達登餐飲 (DRI) 2014 Q3 法說會逐字稿

Welcome.

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

(Operator Instructions)

Today's conference is being recorded and at this time, I'll turn the call over to Mr. Matthew Stroud.

You may begin, sir.

Thank you, Shirley.

Good morning, everyone.

With me today are Clarence Otis, Darden's Chairman and CEO, Gene Lee, Darden's President and COO, and Brad Richmond, Darden's CFO.

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.

Forward-looking statements are made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

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.

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

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 ability to achieve the strategic plan to enhance shareholder value, including the separation of Red Lobster; the high cost in connection with a spin-off, which may not be recouped if a spin-off is not consummated; acts of its investors and the cost of disruption of responding to those actions; food safety and food borne illness concerns; litigation; unfavorable publicity; risks relating to public policy changes in federal, state, and local regulation of our businesses, including healthcare reform, labor and insurance costs, technology failures, failure to execute a business continuity plan following a disaster, health concerns including virus outbreaks; intense competition; failure to drive sales growth; failure to successfully integrate the Yard House business and the additional indebtedness incurred to finance the Yard House acquisition; our plans to expand our smaller brands, Bahama Breeze, Seasons 52, and Eddie V's; the lack of suitable new restaurant locations; higher than anticipated costs to open, close, relocate or remodel restaurants; a failure to execute innovative marketing tactics and increased advertising and marketing costs; a failure to develop and recruit effective leaders; a failure to address cost pressures, shortages or interruptions in the delivery of food and other products; adverse weather conditions and natural disasters; volatility in the market value of derivatives, economic factors specific to the restaurant industry and general macroeconomic factors including unemployment and interest rates, disruptions in the financial markets, risks of doing business with franchisees and vendors in foreign markets; failure to protect our service marks or other intellectual property; impairment in the carrying value of our goodwill or other intangible assets; a failure of our internal controls over financial reporting or changes in accounting standards; an inability or failure to manage the accelerated impact of social media 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 2014 fourth quarter earnings and same restaurant sales for fiscal March, April and May 2014 on Friday, June 20, 2014 before the market opens, with a conference call shortly after.

We released third quarter earnings results this morning.

These results were available on PR NewsWire and other wire services.

We will review the P&L for the third quarter, discuss our financial outlook for fiscal 2014, and then we will take your questions until approximately 9:30 Eastern Time.

With that, let me turn it over to Brad.

Thank you, Matthew, and good morning, everyone.

Our third quarter earnings were in line with our expectation, excluding the impact of the more severe winter weather and the legal, financial advisory, and other costs related to implementation of the strategic plan we announced in December of 2013.

Together, these unusual items totaled approximately $0.13 in earnings per share.

We estimate that the severe winter weather adversely affected earnings by approximately $0.07 and that legal, financial advisory, and other costs associated with the strategic plan adversely affected earnings by approximately $0.06.

Focusing more specifically on the results for the quarter, Darden's total sales from continuing operations decreased 1.1% to $2.23 billion.

On a blended same restaurant sales basis, the results for Red Lobster, Olive Garden, and LongHorn Steakhouse declined 5.6% in the quarter, with strength at LongHorn Steakhouse offset by weakness at Olive Garden and Red Lobster.

Same restaurant sales also declined 0.7% in our Specialty Restaurant Group.

Looking at the larger brands individually, US same restaurant sales increased 0.3% at LongHorn Steakhouse and declined 5.4% at Olive Garden and 8.8% at Red Lobster.

These results include the adverse effect of the more severe winter weather, which was approximately 160 basis points, and the adverse effect of the shift in Thanksgiving holiday week, which was approximately 100 basis points.

Excluding these impacts, same restaurant sales for the third quarter would have been up approximately 2.9% at LongHorn Steakhouse, down approximately 2.8% at Olive Garden, down approximately 6.2% at Red Lobster, and up approximately 1.9% at the Specialty Restaurant Group.

Food and beverage expenses for the third quarter were approximately 40 basis points higher than last year on a percentage of sales basis.

The unfavorability was driven by higher shrimp and land-based protein cost.

Given the pending separation of Red Lobster, I will call out their results on each line item.

From a food and beverage perspective, Red Lobster's expenses for the third quarter were approximately 110 basis points higher than last year on a percentage of sales basis, due primarily to very significant shrimp inflation.

Restaurant labor expenses were approximately 10 basis points higher than last year for the third quarter on a percentage of sales basis.

On this line, we achieved productivity gains in most of our brands and combined with favorable group insurance and unemployment taxes, that mostly offset the effects of wage rate inflation and sales deleveraging.

At Red Lobster, restaurant labor expenses for the third quarter were approximately 100 basis points higher than last year on a percentage of sales basis, due to sales deleverage, wage rate inflation, and some decrease in productivity.

Restaurant expenses for the quarter were approximately 80 basis points higher than last year on a percentage of sales basis because of sales deleverage.

At Red Lobster, restaurant expenses for the third quarter were approximately 140 basis points higher than last year on a percentage of sales basis, due the to sales deleverage and increases in workers' compensation and public liability cost.

Selling, general, and administrative expenses were approximately 50 basis points higher than last year on a percentage of sales basis, due entirely to costs associated with implementation of the strategic plan.

More specifically, these costs, which include legal, accounting, and financial advisory fees, retention bonuses for Red Lobster managers, and various other fees, totaled over $13 million this quarter.

At Red Lobster, selling, general, and administrative expenses for the quarter were approximately 120 basis points lower than last year on a percentage of sales basis, due to our decision to reduce spending in December and January from what were elevated levels.

Depreciation and amortization expenses in the quarter were approximately 40 basis points higher on a percentage of sales basis compared to last year because of the increase in new units and the remodel program at Red Lobster.

Separately, Red Lobster depreciation and amortization expenses for the quarter were approximately 90 basis points higher than last year on a percentage of sales basis, due to the remodels.

Our tax rate this quarter was 10% and was approximately 13 percentage points lower than the prior year, primarily driven by lower earnings and because of tax benefits associated with one of the Company's employee benefits plans.

We now estimate our annual effective rate will be approximately 14%, which is about 700 basis points lower than last year's annual effective tax rate.

This annual effective tax rate will, of course, vary from quarter to quarter.

In the third quarter, total operating profit margin declined by approximately 220 basis points compared to the prior year.

Excluding Red Lobster and the costs associated with implementation of our strategic plan, operating profits would be 120 basis points better.

As we previously announced, we are on track to realize $60 million of annual cost savings by the end of fiscal 2015 as a result of the actions we announced in September.

In the third quarter, we realized $2 million of cost savings from these actions and we should realize a similar amount in the fourth quarter.

For fiscal 2014, we are on track for approximately $28 million in gross savings that are offset by $11 million in upfront implementation costs for a net savings of approximately $17 million.

In addition, which we said previously, with the Red Lobster separation, we are looking for additional cost savings opportunities and we retained Alvarez and Marsal to help with this effort and with identifying new revenue enhancement opportunities.

Now turning to our commodity cost outlook, we have approximately 74% of our total food spend contracted through the end of this fiscal year; a little less coverage than typical for us at this point in the cycle because we believe the premiums for future contracts are simply too great, given where we expect prices to be in the cash market as we look forward.

Food inflation in the third quarter was approximately 3.1% with shrimp inflation in the 35% range and land-based proteins inflations in the mid-single-digit range.

Shrimp inflation is expected to stay at this level in the fourth quarter because of production issues in Asia.

We see signs of progress emerging, but we don't anticipate relief on shrimp prices until early fiscal 2015.

For fiscal year 2014, our current expectation is that our commodity basket will see net inflation in the range of 2.5% to 3%, which is about 40 basis points higher than we expected when we began the year; again, driven primarily by even higher shrimp and moderating, but still higher, beef cost.

Category by category, on a year-over-year basis, food in the fourth quarter of fiscal 2014, shrimp costs are higher with 100% of our usage covered.

Beef costs are slightly higher with 75% of our usage covered.

Poultry costs are slightly higher with 40% of our usage covered.

Wheat costs are lower with 60% of our usage covered.

Dairy costs are slightly higher with 75% of our usage covered.

Our energy costs are expected to be slightly unfavorable on a year-over-year basis.

We have contracted a majority of our natural gas and electricity usage, in the deregulated markets in which we operate, through the fiscal fourth quarter of this year.

Looking ahead to fiscal 2015, we have approximately 25% of our total food spend contracted through the end of the second fiscal quarter.

Our outlook for food inflation at Darden, excluding Red Lobster, is approximately 1% to 2%.

