Edited Transcript of DFRG earnings conference call or presentation 7-May-19 12:00pm GMT

Dramatically, comparable restaurant sales trends were similar, albeit slightly stronger overall to what we experienced in the fourth quarter last year. Concept Barcelona and Bartaco increased in the low and mid-single digit ranges respectively. Del Frisco’s was slightly positive and the Double Eagle was only slightly negative despite planned sales transfer in our Boston Seaport location.

We had anticipated 10% sales transfer impact on our Boston Seaport Double Eagle restaurant from the opening of our Boston Back Bay Double Eagle restaurant in Q3 of 2018. Excluding Boston Seaport, which was down 11% in comp store sales in Q1, all four brands including the Double Eagle would have experienced positive comparable restaurant sales in the quarter. For the second quarter to date, which has started off with different weekly laps for Easter and Passover and some seasonal weather variations. we are tracking low to mid-single digit positive comparable restaurant sales at Barcelona and Bartaco, while the Double Eagle and the Grille are low-single digit negative. However, we feel good about the sales trends in the Double Eagle. Chicago, which has been a drag on the Double Eagle in DFRG comp sales for the last few years is now closed and we left the Boston Back Bay opening in Q3, when we will start to see the sales transfer impact mitigate. Excluding Chicago and Boston Seaport, six of the last nine periods up to and including April have experienced positive comp restaurant sales at the Double Eagle.

Note also that was Cinco de Mayo over the weekend, we’re just now entering our historical peak seasonality month for our Barteca brand, which differs from our Double Eagle and Grille brands, which had peak seasonality in Q4. Like Bartaco, Barcelona also has a significant patio business but has more even seasonality across the year. We are pleased with the underlying core restaurant level operating margin performance in Q1 with like-for-like margins growing year-over-year. As anticipated, when we acquired Barteca, we are also benefiting from the addition of the high margin Barcelona and Bartaco brands to our overall portfolio. However, with significant new restaurant development over the last few quarters, we were impacted as expected by new restaurant inefficiencies.

On a GAAP reported basis, our restaurant level EBITDA reduced by 70 basis points from 19.6% to 18.9%. Overall, new restaurant level EBITDA margins were a 270 basis point drag on total margins in Q1 2019 compared to EBITDA margins at restaurants that were included in our comp restaurant sales group. This compared to a 290 basis point drag in Q4 last year. The market drag was 520 basis points at both the Double Eagle and Bartaco, where you’ve seen the most significant development. Recall, that we have most of our 2018 openings in the back half of last year, including five openings in Q4 of 2018 while we had another four openings during Q1 this year and we had 21 non-comp restaurants in Q1, representing over 25% of our total restaurant base. Without the drag of new store margins, restaurant level EBITDA for Q1 2019 would have been 21.6%. As we have discussed in the past, we strive to ensure flawless execution from the very beginning by slowly building our revenue base through limited reservations early on and we open with limited dayparts.

This enables our teams to better acclimate to their new roles and deliver the high standards of service and attention to detail that differentiates our brand and postures to building up long-term relationships with our guests. Therefore, it typically takes sales at new restaurants 18 to 36 months to reach maturity and at least 6 to 12 months for them to achieve EBITDA margins at summer levels to more mature restaurants. This is why we set third year return on invested capital targets for our new restaurants. However, since the margins at new restaurants generally improve from period to period as they mature and all but one to two of our plain restaurants have already opened as of today. We anticipate the impact of our new restaurant inefficiencies on our total restaurant level EBITDA margins to begin moderating in the second half of the year.

Now let’s discuss our individual brands. As I said a moment ago, the comp restaurant sales decline at the Double Eagle once again primarily affected sales transfer from the Boston Double Eagle to the new Back Bay Double Eagle. The sales transfer alone impacted our flagship brands’ comp by an estimate 110 basis points or said another way, the Double Eagle would have otherwise been positive 0.7% compared to the 0.4% decrease that we actually reported if we exclude Boston Seaport. Notably, our traffic trends also improved from Q4, 2018 and would have been flattish, excluding the sales transfer impact in Boston. With our Boston Back Bay restaurant having opened in Q3, 2018, we anticipate the sales transfer will be less impactful in the second half of 2019. As a reminder, the opening of our second restaurant in Boston, has been very successful providing more opportunities for guests to access the brand and creating significantly more private dining opportunity.

As a result, we are growing revenues more than 50% in the City of Boston. Providing our guests with a memorable experience has always been a hallmark of our flagship brand, but we are also utilizing innovation to drive frequency and expand our appeal. Examples include upgrading various guest touch points, such as the core presentation of our food and increased table service presentations highlighting local chef innovation, through an updated bar menu featuring five core and three local items and creating a more robust Fresh Fish program with increased chef driven preparations. We’re also focused on increasing our lunch traffic by adding innovative salads, new entrees and vegetarian options. Notably, Double Eagle private dining rose 4.6% on a comp basis during the first quarter, reflecting the growing strength of this ancillary sales channel, Across all of our Double Eagle and for that matter, Grille restaurants, we believe that there is significant opportunity to continue driving private dining sales and generate revenue streams that are incremental to the core business.

Our growth tactics include innovating around our private dining menus, cultivating relationships with local business and luxury hotels, impactful marketing campaigns targeted to specific industries and gift baskets. From a margin standpoint, we experienced inefficiencies at our three second half 2018 new restaurant openings in our Century City, California location, which opened in February. We also closed our Chicago restaurant in January. Together, these resulted in a 520 basis point drag on the Double Eagle restaurant level EBITDA margins or said another way, restaurant level EBITDA would have been 26% versus 20.8%. Del Frisco’s Grille comparable restaurant sales rose 0.2% reflecting stabilization and the continuation of the turnaround that we have been experiencing since implementation of our new brand repositioning strategy in Q4 of 2017. This strategy entails targeting experienced spenders and social (inaudible) who together compromise more than half of the brand spend and involves aligning all food and beverage offerings in our service platform to pitch your way a lively high-end social experience that leverages the Del Frisco’s brand heritage.

