Bloomin' Brands Inc (BLMN) 2015 Q2 法說會逐字稿

Good day everyone and welcome to the Bloomin' Brands Inc, second quarter 2015 results conference call. Today's conference is being recorded. At this time I would like to turn the call over to today's host, Mr. Chris Meyer, Vice President of Investor Relations. Please go ahead sir.

Thanks, Alan. Good morning everyone and thank you for joining us. With me 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 2015 earnings release. It can also be found on our website at www.bloominbrands.com in the investors section.

Throughout this conference call, we will be presenting our results in an adjusted basis. These non-GAAP financial measures are 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 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 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 10-K filed with the SEC on February, 24 2015. 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 second fiscal quarter of 2015, an overview of company highlights, a discussion regarding progress on key strategic objectives, and an update on 2015 guidance. Once we've completed these remarks, we'll open up the call for questions. With that, I would now like to turn the call over to Liz Smith.

Thanks, Chris, and welcome to everyone listening today. We're pleased to share with you our results for the second quarter of 2015. As noted in this morning's earnings release, our adjusted second quarter diluted earnings per share was $0.28. And our second-quarter US comp sales were up 2%. Overall, we are pleased with the results this quarter as the portfolio delivered solid results, despite sales at Bonefish that were below our expectations. Outback and Fleming's continued their strong performance. Carrabba's maintained its positive momentum, and Brazil is performing in line with our high expectations, despite a difficult economy.

In addition, our productivity efforts remain robust, enabling us to expand restaurant margins. Importantly, we remain on track to deliver our EPS results for the year. The advantage of having a focused portfolio is that the strength of our other brands allow us to take a long-term view at Bonefish Grill, and implement the necessary actions to return to our polished casual roots.

Now, I'll take you through a second-quarter performance by concept. At Outback, comp sales grew 4% in the second quarter. This is another strong result as our focus on reinforcing steak authority continues to resonate with consumers. The steak-centric messaging also increased our guest check average, as we are seeing higher guest preference for steak entrees and steak-focused LTOs that are unique to Outback.

This past quarter, we successfully launched national advertising for lunch. This was a critical step in our multi-year effort to capitalize on the $25 billion lunch segment. We received a strong endorsement from our consumers, and are seeing a meaningful lift since the advertising began. While we will not exclusively advertise lunch again this year, we will maintain support for this day part through advertising tags, and digital media to help build awareness. We are excited about the long-term growth opportunity at lunch, given our current penetration levels relative to the industry.

In Q2, we saw a softening in dinner trends at Outback, as we lapped a highly-promotional LTO calendar from 2014 that we chose not to replicate because of the success of our steak-authority messaging. Dinner remains our number one priority, and we are excited about the initiatives in place for the remainder of the year.

At Carrabba's, we had positive-comp sales of 0.9% in the quarter. This included a 1.4% increase in traffic. This marked the third consecutive quarter of sales and traffic gains, as we continue to leverage LTOs that focus on value and frequency to drive that frequency. Over the past couple of months, we conducted extensive consumer research and testing on the next iteration of our core menu. We're very pleased with the results, and are in the position to launch the new menu in Q4 this year. This will be followed by full media and advertising support in Q1 2016.

You will see a number of significant enhancements to the core menu, including a more contemporary and attractive menu design. Our unique wood-fired grill and wood-burning oven allow us to expand our selection of lighter options, to provide more variety for everyday dining. We will introduce a number of appetizers, small plates, entrees, pizzas and desserts that balance a more Mediterranean-style with traditional Italian flavors. And we will of course, keep popular classic dishes that Carrabba's has been known for years.

The new menu will be complemented by the ongoing work underway to contemporize our restaurants and enhance the overall dining experience. Carrabba's remains the undisputed quality leader and consumer preference for authentic Italian dining. The menu and design work will allow us to capitalize on this preference to increase guest frequency and continued to differentiate ourselves in the Italian category.

Bonefish Grill's Q2 comp sales were down 4.6%. This was driven by two root causes related to Bonefish's return to its polished-casual heritage and its brand equity pillars of culinary-foward cuisine, and fish expertise in the restaurants. First, as we've discussed on previous calls, we are unwinding some of the more CDR-like promotional activities that drove traffic. Although we anticipated that this move would pressure comp sales, the negative impact exceeded our expectations.

Second, we added too much complexity in the restaurant. We had innovation gap at Bonefish which was addressed by the July 2014 core menu re-launch. As a reminder, this refresh was our first new menu in six years and was well received by guests and performed in line with expectations. We then initiated rotating seasonal menus and introduced the bar menu at the beginning of the year. These subsequent innovations were positively received at test markets.

However, when executed at scale they brought a level of complexity that compromised our ability to deliver our core dining experience and service suffered. We saw a meaningful decline in customer satisfaction scores in early 2015. In March, Greg Scarlett, who was instrumental in the resurgence of both Outback and Carrabba's, returned to Bonefish Grill as president. He was with Bonefish for seven years including three as VP of Operations, and no one knows this brand better. In his short time back with the brand, we have removed significant complexity, reengaged the field, and have already seen customer satisfaction improve significantly.

Going forward, our focus is to reengage with lapsed users, but this will take time. We are not going to accelerate this process by using promotional tactics that are not consistent with the brand. As a result, we now expect Bonefish comp sales to remain down at least 5% over the balance of the year. In addition, until there is an improvement in our sales, we will pause on new restaurant development as we did with Carrabba's.

Over the past five years, we have consistently said our priority is always to grow what we own. When we see sustainable growth return to existing Bonefish locations, we will once again open new restaurants. In the interim, we will continue to invest in our promising remodel program. We are confident we are making the right decisions for the long-term health of this brand. The good news is that we have a strong base to build on. Bonefish was once again chosen by consumers as the number one seafood restaurant and number four overall in the total CDR category as rated by Nation's Restaurant News.

