達登餐飲 (DRI) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Darden Restaurants Fourth Quarter Earnings Release Teleconference.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question and answer session with instructions given at that time.

If you should require operator assistance during the call, please press star then zero, and an operator will assist you.

As a reminder, this teleconference is being recorded.

I would now like to turn your conference over to the Vice President of Investor Relations, Mr. Matthew Stroud.

Please go ahead, sir.

Thank you, Bill.

Good morning.

With me today are Joe Lee, Darden's Chairman and CEO;

Linda Dimopoulos, Darden's CFO;

Drew Madsen, President of Olive Garden;

Kim Lopdrup, President of Red Lobster: Laurie Burns, President of Bahama Breeze; and Clarence Otis, President of Smokey Bones.

We welcome those of you joining us by telephone or the Internet.

During the course of this conference call, Darden Restaurants' officers and employees may make forward-looking statements concerning the company's expectations, goals or objectives.

These forward-looking statements could address future economic performance, restaurant openings, various financial parameters or similar matters.

By their nature, forward-looking statements involve risks and uncertainties that could cause actual results to materially differ from those anticipated in the statements.

These risks and uncertainties include competition in the restaurant industry, economic and market conditions, food and labor costs, the availability of suitable sites for new restaurants, government regulations and policies, changes in consumer tastes and demographic trends, weather conditions and acts of God and other risks and uncertainties discussed in the company's SEC filings.

Because of these numerous variables, you are cautioned against placing undue reliance on any forward-looking statements made by or on behalf of the company.

A copy of our press release announcing our earnings, the form 8-K used to file the release with the Securities and Exchange Commission and any other financial and statistical information about the period covered in the conference call, including any information required by Regulation G, is available under the heading "The Numbers" on our Web site at www.darden.com.

We plan to release same restaurant sales results for fiscal June 2005 on Monday, July 12th, and we plan to release same restaurant sales for fiscal July 2005 on Monday, August 9th.

We plan to release fiscal 2005 first quarter earnings and same restaurant sales for fiscal August 2005 on Wednesday, Sept. 22nd.

We released fourth quarter and annual earnings yesterday afternoon.

Results were available on First Call, PR Newswire, and other wire services.

Let's begin by updating you on our fourth quarter and fiscal year results.

On May 11th, we announced asset impairment and restructuring charges of $23.1m after-tax, or 14 cents per diluted share.

We closed six Bahama Breeze restaurants and impaired four others, and also impaired one Red Lobster restaurant and one Olive Garden restaurant.

Including these charges, fourth quarter net earnings was 53.7m and diluted net EPS was 32 cents, a 9% decline from last year.

On and annual basis, we reported net earnings of $231.5m and diluted net EPS of $1.36.

Excluding the charges, fourth quarter net earnings was $76.8m and diluted net EPS was 46 cents, a 31% increase from last year.

Annual net earnings was $254.5m and diluted net EPS was $1.50, a 15% increase from prior year.

These results include the net impact of the 53rd week, which contributed approximately three cents diluted net EPS for the year.

Now, I'd like to turn it over to Joe.

Thanks, Matthew.

Well, Darden had a strong year of financial results even as we addressed several challenges along the year and, at the same time, we invested in our businesses and we strengthened our teams, and we also achieved sales of over $5b.

Olive Garden had an outstanding fourth quarter and fiscal year, delivering results that exceeded our expectations.

Red Lobster is improving, as evidenced by the critical indicators of operating excellence such as high guest satisfaction scores and operating efficiency with more profitability.

We strengthened the management team at Red Lobster when we announced the promotion of Kim Lopdrup, a 19-year industry veteran to President of Red Lobster.

We built upon that strength with the promotion of Kelly Baltus [ph], a 19-year casual dining veteran, and he's Executive Vice President of Operations for Red Lobster, and we also had the appointment of Jane DeAnge [ph], a 10-year casual dining veteran to Senior Vice President of Human Resources for Red Lobster.

Bahama Breeze also delivered much improved results this quarter.

The asset impairment and restructuring we took in May allows Bahama Breeze to focus on its best performing restaurants, and we're seeing good momentum in Bahama Breeze.

Smokey Bones has been well received by the consumers and continues to expand rapidly.

They opened 30 restaurants this year, including 10 in the fourth quarter.

We believe the casual dining industry is a vibrant industry with good long-term growth prospects, and that is going to be taken full advantage of by Darden because we know the industry offers us the opportunity for consistent and solid growth.

Linda will now provide detail about our financial results for the fourth quarter and our thoughts on fiscal '05.

Drew, Kim, Laurie and Clarence are here.

There will discuss their respective businesses in brief, and I'll come back with a few closing comments and we'll take questions.

Linda?

Great.

Thanks, Joe.

As Matthew mentioned, we reported that net earnings in the fourth quarter, excluding asset impairment and restructuring charges, were 76.8m or 46 cents per share, which is a 31% increase in diluted net EPS.

Annual net earnings for the full fiscal year were 254.5m or $1.50 per share, excluding the asset impairment and restructuring charges.

Fourth quarter operating profit increased at Olive Garden, Red Lobster and Bahama Breeze.

While Smokey Bones was less diluted this quarter than the same quarter last year, the favorable effect was offset by our new business division, which was more diluted this quarter.

Darden's total sales increased 10.7% in the fourth quarter as a result of same restaurant sales growth at Olive Garden, our operation of 16 more restaurants than in the fourth quarter of the prior year and the additional operating week.

For the fiscal year, Red Lobster opened nine restaurants and closed two.

Olive Garden opened 23 restaurants and temporarily closed four, all of which will be rebuilt and open in fiscal 2005.

Bahama Breeze opened four restaurants and closed six, and Smokey Bones opened 30 restaurants.

Olive Garden reported positive same restaurant sales of 5% for the quarter on a 13 week versus 13-week basis, achieving its 39th consecutive quarter of same restaurant sales increases.

For the fiscal year, Olive Garden had a same restaurant sales increase of 4.6% on a 52-week basis.

Red Lobster had a same restaurant sales decrease of 6.4% for the quarter on a 13 week versus 13-week basis and a 3-1/2% decrease for the fiscal year on a 52-week basis.

Bahama Breeze opened one restaurant during the quarter in Pittsburgh.

This is a new, lower-cost prototype, and we are very pleased with the results thus far.

As we announced in May, we closed six restaurants and impaired four others.

This action allows Bahama Breeze to focus on the most profitable restaurants as they build their business.

We will postpone any new restaurant expansion at Bahama Breeze while we evaluate the new prototype in Pittsburgh.

As a result of these actions and other steps taken in fiscal 2004, we now expect Bahama Breeze to be accretive to earnings in fiscal 2005.

Smokey Bones opened 10 restaurants during the fourth quarter.

It plans to open a total of 30 to 40 restaurants in fiscal 2005.

With the increase in new restaurant openings, Smokey Bones will remain dilutive to earnings in 2005, but we anticipate that it will be accretive in the second half of the fiscal year.

In terms of margin analysis in the fourth quarter, food and beverage expenses were 139 basis points better than last year on a percentage of sales basis.

There were two reasons for this.

There was a more favorable promotional mix and menu mix at Red Lobster, and our other businesses are becoming a larger portion of the company's food and beverage expense.

Looking to fiscal 2005, we expect food and beverage as a percent of sales to be relatively flat to fiscal 2004 despite a more challenging food cost environment.

We have some forward contracts we're headed in place on many of our products and, in some cases, we've purchased inventory to lock in our positions.

Fourth quarter labor expenses were 105 basis points higher than last year on a percentage of sales bases for several reasons.

Olive Garden's successful performance meant higher bonuses were paid to our managers.

Rising healthcare insurance, higher wage rates and other benefits costs were also a factor.

Restaurant expenses in the fourth quarter were 32 basis points lower than last year on a percentage of sales basis.

There were several reasons for this.

Worker's compensation was favorable this quarter due to a yearlong focus on reducing claims, and there was some sales leverage as well.

Utility costs were favorable but offset by higher pre-opening expense on a year-over-year basis.

Selling, general and administrative expenses were lower on a percentage of sales by 15 basis points primarily due to sales leverage at Olive Garden.

We would have had more favorability in this category except for two accruals.

We increased our accruals by $5m for litigation related costs, and we made an additional 3.5m contribution to the Darden Foundation in the fourth quarter.

The tax rate for the fourth quarter was lower versus last year on a reported earnings basis.

This reflects the impact of the asset impairment and restructuring charges we incurred in the fourth quarter that lowered our reported earnings, while the tax credits we earned, mostly the FICA and the WOTC, were greater than the prior year.

For fiscal 2005, we expect the tax rate to return to approximately 34%.

Finally, we repurchased over 4.4m shares of our common stock in the fourth quarter.

Since beginning our repurchase program in December 1995, we have now repurchased 109.2m shares under authorization of total 115.4m shares.

In dollars, this amounts to almost 1-1/2b of share repurchase dollars, including the 235m we spent in 2004.

This demonstrates the significant cash flow we generate whether in periods of strong performance or more challenging times.

The total impact of a 53rd week was approximately six cents per diluted share, of which three cents is reflected in our fourth quarter diluted EPS.

As we indicated throughout the year, we intended to invest roughly one-half of the gross amount of the 53rd week in our business.

We invested in several areas such as brand building initiatives at Smokey Bones, extending the life of our restaurant manager benefit plans, incremental marketing activities such as research and advertising in the last week of the year, and new leadership development and training initiatives to facilitate our future growth.

We are pleased with the sales growth achieved by Olive Garden in fiscal 2004, and recognize we have some challenges at Red Lobster.

For fiscal 2005, we believe that combined same restaurant sales growth of 1 to 3% is a reasonable expectation, given the current state of our businesses.

Of course, there will be some month-to-month variability where specific factors, such as differences in our promotional calendars and holiday shifts, put us above or below that range during the year.

In fiscal 2005, we expect to increase our restaurant base by approximately 50 to 60 restaurants, similar to the net new restaurants we added in 2004.

We expect to open 15 to 20 Olive Gardens and 30 to 40 Smokey Bones and two Red Lobster restaurants.

At present, we are not planning to open any Bahama Breeze restaurants this fiscal year.

We believe that, in a normalized economic environment, a long-term annual diluted EPS growth rate in the double-digit range is achievable.

However, given our near-term focus to strengthen the performance of Red Lobster and Bahama Breeze, the continued rollout of Smokey Bones as well as some uncertainty in economic conditions and the extra operating week in fiscal 2004, diluted EPS growth in the range of 8 to 12% is our expectation for fiscal 2005.

This compares to $1.50 in diluted EPS for fiscal 2004, excluding the outside impairment and restructuring charges we incurred.

Of course, after the same restaurant sales growth, there always can be some quarter-to-quarter variabilities where there are specific factors that put us above or below their range.

In terms of a pattern of growth in fiscal 2005, we believe the first and second quarters are a bit more challenging than the third and fourth quarter.

We expect modest year-over-year earnings growth in the first quarter and second quarter, with solid improvement in the third quarter and the fourth quarter.

I'll now turn the mike over to Drew for his comments about Olive Garden.

Thank you, Linda.

This was a great quarter for Olive Garden that completed an outstanding year where we significantly exceeded our financial commitments.

Total fourth quarter sales grew 15.7% driven by strong same restaurant sales growth, revenue from 19 net new restaurants and sales from the additional operating week.

For the year, total sales increased 11.1% and exceeded $2b for the first time.

Average annual sales per restaurant also achieved $4m for the first time.

This strong sales growth combined with effective and sustainable cost management across our business helped us achieve double-digit growth in operating profit for the quarter and for the year.

More specifically, Olive Garden set new Darden records for operating profit, return on sales and return on capital during fiscal 2004.

