Bloomin' Brands Inc (BLMN) 2014 Q2 法說會逐字稿

Good day and welcome to the Bloomin' Brands Second-Quarter 2014 Earnings Conference call. Today's conference is being recorded.

At this time I would like to turn the conference over to Chris Meyer, Vice President of Investor Relations. Please go ahead.

Thanks, Heather. Good morning everyone and thank you for joining us.

With me on today's call are Liz Smith, our CEO and Dave Deno, Executive Vice President and Chief Financial and Administrative Officer. By now you should have access to our Fiscal Second-Quarter 2014 Earnings release. It can also be found on our website at www.BloominBrands.com in the Investor section.

Throughout this conference call we will be presenting non-GAAP financial measures including adjusted income from operations, adjusted net income, and adjusted diluted earnings per share. This information is not calculated in accordance with US GAAP and may be calculated differently than other companies similar non-GAAP information. Quantitative reconciliations of our non-GAAP financial measures to their most directly comparable GAAP measures appear in our earnings release on our website as previously described.

Before we begin our formal remarks, I'd like to remind everyone that part of our discussion today will include forward-looking statements, including our discussion of growth strategies and financial guidance. Such forward-looking statements are not guarantees of future performance and therefore you should not put undue reliance on them.

These statements are subject to numerous risks and uncertainties that could cause actual results to differ from our forward-looking statements. Some of these risks are mentioned in our earnings release others are discussed in our form 10K filed with the SEC on March 3, 2014 and subsequent filings which are available at www.sec.gov.

During today's call we'll provide a recap of our financial performance for the second fiscal quarter 2014, an overview of Company highlights, a discussion regarding progress on key strategic objectives and an update on annual guidance. Once we've completed these remarks, we'll open up the call for questions.

With that I would like to turn the call over to Liz Smith.

Thanks, Chris and welcome to everyone listening today.

As noted in this morning's earnings release, our adjusted second-quarter diluted earnings per share was $0.27 and our reported second quarter core domestic comp sales were up 0.6% with flat traffic. This represents a 150 basis point sales and 250 basis point traffic over delivery versus the segment. This was the 19th and 20th consecutive quarters that our performance has exceeded the industry in sales and traffic respectively.

Despite our outperformance relative to the segment, we were not satisfied with our results this quarter. Dinner traffic did not recover following the weather events in Q1 and in Korea we continue to face significant macro issues and an increasingly competitive environment. Both of these events impacted our overall profitability in the second quarter and represent headwinds to our business for the remainder of 2014.

First, let me address the dinner trends in our casual dining business. As we discussed last quarter, our Q1 comp sales were impacted by unfavorable weather. At that time we expected a full sales recovery in the second quarter and a normalization of our dinner business. This did not occur.

Although our traffic gap to Knapp was consistent with Q1, our sales mix shifted from dinner to lunch. While lunch continues to perform well, restoring dinner momentum across the portfolio is our top priority. We understand what needs to be addressed and we have a clear plan of action.

At Outback we have successfully expanded occasions by adding variety and value to the menu and this strategy has driven strong results. We have gained market share for over four years while the state competitors have grown their footprint 30%. Now that we are firmly back in the consumer's consideration set, it is time for us to double down on maintaining our steak authority.

We have always served higher quality beef and have been recognized by numerous publications as best in steak over the years. We have strengthened this commitment to quality with ongoing innovations such as adding the woodfire grill platform and offering unique combinations such as steak slice and butcher cuts steaks to provide our customers with additional opportunities to explore new flavors.

In the back half of the year, you will see an increased focus on strategies and initiatives that reinforce our steak credentials. Including new steak centric LTOs, play presentations and advertising. We will continue to broaden occasions with ideas like $4 finds which just launched but our messaging will balance the steak innovations with exploration. We recognize there are strong competitors in the steak category and we need to continue to be at the top of our game celebrating our steak heritage.

At Carrabba's, our menu refresh in the first half focused on increasing guest frequency by adding more accessible price points and broadening the variety of options. The menu has been well received by existing guests and overall satisfaction scores have increased.

However, we have not seen a meaningful increase in incremental traffic. It is clear that we did not go far enough in the menu relaunch to address consumers desire for lightness and variety on weekday dining occasions. We were more cautious than we should have been and are rectifying that with additional menu enhancements. All of our revitalization the past three years, both in atmosphere and service, have created a warm family-friendly environment that we can build on.

Carrabba's is the consumer's number three overall brand in casual dining and it is the undisputed quality leader and consumer preference for authentic Italian dining. The next evolution of the menu in our back half marketing programs will better complement our best in class Italian credentials with a stronger emphasis on lightness and variety to increase our share of weekday dining.

At Bonefish, we were focused on the new core menu that launch nationally last week. This is the first menu refresh since 2008 and it features over 35 new food and beverage items and three new menu sections to address the innovation gap that we've discussed on prior calls. We are creating awareness for the new items with marketing investment across multiple mediums designed to promote trial and increase frequency.

The dinner revitalization strategy at Bonefish will not stop after the core menu is in place. We now have a robust new product pipeline which includes a new bar menu and new seasonal menu changes. This ensures that we continue to provide food exploration opportunities that Bonefish customers love and expect from the brand.

Success at dinner in this category is about balancing high-quality craveable cuisine that we do better than anyone else whether it's steak, Italian or seafood, with menu innovation and variety to drive frequency. We have strong brands, high customer loyalties and the right strategy to restore our dinner business momentum.