Fleming's finished the quarter with comp sales growth of 3.2%. This is the 22nd consecutive quarter that Fleming's has had positive comps. We expanded weekday occasions to our Prime Monday's program, that offers a customizable three-course meal at an attractive entry-level point. By combining unique value offerings like this with our more indulgent offerings, Fleming's continues to take share.

Turning to our international business, Brazil posted a comp of 3.4% in the second quarter. This result was particularly impressive given they were lapping a 12.2% comp in Q2 of 2014. Although there remains concerns about the economy in Brazil, our restaurants are performing in line with our high expectations. Demand for our restaurant well exceeds supply, so we remain somewhat insulated despite a slowing economy. In Q2, we successfully opened our first two Abbraccio's in Brazil. While still early, we've received strong consumer feedback. And we are very pleased with the initial performance. Italian dining is the number two segment in Brazil. And no clear category leader exists, providing us with significant runway for growth.

Shifting to Asia, Korean comps were down 11.8%. These results were meaningfully impacted by the middle east respiratory syndrome, or MERS virus, that struck the country in late May and June. Despite this sharp decline in sales over this period, our efforts to ring fence the business coupled with the quick response from our local team, helped minimize the overall profit impact. The current business environment has since improved, and recent sales trends have surpassed pre-MERS levels.

On the development front, we opened 14 system-wide locations in the second quarter. Consisting of three Bonefish Grills, two US Outbacks, seven company-owned international Outback Restaurants, five in Brazil, two in South Korea, and two company-owned international Abbraccio Restaurants.

In summary, we are pleased with our second-quarter results. We have remained nimble and agile with the portfolio, as we successfully navigated through a variety of headwinds domestically and internationally. Such as double-digit beef inflation, significant current risks -- currency risk, and in out break of MERS in Korea. However, despite these challenges, the leverage conferred by a focused portfolio, allow us to expand restaurant margins, and deliver our EPS goals. Our productivity pipeline remains robust, and we continue to see progress on eliminating waste. We are investing ahead of growth internationally, and in our promising remodel programs domestically. We are capitalizing on day part expansion with lunch. And are enhancing our engagement with our consumers through various digital initiatives.

And of course, underpinning all of this, is the best operations team in the business. Our confidence in the vitality of our portfolio remains strong. With that, I will turn the call over to Dave Deno to provide more detail on our second-quarter operating results. Dave?

Thank you, Liz, and good morning everyone. I'll kick off the 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 reconciliation between our non-GAAP metrics in the most directly 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 was $0.28 versus $0.27 in 2014. GAAP diluted earnings per share for the quarter was $0.26 versus $0.21 last year. Adjusted net income was $35.1 million versus $34.2 million for the second quarter a year ago. GAAP net income was $32.2 million, versus $26.4 million in 2014. This performance was in line with our expectations, and puts us in an excellent position to deliver on our EPS guidance for the year.

Comparable US restaurant sales were up 2% while traffic decreased 1.1%. For domestic concepts, our comp sales results are as follows. At Outback, comps were up 4% with traffic down 0.8% At Carrabba's, comps were up 0.9% with traffic up 1.4%. At Bonefish, comps were down 4.6%, with traffic down 7.8%. At Fleming's, comps were up 3.2%, with traffic up 3.1%. We're pleased with our Q2 comp sales at Outback and Fleming's, as well as with the continued sales momentum at Carrabba's. At Bonefish, as Liz mentioned, we're taking steps to return the concept to its polished casual roots and restore growth.

Turning to our international business, Q2 comps sales were up 3.4% at our Outback restaurants in Brazil. Traffic was down 1.1% in the second quarter, due in part by the timing of Carnival Holiday, which shifted from Q2 last year to Q1 this year. As reminder, we report Brazil results on a one-month lag, so our second-quarter results include March 2015 through May 2015. This business is performing well across all measures, despite concerns about the Brazilian economy.

In Korea, Q2 comps were down 11.8%, with traffic down 12.6%. Although this result is down sequentially from the first quarter, it was heavily impacted by the MERS virus that affected the country in late May and June. Due to the severity of this virus, many people avoided public places. And it had a significant impact on an already troubled Korean economy. As it relates to our business, despite the negative impact on sales, the impact to profitability was limited to approximately $950,000 in Q2. Our efforts to ring fence this business over the past nine months have made us more agile in responding to challenges such as MERS.

We have a strong, dedicated team in Korea. And they did a fantastic job of dealing with this difficult situation. The good news is that it appears the virus has been contained and Korea is returning back to where it had been prior to the outbreak. Although it is our policy not to provide intra-quarter sales updates, we thought it would be appropriate to let you know that our restaurants have responded well to the improving situation and finished July up 1.6% in comp sales.

Turning back to our financial update, total Bloomin' Brands' revenues decreased 1% to $1.1 billion. $28 million of this decrease was due to foreign currency translation, as the Brazilian real continued to depreciate against the US dollar. In addition, revenues were negatively impacted by restaurant closures, and the sale of our Roy's business. These results were partially offset by new restaurant openings and higher US comp sales.

Adjusted restaurant level operating margin was 16.2% this year, versus 16.1% a year ago. Our Q2 margins benefited from the impact of productivity initiatives, and higher US average unit volumes. These were offset by commodity and wage inflation. Our GAAP restaurant-level operating margins with 16.5% this year versus 16.1 % a year ago. The difference between adjusted-restaurant margin and GAAP restaurant margin was driven by a favorable resolution to our 2011 payroll tax audit.

Now onto the details. First, cost of sales increased 32.7% from 32.5% in 2014. This change was primarily driven by commodity inflation, and unfavorable product mix resulting from Outback's $14.99 steak and lobster promotion that ran in Q2. This popular promotion had a positive impact on check average and profitability, but it did carry a higher cost with in than prior LTOs that ran in 2014. These items were partially offset by productivity initiatives, and menu price increases.

