general, plus we'll have some expense associated with the Department of Labor rate changes. We haven't got to a conclusion on that yet, as far as exactly what we're going to do. We'll know a lot more pretty soon on that, but we're still debating the different options that we have with regards to those regulations specifically, but we're just saying we'll take some pricing, it just might not be as much as we've taken in maybe the last two years, and we're just going to continue to stay very aggressive at the price points that we offer throughout the menu. We have a great value whether you're at the lower end of the menu or even in the bigger steaks. We still want the bigger steaks to be a great value for that particular guest as well. Wayne Kent Taylor - Founder, Chairman & Chief Executive Officer: Oh, by the way, this is Kent. When I said 2% and 3.5% traffic, I actually meant sales. Sorry about that. David E. Tarantino - Robert W. Baird & Co., Inc. (Broker): Makes sense. Thank you.

Next question will come from John Glass with Morgan Stanley. John Glass - Morgan Stanley & Co. LLC: Thanks very much. Scott, you had called out those, six-month-old to 18-month-old stores and volumes being little lower than you had seen in the past. What do you attribute that to? How big is that cohort? And I think you said something about we'll continue to watch development. You had been fairly bullish on development in past quarters. Are you more conservative about rate of growth in 2017 and beyond, or is that not the correct interpretation of that? Scott Matthew Colosi - President & Chief Financial Officer: John, I think we're just as bullish, but certainly the gap between our newer stores and our system average has grown from what it was over the last few years. However, that gap is consistent with what it was six years, seven years, eight years ago when kind of we still kept building restaurants. So, we just don't want it to get any wider. I would say that. And at the same time, we've got some work to do on really watching some of the development costs in some of the deals that have kind of surprised us and been a little more expensive, particularly on the site work side. We probably missed a couple deals there on that. So, we still feel like we can build quite a few Roadhouses, but we model them more conservatively, so we typically model the sales to be below the system average. We know it's just tougher when you're opening store 500 or 550 or 600 than it would have been at 100 and 150 and 200. We've always done it that way, and that's why when we do have sales that are a little bit below the system average, we're still able to deliver on mid-teens internal rates of return. But, if we have a particularly strong clash here like we did in 2013 for example, those internal rates of returns are more in the low 20%s, so – which is pretty good for a 22-year-old restaurant chain. So, we're just watching it closely and just communicating to you that we still take pride in having a lot of discipline in the sites that we approve. And we're still willing to say no and not have a lot of wishful thinking in our site selection. Wayne Kent Taylor - Founder, Chairman & Chief Executive Officer: Yeah. This is Kent. And I'll say that as I look at 2017, yes, we're going to do less parking lots, we'll have more envelopes than we did in 2016, because I'm tired of Scott giving me a hard time. John Glass - Morgan Stanley & Co. LLC: All right. And then just on same topics, on the franchise side, I think average weekly sales grew slower, were down year-on-year. And then you haven't opened many stores on the franchise side, so what would have driven that? Scott Matthew Colosi - President & Chief Financial Officer: Those franchise stores include like international. And so, some of the countries we've gone into, those franchise restaurants, they typically do lower sales. They're good sales for that particular country, but they're just lower sales overall than what we do in the U.S. And most of the restaurants that we've opened on the franchise side have been international locations. So it's not that our U.S. franchise restaurants are underperforming the U.S. company stores; they're actually not. Wayne Kent Taylor - Founder, Chairman & Chief Executive Officer: Yeah. This is Kent. And a lot of these stores that you might see are like in the Philippines or Taiwan, they might be in an office building where we're only just over 4,000 square feet, so you're not going to have as many seats. John Glass - Morgan Stanley & Co. LLC: Okay. That's very helpful. Thank you.

