Bloomin' Brands Inc (BLMN) 2014 Q3 法說會逐字稿

Good day everyone, and welcome to the Bloomin' Brands Incorporated third quarter 2014 results conference call. Today's conference is being recorded. At this time, I am pleased to turn the conference over to Chris Meyer, Vice President of Investor Relations. Please go ahead, sir.

Thanks Jennifer. 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 third 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 restaurant-level operating margin, adjusted income from operations, adjusted net income, and adjusted diluted earnings per share. This information is not calculated in corporation 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 would 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 subjects 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 10-K filed with the SEC on March 3rd, 2014, and subsequent filings which are available at www.SEC.gov.

During today's call we will provide a recap of our financial performance for the fiscal third quarter 2014, an overview of Company highlights, a discussion regarding progress on key strategic objectives, and an update on annual guidance. Once we have completed these remarks, we will open the call for questions. With that, I would now 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 third quarter diluted earnings per share was $0.10, and our reported third quarter core domestic comp sales were up 3.3%. This represents a 290 basis points sales over delivery, versus the casual dining segment that strengthened during the third quarter. Traffic for the quarter was up 0.6%, which was 280 basis points better than the segment. This was the 20th and 21st consecutive quarters that we have meaningfully outperformed the industry in sales and traffic respectively.

Overall we were very pleased with the results this quarter, driven by an improved dinner sales trend and ongoing productivity savings that helped us achieve an 80 basis points improvement in adjusted restaurant level margins. In addition to our strong operating results, we made several important strategic decisions over the past several weeks that strengthen our ability to deliver long-term sustainable growth. These include debts to restructure our business in Korea, the intent to sell our Roy's business, and right-sizing of our home office team.

Before we discuss these actions in more detail, let me first address the dinner trends in our casual dining business. In the second quarter dinner sales were below our expectations, and on our last call we outlined plans to address the specific challenges confronting each of our concepts. In the third quarter we began to implement these plans, and we are encouraged by our improved performance versus the industry. We recognize that there is still work to be done, but we are quite pleased with our progress. A few by concept is as follows.

At Outback comp sales grew 4.8% in the third quarter. This was an impressive 440 basis points better than Knapp. All aspects of the Outback business performed extremely well in the quarter. As a reminder, last quarter we discussed our intention to reclaim our steak authority. While we are pleased with the results of our multi-year effort to expand occasions through a broad menu, it was time to remind customers of our category leading steak credentials. We started this work in the third quarter, and for the balance of 2014 and into 2015 you will see an increased focus on strategies and initiatives that celebrate our steak leadership, including new steak centric LTOs, plate presentations, and advertising. We will still continue to broaden occasions with ideas like $4 fines menu, but our messaging will balance steak innovation with exploration.

At Carrabba's our comp sales were down 1.2% in Q3, which was consistent with the second quarter. While this result is disappointing, it was not entirely unexpected. As we made clear on the Q2 call, our challenge at Carrabba's is not just a marketing issue that has a short-term fix. We acknowledge that our new menu was an improvement but did not go far enough. We are working on the next-generation of our core menu that will expand lighter options, increased variety, and provide a better range of affordable price points. You can expect this new menu to roll out in the back half of 2015. In the interim we will use LTOs and marketing programs to add variety and affordability to drive traffic. We remain confident in the long term health of this brand. Carrabba's is the consumer's number 3 overall favorite brand in casual dining, and is the undisputed quality leader and consumer preference for authentic Italian dining. We have a strong foundation to build upon.

Bonefish Grill's Q3 comp sales were 2.6%, which was a 230 basis points improvement from the second quarter. We introduced our new core menu in the third quarter, and although it is still early all of the initial metrics surrounding the menu launch and customer feedback have been very encouraging,, the introduction of our new platforms such as our Bowl section have been particularly well received by our guests. The dinner revitalization strategy of Bonefish will not stop with the update to our core menu. We now have a robust pipeline which includes a new bar menu and seasonal menu changes. Continuous innovation is the DNA of this brand. A culinary forward brand like Bonefish, which is more properly positioned as [call us] casual demands continuous innovation.

Bonefish customers have higher expectations and you will see us move away from more CDR-like promotional drivers, such as Bang Wednesday. Bang Wednesday has certainly driven traffic, but it was a more promotional crowd than the typical Bonefish customer. Our renewed focus will ensure that we provide the quality and food exploration opportunities that Bonefish customers love and expect from the brand at a compelling price. We recently brought in Cliff Pleau from Seasons 52 to be our Executive Chef. Cliff brings an agility and expertise that will complement the brand's continuous innovation philosophy.

Fleming's continues to perform at a very high level. Q3 comps were 4.8%, which was 140 basis points ahead of the Knapp-Track high-end steakhouse index. This is the 19th consecutive quarter that Fleming's has had positive comps. Fleming's continues to bring a high level of innovation and indulgence to the table, and is well-positioned in the competitive high-end steak category.

Overall the improvement at dinner was complemented by continued success with our weekday lunch roll out. At the end of the third quarter approximately 59% of Outback locations, and 54% of Carrabba's locations were offering weekday lunch. This is up from 56% for Outback, and 51% for Carrabba's in Q2. Lunch sales continue to grow in restaurants that have had lunch for more than one year, despite the lack of broader marketing mediums, such as television and radio to promote the day part. We continue to evaluate our opportunities to expand the roll out to additional locations, and this may ultimately allow us to further promote the lunch occasion. To sum it up, we had a strong performance across the portfolio in the US.

