達登餐飲 (DRI) 2008 Q2 法說會逐字稿

Welcome to the second quarter earnings release conference call.

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

Later we will conduct a question and answer session.

Instructions will be given at that time.

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

I would now like to turn the conference over to our host, of Investor Relations, Mr.

Matthew Stroud.

Please go ahead.

Thank you.

Good morning, everyone.

With me today are Clarence Otis, Darden's Chairman and CEO; Drew Madsen, Darden's President and COO; Brad Richmond, Darden's CFO; and Gene Lee, President of Darden's Specialty Restaurant Group.

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

In addition to webcasting the audio portion of this presentation we are also webcasting a PowerPoint presentation discussing our second quarter results and other financial information.

You can access this presentation by visiting our website and following the instructions there that allow you to view the webcast.

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.

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

These risks and uncertainties include the impact of intense competition, changing economic or business conditions, the price and availability of food, ingredients and utilities, supplies interruptions and labor 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 Darden's plans to expand to newer concepts, Bahama Breeze and Seasons 52, the closure and disposition of certain Smokey Bones restaurants and the anticipated sale of the remaining Smokey Bones restaurant, our ability to combine and integrate the business of RARE Hospitality International Inc., risks associated with incurring substantial additional debt and other factors and uncertainties discussed from time to time in reports filed by Darden 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 third quarter earnings and same restaurant sales for fiscal December, January, and February 2008 on Tuesday, March 8, after the market close.

In addition, we will hold an analyst and investor meeting in New York City on February 12, 2008, starting at 8:00 a.m.

Additional details will soon follow.

We released second 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 second quarter earnings.

Second quarter net earnings were $43.5 million and diluted net EPS was $0.30.

This includes the effect of the acquisition of RARE Hospitality which closed on October 1, 2007, as well as other items.

More specifically in the second quarter, integration and purchasing accounting adjustments related to the RARE acquisition reduced diluted net earnings per share by approximately $0.09.

Incremental financing costs, net of operating contribution and tax benefits from the acquisition decreased net earnings per share by approximately $0.01 and litigation charges related to the settlement of certain legal issues in California reduced diluted net earnings per share by approximately $0.02.

In aggregate these items adversely affected diluted net earnings per share by approximately $0.12 in the second quarter.

We reported diluted net earnings per share of $0.41 in the prior year second quarter.

In this years second quarter diluted net earnings per share from discontinued operations were $0.00 compared to diluted net earnings per share from discontinued operations of $0.04 in the prior year.

As you'll 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 cost for the nine closed Bahama Breeze Restaurants.

Brad will now provide additional detail about our financial results for the second quarter and our revised fiscal year outlook.

Drew will discuss the business results of Olive Garden, Red Lobster and Longhorn Steakhouse.

Gene will discuss the specialty restaurant group followed by Clarence with some final remarks.

We will then respond to your questions.

Thank you, Matthew, and good morning.

Darden's total sales from continuing operations increased 17% in the second quarter to $1.52 billion driven by the addition of Longhorn Steakhouse and the Capital Grille and meaningful new and same restaurant sales growth at Olive Garden.

The incremental sales from Longhorn Steakhouse and the Capital Grille totaled $163 million for the fiscal months of October and November.

Excluding the acquisition, sales growth for the quarter would have been 4.6%.

At Olive Garden, same restaurant sales were up 3.2% for the quarter, its 53rd consecutive quarter of same restaurant sales growth and its total sales increased 8.2%.

Red Lobster reported same restaurant sales increase of 0.1% for the quarter and total sales increased 0.6%.

Longhorn Steakhouse same restaurant sales decreased 3.9% for October and November only, and decreased 2.5% for the periods of September, October, and November.

The Capital Grille had same restaurant sales increase of 0.7% for October and November only.

And same restaurant sales increased 1.2% for the September, October, and November period.

Bahama Breeze had same restaurant sales increase of 0.1% for the quarter.

For context, industry same restaurant sales as measured by Knapp-Track and excluding Darden were down approximately 2% for the quarter.

Thus, relative to the industry, you can see then, aggregate Darden performed favorably.

Now, let's discuss the margin analysis of the second quarter, which is complicated by the acquisition of RARE Hospitality.

To offer more charity and an apples-to-apples comparison, of our year-over-year results, we are comparing results from continuing operations this year and last year, adjusted to include Rare Hospitality's October and November operating results for fiscal 2007.

Thus, the results from Smokey Bones and closed Bahama Breeze Restaurants are not included for either fiscal 2007 or fiscal 2008, but the results of the acquisition of RARE Hospitality are included for the months of October and November in both fiscal 2007 and fiscal 2008.

So let's begin by reviewing our results for the second quarter which are shown here on this slide labeled fiscal 2008 Q2 results.

The left and middle columns show our reported results for this year and last year.

I'd like to draw your attention to the right column of the slide, which is highlighted for you.

This column represents our second quarter results adjusted for the impact of transaction and integration related costs and the impact of purchase accounting adjustments related to the acquisition of RARE Hospitality.

In other words, this represents second quarter results excluding the various costs and adjustments associated with the acquisition.

More specifically, when compared with our reported second quarter results shown in the left column, you see the various acquisition related adjustments.

One, adversely impacted restaurant expenses by approximately 10 basis points.

They adversely impacted selling, general, and administrative expenses by approximately 120 basis points and adversely impacted depreciation and amortization cost by approximately 10 basis points.

In sum, the various acquisition, integration and purchase accounting a adjustments adversely impacted our second quarter results by approximately 130 basis points, roughly $21 million which equates to diluted net earnings per share of $0.09.

We anticipate additional acquisition integration and purchase accounting adjustments in the third and fourth quarter of approximately $0.03 per diluted share and $0.02 per diluted share respectively, which includes approximately $0.01 per diluted share each quarter for purchase accounting adjustments.

On this next slide, labeled fiscal 2008 Q2 results adjusted, we show our second quarter results in fiscal 2008 adjusted for the various acquisition related costs I just mentioned.

And compare that to second quarter results last year and fiscal 2007 adjusted to include the operating results of RARE Hospitality, for October and November 2006.

While these results were unaudited, we believe they offer a better understanding of the year-over-year performance.

This information was included in last nights press release.

I will discuss the margin analysis for the second quarter based on this presentation of results.

Food and beverage expenses were approximately 30 basis points higher than last year on a percentage of sales basis, adjusted for the inclusion of the RARE brands, primarily because of commodity cost inflation and most significant inflation was on dairy, bread, and some seafood products.

Menu exchanges at Red Lobster also contributed to higher cost of sales.

As many of you know, the cost of dairy and wheat in particular has increased dramatically in recent months, especially in October and November.

We are not able to effectively hedge our dairy usage and so there, we operate with market risk.

We do, however, hedge our wheat related products primarily with contracts on bread and pasta, but had to remove some of our contracts on those products during the quarter at higher than expected year-over-year prices.

Bread in particular was a major contributor to our food and beverage and favorability this quarter.

We have taken pricing to offset some of the expected cost inflation this year and will take more pricing if we believe there is a structural change in the commodity cost environment.

Rarely will an increase in any single one of these product categories have a major effect on the business but unfortunately, this quarter we see a significant combined rise in their cost.

Second quarter restaurant labor expenses were 60 basis points higher than last year on a percentage of sales basis adjusted to include the RARE brands.

Due primarily to wage rate inflation of about 5%, which was near our expectation and driven mostly by minimum wage increases.

We also chose to carry additional managers at Red Lobster and Olive Garden that were transferred from the Smokey Bones Restaurants we closed in May 2007.

The cost of these additional managers was approximately 10 basis points or $0.01 on an earnings per share basis in the second quarter; however, we expect these costs to be offset late in the year by lower manager hiring and training costs.

Restaurant expenses in the quarter were 50 basis points higher than last year on a percentage of sales basis adjusted to include the RARE brands.

Primarily because in last years second quarter, there were 45 basis points of workers compensation, public liability, and insurance favorability.

Selling, general, and administrative expenses were 20 basis points lower as a percentage of sales adjusted for RARE, primarily due to sales leveraging and lower incentive performance pay.

This favorability was slightly offset by the California litigation charge.

As mentioned previously, this litigation charge adversely impacted diluted net earnings per share by approximately 30 basis points or $0.02 per share in the second quarter.

Now, I'd like to update you on our revised 2008 annual outlook.

For the full year, we continue to expect combined same restaurant sales growth for Red Lobster, Olive Garden, and Longhorn to be between 2 and 4% but more in the lower to middle part of the range given the current consumer environment.

We expect a net new restaurant increase of approximately 65 restaurants and that includes the growth at Longhorn and the Capital Grille for October through May, putting total sales growth for the year in the range of 19 to 20% compared to reported sales of $5.57 billion in fiscal 2007.

With the addition of Longhorn Steakhouse and the Capital Grille for the period October 2007 and May 2008 and the more challenging cost environment we have new expectations for cost and expenses as a percentage of sales in fiscal 2008.

We expect food and beverage costs to be approximately 30% of of sales in fiscal 2008 and that's about 100 basis points higher than we expected coming into the year, but about 70 basis points of this increase reflects the increased protein mix attributable to Longhorn and the Capital Grille while the remaining 30 basis points relates to higher seafood cost , particularly lobster, increased costs for the reported products due to currency valuation and the current commodity environment previously discussed.

We expect labor costs as a percent of sales to be approximately 32% in fiscal 2008 and that's about what we expected.

Restaurant expenses as a percentage of sales are expected to be approximately 15% in fiscal 2008, also near our expectation.

We now expect that selling, general, and administrative expenses will be approximately 10% of sales in fiscal 2008.

Now this includes transaction and integration cost and the impact of purchase price accounting adjustments related to acquisition of RARE.

As I mentioned earlier, these costs total approximately $0.09 per diluted share in the second quarter and we anticipate an additional cost of $0.03 and $0.02 per diluted share in the third and fourth quarters respectively or about 40 basis points for the year.

We expect that as a percentage of sales, depreciation and amortization expenses will be approximately 4% this year.

And finally, we believe our annual tax rate will be approximately 29% for the year.

While these expectations for costs and expenses, we now anticipate that diluted net EPS growth from continuing operations will be 2 to 4% including transaction, integration related costs, and the impact of purchase accounting adjustments related to the RARE Hospitality acquisition.

These costs and adjustments will impact net diluted earnings per share growth by approximately 5 percentage points.

So excluding the transaction and integration related cost and purchase accounting adjustments, we estimate the acquisition of RARE Hospitality to be accretive to our EAT, neutral to diluted net earnings per share, and that total diluted net earnings per share growth for Darden will be 7 to 9% in fiscal 2008.

While we believe this is solid EPS growth in a challenging environment that has been temporarily impacted by our reduced share repurchase expectations this year, we anticipate repurchasing between 125 million and $175 million of our stock.

This is less than half of what we spent last year as we focus on reducing our debt accumulated from the acquisition.

In fiscal 2009 and beyond, we expect to return an increasing amount of our strong cash flows to shareholders through share repurchases, lowering our share base.

Now, let's turn to an integration update.

Our integration plans are on track.

We have made considerable progress working with the people at RARE to better understand how to combine these companies, to leverage resources and pull expertise, we created the Specialty Restaurant Group which combines the Capital Grille, Bahama Breeze, and Seasons 52.

As we've disclosed before, the Specialty Restaurant Group or SRG, is headed by Gene Lee and in a moment he will discuss more and the rationale behind the structure.

While there are many significant transitions occurring as part of the integration, I want to update you on three in particular.

We expect to complete transition of the Atlanta Restaurant Support Center which is RARE's headquarters by the end of July 2008.

We have spoken with each employee in Atlanta to discuss their role in the transition.

Approximately 50 people will be moving to Orlando over the next few months.

We are also working on transitioning RARE's financial systems and we expect to complete that in January of 2008, and we begin to transition RARE's supply chain in two phases.

The first phase will be completed in May of 2008 and the second phase will completed in November of 2008.

As you know, these categories are the source of many of the cost synergies we expect to see from this transaction.

We discussed how we see those synergies shortly, but let me conclude with this slide by saying that after working with the RARE team, we are more convinced than ever this action makes sense.

As we've said before, Darden and RARE have very similar cultures focused on getting results the right way.

In addition to having strong values both companies are focused on what matters most, the guest and employee experiences.

In particular, in the case of employees, the employee experience for the member of our team who come in contact with the guest every day.

Acquisition synergies.

We want to give you an update on our expectations for cost synergies for the RARE acquisition.

