Bloomin' Brands Inc (BLMN) 2023 Q2 法說會逐字稿

Greetings, and welcome to Bloomin' Brands Fiscal Second Quarter 2023 Earnings Conference Call. (Operator Instructions) It's now my pleasure to introduce your host, Tara Kurian, Vice President, Corporate Financial and Investor Relations. Thank you, Mrs. Kurian. You may begin.

Thank you, and good morning, everyone. With me on today's call are David Deno, our Chief Executive Officer; and Chris Meyer, Executive Vice President and Chief Financial Officer. By now, you should have access to our fiscal second quarter 2023 earnings release. It can also be found on our website at www.bloominbrands.com in the Investors section.

Through this conference call, we will be presenting results on an adjusted basis. An explanation of our use of non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures appear in our earnings release on our website as previously described. Before we begin formal remarks, I'd like to remind everyone that part of our discussion today will include forward-looking statements, including a discussion of recent trends. These statements are subject to numerous risks and uncertainties that could cause actual results to differ in a material way from our forward-looking statements. Some of these risks are mentioned in our earnings release. Others are discussed in our SEC filings, which are available at www.sec.gov.

During today's call, we'll provide a brief recap of our financial performance for the fiscal second quarter 2023, and an overview of company highlights and current thoughts on the 2023 guidance. Once we've completed these remarks, we'll open the call up for questions. With that, I would now like to turn the call over to David Deno.

Well, thank you, Tara, and welcome to everyone listening today. As noted in this morning's earnings release, adjusted Q2 2023 diluted earnings per share was $0.74, which compares to $0.68 last year, up 9%. Combined U.S. comparable sales were up 80 basis points with each of our casual dining brands having positive same-store sales. Importantly, this reflected 110 basis points outperformance on traffic versus the industry in Q2. I am pleased with our U.S. results as they continue to validate the strategic and operational framework we outlined for the year. This includes leveraging our leading off-premises business, the addition of sales layers, growing digital capabilities and improving operational effectiveness and efficiencies.

Turning to our international business. Simply put, we had an exceptional quarter. This was led by our Brazil business. Q2 revenues were up 17% due to new unit openings, the Brazil tax benefit and strong same-store sales growth. Additionally, operating profits and margins were up significantly versus a year ago. Our international business is very strong with lots of growth ahead. For us, international is a unique asset in casual dining.

I'd like to thank our teams in the restaurants and the restaurant support center for their continued commitment to serving our guests, their dedication to great hospitality, service and experience is what makes our company so successful. As we look ahead to the rest of the year, we are focused on achieving our full-year guidance and objectives. We continue to have confidence in our strategy to elevate the customer experience while achieving sustainable sales and profit growth.

As a reminder, our key strategic priorities are to drive same-store sales growth, maintain off-premises momentum, become a more digitally-driven company, sustain the progress we've made in operating margins and increased new restaurant openings. Improving same-store sales growth is a multifaceted approach. Sustainable traffic growth, especially at Outback, continues to be the primary focus. We have several initiatives in process to achieve our goal.

As I mentioned last quarter, we are utilizing innovative technology to improve execution and consistency in our restaurants. Outback servers now use handheld technology, which allows them to spend more time with guests and deliver a differentiated guest experience. Our new cooking technology in the back of the house, including advanced grills and ovens is on track to be completely rolled out in the third quarter. Our guests will experience improved product quality and overall meal pacing.

Recently, the annual ACSI Restaurant Study of customer satisfaction was released and Outback Steakhouse has emerged as the industry leader in casual dining, moving from number 6 in 2022 to number 1 in 2023. This is a tremendous accomplishment. The investments we are making are clearly paying dividends. Our guests recognize the actions we are taking to improve the overall guest experience. Over the long term, we expect this to drive sustainable traffic growth. Complementing our restaurant operations is more targeted marketing designed to drive guest frequency, leverage our heritage and build brand equity. Earlier this year, Outback brought back the no rules just right platform, leading into our Asia roots. This is an ad to that goes beyond just marketing is how we reenergize their restaurants with new food offerings, exceptional service and importantly, it ties back to our past. No rules just right highlights our great menu and everyday value. For example, our current seasonal offerings feature new menu innovation that start at an acceptable $16.99 price points.

The third element to our sales-building strategy is introducing additional sales layers. For example, Fleming's launched Social Hour earlier this year. This captures our creative food and drink offerings during the early evening. At Carrabba's, they have reintroduced our successful wine dinners. These highlight the quality and great value that Carrabba's known for, and Bonefish has enhanced their weekend brunch and introduced a social hour. The response to these offerings has been positive, and we are seeing early success. The final sales-driving strategy is improving our asset base. We spent the last 2 years developing different scopes that can now be deployed dependent on a restaurant's need. This is the beginning of a multiyear effort to touch a large percentage of our restaurants. We are on track to remodel over 100 locations this year and will accelerate our remodel pace in years to come. All the initiatives I just described are designed to build sustainable sales and traffic growth now and over the long term.