Next, we'll hear from Brian Bittner with Oppenheimer. Brian Bittner - Oppenheimer & Co., Inc. (Broker): Thanks. Just couple questions; first on the balance sheet and cash flow. When I look at that, your free cash flow is really strong despite you're still opening a lot of stores. Your cash is real high, your debt is real low; so would you guys ever look at accelerating capital returns, whether it be really stepping on the gas pedal on the share repurchases or some other method? Have you guys looked at that? Wayne Kent Taylor - Founder, Chairman & Chief Executive Officer: Yeah. I would tell you, Brian, great question. I would say, we today live in a very litigious and seemingly regulatory world. And there's a cost to be in that world, and we feel a lot more comfortable having some cash in the bank and not a lot of debt, and living in that world. So we just like to have some cash for rainy day. Now that said, we are very committed to our dividend payment and raising that dividend at a very healthy rate each year. And, we are very prepared to be very opportunistic on share buybacks, and have no problem buying back a lot of stock, as we've done in the past. Brian Bittner - Oppenheimer & Co., Inc. (Broker): Okay. And then on sales, you know on the July comps (24:06), did you see very low value nights during the Republican and Democratic Conventions, because I guess that would make sense, and then would you see maybe a return of people on the weekends? Any color you can give maybe around like those political events, and maybe how that's impacting the industry would be helpful. Wayne Kent Taylor - Founder, Chairman & Chief Executive Officer: I can't tell you that specifically for the conventions. I can tell you for the quarter, we didn't have any differences on days of the week. Our days of the week growth, we were very consistent throughout days of the week. Brian Bittner - Oppenheimer & Co., Inc. (Broker): Okay. And then just the last question is on your comments on continued food cost deflation in 2017. As you sit here today is that mostly related to the beef market or is that – would you categorize the beef, or it is food cost inflation outlook in 2017 is pretty broad-based across the basket? Wayne Kent Taylor - Founder, Chairman & Chief Executive Officer: A little bit of both. I mean certainly beef's a big part of it, because it's over 40% of our food cost. So, in most years as beef goes so does the rest of our total food cost inflation or deflation. But, there's more to it than just beef. Brian Bittner - Oppenheimer & Co., Inc. (Broker): Okay. Wait. Can I sneak one more in real quick?

Okay. Wayne Kent Taylor - Founder, Chairman & Chief Executive Officer: Well, you're hogging up all of the questions from everybody else, but go ahead. Brian Bittner - Oppenheimer & Co., Inc. (Broker): I'm sorry. Just on the franchise company operating comps in the quarter. Was it just geographical differences for the difference in trends or is there anything else you can point out? Wayne Kent Taylor - Founder, Chairman & Chief Executive Officer: Are you talking on franchise? Brian Bittner - Oppenheimer & Co., Inc. (Broker): On the comps for the second quarter, the trends were different. Wayne Kent Taylor - Founder, Chairman & Chief Executive Officer: No, our comps are pretty consistent across the country and I mentioned earlier there's a few markets in Texas that are exhibiting slower growth or negative growth in a few places, that we think is due just to the whole oil-related issues. Scott Matthew Colosi - President & Chief Financial Officer: And then on the franchise side, we got quite a few stores in the Middle East, and they're potentially affected a little bit by the price of oil. Brian Bittner - Oppenheimer & Co., Inc. (Broker): Okay. Thanks for the answers, guys.

And from Credit Suisse, we'll hear from Jason West. Jason West - Credit Suisse Securities (USA) LLC (Broker): Yeah, thanks. Tonya, can you just clarify exactly where you guys are on pricing? I think it was 2%. I just want make sure you haven't made any changes there year-to-date.

No, no changes there. We'll see that consistently until November, Q4, we'll lap that pricing. Jason West - Credit Suisse Securities (USA) LLC (Broker): Right. Got it. Okay. And then Scott, you had touched on the overtime rules change and you guys are looking at different options there. Can you just provide maybe a little more, I mean without being too specific I guess yet, but just how many employees or what percentage of your base may be impacted by those rule changes and sort of the some of the options that you're looking at? Scott Matthew Colosi - President & Chief Financial Officer: Well, in our system we are heavily, heavily incentive compensation-based, which means that many, many, many of the managers that work in our restaurants, a big piece of their compensation is profit sharing or bonus in effect. And so they typically get a little bit lower on the salary side, but a lot more on the incentive compensation side. So, we've got more probably assistant managers than in most concepts that their salaries are below the new federal thresholds, and so we've got some decisions to make about just how we're going to manage to it. And then, we've got some other support positions that also have some salaries, again they're heavily incentive compensation-based and their salaries are below the threshold for the government, as well. And so, again we're looking at a variety of options, but at the end of the day, we're a people-based company and our folks are going to end up making more money than they were making before. We're not going to get cute with them and we're going to be very straightforward with them and they're going to end up making some more money. And we'll let you know once we know more. Jason West - Credit Suisse Securities (USA) LLC (Broker): Okay. And can you remind us how many managers and assistant managers you'd have in a typical restaurant, just the break down there? Scott Matthew Colosi - President & Chief Financial Officer: Well, probably the average restaurant would have four to five managers; out of those four to five managers, of course one's the managing partner. And typically you have a kitchen manager and a service manager. And then after that there's quite a variety. There's assistant kitchen and assistance service managers, but there's also a key hourly position. And so – and it is very different across the board. Some of our highest, highest prime restaurants actually have two kitchen managers and two service managers. So, when you multiply those numbers times 500 restaurants approximately, you're talking well over 1,000 people. Jason West - Credit Suisse Securities (USA) LLC (Broker): That's helpful. Thanks a lot.