Our foundation of operations excellence has never been stronger.

In the fourth quarter, we achieved new best-ever levels of performance in total quality assurance plus restaurant team and restaurant manager turnover.

We also continued to leverage our strong sales growth while eliminating unnecessary costs.

In particular, we reduced food, beverage and restaurant expenses as a percent of sales while maintaining best-ever levels of guest satisfaction.

New television advertising featured four new entrees plus traditional favorites during the fourth quarter, providing compelling new reasons to visit our restaurants and further strengthening our brand equity.

New Steak Gorgonzola Alfredo plus Chicken and Roasted Red Pepper Alfredo were featured early in the fourth quarter.

New Parmesan-Crusted Chicken and Parmesan-Crusted Shrimp ended the quarter.

Beverage alcohol sales increased 4% for the year and remain an opportunity area.

Significant investments in training and leadership development were made during the fourth quarter to help ensure continued success.

Olive Garden was also recognized as one of the top 100 training companies in America.

In summary, Olive Garden is a well-positioned and trusted brand, consistently superior in restaurant operations, highly effective marketing and a strong, principles-driven culture.

We are excited about our future and look forward to achieving even higher levels of success.

Now, Kim will comment on Red Lobster.

Thanks, Drew.

We're encouraged that Red Lobster was able to increase profits during the fourth quarter and for the year as a whole despite significant challenges.

Highlights are as follows.

One, we made major improvements in guest satisfaction as the year progressed.

Both internal and external measures indicate that we tied or be our previous best-ever overall quality-- overall quarterly guest satisfaction levels during the fourth quarter.

We are committed to making additional improvements during the coming year.

Two, we improved our operating efficiency.

Our operating margins increased versus the previous year during the first quarter and for the year as a whole.

Again, we are targeting further improvements during the coming year.

Three, during the fourth quarter, we launched a transitional ad campaign from our new ad agency, The Richards Group.

Internal research indicates that our ad awareness rose sharply during the fourth quarter, and that our overall brand imagery also improved to match our previous best-ever levels.

We aim to make additional improvements to our advertising during the coming year.

During the quarter, we completed our strategic review and made great progress sharpening our brand identity.

Although we won't disclose specifically today, we have identified opportunities to enhance our brand's already strong appeal.

Five, seafood, like most categories, experiences ups and downs.

Industry data suggests that, at times during fiscal 2004, casual dining seafood eatings were at lower levels enduring previous periods, but these trends have been moderating and we believe seafood eatings may be again growing.

Nutrition is a major opportunity for Red Lobster since most seafood is very low in carbs, fats and calories.

Although we do not intend to align ourselves with any specific diet, you will see us address the nutrition issue in the near future.

There has been a great deal of work behind the scenes to strengthen the middle of our menu.

We're using a disciplined approach, testing new food to ensure it delivers high guest satisfaction, fits our desired brand image, works well operationally in our restaurants, and is not dilutive to margins.

Because we're being thorough, it will take a little while before you see most of the new menu items that are currently in development, but real progress is being made.

We believe the seafood category is very attractive, and that it will grow over time as the population ages and becomes more diverse.

Further, we believe Red Lobster has strong competitive advantages within the seafood category, and that we're already starting to build positive momentum in many areas.

We recognize that we have much more work to do to fully unleash the potential of this great brand, but our organization is excited about Red Lobster's future.

And now, Laurie will comment on Bahama Breeze.

Thanks, Kim.

We're encouraged with our progress at Bahama Breeze.

The changes we have made over the past year to broaden our appeal and improve financial performance are working, and our new lower-cost prototype in Pittsburgh is demonstrating promising early results.

Our new lunch business has continued to grow as awareness of that day part increases.

Lunch is positively impacting our dinner business as well by introducing the brand to a new group of users, and guest response to our new dinner menu, including the daily specials page, has been favorable.

As a result, we've seen improvement in comparable sales at dinner over the last three quarters.

We've also significantly improved restaurant level operating expenses, particularly labor and food waste, as our restaurant team has mastered the significant changes that were implemented during the first half of the year.

The closing of six restaurants in May will continue to have a positive impact on the performance of Bahama Breeze.

These sites were not in the best locations for our brand, and depressed the financial results of the company.

We were able to move many of our managers from the closed restaurants to higher potential locations, strengthening our restaurant teams.

We're pleased with the early success of our new prototype in Pittsburgh.

We reduced our initial investment by approximately 20% versus prior prototypes while retaining the elements that helped create the Bahama Breeze atmosphere that guests love.

Things like the big timbers, high ceilings, the open display kitchen, colorful decor and quality finishes.

The prototype is working very well operationally, and is exceeding our early guest experience, guest count and financial expectations.

So, we are excited about the long-term potential for Bahama Breeze.

Guests continued to tell us that they love our terrific Caribbean-inspired food, drink and atmosphere, and the brand has very strong appeal as evidenced by average unit volumes of $5.2m in our 32 restaurants.

With an improving business model in all of our restaurants and promising early performance of our new lower-cost prototype, we are well positioned to become a meaningful contributor to Darden's future earnings.

And now, Clarence will comment on Smokey Bones.

Thanks, Laurie.

I'm delighted to report that we've really made some tremendous progress this year at Smokey Bones.

We once again nearly doubled our size, going from 39 restaurants and operations start of the year to the 69 we ended the year with.

And as we expanded our business, we were able to achieve two things that are essential for future success.

Based on fan survey, total quality assurance and guest feedback results, we know that, first, we maintained high levels of operating excellence and, secondly, that we continued to have very strong brand acceptance.

What's especially impressive is that we saw both of these strengths, strong operating excellence and strong brand acceptance, across all regions of the country, and each was equally apparent in both our new restaurants and our established restaurants.

The net of it all is that we continued to enjoy solid sales per restaurant averaging $3.2m this year.

We believe these results are a testament to three important factors.