On an adjusted basis, labor and other related expenses increased to 27.8% from 27.4% in 2014. The change was primarily due to wage inflation, higher field management compensation, and continued higher health insurance expenses. It is important to note that the increase in field management compensation was worth 40 basis points. This was largely due to a lapping in Q2 2014 of the benefit when we lowered our performance expectations for the full year and reversed some of our accrued incentive compensation. This was offset by higher US average-unit volumes and productivity initiatives. On a GAAP basis, labor and other related to expenses increased to 27.5% from 27.4% 2014. The labor line benefited by $2.7 million from the favorable resolution of a 2011 IRS payroll tax audit. This item was excluded from our adjusted results.

Finally, restaurant operating expenses decreased to 23.3% versus 24% a year ago. This decrease was primarily driven by higher US average-unit volumes, favorable market expenses, and productivity initiatives. This was partially offset by or higher R&M, operating supplies, and general liability insurance expenses.

Turning to G&A, Q2 general and administrative expenses were $76 million versus $72.3 million a year ago. This increase was primarily driven by $6.1 million of higher incentive and stock compensation expenses. On our last call in May, we discussed that in Q2 2014, we had lower incentive compensation expenses due to our performance against objectives. This favorability in 2014 represented a headwind in Q2 of 2015. Finally our Q2 tax rate was 26.6% on an adjusted basis, and our GAAP effective income tax rate for Q2 was 29.9%.

In terms of productivity, we are in excellent shape to deliver on our goal of at least $50 million of productivity savings in 2015. On the cost of sales line, we made great progress on the implementation of our actual versus theoretical food cost initiative and to expect to improve our cost of goods sold in the back half of the year, and into 2016. We expect cost of sales to represent 50% of our overall productivity savings in 2015. In addition, we are seeing incremental benefits in the labor line, as we become more proficient at using our labor scheduling tools. These efforts will help us offset the increased pressure on wage inflation that we're seeing this year. We do expect to see margin improvement in 2015, and continue to work on closing the gap in margins versus our peers.

In terms of our reporting segments, I would like to take -- point out a couple of items of note from our international segment. As I mentioned earlier, we continue to be negatively impacted by foreign currency translation. In Q2 FX translation negatively impacted our adjusted operating income by $2.4 million, most of it relating to our international business. In terms of margin performance, restaurant margins continue to be higher internationally than in the US, given the strength of our international business. In Q2 however, we had increased impact from our investment at Abbraccio. This should be less of an impact as the year progresses, and we expect international restaurant margins to be favorable versus last year in the back half of 2015.

Turning to our capital structure, we re-purchased $30 million of stock in the second quarter. This completed our initial $100 million share repurchase program. Yesterday, our Board of Directors authorized another $100 million of share re-purchases that will run through January of 2017. Also of note, last week our Board of Directors declared a cash dividend of $0.06 a share, payable on August 28. In addition, we are pleased to announce that Moody's has upgraded our corporate family rating to Ba2. This places us just two notches away from investment grade, with both Moody's and S&P. This is a great accomplishment for us, given how far we have come in terms of improving our capital structure since our days as a private company. Our goal is to achieve investment grade status. We continue to make progress on our balance sheet, while being more aggressive in returning cash to shareholders.

One other item of note, is the April 2017 maturity of our CMBS property financing vehicle called Propco. There is currently $464 million outstanding on this loan. Propco owns 258 properties. We are currently engaging a banking partner to help is explore strategic options for this real estate, and we will report back to on our progress.

Now I'd like to discuss a few key items related to our 2015 guidance. First, we are reaffirming our full-year EPS guidance of at least $1.27. We now expect commodity inflation to be between 3.5% and 4%. This is an improvement over our prior guidance of 4% to 6%, primarily due to seafood and dairy. And may I say it is a tremendous -- it has been tremendous work by our purchasing and supply chain team.

We've also updated our full year comp sales guidance of at least 1.5% to approximately 1.5%. This change is due to lower sales expectations at Bonefish. Total revenues are expected to be approximately $4.3 billion, versus prior guidance of at least $4.43 billion. The final change to our guidance is in capital expenditures. We now expect CapEx to be between $225 million and $235 million in 2015. We will remain disciplined stewards of capital as we focus on delivering on our long-term goals, and driving shareholder value. This means re-prioritizing our investments as appropriate. For now, we will focus our investments on our international opportunities, the successful Outback relocation initiative, new units at Outback and Fleming's, and our remodel program that will keep our assets up-to-date. As Liz indicated, we will resume Bonefish new unit development when the core business returns to growth.

In addition to our updated guidance, it is important to call out a few things related to the back half of 2015. First, we had a very challenging second half of 2014, in both general liability and health insurance. We are self-insured, so claim expense can be difficult to predict. But given the unusually higher level of expense in the back half of 2014, we should see some favorability this year. Secondly, as reminder, our US comp sales were 350 basis points higher in the second half of 2014 than they were in the first half, as we successfully pivoted our messaging at Outback to reclaim our steak authority. Although this messaging continues to resonate effectively, second half comp sales will be lower than we saw in the first half of the year as we lap this elevated level of performance. This has always been accounted for in our guidance, but it is worth reiterating.

In addition, we now expect full year G&A expenses to be flat to slightly above 2014, excluding any adjustments. We have found ways to be more efficient with our cost structure, while are continuing to fund our growth investments. And finally, through the second quarter, we have experienced $4 million of FX, and looking at the forward curve, we expect $8 million more of FX risk of the balance of the year. This is baked into our at least $1.27 EPS guidance for 2015.

In conclusion, the strength of our portfolio is evident in our Q2 performance. We successfully addressed our challenges, and we remain well-positioned to deliver on our EPS commitment for the year. And with that I'll open it up for any questions.

(Operator Instructions) Joseph Buckley, Bank of America.

Thank you, good morning. Could you walk us through the Outback domestic comp, the 4% number, very strong versus naptrack getting you back to more than a 200 basis point beep. Walk us through the check-in traffic numbers again, and how that works between lunch and dinner. I think in your opening remarks you mentioned dinner traffic being negative, so maybe if you could put some more color around that versus what you show at lunch as you turned advertising on, please?