And from KeyBanc, we'll hear from Chris O'Cull.

Thanks. I have a follow-up regarding the food cost deflation outlook for 2017. Scott, have you guys entered into contracts for beef for the out year yet? Scott Matthew Colosi - President & Chief Financial Officer: Chris, I can't comment on just for competitive reasons what we've done or what we haven't done so far, but I will tell you, we feel pretty good about our prospects for next year and the timing couldn't be better just given where the labor markets are today just with normal wage inflation plus the DOL reg, so it's pretty fortuitous I think, for us at this point in time.

Okay. Fair enough. And then how much of the gap in average weekly sales for comp stores versus these post-honeymoon stores can be explained by opening more smaller market locations? And because, I know they're lower cost, but is there a meaningful impact on this average weekly sales comparison? Scott Matthew Colosi - President & Chief Financial Officer: There's definitely some pretty small towns in there no doubt and no doubt we would expect those restaurants to do some lower volumes that is part of the equation. Sometimes, we're building places that are – the developments are just very new as well. So, they may not be the cheapest deals but longer term, once the rest of the development gets done and there's more housing built and so forth, because we've seen this many times before. That start a little bit slow, but then you're really killing it few years down the road. So, that's some of that as well. But at the end of the day, we're still looking for a certain return and we'll keep building it if we get the returns and we won't if we don't. But there is a story and the story does change depending upon size typically whether it's a smaller town or whether it's a more of a newer, the outskirts of a larger city type development.

Okay. That's helpful. And then lastly, can you remind us what the functionality will be available with the new mobile app and maybe what your expectations are for downloads or will there be a mobile website that also allows the functionality you have on the app? Scott Matthew Colosi - President & Chief Financial Officer: So with the app itself, the app you can get on are Call Ahead wait list in effect through the app so like a number of folks in the restaurant industry, you register on the app and you'll be able to see what the current wait time is for that particular restaurant. You'll be able to pay your bill at the restaurant by using the app and you'll be able to order to go through the app. All that same functionality eventually will be on the web, as well. It doesn't exist today. The Online To-Go part exists today but getting on the Call Ahead wait list does not exist today, but it will in the future. So, – and the app has been in development in some time, it looks great, at least to us. And we've had quite a number of people download that app, so far. And so, we're just very encouraged by the start.

Great. Thank you.

Next, we'll hear from Jeffrey Bernstein with Barclays.

Great. Thank you very much. Actually, just following up on a couple of those cost questions, I mean I think you said up 2.5% to 3% for food for full year 2016. I know in this quarter it was down close to 7%. So I'm just wondering, your outlook specifically, the lumpiness in the back half of the year and then similarly on labor, I think that was up 3.5% in the second quarter. I'm wondering what your full year 2016 outlook is for labor? And then whether you thought either of those would be directionally higher or lower in 2017? I know you said kind of the same side of the fence for each one of them, but directionally whether you thought either one would be more or less versus this year?

Sure. So on the labor side of things, Jeff I think that 3.5%, we expect to see that continue throughout the year. I don't think we expect to see much change from that. Now into 2017, I think a lot's going to depend, as Scott mentioned, what the DOL regulations, how those get implemented, what that looks like. So that remains to be seen. Could be that, that maybe is a little bit higher just from the impact of that. On the cost of sales, yeah, 2.5% to 3% deflation on a full year basis. So, back half of the year, we expect to see some deflation in Q3 and not as much in Q4, kind of where we are right now.

And for 2017 on the food cost side, might it be more deflation than the 2.5% to 3% that you're looking for this year?

I think it's probably really too early to tell what we're going to see for 2017. I think, when you look at cattle futures and see what the government estimates look like, I think it's – deflation definitely looks like a possibility, but I don't think we could even begin to speculate how much it could be.