One, they're a tribute to the great job that Blaine Sweatt and the new business team did in developing a concept that truly has broad everyday appeal.

Two, the results speak to the strength of the restaurant and restaurant support teams at Smokey Bones.

We have excited people, take great pride in what they're delivering to our guests, they're excited about the tremendous growth we're experiencing.

And then thirdly, our operating excellence and our brand acceptance reflect our approach to growth, and that approach involves making significant investments to ensure we have a strong foundation.

We've talked about many of those things with you in the past.

As we have each year since we first opened, we also learned some important things about the business this year.

We know, for example, that while we have strong brand acceptance across the country, there's still meaningful regional variation in per-restaurant sales.

We believe much of that has to do with low brand awareness in some areas, and we took a first step toward building on our strong brand acceptance by retaining Lowe Worldwide [ph] as our advertising agency to help us communicate with consumers more consistently and more effectively.

I'd say all in all, fiscal 2004 was a very successful year for Smokey Bones, and we've positioned ourselves for continued strong growth.

In fiscal 2005, as we've indicated, that growth will take the form of 30 to 40 new restaurant openings which is an acceleration from the 30 restaurants we opened this past year.

And now, I'll turn it back to Joe for some final comments.

Thanks, Clarence.

Well, overall, we're pleased with the overall results of Darden for this quarter and this year.

We've got solid management teams in place that are committed to building a great company, one that will last for generations.

Olive Garden continues to demonstrate how strong brand positioning brilliant with the basics in in-restaurant operations, great restaurant support and compelling advertising combined to drive excellent guest satisfaction and consistent guest count growth.

Red Lobster is making progress on improving in-restaurant operations, restaurant support, advertising, and this quarter's results reflect that progress.

We have a new leadership team in place.

We are expecting to continue improving our operating efficiencies, and we have in place a strategy for future growth.

Bahama Breeze continues to build its business, too.

It's on the road to profitability.

They have a better guest experience, improved cost controls, and a more appropriate level of investment for the future.

Smokey Bones represents a meaningful business opportunity for Darden.

It's maintaining strong operational focus where the guest experience is not being compromised and, in fact, being improved while it continues to expand very rapidly.

And we have two large brands.

We have two brands that are meaningfully above the $2b sales mark, and we have two emerging brands and a focus on operating excellence and effective brand building.

We're making progress as we strengthen our business, and I'm confident that we will achieve long-term success now and for generations.

And now, we'd like to take your questions.

I'll turn it back to Matthew to run the Q&A session.

Thank you.

Ladies and gentlemen, if you wish to ask a question, please press star, then one on your touchtone phone.

You will hear a tone indicating you have been placed in queue, and you may remove yourself from queue at any time by pressing the pound key.

If you're using a speakerphone, please pick up your handset before pressing the number.

We ask that, when your line is open, you please ask only one question at this time.

Once again, if you do have a question or a comment, please press star then one.

The first line we'll open is John Glass with CIBC.

Please go ahead.

Thanks.

Good morning.

Could you comment a little more on your '05 earnings outlook, particularly as it relates to back loading some of the earnings growth?

You've been able to achieve in the last couple of quarters some significant earnings growth despite the shortfalls at Red Lobster.

You've got some fairly easy year-over-year earnings comparison in the first half.

So, could you maybe give a little more context as to what you see in the near term maybe from the expense side of the business that we didn't anticipate and/or maybe some clarity of what you're thinking about Olive Garden over the next couple of quarters?

Thanks.

Linda, you take the first part of that.

We'll let Drew comment on Olive Garden.

OK.

We did see some improvements in the first half, but just not as great as we would anticipate in the second half as we get more momentum around Red Lobster.

That's clearly the biggest driver of that.

We also, as I said, expected Smokey Bones to be more accretive, as well as Bahama Breeze, in the back half as well, which starts to contribute more meaningfully to operations-- operating profit improvement.

Drew?

Olive Garden is very well positioned to continue both top line growth and operating profit growth.

Our same restaurant sales slowed down a little bit in May, but that was primarily due to reduced marketing support.

We had one less week of advertising and slightly less coupon support, and we fully expect to continue solid performance into next year.

The next line we'll open is Mark Kalinowski with Smith Barney.

Please go ahead.

Hi, just two things I wanted to ask about.

First, on the same-store sales outlook, you're saying on the call one to 3% combined for Olive Garden and Red Lobster.

I didn't take that away from what I read in the release yesterday.

So, to be clear, you have not stated an expressed goal for Olive Garden by itself, and you have not stated a goal for Red Lobster by itself.

Is that understanding correct?

That's correct, Mark.

OK, so it might be wise to assume your internal goals for Olive Garden may be above that range and Red Lobster below that range?

I'd say that's directionally correct.

OK.

The second thing I wanted to ask about is just about the long-term annualized earnings growth.

A year ago, management was pretty adamant that it could achieve 15% or better earnings growth over time annualized, and now it looks like you're saying double-digit growth is what's expected.

What led to the downward revision, and in relation to what management was thinking a year ago, it just seems a little striking that you were so confident a year ago in the 15% plus outlook and have now backed away from it.

Part of that, Mark, was-- this is Joe-- was the fact that we were looking at very long-term when we were talking 15, and we were giving guidance for near-term, and it seemed to be people were confusing the two.

But Linda can amplify and explain this a little better.

Go ahead, Linda.

Yes.

First of all, we've tried to express many times how confident and excited we are about the potential for this business, and this company particularly.

We do continue to, as you know, have some challenges with Red Lobster, and we want to make sure that we are clearly focused on that and doing the systemic sort of changes we need to build that business for the long-term.

We also know that we will ultimately need to have more unit growth to achieve those long-term, and we're going to be very focused on working to achieve those levels as well.

And so, while we do believe that we are clearly in the range of 15%, we feel it's more appropriate to back off that a bit and give ourselves a little bit more breathing room.

Next line I'll open is Matthew DiFrisco with Harris Nesbitt.

Please go ahead.

