達登餐飲 (DRI) 2016 Q1 法說會逐字稿

Welcome.

Thank you for standing by.

(Operator Instructions)

Today's conference is being recorded.

If there are any objections, you may disconnect at this time.

I'd now like to introduce your host for today's conference, Kevin Kalicak.

Thank you, you may begin.

Thank you, Dori.

Good morning.

Welcome, everyone.

With me today is: Gene Lee, Darden's CEO; Jeff Davis, CFO; and Bill White, Treasurer.

As a reminder, comments made during this call will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

These statements are subject to the risks and uncertainties that could cause actual results to differ materially from our expectations and projections.

Those risks are described in the Company's press release, which was distributed earlier today, and in its filings with the Securities and Exchange Commission.

Today's discussion and presentation may also include certain non-GAAP measurements.

A reconciliation of these measurements is in our earnings press release.

In addition, we are simultaneously broadcasting a presentation during this call.

This presentation will be posted under the investors tab on our website at the conclusion of the call.

We've planned to release FY16 second-quarter earnings on Friday, December 18, before the market opens followed by a conference call.

This morning, following prepared remarks from Gene and Jeff, we will take your questions.

Now, I will turn the call over to Gene.

Thank you, Kevin.

Good morning, everyone.

We are pleased with the progress we made during the first quarter, as we significantly outperformed the industry in terms of same-restaurant sales and traffic.

Total sales grew 5.7% for the quarter, which was driven by strong same-restaurant sales growth of 3.4% and positive same-restaurant sales at each of our brands, plus the addition of 30 net new restaurants.

Earnings per share on an adjusted basis increased approximately 113% to $0.68 and first-quarter adjusted EBIT margins once again showed strong improvement.

Olive Garden continues to build on the positive business momentum generated in FY15 with its fourth consecutive quarter of same-restaurant sales growth.

During the quarter, guest counts turned positive and outperformed the industry by more than 200 basis points.

As we've discussed previously, a key element of Olive Garden's culinary strategy is to create menu items that leverage core brand equities.

During the quarter, we saw two examples of this strategy.

First, the create-your-own Tour of Italy promotion, inspired by one of our most popular core menu items allowed guests to create their own entrees by choosing from many of their favorite dishes.

Additionally, this full price and customized offer, which started in July, outperformed the deep discounted promotion during the same period last year.

Second, we introduced the create-your-own lunch combination menu platform, which features the choice of unlimited soup or salad plus the choice of either a mini pasta bowl, a flatbread, or one of our highly anticipated and extremely well-received breadstick sandwiches.

This platform strengthened Olive Garden's competitive advantage by adding more variety and giving guests the ability to customize their order for a great value.

The new lunch menu was supported by a successful integrated marketing campaign, which we called Breadstick Nation, that featured Olive Garden food trucks that traveled across the country making 80 stops in 20 different markets to share more than 50,000 samples of breadstick sandwiches.

The campaign clearly resonated with our guests, as it generated more than 820 million impressions across traditional and social media.

This new platform coupled with the Breadstick Nation campaign led to a 3-point improvement in weekday lunch traffic during the quarter.

It was the most successful new lunch platform since the introduction of the original soup, salad and breadsticks.

Guest preference for the create-your-own lunch combination was higher than the lunch option of soup, salad and breadsticks during the quarter.

Additionally, OG-To-Go continues to be a focus as we strive to meet our guests' growing need for convenience.

This quarter OG-To-Go grew 18%.

We've seen a two-year growth rate of over 30%.

We continue to be excited about the opportunity that growth in take-out represents for our business.

We also continued the rollout of our tabletop tablets.

The tablets are now in more than half of our restaurants, with 80% of the tables choosing to interact with the devices in those restaurants.

We continue to see the same benefits as we saw during the test, higher add-on sales, faster dining times and overall higher guest satisfaction scores.

We are pleased with the progress of the rollout.

We expect to complete it by the end of the second quarter.

On a final note on Olive Garden, we have now refreshed 19 restaurants.

We remain pleased with their continued performance.

As we've shared previously, we are taking the time to develop individualized plans for each restaurant based on a number of factors to ensure optimal investment levels going forward.

We plan to refresh approximately 25 additional locations this fiscal year.

Now let's look at LongHorn Steakhouse.

LongHorn continues to be well-positioned in the market and delivered strong top-line growth driven by positive same-restaurant sales of 4.4%, marking the 10th consecutive quarter that we've outperformed the industry.

Two key factors have contributed to that performance include: focusing on culinary innovation that leverages our steak expertise and continuing to evolve our marketing strategy with an increased emphasis on one-to-one engagement.

During the quarter, we welcomed Todd Burrowes back to LongHorn as President.

Todd's strong operations focus, passion and deep understanding of the brand will further strengthen LongHorn's performance.

Operational execution has always been a hallmark of LongHorn's success.

I believe we have the opportunity to take our in-restaurant execution to an even higher level under Todd's leadership.

Looking at our specialty restaurants.

All five brands, Yard House, The Capital Grille, Seasons 52, Bahama Breeze and Eddie V's had positive same-restaurant sales during the quarter.

We are pleased with their continued progress.

Each brand is well-positioned in its competitive set and has the opportunity to increase their market share through same-restaurant sales growth and the addition of new restaurants.

Now I want to provide an update on our comprehensive real estate plan that we announced in June.

Since that time, we have made refinements to our plan.

We now intend to separate 488 restaurant real estate properties through the sale lease-back of 64 restaurant properties and a REIT spin that will include 424 restaurant properties to create an independent company called Four Corners Property Trust, which was discussed in its Form 10 filing last month.

Using proceeds from the sale lease-backs, debt financing from Four Corners and Darden's balance sheet cash, we will retire approximately $1 billion of debt and pay approximately $100 million of debt repayment cost, largely representing the acceleration of interest payable through 2017.

The rating agencies have conveyed that they anticipate these transactions will be credit neutral to positive for Darden.

These transactions are bond covenant compliant.

Bondholder consent is not required.

The approximate annualized financial impact of these restaurant real estate transactions to Darden will include: incremental cash rent of $108 million; and GAAP rent expense of $116 million; a reduction in depreciation of $51 million; and a reduction in interest expense of $45 million, resulting in a run rate reduction to pretax earnings of $20 million.

Of course in the spinoff, Darden's shareholders will receive equity in Four Corners, the new owner of the real estate.

We would expect the equivalent per share dividend amount of Darden and Four Corners to be at least equal to the current Darden dividend.

Since announcing the appointment of Bill Lenehan as CEO last month, the process to build up the management team and Board is fully underway.

We continue to work towards the goal of completing the Four Corners spin by the end of the calendar year.

One final note on our real estate plan.

We continue to pursue a sale lease-back of our restaurant support center.

With that, I'll turn it over to Jeff for our financial update and outlook for FY16.

But before I do that, let me say how excited we are to have Jeff as our new CFO.

In the short time he's been here he's made a meaningful contribution and has proven to be a valuable addition to our executive leadership team.

Jeff?

Thank you, Gene.

Good morning, everyone.

I'm excited to be a part of this outstanding organization.

I look forward to the opportunity to work with many of you in the future.

As Gene mentioned, we reported strong same-restaurant sales of 3.4%.

As you saw in the release, there was monthly variability in sales performance.

We report same-restaurant sales on a fiscal calendar basis.

Due to our 53rd week last year, it's not on a comparable calendar basis.

In addition to normal holiday shifts, this may create month-to-month variability in our reported results.

However, during the first quarter, the monthly variability was completely offset by quarter end.

As a reminder, the upcoming Thanksgiving holiday will be reported in our fiscal second quarter versus fiscal third quarter last year.

Reviewing our earnings performance this quarter, adjusted EPS from continuing operations more than doubled as adjusted EBIT margins expanded 330 basis points versus the prior year.

This was partially driven by leveraging positive same-restaurant sales.

Other significant drivers on margin expansion were 170 basis points improvement in food and beverage expense and 100 basis point improvement in restaurant expense.

More specifically, we had significant year-over-year favorability in dairy costs at Olive Garden.

We had six fewer weeks of deep discounted promotions at Olive Garden versus last year; we continued progress towards previously disclosed cost reduction initiatives; a 30 basis point improvement in worker's compensation and public liability expense related to historical claims; and more efficient restaurant support resulting in 30 basis point improvement in G&A versus last year.

Moving below operating income.

Interest expense was considerably lower this year as we lapped the $1 billion extinguishment of debt last year.

Our effective tax rate was 130 basis points higher than last year.

We expect the tax rate for the full year to be within 21% to 24% range we disclosed in June.

From a balance sheet perspective, we received approximately $130 million in proceeds related to the sale and lease-back of 33 restaurant properties, which are included in the 64 Gene mentioned earlier.

These proceeds largely drove the increase in our cash balance for the quarter.

Turning to segment performance.

Olive Garden segment profit margin of 20.3% grew by 410 basis points from leveraging their positive same-restaurant sales, dairy cost favorability, fewer weeks of deep discounted promotions versus last year and continued progress on cost reduction initiatives.

LongHorn segment profit margin remained flat at 14.9%.

A significant beef cost inflation offset sales leverage and cost reductions.

Fine dining expanded segment profit margins by 100 basis points as leverage from sales growth more than offset beef cost inflation.

Finally, in other in other business, Seasons 52 and Yard House significantly improved their profitability, resulting in the 360 basis point improvement in segment profit margin.

While we continue to expect margin expansion in the second half of the year, we anticipate that it will significantly moderate versus first-half performance as we lap margin improvement initiatives that began in the third quarter of last year.

Given the Company's strong first-quarter performance and our expectation for the remainder of the year, we are increasing our outlook for FY16 full-year adjusted earnings per share from continuing operations to range between $3.15 and $3.30 versus $3.05 and $3.20 previously announced in June.

Our same-restaurant sales expectation for the full year remains unchanged at 2% to 2.5%.

We also remain on track to deliver 18 to 22 new restaurants with LongHorn and Yard House accounting for the majority of the openings.

These expectations do not include the impact of any FY16 real estate transactions and related capital structure activities.

However, as we approach the completion of the various real estate transactions, we'll provide more details on the specific timing and impacts to our financial performance.

Now, I'll turn it back over to Gene for some closing remarks.

Thank you, Jeff.

I want to close by reiterating that our intense focus on improving our food, service and our atmosphere continues to drive our positive business momentum, enabling us to capture market share as our guests reward us by choosing our brands more frequently.

We're excited about our progress but we know we have a lot of work to do.

Our restaurant teams and our support center staff at our restaurant support center are focused on the right priorities.

The progress we are making is a direct result of their hard work and commitment to creating memorable guest experiences.

So thank you to our 150,000 team members who bring our business to life every day.

Now, we'll take your questions.

(Operator Instructions)

Joseph Buckley, Bank of America.

A couple of questions.

On the monthly data, it looked like the check increase moderated at both Olive Garden and LongHorn.

Is it coincidental that happened at both brands?

Or is there some effort to make that happen?

Joe, it's Gene.

I think it's more coincidental.

I think it has more to do with our fiscal calendar not matching up to what I would call the operating calendar.

As we shift weeks, we've just got some noise in the data.

Okay.

Then secondly, what are the key hurdles or milestones to getting the REIT spinoff done?

There's reports about the IRS being less willing to pre-approve transactions.

I don't know if that is significant or not, in the scheme of things.

Could you talk about that?

Joe, it's Bill White.

What we would tell you is that the latest public statements that the services made really -- they've talked about a no real position applying to PLR requests filed on or after September 14.

So that's really, in our minds, does not impact our plans.

We're working towards spinning the entity by the end of the calendar year.

Okay.

Maybe one last one.

Just on the rent expense line where you've realized some nice improvement, can you talk about the cost buckets in that line with the savings and the efficiencies are being realized?

Joe, do you mean restaurant expenses?

Yes.

That's what I meant to say.

Restaurant expenses.

Well, first off, we're getting some leverage from our sales growth.

As Jeff mentioned in his comments, we had some favorability and historical claims on workers comp.

We're also continuing to manage the non-consumer facing costs very aggressively.

We continue, through the work of BCG, to bid a lot of work.

We're using our scale, as we've talked about in the past, to bring down these costs.

Okay.

One of the big areas, Joe, is contract services.

Okay.

That's helpful.

Thank you.

Matt DiFrisco, Guggenheim.

Can you just talk a little bit more on the August comp trend?

Just to give investors a little comfort?

That -- you don't seem too concerned about the volatility within the quarter.

You mentioned something about some moving around weeks.

I'm just curious if you could tell us what might be driving that perception of slowdown on both traffic and the overall comp at a couple of those brands?

Then also, I was just curious -- just as a follow-up to Joe's question, has there been a change in your view then, with the IRS?

Or no, there has not been a change since you began the REIT process?

There's nothing -- you don't think you'll meet resistance, is what we should read through?

Thanks.

Yes.

Matt, as far as August goes -- again, this goes back to our fiscal calendar versus what I would call the operating calendar comparison.