I'll turn take the numbers piece and I'll turn it over to Liz. Our Outback comps in Q2 were 4%, and our traffic was down.8%

Joe, some color on that. The first one is, that we did see some diminish in the dinner trend Q1 to Q2, which is driven by our purposeful focus on steak authority and moving away, if you remember last year we had two really promotional not steak centric promotions. At $11.99 and $10.99. Which drove traffic last year, but was not consistent with the steak authority messaging.

This year, we had our steak and lobster for $14.99, which performed very well. But we knew would not have the same traffic impact, much higher quality dinner contribution though. Lunch, we were delighted with the performance. Lunch continues to grow at Outback and we continue to get a lot of positive feedback. When we turned on the advertising we saw that lift go exactly where we hoped it would. We see this continuing to grow on a year-over-year basis as awareness growth.

Again, as we look towards the back half of the year on Outback, it is about going hard against that steak authority messaging, which is working so well. It is about continuing the momentum on lunch, it is about reloads and remodels. And our digital investment which is, we are going to be launching our Outback App in Q4, which we're really excited about. So there's lots of come to keep dinner and lunch going.

Could you quantify the traffic decline at dinner? Was that down several percentage points?

Yes -- we don't break out lunch and dinner. What I will tell you is, we felt it was worth mentioning the Q1 to Q2, but that was as expected. So it's really, what I would say is the dinner trend at Outback, we continue to see it positively respond to steak authority. We knew we moved off these very promotional price points in Q2 you would see that.

As we look at the category, we are always looking for information on how the category performs. As you probably have seen with MPD Crest, which is the only way to break out category, what it had for the period of March, April, May, it had dinner down 4% and it had lunch up 4%. We're not sure if that's a category dynamic. We certainly what we were expecting and saw our dinner performance in line with our expectations.

I would say, as we rolled in lunch, and talked on prior calls, we rolled through a lot of different test scenarios and stuff. And lunch performed as we expected. Lunch did well and the dinner comp was as we expected. I don't really see too much of a change here as we go forward.

Okay thank you.

John Glass, Morgan Stanley.

Thanks. I want to first start by following-up on the comp -- the dynamic at Outback. Is this a competitive issue with dinner, in other words, have things got more competitive at dinner? I know it's always been competitive, so that's sort of an understanding. Can you talk about the back half? You've had big check lifts, and that's because of some of these more compelling offers. Do you expect-- how do you expect the trade off between check and traffic to work in the back half? Is it the inverse of what you see in the first half? And we talk about generically your plans and how you drive the business in the back half, given tougher compares?

Sure, John we are very happy with the 4% comp. Q1 was 5%. Q2 was 4%, and the balance between dinner and lunch will continue to ebb and flow through the year depending on the promotion that we run. I do want to clarify that the dinner traffic was consistent with our expectations. Because we were purposely moving off of that $10.99 moonshine barbecue last year, $11.99, and more toward that appropriate $14.99 percent steak and lobster promotion, which performed very well. We're not unhappy with the dinner trends, but it was in line with our expectations as we moved off the highly-promotional price point.

Lunch continues to grow and continues to perform well, and get very good feedback. We look in the back half of the year, we see both trends maintaining their momentum. On dinner, specifically, you're going to see some very exciting steak-centric and steak-authority messaging. Tomorrow we start with a very successful steak and -- promotion. I don't wanted to tip our hand, that will run for about 13 weeks. Then we were back with additional steak innovation and messaging. That's working, and it continue to work.

As we indicated before, steak authority reassertion is not something that you quote unquote lap. We're seeing in all of our imagery and our brand strengthening, our brand raising. We know that we are back where we need to be and that dinner is resonating. On the lunch front, we're going to continue to support lunch. The awareness keeps growing, the satisfaction with lunch our very high, so that will continue to happen.

Our digital investment on Outback kicks in, in Q4. We've been working on this app for a long time and we're very excited about it. It's going to solve a lot of [paying] points. It's going to allow you to virtually check in to see where you are on the wait list, to pay at the table and go. We're going have some support for that, as well.

The reloads continue to perform well, and the remodels are performing well. And we will be back to you next year, but the exterior remodel tests are looking very promising. We feel very good about what has happened in the first half on Outback, and what's to come. But it is true, as Dave said, that it's more about the 2014 base that drives our H1 versus H2 compares this year.

If I could just follow-up, two unrelated questions. One is the Bonefish development, does that stop right away? Or is there a glide path and you're going still [open unit] to the back half, and you are thinking more pausing in 2016. How does that actually happen?

And then Dave, you talked to little bit about real estate in your [aspect] securities, do you have -- is there something that prevents you from refinancing that prior to 2017? Or are you thinking about what you do after 2017? You're just doing the ground work now?

Sure, on the Bonefish side, we have sites in pipeline. We feel great about the sites. We've really focus hard on the sites. They will play itself out, over the balance of 2015. There might be couple go into 2016, because they're A sites with commitments.

The pause is in place until we see base sales trends get better at Bonefish. We talked about what's been working so well for us Outback New, Outback relocations, restarting the Fleming's development, and international. So that is how we are balancing our capital spending John, with some of the details on the Bonefish piece.

On our mortgage financing on the property, we are doing work as we speak. The biggest thing we have to decide is, there is a prepayment penalty, and we have to decide is it worth it to pay the prepayment penalty? Or is it better to wait until a little bit later on? But we have got some really sharp people helping us with that. And we are being very proactive on this opportunity. More to come as we know more.

Okay thank you.

Karen Holthouse, Goldman Sachs.

Hi. Thinking about the G&A controls in the quarter, as we look out in -- the annual guidance as we look out for the next couple of years, shall we change how we are thinking about the ability to leverage that cost basis going forward? Is there an element of pulling forward from efficiencies in that?

Yes. Liz and I have talked many times. Our goal is to be as efficient as possible in managing our overhead structure. And -- there's a magic in that and. And investing ahead of growth in our key initiatives such as digital.