Got it. And then, my other question was just on throughput. I know you talk about the app, which seems like it will be a net positive across the board, but wondering if you could size up maybe what percentage of the system you think there is, just a broad capacity constraint? And whether there are any other initiatives to ease that pressure besides the app? Whether it's the handheld devices for the servers or tablets at the table or anything else you might be dabbling with on the technology front to help with that throughput? Wayne Kent Taylor - Founder, Chairman & Chief Executive Officer: This is Kent. I'll just give my two cents. I think when it's – specifically with younger people that prefer to just do a quick thing on their phone and not talk to people, I think the app on getting on our wait list and for To-Go Ordering is going to really help. And Pay-at-the-table, I would tell you everybody that's invested in those kiosks on the table will probably be throwing those away in the next two years, because I think everybody's going to switch to phone applications.

And a percentage of the system, if you were to size it up, I mean, does the entire system have throughput constraints or is it really more select markets? Wayne Kent Taylor - Founder, Chairman & Chief Executive Officer: I think, we've got a lot of stores doing huge volumes and then a lot of stores that aren't doing those huge volumes, but they have the same kitchen. So, I think we have capacity for sure. Scott Matthew Colosi - President & Chief Financial Officer: Yeah, Jeff, I mean, based on sales, we don't know what our capacity is, just because even our highest-volume restaurants continue to grow sales. To Kent's point, certainly there's only so much room in the kitchen to only produce so much food per hour and store it all. We might experiment with doing some kitchen bump-outs at some point, but our restaurants are doing the highest volumes, continue to grow sales. So, we're not really sure how many of our restaurants are truly capacity-constrained.

Good to know. Thank you.

From Jefferies, we'll hear from Andy Barish.

Hey, guys. Most of mine have been asked and answered. On mix shift, it looked like it went negative this quarter. Anything to point to there? Scott Matthew Colosi - President & Chief Financial Officer: Andy, this is Scott. Most of our mix, our negative mix is related to really three areas. Two of those are beverages, soft beverage and alcohol; and then on the appetizer side. So it's a little piece from each one. That's pretty much the big driver of the mix. Hard to say why, I mean, alcohol is it, because the prices continue to rise for alcohol relative to the cost of entrées? Is it because of DUIs or people being more careful? We don't know. And same thing on soft beverage. Is it because the prices continue to rise for those items? Or negative news on soft drinks in general? We really don't know the answer to that. But again, it's – you're talking relatively small changes relative to the size. Same thing with apps. Apps are very small change in mix, but all of those things added together make up that difference. Wayne Kent Taylor - Founder, Chairman & Chief Executive Officer: Yeah, I think InBev needs a little more money from us to pay for all their debt for their recent merger, so that's my opinion.

And then any reason that Houston was selected as sort of the initial test on the app, that market? Scott Matthew Colosi - President & Chief Financial Officer: I think those guys just volunteered and they are a pretty closed-in market, at least geographically. So a combination of the two, you know, easy for us to keep sort of the guests, I guess you could say, contained and who's got the app and who doesn't in that particular market. And they were more than willing to help us test it, because anytime you test something like that there's inevitably some bumps along the road, along the way. And so they are kind enough to let us work with them on that. Wayne Kent Taylor - Founder, Chairman & Chief Executive Officer: Well, I thought they certainly put a blindfold on Scott and he threw a dart at the map, so I'm now educated as well.

Right. Thank you, guys.

From Wells Fargo, Jeff Farmer.

Thanks. Just following up on some of the top-line questions. So, last week one of your peers pointed to the widening gap between consumer confidence levels for younger and older consumers. I'm just curious, what does your most recent data tell you about the demographic makeup of the Roadhouse customer base as we stand here today? Scott Matthew Colosi - President & Chief Financial Officer: I would tell you, Jeff, this is Scott. I have no idea on the demographic makeup of our guests from last...

Let me ask an easier question, then. So... Scott Matthew Colosi - President & Chief Financial Officer: Okay.

Do you think you skew younger than most of your casual dining peers? Is that fair, or no? Wayne Kent Taylor - Founder, Chairman & Chief Executive Officer: Yeah, this is Kent. I mean, I don't really see a huge difference in what I see in our restaurants as far as both young and older folks. Older folks typically come in a little earlier in the evening, maybe take advantage of our Early Bird deals from four to six. And then, you'll see a little bit younger audience later in the night. And the fact that our traffic and sales are up, I don't think we're losing either one.

