Thank you for standing by. Welcome to the Darden Restaurants and Ruth's Hospitality Group conference call. At this time, all participants are in a listen-only mode until the question and answer session, at which point you'll have an opportunity to join the queue by pressing star one on your telephone keypad or the raise hand icon on your Deal Roadshow screen. Please note today's conference is being recorded. If you have any objections, please disconnect at this time. I will now turn the call over to Kevin Kalicak. You may begin.
Thank you, Brit. Good morning, everyone. Thank you for participating on today's call. With me today are Rick Cardenas, Darden's President and CEO, Raj Vennam, CFO, and Cheryl Henry, Ruth's President, CEO, and Chairperson. We appreciate you joining us during what is a busy earnings season for all of you. Yesterday, we announced that Darden Restaurants would initiate a tender offer to purchase Ruth's for $21.50 per share. Following our prepared remarks and presentation, we will open up the call for a brief Q&A session where we will only take questions related to this transaction. During the course of this call and presentation, comments made will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.
Those risks are described in the company's press release, which was distributed yesterday, and in Darden Restaurants and Ruth's Hospitality's filings with the Securities and Exchange Commission. We are simultaneously broadcasting the presentation during this call, which is posted in the Investor Relations section of our website at www.darden.com. Today's discussion and presentation includes certain non-GAAP measurements. A reconciliation of these measurements is included in the presentation. Please note that this conference call is neither an offer to purchase nor a solicitation to sell securities. The tender offer for Ruth's Chris described in yesterday's press release has not commenced.
When the tender offer does commence, investors should review Darden's tender offer statement and Ruth's recommendation statement that will be filed with the SEC as they will contain important information regarding the details of the tender offer and Ruth's board's views regarding the acquisition. Now, I'll turn the call over to Rick.
Thank you, Kevin. Good morning, everyone. We appreciate you joining us today as we share the exciting news about the addition of Ruth's Chris Steak House to the Darden portfolio. I'm extremely pleased that Cheryl Henry, who is with us today, will continue leading Ruth's Chris and report directly to me. This morning, we will share with you why we are confident this deal will strengthen Darden and Ruth's Chris, who will also provide further background on Ruth's Chris as well as high-level financials. Darden's success is driven by our adherence to our winning strategy, which is grounded in our four competitive advantages, our back-to-basics operating philosophy, and our portfolio of iconic brands. Our competitive advantages give our brands an edge.
Leveraging our scale creates cost advantages, allowing us to drive value for our guests, while our extensive data provides insights to help our brands better understand their guests and effectively communicate with them. Additionally, each of our brands regularly go through a rigorous strategic planning process to ensure they are focused on the right work. Finally, we have a results-oriented culture, great teams that have a passion to nourish and delight everyone we serve, earning the loyalty of our team members and guests. Our back-to-basics operating philosophy is the driving force behind the way our brand teams run their restaurants. This simple yet powerful philosophy demands that we remain incredibly focused on executing on the fundamentals of serving exceptional food with attentive service in an engaging atmosphere. These priorities are supported by relevant marketing programs that resonate with our guests.
This strategy has served us well for many years and helps us continually strengthen our portfolio of iconic brands. We have also proven that as brands join our organization, we can strengthen their business while increasing the power of the Darden platform. That is why I'm so excited about Ruth's Chris joining the Darden family of brands. When we consider adding a brand to our portfolio, we have a set criteria we use to evaluate a potential brand. The brand should be a full-service dining concept with strong guest appeal, have the ability to exceed the sales growth in our long-term framework, and make an impact to our financial performance over time. Ruth's Chris checks all these boxes. It is a full-service fine dining restaurant company with a strong brand and impressive history of delivering elevated dining experiences to loyal guests. It has additional runway for new restaurant growth.
Finally, it is big enough to make a meaningful impact to Darden's performance over time. However, to be an excellent fit, a brand must also strengthen our winning strategy. Just as our competitive advantages will benefit them, Ruth's Chris will further amplify these advantages, which is critical to our success. We are a great cultural fit. Darden and Ruth's Chris share a similar operating philosophy as well as the same passion for our people. Ruth's Chris also complements our portfolio with a differentiated brand that allows us to capture a wide range of fine dining guest occasions that we are not competing for today. In fact, the fine dining segment continues to experience strong growth, and there is very little crossover between guests at Ruth's Chris and our fine dining brands.
When you look at the fine dining segment, sales have outperformed relative to pre-COVID, that is expected to continue. As we have seen in our fine dining brands, consumers with income levels above $150,000 continue to dine out, they expect to maintain or increase their spending at casual or fine dining restaurants. When compared to the fine casual dining segment, fine dining restaurant margins are significantly higher. Ruth's Chris has a strong business model with attractive restaurant level economics. In their most recent fiscal year, they achieved more than $860 million in system-wide sales. Average restaurant volumes for company-owned locations are $6.2 million, with an average check of $97 and restaurant level EBITDA margin of 19%. With 154 total restaurants today, there is still opportunity for new restaurant growth. I'll turn it over to Raj to discuss the financial details of this transaction.
Thanks, Rick. As Kevin mentioned, yesterday, we announced that Darden Restaurants would initiate a tender offer to purchase Ruth's Hospitality for $21.50 per share. The transaction is valued at $715 million, representing a multiple of 9.4x Ruth's fiscal 2022 adjusted EBITDA. We anticipate closing on the deal next month. We're already committed to maintaining our investment-grade credit profile. We have sufficient liquidity and debt capacity to complete the all-cash transaction, which has no financing contingencies. With this transaction, we anticipate being at or below the bottom end of our targeted leverage range of 2-2.5x adjusted debt to adjusted EBITDA.
As Rick mentioned, Ruth's is a great fit for our portfolio with strong restaurant level economics, and we anticipate furthering our scale advantage with this addition, which drives value for our guests. By leveraging this advantage, we anticipate achieving run rate synergies of $15 million-$20 million by the end of fiscal 2025, primarily through supply chain and G&A savings. Given the strong business model, we anticipate this transaction will be accretive to our earnings per share by approximately $0.10-$0.12 in fiscal 2024 and $0.20-$0.25 in fiscal 2025. This does not include transaction and integration related expenses of $55 million-$60 million pre-tax, which will primarily occur in fiscal 2024. Finally, I want to wrap up by saying that we believe the addition of Ruth's Chris to our portfolio strengthens our long-term value creation potential.
We expect to maintain our strong balance sheet and return of cash to shareholders through dividends and strategic share repurchases. With that, I want to welcome Cheryl and turn it over to her for a few comments.
Thank you, Raj. This has been an exciting couple of days for the Ruth's Chris team. I am proud of the brand we have built and the culture we have created. Together, we have delivered on our founder's vision through our commitment to hospitality and drive to succeed. This acquisition is the right next step in our journey that began when Ruth Fertel founded this brand in 1965. Throughout my interactions with Rick, Raj, and the Darden team, it has become evident that we have a shared vision of how we run our restaurants and lead our teams. We are aligned on our operating philosophies and have a strong cultural fit. I'm confident this will ensure a smooth transition to help our restaurant team stay focused on providing great guest experiences. I look forward to seeing the Darden advantages come to life within Ruth's Chris.
We are excited to plug into Darden's structure to drive efficiencies, leverage rich and extensive data and insights, and continue to grow. I am grateful for the opportunity to continue leading this remarkable organization, and I am thrilled that Rik Jenkins will continue in his role as Senior Vice President of Operations. I am optimistic about the future of Ruth's Chris and confident both organizations will be stronger together. Now I'll turn it back to Rick.
Thanks, Cheryl. This is just the beginning of our journey together. Over the past 15 years, we have integrated five brands into Darden, though the process can be complex, we have an experienced team ready to ensure that it proceeds as smoothly as possible following the close. I wanna thank Cheryl and her team for the partnership. I'd like to welcome the nearly 5,000 Ruth's Chris team members to Darden. You all have built an incredibly powerful brand. I look forward to seeing Ruth's Chris continue to grow as we bring the sizzle to Darden. Now our best days are ahead. Now let's take your questions.
Thank you. At this time, we'll conduct the question and answer session. Please limit your questions to one each in the interest of time. If you'd like to ask a question, please press star one on your telephone keypad to enter the queue. If you've joined via web, please press the Raise Hand icon on the right side of your Deal Roadshow screen. We'll pause here briefly to allow questions to generate. Our first question comes from Brian at Oppenheimer & Company. Brian, you may proceed.
Thanks. Good morning and congratulations to everybody on the call. Rick, I'm very interested in the strategy as it relates to Ruth's franchise portion of the portfolio. As you look at this and you think about the future, is there an opportunity to buy these units and enhance the EBITDA contribution of the Ruth's portfolio to Darden? It's just, it's hard to imagine that you're gonna start managing franchisees moving forward. I'd love your thoughts on how you strategically think about the franchise portion of the business.
Hey, Brian, thanks for the question. I wanna start by saying the franchise operators are really strong partners, and right now there are no plans to acquire those locations at this time. After the deal is closed, our focus will be on integrating the company-owned and operated locations and welcoming those team members to the Darden family. We expect to continue to be a largely company-owned going forward. Running company-owned brands is one of Darden's core competencies. That said, we'll continue to support our growing franchisee base.
Thank you.
Sure.
Thank you, Brian. Our next question comes from David at RW Baird Securities. David, your line is open.
Hi, good morning. My question, Rick, is, related maybe philosophically on why, now is the right time to make an acquisition and why you chose fine dining as opposed to other parts, of the industry that would fit with your portfolio. That's kind of the first question. I have a follow-up. Thanks.
Well, let me start by saying that no matter the economic environment, we take a long-term view, and the market we know is cyclical, and any decision we make on an acquisition is long term. I will also say that when we mentioned in our prepared remarks the fine dining segment has grown a little bit faster, and we expect that to continue for a while. We have a great portfolio of brands, and we serve a lot of guests from every segment of the industry. This was just a great acquisition, and the acquisition further enhances our competitive advantages.
Great. Thank you. You know, one of your criteria in the past has been, you know, looking at brands that grow faster than the portfolio you have. In this case, you know, as I look back at the history, of Ruth's, it doesn't look like this is a growth brand that would exceed the pace of growth that you would expect to deliver with your existing portfolio. You know, maybe could you comment on that and maybe, you know, what your vision is for the growth rate of this brand and the growth opportunity of the brand?
Yeah. We believe that Ruth's can grow at the high end of our unit growth framework. If you think about a company-owned and operated restaurant brand of 80 units, a couple of units is getting close to the high end of our framework, and they have more than that, I think, in their pipeline. We believe they can grow ahead of that. As we've said, we don't expect any of our brands will grow faster than 10%, so it's not gonna be a high, high growth company. I will also say this deal is valuating without new unit growth, unlike our prior acquisitions.
Got it. Thank you, Rick.
Thank you, David. A reminder, please limit questions to one per person in the interest of time. Our next question comes from David at Evercore. David, your line is open.
Thanks. I guess it's related to that. You know, how would you think about the capabilities at Ruth versus what you have at Darden, in any way that would help it grow, anything from innovation, real estate, procurement and other? You know, what are the biggest opportunities for Ruth joining Darden? Thank you.
Yeah. I'm just gonna get back to why we, why we added Ruth to the portfolio. It further enhances our competitive advantages, and that's critical to our success. They're a great cultural fit. We share a similar operating philosophy and the same passion for our people. It complements our fine dining brand portfolio, and they've been competing well for many years and growing for years. We believe, and finally, actually, we believe guests at Darden and Ruth's Chris will benefit, and it's a win-win for all parties involved.
Okay. Thank you.
Thank you, David. Our next question comes from Chris at RBC Capital Markets. Chris, your line is open.
Thank you. Good morning. I wanted to ask about the synergies. Could you speak maybe a little bit more to the pacing and magnitude that you noted in yesterday's release? Is there any conservatism built into those synergies? For instance, if we were to maybe apply Darden's GAAP margin to Ruth's business, I mean, that alone would get you close to $20 million in savings. I understand it's not that simple, but that's before any sort of scale benefit that Darden brings from a supply chain or labor perspective. Any further thoughts on synergy targets would be great.
Hey, Chris. I think, you know, just let me start by saying, you know, we did say we expect to get to achieve approximately $20 million to run rate of run rate by end of fiscal 2025. The pace at which that happens, we wanna do this right. We wanna make sure that this is set up for long-term success. We're gonna focus on doing it right versus trying to accelerate synergy. And as I said in the prepared remarks, it's primarily going to be supply chain, and then, you know, the public company costs will be part of that. We'll work on and share more details as this process goes along, but we think what we provided is a fairly good estimate.
Got it. Thank you.
Thank you, Chris. Our next question comes from Gregory at Guggenheim. Gregory, your line is open.
Hey, thanks for the question. I think when you bought Cheddar's and other prior acquisitions, one of the governing factors on when you can realize your synergies is putting the Darden technology platform into the business.
I would imagine the systems are different today. Give us a sense for how long that timeline takes, and is that kind of a big governor on when you can realize some of those synergies going forward? Thanks.
Yeah, Greg, I think, you know, obviously technology is a big part of how you realize synergies over time. We believe that we'll be able to effectively leverage Darden's technology platform to get those cost synergies. But, you know, in terms of what systems change when, all that stuff, we're still kind of, you know, it's too early to comment on those specific plans. But that is a pivotal, or critical piece of determines the timing of synergies. But we do think our platform will help enable, and, you know, as you know, we haven't started the integration process, and we really can't do it until close. We'll be able to share more as we get, you know, as we get past the close.
Thank you.
Thank you, Gregory. Our next question comes from Andrew at Cowen and Company. Andrew, your line is open.
Great, thanks. Congrats on the transaction. Rick, in the past, you talked about how when you find a new plot of land that Olive Garden and Capital Grille are amongst the highest ROIC brands in portfolio. I'm curious now that with Ruth's, you know, when you find that new plot of land, how do you decide if it's gonna be a Capital Grille or Ruth's Chris that better fits that area? Kinda ties to your comment earlier that the brand overlap between Ruth's and your fine dining brands, I see minimal guest overlap. I'm also kind of curious how you're able to determine that as well. Thanks.
Yeah. The guest overlap is based on third party data, looking at, kind of transaction data and where restaurants are and how many guests come to either one. As it relates to returns, you know, again, we haven't started the integration process and we'll do that after close. That said, as we mentioned earlier, they've got very strong restaurant level EBITDA margins, and so does Capital Grille. The likelihood is they won't necessarily go after the same piece of property. We feel really good about adding Ruth's to our portfolio.
Thank you, Andrew. Our next question comes from Jon at Citigroup. Jon, your line is open.
Great. Thanks for taking a question. I am curious, maybe following up on David's question earlier about the total opportunity. What do you see for this business over the longer term? Maybe one more on top of it, can you give us a little bit more color on the mix of the business at Ruth's in terms of business versus say, the casual customer coming in on the weekend? You gave some information on the income levels, but I'm curious to know how much of that is really coming from business versus, you know, the casual customer.
Hey, Jon, this is Rick. You know, we're still two public companies, and we haven't started the integration process. You know, there's some data that we won't be able to talk about, on the mix of business versus non-business guests. We still feel this is a very strong brand. They've been a strong brand for many years. They've got strong returns. We'll take a look at all of those things and work through that with some integration partners that we have. We'll have more information down the road.
Got you.
Thank you, John. Our next question comes from Brian at Raymond James. Brian, your line is open.
Hi. Thanks, and good morning, and congratulations. I just wanted to circle back on the overlap between Ruth's Chris and your existing steakhouse brands. Could you elaborate just on some of the key differences in the Ruth's customer, whether it be age, income, et cetera, or other attributes that might be worth highlighting? Rick, correct me if I'm wrong, but I think Ruth's location profile sort of pushes further into the suburbs than some other fine dining concepts. Maybe just touch on how that leads into sort of the Ruth's Chris brand positioning versus other concepts.