We are always looking at, Karen, making sure we are as efficient and as possible in our overhead and our G&A. And then making sure that we are properly resource what we need to do to grow the business going forward. Whether it is our new international markets, or rather its our digital markets. But the team has responded well to our initiatives on G&A, and that's why you have seen the performance that we have.

I would add that relentless focus on zero overhead growth, as Dave said. Which allows us to have the invest-ahead-of-growth opportunities in those two core categories.

Great thank you.

Jeffrey Bernstein, Barclays.

Thank you very much. Two questions.

One, on the commodity front. I mean the lowering of guidance. Seems like it's coming from non-beef. You previously told us beef was 99% locked-up double digits. I'm assuming that has not changed. Can you talk about the outlook, maybe what you are hearing? Now that we're in the summer of 2015 in terms of initial thoughts on beef in 2016, presumably not up double digits, but directionally what you are hearing both internally and externally?

My second question was on Brazil. There is obviously limited historical comp data. It sounded like in your prepared remarks that we should really attribute the comp acceleration to the more difficult compares. If that was really the case, I guess the comp should re-accelerate in the third and fourth quarter.

Or whether or not you thought there was some other drivers? I got the sense from your prepared remarks that maybe the economy comments -- maybe you are seemingly a bit more cautious then perhaps you were in the past. So any directional color on Brazil for that back half?

Yes Jeff. First of on the Brazil piece, let me answer that first, then I'll go to commodities. No we are not more cautious than we have been in the past. We did 3.4% comp on top of a 12.2% comp last year. That comp last year had Carnival, and it didn't have it this year.

As we look at the business, and we look at the new unit development, as we look at how our restaurants are responding and how they're doing we have a great sense of confidence in Brazil. And we are building a stronger and stronger business each and every quarter as we go forward. We are on track to deliver our results. Brazil, there's no caution there. Our trends have been very strong.

Turning to commodities, yes we are 99% locked up on beef. This gives us the time now to look at next year. It's too early to say some sort of speculation on our beef cost for next year. We're doing the work as we speak, we will make some decisions a little bit later on. I don't want to get any more detailed than that.

I will say, though, we hope, back half of 2016, and that is a hope, that beef costs begin to come down a little bit as far as the rate increases go. But that is not built in to any of our any of our numbers yet. We will see what happens.

But most importantly, because of the great work buyer purchasing and supply chain team, we have the time to sit back and look. And make some decisions on where we want to go with beef going forward because we're 99% locked. Secondly, it is seafood and dairy that has been of benefit to us on the back half of the year. So that's the Brazil and the commodity answers.

Got it. David, just to clarify modeling question, you mentioned something about G&A and margins for this year. I think G&A you said flat, slightly above adjusted 14%. I was wondering what that number is so we're on the same page. And when he said that margin was going to expand, were talking about the restaurant margin of the operating margin?

Restaurant margin an operating margin. G& A is flat to up slightly.

Are those adjusted numbers?

$290 million-ish on an adjusted basis. Last year. We will be flat up slightly versus that number.

Thank you.

Karen Short, Deutsche Bank.

Turning to Bonefish, Liz, you gave some fairly big comments or thoughts on how you can help turn that around. I'm wondering if you could maybe given little bit more concrete details in terms of what you think can happen over the next, I guess the back half of the year and next year to help reverse the trend?

Sure Karen select me talk about that in a lot of detail. Where I want to jump off is a reminder that once again, Bonefish Grill leads the pack in consumer preference. Number one in seafood, number four overall. We're talking about a healthy, on trend brand.

Let me talk specifically about what's happened. Which is, we strayed too far from our polished casual roots. And used more of what I would say last year CDR appropriate promotional elements to bridge an innovation gap and we're doing two things. We are actively stopping those CDR promotional things, so we started to talk about this couple quarters ago, and unwinding that. That has absolutely had an impact on traffic, so a number of discount impressions are down.

We shifted our Tuesday program from a $7.90 price point last year to a $14.90 price point this year. We're not doing any bogos, so that traffic which wasn't as profitable and wasn't consistent -- as profitable and wasn't consistent with the brand polished-casual is coming out. Importantly, at the same time as we pivot back, we are focused relentlessly on restoring service and fish expertise at the restaurant level.

That got a bit eroded, because we had a very successful launch of our core menu in July, but than we added too much complexity to the restaurant with seasonal menu changes and a bar menu that compromised the core service. What you saw in Q1 is you saw the core dinner consumer satisfaction take a hit from the complexity which undermined service in the restaurant.

We have taken that complexity back out, we are now ruthlessly focusing on delivering the Bonefish Grill polished-casual experience. The great news is, we have seen customer satisfaction respond significantly in that short period of time. We are not going to do any accelerators to bring in lapsed users back. We're going to keep it consisted with polished-casual, and so it is going to take some time to reengage those users as we continue to focus on delivering the Bonefish way in-house.

I feel very fortunate that we have Greg Scarlett at the helm of that because frankly, no one knows the Bonefish way better. We're back on the path. We absolutely see Bonefish Grill returning to its growth trajectory next year, but we are actively managing that traffic out this year.

Okay. That's helpful. I have a question on the app, when it does roll out, will it have full functionality? Meaning pay at the table and all the elements that you mentioned in the initial rollouts? Will it have full functionality? Will it continue to evolve in terms of functionality? Will you work in your Dine Rewards in the app?

Yes great question.

The first one, is it will have full functionality. Release one will have the click-through seating, where am I on the wait list, is my table ready and the availability to pay at the table. Released two, which will come after that we will have some even cooler things that I don't want to get into for competitive purposes on that. That should be terrific.

In terms of the loyalty program, as you know, we have been really far ahead on this. That is really one of the advantages of our portfolio. We really like what we see with our Dine Rewards program. Having four brands allows us to have a loyalty program that people don't get tired with because they can dive across the four brands.

We've expanded into Georgia this year, out of its five test markets. And that is going to be a piece of the go-forward strategy when we complete that task. So far we've really like what we are seeing. And any app that we would come out with in the future would dovetail really nicely with the loyalty program.

Great thanks very much.

Howard Penney, Hedgeye Risk Management.