Hi.

My question I guess is on Olive Garden.

The May comp seems to have slowed a little bit and the traffic turned negative for the first time in a while.

Are you citing then I guess the less-- one less week of ad sales, or is there something that you're addressing now to try and reverse that before it becomes a trend?

And then also, I guess just to follow up with Linda, if your very long-term growth rate is around 15% EPS, I would presume-- or still 15%-- should we presumed then there's less likely of a chance to change possibly the dividend policy?

OK, do you want to take the--?

--OK, well, let him take the first question.

Let Drew go ahead and answer the first part of that.

In terms of our sales at Olive Garden, we do think that the primary reason we had negative guest count growth was reduced marketing support, and we anticipated that when we put together our fourth quarter plan.

That was just a timing versus last year, and for the quarter we were very strong.

But, one less week of media and less coupon support versus last May did result in, as anticipated, slightly lower growth in May.

In addition, the category, as you know, slowed down a little bit at the end of the year, but I wouldn't take from that that there's anything fundamentally that we need to address to restore growth at Olive Garden.

As we indicated, the long-term double-digit growth rate, we're not saying its 15%.

However, we do intend to invest in this business where appropriate, take advantage of the growth opportunity that is here.

We enjoy strong cash flows, and we intend to have the opportunity to invest them where appropriate in our business.

And so at this time, we would expect to continue with our current policy approach of share buyback versus dividend distribution.

And reconfirming that our long-term rate that we want you to focus on is a double-digit rate, and we will keep giving you guidance on the shorter term of that as we are for next year.

The next line we'll open is Robert Derrington with Morgan Keegan.

Please go ahead.

Yes, hi.

Linda, could you give a little bit more color to the comment about Q1 and Q2 and the earnings growth in that time, some color around the consolidated cost of sales, labor costs, etc.?

At this point, we would not give quarterly detailed guidance of that nature.

The next line I'll open is Howard Penney with BFR.

Please go ahead.

Hi, thanks very much, good morning.

I'm trying to reconcile the commentary about Red Lobster and the guest satisfaction at levels-- I think you used best ever-- and the customer counts that continue to decline.

How do those two correlate, given the great guest satisfaction, or is it that the guests that you are serving are very satisfied, but you're not just bringing in new guests?

And just Kim, if I can understand, since you've come into Red Lobster, have you signed off on the turnaround plan that was in place before you took over or, given the fourth quarter strategic review, are you going to initiate your own initiatives and how you see Red Lobster and what needs to be fixed?

Thanks very much.

Let me hit the first part of that question and give it to Kim for the-- for amplification of the latter part.

The guest satisfaction measures generally precede a longer-term trend in the business, so it takes a while of improved guest satisfaction scores before you see that translate into traffic.

Even so, we've seen some improving trends in the decline in month-to-month as we've gotten into the end of the quarter, and these guest satisfaction measures are fairly recent.

They're just coming up in the fourth quarter of our business.

So, it would normally project that this will be a positive impact as we go forward, and as Kim has made many of the improvements that he's making in addition to guest satisfaction improvements in the area of advertising.

But Kim, you want to further comment on the plan or the guest satisfaction?

Yes, and just to build on that.

I mean, our typical guest comes in three to four times a year, so it could take some time before improved guest satisfaction translates to more frequent visits, but we do believe that there's a strong correlation there and that the rising levels of guest satisfaction are a very strong leading indicator.

Secondly, not only have I signed off on the turnaround plan, I helped create in my prior role, and I support it enthusiastically.

The next line I'll open is Jason Whitmer with FTN Midwest.

Please go ahead.

Good morning.

Two thoughts, one on labor.

It seems like you had an easier comparison this quarter and an extra week, and it looks like it needs some attention there.

And then second, with Kim and your early going on Red Lobster and kind of continuing on the fix-up plan, have you see anything on the simplifying of the operations already that can go into place here over the near-term?

On the simplification of operations, we're looking at a number of things.

One of the early things we're doing is that we've begun designing our promotions to make it easier to execute them in the restaurants.

An example, which we talked about on the last call, is that our most recent jumbo shrimp promotion was designed as a single station plate and was very, very easy to execute.

Our current promotion, lobster and shrimp, is also a very easy promotion to execute.

We're designing the marketing plan and general to reduce the level of churn and unnecessary change in the restaurant so that the restaurant teams can focus on delighting our guests and being brilliant at the basics.

There are a number of other things we're going to be looking at.

A lot of them are just a long list of things that, in isolation, may be fairly small but, cumulatively, we think they're important, and that we can continue to improve our execution as we continue simplifying the business.

Jason, on your labor question, labor was a little bit higher year-over-year on a percent of sale basis because of higher bonuses paid out at Olive Garden due to their successful performance this year, some slightly higher wage rates and some other factors.

Where it comes to the 53rd week, labor is a very low expense.

We don't get a free pass on labor for that 53rd week.

Our employees want to get paid, and they do get paid for that extra week.

So, labor cost is money, and the 53rd week as well as every other week during the year.

Yes, and there's a slight effect on Darden's overall label rate as reported by the fact that Smokey Bones is getting larger and growing faster, so the start-up labor that's associated with the training of those new restaurants does affect Darden overall in a slightly negative way.

But the result is terrific because they're opening those restaurants very strong, with very strong results.

Next line I'll open is Glenn Guard with Legg Mason.

Please go ahead.

Hi, thanks.

Two items on Red Lobster.

Regarding the closures, I guess are units being held to a higher ROI standard or is that ROI standard held constant over the last year or two, and just is more of a cleaning house issue.

And secondly, with the new marketing plan, any comments towards the timing of when we can expect new ads for Red Lobster?

Well, on the issue of ROI return standards, our return standards haven't changed, and so that's the fact.

On the closing of Red Lobsters, we generally will close a few year to year, and there hasn't been a major variance in the Red Lobster closings this year.

We have impaired that one in addition to what we had normally done.

