達登餐飲 (DRI) 2014 Q4 法說會逐字稿

Welcome, and thank you for standing by.

(Operator Instructions)

This call is being recorded.

If you have any objections you may disconnect at this point.

Now I will turn the meeting over to your host, Mr. Matthew Stroud.

Sir, you may now begin.

Thank you, Camille.

Good morning.

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 Restaurant 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 Security 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 a strategic plan to enhance shareholder value, including realizing the expected benefits from the sale of Red Lobster, the occurrence of any event, change or other circumstances that could give rise to the termination of the agreement to sell Red Lobster, the outcome of any legal proceeding that may be instituted against Darden relating to the Red Lobster transaction or otherwise, the failure of the Red Lobster transaction to close for any reason including non-fulfillment of any conditions to close, the timing of the completion of the transaction, actions of actors and investors, and the cost and disruption responding to those actions.

Food safety and food-borne illness concerns, litigation, unfavorable publicity, risks relating to public policy changes, and federal state and local regulation of our business 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, Season 52 and Eddie V's, a lack of suitable new restaurant locations, higher than anticipated costs to open, close or 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, 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 FY15 first-quarter earnings and same-restaurant sales for fiscal June, July and August 2015 on Friday, September 12, 2014 before the market opens, with a conference call shortly after.

We released fourth-quarter earnings results this morning.

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

We have a slideshow presentation that you should be able to access through the webcast link at Darden.com or Videonewswire.com.

After the presentation, we will take your questions until approximately 9.30 AM Eastern Time With that, let me turn it over to Clarence.

Thank you, Matthew, and good morning, everyone.

FY14 was clearly, obviously a year of significant transformation for us.

And so, we had a number of changes that complicate our financial reporting, and we appreciate this opportunity to walk you through the numbers in some detail.

The transformation also had many other very important dimensions, and we appreciate the opportunity to discuss those with you as well.

Ultimately, all the change that took place was designed to do one thing, and that is to better position us to create significant shareholder value.

And so, this year was one that was highlighted by a number of things.

Clearly, the launch of a comprehensive brand renaissance plan to regain momentum at Olive Garden, was highlighted by continued success at LongHorn Steakhouse where same-restaurant sales exceeded the industry by nearly 4 percentage points, and at our specialty restaurant group, which has grown to $1.2 billion in sales.

The year was also highlighted by the announcement of the sale of Red Lobster for $2.1 billion, and our announcement and undertaking of significant cost restructuring, which means that G&A as a percent of sales is expected to remain approximately 5%.

And that is because the cost savings achieved with assistance of Alvarez & Marsal more than offset by roughly $40 million potential stranded costs related to the sale of Red Lobster.

That cost restructuring also means that in FY15, SG&A as a percent of sales is expected to be the lowest since we became a public company in 1995.

The year also included continued industry-leading return of capital, and that return totals $1.2 billion now in the past three years.

We distributed $288 million of dividends to shareholders, and we recently announced an additional $500 million to $600 million of share repurchase for FY15, for a total share repurchase program for next year, or this year that just started, of up to $700 million.

In addition, we have strengthened our credit profile with our plans to retire approximately $1 billion of our existing debt, and we made some refinements in our management compensation incentive programs to more directly emphasize same-restaurant sales and free cash flow growth.

And Brad is going to discuss our sales and earnings results, both with and without Red Lobster.

So Brad?

Thank you, Clarence, and good morning, everybody.

On this slide, I will be brief, as a lot of it is covered in our press release that went out this morning.

But I would point out that combined sales reached $8.758 billion.

That is up 2.4% to the prior-year.

I think more importantly is when you look at continuing operations sales, and that is excluding Red Lobster and the Red Lobster consumer package good products and international fees and royalties, sales were at $6.286 billion or up 6.2%, a significantly higher growth rate than the combined Company enjoys.

Now our brands are making strong progress, or maintaining high levels of performance in the new fiscal year.

And so, what Gene will touch more about activities and initiatives that are driving that.

But if you look over at the far right-hand column, you see same-restaurant sales for the first three weeks of our new fiscal year.

The brand renaissance at Olive Garden is clearly taking hold, as you see improvement in their trends.

Their same-restaurant sales are flat, which is above the Knapp-Track industry benchmark, and you see continued strong performance from LongHorn Steakhouse, and the specialty restaurants.

Now turning to the next page, and talking about our earnings performance and how that is reported.

Unfortunately, GAAP reporting is not always as intuitive as we would like for it to be, and that is the case with the separation of Red Lobster.

So on this slide, I will walk us through the geography of reported earnings, to we what we call performance view of our results.

And if you start with reported combined fully diluted EPS, that is $2.15 for FY14 -- excuse me -- $2.15 for FY14.

Now in that number, we have had the strategic action plan costs, and that is really to execute our plan.

That involves the real estate work, legal work, advisor fees, retention bonuses, and all of those costs, along with some related impairments to implement the plan, you would have to add those back for $0.27.

There is also some other impairment charges that we incurred to exit our restaurant lease in the future, but before their original lease term expires.

And there is also some charges as we move forward with the new Olive Garden remodel design, some previous charges that we needed to write off, and that is a $0.05 charge.

So you would need to add those two items back to get a performance view of Darden on a combined basis.

And this is how we have been talking to you previously, in terms of our guidance and expectations.

So $2.47 earnings per share is that number.

Now with the announcement of the Red Lobster sales, all presumed Red Lobster results for prior -- for current and prior periods are moved to discontinued operations.

But not all of the costs move, when you make that type of reporting adjustment.

So if you start again, with reported fully diluted earnings per share of $2.15, to that you would exclude Red Lobster's results of operations, which are $0.91 in FY14.

You would add back strategic action plan costs and the related impairment charges that are within discontinued operations, that is $0.14.

And so, when you combine these, this results in a continuing operations reported number of $1.38.

Now to move from that reported continuing operations number to how we performed, you have to add back shared support costs.

Darden, we use a very extensive shared service platform for a number of our support services.

But in the reporting, those shared costs cannot be moved to discontinued operations.

Now after the sale obviously, those costs will go away and be moved to Red Lobster, but for reporting purposes currently they aren't.

And that represents $0.15 of impact that we have identified that.

It is virtually all headcount-related, and so we have a high certainty that those costs will move, once the separation is effective.

The remainder of the $0.27 in strategic action plan costs that are not included in discontinued operations, we add those back, that is $0.13.

And there is other impairment charges that I mentioned earlier, for lease exit and remodel costs at Olive Garden of $0.05.

So when we combine those, with reported $1.38 from continuing operations, you get $1.71 of continuing operations performance view, if you will, EPS, or down 11.4% to the prior-year.

I know this is a little confusing at first, but it starts -- but always start with reported results first.

And then for total operations, then we build to discontinued operations and continued operations, so that you can get a view of our true performance.

We will come back to this approach as we build our and detail our expectations for FY15.

We thought that was helpful to lay this out with full detail, so you see can better understand our performance.

Clarence?

Thank you, Brad.

To frame our discussion about our strategic action plan and our outlook for FY15, we thought it made sense to provide some context.

And that context in a sentence is that we are in a more mature, yet more dynamic industry.

So that said, as industry growth slows with maturity, we believe there are attractive consumer segments, and we think we have created a portfolio that is well-positioned to succeed against those consumer segments going forward.

So we think about the industry's maturation, there are a number of things that are driving that.

Certainly slower growth in the Boomer population age 50 to 60, and that is where dining out frequency is the highest -- it has always been the highest -- slower growth in household income overall.

Increased competition, not only within full-service dining, but also with the emergence of attractive new segments, new dining segments like fast casual, and elevated innovation within traditional quick service.

As all that happens, some important demographic and economic dynamics, and where the share growth opportunity is.

And that is a significant increase in millennials, a significant increase in multicultural households, across all age and household income spectrums.

There is increased spending power in Generation X. And the overarching dynamic is that there is increased digital interconnectedness across all generations and all other demographics.

Now as we look at these dynamics, in order to create value, we have got some very clear priorities.

And those priorities for value creation really are,] to separate Red Lobster through the sale, because we don't believe that Red Lobster is as well-positioned as our other brands for the future that we see.

And we have sold Red Lobster again for $2.1 billion to Golden Gate Capital, and we are on track to close that sale in July.

Execute the Olive Garden Renaissance, Gene is going to provide some more detail, but that is all about improved food, improved service, a stronger communications platform.

Continue to develop LongHorn into America's favorite steakhouse, and LongHorn as we have said, very successful both with new restaurant expansion and with same-restaurant sales growth.

To grow our specialty restaurant sales by more than $1 billion is our target over the next five years, and we are on track based on our performance in 2014, and our outlook for 2015 to do that.

Further optimize operating support and direct operating costs.

We have done a lot, and we will talk in detail about that.

We have described some of it already.

And then, better align our management compensation systems to reflect the new reality, and the new drivers really of value creation, and I will get into more detail about that later.

And then, to make sure that we have got appropriate capital allocation discipline.

And certainly, we believe that the reduced new unit growth that we have got going forward the commitment to halt acquisitions is consistent with that.

Let me begin the more detailed discussion of these priorities, by reviewing the Red Lobster sale.

And that sale was a result of a very robust process that maximized value and minimized risk.

Total consideration, $2.1 billion in cash.

That presents a purchase multiple of 9 times trailing 12 months EBITDA as of April.

That process involved 70 financial and strategic buyers, and another 25 real estate buyers.

With the sale, we expect our investment grade credit profile to remain intact, and indeed to improve somewhat.

We expect to maintain our $2.20 per share annual dividend.

The sale will be accretive to Darden's long-term earnings growth rate.

So we expect to have not only a higher earnings growth rate, but higher sales growth rate and higher margins.

With the sale, we will have less volatility in our quarterly sales and earnings.

It was a sale was unanimously approved by our Board, and the $2.1 billion sale price is a premium multiple, compared to comparable restaurant deals.

And we were able to secure that despite the fact that Red Lobster has some meaningfully declining operating trends, and you can see that from the same-restaurant sales perspective, and an EBITDA perspective in the two charts at the bottom of this slide.

And with the sale, we achieved the objectives that we had previously communicated.

Those objectives are listed here, so I won't go through all of them in the interest of time.

But as we look at Darden post sale, there are a number of things that are different.

So Darden post sale is a leading multibrand operator.

Again, higher, more consistent sales and earnings growth, driven by stronger overall positioning with these consumer segments that are attractive, given where the industry is and where it is headed, and given its restaurant expansion footprint.

We are an operator with a commitment to quality and menu innovation, and that also carries with it a more balanced commodity purchasing profile.

We have a commitment to return capital.

So stronger free cash flow, again due to the reduced capital expenditures, and that supports strong dividend and allows for increased share repurchase.

We have stable and growing cash flow, with reduced again, quarterly sales and earnings volatility, and as I said a better credit profile.

And then finally, we have an experienced and quality management team.

And that team, with certain refinements in our management incentive program, has an even sharper focus on same-restaurant sales and free cash flow growth.

Now drilling down, this next chart shows just how much better positioned for growth Darden is, post the Red Lobster sale.

It shows our cumulative total sales growth from FY09 to FY14, overall at 23%.

And then, if you exclude Red Lobster, that cumulative number is 40%.

It also shows the CAGRs, and the CAGR excluding Red Lobster for that period is 2.5 points higher, than it is including Red Lobster.

Beyond the Red Lobster sale, a key component of our strategic action plan is, of course, regaining momentum at Olive Garden.

And Gene is going to update you on that.

So Gene?

Good morning.

I will spend the majority of my time this morning talking about Olive Garden, and then quickly discuss LongHorn and our specialty restaurants.

Olive Garden provides a strong foundation for the overall Darden business.

It is a premier brand in casual dining, with average restaurant volumes of $4.4 million and industry-leading returns.

We are confident that the recently launched brand renaissance plan is addressing erosion in visit frequency among our core guests.

This plan also will enhance our solid position with millennial and multicultural households, and it is a platform for renewed same-restaurant sales growth and margin expansion.

While many of the elements have been under development during the past year, we are in the early stages of exposing guests to what we call our brand renaissance plan.

Our objective is to make certain that our guests enjoy a differentiated experience of Today's Italy, where Olive Garden's warm hospitality and superior value bring people together.

In terms of food, quality not surprisingly, is what guests want most, and freshness drives quality more than any other attribute.

So we are emphasizing food prepared with the freshest ingredients, presented simply with a sense of flair as very Italian.

Our efforts are focused on making our service approachable and genuine, so guests can focus on sharing great food and conversation, which is why they come to Olive Garden.

Within our restaurants, we want to make certain that our atmosphere is natural, clean and tasteful, while its tone is warm, relaxed and engaging.

At every turn, we are looking to reinforce these aspects of the atmosphere within our restaurants.

Lastly, although Olive Garden has a national presence of more than 800 restaurants, we are most relevant to our guests when we act and are viewed as a family of local restaurants making a positive difference in each community we operate.

There are four key growth aspects of the plan.

One, continuing to evolve the court menu to reinforce value, expand choice and variety, and capitalize on the convenience trend.

Two, simplifying operations, improving food quality and enhancing service.

Three, implementing a more integrated communications platform to enhance brand relevance.

And four, bringing the brand to life with every guest touchpoint.

At the beginning of the fourth quarter, we introduced new menus at lunch and dinner, with significant changes designed to address the consumer needs for increased value, and additional choice and variety and convenience.

The dinner menu now has a $9.99 price point, with the Cucina Mia section at the majority of our restaurants.

We know at that this price point and the customization this offer enables is very compelling for our guests, especially millennial and value conscious consumers.

We also added A Taste of Italy section, which addresses the guest's desire to sample menu items served tapas-style.

In addition, we have added seven new specialty items, including four new lighter fare entrees, buttressing areas of the menu where our guests are looking for more choice.

To address convenience, we have successfully tested online ordering which will further strengthen our take-out business, which is approximately 8% of our sales, but is currently growing 10%.

During the testing phase when orders were placed online, the check average for those transactions were significantly higher than the orders placed over the phone.

Take-out sales in the online restaurants are growing greater than 10%.

At lunch, we introduced Tuscan Trio combinations, nine new items at $2.99 which can be coupled with our soup, salad and breadsticks.

These items create many new lunch possibilities, at a price point that is very competitive with many casual dining brands and fast casual lunch offerings.

Initial feedback from our guests has been favorable, and they tell us these items are unique.

They also help us enter into the emerging snack occasion.

In terms of choice and variety at lunch, we have added sandwich and flatbread combinations, as well as mini pasta bowls and small plates.

Given that many guests are on a time constraint at lunchtime, we introduced the Pronto Lunch menu that provides a full Olive Garden experience, but in a condensed time frame.

Looking at 2015, at dinner we will continue to look for ways to improve the Cucina Mia platform, and increase the number of entrees under $15 to bolster our already strong appeal to younger and budget constrained guests.

When you look at Olive Garden's price points, you have to keep in mind as our guests certainly do, that every meal we serve comes with unlimited salad or soup and breadsticks, thereby dramatically increasing the delivered value versus the competition.

New better for you options will also be added to the menu, as well as an upgrade of our classic Italian offerings, which continue to represent a significant portion of our sales from our dinner menu.

We are in the midst of rolling out our to-go online ordering system nationally, and we expect to have this completed by the end of August.

And as I mentioned earlier, we are encouraged by the initial test results and believe this effort will accelerate the strong growth we are experiencing in to-go sales today.

Olive Garden's absolute lunch business is very strong, however, lunch guests counts are declining approximately 80 basis points more than dinner.

In order to reverse this trend, we will continue to focus on improving our competitiveness at lunch by expanding our Tuscan Trio combinations, as well as introducing new flatbreads, pizzas, and Piadinas which are Italian style sandwiches.

Also in the works is a test of a lunch time guarantee, to ensure our guests with a time constraint can count on Olive Garden to provide a quick lunch experience.

Olive Garden is a high-volume relatively complicated operation, that over time has become increasingly complex.

In order to improve execution, the team recognized the need to simply.

In FY14, we have focused on simplifying recipes and reducing prep production pars.

These steps led to an annualized savings of $20 million.

We also simplified our take-out procedures to improve our ability to deliver a better to-go experience.

In terms of improving food and beverage quality, we have installed Piastra grills which improve the quality and consistency of our grilled items.