Okay. And then, just sticking with the top-line discussion. So again, your peers led a discussion about loyalty programs. I'm not quite sure if the VIP Program qualifies as one, but I am curious where you stand in terms of members? How this program's grown – your VIP Program has grown and how are you using it to drive traffic? Scott Matthew Colosi - President & Chief Financial Officer: I think we're over six million, I want to say, names in our e-mail program and our restaurants can do individualized communications to the folks in their respective trade areas. And so, I wouldn't say it's a big driver of our sales. I would tell you, and it's always been this way since day one, operations is our best marketing at Texas Roadhouse. We're an operation-driven company and we focus as much on the guests getting a great experience, not getting cute with messing that up, and supporting that with very relationship-driven local store marketing. And that's one of the reasons, why we don't have a traditional loyalty program that involves discounting our food and so forth after a certain number of meals or whatever. We think, we give people a great deal everyday they come visit our restaurant.

Okay. That's helpful. And then just one final one, I think for the last few years, Scott, you pointed to G&A growth below revenue growth, which I think you've delivered at least the last three years. I'm just curious, is that still the current expectation for full year 2016 G&A growth below revenue growth? Scott Matthew Colosi - President & Chief Financial Officer: That's probably not going to happen in 2016, because we had a Wage and Hour Settlement deal that hit our G&A line, and I think without that we might have a chance to see a little bit of leverage on G&A, but on reported basis probably not.

Okay. Thank you.

From Goldman Sachs, we'll hear from Karen Holthouse. Karen Holthouse - Goldman Sachs & Co.: Hi. Following up on some of the development questions, when you're thinking about sort of options it failed to settle in at a little bit lower level. How much flexibility do you think you have for sort of a more maybe dramatic reengineering into a smaller footprint or a smaller footprint box or something else that would be a way to take sort of versus nickel and diming the cost structure sort of a bigger chunk out of it? Wayne Kent Taylor - Founder, Chairman & Chief Executive Officer: This is Kent. We actually currently have three different prototypes for Roadhouse, so we already choose A, B or C, depending on the market and like I say with Bubba's we just experimented with a smaller prototype there, so we're actually already doing that. Karen Holthouse - Goldman Sachs & Co.: All right. Thank you.

Next, we'll hear from Peter Saleh with BTIG.

Great. Thanks. I just want to ask about labor turnover; I think, it was mentioned earlier in the call. Where do we stand on the labor turnover today versus historical and how much do you think is that's prefer in the labor line? Scott Matthew Colosi - President & Chief Financial Officer: This is Scott. It's just short of a 120% on the hourly basis, which we're absolutely not happy with and that's quite a bit higher, 20% higher than we were three years or four years ago and we can make all sorts of excuses, tightening labor market, lower unemployment so forth and so on, but at the end of day, it's just unacceptable and we are definitely talking about it internally and challenging ourselves as being a great place and the best place to work, amongst our restaurant peers and looking ourselves in the mirror. So, we've got some work to do on that. And with that kind of turnover change, absolutely positively that impacts our labor cost just with the number of employees we do have and the amount of time we spend in training, which is longer than many folks and that's a pretty big cost to us.

And just lastly on the top-line, I mean can you remind us historically, have you seen any slowdown during the Olympics? During election cycles? Do the customers tend to stay home during those types of events? Scott Matthew Colosi - President & Chief Financial Officer: You know I can't recall from the last Olympics. My guess is probably some – more people stay home and watch the Olympic games, because it is once every four years. And maybe because it's in Rio more of the stuff is prime – live, if you will, you're seeing it live. So I don't know, but fortunately the Olympics are only for a couple weeks if they do impact your sales, and that's only every four years and not every year. So, I guess, we can look at it that way. And if it does, obviously we just get to lap it next year and get to tell you guys, we had better comps because we lapped the Olympics. Wayne Kent Taylor - Founder, Chairman & Chief Executive Officer: Hey, this is Kent. I'll say our sales were a bit stronger in July than they were in June. And the Democratic and Republican conventions were in July, so go figure.

Great. Thank you very much.

Next question will come from Andrew Strelzik with BMO Capital Markets.