You will recall that we said we anticipated generating annual cost synergies of approximately $40 million by the end of the second full year, driven primarily from supply chain and purchasing efficiencies and corporate and other restaurant support efficiencies.

On this slide we offer our estimated cost synergies for the next three fiscal years.

We have classified the synergies into two categories, cost of goods sold and G&A.

As you can see, we expect cost synergies of $8 million in our current fiscal 2008, $30 million in fiscal 2009, and $40 million in fiscal 2010.

We anticipate the increase in these synergies will be achieved in the second half of each fiscal year.

We are comfortable with these estimates and believe based on our current understandings that we are well on our way to achieving them.

Going forward, we will offer periodic updates on our progress towards capturing these synergies.

Let me end the integration update by letting you know that we have included some additional financial results for the third and fourth quarters of fiscal 2007.

These slides are included as part of our presentation today and can also be found on our website at www.Darden.Com after listening to today's webcast.

We offer these slides as information only and are not prepared to speak to them today.

These adjusted financial results will help when comparing our third and fourth quarter reported results.

Now, let me take a moment as well to update you on our recent events concerning Smokey Bones.

Earlier this month, we announced a definitive agreement to sell Smokey Bones to an affiliate of Sun Capital Partners Inc.

for approximately $80 million.

We expect this transaction to close within 30 days.

The proceeds of this transaction will be used to retire debt and repurchase shares.

While it is an important transaction that better positions Darden for the future, we also believe is what's best for the Smokey Bones brand.

As we move forward, we certainly appreciate the contributions of our friends and colleagues at Smokey Bones and wish them well.

And now, I'll turn it over to Drew to comment on Olive Garden, Red Lobster, and

Thank you, Brad.

Olive Garden continued to deliver competitively superior sales performance during the second quarter.

In addition to achieving their 53rd consecutive quarter of same restaurant sales growth, they exceeded the Knapp-Track competitive set by over 5 percentage points.

Olive Garden's key priority remains unchanged.

They continue to focus on accelerating new restaurant growth while maintaining same restaurant excellence.

Now, during the second quarter, Olive Garden opened seven new restaurants and in fiscal 2008, they expect to open a total of 40 net new restaurants, ultimately, we believe Olive Garden has the potential to operate 800 to 900 restaurants in North America.

Olive Garden advertising during the second quarter featured compelling food news and strong value.

First, their signature never ending pasta bowl ran in September and October.

This feature was supported by new advertising and delivered a strong message of choice, variety, and Italian generosity at a compelling $8.95 price point.

Next, twist on classics began in November and will continue through the holidays.

It is also supported with new advertising and features two new entrees, stuffed chicken florentine and stuffed chicken prosciutto that introduced guests to classic Italian ingredients in approachable new dishes.

Operating fundamentals at Olive Garden also remain strong, in particular, guest satisfaction improved significantly versus prior year and set a new record.

Controllable cost management was also strong, especially direct labor productivity and food waste.

By contributing to the improved guest experience was the completion of our Meal Pacing System rollout.

This system as you know helps optimize the flow of an order through our kitchen, and that results in hotter food being served to our guests, faster table turns, and increased throughput in our restaurants.

We're pleased with Olive Gardens strength in this challenging consumer environment and believe their focus on the guest and team member experience will enable them to deliver strong performance throughout the fiscal year.

Red Lobster also delivered competitively superior sales performance in the second quarter with same restaurant sales more than 2 percentage points better than the Knapp-Track competitive set.

Red Lobster also continued to strengthen its business foundation and delivered record guest satisfaction during the quarter.

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 is to refresh the brand, broaden its appeal, and build guest counts.

The third phase, which we expect to start in the second half of fiscal 2009 will be to accelerate new unit growth.

During the current fiscal year, their primary focus will be to refresh the brand and accelerate guest count growth by improving perceptions among lapsed users that Red Lobster offers a variety of fresh seafood prepared with culinary expertise.

Red Lobster ran two promotions during the second quarter, in September, October, and early November, they offered their signature Endless Shrimp promotion where guests could choose between five different shrimp preparations including new Buffalo Shrimp and indulge their craving with all of the delicious shrimp they could eat.

The big Seafood Festival began on November 13, and will run through the holidays.

It offers celebratory new dishes perfect for the holiday season that feature colossal shrimp or colossal scallops, proprietary items that are not available at any other major restaurant chain.

Our meal pacing system has been implemented in approximately half of the Red Lobster Restaurants so far and is scheduled for completion in the fourth quarter of this year.

Similar to Olive Gardens experience, the introduction of this system is improving guest satisfaction, service times, and throughput.

Red Lobster opened three more Bar Harbor prototypes this quarter in Aurora, Colorado, Lakewood, Colorado, and Reno.

The 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 going forward.

Red Lobster is also completing remodels of four existing restaurants to the Bar Harbor theme and they expect to expand that test with additional restaurants in the fourth quarter this year.

Now most recently on the first day of the third quarter, Red Lobster introduced a new core menu that has a cleaner, more elegant design, some new deserts, a new wine list, and more clearly highlighted lunch features.

They simultaneously introduced more brand appropriate plateware and flatware.

We are confident 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 fiscal 2009.

Turning to Longhorn steakhouse as Brad mentioned our integration efforts are on track and we are pleased with our progress to date.

Dave George has built a strong leadership team at Longhorn that combines executives from both Darden and RARE and we expect most of them to be in Orlando by the end of January 2008.

Longhorn same restaurant sales performance in a period of September, October, and November was in line with the Knapp-Track competitive set.

However, their year-over-year comparison were negatively impacted by four factors.

Incremental spending last September in support of the 25th anniversary, a new promotional strategy that shifted their signature fillet and lobster tail promotion from September, October last year to November, December this year, media support that only included 15 second ads this year, and a geographic footprint that is concentrated in regions that have weakened considerably versus last year, particularly Florida and New England.

Now, turning back to their advertising, Longhorn ran two promotions during the second quarter this year.

The first promotion, eye of prime rib fan for five weeks and the second promotion, flows fillet and lobster tail ran for four weeks.

Last year the fillet and lobster tail promotion ran for eight weeks.

Now, during October and November, Longhorn opened seven new restaurants and they expect to open 26 net new restaurants during fiscal 2008.

Ultimately, we believe Longhorn has the potential to operate 600 to 800 restaurants in North America.

Our primary focus at Longhorn over the next several months is to ensure that we continue to deliver a great guest experience by maintaining a high level of operations excellence and restaurant support while also effectively integrating the brand into Darden.

In addition, we continue to build a pipeline of quality sites for future new restaurant growth and we've taken the initial steps required to accelerate menu innovation and strengthen advertising and promotion effectiveness, including the promotion of Terry Stanley to Executive Vice President of Marketing at Longhorn.

Terry was previously Senior Vice President of Culinary and Beverage at Olive Garden.

Longhorn Steakhouse has a strong foundation and a talented team and we are delighted to have them as part of Darden.

And now Gene will discuss our new specialty restaurant group.

Thanks, Drew.

It's great to be here with you this morning to discuss the Specialty Restaurant Group.

As you've heard Brad mention, the Specialty Restaurant Group was designed to leverage our resources and pull our expertise around building the Capital Grille, Bahama Breeze, and Seasons 52 brands.

I see a tremendous amount of promise in each of these brands by combining our efforts under one group we believe we can more effectively grow these small, premium brands to be meaningful contributors to Darden.

To foster this effort, we have centralized the finance and human resource teams at these brands and are looking for other synergies as well.

The Capital Grille second quarter sales which include only October and November were $37.3 million, an increase of 11.3%.

This growth was driven by four additional restaurants and the same restaurant sales increase of 0.7%.

We successfully opened two new restaurants in the quarter and we plan to open three more restaurants in this fiscal year.

Guest satisfaction continues to trend at very high levels as measured by our Mystery Shopper program.

And in the coming months, we will focus on a number of brand building and sales strengthening initiatives.

John Martin and his team have done an outstanding job operating the Capital Grille and we're excited about the growth potential.

We continue to be successful in central business districts, malls, and other destination locations.

Bahama Breeze's second quarter sales of $30.3 million or one-tenth above prior year sales of continuing operations driven by same restaurant sales growth.

As you are aware, Bahama Breeze has made tremendous progress over the last two years improving the guest experience, increasing restaurant level returns, and broadening the brands appeal.

Given this performance, the strategic focus for Bahama Breeze is to prepare the business for disciplined new restaurant growth which begins with two new restaurants in fiscal 2009.

Laurie Burns and her team have successfully repositioned Bahama Breeze for future growth.

Seasons 52 is performing very well.

This is a uniquely positioned brand with strong guest acceptance.

Our seven restaurants are delivering average sales volumes in excess of $6 million.

Stephen Judge and the team are focused on building the concepts operational foundation and setting the brand up for successful future growth.

And now, I'll turn it over to Clarence for final comments.

Thanks, Gene.

As we indicated in our press release last night, while we feel good that our sales results continue to be industry leading this quarter, we are disappointed that those sales did not translate into stronger earnings results.

We do recognize, of course, that that's due primarily to a very challenging cost environment with meaningful escalation on a couple of items over the last two months or so.

And we also believe that costs are going to remain challenging for awhile.

That said, though, we're confident we can successfully navigate through this environment and that's because we think we have three advantages.

First, as our competitor, we felt strong sales results suggest each of our brands is strong.

Each has proven guest appeal and that should continue to serve us well as consumers become more discerning than ever about where they choose to dine.

And the second one is that with the RARE acquisition, and with the cost synergies that come along with that, we're better positioned than we've been in the past to mitigate these near term cost challenges.

And then longer term as the cost environment normalizes, those synergies and the accelerated total sales growth that we're now capable of because of the acquisition are going to serve to enhance our margins, they're going to serve to enhance our profit growth.

We feel great about the acquisition of RARE Hospitality and we're clearly pleased to be joined by so many talented leaders who are joining us in our quest to build what we think will be a great Company.

And then finally, I think the final very important advantage is our proven approach to the business, and you've heard us talk about that before.

It's an approach that involves combining strong brand management and great operations, supported by excellence and the functions that are driving much of the synergy that we expect from this acquisition, functions like supply chain, information technology, human resources, and a number of other key business disciplines.

And ultimately, we think that all of these advantages and the resulting ability that we have to create sustainable leadership value for our shareholders really rests on having great people, and so we're proud of our outstanding people.

They're outstanding in our restaurants as well as in our restaurant support center, they're working hard to make the integration successful, and they're working hard to create a Company that's a leader in our industry, now and for generations.

And with that, we're happy to take your questions.

We do apologize for the length of the presentation but there have been a number of moving parts in this quarter and so moderator, we'll open it up for questions.

Thank you.

(OPERATOR INSTRUCTIONS) First question comes from the line of Glen Petraglia with Citigroup.

Please go ahead.

Good morning.

It's Glen Petraglia.

I get the sense from your comments that it sounds like you expect the environment or the sales trends to sort of stabilize as we go over into the next half of the year and I guess given that traffic trend that each of the three core concepts seem to weaken as we move through the second quarter, I'm wondering what gives you confidence that the consumer environment won't get even more challenging as we go ahead?

Well, we think, Glen, that you're right.

We do expect it to actually stabilize and improve a little bit.

As we look really over the last several quarters, what we see on the consumer side the last couple of years quite frankly is a fair amount of volatility, and so from quarter to quarter, sentiment bounces around a lot.

A lot of it is related to the fact that some of the pressures on discretionary income bounce around, so when you look at the second quarter, probably the thing that stands out is gasoline prices and that's something that we have seen move the consumer around and it's a pretty volatile price.

We don't expect it to stay at second quarter levels.

We do expect it to come back a little closer to where it's been over the last 12 to 18 months and so that's part of it, but we do expect some improvement from the second quarter modest improvement but some improvement and part of that is because of the balance, for example, the first quarter was dramatically better than the second quarter from a consumer perspective if you look at total industry as we look at our brands so that's sort of definitely in our thinking and I think the other part is that we expect cost to sort of stabilize where they are.

We're not expecting a whole lot of favorability there.

That may happen.

If that does, that's upside to our current outlook.

And then secondly, as you've gone through RARE in the last couple of months, is there anything that stands out to you as particularly surprising, either on the positive or the negative side?

Versus what maybe your expectations were when you made the acquisition?

Yes, we felt that this was really a good fit from a culture perspective and by that, we really mean the values and what we think is important in terms of how you treat people and what ultimately drives business performance and that's been true, but that fit also is that we both from an operating philosophy perspective are very similar so we're very systems driven when it comes to restaurant operations and restaurant support.

The systems are somewhat different and so that's part of the integration cost is aligning those systems but all of that has been great.

I think from a cost synergy perspective, we had a view that there were significant synergies there and that's been confirmed as we've worked through it.

I think on having not done this before, the integration just takes a lot of time and energy.

There are a lot of details.

We've been able to compartmentalize that work and keep it away from the Operators and more on the support personnel but it is a great deal of work.

Thanks.

The next question is from the line of John Glass with CIBC.

Please go ahead.

Thanks very much.

On the guidance I just wondered if we could clarify a little bit, is the base year you're using still 253 for '07 to grow the earnings base?

John, this is Matthew.

That's correct.

That's the benchmark.

Okay and then if you back out your, the integration cost have you actually changed your second half earnings guidance?

Yes, that would slightly be adjusted for the higher cost and slightly lower same restaurant sales growth, lower in that range so we have taken it down but when you put the first half of the year and look at the second half you're going to get into that 8 to 10% range, so it's 7 to 9 range.

Okay, I'll walk with you after the call, I'm still a little unclear.

And then in terms of the visibility you have on the food cost in the back half of the year I understand you expect costs to stabilize.

Where are you at risk?

It sounds like there were a few things that changed quickly this quarter, maybe you didn't have contracts on or maybe you renegotiated unexpectedly with a vendor.

Can you talk about where you still have some exposure of things you don't know or don't have locked down?

When we look at our, particularly the food and beverage cost for the back half of the year, at this point we have much more of a contracted in, I think the ones that I mentioned earlier that were at the market risk would be for some of these dairy items would be the ones that will fluctuate.

I think we'll see those move both up and down over the course of the back half of our fiscal year.

Okay, thank you.

The next question is from the line of Jeffrey Bernstein with Lehman Brothers.

Please go ahead.

Great, thank you.

First just a follow-up on an earlier question in terms of kind of the second half guidance.

Just wondering in terms of your assumptions, seems like you are taking a stance that things will stabilize or actually get slightly better in the third and fourth quarter.

Just wondering based on what we see of late and the volatility, why perhaps you wouldn't take a more cautious stance in the back half, kind of bring down expectations just based on the fact that there is trends volatility and we have seen trends decelerate just over the past couple of months and then I have a follow-up.

Yes, well, I will start off, this is Clarence, and I would just say on the back half, I think Brad just said it, we have taken a more cautious look than we ended the year with from a sales perspective and so we talked about 2 to 4%.

I think if we looked at the front half of the year we would have thought we would be at the high end of that range, maybe even slightly above it and we saw that in the first quarter and we still have that same range but we're clearly thinking that we're going to be in the bottom half of that range.

First half of the year is slightly above the mid point and so a little bit more cautious, but we're working on and strengthening our brands and we think we've got strategies in place that will enable us to continue to outperform the industry and so that's part of it.

On the cost side, I think as Brad just said, our outlook has changed meaningfully and so while we don't expect it to deteriorate from second quarter a lot, it is still significantly higher than when we came into the year.

Okay, and then just a follow-up on the broader consumer environment, Clarence, you've recognized consumer pressures still by far outperforming peers, just wondering first kind of the specific measures you look at that you believe drive that and then more specifically what are you doing to combat the more recent pressures?

Any thoughts of perhaps more value focused offerings or greater couponing?

I know we've seen a number of your competitors kind of talk about going more deep discounting, just wondering why you have a short-term plan to help combat that or whether it's status quo.

Well, I'll start with just the overall measures, we look at clearly disposable income growth and then digging below that to try to get at discretionary income growth, and so that's what we look at, and of course as a result of that, we're looking at all of the outlaid pressures, whether it's gasoline prices, home fuel prices, mortgage rates and so we look at the level of adjustments, et cetera, et cetera, and we do that region by region, and so it's really many of the same things that you looked at as we try to get a handle ultimately on discretionary income growth.

In terms of our thinking about how to navigate through this, I'll let Drew take the first stab at that.

Well, in an environment like this, we're really focused on three or four key things.

When consumers spend to choose their discretionary time and money with us we have to give them a great experience, as I said before, we need compelling food news for sure.

We need appropriate value over the course of the year, and the fourth thing is we need to make sure we're building a brand in a base business that we can carry into the future, so we are looking at making sure that we have a great experience that each of our promotions features new products and new food news that's compelling to our guests and that throughout the next six months and in the second half, there's going to be periods of appropriate value emphasis, but I wouldn't say -- you mentioned deep discounting before.

I think that would be inconsistent with how we're thinking about building a brand and a base business for the long term that we can carry into the future, but we are going to make sure we have appropriate news and value over the course of the second half.

And I would just say stepping back and looking at it from a strategic perspective, each of our big brands are in different places in terms of where they are, in terms of strength of promotional pipeline and these, and we talked about it before Olive Garden clearly leads the industry on that score, very strong, well ahead year and a half, two years out on promotional pipeline, that's where we've been trying to get.

With Red Lobster we've made tremendous progress over the last several years but we still got more work to do, and at Longhorn, they really have done a lot of work on the promotional side.

We think there's a lot more that we can do to strengthen promotional pipeline there, and so that's some of the work that we've got designated there.

Thanks.

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

Please go ahead.

Hi, thanks very much.

Good morning, guys.

A couple of questions.

One, I guess first just looking at Olive Garden and looking at the press release and seeing what I think is even excluding the one-time item deleverage again in the P&L despite an above 3% comp, I suspect that's where you're getting a lot of the commodity pressure but I guess can you just talk about that and what your expectations are from a margin standpoint at the brand going forward and baked into your guidance and related to that just you mentioned pricing and how you obviously continue to keep an eye on that, particularly in the current environment, when might that decision come as far as further pricing and what kind of pricing power do you have at that brand right now?

Well, you're absolutely right.

Olive Garden is experiencing a disproportion at amount of the commodity cost pressure, dairy, bread, wheat, in particular, and that was reflected in their second quarter performance.

On the question of pricing, our pricing decisions have to balance two things.

We want to make sure that we have a strong consumer value equation and broad price point accessibility on the one hand and on the other hand, we know we need to maintain strong unit level margins.

We believe that our scale in our operating infrastructure is a competitive advantage because it allows us to take less pricing than some of our competitors, still maintain strong unit margins and perhaps take some market share.

In the current environment we've had to increase our pricing from say the 2% range in the past few years to more like 3% in the current year roughly.

Most of that was driven by minimum wage.

Things that we knew were coming, things that we knew were going to be permanent cost in the business model, so we priced to cover that.

What surprised us as has already been mentioned by Brad and Clarence is the rapid run up in several commodity costs at the same time.

We're evaluating those costs now to see if we believe they 're going to be with us for an extended period, if they feel like they're more structural and we're looking at other ways we can offset it without pricing.

I mean, very important part of our enterprise value creation going forward is the synergy from the RARE integration that was already talked about which is going to help us combat some of those cost pressures in a way that other people can't.

So we're evaluating potential pricing in the future but we're going to balance it against maintaining broad consumer accessibility.

I would just say also, there's a silver lining.

It is that the pricing pressures at Olive Garden where our margins are the strongest, and so we feel like we've got more choices from an Olive Garden perspective than we might at some of the other larger brands and so it really is a question and with we're talking about it, how much to price, how much to maintain pricing and take market share.

I think if you look at California it's a microcosm of what the alternatives are because California is one of the weakest markets when you look at Knapp-Track but for Olive Garden, California is extraordinarily strong market and a large part of that is because of its value leadership so we've got to make choices about our sales growth versus pricing and we'll be thinking that through over the course of the next couple of months.

So year-to-date it looks like in that brand the margins are down.

Is baked into your guidance for the back half an improvement in margin trends on a year-over-year basis or more of the same as we move through the year?

On the food and beverage, it's going to be pretty much what we're seeing now, although if you look at the restaurant labor line as we ramp some of those increases from last year, we expect to see some improvements there and from minimum wage increases and our efforts on the integration and some of those synergies will start to have a very modest impact towards this fiscal year but particularly as we look to next year would have a significant impact on our margins and earnings growth.

Okay, and then the last question, just related to a couple of other questions that were asked as far as the outlook going forward from a sales perspective.

You at times give some insight as to how the current month is developing.

Care to make any comments just on how December is shaking out relative to November?

Well, we really tend not to do that unless we're at the end of a period where we're about to report and so we went away from monthly sales we've not had that need.

I would tell you, the obvious I guess that weather has been a significant negative so far in December, but there's a long winter just started.

We've had tough Decembers followed by a mild Januarys and Februarys from a weather perspective, we plan normal winter, so the three winter months overall, we would expect it to look a lot like last year.

It's hard for us to forecast any variance from that.

Thank you very much.

The next question is from the line of Bryan Elliott with Raymond James.

Please go ahead.

Good morning.

Wanted to get a little better insight into Longhorn.

You mentioned the exposure to Florida and the timing differences on the promotional, marketing, spending being dialed down a bit, but nominal same-store sales they are down significantly and just wondered what you could talk about potentially, we've seen disruptions from integration standpoint, have we seen manager turnover rise for instance?

Anything in addition to the geography and marketing that you could help us give insight into that deterioration?

Sure.

We don't think, first of all that the same restaurant sales trend at Longhorn is related to loss of focus or disruption related to integration.

As Clarence said earlier while there's certainly a lot of hard work and a lot of great work going on there, we think we've done a good job of shielding it from the operators.

The biggest trends that really, or factors that really impacted the same restaurant sales trends are the four I mentioned earlier and it's not a reduction in promotional support or advertising support.

It's a shift in their strategy, but let me walk you through them.

A year ago, when Longhorn was celebrating their 25th anniversary, they had a significant amount of incremental marketing spending particularly around the Atlanta area where there's 40 or 45 Longhorn Restaurants, they had 13 or 14 billboards up, they had some incremental media, they had newspaper ads that featured steaks at 1982 prices, so it had a meaningful impact on sales for a couple months in that area.

The second factor was their promotional strategy and I'll use the Longhorn fiscal year here, but from fiscal 2006 going into fiscal 2007 in Longhorn's calendar 2007 essentially, they made a decision which I think is a good one to go from four promotional windows in 2006 that were pretty long, like nine or 10 weeks, to more like seven promotional windows that are shorter, say five or six weeks each and that's more what Red Lobster and Olive Garden does, it gives you a better chance to introduce more news and have more new reasons to visit your restaurant.

But in the process of doing that, and putting in more promotional windows, the last promotion of the year, the steak and lobster promotion got pushed back so four weeks, there's about a four week shift there.

And that had a big impact.

The geographic footprint you're talking about is meaningful.

It's not a change year-over-year, but they tend to be concentrated in regions of the country that have seen the biggest softness year-over-year, Florida, New England, South Atlantic are probably the three biggest.

We don't expect those trends all to continue, obviously the 25th anniversary has passed them, the promotional strategy shift is past them, we're going to be working with the team already at Longhorn to see if we can't strengthen their advertising and promotions going forward, and as it relates to guest satisfaction, that continues to increase and we haven't seen an appreciable increase in turnover.

In fact, Longhorn was just recognized with the Peoples Report Award recognizing excellence in turnover, so the fundamentals are solid.

All right, thank you.

The next question is from the line of John Ivankoe with JPMorgan.

Please go ahead.

Hi, thank you.

First, just a really quick housekeeping question.

What number are you using for your second quarter earnings for your 7 to 9% guidance for the year?

What's the base?

Is it $0.39?

That would be $0.42.

I'm sorry, okay, so the second quarter is $0.42, okay, thank you for that.

Yes.

And secondly, obviously, Longhorn was mentioned to have some pretty tough geographies and in much of the country is completely under penetrated or I should say non-penetrated.

I mean where is the growth of Longhorn going to go in fiscal '08 and fiscal '09 from a new unit perspective?

Well, in our fiscal '08 they continue to slowly move West.

I think the furthest West they're going to get is Phoenix and they're also filling in some of the regions that are already in in new trade areas.

There's probably more of that frankly, than there is new geography going West, but it is a gradual expansion West but more filling in regions that they're already in.

Okay, now, I mean but are they continuing to develop in some of the under performing markets or are they developing in markets that are doing much better?

No, they are continuing to penetrate in those softer markets, as well as the ones that are doing better.

One of the things that the we need to do is get to a point where we can have more effective media, and that will help in all markets and so getting the full penetration of those markets is important.

When might Longhorn see national cable advertising?

Is it many many years away still?

