Bloomin' Brands Inc (BLMN) 2015 Q3 法說會逐字稿

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

Thanks, Jayna. 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 2015 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 our results on 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 formal remarks, I would like to remind everyone that part of our discussion today will include forward-looking statements, including our discussions of growth strategies and financial guidance. Such forward-looking statements are not guarantees of future performance and therefore you should not put undue reliance on them.

These statements are subject to numerous risks and uncertainties that could cause actual results to differ from our forward-looking statements. Some of these risks are mentioned in our earnings release, others are discussed in our Form 10K filed with the SEC on 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 fiscal third quarter 2015, an overview of company highlights, a discussion regarding progress on key strategic objectives, an update on 2015 guidance, and some initial thoughts on 2016.

Once we've completed these remarks we will 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. As noted in this morning's earnings release, our adjusted third-quarter diluted earnings per share was $0.15, up 50%, and our third-quarter US comp sales were down 1.3%.

Overall we are pleased that we exceeded our EPS target for the quarter and that we are set up to achieve our EPS goals of $1.27 for the year. Our international business continued its strong performance, and our productivity efforts remain robust enabling us to expand restaurant margins. However, domestic comp sales were below expectations, and this was driven by a combination of category trends along with our own performance.

On the category front, we utilize MPD CREST data to provide a more granular look CDR traffic. For the 13 weeks ended August 30, they reported casual dining dinner traffic down 3% with lunch down 1%.

Casual dining dinner declines were primarily driven by weekend dinner traffic, which MPD CRASH reported was down 6%. Our Company remains primarily a dinner business that skews more towards the weekend than it does for the industry.

So this dynamic of dinner and weekend traffic declines has been particularly noticeable over the past two quarters and had an impact on our comp sales.

On the brand front, we knew that our back-half trends would be challenged given the high year -ago base. However, our marketing programs did not breakthrough as expected. We are preparing for 2016 with significant innovation-driven platforms and new levers to drive comp sales.

Now I will take you through third-quarter performance and plans by concept. At Outback, comp sales grew 0.1% in the third quarter. We launched our "Best at Steak" campaign last year to reinforce our steak authority positioning and are seeing positive consumer reactions.

We complemented this steak-centric messaging with unique and differentiated offerings to drive traffic and highlight our value equations. This quarter, however, instead of a new LTO, we went back to our "Steak and Unlimited Shrimp" promotion for the third consecutive year, and it did not drive the expected levels of incremental traffic in an environment that's saw an increase in competitive promotions.

As we head into 2016, our focus will be on continuing to enhance the 360-degree experience for our customers. Moving forward our marketing will reflect a higher level of innovation, both in food and brand messaging.

We will also be investing in other aspects of the consumer experience. First our exterior remodel test has proven successful, and we will begin an aggressive multi-year rollout of the new design in 2016.

The new design contemporizes and updates our restaurants with improved curb appeal, and it's driven approximately 5% sales growth in 33 test locations. In addition we continue to relocate Outback restaurants as quickly as quality sites become available.

Second, we are rapidly developing more innovative technology platforms. For example, this past Thursday we launched our new Outback site. The new site offers an elevated level of convenience and control to our customers.

You can expect other technology enhancements in future quarters including the launch of our new Outback app which is finishing up a successful test in our Tampa market. The new app will allow guests to control their experience from beginning to end.

It will integrate our Click Thru seating feature to get on the wait list before arrival, allow guests to view the menu while waiting, and end their visit with the ability to pay at the table. Technology is an area where we will continue to invest ahead of growth.

Although we are not satisfied with our comp sales results in Q3, Outback is on track to deliver positive comp sales for the sixth consecutive year. This is a strong brand with strong consumer appeal and given our many levels, we are confident that it will continue to grow in 2016.

At Carrabba's, comp sales were down 2% in the quarter. Over the back half of the year we have purposely reduced advertising spend on a year-over-year basis as we gear up for the next iteration of our core menu.

We will soft launch the new menu in the fourth quarter, and then we will follow-up with full media and advertising support in Q1 2016. The new menu reduces the number of menu items from 80 to 70 while introducing new platforms such a small plates.

Our unique wood fire 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 over the years.

The new menu will be complemented by the ongoing work underway to contemporize our restaurants and improve 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 continue to differentiate ourselves in the Italian category.

Bonefish Grill's Q3 comps were down 6.1%, consistent with our expectations. As we discussed on the last earnings call, we are returning Bonefish to its polished casual roots and its brand equity pillars of culinary-forward cuisine and fish expertise in the restaurant.

We've made great progress, and over the past quarter we've removed significant complexity from the menu, reengaged the field, and have continued to see customer satisfaction scores meaningfully improve. Our focus is to reengage with lapsed users, but we are not going to accelerate this process by using promotional tactics that are not consistent with the brand.

When we have finished our work to restore Bonefish to growth, we will launch a significant marketing effort to drive awareness and increase traffic. We are confident in the future of Bonefish as it remains a consumer favorite in the CDR segment across a variety of measures and surveys.

Fleming's finished the quarter down 0.6%. We pulled back on some of the promotional offers we have been featuring at the brand, and the impact of traffic has been in excess of what we expected. Prior to Q3, Fleming's had posted 22 consecutive quarters of growth, and all health measures point to a encouraging long-term trend for this brand.

You can expect new menu innovation that will offer multiple price points delivering both value and indulgence while highlighting seasonal ingredients and pared with wine and cocktail experiences.

Turning to the international business, Brazil posted a comp of 6.1% in the third quarter despite lapping a 8.9% comp in Q3 of 2014. Although there remains concern about the economy in Brazil, our restaurants are performing in line with our high expectations.

Keep in mind that Brazil is the sixth largest full-service restaurant market in the world and is very underpenetrated in casual dining relative to the US. We will continue to aggressively invest capital into Brazil.

What gives us such confidence in this business is our extraordinary brand strength. We know that the brands that endure and do well are the ones that deliver superior service and quality at a affordable prices. Our business in Brazil delivers on all these areas

For perspective, just last month, Exam A, one of Brazil's largest and most influential business magazines, released their annual ranking of companies based on overall consumer experience. Outback placed second among all companies in Brazil. We were first among restaurants and ahead of such leading names as Coca-Cola, Apple, and American Express.

The high level of engagement and brand equity with consumers is further evidenced by our approximately 4,000,000 Brazilian Facebook fans. In addition, restaurants we have opened over the past 18 months are exceeding their business plan. Every operating metric associated with this brand is world-class. We have made a similar commitment to service, quality, and value with our launch of Abbraccio.

We have three restaurants open now and are very pleased with their initial performance. Sales results have been similar to new Outbacks, validating our market opportunity and consumer appeal. Italian dining is the number two segment in Brazil providing us with significant runway for growth.

Underpinning all of this is the strength of a world-class management team. We are extremely fortunate to be able to leverage their expertise and it's their leadership that ensures the demand for our restaurants continues to be robust.

Switching to Asia, Korean comps were up 6%. This performance is particularly impressive considering the casual dining market was down 16%. Korea is a great example of our ability to stabilize difficult situations within our portfolio.

We made the tough but necessary decision to right-size this business late last year. We closed restaurants, streamlined our infrastructure, and brought in a veteran leadership team to move the brand forward.

On the development front, we opened 10 system-wide locations in the third quarter. Consisting of two US Outbacks, one Bonefish Grill, one franchised Carrabba's, and six company-owned international restaurants. Three in Brazil, two in China, and one in Hong Kong.

Before I turn it over to Dave to provide more color on Q3, I would like to share my thoughts on the progress we have made towards our sustainable growth plan in 2015. As a reminder, this plan is focused on three key areas. Growing US sales and profitability, accelerating international growth, and driving long-term shareholder value.

In terms of US growth, we have plans to address our recent sales trends and are on track to grow margins this year, despite an unfavorable commodity and wage environment. This progress has been made possible by our productivity efforts, which will well exceed our annual goal of $50 million this year.

We are committed to closing the margin gap to our peer group and expect continued improvement in 2016. We recognize that most of the conversation in casual dining is centered on the US, and we remain confident in our ability to grow comp sales as we have demonstrated annually over the past six years.

However, we think the biggest opportunity in casual dining is in international. In our focussed areas of Latin America and China, a rising middle class is expected to lead to significant growth in the casual dining market over the next five years.

We are uniquely suited to capitalize this opportunity and are delighted with our progress. In Brazil we successfully launched our second brand Abbraccio and are on track to open Fleming's as a franchise business in the first half of 2016.

In addition to our vibrant business in Brazil, we are building out our China business. China represents one of the largest market opportunities for CBR brands given the highly fragmented market and increasing levels of disposable income. We are also expanding our efforts to open franchise restaurants globally. There is a great deal of demand for our restaurants outside the US, and we plan to capture this opportunity.

Finally, our strengthening balance sheet and free cash flow generation have allowed us to more aggressively return cash to shareholders. As our credit metrics continue to improve, we plan to increase the amount of cash we return over time both in the form of dividends and share repurchases. This is just one aspect of our overall strategy to increase total shareholder returns.

We have a tightly edited portfolio brands that have leading market positions within their respective categories. Our commitment is to remain nimble and agile as we evaluate the best go-to market strategy for our portfolio, and we are always reviewing our options.

In summary, although domestic comp results were below expectations this quarter, our international business performed extremely well. Our long-term growth thesis remains intact and the confidence in the vitality of the portfolio remains strong. The levers provided by a focused portfolio allow us to expand restaurant margins and deliver our EPS goal.

We have strong brands and numerous opportunities for growth. And all of our decisions will be made with the lens of maximizing total shareholder returns for our investors.

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

Thank you, Liz, and good morning, everyone. I'll kick off with discussion around our sales and profit performance for the quarter. As a reminder when I speak to net income and EPS I will be referring to adjusted numbers that exclude certain costs and benefits.

Please see our earnings release for reconciliations between our non-GAAP metrics and their most directly comparable US GAAP measures. We also provide a discussion of the nature of each adjustment.

With that in mind our third-quarter financial results for just the prior year are as follows: adjusted diluted earnings per share was $0.15 versus $0.10 in 2014. GAAP-diluted earnings per share for the quarter was $0.13 versus a negative $0.09 last year. Adjusted net income was $18.6 million versus $12.6 million for the third quarter a year ago.