We anticipate that most of the food inflation will come from proteins; particularly beef and seafood.

We expect some favorability for chicken and wheat-related products.

We expect diluted net earnings per share for fiscal 2014 to decline between 15% and 20% compared to fiscal 2013.

This reflects our projection that combined US same restaurant sales growth for Red Lobster, Olive Garden, and LongHorn Steakhouse this fiscal year will be minus 2.5% to 3%.

This is below the minus 1% to minus 2% we anticipated previously, with the change in expectations due largely to meaningful downward adjustment in the forecast of same restaurant sales results at Red Lobster.

Current earnings expectations for the year also reflect the opening of approximately 70 net new restaurants and the net impact of the September support expense reduction efforts, as well as the legal, financial advisory, and other costs incurred in the second quarter in connection with our strategic review and related actions.

The earnings forecast for fiscal 2014 does not include costs we have incurred in the third quarter or are likely incurred in the fourth quarter in connection with the separation of Red Lobster and other strategic actions announced in December.

Now, I'll turn it over to Gene for some comments.

Thanks, Brad.

I'll start this morning with a few comments about our third quarter sales; specifically about choices we made in December that affected Olive Garden and Red Lobster, and then I'll provide a high level update on the brands.

On an absolute basis, December is always a very strong month for both brands.

In the planning process this year, however, we did make some very important adjustments to our promotion and advertising plans for the month.

Last year, both Olive Garden and Red Lobster featured discounted price point promotions during December, which was a departure from our prior practice.

This year, we decided not to use this kind of price point promotions during this high volume period.

Instead, our advertising focused on the core equities of each brand and in restaurant, we emphasized the core menu.

We also reduced our media spending during this time period, so Olive Garden was only on air three out of the five weeks this year versus four out of the five weeks last year and Red Lobster reduced total rating points they purchased by 20%.

Additionally, we decreased the number of incentives in circulation compared to last year.

These significant changes in marketing tactics were made to return us to more sustainable and healthy management of our business.

Beyond that, as we have been communicating, the Olive Garden team is executing a brand renaissance plan.

The plan includes a focus on a holistic core menu and promotional plans designed to deliver superior value, choice and variety, and convenience.

We implemented the most comprehensive menu change in the brand's history on February 24, the first day of our fiscal fourth quarter.

Execution of the new menu continues to improve every day and we're encouraged with the initial guest feedback we're receiving.

Another component of the plan is to re-image our non-Tuscan farmhouse restaurants.

The first remodel is on track to be completed by the end of April and the second is starting soon.

Red Lobster had a challenging quarter with sales impacted by weather, the reduced media weeks, our promotional decisions, and guest confusion that resulted in inaccurate press reports around the announcement of the separation.

We are pleased, however, that guest satisfaction recovered to best ever levels during the quarter and sales trends improved as the quarter progressed; especially once Lobster Fest began.

This year's Lobster Fest has more new items than in prior years and has been very well-received.

LongHorn Steakhouse same restaurant sales exceeded the industry benchmark for the fourth consecutive quarter.

The team is focused on offering compelling promotions supplemented by additional menu items in the Chef Showcase selection.

The operations team continued to improve results in two important focus areas: [steak orders] filled correctly and server attentiveness, resulting in meaningful improvements in guest satisfaction scores.

LongHorn continues to benefit from multi-pronged brand refresh they began several years ago, that is similar, in many respects, to Olive Garden's brand renaissance plan.

We strengthened the operating foundation, added superior value, choice and variety, and convenience, and updated the atmosphere to remain in sync with rising guest expectations.

The Capital Grille continues to have strong sales momentum and will open five new restaurants this fiscal year, four of which have already opened.

Their focus remains on creating exceptional dining experiences through innovative culinary offerings and personalized service.

The Yard House integration is behind us.

The team is focused on regaining same restaurant sales momentum, mastering the new systems implemented, and opening new restaurants.

We recently opened a 22,000 square foot restaurant in Las Vegas in the new LINQ entertainment district adjacent to the 550-foot tall High Roller, the world's largest observation tower.

This will be a flagship restaurant and create a lot of exposure for the brand.

We'll open a total of eight restaurants this year.

Same restaurant sales at a few restaurants have been inconsistent at Seasons 52 over the last year.

That should improve as we slow new restaurant growth from a percentage of the base perspective.

This will enable us to ensure we have strong management at each restaurant that can consistently execute our culinary and service standards at a high level.

During our recent growth period, we have experimented with different types and sizes of buildings and now know which site characteristics make for the most successful Seasons 52.

We have opened a few Seasons in central business districts and in malls that don't permit us to show full branding and some of these restaurants performing well below system average.

We will be focusing our future development on the upscale suburban trade areas was where the brand excels.

Bahama Breeze same restaurant sales continue to exceed the industry benchmark.

This sales strength is being driven by the significant changes we have made in the menu over the last two years and the very effective happy hour programs we implemented last year.

Additionally, in-restaurant execution has meaningfully improved.

Eddie V's continues to perform well and the two new restaurants we have opened are performing above our expectations.

Now, I'll turn it over to Clarence.

Good morning, everyone.

We do welcome this opportunity to speak with you and take your questions.

But before turning to questions I'd like to briefly address the consent solicitation that's underway to call a special meeting of Darden shareholders to consider a non-binding resolution prior to our annual meeting.

Our Board is strongly committed to engagement.

We value the views of our shareholders and as many of you know, we've had a robust investor relations effort since becoming a public company nearly 19 years ago.

We've consistently spent and will continue to spend an extensive amount of time talking directly with our shareholders and with the investment community.

In terms of our more recent business circumstances and potential paths forward, we appreciate the input we've received and these insights are reflected in the plans that we've announced.

Given the significance of the initiatives underway at Darden, we believe it's important that we continue engaging with our shareholders directly and individually, so that we receive input in a productive and nuanced manner.

With respect to the consent solicitation, shareholders should make their own determination.

Given our extensive ongoing discussions with shareholders and the substantial value we've gleaned from those conversations, we believe that shareholders should continue to engage directly with the Company and should not view a special meeting as a substitute for that ongoing two-way engagement.

We look forward to continuing to speak with our shareholders and with the investment community.

With that, operator, we'll take some questions.

(Operator Instructions)

David Palmer, RBC.

First, on media weight, could you just talk about what your strategy is with media?

There was a reduction in both brands, I believe you said that in the comments, particularly on the Olive Garden.

I'm trying to understand why that might be.

Perhaps you're saving that for the push behind this new menu.

That brings me to the second question, how is that going?

That new menu is a big event for that brand and obviously, visibility on that will be helpful.

Thanks.

On the media weight on Olive Garden, first part of it was just the way the holiday schedule fell.

We always have a hiatus week after Thanksgiving and that fell into Q3 this year instead of second quarter and we've always taken a hiatus week the week after Christmas.

That really wasn't a huge departure on Olive Garden.

On Red Lobster, it was a conscious decision to pull back the total rating points by 20%, as that spending just got a little too high in that time period.

We're also trying to balance that very busy time that allows -- we want to make sure that we are not putting too many incentives out that displace guests who are willing to pay for a full price experience with guests who are using some sort of incentive to come in.

That was a big part of the decision.

The second part of your question, the new menu is doing well, as I said in the comments.

It was a big change and so execution was what we thought it was going to be as we introduced it.

We have been very pleased with how quickly our operations teams have picked up this new menu and we're seeing guest complaints drop very, very quickly and actually receiving a lot of positive comments here over the last few days.

Thank you.

Keith Siegner, UBS.

Gene, some questions on Red Lobster: considering that the shareholders do currently own it, if it was spun, they would still own it and even if it was sold, there would be some efforts to try to ascertain what the appropriate value was.

I appreciate the resetting of the media weights and maybe some additions to the Lobster Fest menu, but could you talk just a little bit more about maybe some other efforts that are in place to help address what was three months of double-digit traffic decline?

Thanks.

I'll start and I'll let Gene comment.

But I do think we do want to make sure that we have the right level of media.

We feel like it had drifted up too far over time and we need to bring that back.

We also feel like we need to have the right balance between discounted offers and non-discounted offers.

We think we've gotten out of balance in terms of having a few too many discounts, because an important part of the Red Lobster brand is, for a lot of guests, it is a special occasion experience and we want to make sure that we continue to deliver on that and we aren't pushing those guests out with too much of a focus on the discounting side.

We think that's getting the brand back to where it needs to be in terms of really what current users look to Red Lobster for.

I think the other thing that the team here is focused on really mirrors a little bit of what Dave George talked about at Olive Garden, which is making sure that the foundation, so the in-restaurant operating execution, is stronger.

We've seen some plateauing there on a couple of different dimensions, some stepping back, and so some intensified focus there.

Gene?

The only thing I would add is that we thought that the promotion that we ran in December was going to be more effective than what it was.

It tested very well and we were focusing on superior seafood.

It really resonated with the consumers in test and then when we put it in market, it did not perform at the level we thought it was going to perform at.

We did believe the plan that was in place was going to work better and we had the quantitative feedback from some testing that led us to believe that.

It just didn't work out the way we thought it would.

Thanks.

Joe Buckley, Bank of America.

First, on the Olive Garden new menu, this was not mentioned on this call, but I guess when we spoke last week, is the new version of that planned for as early as May?

I think we'll probably have a menu change in May, which is normal for us, and that the adjustments will be more operational than menu change.

There'll be copy change, things that will help us execute better, but there will be no significant change to the offerings at all.

There may be one or two products that aren't working the way we thought they would work and we may choose to remove those, but the change will be more stylistic than anything else.

Okay.

A question on Red Lobster, you're obviously lowering the same-store sales forecast for the year, performance disappointing so far.

How is this working into your thoughts on the valuation of a standalone Red Lobster as you proceed with the spin?

I'll start and I'll let Brad comment further.

We don't think it's useful to get into some real detailed level of specificity, given that we're engaged in an active sale process.

But what we would say is that we think we've been appropriately conservative as we forecast out next year and the year after for Red Lobster.

It accounts for current business trends and it also accounts for the level of effort that we think it's going to take to stabilize sales.

Joe, Brad here.

The thing I would add is that there's been a conscious effort to reduce the amount of price point features and promotions there.

While we've dialed back a little bit, our top line expectations, in terms of our earnings expectations, they really haven't changed that much other than obviously the severe winter weather impact.

As we look through the fiscal year for that brand, that's stayed fairly stable.

The only other thing I would add is that, and Brad can put some dimension to this, but as we look today, we recognize that this year, from a cash flow perspective, Red Lobster's results have been depressed by this fairly significant spike in shrimp costs as a result of some of the production issues in Asia.

Brad talked about a 35% inflation in the third quarter.

We do see that coming back the other way eventually and we've accounted for it coming back the other way.

As Brad said, not in this quarter and there may still be some pressure in the first quarter of 2015, but following that.

Yes, on shrimp cost in particular, on an annual basis for the Red Lobster brand, it's approaching $30 million on a year over year increase.

As Clarence said, it's going to be elevated for the rest of this fiscal year.

Although we've seen the early indicators that we were looking for that the situation is improving, but we probably won't see cost relief on that until early in our new fiscal year, FY15.

Sara Senatore, Sanford Bernstein.

I wanted to ask a question about some of the information that was disclosed in the Form-10, which has basically allowed us to look at the business ex-Red Lobster.

I had a question about that in the sense that we saw fairly most of Darden's margin compression has come from Red Lobster, but it's happened elsewhere, too.

It looks like there's probably some mix going on in the food and beverage line.

With the exception of maybe the last couple quarters for Olive Garden, but for comps where ex-Red Lobster they've been actually sort of modestly negative to up depending on the brand, it still seems like there's been a lot of margin pressure over time.

I was hoping you could just comment on to what extent that's been mix from these new brands and to what extent any of that is addressable because, again, it does look like the sales alone wouldn't necessarily dictate that?

A couple of thoughts: one, and Brad can follow on, clearly, some of the sales deleverage at Olive Garden put some downward pressure.

In addition to that, we do have some fairly meaningful new unit expansion costs and those costs, given the plans that we outlined to bring new unit expansion down by at least half are going to come out, but that is significant.

It flows through a number of lines as we prepare management teams, managers in training, all those sorts of things.

We're also, in addition to those adjustments on the new unit side as we talked about before, really adjusting our support cost to reflect the lower sales base.

Yes, and I guess the piece to add to that, it's really the same thing is that what the new unit growth premium is a fairly significant headwind.

As you pointed out, Red Lobster, if you look even just at the most recent quarter, its impact on Darden and obviously, the strategic plan-related costs are fairly significant.

You take those out, the 120 basis points better than it is.