Our execution philosophy is predicated on consistency of service by being the best at the basics in simplifying operations including back of house systems and processes, creating reasons to return was seasonal menus and events such as regular wine wind dinners and continuing to diversify and innovate our core menu for our regular guest.

For example, by expanding our proteins. As you can see, largely offsetting the significant increases in check and decreases in traffic continue to moderate as these strategic changes take hold and we’re encouraged by sequential improvement in traffic compared to Q4 of 2018. We anticipate the strategic churn that we are seeing in our consumer base will continue to decline in the second half of 2019. Private dining sales at the Grille continue to be a major growth driver rising 2% on a comp basis, rolling over a 35.7% increase in Q1 2018. As more guests are becoming aware of our banquet menu offerings and considering us as an attractive venue for business or social functions. Our private dining growth initiatives include centralizing our private dining team from the restaurant to in-house call center staff by experienced restaurant operators, updated menu offerings to match guest demand, new social media managers with hospitality background in an upgraded service style to both elevate and simplify the experience. The Grille restaurant level EBITDA margin increased 220 basis points as we benefited from restaurant closures last year, gained efficiencies at comp restaurants and saw strong performance from new restaurants.

Notably, Fort Lauderdale, which is the best representation of our Grille prototype for future development is now the second highest revenue generating Grille after our New York City location and more ahead of our targeted sales. Together with our other two 2018 openings in Westwood, Massachusetts and Philadelphia, which are also performing well, our new restaurants are benefiting from the Grille’s margins with total margin 60 basis points higher than prior comp restaurants.

We are delighted with the results at our newest brands, Bartaco and Barcelona, which are both off to a very strong start in 2019. Having posted comp sales results for the first quarter at 6.7% and 3.7%, respectively, both driven by guest count increases. While Bartaco is benefiting from a 310 basis point lap from the October 2017 incident at Port Chester, both brands are clearly running on all cylinders, prioritizing guest satisfaction above all else, and have experienced as we transition to the DFRG.

After adjusting for insurance settlement accounting and the change in straight-line rent accounting as a result of the acquisition, Barcelona restaurant level EBITDA is slightly favorable year-over-year at 20.5%. Similar to the Double Eagle, our rapid growth at Bartaco has led to an impact from new restaurant inefficiencies on margins with new restaurant margins being a 520 basis point drag on total restaurant level EBITDA, which still came in at 21%. As these new restaurants mature, restaurant level EBITDA has been increasing every accounting period and we are well set to continue our strategy of maintaining high restaurant level margins in the future.

Turning now to integration. We are nearly finished with the process and are even ahead of the 12 to 18-month timeframe we laid out when we first announced the transaction. The entire DFRG is now live on our new HR system Workday, while Barcelona and Bartaco are expected to go live on our accounting systems this month after Double Eagle and the Grille brands both transitioned to it at the onset of this year. As expressed on our last quarterly conference call, we are also committed to realizing at least $10 million of integration benefits by 2020 or 2021 with just over half of these savings being G&A related. We already started to realize some of these G&A savings late last year while others will start to be realized in the second half of 2019 with the completion of integration. The balance of the integration benefits are anticipated through purchasing savings, new labor management systems and other operating expense efficiencies. We intend to use the benefits of these cost reductions to offset anticipated cost inflation. With respect to recent and near-term development, in February we opened a Double Eagle in Century City, California, which is the brand’s only opening this year. This location takes the concept of luxury to a whole new level including a revenue [ph] center called the Esquire Champagne Room that offers a (inaudible) small plate paired with champagne.

We also have signed leases for Santa Clara, California where construction has already begun and will open in the first half of next year in Pittsburgh, Pennsylvania, which is expected to open in late 2020. Additionally, we have two signed leases for prospective 2021 openings in Miami, Florida, and Austin, Texas, which we expect to be our second smaller box restaurant followed by last year’s Atlanta opening. In late January, Barcelona opened in Charlotte, North Carolina, which was the brand’s strongest opening in four years and this was then followed by an opening in Raleigh, North Carolina in April, which is also off to a great start. The third and final Barcelona opening of 2019 will be in Dallas, Texas, which is under construction (inaudible) . We also have a lease signed for Barcelona opening in 2020 in Miami, Florida and our ability to pipeline (inaudible) further 2020 openings. Bartaco opened in Madison, Wisconsin in February, which was then followed by King of Prussia, Pennsylvania in March and Deerfield, Illinois in April. The fourth and final Bartaco opening will be in Aventura, Florida during Q4 .In 2020, we have leases signed for openings in Arlington, Virginia; Miami, Florida, and Denver, Colorado. We’re also building the pipeline for 1 to 2 further 2020 openings. For our 2021 pipeline, we already have a lease signed in Woodbury, New York.

As a reminder, there are no Grille openings planned for either 2019 or 2020 as we seek to optimize our current portfolio and assort the learnings from our market research conducted in 2017. Recall that we closed a Double Eagle in Chicago in January and have one additional Grille closure under consideration. But beyond that, no other restaurant closures are currently contemplated. These steps are necessary to optimize our portfolio, ensure high returns and solidify our platform for future growth.