Yeah, Brian, I think as Rick mentioned, you know, as we look at the transaction data from, you know, third party, there's clearly, as we said, there's very little guest overlap between the two of them. We see this as actually complementary to our portfolio. I think Rick mentioned earlier, the locations they go after are different. To your point, they're a little bit more, you know, in a different area from where fine dining would be. We do think that we can actually grow fine dining overall more by adding Ruth's to our portfolio.
Thanks for that, Raj. Raj, if I could squeeze a follow-up in, could you just walk through the sort of big two or three buckets within your synergy target that $20 million by end of year two? Thanks again.
Yeah, I'll tell you that just, we'll talk more at the next call, but, you know, it's always, supply chain is always the big one, and then it's the public company costs and other administrative costs.
Thank you, Brian. Our next question comes from John at Wells Fargo. John, your line is open.
Hey, good morning, and congrats. I guess, does Ruth's Asia and Canada presence kinda accelerate your ability to enter these markets with some of your legacy brands over time?
You know, I think about the Asia presence. Yes, if down the road when we start talking to franchisees, if they have some desire to add to their portfolio with some other Darden brands, that's something that we can do. Again, we haven't had those conversations yet, and we will plan on having those conversations when the time comes.
Great. Thank you.
Thank you, John. Our next question comes from Danilo of AB Bernstein. Your line is open.
Good morning and congratulations. Why do you think this acquisition is providing the best returns to shareholders versus, let's say, you know, expanding dividends, share repurchases, investing in the business? Perhaps if you can comment also on how we should be thinking about going forward, kind of the magnitude of impact on the share repurchase capabilities of Darden. Thank you.
Hey, Danilo, this is Raj. Obviously, that's part of the calculus, right? When we look at, you know, best user for capital, buying a productive asset and looking at the net present value to our shareholders, adjusting for, you know, accounting for the cost of capital, is how we look at it. We truly believe, and as we share, you know, we shared with our board why this was, you know, better option than these other ways of returning cash to shareholders. We think that it's actually highly accretive to our shareholders, and primarily because of, you know, our cost of capital being different from a smaller brand and then two, because of the platform that helps with the synergies.
That's, that's something that our board has evaluated, and we have come to the conclusion that this is a better alternative. That's the answer to that. Then on the dividends, and share purchase, Our philosophy around that will not change because of this deal.
Thank you.
Thank you, Danilo. We have time for one final question. Sara from Bank of America. Your line is open.
Thank you. Sorry, I jumped on late, but I don't think you've touched on this precisely. As I look about the Darden Fine Dining segment, you know, the pace of unit growth has been fairly modest in the last couple of years. Now, granted, you know, there's been a lot of upheaval, perhaps. I'm just trying to understand kind of the, you know, the gating factors for why it has been slower. Is it the brands? Is it the real estate location?
Just kind of as I think through adding another fine dining restaurant to the portfolio, what distinguishes this one versus, you know, the what I would call the high quality brand learning in place, but that have supported maybe, you know, slightly slower growth in recent years?
Hey, Sara, thanks. You know, if you think about our fine dining, current fine dining brands with The Capital Grille and Eddie V's, you know, they had slowed down. COVID really was a little bit of a damper on unit growth for a lot of brands. Remember, these brands are generally a little bit more into a little closer urban, more complicated deals, and they take a while to get up and running. We're looking for some specific sets for Eddie V's especially and for The Capital Grille. That said, we bought Eddie V's a few years back, and we've more than close to triple the number of units they have. We've, I think close to doubled or more the number of The Capital Grille since we bought them.
You know, we think, not, we're not saying that we'll double the number of Ruth's Chris, but there's still growth ahead of us for all of the Darden Fine Dining brands we currently have and for Ruth's Chris, after we add them.
Thanks.
Thank you, Sara. This concludes today's question and answer session. Handing it back for final remarks.
Thanks, Brit, thank you all for participating in today's call. Look forward to speaking again in June. Have a great day.
This concludes today's conference call. Thank you. Have a great day.