We also improved the quality of our proteins, chicken, steak and salmon.

Using higher-quality proteins in our specialty dishes is key to ensuring we continue to deliver strong value in entrees that appeal to all consumers, but especially those consumer segments that provide attractive opportunities for growth.

Additionally, we have implemented enhanced service training to reemphasize and reinforce our traditional Hospitaliano service culture.

This year we will continue to pursue our culinary simplification program on several fronts, including sauce consolidation and pasta preparation.

As I stated earlier, we are aggressively rolling out our online to-go ordering platform, with the expectation of being completed in August.

In terms of improving food and beverage quality, we will elevate and intensify our focus on alcoholic beverage sales.

We will narrow our focus to wine and a few unique specialty cocktails.

This is an effort underway to re-energize the wine sampling service step, and to increase server wine training and knowledge through mobile apps, which will help servers recommend wines, and be comfortable pairing wine with food.

While there is opportunity to elevate the guest experience throughout the entire system, we have some restaurants that underperform the system on many performance metrics, and these restaurants are a significant drag on same-restaurant sales.

Senior operational leaders have been assigned to these underperforming restaurants, and will be accountable to improve their performance.

In addition, we are placing increased emphasis on ongoing training and development of all our members a recertification process.

The objective of this is to ensure that training initiatives we started last year are gaining traction.

Lastly, we are partnering with Ziosk to introduce tabletop tablets to enhance the guest experience.

This test is expected to begin in August.

One of the key drivers of the Olive Garden renaissance plan is to develop a truly integrated communication platform to enhance brand relevance.

During the past several years, nearly the entire casual dining segment of the restaurant industry has reverted to a nearly 100% reliance on price-driven promotional advertising.

And while promotion is always an important piece of the marketing communications mix, they do not tell the whole story.

Importantly, it is impossible to build and maintain a strong brand with only promotional messaging.

In FY14, we began to place their emphasis on the brand building portion of our messaging.

We developed new creative content to showcase new core menu items, and reinforce our culinary credentials.

We launched a new interactive website, implemented a social media engagement and service recovery program, and launched a social media road show to introduce many of our new menu items.

In terms of our promotional efforts, we placed greater emphasis on our core menu items, with a promotional messaging in order to minimize complexity and maximize appeal.

The result has been increased guest preference of the promoted items, with less strain upon the operating system to deliver them.

We also began to use radio as part of the media mix to support promotions in select markets, and we introduced more weekday promotions in order to drive traffic when the guest's greatest capacity, rather than offering discounts during our high highest traffic periods which are on the weekends.

During FY15, a new Olive garden advertising campaign will be unveiled, emphasizing our culinary credentials and the emotional connection that our guests seek when they come to Olive Garden.

Creating an emotional connection with our guests help make Olive Garden a leader that it is today, and we need to return to using this strategy with greater emphasis.

We are increasing our investment in visual and social media tools to drive greater guest engagement.

And with these tools, we will provide much more in the way of regional and personal messaging through customer relationship marketing and mobile devices.

In terms of our promotional messaging, we will continue to inject new news into our existing promotions, and look for innovative new promotional constructs, including the use of more seasonal and regional products, as we will offer more targeted and relevant promotional incentives, not always about low price through the use of CRM.

All that said, while we intend to be much more effective and efficient in our promotional messaging, as stated above, we will have a much, a much better balance between our limited time offerings and our equity messaging.

Finally, we are redesigning all of our in-restaurant merchandising materials to reinforce Olive Garden's culinary expertise, to elevate menu news, and to enhance ease of menu navigation so that our guests can quickly find their old favorites, but also learn about exciting new offerings.

The fourth and final driver of our brand renaissance plan is what we call the Olive Garden reimaging program, which is intended to bring the renaissance plan to life at every guest touchpoint.

In FY14, we reimaged both the interior and exterior at one of our Revitalia restaurants.

The new design is natural, up-to-date, comfortable and engaging.

We also introduced new plateware to enhance the presentation of our food, contemporize the music, and work with Lippincott, a consulting firm specializing in logo evolution to develop a new logo and visual identity system.

This is an extremely important opportunity, because same-restaurant sales of the 300-plus restaurants in need of a remodel lag results at our other restaurants by more than 2 percentage points.

Initial sales results at the remodeled restaurant are very, very encouraging.

The sales trends have improved mid single-digits since the completion of the remodel and the new signs were installed.

When the Revitalia restaurants in the market have been updated, the Tuscan Farmhouse restaurants in the market will also convert to the new logo signage, and new plateware package.

The Olive Garden brand renaissance is a large and complex initiative with many components.

We have already made significant progress in many areas, building a strong foundation in FY14, but most of the changes will come to life for our guests in FY15 and beyond.

Olive Garden is a large business, with more than 800 restaurants and 8,000 employees.

So we know that it will take time for the brand renaissance to be fully implemented.

But we are already seeing positive measurable results, such as strong preference and menu satisfaction on new menu items, and an improvement in guest satisfaction scores.

We are confident that the rate of progress will increase in the quarters ahead, as the various aspects of the plan reinforce and build on one another.

In fact in June, as we have gotten past some of the year-over-year promotional mismatch we had in the fourth quarter, we have already seen significant positive trend change compared to the fourth quarter, from a same-restaurant sales perspective.

I will conclude the Olive Garden section with a couple of quick quotes from guests.

This quote is from a Yelp event we hosted recently, I am not usually the first one to say Olive Garden when someone wants a suggestion on where to eat.

On Monday, that all changed.

This a quick quote from some qualitative research we did after our remodel was complete, I do not even know you had a bar before, and now I really want to go in there.