GAAP net income was $16.8 million versus negative $11.8 million in 2014. We had significant margin gains in the quarter, and this sets up us well to deliver on our EPS guidance for the year.

Now onto our sales performance. Comparable US restaurant sales were down 1.3% while traffic decreased 2.6%.

For domestic concepts our comp sales results were as follows: at Outback, comps were up 0.1% with traffic down 0.9%. At Carrabba's, comps were down 2% with traffic down 3.7%. At Bonefish comps were down 6.1% with traffic down a 8.5%, and at Fleming's comps were down 0.6% with traffic down 2.3%.

We knew our third quarter would be challenged as we were lapping stronger comps from a year ago, and Liz indicated our marketing program did not break through as expected. We are preparing for 2016 with significant innovation-driven platforms and new levers to drive comp sales.

Turning to our international business, Q3 comp sales were up 6.1% at our Outback restaurants in Brazil. Traffic was flat in the third quarter. As a reminder, we report Brazil results on a one-month lag, so our third-quarter results include June 2015 through August 2015. This business continues to perform well across all measures.

In Korea, Q3 comps were up six 6% with traffic up 13.8%. We are very pleased with the progress our dedicated local team is making in a continually challenge Korea market. The effort taken to ring census business provides a more sustainable and agile business from which to grow.

Turning back to our financial update, total Bloomin' Brand's revenues decreased 3.6% to $1 billion. Excluding the impact of foreign exchange translation, our revenues would been flat for the quarter.

Now I'll provide a brief overview on margin performance. Adjusted restaurant-level operating margin was 14.5% this year versus 13.8% a year ago.

Our 70 basis point improvement was driven by strong international performance and sustained benefits from our productivity initiatives. On the cost of sales line, we made great progress with our actual versus theoretical food cost initiative enabling us to mitigate pressures from double-digit beef inflation.

As a reminder, food costs would have been significantly higher after these initiatives, as we did not take near-to-level pricing to fully offset the cost increases we experienced this year.

Turning to labor, we continue to see higher wage inflation particularly in the front of house due to minimum wage increases, coupled with an improving job outlook for hourly employees. We are able to partially offset this impact through the utilization of our labor scheduling and optimization tools. Which inflation pressures remain a headwind, and we are exploring opportunities to gain further efficiencies in this area while improving customer service.

Lastly, we have done a good job managing other parts of our cost structure. For example, we have increase the use of digital advertising which has allowed us to be more efficient with our advertising spend.

In addition this quarter we benefited from the lapping of higher general liability expenses last year. Our GAAP restaurant-level operating margin was 14.8% this year versus 13.8% a year ago. The difference between adjusted restaurant margin and GAAP restaurant margin was driven by favorable resolution to a payroll tax audit.

In terms of reporting segments I would like to 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 Q3, FX translation negatively impacted our adjusted operating income by over $4 million, most of it relating to our Brazil business. In terms of margin performance, international restaurant margins are significant higher than in the US.

Our strategy of investing in key equity markets with high growth opportunity enables us to leverage infrastructure to drive outsized returns. We remain committed to investing ahead of growth to position our great portfolio brands for long-term success.

Turning to our capital structure we repurchased $60 million of stock in the third quarter. We will be opportunistic with share repurchases given current revaluation levels. We currently have 40 million remaining on a share authorization that runs through the beginning of 2017.

Also of note, in October our Board of Directors declared a cash dividend of $0.06 a share, payable on November 25. As our balance sheet improves, we will be more aggressive in returning cash to shareholders.

Now I would like to discuss a few key items related to 2015 guidance. First, we are reaffirming full-year EPS guidance of at least $1.27. Second we now expect full year comp sales guidance to be 0.5% to 1% from approximately 1.5%.

This change reflects our Q3 sales results, a strong competitive environment, and our planned reduction in discounting across the portfolio in Q4. Lastly, total revenues are expected to be approximately $4.37 billion versus prior guidance of approximately $4.43 billion.

All other elements of our 2015 guidance remains unchanged. In addition to our updated guidance, it's important to call out a few things related to the fourth quarter of 2015.

First, comp sales include a 90 basis point headwind related to the timing of Halloween and Christmas. Christmas falls on a Friday this year, versus a Thursday last year.

Second, we had a very challenging fourth quarter 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 fourth quarter of 2014, we should see some favorability this year. In addition we now expect full-year G&A expenses to be lower than 2014, excluding any adjustments.

Since we lowered our sales performance expectations for the full year, we are expecting lower incentive compensation versus our initial expectations. We've also found ways to be more efficient with our cost structure while continuing to fund growth investments.

Finally through the third quarter, we've experienced $8 million of unfavorable FX and looking at the forward curve, we can expect $5 million more of FX risk for the balance of the year. That is baked into our [lease] a $1.27 EPS guidance for 2015. But for perspective, 4X for the year represents an $0.08 headwind versus 2014 rates.

Before I provide some preliminary thoughts on 2016, I want to provide a brief update on our CMBS property financing we called Propco. As we noted on a previous call, we are evaluating strategic options for this real estate. After much consideration and analysis, we are exploring options to terminate this existing facility ahead of the April 2017 maturity to take advantage of favorable financing and the real estate environment.