Hey. Good afternoon, everyone. I have two questions. The first one, we've heard a couple of your large competitors talk about shifting away from these real value price point promotions. I'm wondering if you think kind of bigger picture, I know the focus has been on kind of this near-term slowdown, but do you think that, that actually works in conjunction with your less pricing to really solidify that value message and the position that you guys hold in the segment, and that could actually be a net benefit for you over time? Wayne Kent Taylor - Founder, Chairman & Chief Executive Officer: This is Kent. I like what you're saying and why not. But I'll let Scott have a more serious answer. Scott Matthew Colosi - President & Chief Financial Officer: I agree. I agree with that. I think when – if folks do move away and there's a material difference in what moving away means from a price point, advertising and discounting, absolutely I think it strengthens our value proposition overall.

Okay. And then one last one on the change in the food cost guidance, how much of that is actually driven by a change in the back half outlook? Or was it more driven by greater deflation than you expected in this quarter? I'm just trying to judge what was the reason for the change.

Yeah. More of it, Andrew, was probably related to the quarter, Q2, versus expectations on the back half. But any expectations we have for the back half was built into the new guidance, but we did see a bit more deflation on that floating, the 20% beef we were floating. We saw a little bit more on cheese, which we're floating, so that played a part for sure.

Great. Thank you very much.

And next we'll go to John Ivankoe with JPMorgan.

Hi. Thank you. The question is on pricing and I've certainly heard you guys say I think a few times on the call that you'll be conservative on pricing going forward, as I think you generally always are. But, in the previous economic cycles that you've lived through, is it easier to take pricing when labor costs are higher meaning your customer presumably has more money to spend or take pricing when the commodity costs like beef is higher where I think some pricing has been taken before in direct response to that? Scott Matthew Colosi - President & Chief Financial Officer: Hey, John. This is Scott. I would tell you I think it's easier for us when it's a minimum wage related and that's impacting everybody kind of in the same way. We've typically taken a little bit more pricing. It's a little tougher when it's commodities, because those impact everybody differently. So, some years or some concepts they have very little inflation and we may have a ton of inflation if it's all beef-related versus wheat or some other commodity items. So I think it just varies. And then, yeah, the Department of Labor reg stuff will vary depending upon what approach you take and you can definitely take approaches to absolutely minimize the impact. There's different things that you can do or you could take an approach and show a little bit more love to your folks and what not. So, I think, if we're taking a little bit more love for our folks, we may not just use that as an excuse to take pricing, because a lot of our competitors may not take the same approach if you will. So, to pick up a long answer a little bit shorter, minimum wage, probably a little easier to take pricing; commodity inflation, I would tell you a little bit tougher.

So, it would only seem just you're following that logic that 2017 could even be an above average year for pricing, not a below average year for pricing? Scott Matthew Colosi - President & Chief Financial Officer: You know what it could be based on the labor pressure that we have. However, we will always take advantage of an environment if you've got food cost deflation because, again, we were talking about pricing power. We never assume we have per se pricing power, because you just cannot take anything for granted. And as you know, from being on all the other call and all the other competitors in the industry nobody is standing still, and everybody is pulling different triggers and doing different things in their respective chains whether it's reinvesting in their food quality, their labor standards, remodeling and so forth. So, you just can't take your competitive positioning for granted. You got to continue to act like you cannot take any individual guest for granted and treat your pricing actions as such.

Thank you.

And we'll take a question from Stephen Anderson with Maxim Group.

Yes, sir. Good evening. I want to talk about pricing. While it may be a little bit early for you to discuss that, you mentioned on the last call about how you adjusted some of the pricing on the Early Dine Program. I know you raised it in Connecticut, New York, California. Do you think with the Department of Labor regulations beginning to shift, do you see the need at this time to maybe consider some additional markets for price increase? Scott Matthew Colosi - President & Chief Financial Officer: I don't think that our Department of Labor changes will influence our pricing decisions. I think those will be more influenced by just other wage rate inflationary items, just whether it's the overall strength of the market from an hourly perspective, that's where the bigger dollars are. And then specific state minimum wage actions, that's also where the bigger dollars are. And depending upon how much of all of that is offset by food cost deflation will have a greater impact on where we take menu pricing actions and what specific items would we touch or don't touch.

All right. Thank you.

And ladies and gentlemen, that does conclude today's question-and-answer session. At this time, I would like to turn the conference back over to Tonya Robinson for any additional or concluding remarks.

Thank you all for being with us this evening, and have a great night. Thank you. Wayne Kent Taylor - Founder, Chairman & Chief Executive Officer: And more happy faces and anyway, thanks.

Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation.