Texas Roadhouse, Inc. (TXRH) Q1 2017 Earnings Report, Transcript and Summary

Good evening and welcome to the Texas Roadhouse Incorporated First Quarter 2017 Earnings Conference Call. Today's conference is being recorded. All participants are now in a listen-only mode. And 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 your conference.

Thank you, Kevin, and good evening, everyone. By now, you should have access to our earnings release for the fourth quarter ended March 28, 2017. 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 refer all of you to our earnings release and 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. And 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 CEO; and Tonya Robinson, our Vice President of Finance and Investor Relations. Following our remarks, we will open the call for questions. Now, I would like to turn the call over to, Kent.

Thanks, Scott. We are pleased with our top line momentum and operating performance in the first quarter with sales growth of 10.2%, and comparable restaurant sales growth of 3.1%, including traffic growth of 2.7%. Diluted earnings per share decreased just over 4% this quarter, including the impact of the charge we took this quarter to defend and ultimately settle a legal matter. Tonya will have more on our results in a moment. We are pleased that our sales momentum continued in the first four weeks of our second quarter with comps up 2.6%, despite approximately 90 basis points of negative impact from Easter shifting from March to April. We will roll-out new menus this week at all restaurants that will include calorie counts, along with some small changes to the menu. The changes include the companywide roll-out of two smaller portion entrées with the addition of a 5-ounce salmon and an 8-ounce New York strip. We will also be implementing a price increase of about 0.5% as part of the roll-out. On the development front, we have opened seven company restaurants so far this year, and the remainder of our 2017 pipeline is in great shape. We have 13 restaurants currently under construction that are expected to open by the end of September. We continue to expect our 2017 development to include 24 Roadhouses and 6 Bubba's 33 openings. In addition, our franchise partners opened two restaurants this quarter, including our second location in the Philippines, bringing our total international presence to 14 locations. In closing, I want to congratulate Paul Ashton of Sherman Texas for being named our 2016 Managing Partner of the Year at our recent annual conference in Florida. It was great to be together with all of our operators and partners celebrating another successful year. Now Tonya will walk you through our financial update.

Thanks, Kent, and good evening, everyone. For the first quarter of 2017, revenue growth of 10.1% was driven by an 8% increase in store weeks and a 2.3% increase in average unit volume. The strong top line growth, along with the impact of commodity deflation, was partially offset by continued wage rate inflation, which led to a 9% year-over-year increase in restaurant margin dollars to $112.3 million. Below restaurant margin, increased G&A cost partially offset by a lower income tax rate contributed to a 3.6% decrease in net income compared to the prior year period to $34.3 million or $0.48 per diluted share. As Kent mentioned, our reported diluted earnings per share for the quarter was negatively impacted by approximately $0.13 due to a pre-tax charge of $14.9 million or $9.2 million after tax related to a legal matter and its settlement during the quarter. The negative impact of this charge was partially offset by the benefit of lapping a $5.5 million pre-tax charge recorded in the first quarter of 2016, which had a $0.05 impact on reported diluted earnings per share in that quarter. Comparable restaurant sales for the quarter increased 3.1% comprised of a 2.7% increase in traffic and a 0.4% increase in average check. Comparable sales during the quarter were negatively impacted by a net of approximately 30 basis points due to calendar shift. The impact – the negative impact of Valentine's Day was partially offset by the benefit from Easter shifting to the second quarter this year. By month, comparable sales were up 3.6%, down 0.7%, and up 5.8% for our January, February and March periods, respectively. February comp sales were negatively impacted approximately 170 basis points from the calendar shift related to Valentine's Day, while March comp sales benefited by approximately 80 basis points from the shift of the Easter holiday from March to April. For the quarter, restaurant margin decreased 21 basis points to 19.9% as a percentage of restaurant sales compared to the prior year period. Wage rate inflation of approximately 5.3%, including the impact for manager compensation changes made in December of last year continue to drive higher labor costs and outpace the benefit of average unit volumes and commodity deflation of approximately 2.4%. Looking ahead, our expectation of mid single-digit labor inflation and commodity deflation in the range of 1% to 2% for full year 2017 remains unchanged. Moving below restaurant margin. G&A costs increased $10.2 million in the quarter or 126 basis points to 7.1% as percentage of revenue, primarily due to the legal charges mentioned earlier. In addition, depreciation expense increased $3.1 million year-over-year to $22.6 million or by 19 basis points to 4% of revenue. Finally, our tax rate for the quarter came in at 26.5%, which was lower than the 30% rate last year. The decrease in the rate was primarily due to the impact of new accounting rules related to share-based compensation, which went into effect at the beginning of 2017. As part of the new rules, we now recognized excess cash benefit and tax position fee from share-based compensation through the income statement rather than the balance sheet in the period in which the restricted shares vest. Because of the number of shares vesting in the first quarter, the accounting change had a 3.2% impact on the tax rate. Based on the expected vesting of restricted shares going forward, we do not project the impact to be a significant for the rest of the year. Thus, we continue to expect our tax rate to be 29% to 30% for the full year of 2017. Our balance sheet remains strong as we ended the quarter with $138 million in cash and $53 million in debt. During the quarter, we generated $94 million in cash flow from operations, incurred capital expenditures of $36 million, paid dividends of $13 million and spent $17 million to acquire four franchise restaurants. As a result, our cash balance increased $25 million compared to year-end. We continue to project full year capital expenditures of approximately $170 million, excluding any cash used for franchise acquisition. Now I'll turn the call over to Scott for final comments.

Thanks, Tonya. We're pleased with the current momentum in our business as well as what the future holds for Texas Roadhouse. We believe our disciplined approach to running our business combined with our long-term operational partnerships will continue to drive our success. Sales at our comparable restaurants as well as our – at our newest restaurants opened less than six months continue to be strong with average weekly sales of over $100,000 a quarter. The sales gap between our comp restaurants and our restaurants opened 6 to 18 months was again fairly wide with weekly sales at our 27 new restaurants averaging a bit over $87,000 a week. We remain comfortable with the overall returns that these restaurants are generating, however, we would like that gap to be smaller. In addition to our domestic growth, we continued to see progress on the international front. We expect to have as many as six new restaurant openings this year, including our first location in Mexico. Kent mentioned, we've recently returned from our Annual Managing Partner Conference in Orlando, Florida. It was a great time celebrating our 2016 accomplishments and our cultural partnership with our operators and vendor partners. In addition to congratulating Paul Ashton, our 2016 Managing Partner of the Year, I'll also give a big shout out to our National Meat Cutter Champion, Shawn Hayes (10:09) of Palm Bay, Florida. Way to go Shawn (10:11) Overall, we feel very good about the direction of our business and the vest (10:15) of our teams both in the field and in our support center. We will continue to challenge ourselves to get stronger and create more value to our employees, our guests and our shareholders. That concludes our prepared remarks. So Kevin, please open the line for questions.

And we'll take our first question from John Glass with Morgan Stanley. Go ahead please. John Glass - Morgan Stanley & Co. LLC: Thanks very much. First, just a couple of follow-ups on the pricing and commodities. Just to level set, what is the effective pricing therefore going to be in the second quarter? I know you've talked about a 50 basis point increase and what's the residual pricing and what is total pricing run at (11:06)

Total pricing with 0.5% that we're taking this week. We'll put the quarter – second quarter probably around 1.3% because we had one, and then we had the 0.5% of the quarter and then we'll be closer to the 1.5% in Q3 and Q4. John Glass - Morgan Stanley & Co. LLC: Very helpful. Thank you. And then second detailed question on the commodities. You saw a little bit greater deflation for the full year. Does it flow roughly ratably through the balance of the year? Do you have visibility on if it gets lumpy quarter-to-quarter on the food costs in the coming quarters?

It doesn't really get very lumpy. I will tell you though in Q2, right now, we don't expect to see as much deflation as maybe we saw this quarter. Still deflationary, but maybe just a little bit softer, primarily because we're making some assumptions on produce and things like that. There's been some adverse weather conditions in the west. And while we're not seeing a huge impact on that, it is making prices go just a little bit on produce, so some of that will be coming into play in Q2. But other than that, it's not too lumpy I would tell you over the rest of the year. John Glass - Morgan Stanley & Co. LLC: That's great. Thanks. And then just, Scott, finally, you've talked last quarter and you mentioned this quarter again about trying to get the cost in the box down, right. That's a place where I think you'd be more comfortable, but I guess, it's below – I don't know what the current number is, I think you said it $5 million like to get below. What are you specifically doing? There's a point in time you kind of rethought the prototype and really squeeze some costs out of it. How do you manage down that cost specifically? And can you do it during this year? Are you really thinking about that for 2018?

Well, we – John, probably the biggest thing is just what sites we're going to develop, meaning how much site work risk we're willing to take on, typically the biggest variable has been site work risk, and has been put us way above $5 million or way below $5 million. And getting into deals whether we've typically maybe been little bit surprised (13:10) in that regard. And so we're just trying to be more careful in the sites we select. And do the best we can to understand the site risk or lack thereof that involve meaning how much work the landlord, if I'd say landlord is responsible for versus how much risk we're taking on if we decide to develop further (13:29) or not. John Glass - Morgan Stanley & Co. LLC: Got it. Okay. Thank you.

And we will take our next question from Will Slabaugh with Stephens. Go ahead please.

Hey, thanks guys. I wonder if you could give us the update on Bubba's, what's been going there with both existing stores and then the more recently opened ones. How you thought those are (13:49) coming along both the top and bottom line, if you would?

This is Scott. We've got 16 Bubba's open. I think as you guys know. Sales have been okay at Bubba's, I say okay, not bad, not great, pretty close to Roadhouse overall, though there is a spread obviously at any number of restaurants, you got some higher than lower, but the average close to Roadhouse, probably the biggest opportunity is just on the development cost side, and that's figuring out to right size the Bubba's prototype, hence already shrunk it down from two big bars to one big bar. And Kent and the team are continuing to look at all the different features of Bubba's and all the construction components of Bubba's to see what else we can strip out without impacting the guest experience because we are getting solid repeat business of guests. Bubba's sales are well over $4 million a year in average, which is a pretty strong concept bringing new concept over the gates (14:53) so we're pretty happy with that, the margins are very good. It's really more of a fact that the development costs are the biggest opportunity for us.

This is Kent. Yeah, we've taken – probably we'll end it with about 1,400 less square feet and then from a parking standpoint, we were up at about 220 parks and we think now we can probably do about 180 parks and then be okay.

Got you. And then back on the Roadhouse side, I wonder if you could talk a little bit more about the sales trend during the quarter. Those clearly picked up and it looks like your gap versus the industry widened a little bit in 1Q versus 4Q, and definitely even from the startup of 1Q. So curious if you could walk through kind of what you saw in January, February, March, and then just any color you have around what's going on in the industry, love to hear it?

Will, this is Tonya. I can tell you, there was just a lot of noise, I think – a lot of calendar shifts going on, really in all months we didn't even (15:56) had a little bit in January with New Year's Eve. So there was just a lot of that going on. I know a lot of – again, a lot of people speculated on tax refund delays and things like that. I mean you could look at those numbers and think perhaps some of that was going on too, if you're looking at February and March. But overall, when we're looking at day parts and regions of the country and things like that, it was much of the same story as what we've been seeing in the past from that perspective.

Will, this is Scott. I think when you're looking at us versus the industry trends and the gap widening or narrowing and widening and narrowing, and it's happened over time for many, many years. We never really know why their rules are widen (16:40) to be honest, we've just keep doing what we're doing which is very protective of our food quality and our price points and our flavor standards, same things you've heard forever and we kind of just stuck (16:53) to that and continue to do that and gets work for us (16:54)

Great. Thank you very much.

Thank you. We'll go next to David Tarantino with Baird. Please go ahead. David E. Tarantino - Robert W. Baird & Co., Inc.: Hi, good afternoon. My first question is on the pricing and the margin outlook. I guess, Scott, in the past, you've sort of talked about getting to restaurant level margin expansion this year might be difficult and now that you've taken a little bit more pricing. Can you talk about the dynamics around the margin outlook and whether it's more probable that you can show a little bit of margin percentage expansion this year if the traffic momentum continues?

Well a lot of good things happen if your traffic momentum continues I mean that's always the case typically. Labor inflation is still somewhat of a wildcard because it's still very high for us right now. And we projected that, we'll likely continue to the rest of the year which if it does, we'll make it tough for us to grow margins even with a little bit more pricing. Again, how much of the extra 0.5% of pricing will flow through in the form of check increase remains to be seen. But I wouldn't take any margin or growth for granted at this point despite us take a little bit more pricing. David E. Tarantino - Robert W. Baird & Co., Inc.: Great. That's helpful. And then on the mix side, so it looks like in Q1, the mix was negative. If you could talk about the dynamics of what caused that and whether that will continue? And then I think you mentioned that you're going to have smaller portion sized entrées added to this new menu. And I was wondering if you test with the (18:45) the impact of that and if that will have a measurable impact on the mix going forward?

Hey, David, it's Tonya. I can answer your mix question. Yeah, we had about negative 60 basis points or so on negative mix in Q1. And really it was more a function of the calendar shifts and things like that, specifically on Valentine's Day. That one seems to pop (19:03) pretty big for whatever reason, whether it was related to alcohol or entrées. So if you kind of take those out, it gets much more – the mix gets much more consistent over the quarter and actually comes down to I would say, call it, like 30 basis points, 40 basis points. So hard to read a whole lot into that 60 basis points in Q1 because of all the calendar shifts.

And then I think on top of that as Kent mentioned in his remarks, having a smaller sized salmon and New York strip will probably no doubt have little bit negative mix for us. But we think, in the long-term, in the marathon versus the sprint, having increased competitively price points on the menu plus a smaller portion sizes will be appealing to certain number of guests in today's world, but being a little more relevant on the menu, and we think it will pay us of course (19:56) in the long-term will pay off, however, in the short-term, it maybe a little bit of negative mix for us. David E. Tarantino - Robert W. Baird & Co., Inc.: Great. Thank you very much.

Thank you. We'll go next to Chris O'Cull with KeyBanc. Please go ahead.

Thanks. Good afternoon guys. Scott, are the stores that have been opened 6 months to 18 months on track to average volumes that would be equal to or a little higher than their fully capitalized investments?

No. They would be probably 85% of their – that's a rough number of their fully capitalized investments, that includes taking 10 times their first year's rent plus adding all the preopening in, probably closer to that range.

And so when you see they're meeting your (20:45) hurdle rates, are you thinking that their volumes will continue to improve? Or the margins just pretty compelling and that's why you're generating the sufficient return?

Well, it's just that when you're doing 87% a week, that's still a pretty high number. And with the margins that we've got, I know it relative to the total investment costs. And keep in mind, a lot of that investment costs, number one, it's 10 times rent and then you've got a preopening which is all deductible and in time zero, if you will, from a cash flow perspective, so it's a pretty big number for us, so all that gives (21:23) into the returns. Because returns aren't as strong as they were three or four years ago when our average investment costs were in the low 4%s. So it's still a cautious time for us and one reasons why we're doing 24 Texas Roadhouses and not 34 or 44 (21:38) and we've always said, it's probably going to get tougher once we get past each 100 of restaurants, now past 500, if you will. We know it's going to get a bit tougher and part of the rationale why we said our limit probably 700 to 800 because the return equation just gets tougher and tougher.

There's been – as well, our building materials are up and the labor associated with electric HVAC and plumbing is up, so part of it is baked in there as well.

Sure. Our expectation be that Bubba's will continue to increase in the number of units and Texas Roadhouse will continue to decline in terms of total number of units, with the 30 will stay pretty constant going forward?

I think, Chris, it depends on how well Bubba's performs over time. And if we're able to get the economics or the returns I'll say to a point that we're comfortable increasing the number of Bubba's that we build. And as I mentioned earlier, we do need to do continued work on the investment costs day written gross (22:46) sales, that's free. Margins are really good on the Bubba's side, but I think the investment cost is the bigger opportunity for us that we can continue to work on that. I would see us accelerate number of Bubba's. Definitely the runways there, there's no doubt for the food, and the service that Bubba's provide, there's a long runway for it, we just got to keep sharpening our pencils on the box economics.

This is Kent. Also on the people front too, we want to let our leaders of Bubba's get a little more experience before we push down the guests a little more as well.

Okay. And then just lastly, what's the company choose to leave so much cash on the balance sheet?

Well, we like looking at large numbers of cash on our balance sheet, basically. It's a risky world out there, and you never know what could happen, that's one thing. Second thing is, we've got a lot of flexibility, obviously when you've got that much cash on the balance sheet, whether it's the buyback our stock, buy something else, acquire franchisees. Whatever it is at the end of the day, we'd like to have the flexibility. There's a limit of how much cash, I can't comment on what that limit is that we would allow to pileup, but we definitely like seeing the flexibility that we have.

Great...

And we wanted to be very prudent on our stock buybacks as well.

Fair enough. Thanks guys.

We'll go next to David Palmer with RBC. Please go ahead.

Thanks. It looks like labor per restaurant was up 7% or so, maybe a little bit more. Given the mid single-digit guidance for labor inflation, does that imply that you think that inflation will moderate in the upcoming quarters?

I would say we certainly hope so. I mean you're right, it was up 7%, that's all in. We saw hourly wage rate inflation was up about a little over 4%. We had that manager compensation change that we took early December, that's running about 1%. And then obviously, the traffic – how much traffic you're running also comes in a play as far as what your store week growth is. So I would – so that's 7% store week growth is just a little different than just wage rate inflation and the guidance that we're giving you on, what we think the wage rate inflation would be.

I would tell you too, we challenge our people to staff to grow sales, yeah, so we challenge them to do and certainly our folks get pick on the bottom line, they're natural waste (25:23) labor but at the same time, they kind of get it sales (25:31) making a lot of money. So and they tend to be pretty comfortable, being very well staffed. And over time is not necessarily a bad word, there's good over time, there's bad over time, in any concept and we're not afraid to some over time and that's part of the inflationary – or part of the cost per store we – the labor increase that you're seeing as busy as we are particularly, first quarter is typically our busiest quarter of the year. So we're not too beat up over that, if you will. Sometimes, with a healthy labor market comes a healthy revenue market as we've seen in our own traffic growth. And we know it hasn't always passed on this lobby (26:11) or casual diners, but I think the restaurant industry as a whole is still (26:16) growing, many more people continue to open restaurants because of the opportunity that is there.

Thanks. And just on your new store productivity, it looked like it improved across various ages of restaurants. To what do you attribute this improvement? And also just separately calorie counts, do you think that that's going to have any change or any impact in your business and why now for that? Thanks.

This is Kent. We've been doing calorie counts for quite a while in New York and a couple of other places and we've seen no change in the mix.

Right now, I think there was some rules associated with some of their Affordable Healthcare Act that they required (27:02) the calorie counts to go on in early May. I know there's some question as to if those are going to be implemented or not, but again, we kind of had already started that process and didn't want to turn back on that, so we're going to go on in and make that happen this week.

I think the other question about performance of clash years (27:20) in older restaurants, and our oldest group of restaurants continues to have very robust sales growth and has – and historically I think it's just part of our – the way we operate, particularly at our local store marketing programs and building relationships in our various communities has always been a big plus for us.

Thank you.

Thank you. We'll go next to Jeffrey Bernstein with Barclays. Please go ahead.

Great, thank you very much. My first question is a follow-up on the pricing, I guess, you're taking this week. And just wondering how you determine that level. I think you said 50 bps, I'm not sure whether you – is that based on surveying (28:03) of the operators? I mean it sounds like your traffic is solidly positive and it sounds like that pricing isn't necessarily enough to offset inflation, so I'm just wondering what the push and pull is in terms of how you arrive with that pricing? And then I had one follow-up.

Yeah, this is Kent. I had calls with all 50 of our area managers. And I would say of the stores that we are increasing, probably half of them had a labor increase on minimum wage in various states. I would say that's probably half of it.

Was there any thought on taking pricing above the 50 basis points to better protect the margin against the outside inflation? Or at this point, are you concerned about not necessarily want to lose the traffic?

I would say the answer is no.

Got it.

Yeah, I think we're always going to be conservative when it comes to pricing and really being careful, our operators with much rather (29:00) drive traffic then take the chance on taking pricing up too much and we just really want to make sure we're maintaining that value.

Got it. And then just on Bubba's and with 16 units already in (29:16) this year. I mean it sounds like you're making some tweaks to the size of the box and maybe the parking, but at this point, is it safe to say that you're confident that Bubba's as the second brand or but we're not yet far enough along where we can make that kind of commitments just yet?

I am confident to tell you that is the second brand.

Great. Well my last thing was just any comment on Texas exposure. I know you mentioned something about regional trends, but I'm wondering whether Texas or any other regions were specific stand outs?

Yes, Jeff, this is Tonya. Really we didn't see much of a change. I mean, Texas continues to perform well relative to the base of restaurants. We continue to see a little softness in the northeast, that's really been that way compared to the rest of the country. So really no changes from what we would normally see.

Great. Thank you.

Thank you. We'll go next to Jeff Farmer with Wells Fargo.

Thanks, guys. And sort of a harp on Bubba's, but definitely some follow-up questions on this one, so where do you guys stand with Bubba's management in development infrastructure, meaning, are there some sizeable incremental investments that will need to be made in 2017 or 2018? Or are you guys still waiting to figure out when to make those investments?

Jeff, this is Scott. We've actually been making those investments, so year and a half or so ago, we've created a dedicated operational leadership position for Bubba's, we call it regional market partner in Texas Roadhouse product launch (30:52) if you will. And he's gone out and hired a number of market partners. And those folks in turn have gone out and hired a number of potential or current managing partners, either to staff current restaurants or (31:06) restaurants, so in essence, building the people pipeline. And on top of that, we've added similar support positions such as product coach, service coach that we have on the Roadhouse side to the Bubba's side. So the Bubba's team is staffed, and they are getting in gear or have been getting in gear for some time now, as Kent mentioned. And are continuing to learn more about day-to-day operation of the concept what the guest likes, what they like less and from all aspects of quality of the food, the consistency of the food, the service experience, the asset, everything.

Yeah, typically, we're hiring people 12 months to 18 months ahead of when they get a store, so we would like to have some seasoned people up with a relatively new brand.

And just again, a follow-up on that, so how are you handling the supply chain across the two concepts? Is there shared supply chain, is there efficiency there?

Not really much efficiency yet, I mean of the same purchasing department that does all the buying for Texas Roadhouse for us is also doing under all the buying for Bubba's. Ultimately, if we were to develop enough Bubba's, we'd see more efficiency, so there's some upside likely and food costs over time. But for now, the purchasing power is very minimal, just given the smallness of the concept.

Okay. And just final one again on Bubba's, so Scott, you were asked about the economics earlier, and I think you sort of said that, you need to get the clarity figure out if that concepts sort of merits the accelerated development. Is that decision where you have the, I guess, the feedback or all the information you need by the end of 2017? Or is this something that sort of maybe you get into 2018? When do you expect to have that clarity?

I think it's going to take us beyond 2017 to retched out how far we can go on the development costs without sacrificing the experience of the guests in some way, shape or form, whether it's the overall vibe of the restaurant, whether it's our ability to crank out legendary food, whatever those things are, we still got a little bit of ways to go to right size the whole thing. It's going to take us fire a few more bullets, I think, kind of the Bubba's gun to figure that out.

All right. Thank you.

We go next to Andy Barish with Jefferies.

Hey, guys. Just on the negative mix issue, and the introduction of smaller entrées. I guess, are you seeing, I know you don't do sort of the real time consumer behavior stuff, but do you think the consumer is changing? Or is it – are you responding and trying to attract a new consumer to the brand with some of these smaller, lower price point entrées?

Andy, this is Kent. Some people don't like to eat as much and some people don't like to pay as much. It's kind of that simple, believe it or not.

Okay. And are consumers kind of figuring out the way with early dine, is that continue to increase as well to try to avoid the wait time you guys go on a lot of those restaurants?

Exactly, I mean early dine is up a little bit, our carry outs up a little bit as well and has grown over the years without us really pushing it, it continues to go in part because of the ways that we have teed (34:45) inside the four walls. So, and we've gone to more of an online to-go platform that's still rolling out along with our app, on which you can order to-go in addition to get on our call ahead list and pay your bill, all those things are being rolled now. And when you have online to go, typically you sell a little bit more to-go products, so all those are a little bit lower guest check vacations in that case. But I think people also figure out that like our 6 ounce and 8 ounce sirloins are really awesome, it's sort of (35:20) like have you had our steak lately, and if you have, you kind of get a wow, pretty good. And so that's part of our – part of what's made us successful.

Appreciate it.

We'll go next to Karen Holthouse with Goldman Sachs. Karen Holthouse - Goldman Sachs & Co.: Hi. One more of Bubba's question for you, so there's couple of units out there that opened for a couple of years. Are those units, if you were to look at sort of the Bubba's only same-store sales comp, are those units comping positively?

That's something that, I would tell you, is mixed. So we've got some that are up, and we've got some that are down. And that's part of us trying to figure out, sharpen our pencils on, what is the guest liking about the concept, not liking about the concept, is it us, is it our operational execution, is it the menu? And again, all of the older stores have the two-bar prototypes which are pretty large prototypes. And (36:32) those two-bar prototypes, sometimes the energy level and suffer a little bit depending upon the location if the bars are less than full, meaning if you got two bars that are half-full versus one bar that's full, and maybe that is not such a great experience, but we're still working on with the Bubba's team to understand the why it's behind all that. Karen Holthouse - Goldman Sachs & Co.: And then one quick modeling question. If you exclude the charges from this year and last year, G&A looks like it was actually down by about 30 basis points as a percent of sales. It's probably up like, 5%, 3%, 4% which is much slower less than (37:20) an increase, somewhat we've been seeing. And so anything else in (37:22) incentive comp or something like that, then they're just trying to think about (37:27) to extrapolate that trajectory forward.

Sure, Karen, this is Tonya. Yeah, you're right, so bonuses, incentive compensation for the quarter, did come in a bit lower in Q1 compared to last year due to the charge, so some of that is coming into play there. If you keep back with just those charges out, you're going to see more of that bonus impact. Karen Holthouse - Goldman Sachs & Co.: Okay. So then thinking about the growth rates going forward, would we expect that the year-over-year increases are accelerating or 20 basis points or 30 basis points of leverage reasonable for the rest of the year if there was a pretty stock departuring (38:13) trend.

Yeah, I think for the full year, we expect our goal is to keep G&A growth year-over-year below revenue growth. I mean that's what we're shooting for. So I would say we definitely still expect even baking out the charges there to be some growth year-over-year on the G&A line. Karen Holthouse - Goldman Sachs & Co.: All right. Thank you.

Thank you. We'll go next to Jason West with Credit Suisse. Jason West - Credit Suisse Securities (USA) LLC: Yeah, thanks. Just a couple of things, on the beef outlook, it looks like beef prices has started to come up again off the bottom here. What you guys are seeing there, if you expect the bounce we've seen lately in cattle and beef prices to be sort of temporary and that would still in sort of a downward trend or are we going to start seeing higher beef prices as soon as the back half of this year?

No. I mean, really, I would tell you, we're floating a pretty significant amount of the beef, especially in the back half of the year and there's some thought that waiting is maybe the better way to go. But who knows, at the end of the day, you're absolutely right, cattle futures look pretty good right now, so who knows where that'll end up.

Seasonally, this is a higher time or seasonally, Q2 is higher normally for price to cattle and beef in general, so that's not necessarily that unusual. I still think brand (39:37) is in a pretty good direction, but you know what, we never expect or bank on any particular direction, to be honest, beyond the years out. Jason West - Credit Suisse Securities (USA) LLC: Okay. And can you comment what was the 1Q deflation in the full basket? And then if you could offer (39:59) what beef was in the quarter as well, I didn't catch that.

We didn't talk about beef on the full basket, but – beef deflation, but we did talk about the commodity basket was 2.4% deflation for the quarter.

We don't typically give out beef by itself. Jason West - Credit Suisse Securities (USA) LLC: Okay. Got it. And then just want to understand on the labor outlook, the overtime rule change you guys put in place in early December, that's kind of a one-time step up that you would lap, I guess, going into next year or not lap, but it would sort of level off into next year, and maybe takes a little bit of pressure off the labor line for next year?

Yeah, you're absolutely right. We rolled that at the beginning of December 2016, so we would see that – we would start lapping that at the end of November this year. Jason West - Credit Suisse Securities (USA) LLC: Okay. Got it. Thank you.

Thank you. We'll go next to Alton Stump with Longbow Research.

Thank you. Good afternoon. Just a quick question, actually a follow-up on a prior caller asking about balance sheet, Scott, obviously, but you guys are generating (41:10) more than enough core operating cash flow to fund your capital expenditures, which sound like (41:15) meaningful in coming years. So why not put your balance sheet more to work (41:22) net cash position, once again, you're able to fund growth on your own. What's your thinking as far as whether it could be buybacks and/or dividend to potentially put your balance sheet to work?

One, we continue to raise our dividend at pretty healthy rate each year, and we've done that and we'll continue to do that. And I don't know that cash certainly helps protect our ability to do that. Again, we bought back four franchise stores at the beginning of the year and you may see us do more of that in the coming years. We just like to have a lot of flexibility. We also like to just know we're able to weather any storm that might come our way, and – because sometimes these things happen, I mean, the economy is tracking (42:17) pretty good now, unemployment is pretty low, and all of a sudden it's not. So we just have seen other companies have some tough times and we just want to be prepared in case that happens to us for whatever reason. We've got a lot of cash on hand to take care of the day. But again, if the opportunity presents itself, in some way to use that cash, we'll definitely put it to work if we feel the return is there.

Excellent. And just one follow-up, just also back to a prior question, I know there's a lot going on as you mentioned, Tonya, sort of holiday shifts, et cetera, during the quarter. But as far as the tax returns impact, it seem to me like that would be a pretty big deal just that's what (43:00) the numbers were, (43:02) was there any evidence you guys saw whether it is in markets or any population groups that were most heavily impacted by those delays if it did indeed drive some of that traffic recoveries from the first half to the back half of the quarter?

Yes, Alton, it's Tonya. I don't think there would be any possible way to read that into the numbers. I mean, there's just no way to isolate that. And you certainly can't ask people, it's just really hard to quantify what that could be. I mean, given the size of the tax delays that a lot of people were talking about, I mean, it's not unreasonable to think that that was maybe doing some things there, but there'd be no way to quantify what that was from a comp perspective for us.

Got you, understood. Thank you.

Thank you. We'll go next to Peter Saleh with BTIG. Please go ahead.

Great, thanks. I just wanted to get your perspective on the industry dynamics, I guess, during the quarter, and maybe if we're even taking a step back a little bit until last quarter, are you seeing the promotional environment discounting, has that changed at all over the past couple of months? I guess, what is your take on the overall promotional discounting environment today?

Peter, this is Scott. We don't have a specific measurement for that. It does seem like there are certain people that are discounting and then they stop and other people start discounting and then they stop. It just seems like there's always somebody out there with some level of discounting. But at the end of the day, that's why we keep our prices very aggressive and competitive, and why we only take – you're only taking 0.5% versus any more. We never talk in terms of pricing power. And so it drives kind of what we do. We just don't have a measurement to tell you that the level of discounting or promotional activity is greater or less than what it was last week, last month or last year.

Okay, fair enough. And then I think you mentioned your to-go sales grew during the quarter. Can you give us a sense of whether to-go sales as a percentage of mix are today, and how quickly they grew in the quarter?

Well, they were about 5% to 6% of our total sales today. I can't tell you how much they grew in the quarter. I can tell you, if you went back five years ago, they were – roughly 3% to 4% of our sales. So they've grown in a nice clip over the last three or four years.

Okay. Thank you very much.

You're welcome.

We'll go next to John Zolidis with Buckingham. Go ahead, please.

Hi, good afternoon.

Hey, John.

Question on two separate topics. First one is a follow-up on the labor costs. You mentioned that it was up about 7% per store. And one of the explanations for that relative to the mid-single-digit guidance on labor inflation was the sales performance in the store. So my question is, if we're assuming a 3% comp environment going forward, just theoretically, should we also then assume about a 7% per store labor increase?

Well, yeah, when we were talking about the 7%, that was on a per store week basis. Typically – it's a hard question to answer. Typically, I can tell you when we're looking at that, we would assume you're going to probably lose the benefit about 50% of the traffic when you're looking at labor as a percentage on a store week basis as far as they're (46:55) growing. So you don't get the full impact of that traffic flowing through, you're going to lose probably about 50% of that. But that number could be different. It just depends on the productivity of the restaurant, how well they're staffing, different things like that, it could be more, it could be less. But just when we're kind of looking at over the long-term, that's kind of the number we use.

So just to clarify, on a 3% comp, is the 7% labor per store week could be higher or lower than that going forward?

Part of it depends on just you've got multiple pieces that define labor inflation. You've got just inflation in hourly wage rates of just hourly positions in the restaurant. And some of those are influenced by the labor market, some influenced by minimum wage, you got another piece influenced by just our traffic counts and how much we staff in our restaurants to manage our traffic. And then you've got, of course, the impact from the (47:58) the Department of Labor changes. And so all those are slightly moving pieces. And so the comp growth piece is only one part of that. So a 3% comp for the whole year could result in 7% labor for per store week inflation, but it could be higher, it could be lower than that depending upon what these other two pieces do, meaning just inflation and just normal hourly wage rates plus the Department of Labor stuff and where that ends up being for the rest of the year.

And a lot depends on what – how much of that 3% comp is traffic versus pricing, the pricing you're going to get the benefit of.

Right. That makes a lot of sense. Okay. And then on a different topic, I wanted to ask about the purchase of the franchisees. I know it's four locations, but you mentioned you might do some additional locations. So first, just from a modeling standpoint, are those in addition to the 30 openings that were previously guided for the year? And then separately, can you talk about how you price and decide whether or not to purchase franchisees and what your return hurdle rates are if those are similar versus you opening up a store on its own, or do you use a different criteria? Thank you.

So the four franchise stores we repurchased (49:28) are in addition to the 30 openings that we mentioned for 2017. So to your point, there'd be roughly 34 additional company restaurants at the end of the year. Actually two of the four actually are going to be joint ventures where we're buying a majority – or we bought a majority portion of those restaurants. So typically, when we buy franchise stores, we've got minimum return thresholds that we're shooting for. We're comfortable if those are a little bit below our return thresholds on a new restaurant, most importantly because we already know what the sales are of the franchised restaurant. They already have a sales history which takes a significant part of the risk in volatility out of the whole equation. No one knows (50:18) what's going to happen in a restaurant. So new store, no one's really that great at predicting sales in new restaurants, there's a certain amount of fluctuation there to it. Buying a franchise restaurant, you've already got a track record that you're buying, so you can afford to pay a little bit more for that, albeit (50:39) little bit lower returns.

Great. Thanks very much. Good luck.

(50:42).

Thanks very much, and good luck.

Thank you.

Thanks, John.

We'll go next to Andrew Strelzik with BMO Capital Markets.

Hey, good afternoon. So I wanted to follow-up on the to-go sales. As you mentioned, growing nicely, making some changes on the digital side, but there really isn't been much of a focus in pushing that piece of the business. So can you just talk about conceptually your thought process behind to-go? What role does it play over time in the business? Is there any thought to really putting some more push behind it?

We like to have people come into our restaurants. Our mission statement is Legendary Food and Legendary Service, Legendary Service is a big part of it. The energy in our restaurants, we want to serve guests, we want to spend an hour with them in our restaurant, that's what we love to do is run restaurants and we think it's a strength of ours. For those folks that prefer to take the food home, we want to do a great job with that, we want the food to be great. We want them to get great service with us, but ultimately, we wanted them to spend time with us inside the four walls, so we want to be very careful about pushing our guest into a carry out type occasion and not coming in and spending time with us. Previously, some other concepts have gone that route. And while they may have been saying carry out was incremental or it's getting to this level, it seemed like the reality was their dining business was going down. And once your dining business starts going down and your restaurant gets a little more emptier, you lose a lot of energy and it just ends up being maybe a tiny bit incremental in the short-term, but more detrimental in the long-term. So we're just very careful about how we talk about the carry out opportunity.

That's helpful. Thank you. I also wanted to circle back on something. I think you mentioned last call, which was making some investments in the back of the house to kind of ease up some capacity. Where are you on the thought process as it relates to that? And is there a percentage of the company-owned stores that you think might need that type of investment?

I'm not sure – the only thing you're talking about is making our kitchens bigger. We really haven't gone that route any big way yet. We've just been experimenting with various plans to what would it mean cost-wise to expand the back of house to support adding additional seats, but there's also the part of how food flows through the kitchen and certain bottlenecks in the kitchen that we have to resolve, so otherwise not to have inordinate cook times, and it will just make our guests be upset. So we're still playing around with different plans, but we haven't pulled any triggers on really kitchen expansion at this point.

Great. Thank you very much.

Thank you. Next we'll go to John Ivankoe with JPMorgan.

Hi. Thank you. Just a couple of quick ones, if I may. Scott, in your prepared remarks, you mentioned not being happy with or I guess wanting the newer average weekly sales volumes at $87,000 to be closer to your existing units of $100,000, 87% is just the way those numbers work out perfectly. Is there a specific plan of looking at that newer class to getting sales volumes? I mean, are you doing anything from a marketing or operational perspective, or was that just like a broad comment that you wish they were higher?