The preferred approach would be to maximize value through sale lease-backs or secured financing. We will provide additional details as to the timing and size of the transaction on the next earnings call.

I would now like to take you to our preliminary thoughts on 2016. We expect to deliver an increase in adjusted EPS within our long-term target of 10% to 15% growth, with positive comparable US restaurant sales and an increase in operating margins.

Commodity inflation is expected to be approximately 1%, and foreign-exchange headwinds are approximately $12 million, primarily due to the depreciation of the Brazilian real. Most of this impact will incur in the first half of 2016.

We'll provide detailed guidance -- 2016 guidance on our fourth-quarter earnings call in February of 2016. In conclusion, our results for the third quarter set us up to deliver on our full-year EPS goals.

We were pleased with the progress and margins, while making investments both domestically and internationally to support long-term growth. We remain disciplined stewards of capital, and our strengthening balance sheet provides us increased flexibility to return cash to shareholders.

We look forward to talking to you after the new year when we report our full-year 2015 results. And with that, we will now open it up for any questions.

(Operator Instructions)

Joseph Buckley, Bank Of America.

A couple questions on sales. Just so we're on the same page, could you talk about what the full-year -- the revised full-year guidance on the blended same-store sales implies for the fourth quarter?

And maybe elaborate a little bit on your comment less discounting. How aggressive were you last year versus what the plan is for this year?

I will the first piece, Joe, and then I'll turn it over to Liz on the promotional stuff. Our guidance is 0.5% to 1% for the year. We typically don't provide quarterly guidance on sales. I think you can kind of see where we see fourth quarter going, but we try and stay away from quarterly guidance on sales. But our full-year is going to be 0.5% to 1%.

Joe, just to add to that, some of the assumptions as we gone into the back half of the year is that we viewed it as prudent to assume some of this weekend dinner traffic headwind that we've been seeing continues. We think that's a prudent call. We talked about the holiday shift timing.

And then we talked about the fact that in Q4 we are pulling back on Bonefish discounts -- well, not just Bonefish discounting but discounting across the portfolio as we set ourselves up, again, significant innovation that we've been working on that's coming out across the brands in 2016. So it's the resilience of the portfolio with the productivity in international that gives us confidence in delivering the 127 with those kinds of headwinds in the back half of the year.

One other thing, Joe, I just want to remind everybody, as in my prepared remarks, there's a 90-basis-point headwind due to holiday shifts in the quarter. And also, we also expect terrific sales gains in Brazil and Korea as well in Q4.

Okay. Just a question on the third-quarter composition of the Outback same-store sales. I think you said traffic was down 0.9%, that's a very narrower gap that what we've seen in prior quarters.

So could you talk a little bit about that, how that traffic number was down less than in some of the prior quarters?

How the 0.9% traffic -- let me -- Joe, what I think you're asking about is the composition of third quarter on Outback, so let me talk about that.

Correct.

We were, obviously, disappointed in the results of the third year that we ran "Steak and Unlimited Shrimp," and it did not drive the incremental traffic that we had expected. That was running for two months of the three months. It was also longer window than we've had in the past.

That's really the story on traffic for Outback in Q3. That 0.9% was the dinner business associated with the Q3 promotion. You had said that -- does that answer your question on traffic or was it a sequential question?

I was thinking more sequentially. When I saw the plus 0.1% I thought the traffic would be far worse based on a couple of the prior quarters. If you can, just fill it out for us.

Sure, Joe. Net pricing was low this quarter, about 1%. And we didn't see some of the P-mix benefit we've gotten from prior quarters, so that's why you see the numbers that you do.

Okay. Thank you.

John Glass, Morgan Stanley

Could I just follow first up on that, so pricing had been running 3.5% or 3.8%, so if you're saying that it went to -- you let some roll off, was that just a quarterly timing --

Our net pricing was up 1%, John.

What does that mean, though, are you saying -- is that mix or are you just talking about pricing?

Net pricing, mix was unchanged.

Okay, so why did pricing go from 3.8% to 1%. Are you just using not --

We did have some -- we did have some roll-off in the quarter, yes.

Okay, and is that the way to think about pricing going forward or is this just a one quarter timing issue?

Our long-term goal, John, it varies from quarter to quarter, but our long-term goal is to have pricing between 2% and 2.5% percent.

So, I guess I'm still struggling, but I'll just assume that you go back to 2% to 2.5% in the fourth quarter?

That's pretty much our long-term trend. It varies by quarter to quarter, but our long-term plan is 2% to 2.5%.

You talked about being ahead on productivity, so where do you think you'll come in on productivity -- what was at this quarter and what do you think you'll end up at the year at now?

We will be significantly above $50 million, John. We've had a really good run so far. We are ahead of plan so far.

I try not to talk about quarter-to-quarter, but we will be given our initiatives on actual versus theoretical pricing and some of our labor initiatives. Some of the things we saw in facilities, management, utilities, is giving us opportunity pretty sizable above the $50 million.

And despite that your US margins were flat, so I'm presuming your offsetting a lot of de-leverage, or maybe you could quantify what you gained in productivity versus what you lost in de-levering?

Sure. First of all we don't price up to the levels of commodity inflation, number one. Number two, we did have some wage inflation. We are looking at 3% to 3.5% this year, and then number three, if you look at the release in unallocated section, there's -- general liability is down there. That's part of our US business.