So, they've been assessed and they're strong units capable of performing to our return standards.

We do hold our new businesses, Bahama Breeze and Smokey Bones, to a slightly higher ROI standard because of the higher risk going into the newer businesses.

And Kim, you want to talk about advertising?

Yes, Glenn.

We introduced our new transitional advertising campaign on April 11, and we have seen improving trends since that went on air.

The reason we call it transitional is because it does not fundamentally reposition the brand, but it does do a much better job of focusing on our food, and it clearly has improved our quality impression with consumers.

And we are seeing improvement.

Our second ad went on air here at the beginning of the new fiscal year and, again, I'll say, based both on copy testing as well as what we're seeing in the marketplace, we believe we have continued to make sequential improvement and obviously will continue to work to do that.

We are working on a longer-term campaign that will be introduced at a later date, and we're looking to actually make some changes in the restaurants before we introduce that campaign, and I will say that that is some ways out yet.

But, we are working to continue to improve our ad campaign, and actually we're pleased with what we're seeing from the work so far.

The next line we'll open is Larry Miller with Prudential.

Please go ahead.

Yes, thanks.

I just wanted to clarify something on the dilution first.

First of all, can you tell us what dilution was in '04?

And then secondly, are you guys saying, net-net, you may be still dilutive in '05?

And then Linda, you also talked about being hedged and locked on some commodities.

Can you give us a little more detail on that, particularly as it relates to butter and shrimp and what you guys are expecting from the Department of Commerce ruling on shrimp tariffing?

Thank you.

OK, I'm asking for a little clarification on the question.

I'm presuming you're referring to our new businesses and their dilution effect, and we attempted to make that pretty clear, that we do expect Smokey Bones to still be dilutive for the whole fiscal year but certainly less than the prior year, and they would be accretive actually in the back half of the year.

We expect Bahama Breeze to be accretive throughout the year.

And on the issue of seafood prices and dairy prices, etc., dairy is not as easy to hedge or advance buy as a lot of the other products.

We're closer to the market on those items.

But then, in the area of shrimp and the question around shrimp tariffs, we're monitoring that situation very carefully.

We are members of various groups that are following it and attempting to have some impact on the outcome.

But the 35 years that we've had, plus 35 years of buying seafood and the number of people that we know in the business allows us to be better than anyone else at dealing with the issue should it occur, and we do have shrimp already committed and hedged and bought through the second quarter of the year, so we've got half the year covered currently, and we're looking at ways to-- we don't want to tell our competition exactly how we plan to moderate any tariffs should it occur, but we will.

Next line we'll open is the line of [David Pinkas] with [KR Capital].

Please go ahead.

Yes.

First of all, I applaud your move to a double-digit EPS growth goal because I think you weren't really getting paid, or weren't getting any credit for a more aggressive long-term target, and I guess what I'm hearing is that you really haven't changed your thinking, you just are putting out a goal that people will find more credible, which I think is good.

Well, we're going to continue to try to take advantage of opportunities in this business.

We're taking a look at where we are now, and we think a double-digit number is appropriate.

We do not want to cause people to think that we're chasing a higher rate than is reasonable.

We want to be more consistent.

Examples of that is, this year, the comparisons at Red Lobster as we look into '04 and '05, you will see that our strategies around promotions have changed, as we said they would some months ago, do not have spiking-type promotions that are exceptionally good, low priced and spike volume intensely, which causes labor issues and quality issues in our restaurant, as well as margin swings that are pretty strong.

And we're gearing ourselves to run our business more consistently and more dependably, and that translates on into this double-digit number that we have.

Probably the only thing I'd add to that, we know some years-- it's always been our intention, we may be above the 15 or below the 15, and it seemed to be too confining and too confusing if we didn't hit it every single year, so we believe double-digit is clearly more the range that we can consistently deliver year in and year out.

Next line I'll open is [Steven Spence] with Longbow Research.

Please go ahead.

Good morning.

I wanted to follow up on the labor questions.

That line was up about 100 basis points, and you gave several of the items that made up that increase.

I wondered if you found that those items were across all regions of the country and all the concepts in terms of the wage rate increase, and I wondered if you could kind of quantify how much of that 100 basis points was for each of those items.

Yes.

I don't know if we want to quantify each one.

We can get a view of the room here on doing that, but the key thing is-- behind your question is do we have labor running out of control either in the way we manage the labor hours or in the labor cost.

Our labor cost per hour is very favorable, and our work per guest-- our labor programs are actually being managed better this year, particularly at Red Lobster, where they had more room for improvement, has gotten quite a lot better this year than last year.

So, against our standards, if you will, and against our targets, labor control is in good shape.

Remember that the excellent performance that was turned in at Olive Garden meant real excellent bonuses for management.

We have a very good incentive system that penalizes if we under-perform and rewards if we over-perform, and Olive Garden did that, and then their entire team's bonuses will be up, and that includes field management bonuses in the field.

You want to add to that, Drew?

I was just going to say that the single biggest impact on the labor line for Darden was a significant increase in the bonus at Olive Garden compared to last year, fiscal 2003, which is-- while we record it on the labor line, we view that as an investment in demonstrating the art of the possible and ensuring continued long-term success.

So, we're delighted to be able to have that.

The next line I'll open is Joe Buckley with Bear Stearns.

Please go ahead.

Thank you.

I was hoping you give us an update on where you are in terms of testing the new menu at Red Lobster.

If I understand, you might be in 30, 35 restaurants, something like that, and here is the check experience you had in those restaurants.

And also, Kim, you referred to changes being made at Red Lobster at the restaurant level before the new ad campaign would be launched.

Are you referring to the menu or are you referring to other things?

First of all, Joe, there's a great deal of testing going on, and some elements are in different restaurants.

There certainly a lot more than 30 restaurants involved overall.

I think it's premature to comment on individual items.

I'll just say we are excited about a number of items, and we're just going to be very thorough and methodical in making sure that we roll out the right ones.

As I indicated earlier, it will be a little while before you see a majority of the work that is currently in the pipeline actually in the restaurants.

Regarding my other comment about changes in the restaurants, we have been doing a lot of work to clarify the brand, to really define what the optimum dining experience is, and then to be able to align all consumer touch points with what that experience is.

And that work is something we have recently done.

We are currently validating it with some additional research, and we intend to provide a better dining experience than were doing today.

I'm not going to be specific about how we're going to do that, but when we introduce the new ad campaign, we intend to offer consumers a better dining-- an even better dining experience than they're getting today.

And Joe, you know we walk that fine line here between letting you know directionally where we're going strategically and tactically, but without identifying examples of menu items and margin changes.

We'll let that-- let our competitors find out about that after we've settled in and we are actually on air with it.

Next question?

The next line I'll open is Janet Meyer with Credit Suisse.

Please go ahead.

Thanks, hi.

Two questions.

The first is I think you mentioned during the conference call that seafood eatings were lower.

I was wondering if you could just elaborate on that.

I mean, in the last year we've talked about more casual dining chains adding shrimp and actually getting into a little bit of your territory.

But, you said seafood eatings overall were down, so I was wondering if you could explain why, and maybe contrast that on the pasta side to what's happening with carbohydrate items.

And then, secondly, you said that there's a lag between the guest satisfaction scores improving and the traffic going up because your frequency is relatively low.

How come that lag doesn't exist on the down side, meaning is there any way to catch the decelerating traffic on the down side before it gets really to the extent it is now, or is there anything you can do to change your research to help catch it in the future?

That's an excellent question, particularly the last section there, Janice.

We have changed the way we use our research, and I have admitted to you a year ago that we were not at that time using the research tools that we had here in-house the way we should have been.

So, you're absolutely right that we should have caught this earlier, and we shouldn't have let it get as bad as it did get, and that the fact.

I'm not proud of it at all, but we have responded pretty aggressively, and we're seeing it come back, and we're proud of that fact.

And what was the first part of the question?

Seafood eating is down.

Seafood eatings go up and down just like all categories do, and we felt it prudent to let you know that it had gone down.

It is recovering, and it's operating within a range that we've seen before, so there's-- it's not a big item, but it is an item that we thought that you should know.

And additionally, Kim is working very hard on some new strategies for us that may make seafood eating occasions go up even above what they have been in the past, but the long-term trends are still very favorable to seafood eating occasions.

Kim, do you want to add anything to that?

Just, Janice, your point about competitive activity on shrimp is absolutely accurate.

We have seen unusually intense activity in that area over the last several months with a majority of the chains we track promoting shrimp and one way or another, so that undoubtedly is a factor in what's going on in the marketplace.

And I don't want to sound too full of myself here or our team, but we need to do an excellent job with seafood and shrimp, and when people try it in other places, they may not be quite as satisfied, and I don't know if that has anything to do with it or not.

But, we're going to make sure that people realize how good it is at Red Lobster and get them disproportionately coming back to us.

Drew, you want to talk about the pasta?

I mean, it's a good example of how it can be done as to what Drew has done.

Yes, Janice, you asked about pasta eatings.

I think the broader question there is just the low-carb impact on our business.

And I would say first it's difficult to isolate that impact specifically at all live garden.

Pasta eatings, your specific question, were down for the category towards the end of our fiscal year last year in'03 when Olive Garden experienced a little bit of softness, and they've increased since that time, and they're up today.

So, it's difficult to isolate the impact.

Having said that, obviously we had a record year this year.

Our sales are strong.

We do think it's important to offer the appropriate information and food choices to our guests so that they can tailor their meals and eating occasions appropriately, and that's what we do with our menu.

We've got a Garden Fare section on our menu that offers a range of healthier choices and the ability to substitute things like fresh vegetables for potatoes, and we offer some more indulgent items, as well.

So, we think that choice and variety is important.

The next line we'll open is Clive Munro with Javelin Research.

Please go ahead.

Hi, good morning.

In light of Q1 and Q2 being a little bit weaker and Linda's comments about Bones being more accretive-- or being accretive in the second half, is the development schedule for Bones more front-end loaded in fiscal '05?

Yes, it is.

The answer to that question, Clive, is that it is more front-end loaded, so we do see an increase in pre-opening expenses.

First of all, it's a stronger development schedule in terms of number of restaurants.

We're opening 30 to 40.

This year we opened 30, so if you look at the top of that range, it's a significant increase.

And we do have it more front-end loaded, which is our objective so that we get more operating weeks into the year from each of our new restaurants.

And it really helps a lot in future years if you get them in earlier each year.

The next line we'll open is Mike Smith with [Vaughn] Stock.

Please go ahead.

I'm sorry, it's Oppenheimer.

Could you give me an idea of what your cap-ex budget is for 2005, and what you have remaining on your share repurchase authorization?

And any thoughts about what, on a longer-term basis, you might shoot for in terms of square footage growth?

OK, let me take the first question on cap-ex.

We are anticipating roughly the same level of capital spending in '05 as we had for '04, which was roughly 350m, so roughly at that same level.

And as we indicated earlier, we would anticipate roughly the same amount-- number of openings in '05 as we did in '04.

What was the question on--share repurchase.

We have roughly six million remaining on our share repurchase authorization, and the last question was--?

--Long-term unit growth square footage.

Oh, the long-term unit growth square footage.

That continues to be, we believe, an opportunity for us.

As we have indicated, we have-- we're not doing much growth in Red Lobster or Bahama Breeze, and so we believe these to be growing opportune businesses, and we would expect in the future to have growth in these businesses, but we are being appropriately-- allowing these teams to focus on their business models and strengthen them before we start growing them again.

We continue to see strong unit growth opportunity available for Smokey Bones, and we'll continue that, as well as Olive Garden.

The next line I'll open is Peter Oakes with Piper Jaffray.

Please go ahead.

Actually, I've got a couple, if I may.