Before I turn the call back to Neil for a more comprehensive financial review, let me briefly discuss how we are enhancing guest engagement through our marketing activities. We are planning to launch a new loyalty program in the fourth quarter that honors the brand experience for each of our four brands, supports their operational approaches and provides all the experience that builds relationships and celebrates each guest. The loyalty program has been designed with a leading third-party loyalty consultant that has deep experience in the luxury and experiential dining space. This program will also help inform our decision regarding establishing a new CRM platform. While we are already employing personalized communication often in the form of paid written notes from our wine directors, executive chefs and GMs. In addition to email marketing and paid social overtime, we intend to use CRM data to prospect look-alike guests, target new guests through their interest in wine, food or events or through live events such as birthday, anniversary or new home purchases.

Digitally, we launched a new email provider, which has resulted in higher pick-through rates and enhanced our abilities to segment, so that we can better target guests versus simply sending out mass emails. We have also enhanced our search engine optimization for Barcelona and Bartaco to gain new guests in brand awareness and we continue to focus on enhancing our content library across all four brands. As you can see, we have a lot of initiatives and process within marketing that are designed to encourage our guests to celebrate life in our highly differentiated experiential restaurants.

Turning it over to Neil. Neil.

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Neil H. Thomson, Del Frisco’s Restaurant Group, Inc. – CFO [4]

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Thank you. Norman. Let’s begin with a discussion of the 13-week first quarter ended March 26, 2019 for continuing operations. Note that the completion of our sale of Sullivan’s on September 21, 2018, operating results for Sullivan’s and the related impairments and loss on sale are included in discontinued operations for all periods presented, and we will therefore not discuss the brand in any detail. For comparison purposes, I will use recast first quarter 2018 tables in the back of the earnings release, which also show results of Barcelona and Bartaco prepared by the former management of Barteca. Q1 consolidated revenues for the continuing business consisting of Del Frisco’s Double Eagle, Del Frisco’s Grille, Barcelona and Bartaco as if they had all been part of our company in the year ago period as well, increased by 15.4% to $120.4 million from $104.3 million. This overall growth was driven by 13.7% growth at the Double Eagle, 10% growth at the Grille, 16.2% growth at Barcelona and 29.1% growth at Bartaco.

It was a net 90 increase in operating weeks with new openings more than offsetting restaurant closures. Total comparable restaurant sales increased 1.3%, consisting of a 0.6% decrease in customer accounts, which is more than offset by a 1.9% increase in average check.

By brand, comp sales were minus 0.4% at the Double Eagle comprised of a 1.5% decrease in traffic and a 1.1% increase in average check. There were 12 Double Eagle locations in the comp base out of a total of 16 restaurants at quarter-end. Comp sales were plus 0.2% at Del Frisco’s Grille comprised of a 6.9% decrease in traffic and a 7.1% increase in average check. We are encouraged to see the growth return to positive territory as strategic changes made to the brands are embedded and reflected in our changing consumer base. Recall that traffic counts are based on entree counts as is typical in the high-end and polished casual sectors and therefore do not take full account for the growth in bar sales, and are also impacted by our private dining sales mix, which has now increased to 7% on a full year basis and was 5% in Q1. There were 21 Del Frisco’s Grille locations in the comp base out of a total of 24 restaurants at quarter-end. Comp sales were plus 3.7% of Barcelona comprised of a 3.6% increase in traffic and 0.1% in average check. To the 13 Barcelona locations in the comp base plus the Vinoteca shop out of the total of 16 restaurants at quarter end, note that the opening of Passyunk in Philadelphia enters the comp growth in Q2 2019.

Finally, comp sales of plus 6.7% at Bartaco comprised of a 5.5% increase in traffic and 1.2% increase in average check. The benefit from the Port Chester lapse in the October 2017 incident was 310 basis points. There were 10 Bartaco locations in the comp base out of a total of 20 restaurants at quarter end. All 2018 and 2019 openings are, obviously, excluded as is our restaurant at West Midtown in Atlanta, where there is significant construction work in the immediate vicinity impacting the restaurant. Our 2017 openings at Chapel Hill, North Carolina and Pearl West in Denver will both enter the comp group in Q2 of 2019.

Turning to our cost line items. Total cost of sales as a percentage of revenues was flat at 27.7% compared to the year-ago period. Most notable here was the 20 basis points improvement in cost of sales at the Double Eagle compared to Q1 2018 and an improvement in Grille cost of sales to be flat year-over-year compared to a 17 basis point year-over-year in Q4 of 2018. This is a result of better in-restaurant cost management and approximately 1.5% pricing in early Q1 of 2019.

Our commodity outlook with beef having now reduced to approximately 23% of our overall basket continues to beat the modest food inflation in 2019. Our supply chain team have already executed a number of initiatives across areas such as national produce driving synergies and cost benefits, and there are quite a few more in the pipeline. We expect to see savings on items such as shrimp, calamari, prawn [ph] and duck in the coming months just after the test to bring Bartaco under the same distribution system as the Double Eagle and Grille.

Our approach is generally to maintain the local sourcing and flexibility that is so important to the Barcelona concepts while Bartaco lends itself to similar national sourcing approach as the Double Eagle and Grille. Restaurant operating expenses as a percentage of revenues increased by 210 basis points to 51.6% from 49.5% in the year ago period. Most notable here is the margin erosion at Double Eagle and Bartaco attributed to inefficiencies caused by the respective new restaurant openings. While the gross new opening inefficiencies were more than offset by closures last year and current restaurants gaining efficiencies. new restaurant margin inefficiencies resulted in an estimated 520 basis point impact both at Double Eagle and Bartaco. Overall, non-comparable restaurants had a 270 basis point drag on total restaurant level EBITDA.

There are also three accounting impacts to restaurant operating expenses that are noteworthy. Firstly, with the acquisition of Barcelona and Bartaco, the straight-line rent accounting start point for existing leases changes to the date of acquisition from the lease start date. The impact of this change increased Q1 occupancy costs by 90 basis points above at Bartaco and 100 basis points at Barcelona, with an overall impact to DFRG of 50 basis points. Secondly, the introduction of new lease accounting standards at the start of 2019 has led to the reclassification of three Bartaco build-to-suit leases as operating leases, with the primary impacting a reclassification of costs to occupancy expenses compared to interest expense. As a result, operating expenses are 80 basis points higher at Bartaco, and 10 basis points higher at DFRG.

Third, insurance proceeds benefited Barcelona restaurant level EBITDA of $0.2 million or 120 basis points, and benefited Bartaco restaurant level EBITDA by $0.4 million or 250 basis points in Q1 of 2018 with an overall benefit of 60 basis points to total DFRG restaurant level EBITDA in Q1 of 2018. Note that Q1 of 2018 accounting has been aligned with previous ownerships’ policies whereas DFRG’s accounting policies account for proceeds from insurance policies below restaurant level EBITDA. In total, the impact of these three non-operating related changes was a combined 120 basis points on our operating expenses.

Marketing and advertising expenses increased as a percentage of revenues by 20 basis points from 1.7% to 1.9% in Q1 of 2019. And for all the reasons just stated, restaurant level EBITDA increased by $0.6 million to $22.7 million while the margins decreased 230 basis points to 18.9% versus 21.2% in the prior year. Excluding the impact of new restaurant inefficiencies and the three accounting changes to restaurant operating expenses noted above, our core operating restaurant level margins would have increased by 160 basis points.

Preopening expenses increased to $2.8 million from $1.4 million reflecting our first quarter and second quarter developments of one Double Eagle, two Barcelonas and three Bartacos that have opened so far in 2019. Recall that pre-opening costs include non-cash straight-line rents, which is incurred during construction and typically precedes a restaurant opening by 4 to 6 months. On a full year basis, we expect to be in line with our 2019 guidance.

General and administrative expenses increased to $16.4 million from $11.3 million and as a percentage of revenues increased 280 basis points to 13.6% versus 10.8% in the year ago period. The higher costs were due to additional compensation costs related to growth in a number of restaurant support center and regional management level personnel to support our recent and anticipated growth. Included in the $16.4 million are $0.4 million of non-recurring legal expenses and $0.4 million of non-recurring corporate expenses, which are added back to our adjusted EBITDA. Note that our first quarter of 2019 also included approximately $0.5 million of costs related to our Annual Operations Conference, which this year was focused on the theme of “One company, Four brands”.

Although we are seeing G&A synergies from the acquisition already, we have greater G&A savings to be realized beginning in the second half of this year, when the transition of back-office systems and support is complete. We had a number of expenditures in Q1 that were significant, that we consider non-recurring, infrequent or unusual and therefore have adjusted them out for comparison purposes. Consulting project cost total $4.5 million and includes costs related to the rollout of our enterprise resource planning system, or ERP; the ongoing strategic alternatives process, our new loyalty program and accounting advice primarily related to the sale of Sullivan’s and adoption of new lease accounting standards.

Reorganization severance was $0.3 million, being costs associated to replacing certain employees as a part of strategic initiatives effected by our executive leadership team. While lease termination and closing costs were $3.9 million and primarily related to the closure of the Chicago Double Eagle. Additionally, we incurred $0.4 million of large one-time legal expenses related to two cases, while our regular legal expenses are accounted for within G&A, (inaudible) $0.4 million of non-recurring corporate expenses related to a one-time marketing event associated with the Barteca acquisition.

Interest expense was $7.7 million, which reflected an effective interest rates of 9.6% excluding capitalized interest, which is based upon the term loan interest rate of LIBOR plus 600 basis points, our revolver interest and the amortization of debt syndication costs across the life of the loan. $200 million of the term loan is currently hedged with a cap of 3.3% LIBOR up to four years. Note also that we increased our term loan debt balance during the quarter by $25 million as previously reported, and the amount of our capitalized interest will moderate in 2019 compared to 2018 as our capital expenditure moderates.

Net loss was $18.3 million or $0.55 per diluted share. This compares to the prior year net loss of $35,000 or $0.00 per share. Excluding one-time items, adjusted net loss was $3.4 million or $0.10 per diluted share compared to prior year adjusted net income of $1.2 million or $0,05 per diluted share. Note, that our diluted share count was 33.4 million in Q1 of 2019, compared to 20.6 million ph in Q1 of 2018.

Now I would like to reiterate our guidance for the 53-week fiscal year 2019, which ends on December 31, 2019. We are projecting total comparable restaurant sales of 0% to plus 1.5%, 7 to 8 restaurant openings consisting of one Double Eagle, 2 to 3 Barcelona Wine Bars and 3 to 4 Bartaco restaurants. To date, we’ve opened six of these planned restaurants, a Double Eagle in Century City, California, a Barcelona Wine Bar in Charlotte and Raleigh, North Carolina and a Bartaco in Madison, Wisconsin; King of Prussia, Pennsylvania and Deerfield, Illinois. Restaurant level EBITDA of 20% to 22% of consolidated revenues. General and administrative costs of approximately $53 million to $55 million, which excludes items we consider non-recurring in nature. Preopening expenses of $5 million to $7 million. Net capital expenditures after tenant allowances of $25 million to $35 million and we expect to generate free cash flow starting in Q4 2019 as our new restaurants start to contribute meaningfully towards our EBITDA and adjusted EBITDA of $58 million to $66 million.

We estimate that the extra week in the fiscal year will contribute approximately $2 million to our adjusted EBITDA and finally we are targeting net debt to adjusted EBITDA to reduce around 3x by the end of fiscal year 2021 and 2x by the end of fiscal year 2023 as we anticipate strong EBITDA growth from Bartaco to Double Eagle and Barcelona.

Now I’d like to hand back over to Norman for some closing comments.

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Norman J. Abdallah, Del Frisco’s Restaurant Group, Inc. – CEO, President & Director [5]

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Thank you, Neil. We’re forging ahead with our initiative and in doing so, expect to build sustainable long-term growth. We are purpose driven to do right and invest in others from our field base and restaurant support center teams to our guests, our shareholders and the large communities that we are part of. We have a strong line of sight to our 2019 guidance and are pleased with our comp restaurant sales momentum and improving traffic trends in the first quarter with further initiatives in place. Our Bartaco and Barcelona brands have integrated quickly and smoothly with our existing Double Eagle and Grille brands and had another great quarter in Q1 of 2019.

We are also very proud of our newest restaurant openings, which are garnering great guest feedback and social media reviews and we believe should deliver on their 3-year return on invested capital targets. And as Neil said earlier, we would expect the new restaurant inefficiencies, our total restaurant level EBITDA margins to moderate in the third and fourth quarters as these restaurants continue to mature.

While the new restaurant inefficiencies are driving on short-term EPS, they clearly add significantly to our future earnings power. We estimate that our new restaurants with partial year results lag more than $50 million in sales and $20 million in the EBITDA on a full year basis by the end of their third year of opening. Thank you very much for your time and for listening to us this morning.

Now I’ll turn the call back over to the operator, who will open the lines for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take our first question from John Ivankoe from JPMorgan. Please go ahead.

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John William Ivankoe, JP Morgan Chase & Co, Research Division – Senior Restaurant Analyst [2]

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Hi, great, thank you. I was looking for some helping on new unit volumes at the Double Eagle, it’s certainly relative to our model. And if there is a mistake there, obviously, we will take the blame for that. It does look like the non-comp average weekly sales was much, much less than what we expected, especially after considering the closure of Chicago, which I think is the lowest volume unit that you have. So I mean I hate to ask about what specific unit performance but can we talk about maybe the last four units or so that were open at the Double Eagle, and just to help us understand what type of annual sales that they’re tracking to because, again, I mean, it does look like to me the store openings is at a very different level than even your non-New York Double Eagle install base?

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Neil H. Thomson, Del Frisco’s Restaurant Group, Inc. – CFO [3]

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Yeah. Hello, John, how are you? So on the new restaurants, as an overall class, the new restaurants are performing at expectations on the top line. When you look back at how we open and I’ll take Century City as example because it there was the last restaurant that opened in February, we control the reservations. So all the way up until Century City, which opened in February, to up to two weeks ago, we controlled everybody walk in the door. So we start off with 175 people is that we’ll serve. And so that’s a shift in timing on that restaurant, and we still haven’t turned private dining at 100% in that location. So across all four brands, we moderate pretty severely the sales coming in through the door, so we can make sure that we execute, and then we slowly ramp up. So if you look at the Boston Seaport, Atlanta and San Diego, they really continue to build on a weekly basis as we start to take the governor off on openings. And then on Century City, we’re at our exact plans on reservations. We fill the exact number of reservations every single night and the only private dining we’re taking at this point are 30 (inaudible) .

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John William Ivankoe, JP Morgan Chase & Co, Research Division – Senior Restaurant Analyst [4]

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Okay. So if you look at it, because it is such an important piece of the model for you from a revenue perspective. I mean, you don’t want to talk about individual restaurants, I get that but in the asset class, I mean how should we be thinking about the remainder of 2019 in terms of how those four restaurants plus — is there anything new that you’re opening, I think maybe you just opened the only unit for the year. But kind of the last four units that’s been opened over the last 12 months, what do you think in general, they will do on average after 2019, if that’s a fair question to ask.

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Norman J. Abdallah, Del Frisco’s Restaurant Group, Inc. – CEO, President & Director [5]

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Yeah, it’s very difficult to look at averages, John. I do remember the Atlanta opening is a smaller box restaurant for us, it’s a 10,000 square foot location. So that’s going to be a lower than average volume for us. I would say that San Diego has opened absolute just above our expectations and that’s kind of an average volume restaurant for us, we anticipate Boston Back Bay to be slightly higher than average volume location when it gets to its third year of opening. So in the first year, we anticipated to be more, probably more around the average because I think as you know the Double Eagles typically, they build over a number of years as they start. And then Century City, as we said, it’s very early days, we’ve only just hopefully opened our books, in time we expect that to be an above average location. I think we mentioned it before, but we use a tool called eSight to help us model out restaurants, they have a pretty strong forecasting methodology and when we look back at our historic sort of locations, we get a sort of plus, minus 8 to 10% degree of accuracy. So we have a good level of confidence that I think Boston Back Bay in particular and Century City out of this portfolio will become above average locations, but it’s early guys and Atlanta is going to be a below average location for us.

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John William Ivankoe, JP Morgan Chase & Co, Research Division – Senior Restaurant Analyst [6]

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No, it does. Thank you for that color. And then a slightly different direction, the Wyoming unit was a smaller box unit. I think you’ve talked about signing a lease in Texas. You can tell us where that is or remind me where that is, it’s a smaller unit. And then I see some of the changes, for example, that you’ve done at the bar menu at Del Frisco’s, I mean, is there — I mean, at the Del Frisco’s Double Eagle. I mean, are you guys starting to kind of bleed into that what the Grille was supposed to be — I mean. I know done you’ve done some work on the higher end at the Double Eagle in terms of some of the dry aged meat. But when I think about smaller box and I think about bar menu, what comes to mind is the Del Frisco’s growth. So is this the type of maybe brand product that might be happening. I mean am I reading into this the right way or is this a second normal evolution that you’re going to have big units and small ones and high menu and low menu.

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Norman J. Abdallah, Del Frisco’s Restaurant Group, Inc. – CEO, President & Director [7]

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I think you’re probably reading a little bit too much into it, John. So we came out and said that we should have 40 to 50 Double Eagle locations ultimately and we think nay be that’s kind of those would be smaller box locations, that’s more on a city by city basis. So the second smaller box would in Austin, Texas. It happens to be a location, which was a former Sullivan’s of ours, where the landlord recaptured the space and he’s done major redevelopments and it makes no sense for us to get back into that space as a Double Eagle but given the city, and given the size of the location, it will be a smaller box one for us, it’s more of a situational opportunity for us there.

We still have opportunities to really build primarily the larger box location. So all of the rest of our pipeline at the moment apart from that Austin site are larger box locations and we would anticipate really as we continue to penetrate the country that then we will be able to use the smaller box model for that deeper level of penetration.

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Neil H. Thomson, Del Frisco’s Restaurant Group, Inc. – CFO [8]

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Yeah. And then if you look at the bar, John, we’ve always had a bar menu in the Double Eagle, but it had different things like sloppy joe keto [ph] on it and we moved in different ways and we’re now looking — we’re putting in higher class type of options like Uni Toast and things that the Double Eagle consumer really like. So we’ve taken the bar menu and upgraded the current form and the three items where the chef get to create, it allows them to have that creativity on the bar menu and really adjust to their guests for the Double Eagle. So it’s completely staying away from the Grille. It’s a continued upgrade on all the touch points that we’re doing at the Double Eagle

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John William Ivankoe, JP Morgan Chase & Co, Research Division – Senior Restaurant Analyst [9]

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That’s great. Thanks for the clarification.

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Neil H. Thomson, Del Frisco’s Restaurant Group, Inc. – CFO [10]

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You bet.

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Operator [11]

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We will now take our next question from Brian Vaccaro from Raymond James. Please go ahead.

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Norman J. Abdallah, Del Frisco’s Restaurant Group, Inc. – CEO, President & Director [12]

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Good morning, Brian. You may be on mute.

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Brian Michae Vaccaro, Raymond James & Associates, Inc., Research Division – VP [13]

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Sorry, still learning the mute button. Thank you and good morning. So just wanted to follow up on John’s question and, obviously, you gave comp guidance, but just so we’re on the same page as it relates to what you’ve embedded in terms of new unit assumptions, perhaps you’d be willing to provide some high level total sales guidance or specific perhaps to the Double Eagle a range of expectation on sales for that concept?

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Norman J. Abdallah, Del Frisco’s Restaurant Group, Inc. – CEO, President & Director [14]

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So, Brian, you’re asking for comp store guidance for the whole Double Eagle –?

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Brian Michae Vaccaro, Raymond James & Associates, Inc., Research Division – VP [15]

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No, just sort of a high level — it doesn’t even have to be Double Eagle segment specifically, just so we understand some of the moving and what you’ve embedded on new units? Would you be willing to provide a range of your total sales for ’19 expectation or Double Eagle specific?

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Norman J. Abdallah, Del Frisco’s Restaurant Group, Inc. – CEO, President & Director [16]

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No. We don’t comment on segmentation as far as guidance at this point.

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Brian Michae Vaccaro, Raymond James & Associates, Inc., Research Division – VP [17]

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All right. Fair enough. So Double Eagle, just want to ask about the brand performance in the quarter and maybe some perspective on what you’re seeing from a daypart or regional perspective and were there any calendar shifts in the first quarter or other swings we should be aware of?

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Norman J. Abdallah, Del Frisco’s Restaurant Group, Inc. – CEO, President & Director [18]

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Not so much in the first quarter for us, John. In the second quarter, there was an Easter shift still within and Passover still within the second quarter for us, but it was a couple of weeks different. But there wasn’t anything particularly in Q1 that was a calendar shift for us.

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Brian Michae Vaccaro, Raymond James & Associates, Inc., Research Division – VP [19]

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Okay. And you said private dining at the Grille, I believe was 5% sales mix in Q1. What was that on the Double Eagle?

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Neil H. Thomson, Del Frisco’s Restaurant Group, Inc. – CFO [20]

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It’s reverse. So the Grille was 2% increase and then the Double Eagle was — I don’t have that number to hand you. But we’re 18% mix for the full year — someone is just telling me we’re 17% mix in Q1, our Q4 is our highest mix for the private dining. So we were 17% mix in Q1 and we are 18% mix on a full year basis for private dining.

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Brian Michae Vaccaro, Raymond James & Associates, Inc., Research Division – VP [21]

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Okay. And then last one from me just on the guidance. So you seem to have acquired pretty sharp improvement in store margins in the second half of the year and lower G&A. Could you spend a little more time on the new unit sales and margin normalization that you’ve embedded in that forecast? And what’s the — is it 12 months the sort of margin normalization occur across each brand and then last one on G&A, how much of the $10 million run rate savings do you assume that you achieve exiting the year?

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Neil H. Thomson, Del Frisco’s Restaurant Group, Inc. – CFO [22]

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Yes, I think you are exactly right, Brian. The shape of the quarter-by-quarter for us this year is going to look different from what we or many other restaurant companies would normally experience both on restaurant level margins and G&A. So on the restaurant level margins, obviously, we have six of our eight plant openings already in the ground as well as, obviously, we’re still getting impacted from inefficiencies from the volume of restaurants we opened in Q3/Q4 last year. So we are anticipating that each quarter, the restaurant level margins improve as those restaurants reach maturity. Typically, what we see is a faster part to restaurant level EBITDA maturity in our Grille, Bartaco and Barcelona brands and a slower pickup in a Double Eagle brand. So in the other three brands, it’s maybe closer to a 6-month period where we get some maturity, it’s a slightly longer build in the Double Eagle for some of the regions that Norman just gave earlier of how we really sort of throttle sales to start with and also how private dining tends to take a longer period of time to grow. I mean, actually at Double Eagles, it can even be up as long as four, five years before we truly reach maturity on our restaurant sales if we look back at that historical openings. So we would anticipate really Q3, Q4 being much stronger restaurant level margins than we experienced in Q1 because of the drag and that’s primarily as we mentioned on the effect really coming on the Double Eagle and Bartaco brands more than the other two because of the volume of openings that we’ve seen in those two brands. And then on G&A, I think we called out a few one-time items that hit us in Q1 this year, there were a couple of others as well. So we feel pretty good about the full year number of the guidance, $53 million to $55 million, it does require the G&A to come down in the back half of the year and that’s exactly what we expect, because, for example, we go live on our new accounting system at the Barcelona and Bartaco later this month and then we’ll be able to shut down the office in Connecticut since we’re essentially running two accounting teams at the moment, one in Connecticut and one in our office in Irvine, so we’ll be able to start realizing those types of savings and that’s how we get to our $55 million number.

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Brian Michae Vaccaro, Raymond James & Associates, Inc., Research Division – VP [23]

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Great. Thank you.

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Operator [24]

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(Operator Instructions) . We will now take our next question from Will Slabaugh from Stephens, Inc. Please go ahead, sir.

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William Everett Slabaugh, Stephens Inc., Research Division – MD [25]

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Thanks, guys. I had a question on the Double Eagle as well in Boston, in particular, it’s good to hear those Boston revenues are up 50% as you mentioned, I know it’s early, but broadly, how should we think about the situation or situations that I’m assuming will be similar to this from a profitability standpoint going forward and what these will ultimately mean for margins and dollar profit of the City of Boston?

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Norman J. Abdallah, Del Frisco’s Restaurant Group, Inc. – CEO, President & Director [26]

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So, we’re going to see a handful of these situations. Well, as of now, as we sort of look at that pipeline going out, we have no other signed leases that are going to be cannibalizing for us. We do have a couple of sites under consideration where we haven’t signed leases yet that could potentially be cannibalizing. But I don’t think this is going to be a huge impact for us in the model that we are only opening sites where we are going to cannibalize our existing locations. Just as an example for that, the numbers that we’ve shared in terms of potential for the each of our brands over the long term comes from what we do with these sites and that model is based on — we’ve billing no restaurants that have more than a 10% cannibalization. So we’re still reaching pretty high growth numbers even building that assumption. And in terms of individual restaurants sales and margins, we would anticipate for example in Boston, being able to run both the Seaport and the Back Bay locations that had strong restaurant level margins, I think this, you were taking about a 10% sales transfer from Seaport to Back Bay. But in terms of overall restaurant level profitability, we would expect to still run very, very strong margins at both those locations.

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Neil H. Thomson, Del Frisco’s Restaurant Group, Inc. – CFO [27]

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Yeah. And an example of that is Dallas, Texas, where we closed down one restaurant, the original doing $8 million in sales. We have two restaurants doing around 3x that sales now. And then if you’d look at the comp basis, both are at that positive comp as they’ve lapped the other opening because there was a sales transfer, but it’s a better market for us and the margins are very good and similar to our system and those two restaurants as well.

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William Everett Slabaugh, Stephens Inc., Research Division – MD [28]

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Got it. Thank you. And then you mentioned in the quarter-to-date period that both the Double Eagle and the Grille were running, I think, you said low-single digit negative into April. How would you like us to think about that underlying run rate given the calendar shifts that you mentioned? And then any sort of weather impact that may have happened?

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Norman J. Abdallah, Del Frisco’s Restaurant Group, Inc. – CEO, President & Director [29]

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Yeah, I think, I mean we kind of shared that April was an odd month with the shifts of Easter. So we saw some weeks where we are significantly up and some weeks we’re significantly down. So I mean, we tend to look at our business over the longer term and that’s why we shared, for example, that six of our last nine periods for the Double Eagle. If you take out Chicago and Seaport, that have been positive. So we are seeing as you look over the longer term generally positive trend for our business. As you know, with the Double Eagle, we can see shifts between even quarters or periods because we are event driven, or it could be weather impacts. But I think the general medium-term trend is a positive one as the sort of six out of none positive period shows. So we had — that’s our outlook for the full year. And that’s reflected in our guidance. We have zero to plus 1.5 for the full business and we would expect the Double Eagle to be in that range to.

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William Everett Slabaugh, Stephens Inc., Research Division – MD [30]

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Got it. And last one, I wonder if you talk a little bit more about Century City, I know it’s very early there, but you went more scale there including the champagne room that you talked about. So despite it being early, I was curious how that’s going in general, and if there’s any learning to take away from you going a little bit even more upscale from where you currently are positioned across the country.

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Norman J. Abdallah, Del Frisco’s Restaurant Group, Inc. – CEO, President & Director [31]

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Yes. So if you look at the design of Century City, we really –and then you see San Diego and Boston, we really designed this space for the city. So there might be a few things that look more upscale and then being able to do the champagne room, it has a back staircase, it’s like a champagne, speak easy, and we’re starting to see the value of increase from that as word gets out and we only take select reservations in there, it’s very exclusive to get in, we’re having private dining parties come in and book it out as well.

So again, it’s how we program the space. So Santa Clara will be programmed to Santa Clara. The same thing from Miami. We just went through the complete last design presentation on Miami. And so it really fits at Miami neighborhood. So Century City was designed to be kind of Hollywood style from the old Hollywood think Frank Sinatra, Marilyn Monroe. So those are some of the touch you see, the champagne room is again a very, very, very high-end because of what we can charge in the champagne room. It has a completely different menu

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William Everett Slabaugh, Stephens Inc., Research Division – MD [32]

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Thanks, guys.

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Operator [33]

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We will now take our next question from Brandon Sunamiker [ph] from JPMorgan. Your line is open. Please go ahead.

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Unidentified Analyst, [34]

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Yeah. Thanks, guys. Just quick one from me. I think in your previous 2021 guidance, you had embedded a cash G&A excluding stock comp margin of 7% of sales. Would you be willing to provide an updated cash G&A margin expectation excluding stock comp for perhaps 2021 or even 2023?

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Neil H. Thomson, Del Frisco’s Restaurant Group, Inc. – CFO [35]

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Yeah, Hi, Brandon. Yeah, we anticipate our G&A to get down into that sort of call it 7%, 7.5% range by 2023, that’s what we think is appropriate for a 100% equity run business and, obviously, franchises, franchise run businesses is mixed, ownership businesses can get to lower percentage of sales but that’s we think the appropriate sort of medium, long-term place for us to be on our G&A cost and that’s what’s embedded in our current model that, as you know, goes out to 2023.

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Unidentified Analyst, [36]

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Okay, that’s helpful. Thanks, guys.

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Operator [37]

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We will now take our next question from Joshua Long from Piper Jaffray. Please go ahead, sir.

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Joshua C. Long, Piper Jaffray Companies, Research Division – Assistant VP & Research Analyst [38]

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Great. Thank you for taking my question. Want to just go back and talk about the complementary nature of the portfolio now, Norman and Neil, we’ve talked about a couple times over the past just kind of bringing in Bartaco and Barcelona helped balance out things from a guest perspective, from a cost perspective. And so just curious if that’s playing out the way you would have expected to. I know it’s still early on in terms of the brands integration but anything you can share there in terms of how the portfolio is coming together and then really complementing the overall corporate organization from a restaurant perspective would be helpful.

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Norman J. Abdallah, Del Frisco’s Restaurant Group, Inc. – CEO, President & Director [39]

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Yeah, I mean, absolutely we’re seeing in an number of our business and I would say it’s playing out as expected. So, we’re seeing it. The ability on supply chain to drive synergies, we mentioned that we’re looking at taking our broadline distribution system across without beef — exposure to beef, which you know at one point was around 50% of our basket, we’re now under 25% of our basket. We’re seeing benefits in seasonality, we mentioned on that as well. So we’re just now — I mean, think and admire is we see a sort of at the start of ag [ph] season for Bartaco, so we’ve got a more even mix of seasonality across the year. So we’ve got some important hedges and the same year the benefit of the strong margins that are coming from Barcelona and Bartaco as well. So that’s really helping us. Yeah, and our overall margin mix too. So we’re seeing a lot of benefits coming out of the acquisition. I think you can start to see it showing up in our numbers and frankly as well, we’re really pleased with how the integration has gone, a lot of businesses take on new acquisitions and they struggle to start with all the trajectory changes and we’re very proud of the fact that the integration has been smooth and the results from Barcelona and Bartaco — we haven’t blinked, they continue to be strong each quarter and we’re really pleased with that.

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Unidentified Analyst, [40]

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Okay. Thank you.

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Operator [41]

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We will now take a follow-up question from Brian Vaccaro from Raymond James. Your line is open, please

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Brian Michae Vaccaro, Raymond James & Associates, Inc., Research Division – VP [42]

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Thank you, Just a quick follow up on what was the adjusted debt-to-EBITDA leverage ratio at the end of Q1 ’19 and what’s your expectation on that ratio sort of as you exit ’19? Thanks.

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Norman J. Abdallah, Del Frisco’s Restaurant Group, Inc. – CEO, President & Director [43]

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So we look at it, Brian, according to how our covenant is in our debt model with the bank. So we’re just over 5 at the end of Q1 and we would anticipate that being under 4.5 at the end of this year and that’s a definition that’s laid out in our loan documentation, it’s on an adjusted rent basis one and there’s a number of add backs and changes, but that’s the most important one for us, obviously, what’s in our loan agreement.

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Brian Michae Vaccaro, Raymond James & Associates, Inc., Research Division – VP [44]

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Great. And Neil, would you happen to have that dollar number on EBITDA available since there’s the add backs, so we really can get to with the public filings.

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Neil H. Thomson, Del Frisco’s Restaurant Group, Inc. – CFO [45]

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We don’t report that publicly, no sorry, Brian.

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Brian Michae Vaccaro, Raymond James & Associates, Inc., Research Division – VP [46]

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Understood. Alright. Thank you.

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Operator [47]

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There are no further questions in the queue. I would now like to turn the call back to your hosts for any additional or closing remarks.

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Norman J. Abdallah, Del Frisco’s Restaurant Group, Inc. – CEO, President & Director [48]

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Thank you, operator. Appreciate it. And again, UTC [ph], everything continue to build. It’s right on track with what we talked about of our long-term plan and we’re even a bit ahead of as well. So we’re very happy with the sales and continue to see the sales continue to grow in a very positive way. And then once the inefficiencies are taken out of the new restaurant, we have a very, very solid core business. So thank you for your time today and we look forward to any follow-up calls from you. Thank you.

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Operator [49]

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Thank you. That will conclude today’s conference call. Thank you for your participation, Ladies and gentlemen, you may now disconnect