The traffic softness we experienced at dinner was largely offset by an increased contribution from lunch. At the end of the second quarter, Bonefish Grill completed their addition of Saturday lunch and approximately 56% of Outback locations and 51% of Carrabba's locations were offering weekday lunch. This is up from 45% for Outback and 44% for Carrabba's in Q1.

Lunch sales continue to grow in restaurants that have had lunch for more than one year. Last quarter we indicated that analytics now suggest that we can expand weekday lunch beyond the original 50% to 60% estimate. And we continue to evaluate the ultimate opportunity for lunch.

At Fleming's, we finished the quarter with comp sales growth of 3.6%, once again outpacing the Knapp-Track high-end steak chain restaurant index. This represents Fleming's 18th consecutive quarter of positive comps. By delivering indulgent offerings across a wide range of price points, Fleming's continues to take share and has distinguished itself in a very competitive high-end steak category.

Now I would like to discuss our International portfolio. As you know, we have two large markets in Korea and Brazil and we are building our presence in China. In our two big businesses we have two different situations. Brazil is doing extremely well across all measures while Korea continues to be very challenging.

So let me first address the situation in Korea. Last quarter, we discussed the pressures on discretionary spending facing the Korean consumer. These pressures showed no signs of easing in the second quarter and are having a significant impact on the casual dining industry there. Second-quarter casual dining sales volumes in Korea were down over 20%.

Compounding this is an 88% increase in the number of new casual dining restaurants built over the last six years. The combination of the declining sales and increase unit counts have led to an aggressive battle for market share with an increased reliance on discounting.

We recognize that to differentiate ourselves in this environment we must undergo a major brand refresh focused on value, innovation and investment in our restaurants. As part of this effort, we are introducing a new go-to-market strategy with new promotional and marketing components. This new strategy is already underway.

In addition, we have brought in a new President to lead our Korean business. In-Soo Cho spent 10 years with Yum! Restaurants International and is an experienced seasoned leader with local ties. We like the lens he brings to our business. With new leadership executing our strategy, we are confident in our ability to make progress against this business but it's clear that given the country's macroeconomic issues it will take some time to gain traction and that headwinds will continue through 2014.

Staying in International, our Brazilian Outback business had another outstanding quarter. This acquisition is really paying off. Comp sales remain very strong and cash flow continues to grow at existing locations. We have a terrific seasoned management team and we intend to double the number of Outbacks in Brazil over the next three plus years.

In addition, we are pleased to announce our intention to open our second concept in Brazil in the first half of 2015. We conducted extensive research into which of our concepts should be the next to expand internationally. And although all of our concepts tested well, Carrabba's emerged as the clear winner. Italian dining is the number two segment in Brazil and no clear category leader exists providing us with significant runway for growth.

Given our strong team in Brazil and their expertise in building our Outback business so effectively, it was a natural fit to take Carrabba's abroad. We have already identified the first two locations and we'll update you on our progress as we take this next big step in our International expansion efforts.

Moving onto China, we see this as another big opportunity. We've opened three restaurants over the last 18 months and plan to open two more this fall. We are making real progress in China even though there is still a lot of work yet to do. In addition to our three new restaurants in Shanghai, we have eight high-volume restaurants in Hong Kong that do very well and will serve as our base for expansion into South China.

On the development front, we opened six system wide locations in the second quarter consisting of one Bonefish Grill restaurant, one domestic Outback restaurant, and four company-owned international Outback restaurants, three in Brazil and one in South Korea. These openings brought our year-to-date 2014 total to 21 locations. This is on track to meet our expectations for the year.

At Carrabba's we remodeled nine locations in the second quarter giving us 14 for the year. We are pleased with the sales and traffic lift we are seeing as a result of these efforts. Outback continues to test exterior remodels but we are still in the early stages and we will update you on this later in the year.

Dave is going to take you through the financials in detail but I want to comment on the revision of our full-year guidance. Our full-year expectations for domestic comp sales are now flat to up 1%. Our adjusted diluted EPS is now expected to be between $1.05 and $1.10. This is a reduction from our initial expectations to reflect the first half trends in our domestic dinner business and challenges in Korea.

Although we do expect to make progress with our efforts to improve these trends over the back half of the year, we believe it is prudent to temper our expectations for both 2014 sales and profitability. Should our revitalization efforts gain traction more rapidly, it represents upside to this guidance. While 2014 is challenging, we remain confident in our long-term growth prospects and our portfolio's unique growth runway.

As we go forward and execute our strategies, we remain grounded by two key principles. First, we will continue to invest ahead of growth while aggressively managing our cost structure given domestic sales headwinds.

For example, we are supporting our International growth strategy by hiring some great leaders such as Pat Murtha, President of International; Suk Singh, head of Global Development; and Juan Guerrero who now leads our Global Supply Chain organization. Each of them have had an immediate and positive impact on our Company building out our capability and infrastructure to support our expansion.

Second, we will continue to be disciplined stewards of capital. We will accelerate investment at areas such as Brazil that provide high returns. In addition, we will reduce spending in areas where our expectations are not being met.

In closing, despite the challenges we are seeing in 2014, we continue to gain share and make progress on our key strategies. Also, I am pleased to announce that we will be having an Analyst and Investor Day in late Q4 and at that meeting we will provide you with more detail and an update on our growth plans and future priorities. We look forward to seeing you in Tampa.

And with that, I'll turn the call over to Dave Deno to provide more detail on our second-quarter operating results and our updated guidance. Dave?

Well thanks, Liz and good morning, everyone.