It's more of a broad comment to wish they were higher, John. Again, as we've mentioned before, we know it's tougher. And so when you're looking at the individual locations, you kind of knew going in, this one, smaller town, or this one, more competition, or this one, more in the outskirts of a particular city. So you knew you were taking a little bit more risk and it might be a longer road to get to a more higher sales volume, meaning that either you've got to let the (55:02) catch up to where you build, you got to wait out somebody else – competition to close or you know you just are taking some chances with some smaller towns and you got to accept a little bit lower sales and therefore a little bit low return, but you're okay with as long as it's above your cost of capital. And so that's just part of that.

Let me take the bait on what you just said, wait for some competition to close. Are you beginning to see competition closing have a positive impact on your business even in specific trade areas?

I mean, if you've got – I think we had 25 Logan's closed recently. We've got Logan's that's closed near us, typically that's going to – some of those folks are going to drift over to us or any other concept that has a similar menu to ours, that's going to be a help to us. So sometimes we know that can happen and that can be a benefit for us to happen and that can be a benefit for us and we feel like a marathon, not a sprint, so – and we do these deals and lot of times that can happen and will happen.

Okay. And I mean, you're asked about your cash balance a number of different times on the call and I think you used the word acquire something else at one point in one of the answers, what would that be? I mean, would that be casual dining brand, a casual dining value brand? Would you potentially do an asset deal and do conversions to Texas Roadhouse, I mean, what's the strategic planning at this point in terms of maybe you guys doing something additive or transformational or what makes sense for the company at this point?

This is Kent. It would be, call it, buying back more franchisees.

Oh, all right. Sorry for putting words in your mouth. I didn't mean to do that. So is an acquisition off the table at this point be it for anything that you currently don't own?

You got somebody in mind?

Sure, I don't, not officially, there's a lot of cool independent stuff that's out there as you know, but it's probably not the venue to throw out names.

I have your people call our people (57:17).

Well, I can't know about that.

Yeah, yeah (57:20).

We have to start (57:22) talking about that.

Yeah. I can't – I would tell you this John. I would say that never say never. We don't have our heads in the sand, I'll tell you that, highly unlikely we would buy something of a large size that somebody pitched to us for G&A efficiencies or even large scale conversion for Texas Roadhouse locations or even Bubba's location, that's happened in the past, and usually it's some 50, 100, 200 store restaurant chain (57:58) of the sites, and nobody's going to sell you two of the sites. So I don't see us do anything in a big way. If anything, it would be really small, to your point, some small independent or something and that's a big if, and I would never say never.

Thank you.

You're welcome.

And we'll take our final question from Steve Anderson with Maxim Group. Please go ahead.

Yeah, so thank you for taking my call. Most of my questions have been answered, but I do want to ask about geography, I know you said you didn't notice (58:28) anything, any wild swings in – between the regions, but we're hearing from some of the operators that some of the Midwestern operators have seen better sales relative to a year ago, they think weather might have played a role in the easier comparisons, just want to get your thoughts on that.

Yeah, I mean, you always have the potential for some weather shift, you just never know year-over-year. We really don't pay a whole lot of attention to weather, or what impact it's having. I can't think of anything. There was nothing that I don't – that we would call out that was significantly different or driving anything.

All right. Thank you.

We don't measure – and our Midwest region wasn't that much different than our other regions, say for, as Tonya mentioned earlier, the Northeast a little bit softer, but not that much different. So I wouldn't say if there is something there today.

All right. Thanks.

And we'll take our final question from Brett Levy with Deutsche Bank. Go ahead, please.

Good afternoon. Can you be able to share a little bit more color on how you're thinking about technology, what's going on with your test in Houston and just in general either customer facing at the store level or other areas where you might have additional capacity improvements? Thanks.

Brett, this is Scott. I mean, right, so we started our app test in Houston and we've expanded it to Dallas and then now we're probably encrypt (01:00:00) to maybe 100 restaurants now with the app, pretty soon it'd be 100 restaurants, and I imagine by the end of the year we'll be – most of the country will have the app. And again, on our app, you can get on our caller head list (01:00:12), you can pay your bill, and you can also order to-go. It will be slow going, meaning that there will be – some people will download the app, some people won't. Our marketing folks are working on various incentives to get people to establish a profile and download the app and use the app in various ways, but there'll still be plenty of need for us to have numerous phone lines and be prepared to answer the phone and be prepared to deal with an online platform as well in addition to the mobile platform. That's probably the biggest technological thing we have. We don't have any plans for table-side tablets at this point. At some point, I'm sure there will be some probably pay-at-the-table thing that we will do, but that technology continues to evolve. So not sure where we will end up on that or where the laws will take us, meaning will it be illegal for us to even touch your credit card five years from now. Don't know. But something will happen there and we will act accordingly with that. But actually the biggest thing technology-wise that we've got, we've got our guest management system in place that we're very happy with. We've got our back office system, which helps us better understand our food costs, P&L and look at labor and so forth, which we're very happy with. So we don't have plans at least in the Roadhouse fran (01:01:48) to do a kitchen display system like you see in other concepts, Bubba's has it, but we don't think today that's something that's needed at Texas Roadhouse. So we feel pretty good of where we're at right now technology wise.

This is Kent. We have been pleased though with our to-go sales with people online and using the app. So, hopefully, that will be a nice add for us.

Thank you. I'd like to turn the conference back over to management for closing comments.

Yeah. Thanks to everybody for joining us and have a great week. Thanks.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation.