達登餐飲 (DRI) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Darden Restaurants, Inc.

second-quarter earnings release conference call.

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

Later there will be a question-and-answer session and instructions will be given at that time.

(Operator Instructions).

As a reminder, today's call is being recorded.

At this time then I'd like to turn the conference over to Mr.

Matthew Stroud.

Please go ahead, sir.

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.

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 (technical difficulty) 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.

We wish to caution investors not to place undue reliance on any such forward-looking statements.

Any forward-looking statements speak only as of the date on which such statements are made and we undertake no obligation to update such statements to reflect events or circumstances arising after such date.

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; supply interruptions; labor and insurance costs; the loss of or difficulties in recruiting key personnel; information technology failures; increased advertising and marketing costs; higher than anticipated costs to open or close restaurants; litigation; unfavorable publicity; health concerns including virus outbreaks and food safety; 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 Darden's newer concepts, Bahama Breeze and Seasons 52; our ability to achieve the full anticipated benefits of the RARE acquisition; possible impairment in the carrying value of our goodwill or other intangible assets; risks associated with incurring substantial additional debt; a failure of our internal controls over financial reporting; disruptions in the financial markets; volatility in the market value of our derivatives; 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 with the Securities and Exchange Commission, and any other financial and statistical information about the period covered in the conference call, including any information required by Regulation G, is available under the heading Investor Relations on our website at Darden.com.

We will hold an analyst and institutional investor meeting in New York City on Wednesday, February 17, 2010 beginning at 8:30 am.

This event will also be webcast for those unable to attend and we plan to release fiscal 2010 third-quarter earnings and same restaurant sales for fiscal December, January and February 2010 on Tuesday, March 23, 2010 after the market close.

We released second-quarter earnings results yesterday afternoon.

These were available on PRNewswire and other wire services.

We recognize that most of you have reviewed our second-quarter results, so we won't take the time to go through them in detail once again, nor will we spend time on a brand-by-brand operating summary in an effort to provide more time for your questions.

Rather Brad will provide some additional line item detail about the financial results for the quarter and discuss our outlook for the fiscal year.

Drew will briefly touch on our operating strategy trends followed by Clarence who will have some additional remarks.

After that Clarence, Drew, Brad and Gene will then respond to your questions.

Brad?

Thank you, Matthew, and good morning.

Given the impact of Thanksgiving holiday week shift this quarter, I want to spend a few moments clarifying our same restaurant sales results.

Blended same restaurant sales for Olive Garden, Red Lobster and LongHorn Steakhouse were down 4.7% this quarter.

This includes a negative impact of 80 basis points due to the Thanksgiving holiday week shift which moved to fiscal second quarter this year from the fiscal third quarter last year.

Excluding this effect blended same restaurant results were down 3.9%.

For context, industry same restaurant sales as measured by Knapp-Track and excluding Darden which are not affected by the holiday shift are estimated to be down approximately 5.9% for the quarter.

So we continued to outperform the industry by approximately 200 basis points this quarter, which combined with continued new unit growth, increases our total market share.

Turning to each brand -- Olive Garden's same restaurant sales were down 1.4% for the quarter and, adjusting for the Thanksgiving week shift, same restaurant sales would have been down 0.7%.

Red Lobster had a same restaurant sales decrease of 8.4% for the quarter and, adjusting for the Thanksgiving week shift, same restaurant sales would have been down 7.6%.

LongHorn Steakhouse's same restaurant sales decreased 6.2% for the quarter and, adjusting for the Thanksgiving week shift, same restaurant sales would have been down 5.0%.

The Capital Grille had a same restaurant sales decrease of 14.2% for the quarter.

And adjusting for the Thanksgiving week shift, same restaurant sales would have been 11.2%.

(technical difficulty) discuss monthly same restaurant sales trends for the Capital Grille (technical difficulty).

Pardon the interruption sir.

I'm sorry to interrupt.

Your signal is just starting to garble from that microphone.

Okay.

Let me start again from the Capital Grille.

It had a same restaurant sales decrease of 14.2% for the quarter and, adjusting for the Thanksgiving week shift, same restaurant sales would have been down 11.2%.

While we usually don't discuss same restaurant sales trends for the Capital Grille, we do want to highlight that same restaurant sales showed broad-based improvement throughout the quarter from approximately down 17% in September to down 9% in October and down 6% -- excuse me, down 9% in October and down 6% in November adjusting for the Thanksgiving shift, indicating to us that consumer and business spending are rebounding.

Bahama Breeze had a same restaurant sales decrease of 6.1% for the quarter and, adjusting for the Thanksgiving week shift, same restaurant sales would have been down 4.5%.

Now let's discuss the margin analysis for the second quarter.

As a reminder, the second quarter is our seasonally lowest gross sales quarter which leads to larger variances on fixed costs as a percentage of sales.

Adding to this effect is the inclusion of the Thanksgiving holiday week shift in the second quarter this fiscal year.

Food and beverage expenses were 223 basis points lower than last year on a percentage of sales as a result of reduced food cost.

This reflects the fact that we benefited from declining commodity prices this quarter and we expect to continue to see meaningful benefits for the remainder of the fiscal year, although not to the degree we experienced this quarter.

We have contracted most of our commodity usage through the remainder of the fiscal year.

Second-quarter labor expenses were 151 basis points higher than last year on a percentage of sales basis due to the impact of sales deleveraging, wage rate inflation, manager bonuses, and increased benefit costs, partially offset by reduced turnover in our restaurants and lower turnover-related expenses.

Looking ahead we continue to expect some unfavorability as a percentage of sales for the remainder of the fiscal year, but we should see some improvement compared to this quarter.

Restaurant expenses in the quarter were 91 basis points lower than last year on a percentage of sales basis because of lower utility expense, reduced repairs and maintenance expense and lower workers' compensation and public liability costs.

Looking ahead we don't expect to see favorability and restaurant expenses as a percentage of sales on a fiscal year basis.

Selling, general and administrative expenses were 156 basis points higher as a percentage of sales for the second quarter because of unfavorable comparisons for some employee benefit and stock-based plans related to favorability last year, as well as higher bonus accruals, return of deferred field [super very] conferences this year and sales deleverage.

The benefit plan related unfavorability reflects the fact that we had some stock market-based employee savings plans benefits and last year we had a meaningful market-driven gain on those hedges in the second quarter.

We also recorded an asset impairment of approximately $2 million in this quarter which is primarily related to the fire that destroyed a LongHorn Steakhouse located in Tennessee.

These expenses were partially offset by lower media costs.

For the fiscal year we still anticipate that selling, general and administrative expenses as a percentage of sales will be slightly higher than the prior year.

The effective tax rate for the second quarter was 24.2%, increasing diluted net EPS by approximately $0.01 if you compare net earnings to what it would have been with a tax rate consistent with our annual guidance of 25% to 26%.

Our year-to-date tax rate is approximately 26%, but given the success of some of our tax planning initiatives we now expect our annual effective tax rate to be approximately 25% for the year.

Please remember that this rate will vary in the third and fourth quarter reflecting our tax planning initiatives and resolution of certain tax matters.

With half the year now completed yesterday we refined our annual outlook.

We expect same restaurant sales for the year to decline a little more than initially anticipated, but we also expect more favorable than initially anticipated costs.

So now we anticipate our reported diluted net earnings per share growth from continuing operations to be flat to plus 4% in fiscal 2010.

This compares to reported diluted net earnings per share from continuing operations of $2.65 in fiscal 2009 which included an extra fiscal week.

As a reminder, our fiscal third quarter will be favorably affected by the Thanksgiving holiday week shift and the earlier start to the Lenten season.

The earlier start to the Lenten season will favorably affect same restaurant sales at Red Lobster that will put some downward pressure on comparable sales at LongHorn Steakhouse.

Now here's Drew with some comments.

Thanks, Brad.

As Matthew said earlier this quarter instead of discussing operating highlights for each of our brands I want to take a step back and briefly provide some important context on the overall full service dining industry as well as Darden's strategy to deliver competitively strong results in the near term while we make the necessary investments to position us for superior long-term growth.

Now clearly industry conditions remain very challenging and a number of large competitors continued to discount heavily during the second quarter.

And this is evident in our estimated minus 5.9% decline for the Knapp-Track same restaurant sales benchmark and the minus 1.2% decline in the implied Knapp-Track check, which is the difference between same restaurant guest count and same restaurant sales performance.

At the same time, Knapp-Track same restaurant sales during the second quarter improved by 1.9 percentage points my compared to the first quarter driven by a 170 basis point improvement in guest count and a 20 basis point improvement in check.

And this marks the first time in the last six quarters since the fourth quarter of our fiscal 2008 that there has been a sequential improvement in same restaurant sales and in check.

The sequential improvement in same restaurant sales has continued so far in fiscal December for both the industry and for our brands after adjusting for the estimated impact of the Thanksgiving shift.

However, we're still early in the month and weather can always be a factor in December.

Now we think that some of this directional improvement is due to the weak ago industry comparison.

But we also think that we may be seeing early signs of improvement in sustainable consumer spending and full-service restaurants.

The outlook we provided in September (technical difficulty).

Sir, I'm sorry to interrupt.

We're just starting to garble again, it started to break up just about the last sentence.

Okay.

Well, let me back up a little bit.

We think that some of this directional improvement is due to the weak ago industry comparison, but we also think that we may be seeing early signs of improvement in sustainable consumer spending in full-service restaurants.

Now the outlook that we provided in September anticipated improvement in same restaurant sales trends for the industry, so we're encouraged by what we're seeing, even though the improvement (technical difficulty) what we had hoped.

Our strategy to drive competitively superior results during the second quarter was consistent with the approach that we discussed with you back in September.

We continue to be wary of utilizing deep discounts to combat difficult industry conditions.

Given our concerns about (technical difficulty).

And Sir, again, I'm sorry to interrupt.

Again, you are starting to break up a little bit.

Our strategy to drive competitively superior results during the second quarter was consistent with the approach we discussed with you in September.

Now as I mentioned, we continue to be wary of utilizing deep discounts to combat difficult industry conditions given our concerns about what this might do to long-term brand integrity, business model integrity, and (technical difficulty).

Our approach is (technical difficulty), leverage the cost advantage that comes with our scale, and utilize selective value offers across our portfolio that help drive profitable incremental sales.

(technical difficulty) cost structure will be able to offer more of this type of promotion than either LongHorn or Red Lobster, so we have to be selective regarding when we choose to promote value directly at our higher check, higher cost brands.

During the second quarter we chose to offer an additional price point promotion compared to last year at both Olive Garden and LongHorn.

This helped drive blended same restaurant sales for our three large brands that outperformed the Knapp-Track industry benchmark by two percentage points on a Thanksgiving adjusted basis.

Combined with favorable commodity cost trends and proactive internal cost management, we also improved the operating margin at all three of our large brands and delivered a modest increase in earnings.

Now we chose not to feature a price point promotion during the second quarter at Red Lobster because we already had endless shrimp in place, which is historically their strongest value promotion.

However, Red Lobster did make a promotional change in the second quarter, stepping away from the Taste of New England event featuring premium priced new dishes for the holidays which they had planned to run and substituting a create-your-own-seafood-feast promotion emphasizing abundance and variety.

Now this create-your-own promotion did not feature a price point and we don't believe it was able to break through in a compelling way.

Going forward, some of Red Lobster's promotions during the second half of fiscal 2010 will include attractive price points that more directly address our guests' need for value and affordability.

But they will not be deep discounts that could erode profitability or brand image.

Given the stress and uncertainty in the financial markets and the economy that intensified during the second quarter last year and the differential way that impacted the full service restaurant industry in total and individual brands in particular, we think it's also instructive to look at second-quarter same restaurant sales results on a two-year basis.

And when we do that the Knapp-Track industry benchmark for same restaurant sales is down 12% on a two-year basis and compared to this performance Olive Garden has outperformed Knapp by a 11.4 points, Red Lobster has outperformed Knapp by 3.9 points, and LongHorn is essentially even with Knapp-Track, up 10 basis points.

Now we believe this is further evidence of the strength of our brand portfolio and the appropriateness of our strategy to achieve consistent profitable (technical difficulty) across (technical difficulty).

Importantly, all of our large brands also continue to increase guest satisfaction and reduce restaurant team turnover both of which achieved new record levels during the second quarter.

Finally, we continued to make significant progress transforming the way we run our business and support our restaurants that will make our brand support platform even more cost effective in the future.

In particular, three core projects targeting high expenditure areas, the automation of our supply chain, the centralization of our facilities maintenance support, and transformation of our in restaurant operating practices to significantly lower our usage of energy, water and chemicals, are all on track to meet or exceed the cost reduction targets that we've discussed with you in the past.

Now Clarence has some closing thoughts.

Thanks, Drew.

And I'll be brief because we do want to get to your questions.

And I can't promise it, but I'll try to get through this without breaking up.

But as Drew said, I mean I think our financial performance this quarter shows once again that Darden is well-positioned.

We're growing market share, we're doing that profitably and we're doing that even as many of the folks we compete with have had to sacrifice profitability to stem sales decline.

We expect to continue to take share.

And importantly, as Drew also mentioned, overall conditions are improving and our outlook for the remainder of fiscal 2010 reflects our belief that there's going to be continued improvement in the economic environment.

Again, we expect to continue to have industry-leading sales and earnings performance and we're focused on doing so without taking steps that adversely affect the long-term strength of our brands or the long-term strength of our business model.

And what that means is that we remain focused on reducing costs wherever appropriate, improving guest satisfaction across all our brands, and investing in our business to drive long-term success.

As we've said before, we have a portfolio of brands that are proven, they enjoy strong guest loyalty and strong long-term sales and earnings growth profiles.

Also driving our success is the fact that we have scale and all the advantages that come with that, and that's evident in our continued improvement in food and beverage costs as a percentage of sales and in the progress that we've made reducing other expenses such as worker's compensation and public liability cost.

And then finally, I want to thank our teams.

We have outstanding teams in our restaurants and our restaurants support them.

And they're working to successfully navigate through the current environment.

They've done a terrific job so far and beyond that create a great company.

And with that we'll take your questions.

(Operator Instructions).

David Palmer, UBS.

Hey guys, I'll just try to wrap in a few quick questions in here.

First, you said that you didn't believe that it was just easy comparisons, we might finally be reaching the bottom.

I'm wondering why you think that might be finally happening?

Second, you guys are not seeming to toe the line with not so many of these price promotions, $20 bundles, and it looks like from your numbers that you're not cutting labor or overhead as much as your competitors may be doing.

And so I suppose this patience is a good thing for Darden to be here for the generations like you tend to talk in your vision statement, but is there any evidence that this is really paying off and will pay off for you to come out stronger?

Could you share with us any metrics there?

And lastly, I think you said you were going to play more at affordable price points with Olive Garden.

Is that possible with Red Lobster?

Because I would imagine that affordability is more of an issue with that brand.

Thanks.

Let me try to start on the overall environment.

And I think as Drew said, we did see (technical difficulty) same restaurant sales basis industry level a sequential improvement.

So down roughly 8% in the first quarter excluding us and down 6% roughly in the second quarter.

So we do think things are improving because the comps have gotten a little easier, that's part of it, but we see some real improvement.

Again, as Drew mentioned, early days in the month of December, but we've continued to see that.

We hope that (technical difficulty) expect that this would be the beginning of yet another (technical difficulty).

Sequential improvement remains to be seen, but that's our expectation.

We do think sentiment has gotten a little bit stronger as most of our business (technical difficulty) by [middle] (technical difficulty).

I'm sorry to interrupt, sir.

You're starting to break up a little bit.

Okay.

I'm sorry.

So we do think that sentiment has gotten a little bit better as we look at our business across a lot of different cuts.

And I would suspect that a lot of that has to do with the abatement in job losses and a little bit less concern about job security.

And Drew, you might want to talk to some of the other parts of that question.

Well, regarding promotions, obviously there's a heightened sense of need for value and affordability on the side of consumers.

And as a business we want to find ways to address that need that doesn't negatively impact our near-term profitability, doesn't negatively impact our longer-term business model, erode margins and doesn't negatively impact brand image.

Meaning it doesn't change the way people will think about or use the brand in the future.

So a business like Olive Garden for instance that has a lower check and a lower overall cost structure and is positioned as a brand fundamentally on value makes more sense for us to consistently, on that business, offer price pointed promotions and strong value.

And we're comfortable doing that because as we track the business guest satisfaction, composition of guest bass, brand image ratings, same restaurant sales lift when we do those promotions, the ability to pay for them -- they're all positive.

At the same time brands like LongHorn and Red Lobster where the dynamics that I just mentioned are a little different in terms of the absolute check, the absolute cost structure and the basic positioning and the way they're refreshing their brand in particular in both cases we think we need to be more selective when we offer price point promotions.

So we had to pick our spots and we chose to offer a price point promotion of LongHorn in the second quarter (technical difficulty).

Sir, I'm sorry to interrupt.

You are just starting to break up again.

So we need to be selective at LongHorn and Red Lobster.

We think that there is a way to offer promotions with price points at Red Lobster in the second half that maintain that balanced scorecard I talked about that drives sufficient incremental sales to be profitable, that don't erode margins and that are consistent with their brand equity.

We've tested these promotions over the last several months and so we're going to selectively use them in the second half.

And this is Clarence.

I would just add that we think it reflects the strength of the Company that we have the portfolio.

So our goal as an enterprise at Darden is to grow share and do that profitably.

And so the fact that we've got three vehicles to do that helps us.

It's especially important in an environment like the one that we have today which is a very tactical environment, right, from quarter to quarter.

And so the fact that we're able to lean one direction with one brand, not have to lean that way with all three or lean one direction with two is very helpful in this kind of tactical environment, it allows us to be tactically effective without sacrificing our long-term strategic interest.

Thanks.

David Tarantino, Robert W.

Baird.

Hi, good morning.

A question for Brad on cost outlook.

You mentioned costs are coming in more favorable than you expected back in September.

Could you elaborate on what the key drivers of that favorability are versus your prior expectations?

Is it commodities or is it some of the internal initiatives you have?

And maybe if you could just give a little more color on those.

Thanks, David.

It's primarily driven (technical difficulty) initially anticipated.

We have locked in a lot of those prices as we look to the back half of the year (technical difficulty).

Sir, I'm sorry to interrupt.

You are breaking up.

We are unable to hear you.

(technical difficulty).

Still breaking up just a little bit.

Okay.

David, to your question there, it's principally been commodity cost.

We have seen more favorability there than what we had initially anticipated.

We've taken advantage of that opportunity to forward contract many of our costs for the rest of us this fiscal year, I'd say more than 75% or so of our food commodity cost for the remainder of the fiscal year that we've locked those in.

And those continue to run favorable to the prior year in the mid to lower single-digit percent range.

And then also complemented by some of our cost initiatives that we've been working on internally, those have been fairly meaningful for us.

I will caution though as we look to the back half of the year, those were fully in place for the back half of the year last year.

So the year-over-year benefit won't be as great in terms of providing earnings growth lift, but there are still meaningful dollars that helped us navigate through these challenging times.

And this is Clarence again, David.

I would just say on top of all of that, a lot of credit has to go to Brad working in partnership with our supply chain folks because, from a tactical perspective, we've taken a point of view on some of these and we've chosen in many cases (technical difficulty) point of view.

We've made some right decisions there.

But as Brad said, at this point in the year we have significant coverage on almost everything that we use from an input perspective.

Okay, thank you.

Steve West, Stifel Nicolaus.

Guys, real quick, a clarification on your guidance for same-store sales.

If you're talking about improving trends out there, you're talking about we've got the easy comps -- and I hate that term, but that plus there is an uptick in consumer spending.

Is your guidance then a little conservative because it just seems low to me if both these things are both happening at the same time.

And then on top of that, if you could talk maybe on a regional basis Florida, are you seeing any improvements there?

I'm starting to see some reports where tourism is picking up there.

Are you seeing kind of those same things in your Florida sales?

(technical difficulty) we're trying to factor in the first half.

So we're halfway through the year, right?

And for sure comps in the first half industrywide and on a blended basis for Darden as an enterprise were lower than our assumptions coming into the year when we talked to you in June.

So somewhat reflects that.

We always thought that there would be sequential improvement through the year, we still think that.

I would say that if we do have a bias as we (technical difficulty) it's towards being a little more conservative, a little bit more prudent given the severity of the downturn that we've seen.

Now this is Brad here.

I'll add just a little bit of color to that.

Drew talked a little bit about the sequential improvement that we've seen in the first quarter, second quarter.

What I would say as a looked at the first half of the year, and you do need to adjust that for the Thanksgiving shift, that puts us down at about 4.5% in the first half of the year.

Our guidance implies that that rate of decline is going to improve to about 1.5% to 3.5%.

So there is some improvement in there, maybe not as much as we had anticipated at the beginning of the year, but it is getting better from what we've seen recently, although I would say it's still down.

To your question about regionality, with the portfolio of brands, they're all performing a little bit differently as to what's going on.

But in general sense, all the major regions are actually trending up from where they've been as we look at this.

I'd say the more favorable trends are some of the areas that were harder hit in the year-ago comparisons around Florida, the south and middle Atlantic regions.

The other caution I would say though is California does still remain pretty weak there.

We're a little less penetrated there so it's not as impactful.

And I'd comment on Texas, when you look at it on a year-over-year basis it was still performing pretty well last year versus that comparison for that area, it's a little bit tougher there.

Okay, thank you so much.

Jeff Farmer, Jefferies & Co.

Good morning.

I think you did touch on this, but you've opened a little more than 30 Olive Gardens over the last 12 months.

Can you just talk a little bit about how those restaurants have been performing relative to what you've seen in the past?

And then just as a quick sort of follow-up -- what does the effective pricing look like at the three larger brands in the back half of the year?

(technical difficulty) performing very well.

I'm sorry.

I'm sorry to interrupt, sir.

You're coming across very garbled.

Hopefully this is a little bit better.

Loud and clear.

Thanks, yes.

Okay.

To the question of new Olive Garden units, not just the units open in the last 12 months, but the units opened in the last three years are all performing at a very high level in terms of unit volume, in terms of profitability and value creation.

And as a result we remain very optimistic in terms of maintaining (technical difficulty) Olive Garden in that same range going forward.

And then as it relates to the effective pricing in the back half of the year for Red Lobster, Olive Garden, LongHorn.

Yes, I don't think we want to talk about our pricing on a forward-looking basis yet.

Okay, and then as it relates -- the final question.

Thanksgiving calendar shift, can I assume that will be about 80 basis points benefit to December?

This is Brad.

I think that's a good going in assumption.

As I commented though, there are going to be a lot of things that are going on with the Lenten season and the shift there.

And I would still caution (technical difficulty) there's always that weather possibility (technical difficulty) last year that can meaningfully move month-to-month results.

The quarter probably not so much, but we'll have to wait and see what mother nature does to us there.

And that 80 basis points is on the quarter.

It will be even more amplified on December.

John Glass, Morgan Stanley.

Thanks.

First, I want to just go back to December for a minute and is the reason you're thinking that things are getting actually better because not only one-year trends are getting better but two-year trends are getting better, or is this something you're seeing in check or something under the surface that maybe we're not seeing?

If you could elaborate on that.

And secondly, on your comments on savings and things like the supply chain and the energy savings, etc., what's the timeframe for that?

Is that part of your better cost for this year or is that really a function of maybe 2011 and beyond when we might see those benefits?

The improving trend that we're talking about is really more on a one-year basis in terms of what happened in the second quarter versus the first quarter, what's happening in December this year compared to December last year and what we think that probably means for the third quarter.

As we looked at it on a two-year basis we were really trying to dimensionalize the strength of our brands and the strength of our overall portfolio because the year ago starting point for each business, for us and for the industry, is different and we were ramping on a much stronger period than was the industry overall.

In terms of the brand support platform initiatives that we were talking about supply chain facilities and then our in restaurant operating practices, it's going to take several years to reach the full potential on the savings in all three areas.

But we are making progress in capturing incremental savings as we go, but it's going to take several years to reach the full potential.

Thank you.

Matthew Difrisco, Oppenheimer.

Thanks, it's Matt Difrisco.

I guess just one overall overriding question.

It sounds like in your guidance that the other operating expense leverage in the back half of the year should be flat or at least less than what you've seen in the first half.

It's sort of counterintuitive to an improving comp.

I just wonder if you can comment on what might be left out of there.

And then just a follow-up to John's two-year question there.

We noticed in Olive Garden in November seemed to have fallen on a two-year basis, down 2.5 from October and September of around flat.

I wonder if you could just comment on that, what might have been in there.

And then if you can give us some context as far as Capital Grille, you opened the door there as far as the monthly comps.

It's sort of without context though to what they were last year, given obviously the precipitous falloff in fall and into winter of last year.

If you could talk about FY '09 September and October and November to give us some context.

Thanks.

Matt, this is Brad.

I'll take the first part of that question there.

On the restaurant expense side I think what you have going on there is a couple things.

Utility costs have been one of the bigger drivers of that and we don't see the year-over-year favorability there that we've enjoyed in the first half of the year.

Also included in there is the public liability and workers' compensation expenses and we've had some real good success in this year.

We hope to continue that probably not something that we plan on at this particular time.

So those are some pretty big expenses there that are a little bit offsetting the impact of sales deleveraging.

Or we're still having -- projecting same restaurant sales to be declining some, so it's not like there should be leveraging there, but there is less of a deleveraging impact as we look at that.

I'll turn it over to Drew for the Olive Garden question.

Related to Olive Garden, our decision to add the price point promotion that we did on television also led us to rebalance some of our coupon support.

So in the second quarter a coupon that we had in November -- that impacted November before it was moved back this year into late September, October and, by the same token, a coupon that benefited us in November (technical difficulty) moved into the third quarter this year.

So it's really all about coupon timing driven by the addition of that price point on television.

That's great to know.

And then the Capital Grille, can you just give us context of what that looked like?

Yes, this is Brad.

Let me take the first crack.

One, we don't want to get into a lot of detail.

I think the point we were trying to make is another data point that's showing improvement -- why we have reason to believe that improvement.

But if you look at their performance last year, September was down but not too meaningfully down.

But obviously that type of business was hit pretty significantly as we got into October and November, roughly similar rates for both those last two months of the quarter given what was going on in the environment at that time.

But I would say (technical difficulty) Capital Grille (technical difficulty) affecting the luxury consumer (technical difficulty).

I'm sorry to interrupt, sir.

Actually your microphone is currently not picking up.

We're not able to hear you.

I'll try a different one.

How's this one?

Coming through clear.

Thank you.

I was saying that with Capital Grille it was clearly affected very significantly last October, November, December even by the financial crisis and the significant declines in asset values hitting both the luxury consumer and the business consumer and we've seen pickup in both of those as we dissect the business.

Jeff Omohundro, Wells Fargo.

Thanks.

Another question on Red Lobster.

When thinking about the H2 strategy, are we going to be seeing new LTOs with more affordable price points with new products?

Or is it more of highlighting some of the existing menu items that feature greater affordability?

And how does the spending -- media spending in H2 stack up versus H1 for Red Lobster?

Thank you.

Regarding the promotional strategy, I don't want to go too deeply into something that we haven't done yet because I suspect there might be some people listening interested in that, but typically we would prefer to develop new products that offer consumers an exciting reason to visit and that are designed to be affordable and financially feasible at a somewhat lower price point.

And directionally that's what I would have in my mind as I think about Red Lobster's second-half promotion plans.

In terms of overall media support for the year, on their base advertising it's very similar to year ago.

On their lunch advertising, which we started in January last year, there are more weeks (technical difficulty) ramping on some heavier launch (technical difficulty).

Thank you.

Todd Duvick, Bank of America.

Thank you, good morning.

I had a quick question for you on an update of your cash priorities in the back half of the year.

Can you tell us what your posture is currently on share buybacks?

And then I guess a follow-up to that would be with respect to some debt that you've got maturing in 2010.

I think you mentioned in the latest 10-Q that you plan to refinance that opportunistically at some point going forward.

Is that still your position?

Yes, this is Brad here.

Let me deal with the share buyback.

We began the year with our guidance saying that we would evaluate how the marketplace was performing, how our businesses were performing, but a priority was that we would continue to work on our debt metrics that were important to us.

Particularly I think recently we've all seen the importance of an investment grade debt profile and so we're working to maintain that.

We'll continue to make progress on that, but I think you bring up a good point.

As we move through this year we'll be continuing to reassess that and as we get to the points that we'd like to be we could potentially be stepping in and be buying some share buybacks there.

The second part of the question was around maturing debt.

Yes, we have in the calendar -- end of the calendar year 2010 we have $150 million coming due in August and then April of the following year another $75 million that we have coming due there.

Now the debt markets have improved significantly.

Our outlook is that they're in a range that we could enter the market if we wanted to, but our businesses continue to deliver the strong cash flow.

So I would say we would wait probably I'm guessing right now late in the next calendar year to potentially go back to the markets there.

But what I would say is we have a line of credit that is very favorable terms to us with significant capacity that we could also choose just to roll that maturing debt into there and find the best point for us to enter into the debt market is how we would look at that.

I would say that, again, we feel we've got very strong cash flows, we've made a meaningful improvement this year in getting our debt metrics closer to the targets that we set for ourselves and that the rating agencies are comfortable with.

Even with that as we look at share repurchase some modest level of share repurchase is probably more likely in the second half than it was as we talked to you at the beginning of the year.

Okay, that's very helpful.

Thank you.

Jeffrey Bernstein, Barclays.

Great, thank you.

A couple of questions, just one on -- if the focus around this bifurcation of the consumer, perhaps seeing underlying improvement at the higher-end brands, you talk about it with Capital Grille versus more the value focused concepts.

Just wondering whether you're seeing any evidence of that or perhaps through ordering habits with each of the brands, whether perhaps that might be part of the reason.

And maybe why Olive Garden slipped a little bit other than the couponing, whether you're seeing anything related to support kind of the higher-end consumer feeling better?

And then secondly, I just wanted to clarify, I think you said the restaurant expenses, I know they were down 80 to 90 basis points year over year in the first half.

I think you said for the full year it was actually going to be up year over year in implying the back half would actually be up pretty meaningfully.

I just wanted to clarify that.

Thanks.

I'll take a first stop on the first part of your question.

I would say as you look at our businesses, our mass businesses, we've held up better than the industry, the industry has held up better than most consumer discretion if you look back.

And that I think is a tribute to the fact that we've got pretty well (technical difficulty) as an industry.

And we probably skew even higher than that given where our brands are positioned.

And so I think where we've seen the most erosion is with consumers on the lower end of that household income range.

And so to the extent that sentiment is firming up we probably get a little bit more of that back and probably more visit frequency from the high end.