Thanks very much. The answer to that question falls into mine, which gets to the portfolio. I've heard you say number of times the benefit of having a portfolio of brands. The fact that you had to spend so much time talking about Bonefish being, the issues with Bonefish and having it to be fixed, and last quarter or two-quarters ago it was Carraba's. I understand -- I don't understand the benefits of having multiple brands. Can you go through the arguments of why multiple brands are better than focusing on the Outback concept in driving your growth from one concept? Thank you.

Sure, thanks Howard. We very much view our -- a tightly edited portfolio with four brands that is in scale to $1 billon as an advantage. Let me go through a couple reasons. The first one, is exactly what you said. Which is in a volatile economy and marketplaces and commodities, we really see diversification in huge segments of CDR as being a real advantage in volatile times.

This quarter is a great example, because you had really strong performance on three of our brands, which helped us do the medium to long-term pivot on Bonefish. They really work in concert having that diversification.

You also see it on the commodities right? Some years were talking about early mortality syndrome with shrimp, and other years were talked about the beef cycle. We feel like this tightly-edited portfolio and diversification really helps us do the right thing by the brands in the short, medium and the long-term.

The second thing that I would say, is that there really is scale leverage. That is so important in this competitive environment. There's no question that we benefit. You saw that in our revised commodity guidance from leveraging our procurement capability. We also are able to leverage our infrastructure investment, and you see a little bit of that in loyalty. But when we make an investment, we are able to benefit and push that through four.

A loyalty program is a great example of that. There's a lot of wear out with loyalty, because you go back to the same restaurant. With our dining rewards, you can pivot around the portfolio.

The third thing I will tell you is that we have a pretty significant internal competition for capital. You've heard me say that before. We think it really makes us sharper stewards of capital, because you have to earn -- there's a fierce competition for the last dollar.

Then lastly I would say -- and probably most importantly, it allows us to have world-class resources. There is no way I could have the level of market research and analytics that we have built here, that we have benefited from, or have the supply chain and R&D innovation, without this ability to leverage these four billion-dollar brands. It is that combination, which has allowed us to gain share over the past 22 - 23 quarters, which is very consistent.

We will always remain very nimble and agile in evaluating our portfolio structure. That's the name of the game in this volatile environment. And you saw us sell Roy's and you see us focus. We're always going to remain nimble and agile in evaluating the best go-to market strategy, as well. I want to reassure you that in addition to seeing these benefits we coupled that with a real bias for nimbleness and agility.

Thank you.

Michael Gallo, CL King.

Hello, good morning.

Just a couple questions. I wanted to delve in a little bit on Bonefish. You've talked about some of the technology initiatives, and some of the things that you could do in the back of the house. You've had in [task] in things like kitchen display. You mentioned that you have increased complexity a lot. I was wondering whether, with that, you think about accelerating perhaps the roll-out of those initiatives, and what the plan is on that front as we head to 2016?

Thanks.

Yes sure Liz addressed some of the menu complexity things that occurred. Let me talk about our high performance kitchen. It relates not only to Bonefish, but relates to all of our brands as we bring it across the portfolio. Our initial objectives in productivity for this year and into next, is continuing the labor cost management and food cost management. We are beginning to work on the high-performance kitchen as we speak.

We will be rolling that into our brands across the portfolio. And we're seeing very positive results from that, as we de-complicate some things. You can expect to hear more from us as we go further into test. It is a priority for us to work through the high-performance kitchen, not only in Bonefish, but in each of our brands. How it applies specifically to that brand.

Okay great. And then a follow up question. I'm not sure if can answer this yet or not. Can you talk at least through the range of options you might be looking at to replace the CMBS? Is it with a more traditional financing alternative? Perhaps doing something with the real estate properties? Or is it all of the above? And just stay tuned? What are some of the options that you are looking at? Because back in the envelope, it looks like your all out interest rate on that's in the low 6%'s. It seemed like you to do better than that with traditional financing, given where the balance sheet is. Thanks.

Yes. We are looking at all alternatives except owning the property. We're looking at all different structures in the financing and the sale and lease-back. Who we do it with. We are well ahead of this, we will pursue the best economic alternative for us. Yes more to come. It is too early to say exactly which structure we will be choosing but I can guarantee you and our investors and analysts that we are well ahead of this and examining all different kinds of alternatives. Yes, we believe we to do better on the interest rate.

Great thanks very much.

John Ivankoe, JPMorgan.

Hi. Thank you. I have a bunch of follow-up at this point. Let's start with that CMBS. The balance, which was approximately $468 million, Dave, you mentioned that you would like to be an investment-grade company. Should we automatically assume that notional amount is fully re-financed? Does it have an opportunity to go up? Or would even look at an opportunity to take the CMBS down, in terms of debt? And make a more concerted effort to be investment-grade sooner rather than later? So how should we be thinking about that refinancing in terms of the next notional value of the security?

Sure. John, like I said before, I can't get more detailed, because we haven't done enough work yet. But we will be examining all options. Whether we take it and refinance it, whether we do something on the equity side, whether we do something with our debt. It is too early, John, but I am very pleased to say that we are getting out ahead of this.

There's lots of economic alternatives here, and something we will be pursuing. It is a little too early to speculate that is going to be this or that. Or we are going to spend on this, but more to come with investors and analysts as we go forward.

Okay understood, thanks for the color. In slowing of FY15 CapEx, it actually, you're still opening Bonefish in FY15, and you'll be open very few Bonefish FY16. What should we should we be interpreting about FY16 CapEx? Obviously you're are going to spending a lot less in Bonefish, but maybe you're going to be spending a lot more in things like exterior remodels. Any initial read that we can have in that very important spending number would be great.

On the CapEx side, we will not provide any 2016 guidance until November. Our November call to start, then we will provide more later on. Let me talk about -- go back priorities John. The Outback New relocation programs are coming along nicely and that will be a priority.