We would have some favorability if you put that up in the US operating margins.

Last question, does that a 8.9% go into restaurant margin? And are you modeling some amount greater than that for the fourth quarter or is that just upside if you get more benefit in the general liability line?

We had modeled general liability trends and health insurance trends, like I mentioned in the script, in the fourth quarter. We've talked about that a lot. Last year we had some downsides happen in general liability and health insurance last year. That's baked into our at least $1.27 guidance.

And that is in the restaurant margin on the consolidated basis?

Correct.

Thank you.

Karen Short, Deutsche Bank

Two questions. In terms of your comp guidance for 2016, I know you just made some comments on pricing or your long-term goal in pricing. I guess in light of your embedded assumption of inflation of 1%, and then you just give that color on 3% to 3.5 % on wage inflation, how should we think about -- is 2% to 2.5% really the right number for 2016 on pricing, or is that too low?

I think we are looking at -- its early to talk about what we expect our operating margins and our pricings to be. I can talk to our long-term pricing strategy of 2% to 2.5%, but we will be talking about our long-term pricing -- pricing plans for next year on the February call.

So the 2% and 2.5% is our net pricing stance that we've had for the long-term in our company, and that does vary quarter to quarter. (multiple speakers)

I would say one other thing, Karen, that whole -- pricing plus productivity offsetting inflation is going to kind of continue to be a strong algorithm for us as we head into next year as well.

Okay. That's helpful. And then I think on the last call you had commented that you'd give some early comments on CapEx for FY16, so I guess I'm wondering if you're willing to do that, and maybe some color on capital allocation by brand. And I'm asking it, obviously, in light of the fact that you did just allocate some capital -- significant capital to buybacks.

We expect -- we won't give any detailed capital guidance this year -- we will in February of 2016. We expect capital spending to be in line with past years, and Liz talked about the exterior remodels at Outback, which we are seeing terrific returns on. We're very excited about -- we'll continue with our relocation program, and we'll continue with our international spending.

Probably the biggest pivot would be the aggressive expansion of the exterior remodel program for Outback. That should give you a sense of capital allocation, differences year-to-year, is that we're going full throttle now that we have the year's long testing on 33 locations.

Okay. That's helpful, thanks.

John Ivankoe, JPMorgan

Several, if I may. First just to follow-up on that. What is the cost of the exterior remodel package that you settled on out of the 33? I know there's kind of a medium, high, and low blow, but what is the right investment to achieve that 5% sales lift?

The exterior has been approximately the same as our interior remodel. You should think of it at that level we shared with you before of 300 and 400, and again, John, that's going to really depend on where the starting base of the store. But you should think about that level of 300 to 400

Okay, if I may, in the quarter, obviously, that other operating expense, which would normally be a fixed line item is what showed the most amount of leverage. You mentioned insurance, you mentioned advertising. Could you compartmentalize what the basis point impact from those two lines were, and maybe there was also some expense in international, just looking at what the international operating income last year that gave you a favorable lap in that line? So just to try to think about what was maybe one-timeish in nature versus what may be recurring.

We've got three things, John, that are approximately equal weight, but I would say that the insurance general liability was beneficial, the moving on digital advertising was also a part of it, and then we also have spent a lot of time in the US on utilities and facility management and our productivity efforts, and we're seeing some benefit from that.

So those would be the three things that we have. (multiple speakers)

I will look for that. Liz, your experience in marketing, do you draw direct correlation between the reduction in advertising and the relatively disappointing sales? Do you think those two are directly related or no?

I want to kind of draw two distinctions. The first one was, on Outback, we pretty much had the same advertising level but really saw, as I said, the third time out with "Steak and Unlimited Shrimp" did not drive traffic. The reduction in advertising that we've seen has been more against the Carrabba's portfolio, as we're getting out of promoting special occasion LTOs and readying for the new menu, which we're to go on air full throttle in Q1, which is that Everyday Dining.

So, I think what drove Outback, I know what drove Outback traffic was the fact that we had 10 weeks' window than in the past had worked for us, but was not resonating. The good news is that we've got a pipeline of innovation, of true innovation in front of us, and we know what happens when we focus on that.

The advertising reduction is more on the Carrabba's front as we ready for the new menu.

And finally, if I may, Liz, you mentioned MPD CREST data so that weekend dinner traffic was down 6%, which would normally be like deep recession area type of levels. That is a pretty profound number.

Give us your insight in terms of why you think that's happening. And I don't know that MPD CREST is always a data source that you cite, if you could juxtapose that role to what you're in NAP and Blackbox if you know that data.

Sure. We use MPD CREST because it's the only long-standing data source in the industry that peals down below the traffic level, right? It's directional and it gives you a sense, but what we have seen over the last two quarters is there has been weekend pressure on traffic for dinner in Q2 and it repeated itself again in Q3.

We've always said what you do to yourself impacts you more, and I think we've, you know, we've proven that we know how to grow weekend dinner traffic when we have more innovative platforms. In terms of what's driving that, I think we talked a lot about that internally. There's been a lot of shifts. We're looking for more assessments into more granularity into those day parts. But we think there's more competition out there from alternate formats, and we also think that, you know, it's a change -- a little bit of a pattern.