Now on the international front. Our business in Brazil continues to perform at a high level. Comp sales remained strong, and cash flow continues to grow. We are opening new restaurants as quickly as possible, and will open 16 Outbacks this year. We remain on track to open our first Carrabba's next year at the end of the first quarter. Italian dining is the number two segment in Brazil, and no clear category leader exists providing us with significant run way for growth. The entire team in Brazil is excited about this new venture, and we look forward to updating you on our progress early next year.

Turning to our strategic actions, our third quarter results also reflect the impact of several decisions. The first of these measures is the plan to close 34 underperforming restaurants in Korea. The market in Korea started to soften last November, and we began to examine all potential options to stabilize this business, and establish a path for future growth. As part of this effort we conducted extensive research and analysis to determine the appropriate geographic footprint given the CDR industry dynamics. This included determining the optimal asset base and trade areas that allow us to move forward with a healthy business. In addition, [Eun-su] Cho, our new President in Korea, has surrounded himself with a world-class team that knows how to effectively ring fence and re-engineer a business that is facing significant headwinds, and return it to stability and growth.

Although the decision to close restaurants is never easy, we identified 34 locations that were either currently underperforming, or were poorly positioned in a mature and saturated CDR market. Our analytics suggest that the closure of these locations will remove the majority of our financial risk. A smaller fleet of stronger restaurants provides the best opportunity to strengthen the business, while still maintaining an adequate market presence, from which to leverage our economies of scale and consumer awareness. Dave will outline the financial implications of our actions in Korea. In addition to our efforts in Korea, we have decided to sell our Roy's business. Roy's is a terrific founder-inspired brand that is constantly pushing the envelope with innovative Pacific Rim cuisine. The brand however is a small port of our portfolio, and not a priority for investment given competing opportunities. Roy's deserves to be in a situation where it can get the time, attention, and resources it needs to grow. We are confident that they will thrive under new ownership.

Finally, we are committed to building a world-class infrastructure at our home office in Tampa, that is capable of supporting a growing global business. To that end over the past year we have added proven leaders in such areas as development, supply chain, and IT technology. Their fresh perspectives on the business have allowed us to bring improved process and discipline to these critical areas. In the third quarter we made the decision to realign development and supply chain, along with other parts of the home office, to position us more effectively for long-term growth. As part of the realignment process, we made the difficult decision to eliminate a significant number of positions. The organizational changes enhance our agility, and allow us to increase spending against key initiatives, such as digital marketing without a corresponding increase in our overhead costs.

On the development front we opened 16 system-wide locations in the third quarter, consisting of three Bonefish Grill locations, three Carrabba's locations, one company-owned domestic Outback restaurant, one franchise domestic Outback restaurant, seven company-owned international Outback restaurants, four in Brazil, and three in South Korea, and one franchised international Outback restaurant. These openings brought our year-to-date to 2014 total to 37 locations, on track to meet our expectations for the year of 55 to 60.

Dave is going to take you through the financials in detail, but I want to comment on our full year guidance. Our full year expectations for core domestic comp sales are now up 1.5%. This change in guidance reflects the improvement in sales trends in Q3. We are pleased with the improved casual dining sales in the third quarter, but still we can see a sustained uplift. We remain cautious on extrapolating this momentum too far into the future. Our goal remains to meaningfully outperform the industry, and maintain the GAAP to Knapp that we have enjoyed over the past five years. Now turning to full year EPS. Given the improvement in our comp sales, we expect to be at or above the mid-point of our $1.05 to $1.10 range. Should sales trends exceed our expectation there is upside to our guidance.

We will post you on our progress at the Analyst and Investor Day on December 16th. We also intend to use our meeting in December to provide a comprehensive update on the growth prospects of our portfolio, and to lay out our financial expectations for the next three years. We have moved the meeting to New York in consideration of logistics, and hope to see many of you there. For those unable to attend the meeting in person, a webcast of the event will be available.

In closing, we were pleased with our third quarter results, strengthening our dinner business is our top priority, and our out performance versus the industry gives us confidence that our strategies are working. We also took several significant steps to better position our business for the future, including the restructuring action in Korea. We will provide our initial thoughts on 2015 in December, but heading into next year we remain confident in our growth strategies, and believe that we are well-positioned to deliver long-term sustainable growth. And with that, I will turn the call over to Dave Deno, to provide more detail on our third quarter operating results and our updated guidance. Dave.

Thanks Liz, and good morning everyone. I will 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 will 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 mostly directly-comparable US GAAP measures. We also provide a discussion of the nature of each adjustments. With that in mind our third quarter financial results versus the prior year are as follows.

Adjusted diluted earnings-per-share were $0.10 versus $0.10 in 2013. GAAP diluted earnings per their for the quarter were a negative $0.09 versus $0.09 last year. Adjusted net income was $12.6 million versus $13.2 million for the third quarter a year ago. GAAP net income was negative $11.4 million versus $11.3 million in 2013. Comparable domestic restaurant sales at our core domestic concepts were up 3.3%, while traffic increased 0.6%. For our core domestic concept comps were as follows. At Outback comps were up 4.8% with traffic up 0.4%. At Carrabba's comps were down 1.2% with traffic down 1%. At Bonefish comps were up 2.6% with traffic up 3%. And at Fleming's comps were up 4.8% with traffic up 3%. Although we do not break out comp sales between lunch and dinner, we saw continued sales growth in lunch from restaurants that have served lunch for at least a year. In addition, we saw an improvement in our dinner trends from last quarter, which helped drive strong comp sales in Q3.

Total revenues increased 10.1% to $1.1 billion. The majority of this increase was due to additional revenues from our consolidation of Brazil, new restaurant openings, and higher domestic comp sales. These results are partially offset by restaurant closures mainly completed in Q1, and continued sales softness in Korea. Adjusted restaurant level operating margins were 13.8% this year versus 13% a year ago. This margin improvement was primarily due to the benefit of productivity efforts, higher domestic average unit volumes, and the operating margin benefit from the consolidation of Brazil. Our GAAP restaurant level operating margins were 13.8% this year versus 12.5% a year ago. Please recall that Q3 of last year included a $5 million accrual for a payroll tax audit contingency that was excluded from our adjusted results.

Now on the details. First, cost of sales decreased to 32.9% from 33.2% in 2013. This change was primarily driven by productivity initiatives and menu price increases. The decrease was partially offset by costs associated with the roll out of lunch, changes in product sales mix, and promotional activity, and increases in seafood app beef costs. We are now locked on 97% of our 2014 commodity needs, including 98% locked in beef. Our supply chain team continues to make great progress in addressing our purchasing needs. On an adjusted basis labor and other related expenses decreased to 27.9% from 28.1% in 2013. The changes in labor costs included productivity savings from the new labor model, higher average units volumes from our acquired Brazil restaurants, higher domestic average units volumes, and reduced field compensation expenses. This was partially offset by higher kitchen and service labor associated with the weekday lunch rollouts, and lower sales volumes in our Korean restaurants.

On a GAAP basis labor and other related expenses decreased to 27.9% from 28.6% in 2013. The 50 basis points change from our 2013 adjusted labor expense of 28.1% was primarily driven by a $5 million expense in 2013 related to the IRS payroll tax audit. Finally, restaurant operating expenses decreased to 25.4% from 25.7% in 2013. The change was mainly driven by productivity initiatives, higher average unit volumes in our acquired Brazilian restaurants, as well as a decrease in operating costs in our Korean market. This was partially offset by lower average unit volumes in our Korean restaurants, and higher general liability insurance expense which was worth about a penny a share.

Turning to G&A after removing $5.7 million of adjustments, which primarily relate to severance general and administrative costs were $69.7 million in Q3 versus $60.9 million a year ago. This increase was primarily driven by the inclusion of the Brazil G&A in our consolidated results. In addition, last year we had a higher benefit from our life insurance investments worth approximately $2.6 million. Third quarter adjusted operating income margin decreased to 3.2% from 3.7% in 2013. Our improvement in restaurant margins was offset by higher G&A and additional depreciation from new capital investments. Also as reminder, due to the consolidation of Brazil we no longer record the Company's share of their earnings as income from operations of unconsolidated affiliates in our GAAP, in our income statement.

And finally our GAAP effective income tax rate was 27.5%. On an adjusted basis our tax rate was 35.4%. This rate is higher than our guided range of 27% to 29%, due to the blend of adjustments and their corresponding statutory tax rate. As an example in the quarter we had $17 million of domestic asset impairments that were excluded from our adjusted results. These adjustments were taxed at their statutory rate of 39% when added back to income.

Given the size of these adjustments relative to our Q3 pre-tax income, they had a large impact on our rate. This was worth about a penny a share. This is really an anomaly isolated to Q3, and should normalize over the full year. Our full year adjusted tax guidance of 27% to 29% is still good. Although foreign exchange translation was unfavorable in the first half of the year, it had a negligible impact on our Q3 results. One thing when summing up the results for the quarter. Our adjusted diluted EPS was $0.10. As noted above included in our EPS was a $0.01 per share impact from the income tax, and a $0.01 per share impact from higher-than-anticipated general liability expenses. Both of these items are specific in the third quarter, and will not continue going forward.

On the productivity front we delivered another excellent quarter of results. We are on track to achieve 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 the house and back of the house labor tools have been completely rolled out, and we are seeing the benefits in reduced labor expense. We are also close to rolling out our actual versus theoretical food cost solution, and we expect to start realizing benefits from this tool next year.

Turning back to the quarter we made a number of strategic decisions in the last few weeks to right-size size our Korea business and optimize our infrastructure for growth. I will now take you through the financial impacts of these decisions. Please note that these actions are reflected as adjustments, and have been removed from our Q3 adjusted net income and adjusted EPS. The first item relates to our plan to close 36 under performing international locations, 34 of which are in South Korea. In connections with these closures we have incurred $11.6 million of pre-tax impairments during Q3. We expect most of these closures will take place in Q4 of 2014 and Q1 of 2015. As we close these restaurants we will record pre-tax restaurant closing costs of approximately $19 million to $29 million, including costs associated with lease obligations and employee termination.

The second adjustment relates to the decision to sell our Roy's business. In connection with the sale we recorded pre-tax impairment and other charges of $6.1 million. In addition, as Liz mentioned, we made some decisions in Q3 to increase the effectiveness and efficiency of our home office organization, and to set us up for future growth. As a result we incurred $5.4 million of expense for severance and related items in Q3. And finally, we have decided to sell both of our company airlines. We recognized pre-tax impairment and other charges of $10.8 million. This charge reflects the difference between the book value of the airplanes, and our estimate of their current market value. Although the financial impact of these actions in the quarter is significant, they have all been carefully evaluated, and we are confident that they set us up for good long term growth in our Company. And importantly these actions address some of our business issues and set us up for the future.

I would now like you to take you through our updated thoughts on our 2014 guidance. Given the improvement in our comp sales, we are now raising our comp guidance for the year from zero to 1%, to 1% to 1.5%. We also expect to be at or above the mid-point of our $1.05 to $1.10 EPS range. Should sales trends continue to exceed our expectations, there could be upside to our guidance. We will provide an update on our progress at our Analyst and Investor Day on December 16th. In addition to these updates, we now expect the following changes to our previously communicated guidance, total Company revenue is now expected to be between $4.4 billion and $4.45 billion for the year. Increases in domestic sales are being offset by sales declines in Korea. Adjusted EBITDA for the year is unchanged at $459 million to $470 million. Adjusted net income for the year is unchanged at $135 million to $141 million.

GAAP net income for the year is now expected to be between $87 million and $93 million, and GAAP diluted EPS is expected to be between $0.68 and $0.73. Commodity inflation is expected to be approximately 3%, and reflects the terrific work done by our supply chain team. General and administrative expenses are still expected to be between $200 million and $290 million. We still anticipate an adjusted effective income tax rate in the range of 27% to 29%, and system-wide new restaurant development in the range of 55 to 60 new units.

Capital expenditures are now expected to be between $215 million and $235 million for the year. We will have a few less new stores and remodels than was built into our previous CapEx guidance. In addition, our project expense is coming in lower. At the upcoming Analyst/Investor Day, we will provide a perspective on 2015 including an update on all of our key financial measures. We will also discuss our long-term targets. As a result we will not be commenting on 2015 expectations on today's call. In conclusion, we were pleased with our results for the quarter, as we had strong sales performance with continued progress in productivity. We also made several difficult but necessary actions that will better position us for the future.

We look forward to sharing more with you in December. And with that, we will open up the call for questions.

Thank you. (Operator Instructions). Please limit yourself to one question. We will hear first from John Glass with Morgan Stanley.

Thanks. Good morning. First just on the top line can you maybe at the Outback brand, just sort of decompose a little bit the same-store sales improvements that you saw. You said dinner led the business or returns, so was that equally balanced with strength in lunch? Did it happen in commensurate with the improvement we have seen in the category and the Knapp-Track numbers, or what was the cadence of improvement I guess through the quarter as well?

Sure, John. So this was Outback's best sales quarter since 2012, and so what I would start by saying is that it was strong across all measures of the business. We talk to you guys about how we were starting to pivot in Q3, to really drive the dinner business by reclaiming our steak authority, and I think you saw that in our LTO and our advertising. That worked extremely well. It was based on a lot of research and analytics, and so we were very happy with the improvements, and the strength of the dinner business on Outback. Particularly when you look at the decomposition of that MPZ CREST breaks out, which always lags by a month with June, July and August. They said that the dinner traffic in June, July and August was down 3%, and so Outback had a very, very strong dinner performance, and that was driven by what we did.

We were pleased, of course, to see Knapp-Track getting some tailwind, but it really had to with kind of the resonance of our positioning, and our new focus on reclaiming steak authority. At the same time lunch continued to perform extremely well. We had growth on a year-over-year basis with stores that had been open more than a year. We continue to have a lot of encouraging signs from this, and as I mentioned in my prepared remarks, we look forward to getting to that point when we can actually have enough of the fleet with weekday lunch where you can really turn on the awareness.

So this growth is happening without any national medium, that is tagging it and saying we're open for lunch. So very strong across all day parts and across all of our initiatives for Outback in Q3, and that focus and that balance will continue into next year.

Thank you. And David if I could just follow-up, the three things you announced, the Korea closures, the G&A reductions and the planes, how much of an ongoing annualized savings do you think that realizes? I know you don't want to talk about 2015, but can you at least mention how much money you think those three things save ongoing?

Yes. What we will do is John, we will lay that out in a more fulsome update in the 2015 for our G&A outlook for the year. The one thing that I can tell you that our goal is to hold core G&A flat year-on-year, and then make investments behind it, but we will lay out all of the pieces and parts of that G&A look into 2015 as we go forward.

The only other thing I would add, is that one of our key tenets is always to invest ahead of growth. So by kind of having that discipline on the G&A infrastructure, allows us to invest ahead of growth and technology and international, which has always been our philosophy.

And when you say flat you mean flat dollars, or do you mean flat percentages?

Right. Flat dollars year-on-year, John, and then investing behind our big ideas, such as technology and international, but this is all part of our effort to be flat year-on-year in dollars in our core business.

Okay. Thank you.

And now we will move to a question from Joseph Buckley with Bank of America.

Thank you. I would like to go back to the sales for Outback as well if I could, so I think Dave you said the traffic increase at Outback was 0.4%.

Correct.

So could you give us an idea on the check how much was price and, how much was mix, and could you say if that traffic increase occurred in both day parts, lunch and dinner?

Yes. So what we have, Joe, is two things. One the Outback pricing is consistent with our long-term approach of approximately 2.5% in pricing. It's a little lumpy quarter to quarter, but that's where Outback will finish the year. But secondly as Liz mentioned, Joe, the dinner business trends were stronger in the third quarter, and were good, and as a result that helped our overall PPA. So strong dinner business helped us with our growth overall.

Okay. And then just given the updated and slightly raised full year same-store sales guidance, just by your calculations what does that imply for blended same-store sales number in the fourth quarter, and maybe if you want to comment at all what have seen in October, or the early part of the fourth quarter, that would be helpful too?

Yes. So that implies I think if you roughly a 1.5% to 2% comp for Q4 within that new range, and Joe, we were delighted like everybody else that Knapp had its first positive sales in two years on a comp basis. As a reminder traffic was down, though, 2.2% for them. So we really feel like it's prudent to be cautious. There's been some false positives on the industry in the past, so while we're encouraged and we really like what we're seeing, we think that it would be imprudent to extrapolate those trends into November and December. And November and December as you know make up such a large part of our business but all of casual dining's business, that I think we're taking an appropriately cautious stance on whether those, trends. What I can tell you is that we feel very good about where the business is, and we also feel very good that we will continue to outperform, and meaningfully outperform the Knapp-Track segment, and that all of the fundamentals are in place. So you can characterize our stance on the industry as perhaps cautiously, but I would say appropriately cautious.

And, Joe.

Thank you. That's helpful.

Joe, just to our long standing policy not to provide intra-quarter sales.

Sure. Okay. Thank you.

Thanks Joe.

Our next question comes from Andy Barish with Jefferies.

Hi, guys. Can you give us sort of the update on where productivity is kind of hitting in the various line items this year, and any surprises, I guess, maybe on the food cost line getting a little bit more in this kind of inflationary environment?

Yes. Andy, a couple things much we were very pleased with food costs in the quarter, especially when we see what's going on in the industry. So our productivity like I mentioned in my remarks we will achieve at least $50 million. We are on track there certainly, we've got a fantastic pipeline for the balance of this year into next. Let me talk a little bit more about that. There continues to be the two big buckets, continue to be food costs as you saw in our P&L, but also labor. Food costs at this point is still pretty much around maximizing our supply chain, really working it with our vendors, working on costs associated in our supply chain. That's number one. We will get to actual versus theoretical, and I will talk more about that in just a minute. So supply chain was still a big part of it.

Labor, we have now rolled out the back of the house labor tool, and the front of the house labor tool, people are using it and we're seeing demonstrable improvement in our labor results, labor results as a result of this new tool. So that's been very good this year. We will continue to see some of it into next year, because we rolled it out during this year, and people are getting better and better and better. So for next year the thing that is a big part of our business will be centralized inventory management, and actual versus theoretical food costing. That will be close, that will be probably 30% to 40% of our productivity opportunity next year are those two things. We've rolled out centralized inventory management to our people. In other words, everybody can see now inventory at all of our restaurants and where they stand.

That's helping us manage inventory, and then secondly we will be rolling out the actual versus theoretical tool, which is in test right now, and working very well. We roll that out at the beginning of next year. As you think about your modeling, it will be like anything else, people will learn it, they will get better and better during the year, we will see more and more benefits as the year moves along. So continued labor productivity and continued food cost opportunity in our P&L as we look into next year.

And could you just give us the basket commodity inflation in 3Q, say versus your 3% expectations for the full year?

We are pretty much right spot on, Andy. We really don't get into specific product lines, but we're pretty much spot on what we have talked about the entire year.

Thank you.

Our next question comes from John Ivankoe with JPMorgan.

Hi. Thank you, a couple follow-ups and a different question. Firstly, just from a housekeeping perspective, weekday lunch as a percentage of the overall system at Outback and Carrabba's in the third quarter? I'm sorry if I missed that.

Yes. No problem. So 59% is Outback's fleet, and 54% of Carrabba's fleet.

So the question is versus the third quarter of 2013 at least if my notes are correct, I think it was 26% of the system at Outback and 28% at Carrabba's. So that's a really big jump year-over-year, and obviously understanding that the Carrabba's traffic is negative, and the Outback traffic is up something less than 1%. Just kind of helped me juxtapose your satisfaction with lunch and your satisfaction with dinner, you have given the percentage of the fleet that had seen weekday lunch add on a year-over-year basis if that's a fair question?

Yes. So what I would say is that when we put lunch in, we're very happy with the performance, and as we said a number of times, it continues to grow from there. So I think the most important thing is that lunch isn't finished offer year, right? When you do it right, it continues to grow, and I think importantly as we approach that threshold which we think is about 70% of the fleet, that allows you then to talk about lunch, and to really drive awareness. So we think that there's a lot, we're happy with lunch, and how it's going in. We think there's a lot of opportunity ahead of us to continue to grow lunch.

On the dinner side, over the last five years we have been very happy with how we have kind of broadened and gained and driven traction there, and we're pretty transparent about how in Q2 we saw the dinner business traffic weaken. Trends in dinner traffic meaningfully improved, and meaningfully contributed to our comp in Q3 on a quarter-over-quarter basis, and we like the momentum that we're seeing and so I would say that we feel like our strategy on dinner and how to revitalize each, is showing signs of working, and continued belief in our lunch business and how it's going in. Dave, I don't know if there's anything-- go ahead, John I'm sorry. I didn't meant to cut you off.

I didn't meant to cut you off. If there's anything else.

No. I think Liz captured it, and I think the change in dinner trends, and the dinner business quarter to quarter was a big piece of our comp improvement.

Okay. Understood. And secondly, Dave, and this is in response to the first question. I just wanted to make sure that I got it. Core G&A flattened dollars in fiscal 2015, and then did you talk about other investments being in addition to that core G&A being flat year-over-year, or I got a little confused on the language?

Sorry, John. Let me make sure I'm clear on that, core G&A, which is all part of some of the work we did in this quarter will be flat in dollar terms year-on-year. At the same time though, we will be investing in our international markets, and continue to make even more investments in technology going forward. So as a result we will see some increase in G&A, but it's all behind our investment ideas and our growth opportunities.

Thank you. Thank you for that clarification. And then finally and the separate question is about the reduction in CapEx for the year, especially considering we have one quarter left is was actually pretty big at $35 million. So is just a timing issue where that G&A is going to get pushed into fiscal 2015, or might you be backing off some other previously discussed projects like Carrabba's unit development, or perhaps Outback relocations that would lead to a structurally lower CapEx level than what we have previously seen?

No. Our strategic initiative behind Bonefish development, Outback relocations, and those kind of things, John, international development are all clearly in place. So that is not a big change. I think the only thing that I would say is kind of during the middle of the year, people are a little more bullish on the ability to spend the capital that they need to spend, and so when we get to this time of year things do tend to drop a little bit. So we may so see a couple of, a few restaurants fall into next year. We may see some projects fall into next year, but nothing our strategy has changed. We're just trying to do some housekeeping on the outlook for the year.

Thank you.

Next question comes from Howard Penney with Hedgeye Management.

Thanks very much for the taking the question. I can appreciate the difficult decisions that you made this quarter, but if I substitute the rationale for selling off Roy's, you could pretty much insert another brand, or a couple more brands in there. How do we know that you have gone far enough in this restructuring and slash asset sales? Thank you.

Yes. So, Howard, the first thing I would say is that one of our core tenets is to be ruthlessly disciplined in our use of capital, and every single one of our brands has to earn the right to be invested behind, earnest keep in the portfolio. So the first thing that I want to assure you is that we are constantly evaluating the portfolio, to make sure that we are excellent stewards of capital. I actually when we think about Roy's, we have talked about the core four for some time, so Roy's I think is not too much of a surprise, that we think that would do better outside of the portfolio. When I look at our core brands though, that you mentioned and maybe we could substitute one, between Outback, Carrabba's, Fleming's and Bonefish, if you look over the last five years, we've significantly outperformed the category, and gained over 25 points of traffic versus the category, and frankly until this year on Carrabba's, every single one of those brands have outperformed the category year after year, quarter after quarter.

So I think Outback, if you had said to anyone five years ago that Outback after losing share for ten years, that Outback's best days were in front of it from 2009 to 2014, I don't think they would have agreed with you. I think that it's pretty incontrovertible that it's had a terrific five year run, and we feel great about the prospects for it, and we love how it plays internationally. If you look at Bonefish, the number two brand in the entire segment. We are pleased with how it's opening we're pleased with how it's performing. We got behind on innovation. We fixed that. If you look at Fleming's, it could not be in a sweeter spot with the high-end recovery that's happening in the US, so we continue to just absolutely perform above market for the past five years for that. So that's a real keeper, and there's tremendous opportunity to expand that brand as well.

And then there's Carrabba's, which has had a tough year and is down about 1.2%, but I just remind you that I don't think you make asset decisions and portfolio decisions based on annual performance. I think you have to look at the long-term health of the brand, and the fit, and what I would tell you that in 2010, 2011, 2012 and 2013, Carrabba's significantly outperformed Knapp and took share. Now, it's in a difficult moment right now, and we have to own that, because we did not go far enough in what we needed to do, and the consumer told us that we needed to do on Carrabba's, right? Carrabba's is the number three brand requested overall in the category, and the top preference for Italian, but we needed to take that menu into lighter, more variety, and we didn't go far enough, and probably I will be honest our success made us a bit too cautious in evolving the menu to drive more every day occasion and usage.

We're going back, and we're doing that, but the brand house of Carrabba's is excellent. It's one of the highest rated brands in the category, and so it's a real foundation of strength to build on. Roy's was a very, very different animal, if you will. The final thing I would say about Carrabba's is that Italian is the number two segment in so many key markets globally, and all of our research in these key markets shows terrific opportunity for Carrabba's, and we are really excited and believe that Carrabba's success in Brazil can be very similar to the success of Outback. So we will always be disciplined stewards of capital. We will keep it tightly edited, but we do feel that we have a confirmed portfolio that confirms advantage.

Thank you so much for that answer.

Sure.

Our next question comes from Matt DiFrisco with Buckingham Research.

I just had one follow-up on a question. With respect to you guys, I think when you were talking about the fourth quarter and your what's behind your comp, I just want to be clear. I know you made an effort to highlight on the third quarter heading into where you were going to pull some advertising forward to rejuvenate your brand equity and re-identify yourselves with the steak authority. Can you talk about or comment about the year-over-year comparisons of marketing spend in the fourth quarter, how that might have been affected, or how that factors into your guidance? And then I just wanted also a question on South Korea. Would it be correct to assume the closures of those stores would be accretive on an operating income basis, once they are done and behind us as far as the costs associated and the one-time nature with the closures?