I think the only piece to add is some of our growth brands obviously contribute to some of the headwind because of the growth premium we've talked about, as well as some of the SRG brands where there's a lot more lease facilities.

You have that full rent cost above the line that's in there.

On an EBIT, you see that.

If you go all the way down to on EAT basis and real cash flow, we make that up there because you don't have those additional financing costs.

The final piece I would add is just, as you look back over the last four years, we've clearly invested in the LongHorn marketing function and in the SRG marketing platform.

We've done that to improve their brand positioning and brand evolution capabilities, to improve their go-to-market capabilities, and those investments are completed so we would expect, going forward, to begin to leverage those investments.

The last piece is that we've also invested in lobster aquaculture and from an operating expense perspective, that's embedded there.

It's not insignificant.

I don't know, Brad, if you want to talk about the size of that investment?

On a year over year basis, it's in the $12 million range of additional expense that we have there for a very promising opportunity that we have there.

But it does, obviously, have costs that proceed the benefit we're going to derive from that.

We do think it's something that creates significant value.

That value as a go-forward, as we think about it and whether it makes sense to continue, that value will best be realized as we get closer to full scale commercialization.

Thank you.

Jeffrey Bernstein, Barclays.

First, specific to Olive Garden and the new menu, it seems like that's your biggest opportunity to turn around the core business, obviously ex-Red Lobster.

It does seem like maybe it's an attempt at more of a permanent reset of price value.

I know there's a lot of value in the Cucina Mia and the small plates.

Just wondering how you think about the impact on that in terms of whether it be comp, margin, or ultimate brand profitability as you now kind of reset down on the value side of things?

Jeff, this is Gene.

I think that we've gone both ways.

We've provided everyday value with Cucina Mia and we've done some other things at lunch that we think provide great value there.

But we've also gone all the way through the menu and we've added price points at $14, $15, all the way the to $18.99.

As we look at it today, with the mix that we're seeing, we're not seeing a lot of margin compression with this menu.

We're seeing the consumer that we hope would trade up to the filet and the salmon and risotto and the dishes like that.

That's happening.

We're getting a good mix on that everyday value.

But it's pretty much what we thought it was going to be at this point in time and I think we've done a pretty good job managing the margins.

That mix could continue to change over time, but right now, it's playing out pretty much like we thought it would.

Jeff, Brad here.

I would just add to that.

You're pretty familiar with how we talk about our P&L at the restaurant earnings line and even at the gross margin lines.

There's very little contraction in that margin in the quarter or even as we look forward here.

I think there is the opportunity, as we move forward with this strategy, to gain some of that traffic back to where Olive Gardens has typically been.

The leveraging in that model would actually provide margins that are well above where we've been the past couple years.

We're not giving much up with the guests we have today for that opportunity to bring more guests in to the future as we increase the appeal and the breadth of their offerings.

Understood.

I think you mentioned in your prepared remarks, $60 million annually in terms of cost savings starting in fiscal 2015.

One, I just wanted to see, I believe that obviously, then, includes some Red Lobster savings.

Just wondering if you could break out that $60 million, ex the Red Lobster if the spin or sale is successful.

Do you see any optimism or further opportunity beyond that?

I know you're embarking on that benchmarking study, whether there's any learnings there or where you might see some opportunity, maybe where you're spending more than peers or maybe there's a distortion in the way you're reporting it that makes it look like that and it's not actually the case?

Let me start out and Clarence can add on.

We talk about the $60 million.

That has been a Darden number, we're well on that path.

That has largely been at support services that Darden provides to the restaurants and the brands.

We would expect, as we move forward, to be pretty close to that $60 million, but even as you mentioned, as we look forward, and as a part of the separation, we see this as a great opportunity to reassess, re-evaluate our support platform, starting there first, that I would expect as we continue to learn more.

We're bringing in strong outside expertise to help us look at it differently than we have, that there's no reason that we shouldn't be at or above that $60 million on a support level basis, so all those cost savings are coming at the G&A level.

We'll also branch out into the other areas.

I feel pretty comfortable that number is where it is and will probably continue to grow, even on a Darden basis, ex the Red Lobster piece.

I would just add, as we look at reported G&A, we feel like we're in line with competitors.

The challenge, of course, with that number is there's no industry convention regarding where some important cost items are included.

For example, we include the cost of multi-unit operations leadership in G&A expense, some include that in restaurant-level expenses.