I would caution you, though, that it's two quarters, but two meaningful quarters in terms of how our business splits. The other thing is, we really have to drive that everyday dining occasion, which is exactly what is going on with the relaunch of Carrabba's.

To move away from just being used on weekends. We think that's -- we know that's what the new menu does for us. We're kind attacking it on the innovation front but also driving more everyday of the week dining.

Okay. Thank you.

Jeffrey Bernstein, Barclays Capital.

A couple questions. One on the Outback comps. You talk about significant innovation-driven platforms and new levers, I'm just wondering without exposing too much. What exactly does that mean, or how would that be evident to the average consumer?

Is that greater emphasis on value? Is it more shorter-term promotions, more LTO-driven, and within that you mentioned positive comps for Outback continuing into 2016. I'm just wondering what you're thinking the industry is going be doing in 2016 when you give that color? You talk about often beating the industry by 200 basis points. I'm just trying to get a frame of reference for how you view the industry, and then I had one follow-up.

Sure. Here's the line of sight I would give you. When we look at Outback, we've always talked about the number of different levers available for growth, and we're really pivoting to new levers for growth to focus on for 2016. So just for some color, we did the interior remodels which had a 3% lift. We are shifting now to the exterior remodels that have a 5% lift, and we're going to be going after those, aggressively rolling those. Because we know that they really work.

We talked about opportunistic reloads on Outback. We're accelerating and prioritizing those reloads because we continue to see terrific results with them. On the food innovation front, we've really used the innovation that we have had to broaden the menu beyond steak. Whether it was the salad, the second best at seafood, or the sips and snacks menu. We're really shifting the food innovation towards steak and quality and cuts, and you're going to see that authority coming through more on the plate as well.

We are shifting from the rollout of lunch to the growth of lunch. We haven't talked about it, but lunch is performing extremely well for us.

And then we're also shifting in -- we've told you guys that we're investing ahead of growth and technology. We've had little customer-facing technology, that investment in technology is going to yield truth for us as we roll some pretty cool stuff out in Outback next year. As I said, the playbook is shifting to new growth levers and that's what gives us confidence that we will be able to continue to grow for, I guess it will be, the seventh year on comps.

What does that say about the category? We've always said that the category would be choppy and that with traffic it would be plus and minus, and despite five quarters of positive comps, I think with NAP, I think traffic looks like it might come in negative for the year again. That's always kind of come in consistent with our assumptions.

Would you still assume though in 2016 you could be able to outpace the industry by couple hundred basis points, or do your comparisons, at least in the first half, make that more difficult to see in 2016 specifically?

Yes. I think we saw a dynamic change with the resurgence of some competitive activity. And so you know we're -- we're confident in our ability to deliver positive comps on Outback next year. Every measure, we love the new levers. We know what they can do. They've kind of been proven out in test.

We think it's prudent to move away from pegging ourselves to a category when we can't control what the competitors' activity will be doing if it becomes more aggressive. I'll just speak to the momentum that I believe our investments next year will yield for Outback.

And then the other thing is on the cost side of things and on the commodity front, you mentioned a very specific 1% base of inflation in 2016. So I'm just wondering how you're able to zone in on that, presumably it's beef, and what's locked in or whatnot?

And would you think that the labor inflation is not going to totally replace the ease in commodity inflation, and therefore you're in a similar blended basket inflation scenario? Or would you think that 2016 the net effect will be favorable with maybe labor less inflation than perhaps commodities has been in the past couple of years?

Sure. First of all, as you know our supply chain team has done a great job managing commodities over the years, and for competitive purposes on this call, we're not going to talk about 2016 in terms of what's been locked or what's not. Jus know that we're working very hard on 2016.

If the beef market continues to improve, there could be an upside to our approximately 1% guidance. But we will see. And We'll provide additional detail in the February 2016 call.

Our market basket is pretty broad; it's more than just beef. But we'll give you more detail in the 2016 call. We see approximately, Jeff, right now about 1% commodity inflation number, and we'll see where the beef market takes us. On the labor front, we're looking at 3% to 3.5% next year.

We do not have as much exposure to higher-wage markets as some of our competitors do. If you recall our portfolio is kind of a south/mid-Atlantic type of portfolio, but we look at wage rates to be between 3% to 3.5% next year, but we'll again provide more updates on the February call.

Great. Thank you.

Matthew DiFrisco, Guggenheim Securities.

Just a couple of follow-up questions, on the remodel of Outback, I didn't catch it if you said it, I apologize, what percentage of the store base or what's that roll-out going to look like on an annualized basis?

We're going to look to complete that in three years. It's going to be pretty aggressive. We have about -- a couple -- so figure at a clip of around 200 per year.

That's helpful. And internationally, did you just say what the check was in Brazil, given all the inflation down there?

Our traffic was flat and our overall comp was up 6%. That's pretty much -- the rest is pretty much pricing.

And also, just know, we -- inflation tends to run higher than that, so we don't price to inflation in Brazil. We're just absolutely thrilled with the performance in Brazil up 6% in comps.

The other thing that we talk about a lot in Brazil is when you're on a wait it's very hard to increase traffic. We are looking at bump-outs in existing restaurants, and that's why we continue to put up restaurants as quickly as possible, and they continue to perform well above plan, even in this environment. They are exceeding their business plans. It's one of those situations where it's -- there's a wait, so the ability to drive traffic is more limited in existing locations.