So I think that's -- we're seeing improved sentiment in the mass businesses.

We're also seeing some improvement in the Capital Grille market which is to some degree a differentiated consumer from what we see in the rest of our businesses.

And one follow-up on the full-service dining industry, the Knapp-Track metrics, we do see at least the first sign of a change in some of the dynamic that has been playing out over the last several quarters.

So for the last five or six quarters what we've seen is a directional improvement in guest counts driven by discounting where the discounting impact on check more than fully offset the improvement in traffic and the result was a reduction in same restaurant sales, a trend -- more negative trend in same restaurant sales.

We didn't see that in the second quarter, so in the first quarter for the industry guest counts were minus 6.4%.

The check was minus 1.4%.

Now typically we see maybe a 2 point improvement in check, so this is obviously very negative, and same restaurant sales in total were minus 7.8%.

What happened in the first quarter is the (technical difficulty) check improved a little bit, it was minus 1.2 versus minus 1.4, but guest counts got better by 170 basis points.

So it was a different dynamic in terms of what was leading to an increase in guest counts, it wasn't an increase (technical difficulty).

In the second quarter.

In the second quarter.

And on restaurant expenses, for the fiscal year we do expect those as a percent of sales to be roughly flat.

You are correct in the first half of the year that we did enjoy some improvement there and a lot of that was driven, as I said earlier, around the energy prices there and our success on cost of repairs and maintenance and group insurance -- or not group insurance -- workers' comp and public liability.

And as we look to the second half of the year and the comparisons for the prior year, and given that we're still projecting a same restaurant sales decrease, those do put downward pressure on those as a percent of sales.

And I would remind you that we had the 53rd week last year (technical difficulty) probably our largest category of fixed expenses.

So there is a little bit of deleveraging that goes along with that.

Great.

Thank you.

Keith Siegner, Credit Suisse.

Thanks.

Just thinking back to the original guidance for the year at the beginning of the year and now we've had two quarters where I think the macro conditions have been a little bit maybe disappointing, the guidance for the same-store sales has come down just a little bit.

And thinking back to that original capital plan for the year, might it make sense in this type of environment maybe to shift some of the capital investment away from share gains through unit growth and maybe more towards share gains through comps?

And maybe what I mean by that is accelerating some of the remodel programs at the expense of some of the unit growth.

Maybe enhancing the perception of the brands and the competitive positioning.

In this type of environment does that make sense?

This is Brad.

Let me start with the first part of the question there and I'll turn it over to him is -- we look at the business as this is still a very opportunistic time to be out growing our unit base, and so applying our capital that will continue.

We've really not adjusted that.

(technical difficulty) quality (technical difficulty) available to us (technical difficulty) thinking they were going to be (technical difficulty).

Sir, I'm sorry to interrupt.

You're starting to break up in your answer.

Okay.

Let me try this again.

What I would say is no, we're going to continue on our capital plan around new unit growth.

We see this is an excellent opportunity for us to be growing our unit base.

Partially because of the sites, the quality of the sites that are coming available to us at prices much less than what we thought they were going to be.

More importantly, on our cost base that's lower than they were last year.

And to be able to take the market share that this opportunity affords us and to provide a bigger base for us to grow same restaurant sales in the future from there.

So no, we'll continue our pace to build new unit growth, but also keep our eye on and keep plenty of attention on growing same restaurant excellence to continue same restaurant sales growth.

That's helpful, thank you.

And just to follow up on your question about remodels, those remodels are a very important part of the overall refresh for both Red Lobster and for LongHorn.

And we've got aggressive tests of remodel designs in both of those businesses that are leading (technical difficulty) to meaningful improvement similar to what -- in same restaurant sales and imaged similar to what we saw with (technical difficulty) at Olive Garden and we'll be talking (technical difficulty) about our plans for remodels and capital investments and remodels in February.

And just a final piece.

I would say that as we look at the business we feel that we could continue to maintain and a prudent expansion pace in terms of new restaurants.

And as we look out probably not a lot different going out than we have this year, maybe a little bit higher.

We can also reinvest in the business through the remodeling that makes sense, as Drew said, to test it that generates the kind offer terms that capital investment warrants, we can do that, still maintain a very healthy dividend that grows at a healthy pace and return cash to shareholders through share repurchase.

And so I think all of that combined just speaks to the cash flow generating power (technical difficulty).

Thank you.

Joe Buckley, Bank of America.

Thank you.

I just wanted to revisit the sales issue again because frankly when I read the release last night I thought it read pretty badly in terms of sales.

And I think you acknowledged that your full-year comp guidance implies down 1.5% to down 3.5% comps in the back half of the year on a blended basis.

Verbally today you're talking about seeing a turn in the business.

So I guess I'm curious.

Originally were you thinking you'd comp up in the back half of the year?

In fact, is it down 1.5% to 3.5% only better from what you've seen in the last couple of months as opposed to what you were originally thinking?

And then going back to December, I'm not sure I understood the answer to the two-year comp question because glancing at December a year ago it seems like you'd have to be positive right now in December for the business to truly be better.

Well, let me start with the full year, Joe.

And I would say that -- and Brad will get the answers, but clearly we expected a ramp up in terms of same restaurant sales performance, not necessarily growth, but an upward climb when you looked at trendline.

And we still see an upward climb, it just doesn't have quite the same slope that we added when we looked in January.

But still an upward trend.

And Brad, you may want to comment more on that one.

Yes, I mean what Clarence is saying is directly what we had anticipated.

What I would say in our initial assumptions without going into great detail is, no, we didn't expect it to be negative in any meaningful way hoping to hit flat to down 1%.

I'd say as we look today we don't see us getting to that level, but the projectory of the line is pretty similar, maybe sloping up just a little bit less than what we are now, but we're just starting from a little bit lower point than we originally thought.

Okay.

And then just one follow-up again on sales with Red Lobster, and I know you mentioned you've had some price point advertising that you'll use in the second half perhaps.

But why is so slow on Red Lobster?

I mean, they had a pretty horrendous August quarter, pretty horrendous November quarter.

It doesn't sound like incrementally year over year you did much of anything and what's the thought process there that you would've been more aggressive trying to drive some traffic when the brand seems like it's really struggling?

I would say, and I'll let Drew answer it, but drew actually provided some of that answer I think in his remarks.

When we look at Red Lobster in the first half traditionally, traditionally the back-to-school quarter, so September, October, November we're running endless shrimp which is a very high value, scores very well on value, not a price point that we advertise because it's not a compelling price point, $15.99, $16.99, but a very strong value offer.

And so our point of view was we would let that ride and to the extent we wanted tactically to put a price point in the business outside of Olive Garden we chose to do that at LongHorn and it worked very well for LongHorn.

Probably endless shrimp worked a lot less well than it has historically because it didn't have the price point on it in an environment where there were more of those including the additional price point that we put on Olive Garden and the additional price point that we put on LongHorn.

So that was our thinking.

And I'll amplify a little bit, Joe, because you mentioned the first quarter for Red Lobster.

And so we'll step back to our thought process when we put the plan together for Red Lobster.

And at the end of our fiscal year, fiscal 2009 in the fourth quarter Red Lobster outperformed Knapp-Track by almost 7 points and that was based on a very strong Lobster Fest promotion and a very strong what we call Mediterranean promotion with some higher priced dishes that were unique and demonstrated culinary expertise and performed very well.

Even the last month of the year in May of our fourth quarter was up almost 2 points versus the industry.

So when we put the plan together we had no reason to believe that our basic strategy of freshening the brand as we were perceiving to do and which was working very well in fiscal 2009 wouldn't continue to work.

In the first quarter when Red Lobster sales relative to its prior trend softened and equaled the industry we said well, we should probably become directionally a little more aggressive in our use of value-oriented promotions.

So when do we want to do that selectively over the year?

And we said, as Clarence just said, we thought through the second quarter where we already had Endless Shrimp, which last year performed very well, Red Lobster exceeded the Knapp-Track benchmark in the second quarter of last year which we're ramping on by 5.7 percentage points driven by Endless Shrimp, we thought why double up in the second quarter, we may need that in the second half.

So that is was our thought process.

Now in hindsight, when we look at the performance in the second quarter, arguably Red Lobster was impacted by the breadth and totality of all the competitive discounting including some of our own and Endless Shrimp and create-your-own promotions didn't break through as much as we anticipated when we put the plan together.

But that was the thought process and that's what's leading us to be selective but a little more aggressive in the second half.

And I would just put a wrap on it by saying, all that said, in the second quarter our blended comp with the incremental price point at LongHorn and the incremental price point at Olive Garden, and choosing to go without one at Red Lobster, is 2 points better than the industry.

So tactically we still feel pretty good about where we are and we have the flexibility in the second half with Red Lobster on a price point because we haven't used that bullet.

Thank you.

That's a good explanation.

Thank you.

We've got time for one more question this morning, please.

Brad Ludington, KeyBanc Capital Markets.

Thank you.

I just wanted to touch quickly on -- and you gave some great color on regional trends for the Company, but more on Red Lobster if you can give any commentary on that.

Are they seeing, given some of their exposure to what may be considered some tougher job markets, more strain regionally than some of the others?

And then to follow up with -- you've commented that same-store sales for your brands and really I think across in the industry improved some into December.

So where we've been seeing reports that mall traffic and retail spending have been down, I guess that implies that people are still spending at the restaurants while they're out shopping?

On the first question, Red Lobster is a little softer than the industry in areas like Florida and California arguably because consumers in those areas are still more price-sensitive and still more affordability shoppers than they might be in other parts of the country and in Texas (technical difficulty).

And then on the retailers versus restaurants, I mean we're not in the malls.

We tend to be on mall pads, but we're on those pads because the average daily vehicular traffic on the thoroughfares that pass those malls is strong.

And so we're not as reliant on mall traffic for sure as the retailers who sit inside the malls.

Okay, but we have seen some stable traffic extend through, following Thanksgiving I guess -- or stabilizing, not stable?

Yes, yes.

Yes.

Improving I think is probably a better characterization.

Okay.

Thank you very much.

Well, thank you, everybody.

We'll (technical difficulty) we promise to have new microphones for you the next time we meet in March.

We want to wish everybody a safe and happy holiday.

We look forward to seeing many of yew in February in New York City at our analyst and institutional investor day.

And if you have any questions, we look forward to hearing your calls here in Orlando.

Thank you very much.

Thank you.

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