We also include certain food safety costs in G&A expense and some folks include that, again, in restaurant-level expenses.

We felt it's very important to get someone like Alvarez and Marsal, who has broad experience in the restaurant business, to help us better understand how we stack up vis-a-vis competitors when we look through all of those mismatches and they are working with us on that.

We think, as we do that work, we'll identify further opportunity and we're also working with them to see are there cost reduction opportunities, four wall sort of more direct operating cost opportunities beyond support cost.

I think one thing, we're tapping into their experiences and expertise is on the revenue side as well, to have a different perspective, a fresh look at that.

We're getting into that soon.

We haven't started that part of the work yet but we look at that as a further opportunity for us as well.

Greg Hessler, Bank of America.

There's been a lot of talk about the debt breakage costs that you would incur if you were to go down the path that some of your shareholders have proposed.

Can you highlight just what, specifically, you're seeing in your bond or your debt covenants that would require you to make whole the capital structure?

Yes.

We think it's fairly clear in there that the degree that we would need to pay off those bonds there are certain provisions that those costs that we would have to incur.

We're fairly certain that those are there and those are obligations that we would need to fulfill.

Okay.

The language in the covenants, you think, is it sort of all or substantially all or is it something else in the covenants?

No, it's pretty clear, in our view, that if we have to refinance those, those are make whole provisions that get those bond holders made whole, given where those bonds trade relative to current market.

John Glass, Morgan Stanley.

I wanted to ask about the cost savings that you're experiencing in Olive Garden right now.

I think you said $19 million on an annualized basis.

That's 15 basis points, I think, if my math is correct.

What do you think the total opportunity there is?

Is it a multiple of that?

Maybe could you discuss the timing of that?

I assume that is outside the $60 million; so it's $60 million pluses whatever you achieve at Olive Garden.

Can you also talk about, is that go going to be a gross savings and you're going to talk about we've got to reinvest that money later on, so we don't actually see it or is it money we actually see in the P&L?

As we described this effort, Phase I was the $19 million in operating savings that we achieved and we're entering into Phase II and we haven't really scoped what the total opportunity is in Phase II.

We do think there's an opportunity.

However, we are working with A&M to allow us to -- we want to make sure we get their perspective on what the opportunity might be also, but we have not quantified this opportunity.

We think there's opportunity there.

But as you go into the second round and Phase II, it won't be as easy as a Phase I, unless A&M comes up with something that we've just missed.

It is incremental to the $60 million that Brad was describing.

It's not the kind of stuff you need to reinvest in, say, pricing or incremental marketing, you believe these are actually going to stay as visible margin gains?

I think this is net of some of the reinvestment we've made.

We have reinvested some of the cost saves that we got out of the simplification effort and the $19 million is net of that.

Matt DiFrisco, Buckingham Research.

With respect to the savings, you keep saying support services.

Is that clear, then, that there's no marketing when you talk about the 20 basis points shifting out, 20 rating points shifting out, was that incorporated at all in the savings?

In that $60 million, a portion of that is -- it's all within SG&A, a portion of that is within the marketing area where we have made some investments in the past that didn't deliver sufficient returns, that we want to keep that.

The marketing portion will come down some and we highlight some of those.

There's a little bit of pullback that we've done in the third quarter.

But on a profitability basis, don't believe it had a meaningful impact to us.

Did you clarify, when you were breaking out the Red Lobster, I appreciate you were doing the COGS, labor, operating expense, did you also break out Red Lobster as far as leverage on the G&A side?

Was that also delevered or did you have an offset where you levered because there was some cost savings?

For Red Lobster, in this particular quarter, their SG&A was actually better by, I believe it was, around 100, 120 basis points than the prior year.

A portion of that was G&A savings within the brand, things that they've been working on, but a portion of that was the reduced marketing support, particularly in the December, January timeframe.

It did lead to a portion of our same restaurant sales decline.

We had anticipated that.

But when we look at the cost of the media to attract those sales, everything fell within our earnings expectations that we had going into the quarter.

Shirley, that's all the time we have this morning for Q&A.

We'd like to thank everybody for joining us on the call.

We certainly are here to take your calls if you have additional questions and we look forward to seeing many of you as we are out on the road visiting with our shareholders and others in the investment community.

Thank you very much for joining us today and we'll speak with you again in June.

Thank you.

This does conclude today's conference.

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