Quickly, we will just look at -- we will talk about LongHorn.

LongHorn has a clear vision.

As Clarence mentioned, they want to become America's family -- America's favorite steakhouse.

This multiyear effort has strengthened the brand, has created strong sales momentum.

The focus on continually improving the menu, enhancing service execution, and providing the guests with a great atmosphere, as all of our restaurants have been remodeled and look and feel refreshed, has been the driving force of LongHorn's outperformance in the industry.

And as we look at the specialty restaurant group, I think we have strong, differentiated, well-positioned brands, and the teams are focused on regaining same-restaurant sales momentum, both at Seasons and Yard House.

I would just quickly say, I think Yard House is very well-positioned in the marketplace, has strong appeal to millennial and Gen X households.

We continue to be pleased with the performance of the new restaurants, and the real estate pipeline is strong.

Seasons 52, broadly appealing, and particularly strong with higher income and Gen X. To improve our sales trend and reverse trends that we have, the team is focused on elevating the operational execution, evolving the seasonal regional menu strategy, and increasing brand awareness in new markets.

And with that, I will turn it back to Brad

All right.

Thank you, Gene.

We continue to achieve a more cost-effective platform.

Transformative changes that we talked about in the past in Darden's operations have significantly reduced cost by over $150 million annually in selected areas, operating areas around support including supply chain, facilities management, water and energy usage.

During the past two years, these efforts have been supplemented with broad-based cost reduction initiatives due to more than anticipated muted sales growth recovery since the financial crisis and the economic downturn.

Despite lower total revenues following the sale of Red Lobster, we expect general and administrative expenses to remain flat at 5%, excluding the strategic action plan cost.

Now Alvarez & Marsal has continued to assist us with efforts to identify additional operating support and direct operating cost opportunities, as well as potential revenue enhancement opportunities.

And so, we expect to further reduce G&A as a percent of sales as we get further into FY15.

We will minimize the impact of continued commodity cost inflation through other select initiatives, to achieve a net inflation, net cost pressures, of 1.5% to 2.5% in FY15.

Our $2.5 billion in product spend is now better diversified, with less exposure seafood inflation post the Red Lobster separation.

The table on the left shows our spend by major category.

You can see the change from 2014 to what we anticipate in 2015 with the separation, particularly see much less of our cost basket coming from seafood costs.

On the right-hand side, we outline our coverage of our main products that we purchase as we look through the new fiscal year, or in particular, June through November of FY15, our first half of the year.

The overall coverage at 52% is a little lighter than it typically is at this point in the cycle for us, given that we believe costs are a little elevated, and we expect them to come down.

We look at inflation in this area for FY15 in the 2% to 3% range, probably the upper half of that range in the first half of the year, and the lower half of that range in the back half of the year.

As Clarence mentioned earlier, we really increased our focus on driving higher same-restaurant sales, and stronger free cash flow to achieve higher shareholder returns.

The annual incentive plan is now weighted 70% on achieving targeted EPS growth, and the remaining 30% on targeted same-restaurant sales growth.

Our performance share units, those are a three-year performance period, is now based on 50% of achieving targeted total sales growth, 50% on free cash flow targets, and a relative TSR performance to the S&P 500 total shareholder return.

On a continuing ops basis, our business generates a substantial and durable operating cash flow.

In FY15, we expect cash provided by operations to be between $670 million and $730 million.

Now we will pay down approximately $1 billion in debt.

The debt leverage that we expect is going to be at the lower end of our 55% to 65%, and that is on an adjusted basis, trading operating leases as debt equivalents.

Our debt coverage is expected to be above our targeted range of 2.0 times to 2.5 times, but it improves from the year just ended of 3.7 to 3.0 at the end of FY15.

We also allocate $500 million to an accelerated share repurchase program, and up to $200 million in additional open market repurchases funded principally from the sale of Red Lobster.

We are maintaining our current annual dividend of $2.20, or an approximate total payout of $275 million, and deploy $325 million to $350 million of capital expenditures.

This really reflects lower new unit growth, offset slightly by the investment in the Olive Garden remodel program.

And all of this, with the expectation of retaining an investment-grade credit profile.

Now turning to some of the more specifics of our outlook for 2015.

On this slide, we have detailed our new unit growth, and you can see at 37 net units that is down fairly significantly from this year's 69, or the year before of over 100 new restaurants.

You can see that the growth is concentrated in LongHorn and our specialty restaurants, and there is also the completing of Olive Garden sites that were well into the growth pipeline.

From a same-restaurant sales perspective, we look at Olive Garden to be flat to plus 1%, Longhorn, a plus 1% to plus 2%, and our specialty restaurants at approximately 2%.

All of these performances will be above the industry expectations.

On the next slide, we outline our operating cash flow, and you can see as I mentioned earlier $670 million to $730 million there, obviously driven by earnings.

This does include the portion of cash flow that is generated by Red Lobster prior to the sale.

You can see our expectations for depreciation and amortization.

Working capital, there is an improvement there ex the Red Lobster business, and we have reflected that.

And the other cash items really highlight the progress that we have been making and continue to expect, in better managing our balance sheet, as well as the cash flow benefits of our tax planning initiatives.

So it leaves cash available for dividends and share repurchases at $320 million to $405 million.

As I mentioned earlier, the capital expenditures are down.

You can see the new units that I outlined earlier will result in about $150 million of capital deployed towards those.

The remodel is principally all related to Olive Garden, as well as there will be some CIP for that, as we end the year to continue that program.

And then, we will continue to invest in maintaining our restaurant standards and cooking equipment standards, and so maintenance CapEx will be in the $125 million to $150 million.

And as I mentioned earlier, maintaining our dividend of $2.20, and share repurchases in total up to $700 million.

So back to this page that I took us to, as we looked at FY14 to better understand and help you get your hands around our performance, and from an EPS perspective here, the prior-year comparison is the performance EPS that I laid out earlier of $1.71 we think is the right benchmark.

We expect to report $1.81 to $1.90 fully diluted EPS.

Now again, we have to adjust the support costs.

For the period that Red Lobster is a part of Darden, those support costs which we know will go away, are a deduction to ours, that is we anticipate around $0.02, that we would need to add those back to the reported continuing operations number.

And as I mentioned earlier, we are paying down $1 billion of debt.

There is some estimated debt breakage related to that of approximately $0.39.

And so, that puts us at a continuing operations performance view, earning fully diluted EPS of $2.22 to $2.30, and that is a 30% to 35% increase above the prior year, but there are some clear and distinct drivers of that.

Those are highlighted in the lower right-hand portion of that.

The results that we expect from our core operating performance driven by the same-restaurant sales and the cost initiatives should drive 10% to 15% EPS growth.

We have talked about the reduced interest expense related to the debt reduction that drives about 12% of EPS growth.

And the share count reduction from the share buyback that we talked about drives 5% growth.

And to just to add a little bit more confusion to the work that you have to do, next year will be a 53rd week for us.

And so, there is 3% earnings growth related to sales from that extra week, so netting to a 30% to 35% increase in earnings per share.

Now I would point out that the share buyback really won't begin until after the closing of the Red Lobster deal, as well as the debt breakage.

So you can see the annualized impact actually adds another 6% in EPS growth that will be realized in the first quarter of the following fiscal year, or FY16.

So with that, let me turn it back to Clarence for a few more comments.

Thank you, Brad.

And so, we think that we have a very strong competitive position, and that starts with a well-positioned, much better positioned portfolio of brands that can deliver balanced same-restaurant new restaurant sales growth which will lever -- leverage our operating support and restaurant support costs.

We are committed to proactive ongoing cost optimization to amplify the leverage that we get from growing sales, and ensure consistent margin expansion and earnings growth.

That will result in consistently strong cash flow growth to support meaningful ongoing return of capital to shareholders, again through dividends and share repurchase, and more than sufficient operating cash flow to address emerging trends as they develop.

With this competitive position, we are confident that we can return to industry-leading financial performance with -- on a sustained basis mid to high single-digits annual sales growth, low to mid teen annual operating income growth, and $350 million or more in annual return of capital to the shareholders.

So with that, we will open it up for your questions.

Thank you.

(Operator Instructions)

Our first question is coming from the line of Mr. [Joseph Buckley] from Bank of America.

Sir, your line is now open.

Hello, thank you.

I would like to ask a few questions on Olive Garden.

So the remodel information you shared with us, was that based on one restaurant, or have you done more than that?

And then, you mentioned the underperformers kind of pulling down the brand performance.

How many stores are in that underperforming group, and what are the common characteristics of that underperforming group?

And maybe just one more, the same-store sales projections for this year while improved, particularly at Olive Garden are pretty low.

And what happens to margins given those same-store sales projections?

I noticed, the fourth quarter LongHorn's operative profit was down per your text.

Do you need stronger comps than that to get restaurant level margins healthier?

The initial results I gave on the remodel were just the one restaurant that we have up in Fort Walton Beach, and it is obviously very, very early.

But we can isolate that restaurant and see what happened.

It will be a little bit more time before we have a good -- what I can say statistically significant sample.

As far as the underperformers, I mean, you always have a bottom quartile.

What we try to do is get to the bottom quintile, and then subdivide that even more, get us down to like 50 restaurants that are really having a significant impact on the system.

I would say that they are, between 7% to 10% below the system average.

And the characteristics around them are, first, the majority of them are our older restaurants that haven't been renovated.

We have probably weaker management teams there.

Our attributes, our ratings on food and service aren't close to the system average, and it is really getting back to some really restaurant basics in there, and ensuring that we are delivering the guest experience.

Do you want to take this?

Yes.

On margins, we expect Olive Garden to expand -- at Olive Garden, not as much as the other businesses, and to your point, really driven by same restaurant sales.

But they would still have margins that increase in the 20 or 25 basis point range.

Even across Darden, with the work that we have done on the G&A costs, and things that we talked about some in the marketing or selling area, as well as what is driven by the same-restaurant sales.

And in a cost environment where cost pressures as I mentioned are not too severe, we are able to greatly mitigate those.

So when you look even across Darden, you are looking that operating profit margins will expand in that 20 to 50 basis points range, depending on which end of the guidance that you look at.

Okay.

Thank you.

Thank you.

Our next question is coming from the line of Mr. Brian Bittner of Oppenheimer and Company.

Thank you.

Good morning.

First, just a clarification question.

Did that operating cash flow guidance for 2015 include or exclude Red Lobster's earnings?

Because I thought I saw -- I thought I saw say it includes Red Lobster's earnings)

It includes it for the approximate period that we would own that business still.

So that would be just part of the first quarter.

Okay.

So the question I have is really -- and almost based on your EPS guidance, you are kind of close that 100% dividend payout ratio here.

And when I look at the operating cash flow guidance, you are assuming working capital in place, and some other in place from non-cash items.

And I guess, the question, is how confident are you that you can really maintain a $2.20 dividend going forward, and how much would you rely on continued influence from working capital and certain items like that?

Yes, obviously as we look to FY15, there is contributions of cash flow from these other items, but also the reduction of CapEx that we have done leaves sufficient room for us to maintain our $2.20 targeted dividend.

From there, I think the platform that we have laid out, the initiatives that we have underway, earnings will grow.

And so, the contribution from operating cash flow would grow, and continue to allow us to have a $2.20 dividend.

And depending on the rate of those earnings growth, the opportunity to modestly, to start growing that dividend rate beyond 2015

I mean, (inaudible) the [$0.03 or $0.04] of?

The new restaurant piece, obviously of the capital budget is discretionary, and we have demonstrated that with the scale back that we accomplished in FY14 on the new restaurant side.

I see.

So if we saw a scenario, where earnings didn't grow as much you expect in 2015, do you think there would be some [leverage cap] on the CapEx, and still be able to maintain that dividend?

Yes, we see sufficient room to make the adjustments that we need to make, to maintain the dividend, to work at our debt metrics as well to have that investment credit profile.

So we see the ability to do both really.

Okay.

And then just the second and final question is on LongHorn.

Revenue growth was up double-digits.

And as Gene said, and you say in the press release, that operating profits -- dollars actually declined year-over-year.

Can you just walk through that a little bit more, and the dynamics there?

So the LongHorn profitability, I mean, it continues to grow, fueled up by the unit growth.

We do see the margins there expanding.

Their particular brand performance is a little bit muted by the elevated beef costs and we see those continuing.

But still good progress from that brand.

New unit growth is profitable, and when you have same-restaurant sales growth as strong as they do well above industry average, we are able to leverage those as well.

I would say also, Brian, as we look into FY15, with the slowdown in unit growth at LongHorn, and there are a lot of new restaurant opening expenses -- not just direct opening restaurant but manager training, all those sorts of things -- in the model that will be a lot lower in 2015, than they were in 2014 with the unit growth pace cut in half.

Okay.

Thanks.

Thank you.

(Operator Instructions)

Our next question is coming from the line of Sara Senatore from Sanford Bernstein.

Ma'am, your line is now open.

Thank you very much.

I do have one follow-up, and one question.

The follow-up was just on the Olive Garden remodeling, I think you said that unremodeled restaurants lag by 2 percentage points.

So it sounds like the core restaurants are still comping negatively, and the remodel isn't having as much of the lift as I would have thought, because I had thought sort of 3% to 4%.

So if you could just clarify that?

And then the first question, the real question is, can you talk about whether Alvarez & Marsal have identified any kind of unit level cost saves?

I think you mentioned G&A savings, further G&A savings.

But it just seems like if you are going to invest in improved food and service for the Olive Garden, you probably need to fund that with maybe cost savings elsewhere?

Thank you.

Yes, I will start.

On the remodel side, I think what Gene was saying is the restaurant that have not been remodeled, are the ones that are in need of a remodel, are lagging by about 2 points.

Now we have had some remodels in the past that have had a lift of 3 or 4 percentage points, but we paused on them because we believed that they really didn't have the kind of shelf life going forward that we needed, that they did not make dramatic enough change.

And so, we would hope that this new remodel -- and again it is too early to tell -- would at least do the 3% to 4% and perhaps more than that.

And then, on Alvarez and Marsal, they are working to identify four wall opportunities, but Dave George and the team at Olive Garden have been working on that as well.

And so, through some of the simplification work that they have done, they have taken out about $20 million of costs on an annualized basis.

And they have reinvested a significant amount of that in food quality, and some of the other things that Gene mentioned already.

Yes, I would add that on -- from A&M's perspective, where they were really able to help us is on the marketing side, help accelerate our tack on non-working media costs.

So that has been a big help, and we think there is big dollars there.

And there are some other marketing ideas that they have, that we are planning on implementing, and I think those are all going to be cost saves.

Thank you.

Thank you.

Our next question is coming from the line of Mr. David Palmer from RBC.

Sir, your line is now open.

Thank you.

Good morning.

You mentioned that the June to date sales for Olive Garden.

You understand that I think, there is short-term influences on the sales, like the promotion timing, the media weight better than us.

Can you tease out that, and perhaps just comment on whether you think that this June result is indicative of the kind of sales you will see, perhaps in the first half of FY15?

And why some of the -- why this is truly a turn, and what are the factors driving the turn specifically, in terms of your initiatives?

Thanks.

So I will start.

I would just say, promotionally June lines up pretty well year-over-year, and so we don't have a lot of promotional noise in the June to date numbers.

But Gene, you might want to?

David, I would say, that we have been working hard to gain guest comp momentum.

If you look back in the fourth quarter, guest counts in March were down [6.1%], effected somewhat by weather, April 3.5%.

May, we were only down 1.7%, and the majority of that was one week when we had -- we had some promotional transition -- transitional issues, but June has come back and been pretty solid.

We think it is just a result of the focused efforts that we have put on this brand from an operational standpoint, from food service, we think our advertising is getting a little sharper and more focused.

Again it is just -- I don't think we are on a straight line up to 3% to 4% comps.

But I do think that we are making -- we are putting in the effort, and we are making some improvement.

And the guests are telling us that, by coming to our restaurants more often

Thank you.

Thank you.

Our next question is coming from the line of Mr. John Glass of Morgan Stanley.

Sir, your line is now open.

Thanks.

Gene, if I can just first ask you to clarify the last comment?

Your mix was down pretty substantially in May, so your traffic was better, but the mix was worse.

So you traded -- it seems like you traded one for the other.

Is that correct?