Well, it won't be in the next year.

Right, that's what I assumed.

And finally, I think the question has been asked before, but I want to see if I can get perhaps a different answer.

What is your sense of the consumer in terms of pricing right now?

I mean it seems like in a QSR companies and casual dining companies are all taking pricing.

Have you tested levels of pricing and what the consumers reaction is?

In terms of what they order on the menu in terms of frequency or have the consumers in your mind just accepted the fact that we're living in an inflationary environment?

No, let me start.

I think consumers are highly sensitive to price and so we see that in how they navigate the menu in terms of preference on items and in terms of add-ons, beverage sales, and so a pretty heightened sensitivity to pricing and so that is definitely a constraint.

It also is an advantage for Olive Garden because Olive Garden is the value leader in casual dining so it certainly helps, and I think that given that kind of consumer environment, we feel pretty good, for example, about Red Lobster's relative performance, the fact that it's outperforming Knapp-Track by 2 points when it's average check and at Knapp-Track set is definitely toward the higher end and I think that speaks to the brand strength there.

Are there any significant pricing lapse that we should be aware of either at Red Lobster or Olive Garden in the near term or should the current pricing trend continue assuming you don't take more pricing?

John, Brad here.

First let me go back to your first question, on the EPS for the second quarter, we're using it ex-the integration -- the acquisition integration cost so it would be $0.39.

Okay.

And on the pricing, probably the biggest thing there is a year ago this coming January was when there was some significant minimum wage increases that we, no selected states did take some increases for so we will be lapping on those as we move into the January time frame, so we have some pricing on a year-over-year basis that would be a little bit less but directly attributable to the minimum wage increases in those selective states.

And to push you a little bit further is that when you're prepared perhaps to take pricing offsets on some of your commodities or would that be somewhat delayed?

I think we are still studying it, would not be prepared to make a comment on that right now.

Okay, thank you.

The next question is from the line of [Dan Henchman] with [Thomas Segal].

Good morning, guys, quick question about the one-time charges you had, earlier in the call you highlighted the integration and the purchasing accounting adjustments and how they affected each line item.

I was wondering if you could do the same thing for the litigation expense in the $0.02 charge where that appeared in the income statement?

If you could also just quickly highlight the pre-tax dollar amounts for each of these charges?

The litigation charge would appear on the G&A line and it would be in the range of $0.02 per share.

Okay, and what would the pre-tax dollar amount on that charge be?

Around $4 million.

$4 million, and what would those be for the integration and purchase accounting adjustments as well?

I believe those combined for about let me check here, about 20 million to $21 million.

Okay, great.

Thanks.

The next question is from the line of Jeff Omohundro with Wachovia.

Please go ahead.

Your line is open.

You may talk now, sir.

We'll take the next question from the line of [Mitch Pfizer] with Telsey Advisory Group.

Thanks, it's Mitch Pfizer with Telsey Advisory Group.

First off, Longhorn, if you were to just try and flush out the promotional mismatches I'm just wondering what you think the comps were in the quarter?

And secondly, it does look like, it's been brought up earlier in the call that the third quarter and fourth quarter earnings growth expectations are probably in the 10 to 13% range and if that is true versus the kind of 9% down in the fiscal second quarter where do you see the delta to drive that type of earnings growth in the second half of the fiscal year?

Thank you.

Well, on your first question, regarding Longhorn comps for the quarter those factors that I mentioned are probably about a point.

Okay.

And regarding, if I understood your question right, is what's driving the back half of the year, what the do we see there, won't get into a lot of perspective there but the comment I mentioned earlier is we're ramping on minimum wage increases, they are now a year ago so on the restaurant labor line you'll see some improvement there.

On the food and beverage line we've talked about stabilization on that line item as well as the continued efforts of the integration and the synergies that will be driven by that.

Would probably be the real leverage points as we look back to the third and fourth quarter.

Thanks and if I could just slip one more in there, Capital Grille comps looks like traffic was negative.

I think that might have been the first time in awhile where Cap Grille's traffic was negative.

Can you give us a sense the upper end, do you think this does imply a slowdown at the upper end or were there any nuances in the quarter to explain the weak traffic?

Thank you.

We have definitely seen a guest/traffic pullback at all levels in full service dining but we have seen a pullback in upscale as you compare us, also compare our other peers we've noticed that they've had negative guest counts also.

Overall we do believe long term that we can continue to grow guest counts on a very high base and continue to open five to six new restaurants a year for several years.

Thank you.

The next question comes from the line of Andrew Barish with Banc of America.

Please go ahead.

Hi, guys, just wondering on shrimp, your largest item, you do import all of that.

How might that cost item be affected by the dollar weakness as you bring it back into the U.S.?

And are you totally protected on contracts for fiscal '08 and maybe kind of dovetailing into how that might look going forward on that major item?

Yes, in our guidance, we've contemplated that, we have because we purchase all the food, we have about 90% of our remaining usage is already covered in our guidance.

And that would be at prices that are very favorable despite the currency fluctuations.

So the weak dollar has not had an impact on that food cost item yet?

Well, it has had an impact but there are other structural changes that are driving prices down, so it still remains pretty favorable.

It would have been better and we would have preferred to see it that way but it's still favorable.

Okay, thank you.

And the next question is from the line of Joe Buckley with Bear Stearns.

Please go ahead.

Thank you, that's Bear Stearns.

First, just a question on the wheat cost you mentioned.

Is the primary impact of that on pasta at Olive Garden?

And could I ask you to talk about whether you're covered going forward or hedged going forward in some way to mitigate that if wheat stays high?

The primary impact is on bread but there is an impact on pasta as well, and we're renegotiating a number of those contracts now, maybe a third of our contracts are in place and the others are being renegotiated as we speak.

Okay and then a question on Longhorn.

Comps, obviously a little bit weaker than expected, you mentioned charges in the third and fourth quarter I think of $0.03 and $0.02, $0.01 of which in each case is purchase accounting.

So is this dilutive on an operating basis now for fiscal '08 and I'm kind of curious what your expectations were when you bought it on a same-store sales numbers versus what we are seeing.

This is Brad.

Let me address your question on its impact on our earnings.

Actually as we've gone through this, we've had no change in our expectations.

We will add to our earnings after-tax on an absolute basis, as I mentioned though this year, buyback buyback though, there's not as much of our free cash flow going to that so on an EPS basis we still see it as being dilutive.