First, I was hoping you could update the specific restaurant manager turnover levels, particularly at Red Lobster, and was hoping you could provide a little more clarification by-- Joe, I think you mentioned in the fourth quarter that you had extended the life of restaurant manager benefit programs?

And then secondly, for Kim, when you talk about the erosion in the seafood category, you're talking, if I understand right, the category, not necessarily seafood consumption or seafood poundage.

I just want to get a little clarification on that.

Thank you.

On both questions, one, Red Lobster management turnover continues to be below industry averages.

Our management turnover was running about five points below industry averages in the latest month.

General manager turnover running about six points below, front-line crew running about six points below.

So, we're in reasonably good shape there.

In terms of category erosion, I was referring to the number of seafood eatings within the casual dining segment.

The next line we'll open is Andy Barish of Banc of America.

Please go ahead.

Yes, question, if you could share with us if you've made the decisions out in the restaurants, kind of your menu pricing here for the summer at both Red Lobster and Olive Garden.

Olive Garden just introduced a menu and some menu pricing this month, as we always do in the summer, and I think there's a question on Olive Garden management turnover that we didn't answer in the last question. and the answer is very similar to Kim's, that we're below industry averages, total management team turnover in the 17 to 18 percent range.

Regarding Red Lobster's menu pricing, we've not taken any recent changes, and our current prices are running around one percent above year-ago.

The next line I'll open is Bryan Elliott with Raymond James.

Please go ahead.

Good morning.

I'd like to get a better understanding also of the seafood consumption comment.

I believe, Kim, you just said that you attributed that to indications that seafood occasions, or people ordering seafood in casual dining restaurants as a whole is down year-on-year.

Is that accurate?

We saw that trend in the second and third quarters.

We do not have published data yet for the fourth quarter, although we are seeing indications that the trend is, we believe, improving, and perhaps considerably here in the fourth quarter.

So, yes, we saw that trend.

There's a lot of things that could be going on, ranging from economic pressure on the 50-plus age group, which is a heavy consuming age group, and also a phenomenon like the Atkins diet and others we believe could be factors in that.

But again, we are seeing signs of clear improvement here in the fourth quarter, although we do not have official numbers yet for that period.

What we would-- I'd like to add to that is that, while we don't normally give you updates into the month that we're speaking, June is turning out to be for us a better month than May and all around, so we are seeing improving trends in our businesses at Red Lobster and at Olive Garden, as well as our other two, as well.

So, I wouldn't want anyone to think of over-reacting to that comment.

We have-- just as Drew said, we saw a similar trend in pasta servings a few quarters back.

It lasted a couple of quarters and was over, and we've seen it now during the period that Red Lobster was also suffering the worst of its declines.

And now, we're seeing indications that that trend is reversing, and we know that we're getting a lot better, and the real answer for us in the future is to make sure we keep improving the guest satisfaction, keep improving our advertising capacity, and get all our long-term strategies aligned with the brand.

And Kim's doing a marvelous job of starting out to do that, and he's got a new, powerful team to help him.

Next line we'll open is John Ivanhoe with JP Morgan.

Please go ahead.

Yes, hi.

Thanks.

Actually, my question is on Smokey Bones, and I wanted to clarify some of the comments that Clarence made regarding regional disparity.

And I think what was mentioned was awareness, and I was wondering if there's anything that had to do with whether it was a very competitive barbecue market or it wasn't a barbecue market?

I mean, if that mattered, first of all.

And secondly, what you're going to do to increase awareness and when significant advertising may be a part of the Smokey Bones plan.

Thanks.

Sure.

And what we're seeing is we're not seeing any correlation to whether we think it's a strong barbecue market or not.

For example, one of our better performing restaurants is in Memphis.

We have three restaurants in St. Louis, which is also fairly heavy barbecue, and we do very well there, as well.

And so, as we dig into it, what we do see is that, in a couple of regions where you've got heavier casual dining intensity generally, in terms of number of restaurants and there are fairly significant markets where awareness is something that is difficult to build, we're seeing lower volumes in those kind of areas.

And as we said, we've taken some steps to address that.

One of the biggest is really retaining [inaudible] to work with us on sharpening our message and getting that message out there.

The next line we'll open is the line of [Tom Thompson] with Thompson Siegel.

Please go ahead.

Thank you.

Could you tell us the total number of shares that were repurchased last year?

And could you comment on the trend in depreciation and amortization over the last four years where it's gone from 3-1/2 to about 4.2%?

Is that due to the rollout of Smokey Bones and Bahama Breeze, and will that continue to rise, or will it stabilize at some point?

Well, let me take the deprecation question first, because it certainly goes directionally with our capital spending.

And we have increased our capital spending in the last three to four years.

We have-- I think it peaked at roughly 400,000 I think in '03, and we've moderated a bit in '04 down to 350, and 350 into next year.

So, clearly, depreciation flows from that appetite.

As we said, we wouldn't expect to greatly increase in '05 our capital spending.

But, beyond that, we are interesting and continue to grow all of our businesses, and that would certainly imply more capital spending.

As to the share buyback, we bought back roughly the same amount of shares in '03 and '04, 10.7m shares in both of those years.

We have time for one more question, please.

OK.

The next line we'll open is Amy Vinson with Avondale Partners.

Please go ahead.

Hi, guys.

Just a quick question regarding the Red Lobster advertising that we've been seeing recently.

I've been seeing the price within the ads, which seems to be kind of a shift from where we were several months ago.

Is that something we should be seeing going forward, and is that helping bring people in? because I'd assumed you'd be at that kind of middle of the menu price point.

Amy, we vary by promotion.

That particular one does show the ad.

Many of our promotions do not.

It really depends on the nature of the promotion.

I would not say that there is a deliberate strategy towards more specific price pointing, though, on a go-forward basis.

We appreciate everyone's signing in and listening to us this morning.

Your interest in our company, and we're looking forward to getting back to work here and delivering you some even better results this coming quarter.

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