Sure. A couple of things. On the third quarter, yes, that's correct. With the Bonefish Grill menu launch, we had some advertising costs fall into the third quarter that were above this year, so we did in our results we did overcome that as well. Fourth quarter there really isn't a big difference in media spending year-on-year. The main thing was the pull ahead of the Bonefish Grill advertising, to get that menu launched properly.

Now on Korea, the main thing there is we believe that Liz has mentioned, we significantly downsized the financial risk there, as we went through each and every trade area, and looked at the performance of the restaurant and the future opportunity for the restaurant. So we went through each one and determined these 34.

We'll provide more color commentary around 2015 in our guidance at the Analyst Day, but we do not expect at this point, just we're going to take a conservative planning posture, and assume that Korea doesn't markedly improve next year. If it does that's upside to what we anticipate, but we want to make sure we stabilize the business and grow it from there, Matt, so we have basically de-risked the marketplace. Hopefully, we can grow were there. I think our guidance for 2015 will call for flattish to up modestly profits in Korea.

Can I just follow up on that? I just wondered are they in your process, I guess most restaurants are closed when they're cash flow negative. Would it be correct to assume that those are cash flow negative?

No. We had. Not all of them are cash flow negative. As Liz mentioned, we are very disciplined stewards of capital. Seven, around seven would be cash flow negative this year, if we extend the trends we would get to about half of those for next year. So in other words we would be at about 17 of the 34 would be cash flow negative. If you assumed a conservative trend. And then the remaining 17 either didn't fit the trade area, they were old restaurants, they didn't deserve the capital. So when you looked at the future of that and the capital spending needed for those remaining 17 restaurants. That's how we got to our number. Site by site, bit by bit.

Great. And then you said the third quarter, so you did not spend more money on Outback in the third quarter, so you didn't really pull forward ad dollars from the fourth quarter to drive that great comp at Outback? You did it on an apples-to-apples spend basis?

Pretty much. Yes. Pretty much. I mean the pivot was as we talked about the shift towards steak authority and how the LTOs and the new positioning worked, and that continues into what you will see in our promotions in Q4. That dedication to celebrating steak authority and celebrating the center of the plate.

Excellent. Thank you.

We'll now move to Jeffrey Bernstein with Barclays.

Great. Thank you very much. Just two questions. One, Dave, I think you mentioned kind of the normalized menu pricing would be in that 2.5% range albeit lumpy quarter to quarter, but as we look out into next quarter and next year, I know you're going to give specific guidance in December. But is the goal to protect the existing restaurant margin percentage and therefore, would you consider taking more than 2.5%, or is that in your framework to consider taking more than that if commodities and labor were higher than 2014? It seems like that's what's looking to be happening in 2015 in both commodities and labor, so I was wondering if can comment on either of those in terms of directional for 2015 versus 2014? But two, would you consider taking more than 2.5% if necessary to draw the line and protect the margin, or you would rather not do that, and therefore you would let the margins take a little bit of a hit, and then I had a follow-up?

Jeff, we're going to protect our margins. First of all, we have the gift of productivity. We have a lot of opportunities in our business, which I outlined in a previous question on productivity, and we will be turning to that again in 2015. So pricing of productivity will offset commodity inflation and protect our margin. Because of the work that we're doing. I also wanted, again give a call out to our supply chain team who continue to do a terrific job, purchasing our products and everything else, and working with our vendors. So our supply chain capability, the productivity that we have, even though we're facing some commodity headwinds in 2015, will help us preserve and grow our margins going forward.

And the other thing I would add on the labor front, even with any type of labor inflation as Dave said, our rolling out the labor tool, and we have that kind of opportunity that has efficiencies coming through the labor line as well. And so I think that productivity run way that we have is something that puts us in good standing, even in a rising cost environment.

Is there any directional color in terms of that commodity basket for next year, either how much you have locked or what it might be up year-on-year even directional?

Jeff we're going to see you in just a little over a month, and we will give you a fulsome update. We are proceeding, I can give you we are considering on our typical plans on how much we have locked during the year so we're in good shape there. But I would really like to give you a fulsome review of what next year looks like, when we're together in about six weeks.

Understood. The only other question was Bonefish versus Carrabba's, I think Liz you kind of mentioned that until the back half of 2015 Carrabba's is likely to see more of the same, so maybe you do more limited time offers, but should we therefore assume Carrabba's comps run negative to the next few quarters, whereas Bonefish seems like traction is building, and therefore we should assume kind of that positive trajectory at Bonefish, just directly for those two brands. Is that fair?

Well, I think two things I would say, Jeff. I think it's fair to say that the menu work and the momentum, and the reception on what we did on Bonefish Grill was certainly very successful, versus Carrabba's where we didn't go far enough. We're not satisfied with negative 1.2 on Carrabba's right, and we think there is a lot of opportunity not to wait for the core menu, but to have interesting LTOs that celebrate variety, that bring the lighter, but the solve if you will, the core menu solve will be the back half of next year. So I think we need to continue, we're going to continue on the renovations of the Carrabba's. That makes sense. You're going to see new advertising, and a mix in LTOs that celebrate that more variety, that more affordable price point, but the structural change in the core menu will be the back half of next year.