I'll kick off with discussion around our sales and profit performance for the quarter. As a reminder, when I speak to net income and EPS I'll be referring to adjusted numbers that exclude certain costs and benefits. Please see our earnings release for reconciliations between our adjusted non-GAAP metrics and their most directly comparable US GAAP measures. We also provided a discussion of the nature of each adjustment.

With that in mind, our second-quarter financial results versus the prior year are as follows. Adjusted diluted earnings per share were $0.27 versus $0.25 in 2013. GAAP diluted earnings per share for this quarter decreased to $0.21 versus $0.58 last year.

Adjusted net income increased to $34.2 million versus $38.18 million for the second quarter a year ago. GAAP net income was $26.4 million versus $74.9 million in 2013. When considering our results versus a year ago please note that our GAAP results for 2013 includes the release of our US tax valuation allowance which was excluded from our adjusted results.

Comparable domestic restaurant sales at our core domestic concepts were up 0.6% while traffic was flat. For our core domestic concepts, our comp sales results were as follows: at Outback, comps were up 0.9% with traffic up 0.3%; at Carrabba's, comps were down 1.2% with traffic down 1.2%; at Bonefish, comps were up 0.3% with traffic down 0.4%; and at Fleming's comps were up 3.6% with traffic up 0.8%.

Although we do not break out our comp sales between lunch and dinner, we can say that on a blended basis these results were about 1% to 1.5% below our expectations for the quarter. We expect our dinner trend to recover -- while we had expected our dinner trend to recover what we lost in the first quarter from unfavorable weather. This recovery did not materialize.

We did however, have better-than-expected sales from lunch due to additional rollouts and the continued sales growth in lunch from restaurants that have had lunch at least for one year. It's important to remember that although our lunch business is profitable, it does not generate the same level of profitability that our dinner business generates due primarily to lower guest check averages. This is particularly true during a time with many lunch rollouts that require additional training and implementation costs.

Total revenues increased 9% to $1.1 billion. The majority of this increase is due to additional revenues from our consolidation of Brazil and new restaurant openings. These results were partially offset by continued sales softness in Korea.

Restaurant level operating margins were 16.1% this year versus 16% a year ago. Although we continue to get the benefit of our productivity efforts in our numbers, these efforts were offset by commodity inflation, cost associated with lunch expansion and new promotions. In addition, lower average unit volumes at dinner domestically and the Company's Korean restaurants also had a negative impact on margins.

Now let's turn to some of the details. First, cost of sales increased 32.5% from 32.3% in 2013. This change was primarily driven by increases in seafood and beef costs, cost associated with the rollout of lunch, changes in product sales mix and promotional activity. The increase was partially offset by productivity initiatives and menu price increases.

Importantly, we are now 87% locked in our 2014 commodity needs including 90% locked in beef. Our supply chain team continues to make great progress in addressing our purchasing needs.

Labor and other related expenses decreased to 27.4% from 28.2% in 2013. The drop in labor costs included productivity savings from the new labor model, higher average unit volumes in our newly consolidated Brazil restaurants, reduced field compensation expenses and lower healthcare health insurance expense. This was partially offset by higher kitchen and service labor associated with the weekday lunch rollouts and lower sales volumes in our Korean restaurants.

Finally, restaurant operating expenses increased to 24% from 23.6% in 2013. The change was mainly driven by lower average unit volumes in our Korean restaurants, increased operating supplies expense associated with our lunch rollouts as well as increases in rent and utilities. This was partially offset by higher average unit volumes in our newly acquired newly consolidated Brazil restaurants.

Turning to G&A, general and administrative costs were $72.3 million in Q2 versus $65.1 million a year ago. This increase was primarily driven by the inclusion of Brazil G&A in our consolidated results, the timing of our annual managing partner conference which is about $4 million, higher legal and professional fees and costs associated with our growth investment. This unfavorability was partially offset by $6.8 million of lower incentive compensation expenses due to performance against current year objectives.

Second-quarter adjusted operating income margin decreased to 5.8% from 6.7% in 2013. Lower-than-expected sales domestically and in Korea did not allow us to gain traction on margin this quarter despite our continued success with productivity. As a reminder, due to the consolidation of Brazil, we no longer record the Company share of their earnings as income from operations unconsolidated affiliates in our income statement.

On the productivity front, we delivered another excellent quarter of results. We are on track to reach our annual goal of at least $50 million in productivity savings. We continue to make progress on removing costs from our supply chain, our new front of house and back of the house labor tools have been completely rolled out and we are seeing the benefits in reduced flavor expense.

Turning back to the quarter, we had two primary adjustments that have been removed from our adjusted net income and adjusted EPS. The first item is the non-cash amortization of new intangibles resulting from our Brazil acquisition. This $1.5 million expense primarily falls in the depreciation and amortization line in the P&L. As a reminder, we will continue to have this adjustment to our income on an ongoing basis.

The second adjustment is $11.1 million of cost related to the refinancing of our term loan that was completed in May. The closing on this refinancing transaction is another step forward in optimizing our capital structure. The refinancing allowed us to convert a large portion of our existing term loan B into a new facility consisting of a term loan A in a large revolver.

It is important to note that this refinancing did not add any additional debt to our capital structure. It simply exchanged higher interest rate debt for lower interest rate debt. As result of this transaction, we expect to save approximately $6 million in interest expense in 2014 which is being reinvested in the business to fund our growth initiatives including the opening of Carrabba's in Brazil.

And finally, for the second quarter our GAAP effective income tax rate was 24.1%. After taking into account the adjustments that we removed from our GAAP net income our tax rate would have been 27.7%.