Turning to our second priority, continuing to capitalize on our leading off-premises business. Total off-premises was 24% of U.S. sales in Q2, and our third-party delivery business continues to perform well. Importantly, off-premises profit margins are comparable to margins of the in-restaurant business. Catering continues to be a growing opportunity for our brands. The Carrabba's team is an industry leader in this space. We recently launched Carrabba's Bistro, which is a lunch-focused catering option featuring a wide variety of sandwiches that represents Carrabba's Italian heritage. We are very excited by the early results and believe this could represent growth opportunities beyond catering. We are also very pleased by the strong momentum we are seeing catering at both Outback and Bonefish. As a result of all of the above, we expect off-premises to remain a large part of our business.

The third priority is to capitalize on our progress to become a more digitally-driven company. Consistent with Q1, approximately 79% of Q2 totaled U.S. off-premises sales were through digital channels. This compares to approximately 75% of total U.S. off-premises sales in Q2 last year. We continue to see positive results with our new online ordering system and mobile app, which has 3 million users. Our fourth priority is to maintain a significant progress in operating margins over the last 4 years in a highly inflationary environment. During this time, we grew our adjusted operating margin from 4.6% in Q2 2019 to 7.8% today. This starts with growing healthy traffic across our in-restaurant and off-premise channels. We reduced the reliance on discounting and promotional LTOs and reallocated advertising spend to more targeted high-return digital channels. We remain disciplined in managing the middle of the P&L and are aggressively pursuing efficiencies in commodity, labor and overhead.

And the final priority is to build more new restaurants, especially at Outback, Fleming's and in Brazil, each have strong sales and profit margins and offer great returns. Domestically, Outback and Fleming's have significant growth opportunity in core geographies. In Brazil, we can more than double our footprint. Today, we have 148 Outbacks, and we expect to have nearly 300 Outbacks in Brazil by 2028. More to come on new unit development on future calls, but we expect to have a meaningful increase in new restaurant development in 2024.

In summary, we are pleased with the success in our business for the first 2 quarters of 2023. We are focused on achieving our annual goals while building a great business that will continue to thrive for many years to come. And with that, I will now turn the call over to Chris, who will provide more detail on Q2 and thoughts for the remainder of 2023.

Thanks, Dave, and good morning, everyone. I would like to start by providing a recap of our financial performance for the fiscal second quarter of 2023. Total revenues in Q2 were $1.15 billion, which was up 2% from 2022, driven by a 0.8% increase in U.S. comparable restaurant sales as well as a 4.1% comp sales increase in Brazil. In our U.S. brands, traffic was down 4.2% in Q2. This is in line with expectations, and importantly, we outperformed the industry by 110 basis points. Average check was up 5% in Q2 versus 2022. Benefits from average check will continue to move a little lower as the year progresses as menu pricing rolls off. We do not intend to replicate the same level of menu pricing this year as we took in 2022. At 24% of U.S. sales, Q2 off-premises increased 100 basis points from Q1. Importantly, the highly incremental third-party delivery business remains healthy and was 12% of U.S. sales in Q2.

In terms of brand performance, Outback total off-premises mix was 26% of sales, and Carrabba's was 33% of sales. Carrabba's already strong off-premises business has been supported by consistent growth in catering. Catering was over 5% of Carrabba's sales in Q2. We are also seeing success in catering at our other brands, and we'll continue to emphasize this sales layer across our portfolio moving forward. As it relates to other aspects of our Q2 for financial performance, GAAP diluted earnings per share for the quarter was $0.70 versus negative $0.72 of diluted earnings per share in 2022. Adjusted diluted earnings per share was $0.74 versus $0.68 of adjusted diluted earnings per share in 2022. The difference between our GAAP and adjusted results in 2022 was almost entirely driven by the required accounting treatment for the Q2 2022 repurchase of a large portion of our convertible notes.

Restaurant-level operating margins were 16.4% versus 15.5% last year. Domestically, the benefits from our pricing and productivity initiatives continue to offset inflation. The technology we are putting into our restaurants is having an increasingly positive impact on our margins. As it relates to inflation, commodity inflation was up 2.8% in Q2. We had favorability in dairy and produce, which helped to lower the overall inflation levels. We do expect commodities to be higher in the back half, particularly Q4, as we lap some 2022 beef favorability that we are able to realize. We still expect total year inflation to be mid-single digits.

Labor inflation was up 5.6%. This was in line with our full-year guidance expectations of mid-single digits. Restaurant operating expense inflation remained elevated at 7.6%. This was driven by higher advertising, R&M and utilities. Also worth noting as it relates to restaurant margins, International segment restaurant margins were up 280 basis points. This was driven by the continued growth in our Brazil business as well as the Brazil tax exemption benefit. Total company operating income margin was 7.8% in Q2, flat from last year. Depreciation expense was up in Q2, consistent with our increased level of capital spending and our investments in infrastructure to support growth. Overall, we feel good about our margins, and we remain well above pre-pandemic levels.

Turning to our capital structure. Total debt was $770 million at the end of Q2. Our current lease-adjusted leverage ratio remains below 3 times. In terms of share repurchases, year-to-date, we have repurchased 1.8 million shares of stock for $43 million. We still have $97 million remaining on the new authorization that the Board approved on February 7. The Board also declared a quarterly dividend of $0.24 a share payable on August 25. We are pleased with our balanced deployment of free cash flow and we'll continue to deploy dollars against additional debt paydown, share repurchases and our dividend.

Before I turn to our guidance, I wanted to provide an update on the latest developments in Brazil as it relates to our eligibility for the Brazil tax exemption we discussed in our February earnings call. During our February call, I mentioned the Brazilian Government enacted legislation that introduced a 0% rate for both corporate income taxes as well as certain federal gross revenue taxes for a period of 5 years. A Brazilian court order reinforced our eligibility for this exemption, and we began to realize this benefit in our financial results.

Recently, the Brazilian legislature unexpectedly passed a new law that eliminated the ability for many businesses to benefit from this tax exemption, impacting many restaurant companies, including our business in Brazil. This change will have the following impacts on our financial statements. First, we had a $4 million one-time tax benefit to our Q2 financial statements as we had to revalue certain Brazil Deferred Tax Assets. Second, we will now be subject to Brazil gross revenue taxes beginning in the fourth quarter of this year. This will reduce our fourth-quarter operating income by approximately $6 million. Given the impact of the Q2 tax upside and the Q4 tax downside largely offset, this new legislation should not impact our ability to attain our 2023 full-year EPS guidance.

Finally, beginning in 2024, Brazil will once again be subject to paying full corporate income tax at an approximate 34% rate. Although we are disappointed with this latest development, we remain on track to receive an approximate $0.25 EPS benefit from this tax exemption in our 2023 income statement representing significant cash tax savings.

Now turning to our 2023 and Q3 guidance. First, we are reaffirming all aspects of our full-year 2023 guidance previously reported on our February 16th earnings call, aside from a change in our tax rate assumption. Given the one-time tax benefit we received in the second quarter, we have lowered our full-year tax rate assumption to be between 12% and 13%. And second, as it relates to the third quarter, we expect U.S. comparable restaurant sales to be 0.5% to 1.5%, and we expect Q3 adjusted earnings per share to be between $0.41 and $0.46.

In summary, this was another successful quarter for Bloomin' Brands, and we are well on our way to becoming a better, stronger, operations-focused company. And with that, we'll open up the call for questions.

(Operator Instructions) Our first question comes from Jeff Bernstein, Barclays.

Two questions. First one, just thinking more broadly about the consumer. It seems like your comp trends were pretty much in line with expectation and ahead of the industry. But just wondering if you're seeing any changes in behavior that you would apply any or all of your brands, presumably any kind of softening? And then I had one follow-up.

Sure. Jeff, we just see the consumer hanging in there. And if you look at the economic reports and you look at everything else about the economy, we're seeing that as well. And the high-end is doing well. And our casual dining brands, we see the consumer hanging in there.

Got it. So there's been no noticeable over the past few months, change in trajectory, whether it's traffic or mix or anything like that, it seems like it's relatively stable.

Yes. No. So if you look at the mix line, I think like we said, middle of Q4 of last year, we turned negative in mix. We were down a couple of hundred basis points in Q1 in mix, still down a couple of hundred basis points in Q2. I expect that negative mix trend to be somewhat consistent as we head throughout the year until we start to lap it in the middle of Q4. So look, it's still negative. I think a lot of that on our part, we believe, is engineered, but there probably is some small element of consumer trade-in parent in that mix number. But other than that, no, I think that -- look, I mean, our guide actually implies, if you look at Q3, a tick up in traffic from where we were in Q2. If you look at Q4, you can simply another tick-up in traffic in Q4. So there is an expectation that the consumer continues to hang in there that our trends continue to improve as we do the things we need to do to improve our trends.

Understood. And then just the follow-up related to your commodity and pricing commentary. I think from commodities, you said pretty much still mid-single-digit inflation. But I'm just wondering what your thoughts are specific to beef, which seems to go on an outsized attention, whether you expect any change. I think you're pretty well protected for this year, but as you start to think about '24. And on the flip of that, I think you said that your pricing won't be as aggressive in the second half of '23. So if you could just clarify what the pricing will be in the third and fourth quarter to mitigate those inflationary pressures? Thank you.

Yes, sure. Well, I think the good news is a couple of things. One, from a beef standpoint, you're right. I mean we've done an excellent shot this year in mitigating exposure to beef. I think the one thing that I called out last quarter that I would continue to call out is that because we did have beef upside in the back half, particularly the fourth quarter of last year, and we were able to take advantage of some of that favorability. We do have a more challenging lack from a commodity perspective in Q4. So our commodities in Q4 will be a little more elevated than that 7% to 8% range versus the 3%, 2.8% that you saw here in Q2. So that's something to keep in mind for the balance of the year. But look, it's way too early to be talking about 2024. We obviously see the same things that you do as it relates to commodities. But I think that one thing our performance this year has shown is that we find a way to navigate uncertain environments in the commodity landscape, and we feel pretty good about that.

In terms of pricing, if you look at -- look, like I said, I would expect, let's just start with check average. As you work through your way through the balance of the year, I would expect check average to continue to tick down. If you saw it in Q1, our average check was in that 6% range, Q2, it's in the 5% range. I wouldn't surprise me at Q3 and landed in that 4% range. And then even closer, a little bit lower than that, maybe in the 3% range or so in Q4. So I would expect that check average to continue to tick down. And I think that's driven largely by menu pricing. I think our menu pricing was pretty consistent in that 7% to 7.5% range over the first half of the year.

I think it would tick down a little bit in Q3, and then it would tick down even further in Q4. We would probably exit the year. Again, we're trying to preserve optionality as it relates to pricing. So we're not going to marry ourselves to a pricing number in the fourth quarter. But if we were to do nothing additional for the balance of the year, you'd exit the year in that 4% to 4.5% range of pricing. But again, because we've had such success with productivity and because we've been able to navigate the commodity environment so effectively, our intention is to not take additional pricing for the balance of the year, which is one of the reasons why we're sticking to the guidance that we've laid out for the full-year.

Our next question comes from Alex Slagle from Jefferies.

I wanted to ask on the development plan and your expectations for the years ahead. It sounds like comps still looking for a material increase in '24 and the comments on Brazil, getting your 300 units by 28. Are there any changes or altering your view at all on where that growth is coming from the next few years by brand or region? Or is that still in line? And then just any comments on the remodels accelerating further in '24 and years ahead, if that's altered at all?

Yes, sure. Well, in a future call in the coming months, we'll provide greater visibility into our development plan. But it's very similar to what we talked about on prior calls. We will see a meaningful step up in development next year. And we're seeing it Outback in Fleming's. And which we're very excited about because both brands have a lot of white space ahead of them, especially in core markets. And we'll continue with our remodel plans in the U.S. as we upgrade our restaurants. So the growth you'll see will be in the unit development will be something we haven't provided to investors in quite some time, and we've got the pipeline to improve it and the returns as well. So that's number one.

Number two, I can't say enough about the Brazil business. The sales, the margins, at one point, we thought we could get to 100 Outbacks in Brazil. We now think we can get to 300. It's got an unprecedented market position down there. And importantly, they're doing with their own cash flow. So they're generating the cash to build the new business. It's primarily led by Outback. We do have Italian business down that we call Abbraccio, but Outback is a lion's share of development down in Brazil. So that business just continues to perform extremely well. And then lastly, I think we can do all of this and yet still maintain our long-term cash distribution strategy on paying down debt, returning cash to shareholders and spend capital within those plans I just talked about. But more to follow in future calls.

As a follow-up to that, the international operating margin, it was up year-over-year like $15 million in the first quarter, another $6 million year-over-year here in the second quarter. And I know there's some of the Brazil tax exemption benefit. But it seems like the underlying margin trend is really strong. And I don't know if you could break that down a bit further and just a read-through of how the margins are doing there just on a base basis.

Yes. No, they continue even if you pulled out the tax benefit. And again, it's going to be outsized. If you look at the International segment, the tax benefit or the tax exemption benefits that we've been receiving is certainly having a pretty material positive impact on their margins. But to your point, outside of that, the benefits that we're getting from check average and from traffic in that business are really driving the day as it relates to the margin upside, particularly when you look at the lines like cost of goods sold, where we've been pretty, pretty favorable over the last, call it, several quarters. I think that you're still seeing inflation. Their inflation is somewhat in line with the same inflationary trends that we've been seeing here in the U.S. But again, given the volumes that those businesses generate and the ability for them to generate high sales volumes and traffic growth, that's really what's carrying the day as it relates to the Brazil business.

Our next question is comes from John Ivankoe, JPMorgan.

A couple, if I may. First, it's a question on COGS. You guys obviously showed a 200 basis point decline in the second quarter, which that's a really big number year-over-year for a restaurant company. And yet, at least in the U.S., same-store traffic is negative. When you think about gross margin ability to maybe reinvest some of that gross margin to drive traffic, new menu understand just no rules just right as starts at $16.99, if that's the right price point. But just philosophically, how do we balance that expanding gross margin with declining same-store sales were declining same-store traffic?

Yes. Well, first of all, our traffic trends outperformed the industry, so I want to make sure we're clear on that. But I completely agree, John. Managing the margin traffic trade-off is so important. And the beautiful thing about when you have strong margin performance, you can reinvest that back in the business as you know so well, right? And so we ask yourself, why are we seeing some of this cost of sales improvement? Well, it's the productivity initiatives we've talked about, but the ovens and other things that we've got going on in our business. And the supply chain team has done a great job managing cost of sales. So that's what we're seeing it, John, but I can assure you, as we think about traffic building initiatives, and Chris talked about how we expect traffic to build the rest of the year, we're going to use some of those margin dollars to reinvest back in the business in some of our offerings. I don't want to get into the details, but that's our philosophy.

Okay. All right. Understood. Secondly, versus 2019, Brazil actually looked pretty consistent between the first quarter and second quarter, but obviously, there is a pretty big one-year fall-off between the first quarter and the second quarter just over 4%. Is 4% a number that you're happy with in Brazil? What does that mean to traffic? And how is it Brazil consumer overall? And how is the Brazil consumer absorbing your expansion in the market?

Brazil consumer is doing well. And each time we build a new restaurant, John, I teased our development team down there because their projections that they give us, they blow them away. So every new restaurant we build is exceeding its expectation. And then the other thing is as we've seen in other businesses and other markets, when you start going into some smaller towns outside the big cities, when you are the main player, you also have development opportunities that we didn't think were possible. We saw that in other businesses. So capital returns are strong, cash flow is strong and the Brazilian consumer is in good shape.

Yes. And John, the only housekeeping item on that is that, obviously, last year, Brazil had a different COVID pattern than we saw here in the U.S. And so there -- Q2 is the first quarter where they're absent some of those big coded lapse that we maybe saw in the first quarter. So that's going to be a little more normalized trend moving forward.

And is there a ticket comment you can make on Brazil, just so we know that. What do you think pricing for…

I don't have it off the top of my head. I'm sorry, but we can get that. We can certainly get that to investment.

Okay. No, that's fine. And the final point, it's a follow-up to Alex's question about development remodels. Can you at least give us a sense -- I think the guidance for this year in CapEx is $240 million to $260 million. Directionally, if you don't want to give us a specific number, I understand at this point, but directionally, what you think CapEx will be 23% to 24%.

It should be in the ballpark, John. I think one of the things as we uptick our remodels, you might see a slight increase, but we're not sure quite yet. But one of the things to think about is we had a lot of IT spending this year because of the ovens and the handhelds and that's coming off. So I think we'll be in that range. We might see a slight uptick, but it's too early to call.

Our next question came from Sharon Zackfia, William Blair.

This year. But I recall prior to the pandemic, you were looking to potentially sell the Brazilian business. I'm just wondering philosophically where you are on key cell strategic alternatives for Brazil?

Yes. There really isn't a market for an IPO or sale right now in Brazil. And as you heard from last prior comments, Sharon, we're thrilled with the direction, but it's more market-based. And we'll always keep our optionality open about that business. But right now, our goal is to grow as rapidly as possible, but there's no market for it right now.

Okay. And then the second question, in the second half of the year, and I know you don't normally talk about concepts, but it sounds like you have different things 31:17 planned. In the first half, we saw Carrabba's lead and Fleming's lag and Bonefish and Outback in between domestically from a comp perspective. Is that how you would expect the second half of the year to progress? Or is there anything initiative-wise where you would expect one concept to strengthen or another to maybe taper off?

Let me talk about a couple of concepts. First of all, Fleming's trends are very strong, even though they were negative in the quarter. That's because we had very high spending in fine dining in the category last year, and Fleming's all performed the fine dining categories. So you look at their trends week-to-week, we see that business to be very strong. And we also see a nice add to that business, which I didn't talk about in the script is the private dining business. We have high hopes for that as people come back to work and come back to the office and done other things. So Fleming's for us is something that we'll continue to see that moving along. So that's the first piece of the business that I think we would see some change in trend, in the balance of the year as far as comps go. But remember, you have to think about what we're lapping. Second one is Carrabba's, they continue to do a terrific job in in-restaurant dining, their catering business and in off-premise. And I think the main thing I want to stress is they just introduced a line of Italian heritage sandwiches that reflect the Carrabba's brand, and it's doing extremely well. And we think we have opportunity beyond catering with that business. And those sandwiches are terrific. And I encourage our investors to get some because they're really great. So I'd say, Sharon, at I'll call out right now is Carrabba's and Fleming.

Next question came from Jeff Farmer, Gordon Haskett.

Just focusing on the Brazil Tax Legislation. Street estimates, as you guys know, across revenue, operating income, EPS, basically every line item does reflect the guidance that you guys provided in early February as it relates to that legislation. So this was strongly implied in terms of not only the release and what you guys just said, but bottom line is, should we be essentially unwinding a 100% of those impacts in our models in 2024 and beyond at this point?

Yes. So I'll give you a little more context on that. That is correct. So in 2024, we would resume paying full taxes back in Brazil. So the way that it works this year is that the value-added tax portion of that is what goes away starting in the fourth quarter. So for the first 3 quarters of 2024, you'd have, call it, a $30 million reduction in sales over the first 3 quarters split relatively evenly and then the corresponding call it, $15 million reduction in operating profit over the first 3 quarters as well. Then if you look at taxes, you're going to have, call it, a $10 million to $12 million increase in tax expense spread out basically over all 4 quarters of next year. It's a little bit lumpy, but not worth calling out and any more specificity. So that's how it would unwind starting next year.

All right. That's helpful. And just one follow-up. So you gave us a little bit of color on the operating expense inflation. It looks like it's come down a little bit. I think you said 7.6%. I might have missed it, but how are you guys thinking about operating expense inflation in the back half of the year?

Operating expense inflation should start to mitigate, right? So more in that mid-single digits. It's been more elevated in the front half of the year because you're lapping the utilities took off a little bit. And so as you start to lap that, it should improve as you get to the back half of the year, lower than -- we're in that 7% to 8% range now. It will probably be more mid-single digits to maybe low to mid-single digits in the back half. Step down from Q3 to Q4.

Our next question comes from Sara Senatore Bank of America.

I wanted to ask about, I guess, the shift in your traffic. You talked about intentionally reducing reliance on discounting and perhaps reducing traffic from consumers who might be solely interested in those price point offerings. I'm trying to understand how you replace that traffic as you move towards the goal of having positive traffic growth. Is that more visits from your core customers? Is it bringing in new customers? And I guess, in that context, if you could talk about the advertising strategy since typically, I think of traditional advertising is having a broader reach. So as you make some of these big changes to Outback in particular and presumably try to reach new customers. How you're thinking about your ability to do that with the digital advertising that you're pivoting to.

Sure. Yes, you're right. We did remove a lot of our discounting and promotions, and we got the customers that use that stop coming to our restaurants, but that was planned. So how are we going to replace that or how we are replacing it right now, and that was set back to what I talked about earlier. With our margin performance, we can reinvest in our products, in our service send you saw that with the ACSI rating at Outback number one that will be sustainable traffic moving forward. So that's what we're trying to do as we invest behind our business.

Now, as Chris talked about, we've got to be very prudent on our pricing. So rather than price up and discount back, we'd rather try and be prudent in our pricing and make sure that value comes to the consumer that way along with great food and great service. Now, we learned a lot as we talked about during the pandemic about advertising. Yes, you can reach a broad group of people with broadcast advertising and that kind of thing. We'll continue to do some of that at the top of the funnel, but we've really learned a lot about the digital space, and that's where we're spending our marketing dollars to target those consumers. We want to bring back the loyal consumers more, and we want to reach, continue to reach for new customers as we build traffic. But the key is going to be to take some most margin dollars and reinvest back in the business. And we may see some of that with additional advertising spend as we go forward, especially at Outback.

Okay. Understood. And then just in terms of what you're already seeing, do you see an increase? And you talked also about digital and membership. Are you seeing an increase in frequency? Is there any leading indicators that suggest, again maybe where that traffic is coming from, whether it's higher frequency, new guests just to help give some sense of as we in that I am going envision improved traffic from here, how we should think about that?

Improved frequency from our dine-in guest to carry out guest and more rich from our third-party delivery, which is an incremental occasion. That's where we're seeing the traffic gain.

Our next question come from Brian Harbour from Morgan Stanley.

Chris, you can see what you're implying for the fourth quarter from an EPS perspective as well. Is any pressure here just about the Brazil change? Or was that you alluded to just commodities there being more pressure in the fourth quarter? Any other drivers of 4Q EPS as we start to think about what you're implying?

So yes, we lose the $6 million. We talked about the benefit from the tax exemptions being somewhat neutral for the overall full-year guidance. But obviously, there is a bit of an interplay between Q2 and Q4. So that is a change, in fact, patterns from where we were a few months ago in terms of how you should think about our fourth quarter. But yes, I think that the commodity is probably the other piece that maybe some folks hadn't fully realized in terms of the piece in the building blocks for the fourth quarter. Those are the 2 big pieces.

The one other thing I would point out for Q4, just overall in the same page, is a little bit of a housekeeping is, it is a 53-week year. So just make it clear, we're going to report our comp sales result for the fourth quarter on a 14-week basis. And we'll be able to provide a 13-week basis as well. The challenge with the way that the holiday shift this year is that if we were to report on a 13-week basis, we have one extra operating day in the 13 weeks because of the timing of Christmas. So we're going to report on a 14-week basis so that you have the same number of operating days in both years, and that makes the comp a little more normalized for yet. But just a little housekeeping there. But no, those are the only 2 pieces I'd point out, Brian, in terms of how Q4 would come together.

Okay. Got it. And then just some of the things around like the new ovens, new grills, handhelds, et cetera. Are we starting to see that to some extent in -- are we starting to see in labor costs, are we starting to see in food cost maybe in the form of reduced waste. Do you think most of that is actually more in front of you? How should we actually see that impact in your P&L?

Yes, we're seeing it right now, and that's why the margins look so good. And one of the reasons why the margins look so good, and I think we've got some more in front of us because we are still rolling out the ovens that will be done this quarter. So as we think about 2024, it's way too early to talk about 2024, but we'll see some of that overlap into 2024 as well. But these investments in handhelds and ovens have been a big part of our productivity this year in the margin benefit.

Our next question comes from Brian Vaccaro, Raymond James.

I just wanted to circle back on the new tech and equipment package. How many of your units have that package in place at the end of Q2? And I guess my question also is just on the stores that have had it in place for, say, 6 months to 9 months, and I'd assume have reached some level of efficiency on it. Could you quantify -- even if it's a range, just any of the benefits you're seeing in key operating metrics, thinking about percent of stakes and back or average ticket time or the waste or labor savings. Just any ballpark you could provide there?

So we are at, what, 3/4 of the way we do the ovens?

Yes. We're about 460 Outbacks. And then heading into the quarter, we had 100 or so remaining...

So we're pretty much through the Outback system that will be done, Brian, during that time. For competitive reasons, I don't want to get into the pieces, parts of where we're seeing it. But here's Brian you see in the P&L, we're seeing an improved food cost as we manage that. We're seeing it in less recooks, we're seeing it in labor efficiency in the P&L. So all 3 of those line items in the P&L, we're seeing demonstrable improvement. And the most important thing, we can talk about the P&L, but the most important thing is that customer gets better service, with handhelds.

We get the table turns, we see we can manage. We don't want to go too fast, okay? We're almost like we got we don't put too fast, but we're seeing the customers seeing better table turns, we're seeing better product, which will lead to greater traffic and they're getting better service. So this is the customer side, that's the most important thing. And then on the P&L side, it's in food cost, labor and some of the recooks and things that we don't have to do anymore. So those are the areas broadly that we see.

And then I would just add on top of that, as you look into 2024 and the reason why we're optimistic that there can be some tails on some of these productivity initiatives. I think the one thing that this new equipment does is it gives us optionality to really look at the labor model and how we configure the kitchen and things like that. So there's opportunity for us to continue to tweak and enhance and provide value to the overall operating model moving forward.

And then lastly, I don't think I'm getting too far ahead here, but you'd expect us on the CEO, it's obvious I walk over to Carrabba and I say, "Well, look at Outback, there opportunity in the Carrabba's business to do similar things." It's way too early to talk about that, but we've learned a lot at Outback that we can apply to other brands.

All right. That's helpful. And Dave, you also noted some significant improvements in the Outback guest satisfactions for going from number 6 to number one. And I'm not sure what level of detail that the survey provides. But I'm curious what areas within that survey. What areas of the guest experience improved the most? Is there any that stood out if you have that level of detail?

Yes. We have our own level of detail as well, Brian, and that's stake accuracy and customer satisfaction growing how we're cooking our stakes and its service attentiveness and response to our customers. I want to see our managing partners out in the restaurants, talking to customers, and we want our service to engage. But with our own internal data, we see the state accuracy and the service levels improving.

All right. And then just 2 quick numbers questions. Chris, on other OpEx, could you share what was the advertising spend in the second quarter? Maybe remind us how that compared to last year? And then what does your guidance embed in terms of the second half spend?