Understood. So, the capacity, you're going to look then to unleash some of that capacity or the bottlenecks there.

Yes, we are. And also, as you know, we've kind of gone over the last five years from like 25 stores to 76 Stores. And you know, we continue to do that.

That takes some of the pressure off the existing stores, but again, those stores continue to open well above, despite the environment down there, well above the business case. (multiple speakers)

The other thing is, Liz talked about in the script, we've opened up our second brand, Abbraccio. We have three restaurants there and we're very pleased with the sales performance there, and we're going to be going with a Fleming's franchise business in the first half of 2016.

I was also going to follow-up on the franchising, what else aside from Fleming's in Brazil? What other markets could we see or do you have -- would be the Middle East and the standard ones that we've seen some other casual dining concepts find some license partners?

Yes. There's a tremendous desire for our brands overseas.

Liz has talked about in the past our equity markets being Brazil and China. We see opportunities, Matt, like you mentioned, in the Middle East, in other parts of Asia, Australia, other parts of Latin America, certainly for Outback, and we'll see how the other brands resonate. But we are building capability to increase our franchising opportunity overseas, and hopefully more to follow there in 2016.

Thank you.

Jason West, Credit Suisse

Just shifting gears a little bit to the balance sheet cash flow. Dave, can you talk about what the cost would be to exit the CMBS early, and in terms of the balance sheet overall, why you would be thinking about paying down debt at this point given where the stock value evaluation is? And would you consider holding onto this level of leverage and focusing all your free cash flow on buybacks? Thanks.

Sure. The amount of the prepayment -- if we paid out before January 2017, the amount of prepayment will be dependent on when we pay it down, and I will provide more details on that as we look at the February call, because we'll have -- we'll be further along on this.

We are going to go early on the matter. On share buyback and dividends, yes, we agree. We think those stocks had a very attractive valuation. We believe we can expand our credit metrics based on our EBITDA growth.

And you'll see more from us in that in the returning cash to shareholder arena going forward. So we don't really expect to pay down too much debt. We have to pay down a small amount contractually for our credit agreement every year, but certainly we've shifted now to returning more cash to shareholders.

Great. Thank you.

Michael Gallo, CL King & Associates

Dave, I think you commented in your prepared remarks about starting to see some of the benefits on actual versus theoretical. I was wondering how much of that benefit's still in front of you, and what we should take about in terms of actual versus theoretical and overall productivity gains for 2016. Thanks.

Sure. First of all, our operations team has done a marvelous job rolling this out. It's all been rolled out now, trained, and we are seeing significant gains in food waste management that we either can take the bottom line or reinvest in the business.

Actual versus theoretical will be part of our $50 million plus productivity opportunity next year, as our targets have always been in the past. I think we have a couple years left to go to continue to capture the upside, and the team's just done a marvelous job.

Thank you.

Jeff Farmer, Wells Fargo.

Following up on that and some other questions, with 1% commodity inflation sounded like low single-digit menu pricing and the actual versus theoretical you just discussed, how should we be thinking about potential COG favorability in 2016? I know it's early, you're not going to give me a lot, but any color would be helpful.

Yes, we'll see margin favorability overall next year as we continue to get margin gains and approach our competitors. Obviously, Jeff, we're not going to get the details on our COGs and everything right today, but we expect nice margin expansion next year in our portfolio and we'll provide more details in February.

But certainly going into more favorable commodity environment, certainly with our productivity performance doing as well as we've done; and importantly with our growing international business that has higher margins, these are things that will help us expand margins as we go into next year and beyond.

Okay, thank you, and then you pointed to marketing miscues. I think weekend dinner headwinds for the entire segment, some of the drivers of the below-plan Outback same-store sales for the quarter, is there anything else you guys would point to beyond that?

Well, I think we said, we weren't happy with how our marketing programs broke through, right? So I think overall that the traffic in the category has been challenged and choppy for long time.

And that, you know, we have seen this dynamic of dinner traffic on the weekends, but it's been a -- call it a two quarters, so I think that that's a little early to call it a long-term trend, but we've seen in the CREST data and we've seen in our own data. That being said, I think we've always been kind of pretty outright with -- the levers that we have determine our ability to grow at Outback, and I guess the really the most important thing is that we have lined up additional and new levers for growth that we're kind of gearing up to support.

We're excited about where that's going to take us for 2016.

Thank you. Just one more. I think you were having this conversation with John earlier, but just in reference to the year-over-year declines that you've seen in the other operating expense line, how should we be thinking about that going into Q4 and heading into 2016?

I know you said that there's theoretically some Carrabba's spending ramping back up, but what are some of the other factors that could potentially move that expense line a little bit more into a normalized level in coming quarters?

Well, a couple of things. First of all, those of you that followed us know last year in the back half of the year, we faced significant general liability and health insurance expenses. We get to lap that now. That's a big part of what you'll see in Q4 margins.

Secondly, we have done a very good job in productivity managing our facilities costs and managing utilities. So those things we can see going forward as well. We are a self-insured company, so things do move up and down in insurance, but we had significant headwinds last year that we now get to lap in Q4, and that's an important part of our story for this year.

