達登餐飲 (DRI) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the first quarter earnings release conference call.

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

Later we'll conduct a question and answer session with instructions being given at that time.

Please limit yourself to one question and for any follow-up questions you will need to requeue.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr.

Matthew Stroud.

Please go ahead.

Thank you.

Good morning, everybody.

With me today are Clarence Otis, Darden's Chairman and CEO; Drew Madsen, Darden's President and CEO; and Brad Richmond, Darden's CFO.

We welcome those of you joining us by telephone or 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 the could cause actual results to materially differ from those anticipated in the statements.

The most significant of these uncertainties are described in Darden Restaurants Incorporated Form 10-K, Form 10-Q and Form 8-K reports including all amendments to those reports.

These risks and uncertainties include successful completion of the Rare Hospitality acquisition on a timely basis, the impact of regulatory review on the proposed acquisition, the ability to achieve synergies following the completion of the proposed acquisition, the impact of intense competition, changing economic or business conditions, the price and availability of food, ingredients, and utilities, labor and insurance costs, increased advertising and marketing costs, higher than anticipated costs to open or close restaurants, litigation, unfavorable publicity, a lack of suitable locations, government regulations, a failure to achieve growth objectives through the opening of new restaurants or the development or acquisition of new dining concepts, weather conditions, risks associated with the plans to expand our newer concepts Bahama Breeze and Seasons 52, closure and disposition of certain Smokey Bones Restaurants and anticipated sale of the remaining Smokey Bones Restaurants and other factors and uncertainties discussed from time to time in reports filed by the Company with the Securities and Exchange Commission.

A copy of our press release announcing our earnings, the Form 8-K used to furnish the release to 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 Investor Relations on our website at Darden.Com.

We plan to release fiscal 2008 second quarter earnings and same restaurant sales for Fiscal September, October, and November 2008 on Tuesday, December 18, after the market close.

As noted in yesterday's press release we are discontinuing the monthly reporting of same restaurant sales results.

Going forward we will disclose monthly same restaurant sales results when we disclose quarterly financial results at the end of each quarter.

We released first quarter earnings results yesterday afternoon.

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

Let's begin by updating you on our first quarter earnings.

First quarter net earnings from continuing operations were 106.6 million and diluted net EPS from continuing operations was $0.73.

This represents an 18% increase in diluted net earnings per share from continuing operations.

As you recall, on May 5, 2007, we closed 54 Smokey Bones and two Rocky River Grillhouse Restaurants and announced our intent to sell the remaining 73 Smokey Bones Restaurants.

Additionally we closed nine Bahama Breeze Restaurants on April 28, 2007 to position the brand for future growth.

The Smokey Bones results and the related impairments and costs are classified as discontinued operations.

As are the results and related impairments and costs for the nine closed Bahama Breeze Restaurants.

First quarter net losses from discontinued operations were $0.7 million, and diluted net losses per share from discontinued operations were $0.01.

Including losses from discontinued operations, diluted net earnings per share for the first quarter were $0.72 compared to $0.59 for the same period last year.

Brad will now provide detail about our financial results for the first quarter, fiscal year outlook; and Drew will discuss the operating companies business results; followed by Clarence with some final remarks.

We'll then respond to your questions.

Thank you, Matthew, and good morning.

Darden's total sales from continuing operations increased 7.9% in the first quarter to $1.47 billion, driven by same restaurant sales growth at Red Lobster and Olive Garden, plus our operation of 27 more restaurants than in the first quarter of last year.

Red Lobster reported same restaurant sales increase of 7.0% for the quarter and total sales increased 6.3%.

Olive Garden same restaurant sales were up 4.8% for the quarter.

It's 52nd consecutive quarter of same restaurant sales growth and its total sales increased 9.6%.

Bahama Breeze had same restaurant sales decrease of 1.3% for the quarter.

For context, industry same restaurant sales as measured by Knapp-Track and excluding Darden were down approximately 0.1% for the quarter, thus relative to the industry, you can see that Darden performed quite well.

Now, let's turn to a detailed margin analysis for the first quarter.

Food and beverage expenses were 50 basis points higher than last year on a percentage of sales basis, primarily because of promotional mix changes at Red Lobster and Olive Garden and costs associated with the introduction of non-transfat oils in our restaurant.

The cost increases were anticipated based on our promotional pipeline this quarter.

While cost of sales increased as a percentage of sales, gross margin dollars increased as well.

Despite the increase in cost of sales on a percentage of sales basis in the first quarter, we still anticipate food and beverage expenses as a percentage of sales to be flat on a year-over-year basis for fiscal 2008.

First quarter restaurant labor expenses were 9 basis points higher than last year on a percentage of sales basis due to wage rate inflation and increased manager compensation cost.

Sales leveraging also played a part in keeping labor expenses as a percentage of sales relatively flat compared to the prior year.

Restaurant expenses in the quarter were 27 basis points lower than last year on a percentage of sales basis, primarily because of sales leverage and lower workers compensation and public liability expenses compared to the prior year resulting from in restaurant safety performance improvements.

Selling, general, and administrative expenses were 6 basis points lower as a percentage of sales for the first quarter primarily due to sales leveraging.

Our tax rate this quarter was in line with our fiscal year guidance but lower than the first quarter of last year due to additional expense recorded in the prior year.

For the full year, we continue to expect combined same restaurant sales growth for Red Lobster and Olive Garden to be between 2% and 4%.

We still expect net new restaurant increases at our existing businesses of approximately 40 Restaurants bringing total sales growth for the year in the range of 6 to 7%.

Our same restaurant sales and new restaurant growth expectations will continue to support an anticipated diluted EPS growth for continuing operations at our existing businesses of 10 to 12%.

The diluted net EPS growth range remains at 10 to 12% when we include the impact of the previously announced Rare Hospitality acquisition.

The tender offer began on August 31, 2007, and will expire on September 28, 2007 at 12 midnight New York City time unless the tender offer is extended.

The transaction is expected to be neutral to Darden's earnings per share in Fiscal 2008 excluding one-time transaction and integration related cost and the impact of purchase price accounting adjustments.

We will offer an update on Fiscal 2008 consolidated financial outlooks including additional detail regarding the Rare transaction with our second quarter earnings release this December.

This assumes the Rare transaction closing occurs in 2007 as expected.

Yesterday, we announced a dividend of $0.18 per share payable on November 1, 2007, to shareholders of record on October 10, 2007, and let me take just a moment to update you on our progress at Smokey Bones.

This month, we met with several potential buyers of Smokey Bones and because the process is still ongoing, we are not prepared to offer any conjecture about sales price, potential proceeds, or closing schedule.

When we have more information to report, we will do so through the normal channels of public disclosure.

And now, I'll turn it over to Drew to comment on the operating companies.

Well, as Brad already said Red Lobster delivered competitively superior performance in the first quarter with same restaurant sales growth that was more than 7 percentage points better than the Knapp-Track competitive set and Red Lobster also continued to strengthen its business foundation and delivered record guest satisfaction.

As we've discussed before, Red Lobster's plan to achieve sustainable growth has three phases, the first phase was to strengthen the brands fundamentals.

The second phase is to refresh the brand, broaden its appeal, and build guest counts, and the third phase which we expect to start in the second half of fiscal 2009 will be to accelerate new unit growth.

Now, during the current fiscal year, our primary focus will be to broaden appeal and accelerate guest count growth by improving perceptions among lapsed users that Red Lobster offers a variety of fresh seafood that's prepared with culinary expertise.

Accordingly, Red Lobster began advertising its today's fresh fish program during July.

The fresh fish spots were largely incremental to Red Lobster's promotional advertising and our research suggests that they're contributing to a measurable improvement in brand perception, especially regarding freshness.

In addition, Red Lobster ran two strong promotions during the first quarter, Summer Grilling, and American Seafood Adventure.

The first promotion, Summer Grilling featured two new dishes, fire grilled lobster and shrimp and citrus rum grilled scallops and jumbo shrimp.

The second promotion, American Seafood Adventure also featured two new dishes, maple glazed salmon and shrimp and the New England lobster and crab bake.

The latter dish was especially popular and helped drive significant growth in guest counts and absolute operating profit, although at a somewhat higher food cost percentage than last years promotion.

In July, Red Lobster began airing a new ad campaign as well.

It still features appetizing food photography but most spots now end with a shot of a Red Lobster restaurant by the sea with the tag line "Come see what's fresh today".

During the first quarter, this new campaign was used for the today's fresh fish ads and the American Seafood Adventure promotion.

During the first quarter, Red Lobster completed the rollout of its new point-of-sales system, and began installing a new meal pacing system which will help them further improve operational efficiency and increase guest satisfaction.

Last but not least, Red Lobster opened its first Bar Harbor prototype restaurant in Sherman, Texas at the end of July.

This Bar Harbor prototype is named after the main fishing village and tourist destination that inspired the design and we expect it to be Red Lobster's growth vehicle for the foreseeable future.

Now if you've been to Red Lobster's new restaurants in North Olmsted, Ohio and Inglewood, California, the Bar Harbor prototype looks very similar but it has a more efficient footprint and many operational refinements.

We're delighted with early sales results, early guest satisfaction scores and feedback from both our employees and guests.

Turning to the second quarter, Red Lobster is currently advertising endless shrimp where guests can choose from a selection of their favorite shrimp preparations.

The promotion offers variety and value and has been a seasonal favorite for many years.

This year, the promotion features a new preparation, Buffalo Shrimp for guests who enjoy bolder flavors.

Red Lobster will also be making several important investments during the second quarter.

They include continued incremental fresh fish advertising, replacing plateware and flatware with new table top items that are more attractive and more brand appropriate, introducing a new menu design with several new dishes, completing the rollout of transfat free frying oil and installing the meal pacing system in roughly 40% of their Restaurants.

Now, we're confident that Red Lobster is on the right course in refreshing its brand and that it will be ready to resume meaningful unit growth in the second half of our next fiscal year.

Olive Garden also continued to deliver competitively superior performance during the first quarter.

In addition to achieving their 52nd consecutive quarter of same restaurant sales growth, they also achieved the Knapp-Track competitive set by nearly 5 percentage points.

Olive Garden's key priority remains unchanged.

They will continue to manage the business to accelerate new restaurant growth while also maintaining same restaurant excellence.

During the first quarter, Olive Garden opened seven new restaurants which are four more than the same quarter last year.

In Fiscal 2008 they expect to open 40 net new restaurants and ultimately we believe Olive Garden has the potential to operate 800 to 900 restaurants in North America.

Olive Garden advertising during the first quarter featured compelling food news that provided their guests with exciting new reasons to visit their restaurants.

In June, they featured two new entrees, five cheese tortelloni with shrimp and five cheese tortelloni with sausage and during July and August, Olive Garden also featured a unique combination of exciting food news, Grilled Shrimp Caprese and Grilled Steak Caprese.

Importantly guests who visited Olive Garden during the first quarter were delighted with a best ever guest experience as guest satisfaction set a new record.

Improving pace of meal has been a key contributor and these efforts are being further enabled by the implementation of our meal pacing system which will be in all Olive Garden Restaurants by the end of the second quarter.

Management of controllable costs continued to be an area of strength as well with both labor productivity and food waste well ahead of expectation and prior year levels.

A new core menu was successfully launched in July and features three new exciting entrees all inspired by their Culinary Institute of Tuscany.

Chicken and [Noke Varenase] and Grilled Shrimp Caprese help enhance the distinctiveness and breadth of appeal of their menu while Venetian apricot chicken adds a unique flavor profile to their garden fare offerings.

Currently Olive Garden is advertising its signature promotion, never ending pasta bowl priced at $8.95.

This strong message of choice and variety is a powerful statement of Italian generosity that provides their guests with an excellent value.

As you can see, we're pleased with Olive Garden's strength in this challenging consumer environment and we believe they will continue to deliver strong performance throughout the fiscal year.

Finally, Bahama Breeze has made tremendous progress over the last two years, improving their guest experience, increasing restaurant level returns, and broadening the appeal of their brand.

Given this performance our strategic focus for Bahama Breeze is to prepare the business for disciplined new restaurant growth.

They have two new sites under contract both in New Jersey in Wayne and Woodbridge which should open in the Fall of 2008 and they continue to look for additional high quality sites to fill their pipeline for future growth.

We continue to believe that Bahama Breeze has the potential to be $1 billion brand for Darden.

Now, Clarence has some final comments.

Thanks, Drew.

I'll be brief so that we can get to your questions but as you might imagine, we're very pleased with our performance.

It does continue to be industry leading.

18% diluted earnings per share growth.

We feel good about from continuing operations, especially in an environment, an economic environment that has had its share of speed bumps and continues to have its share of speed bumps.

We also feel good that even as we do what's necessary to navigate through this environment successfully, we're building the long term strength of each of our brands, and with the Rare acquisition, we're also increasing our ability to deliver consistently strong, profitable, new restaurant growth, and that enhances the long term strength of the entire organization.

Foundation for all of this really is our proven approach to the business, and it's an approach that's anchored in combining strong brand management and great operations and then supporting both of those with excellence in supply chain, information technology, human resources, and a number of other key business disciplines.

But we know that what ultimately drives our ability to create sustainable leadership level value for shareholders is having great people, and so I'm proud of our results but I'm even prouder of the outstanding people that we have in our Restaurants, in our support center, who are delivering those results.

We're excited about the talented leaders who are going to be joining this organization as a result of the acquisition of Rare.

And so we're delighted with the path that we're on.

We think we continue to make great strides toward making this Company even stronger and achieving our ultimate goal which is really to be the best in our industry now and for generations, and with that, we will take your questions.

Certainly.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Jason Whitmer of Cleveland Research.

Hi, good morning, good quarter.

Drew, can you talk a little further about Red Lobster specifically with some of the feedback and research you've been doing over the last few months, certainly the brand has kind of relifted itself with new advertising and you spent a lot the last couple of years really working on the foundation which I gather is really important to kind of make that next step, but what's the feedback you're getting currently, where do you think that can transition over the near to medium term and how does that ultimately stay in step with the long term rebranding strategy for you guys?

Well, you're correct that we've spent a good part of the last couple years strengthening the foundation particularly guest satisfaction and restaurant level returns, and given that stronger foundation, the big opportunity now is to continue to build guest counts and we think in particular, not just with their current core guests but with what we call lapsed users, guests who have not been in in the last year or so, and all our research with that set of lapsed users said there's basically two big reasons, that they haven't been to Red Lobster recently.

One is they view Red Lobster as serving frozen seafood not fresh seafood.

And second, they view Red Lobster as not having the level of culinary expertise that they're looking for in terms of innovative new dishes and flavor profiles.

So as a result, Red Lobster most recently in the last year has been working to overcome those barriers, change those perceptions, so last year, they introduced the Today's Fresh Fish program which you're aware of and offers guests up to seven different varieties of fresh fish in the restaurant prepared in a number of ways, with menus that are printed twice daily.

That's been very well received, but only people in the restaurant were seeing that so this year, they started advertising broadly, letting people know about the Today's Fresh Fish program.

In addition they've been working harder on the culinary side as they've rebuilt their culinary team over the last year or so to add new dishes that are more interesting and show more culinary innovation like the dishes I talked about in their first two promotions this year and by the way those are dishes that their current guests love as well.

So as they continue to address the barriers with lapsed users in a way that continues to make their brand very approachable and satisfying for core users, they're going to expand their breadth of appeal, build guest counts, that's going to strengthen their unit economics even further and put them in the position next year we think to start opening more units.

Jason, I might add that when it comes to the culinary development there really are two tracks.

One is the core menu itself, and to really move that where we need to have it go and the second is the promotional offerings, and we do a number of promotions through the year and it's to move that promotional offerings and get those where they need to be and so they've been working both of those tracks and Drew, you just might comment on where you think they are in terms of progress on each of those core menu versus promotional pipeline.

Well, they've made great progress on the core menu with Today's Fresh Fish and new dishes they've already introduced some new dishes they will be introducing with their new menu later this year.

The first quarter promotional dishes, the promotion pipeline was tremendous.

The opportunity is to continue that sort of level of consistency in their promotional pipeline into the future.

And I would just say that's where the opportunity is.

We continue to work the pipeline and try to build that kind of strength through the entire year and we're not there yet but we're making really good progress.

It's a terrific team that Sally Sata has built over in culinary and beverage side of Red Lobster and we feel confident given the success they have that they will continue to make progress.

Okay, thank you.

And the next question comes from the line of John Glass, CIBC.

Please go ahead.

Hi, thanks.

Brad you talked about a 50 basis point increase in food costs and some of that was promotional shifts, et cetera.

How much was the underlying food cost inflation this quarter , and how much is it baked into your full year guidance versus brand shift and some of the other moving pieces that we see in cost of goods that's impacting that

Yes, the underlying inflation really, we haven't seen any difference from our previous guidance there, and as we look forward, while there continues to be movement around on different products, really not meaningfully changing our expectations, what I would say more and as Drew and Clarence just touched on, a lot of that difference is driven by what items we're featuring in restaurant and this is a particular quarter with the items they have there that on a percentage basis, it did drive up the cost of sales as a percent of sales but the absolute dollar margins that it was driving were also up.

What was your previous guidance on food cost inflation that you referenced?

I believe it was about 4%.

Got you, okay, thank you.

Thank you.

The next question comes from the line of Steven Kron of Goldman Sachs.

Please go ahead.

Thanks.

Good morning, guys.

A couple questions.

First, I guess on Olive Garden margins, in the release it says modestly low on a percentage basis, recognizing you went through some of these factors can you just talk about expectations going forward, how should we think about the leverage in that business off of the strong sales that you've been seeing?

Yes.

I think the first thing I would say there is with their accelerating unit growth rate that that is a little bit of a drag for them.

If you look at existing Restaurants at the restaurant level margin basis you don't see the same drag that you're seeing on a Company reported basis.

They continue to build their guest counts and their pricing is in such a range that it is with the energy they're putting around managing their cost that we see their margin staying about where they are for the existing Restaurants if not maybe up marginally, but when you look at the total Company, the investment in a little bit higher growth rate puts a little bit of drag on that.

And I might just add that, I mean Olive Garden has very high margins, and so expanding that business with those kind of margins drive significant value creation, and so we feel great about where Olive Garden is, and part of our long term plan really is, as Drew said to continue to drive toward 900 restaurants.

Okay, thank you.

The next question comes from the line of Rob Wilson of Tiburon Research.

Please go ahead.

Yes, thank you.

I guess in the past consistently you've expressed that there's been wage inflation in your labor structure, and given your comps, relatively successful comps in Q1, I'm just wondering what is that wage inflation in Q1?

Was that wage inflation 5% or 6%?

Can you give us some color there?

The wage rate inflation being the 4 to 5% driven a lot by the various state initiatives, that's not necessarily what we're seeing across the entire organization.

Okay, thank you.

The next question comes from the line of Mark Wiltamuth of Morgan Stanley.

Please go ahead.

Hi, good morning.

Just to follow-up a little more on the food cost question, could you tell us how much each of the primary protein categories were up and looking forward to when you close the Rare acquisition, what's your pro forma mix of proteins going to be?

How much is going to be beef, how much seafood, how much chicken and have you really thought about any cost savings that you'll get from sourcing as you combine the two companies?

Good question there.

First off though, we really don't go into great detail on the component cost projections there, and with our business, we have quite a broad basket of products that we use, so there's always pieces leaving in both directions, benefits in some areas offset the costs going up in others.

Regarding post acquisition, we'll be much more clearer on that in December once the deal is complete but to your point, we're in the process of our integration work right now and we do see large numbers of opportunities to realize synergies across the entire supply chain and distribution model, and we'll be able to articulate those more in December.

So the $40 million cost savings number you're talking about is that a combination of SG&A and supply chain or is that mostly SG&A?

That would be across the entire cost synergies.

Okay, thank you.

Okay, thank you.

The next question comes from the line of John Ivankoe of JPMorgan.

Please go ahead.

Thanks.

It sounds like in the second quarter, continuing in the second quarter, meal pacing is important for both of the businesses, Red Lobster and Olive Garden.

If you could share with us some of the initial customer satisfaction scores or I guess customer awareness of the fact that maybe you're changing things a little bit of what you're doing operationally, and if there's any measurable difference in table turns as you're starting to get your hands around that system for both businesses?

Well, meal pacing, as you know, just helps us move a meal in a more coordinated fashion and all of the components of a meal through our kitchen in a more coordinated way so it all comes up in the window at the same time, hot and ready to go.

As far as I know our guests are completely unaware that we've done something like this except to the fact that they notice their foods a little hotter.

Well that was the question.

Is that coming out of, is that coming out in your research?

Yes, the things that we see are hotter food and that drives increased food taste satisfaction and then secondly, we can see some modest improvement in throughput efficiency in terms of table turn and there's a little bit of savings in supplies in the restaurant, but not material.

The two biggest opportunities are around guest satisfaction related to pace the meal and then operational efficiency in terms of throughput.

I'm sorry if I missed this.

When would Red Lobster be 100% done?

By the end of this year.

By the end of our fiscal year.

Okay, thank you.

Okay, thank you.

And the next question comes from the line of Brad Ludington of KeyBanc Capital Markets.

Good morning.

I just have a quick one I wanted to ask how many shares were outstanding at the end of the quarter?

Brad's looking that up, one second.

Thanks.

The ending share count would be 141 million.

Thank you very much.

Thank you.

And the next question comes from the line of Andy Barish of Banc of America Securities.

Please go ahead.

A question on the Olive Garden development, what percentage roughly of the 40 or so units are the smaller prototype and can you give us sort of an update on last years store class just in terms of opening volumes?

Well, a majority of the units we're opening called P75 are smaller than what we used to use, the P77 and it lowers our guest count hurdle a couple hundred guests in terms of being able to make a pro forma hurdle and we don't really track it by class but we do look at it in three year periods so new Restaurants at Olive Garden that have been open for three years are on average exceeding at a high level or exceeding their sales and profit and guest count return requirements.

Thank you.

We've been very pleased.

Okay, thank you.

And the next question comes from the line of Glen Petraglia with Citigroup.

Please go ahead.

Thanks, good morning.

Clarence, you mentioned that there's like economic environment has certainly thrown some speed bumps at everybody.

I'm curious to know if the current environment clearly right now you're focusing on value with the Endless Shrimp and Endless Pasta Bowl but I'm wondering if going forward the current environment has had any impact in terms of your marketing plan or your message to consumers and how you go about thinking about that?

Well, I think that value is always important in this category, and one of the things that really is a primary category benefit we talked about it before is every day, price accessibility, and so we think about that all the time as we think about our menu strategy and as a result of that pricing strategy but also a labor model and so protecting every day price accessibility is important to us and then within that, we do as you know think about the year because the year does have a rhythm to it in terms of where consumer s are in terms of their ability or willingness to indulge versus when they're more value conscience.

With all of that, then tactically, we will change our marketing at the edges depending on the particular environment so we might stress a price point in some periods where we wouldn't in others.

We might harry up media at some point so we might drop coupons.

I'd say this year, we're particularly sensitive to value because we do know the environment and so we're doing a number of things to make sure that value comes through.

It is more challenging when you have the cost environment that we've got, although a couple of things really helped there.

One is, as Brad said we've got a broad market basket, so that helps, and then Drew and the teams have been very focused on cost management and making sure that all costs that really don't benefit the guests are being squeezed out.

And I'd add-on that that what we advertise is certainly very visible, but we're equally diligent in making sure that we have a range of price points on the menu and that the items that we picture or feature in our promotional materials in restaurant also offer a range of price points for guests to choose from, and that ultimately we've got new news that delivers at a high level so that when people do come in with higher expectations, in terms of where they're spending their time and money that they leave very satisfied.

Thanks.

Okay, thank you.

The next question comes from the line of Joe Buckley, Bear Stearns.

Please go ahead.

Thank you.

Just a couple of follow-up questions if I could.

On the meal pacing, you talked about some of the effects in terms of delivering the food hotter and so fourth.

What are the physical changes in the restaurant surrounding that?

What changes in the kitchen or in the kitchen, wait staff interaction?

There's no staffing changes but there are some monitors on the line that help at different stations that help people understand when to start new items and when to make sure that the entire meal is up in the window complete and ready to go.

I think the other big change is that the kitchen gets quieter.

There's fewer shouting back and fourth the orders, all of that stuff and so for a kitchen employee especially during peak period, the work environment improvement is pretty dramatic.

Okay, and then just a couple of real quick questions.

Some companies have talked about schools starting later in certain markets, I've heard Florida mentioned a few times.

Did that have any impact do you think on the August sales numbers?

We don't have any data to support a point of view on that.

I think is our first thought, but our sense is it probably did help at the margins, and Florida is a State, we're here, which had a legislative change to drive the school year back.

It had in some districts almost creeped to July I guess, and now it's the third week I think of August.

Okay, and then the pricing on the Never Ending Pasta Bowl is that the same as the pricing a year ago, the $8.95?

$8.95 is $1 higher than a year ago and it had been $7.95 for about seven years up until this change.

Okay, thank you.

And the next question comes from the line of Tom Thomson of Thompson, Siegel.

Please go ahead.

Thank you and good morning.

Two quick ones.

Is it fair to assume given what you say about the very high margins in Olive Garden that putting pre-opening expenses aside, the fact it is your growth vehicle right now provides a general uplift to margins, all else equal, and secondly, can you explain what the meal tasting system is?

Thanks.

This is Brad.

I'll take the first question in regards to margins and Olive Garden that yes, it performs an absolute very high level and when you look at our basket of restaurants, growing those at a quicker rate definitely enhances our financial performance and adds significant shareholder value.

And in the meal pacing system is something that helps the culinary team prepare an order in the right sequence so that everything comes up in the window at the same time, hot and ready to go, so after a server will enter an order in our point-of-sale system, the meal pacing system helps send different elements of that order to different stations in the kitchen at the right time and prompts people working in those stations regarding when to start them so that they all finish at about the same time and come out at the same time.

This is Brad.

I guess the one other thing I'd add to Drew's comment and Clarence, they talk about their work environment but it's paperless as I said.

It's monitors so we have a lot less paper chips to get lost and so that is another factor that improves the guest experience as well.

Okay, thank you.

And the next question comes from the line of [Jack O' Hara] of Sentinel Funds.

Please go ahead.

Hi, thanks for taking the question.

You listen to other retailers and restauranteurs, they talk about the pockets of weakness with the consumer and specifically, your home State of Florida is mentioned as well as California.

Can you just tell us in general of all of your units out there what percentage you have in those two states and whether you see really different results out of those two states versus other regions?

Thank you.

Yes, I would say in California, I believe we have 96 Restaurants and so on a percentage basis we've got 1400 Restaurants, do my math, it's about 6, 7 -- 7%, so a little bit underpenetrated in California if you think about the population there is probably 11, 12% of the national population and then in Florida we have 150 Restaurants, oh, I'm sorry, 115 Restaurants, and so about 8% or so, and that's probably a little bit overpenetrated when you think about Florida's 14, 15 million people as a percent of the national population, in both states, we do see sales that are lower and so when you look at the industry, I'm talking about the industry, when you look at the industry measures, we do see weakness, relative weakness in California and Florida.

I think our Restaurants in California do very well though.

We outperform the industry fairly significantly there, especially Olive Garden, and I think that speaks to Olive Garden's strength from a value perspective, if you've got an environment that's especially value conscience, Olive Garden is the number one value player in casual dining that helps but Red Lobster is doing well in California as well.

And dramatically outperforming the industry, and then with Florida, I'd say it's the same story, that we do outperform the industry and so we have not been dragged down by either State.

Thank you.

Okay, thank you.

And the next question comes from the line of Rachael Rothman of Merrill Lynch, please go ahead.

Hi, thanks, good morning.

Just a couple questions on your guidance if I could.

It seemed as though you had raised the revenue growth guidance and yet kept the EPS growth roughly flat.

Maybe could you comment on what's offsetting the upside surprise in revenue?

And then given as strong as your sales were, we would have looked for stronger leverage in G&A.

Are you guys currently carrying incremental cost for the merger or how should we think about the level of G&A currently?

Maybe opportunities for further leverage there?

Thank you.

On the second question first, on the leveraging, a couple of things are going on there.

We have some carrying costs that are related to the disposition of Smokey Bones.

We've incurred some minor costs in relation to the acquisition there, nothing significant, but also you heard Drew talk about some of the investments in Red Lobster particularly around the Today's Fresh Fish and actually featuring that on air in a meaningful way in the first quarter, so that was a little bit of the drag, if you will, on the leveraging on that particular line.

Again, on the Red Lobster piece clearly, good investments to reposition that brand, and sales, the sales guidance.

Yes, you're correct.

We did move the guidance up.

What I would say is we've had a very strong first quarter.

We look through the rest of the year there's still a fair amount of uncertainty, we're one quarter into the year, but our guidance on the earnings side of that, 10 to 12% still feel that that's a range that covers what we're seeing as we look forward today.

And I would just say again, just to emphasize that point that we're dealing with an environment that is what it is.

It's a tough environment.

We're looking at the forecast as everyone is, and so we think it's prudent to be cautious just a quarter of the way in.

Perfect.

Just one quick one on guidance, again, for the 40 million in synergies that you're looking for from the Rare acquisition, can you just help put a time frame on that?

Is that for fiscal '09 or fiscal 2010 or maybe a blend of the two?

That will be two years out so fiscal 2010 and I would say that we see some meaningful synergies or what we call quick wins, things that we would expect to be able to capture in this current fiscal year, such that our EPS as I mentioned earlier would be neutral to our current estimate which implies what the lower share buyback that we accept for ourself now that there is meaningful growth at the EAT level.

Perfect, thank you.

Okay, thank you.

The next question comes from the line of Mike Smith, Oppenheimer.

Please go ahead.

Good morning.

EAT level?

The earnings after-tax, Mike.

I mean we--.

Oh, I thought it was another one of those PLEs.

I have two questions, actually.

One is on the Rare deal.

What are the costs that are going to be associated with that when you say you'll be flat exclusive of the cost?

How much are those?

Mike, at this particular time we aren't prepared to detail those but they relate to the traditional cost of doing the deal as well as integrating the two organizations, the purchase accounting, we have yet to work through all of that to the detail that we need to be specific on it but obviously there will be some intangibles there, some will be amortized and some will not but we'll add greater clarity around those in December.

And my other question had to do with Seasons 52, we've kind of beaten, or talked about Red Lobster and Olive Garden, Seasons 52, where do they stand in terms of your future expectations?

Oh, I'll start, Mike, and what I would tell you is we've got the 7 restaurants, they continue to do well, and we feel good about how they are performing across the footprint which as you know is 5 in Florida, 2 in Atlanta, and we are out trying to build a site pipeline.

We are at a point where we feel like getting the right kind of site is critical for this business, and that as much as anything will drive the pace of development, and so as we look out, we're probably not looking at a new unit this year.

Maybe a couple in our fiscal '09 which starts June 1, and see what kind of pace we can establish.

My guess is it's probably somewhere 3, 4, 5 a year.

Thanks.

Okay, thank you.

The next question comes from the line of David Palmer, UBS.

Please go ahead.

Thanks.

My question is just a basic one on your earnings visibility in general, and obviously, there is a consumer and cost environment now that is perhaps more influx than ever in many peoples view and I know that those environments are never static, but you're also embarking upon a large scale acquisition and so I'm wondering, as you stand here in the first, after the first fiscal quarter, is the possible disbursion of revenue and outcomes wider in your own minds than perhaps this time last year?

And if not, what gives you confidence that you'll be able to kind of budget and predict for yourselves how you'll be able to navigate these costs and of course this integration?

I would say just a couple of thoughts.

I mean, one is Red Lobster is in a better place now than it was 12 months ago and so that certainly helps.

Olive Garden has accelerated its new restaurant growth and done that without adversely affecting its same restaurant volume, and that helps us as well because the new restaurant growth has earnings attached to it.

The third thing is that we've been working and making significant investments in working to improve making significant investments in our operating platform so our infrastructure, and so we feel that we're in good shape to manage the cost pressures that we face, better shape than we were 12 months ago, even if the cost pressures are more intense, we're in better shape when it comes to managing those so all of that increases our confidence.

The acquisition does introduce another variable, but it's an acquisition of two brands that are pretty proven, and so when you look at Long Horn, 25 years in operation, Capital Grill 17 years, we kind of know how they perform through various cycles.

We've got the leadership teams that have built those businesses coming over the continue to manage and run those and so we feel great about the visibility there as much as we can.

I think our view always is we try to manage what we can control.

We feel that given our capabilities we will outperform our category in any environment and that's really all that we can do.

Just a follow-up I guess separately, last two months the industry has seen an acceleration in same-store sales from dismal levels albeit, but nonetheless, there's been a sequential acceleration in growth.

Do you have any thoughts as to, or theories as to why that might be and do any of those theories make you think it can continue to improve in the near term?

Well, I think a couple of things.

One of them is just arithmetic that the prior year weakness helps when you're just really looking at comps so that's part of it.

I think the other part though is that gas prices stabilized, started to decline a little bit over the summer and that affects spending power for sure, although I think it's probably affects consumer psychology more than it does spending power.

And another thought would be that the improvement we've seen in the most recent period for the industry is more from check than it is traffic, so it just demonstrates that all of the consumer psychology and real spending issues probably still there.

Thank you very much.

Okay, thank you.

And the final question we have in queue is a follow-up question from the line of Steven Kron, Goldman Sachs.

Please go ahead.

Thanks for taking the question.

On the Rare acquisition, I guess, Brad, can you just remind us kind of the financing terms of that transaction and is there any variable debt in there and if so, what, if any impact might we think to that rate as it relates to the Fed decision yesterday and the economics of that transaction and potential accretion?

Okay, well the interim bridge financing we have in place for that was through Banc of America at I'd say terms that provide us the flexibility that we need to turn this bid out.

We would look to do that, to your point with where interest rates are.

We would look to do that in the nearer term, but again we need to get the transaction closed before we get too far down the path.

I'm planning for that.

We have also we renewed our revolver, we've upsized that a little bit to provide us the financial flexibility to accommodate what we're doing with the acquisition, and I think that the other thing, the common question around that is getting that financing, we see deals with our credit profile still getting done in this environment, the rating agencies have commented, we're still investment grade there, so we believe we're in a position and have the flexibility to do this at, if not maybe slightly better than the original assumptions when we made our decision to move with that acquisition.

And that was the 7% that you talked about?

Yes.

Okay.

Thank you.

Okay, thank you.

And there are no further questions in queue.

Please continue.

Well, great.

Thank you, everybody for joining us this morning.

We appreciate your interest in Darden Restaurants.

We look forward to speaking with you throughout the quarter.

We will be attending a few conferences and we'll be back with you in December to report our second quarter results.

Have a great day.

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