Is that the way that you look at it going forward, that you will take a lower check for the traffic?

Or was that just the monthly anomaly?

I think that was just a monthly skew, where we were out there this -- in May, with our classics promotion at $10, and last year we had a different type promotion that didn't impact check averages as much.

I was pleased with May's results, even though we did have a mix change.

I thought getting our classics, which represented close to 20% of the sales in May, into our guest, on the table for our guest was a really good thing to remind them about some of the reasons why they really love Olive Garden.

And I think that momentum has carried on through June

And then on the SG&A, or the G&A savings, where were you -- and just help us benchmark -- where were you in G&A as a percentage of sales in the fourth quarter, after you stripped out all of Red Lobster?

And what is the progression of events in 2015 -- how quickly can you keep getting -- if it was above 5% materially ex-advertising, how fast can you get it to 5%?

Yes, now we will get to 5% in the fiscal year, and I am looking up the -- your question there.

Fourth-quarter --

Yes, we may have to get back to you with it, John.

Brad is flipping through some pages, but we will get back to you.

I think -- I mean, for the full-year it is 5%, so we expect to get to that level pretty quickly.

Yes, the SAP costs that I laid out there are virtually --

SAP, Strategic action plan.

Are virtually all in the G&A line there.

I think maybe to the heart of what you are getting at, as we look forward, when we talk about a flat G&A at 5%, with the opportunity in 2015, as we get through more of the A&M work and things we are doing to take that even lower in the year.

But at a flat 5%, that is implying an absolute reduction of well over $100 million of G&As.

And granted, there is about say, $75 million of that, that is either allocated or directly within Red Lobster that goes away, there are some stranded G&As of about $20 million which says, we have already got well over $50 million of G&A reductions that stays within the Darden continuing operations, and more than offsets the stranded G&A costs over there.

So we are really pleased with the progress, and those plans are largely all in place, and delivering the intended -- the expected results.

And if I can ask one final question, on the low to mid teen operating profit growth longer-term, how do you Or is it -- presume that you are a unit grower, a much more materially faster unit grower in the future again?

Well, let me start it out, and I will turn it over to Clarence.

I think, even if you look at the guidance that we have, our out expectations for FY15, on the composition of same-restaurant sales growth that we have, a cost environment where commodity costs and all those are in that 2% to 3% range, through all of that we are still able to generate, what I call our core operating profit growth of 10% to 15%.

Now that is pretty significant.

There is little bit of unit growth, but a much more moderated pace that we think is appropriate for our businesses, and for a large chain.

And then with that, there is strong cash flows, that will allow us to begin growing the dividend and repurchase shares.

So that -- those repurchased shares also will aid EPS growth as well, is how you get into that low double-digit mid teen range.

And I would say that the portfolio of new Darden, in an industry that is challenged, is strongly positioned against the healthiest parts of the industry.

So when you look at Olive Garden and LongHorn, but also the specialty restaurants, strongly positioned against the healthiest parts.

The brands also have very strong, in the new Darden ex-Red Lobster, very strong restaurant level returns.

And with the support costs activities that we have had, we are able to realize a lot of that restaurant level return

Thank you.

Thank you.

Thank our next question is coming from line of [Priya Ohri-Gupta] from Barclays.

Ma'am, your line is now open.

Thank you for taking the question.

One, just a point of clarification, Brad, around the 3.7 times leverage that you mentioned for FY14, that includes the $1 billion dollars of notional debt reduction.

Correct?

And then secondly, as you map to getting the 3 times leverage at the end of FY15, a lot of it is predicated on you hitting that core operating profit growth target.

But what other levers could you pull, if for some reason you start to fall towards the lower end or below that?

Thanks.

All right.

Well, first, on the 3.7 times, that is adjusted debt to adjusted capital, so we are treating those operating leases as debt equivalents, which they are.

That is the range at the end of FY14.

The outlook that we have laid out here, gets us to 3 times, 3.0 times at the end of FY15.

And so, that is our expectations there.

Like I said, the other key thing is the cash flows.

And to the degree there is a shortages on the operating cash flow, as Clarence laid -- outlined earlier is, we have clearly demonstrated our willingness and ability to work on the CapEx side, particularly around new unit growth.

And so, that would be obviously, the first item that we would look to.

The Olive Garden remodel CapEx we know is very important.

That delivers the results that we are anticipating, we would probably keep that in there.

That would be hard to touch.

And obviously, maintenance CapEx, there is pretty significant operating cash flows, we want to protect that as well.

So the real opportunity is around new unit CapEx, and the others would be more difficult for us to change.

But if needed, we could

Okay.

That's helpful.

And just -- I think I -- you might have misunderstood the first question.

The 3.7 times number that you have at the end of FY14, is that on a reported basis using your current debt?

Or is that adjusting out the $1 billion of notional debt reduction you expect to occur, as the result of the Red Lobster proceeds?

That includes the reduction of debt from the Red Lobster proceeds.

I'm sorry.

Okay.

Great Thank you very much.

(Multiple Speakers).

Thank you.

Our next question is coming from the line of Mr. [Jonathan Pong] --

One second, let me finish that question.

I misunderstood.

The 3.7 is the reported number at the end of fiscal year that does not include any reduction.

That is based on our reported numbers.

Yes.

I am sorry.

That was the last question.

We are out of time here today.

We appreciate those of you joining us and listening in, and those that asked questions.

Of course, we are here in Orlando, if you have further questions and further follow-ups.

We look forward to talking to many of you in the near future.

Thank you.

Thank you.

That concludes today's conference.

Thank you all for participating.

You may now disconnect.