I would now like to take you through our thoughts on 2014. We have decided to update our guidance for the year primarily driven by two key items. First, our comp sales results in the second quarter were between 100 and 150 basis points lower than expected due to softness at dinner.

Although we have begun to implement plans to drive this business, we do not believe it is prudent to expect a meaningful recovery to take place in 2014. Our assumptions for the balance of the year reflect this. Should trends in our dinner business improve, it would be an upside to this forecast. As a result, we are lowering our domestics comp sales expectation for the year to flat to up 1% from the previous guidance of 1% to 2%.

Second, in Korea, the casual dining market has not shown signs of improvement heading out of the second quarter. Although we are working very hard to change these trends, our updated guidance does not assume any material recovery in the Korean business for the balance of the year. Should trends improve in Korea, that would be an upside to our current forecast. These two items make up effectively all of our revised expectations for the year.

Now, I will take you through the specifics of our updated guidance. Total Company revenue is now expected to be between $4.4 billion and $4.45 billion for the year. Adjusted EBITDA for the year is expected to be between $459 million and $470 million. Adjusted net income for the year is expected to be between $135 million and $141 million.

Adjusted diluted EPS for the year is expected to be between $1.05 and $1.10. I just want to remind everyone that our conversion to a 52/53 week reporting calendar lowered our EPS expectations by six tenths in 2014 and this is reflected in this guidance. GAAP net income for the year is expected be between $120 million and $126 million. And GAAP diluted EPS is expected to be between $0.93 and $0.98.

Commodity inflation is expected to be between 2.5% and 3.5% reflecting the great work that our supply chain team has been doing. We expect foreign-exchange to represent a $3.5 million drag on a year-over-year basis.

General and administrative expenses are expected to be between $280 million and $290 million. Most of the favorability to our previous guidance is driven by reduced incentive compensation. This range for G&A does not include the impact of any items that have been excluded from our adjusted results.

We still anticipate an adjusted effective income tax rate in the range of 27% to 29% and system wide new restaurant development in between 55 and 60 units. Capital expenditures will be between $250 million and $270 million for the year.

Now we'd like to comment briefly on Q3. Our stated policy is to only provide annual guidance. However, there are a few items expected to have a material impact in our Q3 financials that are appropriate to mention.

First, we expect to have a timing shift in our marketing expenses into the third quarter from the fourth quarter to support promotional activity at Outback. In addition, similar to our Carrabba's menu rollout in the first quarter, we will incur additional marketing, operating supplies and menu printing costs for our rollout of the new Bonefish Grill menu.

Finally, we will incur additional general and administrative expenses related to the development of Carrabba's in Brazil. All of these items are incorporated into our full-year guidance but they will impact the timing of those earnings between the third and fourth quarter.

In conclusion, our updated guidance reflects a prudent outlook given the headwinds of 2014. However, we remain very positive about the long-term prospects for our business and we look forward to sharing those plans with you in more detail in Q4.

And with that, I'll now open it up for questions.

(Operator Instructions)

Our first question from Joseph Buckley at Bank of America Merrill Lynch

Thank you. It's Andrew Charles filling in for Joe.

Liz, at Carrabba's the new menu increased the variety and affordability of menu items, but it didn't seem like it was enough. So maybe talk about what you think was lacking and why the upcoming additions will be more effective?

Yes, so Andrew you're right. And the additions that we put in are resonating very well in money existing, but they didn't go far enough to drive incremental traffic. And I think some of that is we have such strong Italian credentials there was perhaps an overabundance of caution in further increasing the number of items that were lighter, more affordable price points, more affordable varieties, sections which play to the way consumers are dining and eating during the everyday occasion.

You're going to see the next evolution of the menu push that further and we think from all the work that we've done that is going to continue further accelerate every day of the week dining when people eat more different. The only other thing I'd say is we're not going to wait for the permanent menu enhancements we're out there right now with a LTO that is doing that for us.

Okay, and Dave, looking at your margins. Are you able to parse out how much lower profitability of lunch is offsetting your productivity savings?

Yes, there are really -- lunch is part of that, but I'd also say that some of the dinner sale softness, our comp sale softness, was part of that and then our Korea business was part of that.

But I do want to stress that our productivity trends are entirely on track with at least $50 million of productivity savings this year through better management of our supply chain and rolling out our back of the house and front of the house labor tools, which is coming together quite well. And you've seen that in the lower labor costs year-on-year. So lunch is part of it but also the consolidation of our Korean business and also some of our sales softness versus expectations.

Great thank you

John Glass with Morgan Stanley

Thanks, very much.

If I could just go, Dave, to the guidance for a moment. One is, can you parse out or isolate the Korean impact on the lower guidance versus, say, the core domestic business change?

And more broadly, I'm still trying to understand you've lowered your comp expectations by 1% so it's like $40 million and yet your G&A is cut by almost that amount about $30 million-- I'm sorry, your EBITDA is $30 million and your G&A is lower. Your food costs are in coming in plans.

Are you spending more marketing? Is there some incremental expense in the back half or this simply just delevering on the other lines that you aren't saving on?

Sure, let me answer the Korean question first. There were two major changes that we talked about in our forecast. And that was the change in comps from 1% to 2% and down to 0% to 1%. So that's part of it and also John, as you mentioned the lunch piece is a little bit margin degradation versus dinner.

But importantly, the Korean business, as we've called out, is an important part of our change in guidance. The Korean business by itself is not a large business. But the change in profit performance year-to-year has impacted our results. And if you look at -- if you isolate and you say if Korea had made pretty much what they made last year, John, we would be at or near our guidance of $1.21 for the year.

So importantly, the Korean business had a major change this year. It is not a large business and stuck in 2015 and beyond it won't have a big impact on our results, but this particular year, it's been part of it.

And then on the unit development, you've kept that as well, but year to date you haven't grown many units and I know there's been some closures in there. But what gives you the confidence -- why stick with that if your -- what gives you the confidence you can actually hit the 55 to 60 units this year given we're halfway through the year and you're much -- I don't know only at net up only a handful of units?

Yes, our 55 to 60 John, is a growth number first of all. Secondly, in casual dining you have a really good visibility in your pipeline. So you know given the long lead times of development, we have the pipeline identified and in a lot of cases construction is already underway. Our pipeline is robust and identified. We feel very good about the 55 to 60 number for the year.

I just add John, as you know in years past, we have been more back half-loaded. So if you look at the cadence of this year it reflects the cadence of our openings in 2013 and 2012. We continue to push to smooth the pipeline, but we do have good visibility and we feel very good about meeting that target.

Okay thank you

John Ivanko with JPMorgan

Hi, great.

The question is on you're softness in dinner. What kind of intelligence do you have at this point that lunch is not cannibalizing dinner? Whether it's just attention for the customer or attention from marketing that you're pursuing a lower average ticket at the stake of a higher average ticket?

And I do ask that question in the context of, for example, at Texas Roadhouse that actually did have a dinner-only business, a good second quarter and that's pretty strong start to July. So if you could juxtapose what's happening within the dinner segment, but I think more specifically lunch versus dinner at Outback?

Thanks.

Sure. So John, lunch is coming in from an analytic standpoint right in line with where we thought that cannibalization would be at 10% to 15%, which has about 0.5% drag on dinner comps. That was always in the analytics and the business plan, and that is where it's coming in.

What gives us comfort that it's not a trade-off is all the analytics that we've done. But also, if you look at the -- even in store, if you look at the SMG scores in stores with lunch and without lunch, high SMG scores in each so that there's not a distraction, if you will, that's impacting dinner service in restaurants with lunch and without lunch. We feel very good that we have a handle on how lunch is playing out in its incrementality.

The dinner momentum, as I said in my prepared remarks, we had an impact on the dinner momentum, as did everybody else in Q1 with the weather, because most of it hit on the weekends. We interestingly saw that trend continue, and if you look at the NPD CREST data, which is really the only measure that breaks out industry weekday to weekend. And you look at the most recent period from March, April and May, interestingly, traffic for casual dining was down 4% on the weekends and up 1% on the weekday.

As you know, we skew towards the weekend even more than the casual dining average, so we're looking at that dynamic. But I've always said, what we do to ourselves impacts us most of all and we have very clear action plans to restore the dinner momentum.

On Outback, we did a great job broadening and driving variety. Now it's time to double down on steak credentials. And really play up -- you talked about our competitors, they have done a very good job being single-minded about steak and going after steak. And we have done a great job in addressing the major issue we have with a veto vote and now we need to go back and balance that by reminding people that we are actually best at steak: consumer choice at steak. And we will be doing that aggressively in the back half of the year.

And I think about as I talked about Carrabba's dinner business, it's a bit of the opposite. Where we stayed a little bit too pure and cautious and not moving away from that Italian cuisine to drive us even further away from the weekend and special occasion and into the everyday.

And on Bonefish, I'll just tell you, it's a week into the new menu but we feel terrific. So each, we have a very good handle on what's going on with our dinner businesses since the momentum slowed in H1 of this year and what we need to do to restore it. And it's going to take a little bit of time, but I feel confident about it.

Thank you.

Jeffrey Bernstein, Barclays

Great, thank you very much.

Two follow-ups: the first, Dave, you mentioned Korea and I think you said if your profit dollars were flat this year with last year you would be close to that $1.21 versus now you're at $1.05 to $1.10. It does seem like the reduction in guidance is being driven almost entirely by that. I'm just wondering whether you were assuming at the start of the year that Korea would be flat and therefore Korea is the lion share? Or how to separate those two components of what you described as the guidance reduction, and then I had a follow-up.

Yes, Korea is a big part of guidance change. I mean the comp sales, as well. We went from 1% to 2% to 0% to 1%. But I just want to stress that the Korean piece is a big part of the guidance change. I just want to reiterate, Jeff, I hope you don't mind, that the Korea change this year is large to our business, but the size of the business in our portfolio is not very large. So 2015 and beyond, we should be in good shape on the business

And then the Bonefish refresh, which I think you said the new menu kicked in or finalized the rollout last week or so. Just wondering where we stand on that? I know with the Carrabba's in the first half there was some noise around the rollout. Maybe it didn't achieve the results you wanted that you saw in tests.

As we look at Bonefish now, I mean should we expect a noticeable improvement in trends in coming months or quarters, or has the results at Carrabba's led you to believe that maybe early days if any of these rollouts just doesn't gain the traction that perhaps you had seen in tests?

Yes, so two very different situations, right? We've been transparent on the Carrabba's and the need to go further. On the Bonefish menu, it's one week out. We're really happy with what we're seeing. It was a very extensive innovation. Over 35 new beverage and food items. Three new platforms. Whole new platforms which are whole new platforms surrounding bowls, steak and chops, premium sized.

And the one thing I want to stress on Bonefish is, we got behind in the innovation cycle but we're not finished with the core menu. Coming right up on the heels of that will be a bar menu refresh. We'll then move into seasonal menus, and so we really have a fully loaded pipeline on Bonefish to keep the food exploration going. So I'm feeling very good that we have restored our mojo on innovation to Bonefish.

I think it's clear what we need to do on Carrabba's. I think the new dinner menus will perform very differently.

Okay, can I just clarify one last thing? Did you say -- I know that you're new openings your targeting growth 55 to 60, but you said with the pipeline visibility pretty good, should we assume that next year we're still on target to see that number go up at least directionally? I know you don't have those exact numbers but is there any change in strategy where that number might go down next year because of the struggles you're seeing today?

No, there's no change in strategy on the numbers down for sure. At the same time, it's a little early to layout, Jeff, what we expect next year to be. But, no, no change in strategy in the downside.

Thank you.

Jeff Farmer, Wells Fargo

Great, thanks.

Question for you Dave, and I know that you said you would probably dive a little bit deeper into this at the Analyst Day. But still, going back a couple years to the IPO, company guide in Q, along the lines of 7% revenue growth, 13% upward upper income growth, 20% net income growth.

I realize there's a lot of moving pieces here across both concepts and geographies, but, again, realizing it's early, you're going to give us more information. But how should we be thinking about this financial model over the next -- let's call it 2 to 3 years? Do you think that we need to dial this down a little bit/ or do you think that we can get back up to that 7%, 13%, 20% longer-term guidance range?

Clearly, we'll provide more information in Q4. But if you look at what's changed since the IPO, we have been conservative on dinner trend traffic and traffic in the restaurants overall in the entire time. But traffic trends in casual dining have stepped down just a little bit. So there's more persistent headwinds than we'd envisioned at the IPO. So in the US, that was something that we and others did not anticipate.

But clearly, we're continuing to flip to more of an International growth story and if it was only domestic business, it would be hard to achieve the 20%. But given the opportunity that we have in Brazil and other places I think that model is still an opportunity for us. The growth drivers will change somewhat. We'll explain that more later in the quarter, but I wanted to mention two things.

One, the persistent headwinds in the casual dining business, having said that, we have outpaced, since we went public, traffic trends by 600 basis points. So that's been very good for the Company. We're just facing a little more headwinds in the US then we thought we had before and we have a bigger opportunity Internationally than we thought at the IPO.

The only thing I would just draw a little more color around, Jeff, is that if you looked at the traffic trend in 2012 for Knapp, it's still challenged because we know traffic in this category has been declining for eight years, but was down 1.5%. In the two years since we've gone public, that trend has decelerated rather significantly. It was down 2.8% in 2013 and calendar year-to-date it's been down to about a 300. That's a 600-basis point decline that Dave's referring to versus when we went public.

And we were very clear and we were thought to be conservative at the time when we said that we felt that casual dining would be flat to plus or minus one. Well in fact, casual dining has not been flat to plus or minus one it's been about a 3% decline per year. So, I think the domestic business we continue to take share, but it's off of a lower base and as Dave said we feel very bullish about the mix into International so that we see the 20% on a longer term. But the persistent headwinds have put a harbinger over the last two years.

Just one more quick follow up. I apologize, I dropped off for about by 5 minutes accidentally so I might have missed this and you can just your completely skip over the question.

But acknowledging that South Korea, what's going on there is an unusual environment right now, but even having said that, as you look at that segment and that business in the roughly 110 units you have there. What are some of the strong pros and cons of maintaining equity ownership in that country? And again, if you've already answered that you can skip right over it.

No, we have a very good position there in Korea. We think we have plans in place, that Liz mentioned, to address the situation in Korea with the menu refresh, the product refresh. And we also, in Korea that's different than the US is lease terms are relatively short there. So we have flexibility on our assets.

So we're going to bring some the things that we had talked about earlier at Outback in five or six years ago, to the menu refresh, the marketing work, some of our asset work to Korea and change these trends. We just felt that from a forecasting standpoint for this year it was prudent to continue with the forecast that we have, the trends that we have.

Also importantly, we have a new leader there who's steeped in Korea, In-Soo Cho and we have a new marketing head there too. So we're upgrading our management team. Our plans for Korea are unfolding, but we want to maintain our business there certainly.

All right, thank you

The only thing I'd add, Jeff, is we have a number one position there. This year has been very tough in Korea, an anomaly in some respects on a year-over-year basis versus what we've seen of late. But we think that surrounding it, as well as the government stimulus plans over there, we're looking to get the market back on track.

Jason West, Deutsche Bank

Yes, thanks.

Going back to your back half outlook. Do you guys assume that you're going to maintain this strong gap to the industry that had been 300 basis points? I guess it was more like 150 this quarter. Are you assuming you maintain that gap or you assuming you are going to start performing more in line with the industry going forward?

We absolutely expect to maintain the gap to Knapp and be in a position across all of our brands, or because Carrabba's, to actually be a net share gainer at the end of the year and post our fifth consecutive year on the quote portfolio of share gains.

It's just that, as you said, the gap has narrowed a bit, but it was a still 250 basis points on traffic, which was consistent with Q1, and it was 150 basis points on sales off of 19 in Q1. We anticipate that, but again, I think I spoke to the headwinds that casual dining is facing and we are going in the face of more persistent headwinds, and so we believe it's prudent to have that outlook for the back half of the year.

Okay and just a follow-up on that. Does the outlook assume that you're going to have to make more investments? Whether it's pricing or promotional dollars or marketing? I think you talked about pulling some marketing forward in the third quarter at Outback. But even beyond that, does the guidance contemplate some margin pressure around the desire to improve traffic at dinner?