Thank you.

Brian Vaccaro, Raymond James.

Thanks and good morning. Just two quick clarifications for me. First, Dave, on the food cost, can you give us what the overall year-on-year inflation was on your basket in the third quarter?

Yes. It's been pretty consistent all year, Brian, between 3% and 4%.

So that's what our basket looks like, around 3% for Q3. And we'll finish the year in the high threes.

And then thinking about your 1% commodity inflation outlook in 2016, I know you said there could be upside if beef moves lower, but I just wanted to clarify, does the 1% assume down year-on-your beef inflation? In that 1%?

It's too early to give that guidance because we're in the midst of working through our 2016, Bryan. We'll give you more detail to come in February.

Okay. And then shifting gears, just a quick one on the annual guidance for 2015, is G&A -- just wanted to get some color on G&A. Is that still seen for the year to be flat to slightly up, or has there been some reductions on the G&A front?

G&A will come down to be slightly negative this year. As we manage our cost structure and various line items.

Okay. Thanks.

Sharon Zackfia, William Blair & Company.

A couple of questions. Liz, last year in the second quarter I think you weren't too happy with the marketing program at Outback, and you guys moved really, really quickly and the comps moved back in the mid-single digit really, really quickly.

I'm just curious if you could kind of compare and contrast what you're seeing now and the shift you're going to do on marketing and whether there is that kind of opportunity for a really quick rebound or quicker than we might imagine?

Yes. So, I do think one of the things that we do extremely well is that we are nimble and agile and we do have a lot of analytics at our disposal, so we can zero in.

What we did in the back half of last year was pivot back to the steak authority, which is really important for us and that's where you saw the rebound in the back half of the year. Our commitment this year to really focus on reasserting steak authority, putting it through into the advertising, but as I said, we did go back to an old -- one of the old LTOs, "Steak and Unlimited Shrimp" that predated that shift, and it didn't -- it was a nice value plan and we've seen a lot of competition out there in terms of value and food abundance and that kind of thing, so we felt that we should go back to that. It did not -- it wasn't as consistent with the pivot to steak authority. It did not resonate.

The good news is that we've been focused on our food innovation around steak innovation and quality. And so, we're going to have that news to celebrate and talk about consistent with the shift we made last year in front of us.

So, I think with Outback, it had 0.1% quarter, we're not, obviously happy with it but when I look over the next six years -- the past six years and the levers we have in front of us, I do feel good about our ability to continue to grow this brand. So I think you'll see the innovation on the marketing front, and more meaningful innovation to talk about, but also don't forget the other levers that proved really successful for us like exterior remodels and lunch and some other things.

And just to clarify, the innovation, is that something we should expect more of then in the first quarter of next year? Is it too early to see it kind of pre-holiday this year?

I don't want to get in for competitive reasons, into what were coming out with for Q4 for the holidays. We do have a promotion coming out that we haven't had before for this Q4 for the holidays.

And I think as we look about and talk about food innovation steaks and quality, that's a long-term thing that starts in 2016 in earnest.

Last question, on the franchising globally, can you talk about any specific parameters or goals you might have around that? I'm assuming those would be more markets that you're not already in, but any further dialogue on that would be helpful.

Yes, sure, Sharon. It's markets that we are not in. It's a little too early to begin to state some goals as far as what we think we can do.

I can tell you that we have some transactions that were under discussion, and if they come to fruition, we'll, obviously talk to people about it. Is a little too early to say specific numbers by year.

But we will be focusing in on the Asian peace, the Middle East, Australia, and parts of Latin America. And we have people in our Company that know how to do this and we're building the capability to make it happen. More to follow, Sharon, with some specific targets, but it's a little early.

Thank you.

We'll take our final question from Andrew Strelzik, BMO Captial Markets.

I know when you previously talked about commodity as it relates to 2016, you've been more optimistic about the back half of the year. I'm wondering about the pacing, you know, in 2016 and that 1% commodity inflation. Should we expected it to be better in the back half of the year than in the front half, or is it still too early to tell that?

A little to early to tell, although, you know, if you read the marketplace, what people are saying, they expect a better back half of the year then the front half, but as we finish up our work we will provide more granularity around that. But people -- the marketplace is saying that the back half would be better than the first half.

Okay. And then, you know, you're talking about aggressively spending internationally and you been building out your international teams, just wondering where you are in that process? Is there a long way to go there? Is that starting to slow -- where you sit today versus where you're going to end up?

So, I think we feel great about the infrastructure investments that we've made, and a lot of that was investing ahead of growth, a lot of that's happened. We've got a great team now on the ground in China, a new precedent that's started, that's been built out. And in Brazil, we have infrastructure we need as you saw, to continue to launch new brands.

The whole notion of investing ahead of growth internationally that we've been talking about a couple years has paid off, and we don't see the same pace continuing because now it's about leveraging the infrastructure.

Okay great. Thank you.

Thank you.

Thanks. Well, thank you all for joining us. We look forward to talking to you about the year and the fourth quarter on the February call. I believe -- operator are there any more questions?

There are no further questions on the phone.

Great, everyone have a great afternoon. Takes for joining us.

Again, that does conclude today's presentation. We thank you for your participation. [End of Transcript]