The purchase accounting impact, that single item is about $0.01 per share per quarter, so that was pretty darn close to what we would estimate at the time of the acquisition.

In terms of our evaluation when we were looking at the acquisition, we did see or are anticipating some toughness on the same restaurant sales line so we're within that range still at this point in time.

And I would just say, Joe, the purchase accounting is just one of the one-time up front costs.

I mean, there are other integration costs related to integrating the systems, related to severance and all kinds of other things that continue to play through in the third and fourth quarter.

So when you strip all of those out on an operating basis, it's accretive, and it is neutral at the EPS line again for the reasons that Brad mentioned, it's because we've got less share repurchase, but on an operating basis, operating income basis, accretive and so really a higher quality earnings model post-acquisition.

And then just one more question just on the regional comments, you mentioned California being very strong for Olive Garden, obviously weakness in the Florida and New England for Longhorn.

Are you seeing weakness in Florida or other regional markets for Olive Garden and Red Lobster as well?

Well, let the me step back and say Florida, California are two very weak markets.

Olive Garden is bucking the trend dramatically in California.

For Red Lobster and Olive Garden when you look at where the category weakness is, those would be weaker areas for us too but in some cases, that still means growth for Olive Garden and Red Lobster.

The diversion in California is even more dramatic though, for Olive Garden.

Is there any region you'd highlight other than Florida, California, New England?

Well, Olive Garden specifically is outperforming the Knapp-Track average in every region.

It's probably closest to Knapp-Track in New England, so that's maybe a tougher area for everybody, and Red Lobster is outperforming Knapp-Track everywhere except California.

Okay, thank you.

The next question is from the line of Steve Anderson with MKM Partners.

Please go ahead, sir.

Yes, good morning.

I just wanted to go through the interest line again.

I noticed a big jump, primarily related to the acquisition related costs but I notice with the existing credit facility , with that expiring coming up in October, can we expect, how quickly can we assume that incremental interest rate cost to gradually go

Well, the increase in interest is all attributable to the acquisition.

We have termed out the bridge financing we have at rates that were pretty close to our existing debt so that was on the low 6% range and we do have some of that debt as you can see on the balance sheet that is floating rate debt, short-term debt there, so that's going to be subject to that movement but that's by design because as we intend to pay this debt down relatively quickly, we wanted to have that availability to us.

Okay.

Your next question is from the line of Rachael Rothman with Merrill Lynch.

Please go ahead.

Hi, good morning, guys.

Just a similar question on the accretion dilution.

I'm not sure I understand, in the press release it says the Company estimates that in aggregate the acquisition in other items adversely affected, blah blah blah blah blay.

Is that just the acquisition costs?

Or is that all of the one-time costs as well as the revenues and expenses associated with RARE?

So to ask it another way are you saying that standalone Darden would have done $0.12 ex-RARE and ex-one-time items or are you just saying acquisition costs?

Well, there are two separate pieces.

The bulk of it is really one-time integration costs, and then I'll let Brad talk about that.

Away from that it's really the operating effect so what's the operating contribution from the RARE brands and how does that stack up against the financing cost associated with those brands, and so that's how we think about operations.

That piece in the quarter, the net was minus $0.01, for the year that piece we think will be neutral because a lot of the operating synergies are that Brad talked about, $8 million this fiscal year haven't materialized yet but will over the course of the next several months.

And just to follow-up a little bit with that, there is the purchase accounting adjustments that are required and that's about $0.01 and that's really related to the write up of assets, fixed assets, lease hold improvements, items of that nature and then as Clarence just mentioned the cost of actually combining the two companies, relocations, additional assistance to set us off on the right path here, that is included in there as well and that makes up part of that $0.09 so $0.08 of that was more of a one-time, $0.01 will be an ongoing purchase accounting adjustment.

So am I correct that standalone Darden if we just pretended that the RARE acquisition had never happened would have posted $0.12 versus $0.45 last year?

Yes, $0.12 more.

Sorry, $0.42 versus $0.52 last year?

Am I reading the release correctly?

$0.41.

GAAP was $0.41, yes, adjusted $0.45.

Yes.

Okay, perfect.

And then can you talk a little bit about the new unit productivity at the Olive Garden stores?

In the past you guys had been opening the units at about 100% of kind of your existing sales base, and it seems like now that's trended down to about 85.

Can you talk to us about how the new stores are opening?

Are they seeing any difference in the ramp rate or the opening level?

When we look at new restaurant performance, we don't see really a down tick in that.

We look at their sales performance, their 4 star expectations in terms of hurdling, meeting our cost of capital, and in aggregate, they're well above our cost of capital in terms of return and they continue to perform very strong.

I think new restaurants are expected to open at sales levels on an average basis or below system, I mean, because we're filling in small markets, we're filling -- et cetera, et cetera.

So there's no change there, and as Brad said, they continue to meet expectations and hurdle.

And one additional comment that prototypes that we're using now for Olive Garden are smaller and have fewer seats than most of the older Olive Garden prototypes out there but despite that they're still performing very close to the average unit volume.

Okay, great.

And then just finally on the traffic, can you talk a little bit about it seems like same-store sales has mainly been driven by pricing to this point.

Can you talk a little bit about how much more price you feel you can take without impacting traffic negatively further?

Well, that's the $64,000 question I guess that we're asking ourselves.

We do think we've got more pricing power at Olive Garden because it is the value leader already and has a very strong brand.

That just happens to be where most of our unexpected commodity cost pressure is coming from and as we mentioned that's why we're considering whether it would make sense to have some modest additional pricing there in the second half of the year but have not yet decided.

We're going to have to cut off the questions there.

We've gone past the bottom of the hour.

We appreciate you all being on with us today.

If you have further questions, additional follow-up you can get a hold of us here in Orlando.

We'll be happy to take your questions.

In the meantime we wish everybody a safe and happy holiday and we look forward to seeing many of you in February in New York City.

Thank you very much for being with us today.

Ladies and gentlemen, this conference will be available for replay after 12 p.m.

today through January the 19th, 2008, at 11:59 p.m.

You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 900833.

International participants dial 320-365-3844.

Those numbers again are, 1-800-475-6701 and 320-365-3844.

Access code is 900833.

That the does conclude our conference for today.

Thank you for your participation and for using AT&T executive teleconference.

You may now disconnect.