Yes. So if you look at advertising in Q2, we spent call it $27 million in total, including international. And last year, we spent $23 million. So we had about a $4 million pickup. And I would say that you're going to see year-over-year increases in advertising. I don't know we're still TBD on the level of that, but I think that you can expect to be up year-over-year in Q3 and Q4.

Okay. And then just on pricing, you talked about it earlier, but I just wanted to confirm your second-half guidance assumes you take no additional pricing from here? And then can you remind us also of any pricing actions that you took in the second quarter or the first half of the year?

Yes. We took a little bit in the second quarter. So that takes away some of the need to take pricing in the third Q3 or Q4. It was obviously pretty low levels of pricing. I think that in Q3 or Q4, we're still going to retain the right to change our minds in terms of how we take or think about pricing. But certainly, in the guidance that we provided, yes, we're not contemplating material levels of increased pricing at all over the back half of the year from this point.

Our next question comes from Dennis Geiger for UBS.

I wanted to ask another one on the expected improvement in traffic trends and the strength in the satisfaction scores that you spoke to. Just based on the strength of that survey, curious if you could touch a little bit on improving satisfaction and how you think about converting that to visits, what lag there might be based on the number of times that your customers visit per year, you're probably starting to see some of that. But just curious if you could provide a little more color on that benefit and the timing perhaps of that.

Yes. That will build because we're not a business that has people come every month or 20 times here or something like that. They come a few times a year. Our frequent users come more often. So obviously, they'll see it, but this is something that sustainably will build with this kind of improvement. And when you put on top of it, improve the ambiance with remodels, this is going to have a sustainable improvement in our traffic trends. And the good thing about it is we're going to be able to see it because we're remodeling by sections of the country. So we're starting in Florida. So we'll be able to see how that looks. And so we'll be able to adjust our strategy accordingly. But this is something that's going to build over time because of the guest frequency of our business.

Very helpful. And then, just one more. A lot of good things going on within the restaurant, but can you talk a little bit more about the off-premise and delivery opportunities from here, solid results in the quarter. But just curious how you're thinking about those opportunities going forward and how you're looking to capitalize on the opportunity that's still out there for you.

Got it. The consumer wants convenience, and we've built our capital strategy around providing that convenience and our to-go rooms and our delivery room and through our technology, we're continuing to make significant progress in our technology to ease ordering for our customers. And so therefore, with that business, between carryout and in-restaurant, there's a lot of overlap, right? The customers either comes in to eat or does carry out. But in delivery, especially third-party delivery, that's an incremental occasion and we'll continue to invest heavily in that because that's a customer opportunity for us.

And then finally, we're seeing that the consumer loves our catering business. Again, it's an off-premise opportunity. Carrabba's is leading the way in that, and they've just developed their line of sandwiches that I'm not going to get into details on it. But boy, it is being customers responding. And we think we've got opportunity beyond catering in our restaurants. So this is a great example of how an off-premise business can help an in-restaurant business and the innovation we can use in other places in our business. It's clear the customer likes convenience, and we're there to deliver it.

Our next question can be from Andrew Strelzik from BMO Capital Markets.

My first question is about Carrabba's development. And within your optimistic unit growth outlook that you talked about over the coming years, it's really Outback and Fleming, which has been very consistent. What would take for Carrabba's to play a more meaningful role, especially given the off-prime and catering and the optimism you talked around there, I would think maybe new formats to market. I don't know if you think there's more of an opportunity there. Any color would be great.

Yes, there's an opportunity Carrabba's. I generally don't like to go public anything until we have a pipeline built and I can talk about some more. But there's an opportunity for Carrabba's clearly. The performance has been terrific. The team is doing a great job. But until we build the pipeline a little further, it's something that continue to hold back on a little bit. But certainly, we're looking at it and thinking about it. Having said that, the pipeline at Fleming's, Brazil and Outback is filling up every day and looks very strong. So more to come on development, but Carrabba's certainly earned the right to more expansion.

Okay. Great. And my other question was just on competitive activity within the category. And what are you seeing? Does it feel still pretty rational? And I guess with most expecting pricing to roll off, any concern that there might be more over-traffic driving efforts across the category and what that might mean.

Yes. In the categories we play in, it's been very rational. And we certainly don't want to do any discounting and things like that. We intend to build value other ways like we talked about on this call. But it's been a very rational environment in our section of the business. Other parts, I don't really want to comment on because we don't really play in those areas, but it's been a very rational way about going to business.

There is no further question at this time. I should like to turn the floor back over to Mr. Deno for closing comments. Please, sir, go ahead.

Thank you, everybody, for listening and your interest in our business, and we look forward to talking to you in October on our Q3 call. Take care.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Have a nice day.