On Bonefish it's about as a said, returning to our roots of continuous innovation, so this was the first step, the core menu. We are a going to follow-up with a new bar menu. I mean Bonefish has a 25% liquor mix, and we need to just celebrate that. So you are going to see a very innovative bar menu. Then we're going to be doing seasonal menus. It's a wave of innovation going forward, and a lot of that pipeline is in front of us on Bonefish as well.

Great. Thank you.

Our next question will be Sharon Zackfia, William Blair.

Hi. Good morning.

Morning.

Most of my questions were answered, but I guess two quick ones. On Carrabba's I guess I'm a little surprised that the new menu would be the second half of next year. Just curious as to why that couldn't be pulled forward earlier, and then secondarily on Bonefish, there was a little bit of negative ticket it looks like in the quarter. I'm assuming that's something in the way that customers are using the new menu, maybe if you could give us some color on that?

Yes. On Carrabba's first, I want to stress what I said before is that we're not going to wait to have product news on Carrabba's that addresses variety. So you're going to see LTOs and menu news, but in terms of core menu, when I say back half of the year, it's basically we're talking about nine or ten months from now, when you think about it, and we really want to nail this. And as I said, we didn't go far enough, so we already have several pilots going right now on the new menu, because the menu we're going all the way to bright, and so we really need to read it, we need to leave time, we need to a what it's doing, and so that's why we've targeted the back half, but I don't want you to confuse that with, and I am glad you asked the question, that we're not going to do anything on the food front before that, because we are.

On the question on Bonefish Grill it was really about the Saturday lunch mix that came in. On the new menu we're very pleased with how it's tracking, and our return to net assumptions. It did have some more attractive price points on it, but the whole menu is performing well. So you had Bowls platform, which was one of the new menus, that's lower priced. At the same time we had premium sides introduced. At the same we had a premium a had a steak and chop section. So we feel very good about how the menu is playing out, but I think you're more seeing the Saturday lunch contribution versus year ago.

Great. Thank you.

And now from Michael Gallo, CL King.

Hi. Good morning.

Morning.

Just a follow-up on actual versus theoretical, Dave. When will that system actually be in and fully operational, and then could you remind us, Dave, I think when you were at Yum you rolled us an actual versus theoretical out at Pizza Hut. Remind us what kind of improvements you have seen in the past, when using actual versus theoretical systems? Thanks.

Okay. Thank you. Yes. I was at Pizza Hut at the time. We will roll the actual versus theoretical food cost system in late January. It will build during the year. Like anything, people have to train it, they have to learn it. So as we look at our cadence during the year, that will come into play. We have already rolled through our centralized inventory management system, which is the first step in that. Secondly, the old story about past performance does not dictate future performance, but let me at least answer the question. We saw about a 200 basis points improvement in that when we rolled into the Pizza Hut many, many years ago, and as we looked at our business at that time. So we are not committing to that in 2015 guidance, but that's the size of the prize, potentially.

Thanks very much.

And now our last question will come from Alton Stump with Longbow Research.

Thank you. Good morning.

Morning.

Morning.

Great job on the quarter. I will keep it short since we're obviously at the end of the hour here. But just as you look at the overall industry traffic trends obviously has improved. As you kind of think back to I think you guys mentioned some false starts that we've had in the past. How does this feel to you? Does it feel like we could indeed see this become a new trend for the next couple of quarters anyway, and/or does it feel much like the last couple of positive surprises we've seen?

Well, yes. It's a great question, because I think as we look at it, there's been as you said a number of false starts. Here's what I will say is that for the quarter traffic was down 2.2% in Q3, and Q2 it was down 2.5%, and so you had a strengthening of the overall comp, but traffic has been down for nine years now in casual dining, and so what I will tell you though, is that we are encouraged, we are encouraged by some of the signs that we're seeing, right? And no one wants to bet against a nine year trend, but I will tell you that when you look at the consumer confidence measures, which have really held very nicely since August, it appears that this kind of fear that might have been an issue over the last four or five years, when you see a stabilization and a nice rate of consumer confidence, that feels really good. The challenge though, until you extrapolate this further is one, we need to see more of it, right, so let's play this through.

But two, until you see meaningful growth in disposable income, which is the most highly correlated thing with traffic growth and CDR, in our core target of CDR which is that $55,000-plus, you are not going to see in my judgment a return to positive low single digit traffic numbers, and we just currently haven't seen that structural change and improvement in consumer disposable income with this target. So I think there's very definite green shoots and bright spots. We would like to see consumer disposable income at that $55,000 to $65,000 level start to grow, to really believe that we can kind of project out to days of increasing. So I'm going to go back to my original statement, which is we're cautiously optimistic but we are prudent in our assumptions.

That's great. Thanks so much for the color. That's helpful.

Thanks.

And that does conclude our question and answer session for today. At this time I am pleased to turn the call back over to Liz Smith for additional or closing remarks.

Thanks. We appreciate everybody for joining us today, and we look forward to updating you on our portfolio, and our thoughts on 2015 and long-term growth at our Analyst and Investor Day in December. So we hope to see you then. Thanks everybody.

Thank you ma'am. That does conclude our call for today. We do thank you all for your participation.