We are testing exterior remodels right now. And we like what we see. We will be announcing something shortly, but hopefully we can roll something into 2016. We are starting modestly, the Fleming's New. Because those are AAA sites, and we are excited about the Fleming's New. We continue to be enthusiastic about our international opportunities, as we look at that business.

Additionally we know we can never fall behind again on remodels. We will be continuing to update all of our concepts. Bonefish, Carrabba's, Outback. Everybody as we go along here, to make sure our concepts are as fresh-looking as possible. Those are the buckets of capital, John, that we will be looking at 2016.

I really don't mean to put words in your mouth, but it sounds like 2016 might be something at least in the ballpark of 2015? Because we obviously have to choose something for a number for next year.

John.

Okay. I tried my best.

We have worked together a long time. More to follow.

Let me ask another 2016. Dave, you're very clear about $50 million of the structural cost savings in 2015. You are going to have some actual versus theoretical spill-over from 2015 into 2016. That is going to give us a little bit of a tailwind in 2016. Assuming that the high-performance kitchen isn't going to be ready for 2016, and I don't think that will be from what I remember, do you have other costs, you don't have to say what they are necessarily, but do you have the full $50 million identified at this point for 2016?

Yes we do. It is very robust. We have more actual versus theoretical opportunity in front of us. As we talked about before, turning these systems on is like getting to a higher and higher and higher level as time goes by. We do have a lasting opportunity in 2016 on the actual versus theoretical. That will be a big part of our productivity plan.

Secondly, we still have labor scheduling opportunities. We have made a lot of progress this year. Labor costs were in very good shape in Q2. Especially if you remember my early remarks about 40 basis points of headwind from the incentive reversal last year in labor. Basically our labor costs were flat year-on-year.

We still have opportunities in labor cost management. We still have opportunity in labor cost management. We still have opportunity in actual versus theoretical. We have opportunity in other line items of our P&L, which I really don't wanted get into the competitive reasons. Then lastly we do think the back half of late 2016 and certainly into 2017 we're going to see some of the benefits from the high-performance kitchen work.

We've used a baseball analogy, John and what I would say is, it is market proven initiatives that are out there. We still very much see ourselves in the middle innings of stuff that's already out there in the market place that we are catching up to. We feel very good about our pipeline.

Okay great this is the final one. Obviously, at Outback you are lapsing at a very big change in the average ticket in the second half of 2014 versus the first half of 2014. We are hearing companies obviously talking about wage rate, inflation, or an increase in wage costs also driven by turnover. To what extent will you use straight pricing as a tool? Going forward? Is that something that could materially tick up for the brand? And is there anything to discuss near-term, maybe in terms of how second half pricing will be different year-over-year than first half pricing?

Yes, John our philosophy on pricing is that you have to provide superior Brown value which is of total benefits divided by price. You just can't pass along and take pricing because your wages are up. We're going to continue with that mentality of very responsible, appropriate pricing and not take a cost-plus basis and never return to that. That's been our policy consistent with the five years. Call it responsible pricing that you've seen with us over the last five years, coupled with a lot of innovation and service improvements. And that notion of value will always be front and center and will never be behind any type of cost-plus situation.

If I could just add John, tying that question to your first question. That's why the productivity initiatives are so important. Because if you look at our next pricing in Q2, it wasn't anywhere near the commodity cost increases that we had. So, we get a lot of questions about when am I going to see some of that on the bottom line. Well you will, and we have been providing it. At the same time, it allows us the opportunity, to not neccesarily take pricing all the way up to commodities.

Thank you.

Jeff Farmer, Wells Fargo.

Thanks. Just a couple quick follow-ups. An earlier question, you lowered your commodity-inflation guidance to a range of 3.5% to 4% for the full year. If you put that context for us? What levels of inflation did you see in the first half of the year? What are you expecting to see in the back half of the year, Dave?

We have seen around of upward of lower 4%'s, and we'll see a little bit less than that in the back half of the year. Primarily because of the seafood and dairy piece I talked about.

Okay and you and John were just talking about this, but on the productivity savings, $65 million last year; at least $50 million this year. You made it clear that you do reinvest some of that into offset food inflation, some restaurant -- to fund investment and technology and things like that. Is there a rule of thumb we should be thinking about in terms of the profit flow through on those productivity-saving initiatives? How much of that actually gets to the bottom line?

No. It will vary quarter by quarter, because of some of the commodity cost changes, and also some of the investment ahead of growth that we make. That's it is not linear. We can tell you that our commitment is at least $50 million a year, which we have a very productive pipeline on. Those two things.

I think the other piece is, we want to continue to close the margin gap versus our peers as go forward. We see that opportunity, and as I talk about my prepared remarks, we expect some margin improvement back half of the year. Both in US and international as we go forward. And that's a result of some of our productivity efforts. So there is no specific flow through I can give you. I can tell you that it's a big-time funder of investing ahead of growth, and it's also helped us mitigate some of the commodity cost changes that happen from quarter to quarter.

Okay thank you.

Jason West, Credit Suisse.

Thanks. A couple follow-ups. On the pricing, Dave, I don't know if you gave the pricing at Outback for the quarter? Just so we can understand the mix on the comps?

Yes, our US net pricing was 2% in the quarter, and Outback was 2.6%.

2.6%. Is that net of changes in the promotional strategy or is that the actual pricing inflation?

That is net pricing, so it'd have the promotional piece with it.

Okay got it. Just a quick one, on the wage question. You have mentioned that's picking up. We're hearing that from a lots of folks. Can you give any sense of magnitude on what you are seeing in wage inflation? Percentage that you had been running? And what you are running now on that item?

Sure we expected to start the year with about 2% ish in wage inflation to the 2.5%. We're now looking at 3% to 3.5%.

Great thank you.

Sharon Zackfia, William Blair.

Good morning. Most my questions were answered, but a few more.

Guidance implies flatish comps for the back half of the year. And I know there are some holiday shifts in the fourth quarter. I don't know if you any commentary on how you think cadence might be in the back half? And how the move and Christmas or Halloween might impact you in the fourth quarter?