Everything that we have on the margin side -- everything that we have done in the past and discussed in this forecast is consistent with our past trends. The only difference is the timing that I talked about in Q3 and Q4.

The only thing I would add to that is that we are committed because of our passion and belief in optimism around the long-term growth of this. We are committed to not cutting long-term investment for the sake of short-term results. And we continue to invest ahead of growth. You saw that in infrastructure, you see the step up in digital and technology, you see investing ahead of growth in China, as we ready Carrabba's for Brazil. And you see us continuing to invest ahead of growth to get lunch out there.

I want to reiterate that -- I'll take Carrabba's. It's an intense competitive discounting environment out there, okay. The number of SSIs in the Italian category I think is almost double year-to-date from the competition versus it was year ago. We are not going to use discounting to drive traffic. A 2% list in traffic that has no margin benefit is not where we're heading with this.

We know what we need to do to pump up Carrabba's. Which the Italian segment has been challenged. Most of the Italian competitors are down mid to low single-digits. So we are not going to chase discounting to counteract what we see as an accelerated discounting environment. We have always defined value as total benefits divided by price and we're going to continue to do that.

Thank you.

Bryan Elliott, Raymond James

Good morning.

Dave, a couple of clarifications. You talked about gross openings. Have you guided to net openings for this year?

No, we've not guided to net openings this year, Bryan.

How many units would you expect to close?

Very few, Bryan.

As remember, we already did a big wave, and so I think that's not going to be a meaningful number at all

So second half, couple if that. Okay.

Yes, very small. We've done a great job so far pruning our portfolio over time. We will always do that, Bryan as you know. But relatively speaking, pretty small back half.

Okay, so for you to say 25, you've done 22, we can model for that.

Dave, you listed three important Q3 things to be aware. Marketing shift, Bonefish rollout, marketing and menu and additional G&A for Brazil. It's nice to know that, but it's kind of useless to us if you don't give us some sense of, for example, what's some quantification of the timing shift in marketing, for example, and some range on those three things. Otherwise, it's nice to know, but it's absolutely useless to us

$5 million-ish, Bryan.

For all three?

Yes.

Okay, that's helpful.

Last question on Korea. You've talked about it being a small business but it obviously is having a big impact on overall profitability this year, the magnitude of the guidance change is pretty substantial for a small business, but not to worry about it 2015 and beyond. What's to prevent another 20% drop in casual dining demand and another significant reduction in contribution from Korea in 2015?

Couple things. One, given the plans that we know we have in place and the people we have place there, Bryan, is number one. Two, we have tremendous flexibility on our assets in Korea so we can make the moves that we need to make. And three, candidly, the profit amount is relatively small now.

And those three things coming together gives us pretty good -- very good confidence that this year is an anomaly year. A one year, a year in Korea. And going forward we'll be in good shape. But I don't -- certainly don't sense that this will be something that we'll have to talk about year-on-year next year at this time. (multiple speakers)

Go ahead.

No, I'm sorry, Bryan. Go ahead.

I was just going to ask for some help for those of us that don't have much insight into what's going on in Korea. I mean a 20% decline in casual dining there is pretty staggering for what seems like an economy that's reached first world status. What's really happening to the consumer over there, and why such a substantial decline?

Yes, basically what's happening, Bryan, is in the entire restaurant segment, is the disposable income for the Korean consumer, given increases in housing costs and debt levels are being squeezed significantly. And discretionary spending has dropped off and you see that in the food and food away from home business. And we're participating in that in the economy right now and seeing that. So that's the main reason why.

The other thing I would add is that if you look at the where the growth is happening in the economy, it's at the very top of the income distribution. So it's even more skewed.

It's even more of a high-end growth story in Korea that is not trickling down. And, in fact, the government I think last week announced another stimulus package to try to assist the vast majority of folks that are seeing a pretty significant crunch on disposable income versus the top X percent, which are really driving that growth. It's a bigger skew than you even have in the US.

Okay that's very helpful thanks a lot

Thanks, Bryan.

Andy Barish, Jefferies.

Hello.

Can you give us a little more color on the B side of things within your overall inflation outlook for this year? And how does that set up, I know it's early, but how does that set up for 2015 in terms of your outlook on that particular commodity?

Sure, Andy.

Beef has been good for us this year relatively speaking. It's single digit-ish part of our commodity portfolio. It hasn't been too much of a drag on our results, and that's why we can hang with the 2.5% to 3% increase. Beef for us is about a third of our total company spend on all of our buys. It's slightly more than half of our commodities spend, because we are obviously big seafood buyers.

So the supply chain team has done a great job locking up this year and giving us plenty of flexibility as we go into next year. So we're beginning -- given the high beef cost, we're beginning to think about making some purchases for next year at this time, and certainly for competitive reasons we don't want to get into our strategy.

But we have the flexibility to address the beef cost piece in 2015.

Now again, I just want to remind everybody beef is slightly more than half in our proteins and it is about a third of our overall company spend.

Thank you

Yes.

Matt DiFrisco, Buckingham Research.

Thank you.

I had two follow-up questions, as well. Just looking at the -- to get more comfortable about the control of cannibalization from lunch potentially, domestically. Have you seen -- did you say before that the markets that have had lunch rolled out that you've seen proportionate dinner drop off in line with markets that don't have lunch rolled out? Or, have you seen a meaningful difference in the dinner drop off there in context with that data you gave as far as the 4% drop off on weekends? Just wondering if you tangibly see that difference?