There is a trading day impact because Christmas in on a Friday or Saturday. That would impact us in the fourth quarter. I don't have the number off the top of my head but it is a bid of a head wind the back half of the year. I think Liz laid out of the matters on our guidance for the back half of the year. We did have a stronger back half of the year last year than we did the first half, especially at Outback. That is in our guidance. Secondly, Liz talk about our efforts at Bonefish Grill to return to polished casual. That is in our guidance, as well. Those are the two factors that make our guidance for the back half of the year on comps.

As we talked about Sharon, that is a prudent way to look at it as we lay out the back half.

Liz I had a question, too, on Carrabba's and Bonefish. Can you talk about, first as you're going through the Carrabba's menu launch, what you've learned from the Bonefish menu launch, so we don't run into a complexity issue with Carrabba's when that comes out? Then secondarily, when you're starting and stopping the development process, for Carrabba's or Bonefish, can you talk about what, if any, disruption that puts in your system? If you decided to restart what the lag would be, before we with start to see the development start again?

Sharon, the lessons learned for Bonefish on Carrabba's, The Bonefish Grill menu innovation, which was in July 2014, that was a big menu redo that we had not had a core menu renovation in six years, performed well and in line with our expectations. It was the subsequent churn of moving to seasonal menus and a bar menu, that created the complexity that backed up on the core dining experience.

We're not doing that at Carrabba's. It is a core menu refresh. Where innovation is really key and critical, we overloaded the system at Bonefish with ancillary innovation, that backed up on the core experience.

Now the good news is, we've taken those menus out. We're returning to focus on the core execution, and you're seeing customer satisfaction levels return to the high level. But re-engaging lapsed users will take time.

On Carrabba's, there are no plans and haven't been any plans to launch any type of seasonal menu or subsequent menu. We've taken our time to get this next core menu update right, and we feel really good about it. Dave, do you want to comment on the second part?

Yes that ties Liz's to the discussion of the portfolio. We have a US development team that is extremely strong, and we just basically will shift them to some of our other opportunities especially Outback New and Outback relocations. That's the advantage of having a group that covers the entire Company.

From a timing standpoint, we will continue to be on the lookout for Bonefish sites. We're not going to be signing any, but it will take about a year or so to get geared back up. It will not be a standing start, it might be a walking start as we started. That's our plans for Bonefish. The benefits of having a strong US and international development team allows us to shift to our priorities.

Dave I was also thinking about the talent side though. As you are recruiting people that want to move up through the ranks, if you're stopping development it seems like there would be less opportunity for people at the restaurant level to move up. I'm not aware that folks move between Carrabba's and Bonefish and Outback? Maybe they do. Is there repercussion for developing talent? Or the right talent to move up to the ranks?

Yes, from a development standpoint, they could certainly move around. Secondly, from operations standpoint, yes we do have people that move across brands. From partner level to a JVP or something. That is something we take a look at our people planning very carefully.

In the one thing I would build on that, Sharon is that, you know our partners program and how successful that is at rewarding growing what you own and growing same-store sales. A couple years ago, we put on top of that a really unique incentive program called the Presidents' Club which has outsized opportunity in addition to our partners program, for delivering same-store sales above target in the restaurant. You see a significant portion of the compensation being aligned with our goal of number one, grow what we own. And number two there will continue to be domestic opportunities for that.

And then for opening new stores. We are always going to have that critical lens on it. And then, the international speaks for itself in terms of the success we've seen there to date. I just want to reiterate that those -- compensation is always focused on our first priority of grow what you own. That has been successful for us.

Okay thank you.

Andrew Strelzik, BMO Capital Markets.

Good morning. When I'm thinking about the commentary you're making on Bonefish and having to return to the roots of the concept, it sounds very much like what you did a couple quarters ago with Outback in the US. I'm wondering as I think about coming out of this weaken period is there any reason that parallel does not hold?

Yes. With Outback, we had 22 consecutive quarters on Outback. For Outback it was a balancing act. We had to become broader in our appeal, and we needed to better balance it with steak authority. You did not see the magnitude of the pivot that we're making on Bonefish. I think you saw steak authority and. That's why Outback continued to grow comps for sales and traffic all through that period as we changed our emphasis.

The pivot back on Bonefish is probably more dramatic, because it is a polished casual. And we were engaging in more casual dining methods that we're taking out. We feel we are actively managing those more promotional elements out. We're putting back the polished casual elements. It is being very well received. It's showing up in customer satisfaction, it's the top ranked brand. And we are restoring this to brand health. I would say it is different because of the pivot.

Okay, and I just wanted to ask a quick question again on beef. Or maybe just your approach to beef in 2016. Obviously you locked up the double digits for 2015. And it seems like maybe the underlying beef fundamentals are not as -- or the increase for the back half of the year maybe won't be as great, at least as I was previously expecting. I am wondering if you are not able to lock in for 2016 at levels that you like, are you willing to let beef float? Or will you definitely be locking in?

We pursue a hybrid strategy depending what the market looks like in front of us. I think the team did a great job last year locking us in, when things look at least somewhat favorable. We're pursuing a hybrid strategy that would be a lock or floating in market. We will make that decision in the coming months obviously for competitive reasons I won't go any further than that.

Understood thanks very much.

Matt DiFrisco, Guggenheim.

This is Matt Kirschner on for Matt. If you we pivot back to the lunch break out for Outback, is there any clarity on the percentage of sales related to lunch now?

It's been our practice not to typically break out lunch and dinner sales. I can say that the lunch launch, like I mentioned earlier, exceeded our expectations. It's something we will be going back to in future quarters. It has done well for us.

Okay I think -- it continues to grow. As awareness builds.

Okay thank you.

Ms. Liz Smith, I would like to turn the conference back to you for additional or closing remarks.

Great. Thank you Andy. We appreciate everyone for joining us today, and we look forward to updating you on our portfolio on our Q3 call in November. Thanks a lot.

Ladies and gentlemen that does conclude today's conference. We'd like to thank everyone for their participation, you may now disconnect.