Yes, so first thing is, cannibalization is coming in exactly in line with our model of expectations. So that means that restaurants that have lunch, right? Where the lunch business is, it has about a 0.50 basis point impact on the system wide and a 1 basis point impact in the exact restaurant, right? So where we've rolled out lunch is probably been 50 basis points of headwind on the dinner business across the system.

In the restaurants where lunch is, it's about 100 basis point headwind. But that's entirely where our model said it would be at that 10% to 15% level. That was built into our expectations. As we've said, the dinner business momentum became challenging in H1 of this year and we know what we have to do to address it. We've been rolling out lunch for multi-years and the dynamic of lunch and dinner hasn't changed at all.

Okay, great.

I want to remind folks that, because there was some concern about this when we first started rolling out lunch, comps in our lunch business that have had lunch at least a year are favorable and growing. So that's a very important point.

Okay, and then just as another follow-up here.

I know you're not giving 2015 guidance, but you mentioned a lot of incremental cost both somewhat Internationally. With the introduction of Carrabba's in the back half of this year it looks like there's some up-front G&A cost associated with it getting into Brazil. You talk now, I think you've at least had two concepts with significant menu redos. I'm just trying to think of the model, how it works in 2015.

Are these costs that will continue to be top line drivers and required in the model, or are we looking at a, as far as operating costs investment year-end 2015, maybe being a little less when you take a look at the menu introductions that investment had, as well the -- what is required to get Carrabba's -- the footprint going in Brazil. What that will be to the 2015 look? Because it looks like you're investing a lot now and there could be an inflection point in 2015.

Yes, we are investing a lot this year. It's too early to say if that number will come down year-on-year, but what we can tell you is, given the dynamics of the restaurant business and what we see internationally, we will continue to invest in those markets.

I'm not calling for an increase or decrease, but just as you model these things out, when we see progress in China, we're going to continue to invest in China. We see progress in Carrabba's in Brazil, we're going to continue to invest there.

Certainly, we've stepped up the investments this year in 2014. Those could continue into 2015 of a similar magnitude. I don't think you're going to see a drop off. But what you will see is some of our investments starting to take root in more restaurants, higher volumes and things like that as we go forward in some of these markets.

We're especially excited about the opportunity with Carrabba's in Brazil, given the Italian number two, we've got a fantastic business there, great leadership team and that Carrabba's business tested out from a market research standpoint very well. So these investments we're seeing are going to pay off.

What about the menu side of it in the domestic level of investment? Would that be -- is it appropriate to think that you're spending more now in 2014 than you potentially might be in 2015 when you look at the level of menu innovation and changing of the menu? Or is that something that is a 12-month cycle now?

I think that's fair. I think it's fair with the Carrabba's. We will be coming out with another enhancement on Carrabba's, but we had the big Bonefish relaunch the 3rd of last week. I just want to stress continuous innovation though, is really pretty critical.

We just launched $4 finds on Outback which is going to get the bar business going. We like how that's going. We think that there's a big opportunity -- we know there's a big opportunity to get to drive the bar business with a new bar menu at Bonefish, which has a 25% alcohol mix, which is very unusual. Yes, we're not going to have the number of new product launches, but we're always going to invest behind innovation, and that's an ongoing thing.

Okay, thank you.

Michael Gallo, CL King.

Just a couple follow-up questions.

I want to delve in a little more into Korea. I know you noted that the size of the business from a profitability standpoint is pretty low. Should we think about the business if you can improve trends that you might shrink it meaningfully and do you have a number of stores there that are now not profitable?

Yes, we will continue as part of our work to optimize the asset base. Like I mentioned earlier, one of the really good things about the Korea business is that their leases are short-term so we can move assets around pretty easily. We will do a lot of work around the assets, where they are, the number of them and everything else right now and as we go forward. So we have the flexibility.

It's too early to say if we'll shrink the business meaningfully or anything like that, but I can tell you that we'll do a lot of asset work to make sure that as these leases expire and things, we move these assets into better locations or different formats. So that's probably the biggest thing that'll be going on in Korea from an asset standpoint.

Okay, great.

And then another question, I'm not sure if you hit it or not, but the actual versus theoretical food system. Is that still going to go in the fourth quarter this year?

Part of it's in now. There will be more of it going into the fourth quarter and will be moving into it into the first part of next year. Just want to remind everybody, just like the labor system when we turn it on we have to train people and everything else.

So there'll be a learning curve, but we'll be working towards that at the balance of this year and into early next as we go forward. It'll be a big part of our productivity plan

Our final question comes from Michael Halen, Bloomberg Intelligence.

Michael Halen, if you would check your mute function.

Thanks for taking my question.

How will the pricing of new lighter menu entrees at Bonefish and Carrabba's compare to the prices of traditional entrees already found on the menu?

Yes, so let me just stress that it's not going to be just lighter items, right. It's going to be variety and affordable price points and so we will do the menu engineering so that the return to net on the menu is healthy and intact. So the Bonefish that just rolled had a number of lighter, it had a number of variety of price points, but the return to net in itself is intact because the menu is designed that way.

Great, thank you.

And can you give any insight into what you think the impact of the World Cup could be on the third quarter results?

For us, there wasn't much there. The only thing we did see is we know Brazilians love football and they watched it -- the games they played so our restaurants were pretty quiet that day, but overall trends hadn't changed.

And it appears there are no further questions at this time. Liz Smith, I'd like to turn the conference back to you for any additional or closing remarks.

Thank you, we appreciate everybody for joining us today. We look forward to updating you on our Q3 progress as well as seeing you down here in Tampa in Q4. Thank you.

This concludes today's conference. Thank you for your participation.