The last week of August was a really bad fiscal comparison, which hurt the overall month.

As we look at it -- we don't see a deceleration as we look at, what we would call, comparable comps or true comps is what Malcolm refers to them.

So we believe that the business is -- on an operating basis, is not -- didn't fluctuate, didn't have as much variability as it shows as we report through the fiscal calendar.

As far as the question on the REIT, we're really confident that our proposed transaction will satisfy all the requirements of applicable law.

We plan on moving forward and having this deal done by the end of the calendar year.

Okay.

I guess, just to read through for layman's terms, the later timing of Labor Day, is that something to say might have caused of the imbalance on fiscal versus actual calendar of how you look at it on business quarters?

So what might have been lost in August, you're feeling good enough that, that's evenly balanced?

What might have been hurting in August, just like July and June said shifts, maybe we're going to see a lift in September?

I'm not going to comment on the sales in September, at this point in time.

But it was the combination of the Labor Day pushback.

You've heard some retailers talk about that.

Also comparing the fiscal calendar back -- we're actually comparing against -- the last week of our fiscal calendar was comparing against a week that was really in the center of August last year, not towards the end of August.

So those combinations really created for a tough fiscal comparison the last week of August.

Very helpful.

Thank you.

Will Slabaugh, Stephens Inc.

I had a question around the Olive Garden comps.

You mentioned, one of the reasons that both the margins and the comps improved is, you saw some really good uptake on the promotions and then a little bit less of the deep discounting.

So I wanted to center around the deep discounting comment that you made.

Can you put any numbers around what the discounting looked like last year?

Then what that looks like now?

What you want the discounting piece of the business to look like going forward?

Yes, good question.

Last year, in July, we ran three-course, which is a heavily discounted promotion; it was at $12.99.

This year, our promotion was build-your-own Tour starting at $12.99 with add-ons; so it had more of an effective price range in the $15 to $16 price point.

So that worked -- it really helped us as far as our overall cost management.

It helped our labor cost.

It helped our food costs, so on and so forth.

We are going to -- we look out into the future, we're going to continue to look for ways to modify the promotional calendar.

Right now, at the end of August and right now, we're running buy one, take one against buy one, take one.

We're going to run never ending pasta bowl against never ending pasta bowl.

So that at times of the year, we think we still have to have a strong value message out there.

But as I've mentioned in the past, the three-course and the $2 for 25 constructs are nowhere near as effective as they were 24 or 36 months ago.

We are trying to move away from those constructs from a promotional standpoint.

That's helpful.

Just a quick follow-up if I could on the food costs basket.

So, 50 basis points, it looks like was the improvement year-over-year.

Wondering how much of that was directly attributable to better commodities versus simply food waste or more efficiency?

What are your updated thoughts on food costs, beef in particular?

Given the spike that you said you saw at LongHorn this quarter?

For Olive Garden, half our commodity favorability was dairy and shrimp.

The other half was primarily menu mix.

We saw some improved waste which we can tie back to the simplification efforts that management has been working on for the last couple years.

Olive Garden, actually in the quarter, had its best waste ever in the history of the brand, since we've been tracking that.

So very pleased with the operational improvements on the cost of sales side.

On beef, as I've said in the past, beef year-over-year comparisons have a lot to do with when you contracted last year.

We believe that we're going to start to have some positive advantages in LongHorn as the beef market starts to weaken.

Especially, we expect to see some significant improvement in the back half of the year.

But as we move into 2017, we think that the beef market is going to be a much better market for us.

Great.

Thank you.

Brian Bittner, Oppenheimer Company.

This is Mike [Tames] on for Brian.

So, you've had a couple of quarters of easy comparisons at Olive Garden.

Now we're going to be facing much tougher comparisons.

So can you maybe walk us through how you're thinking about the comps and specifically traffic at Olive Garden as you roll over tougher comparisons?

Thank you.

Yes.

I think the way we're thinking about it right now is what's our -- how we are performing against the industry?

We made great progress in the first quarter as we had guest counts exceed the industry by 200 basis points.

But I would caution everyone to say that the industry did weaken from fourth quarter to first quarter.

The industry was 100 basis points -- lost 100 basis points in momentum.

So as we look out, I think there's two things that we're considering.

What's the strength of the industry?

Then what's the strength of the Olive Garden brand?

I believe that we have strong momentum in Olive Garden right now.

I think that we're executing at a very high level, I believe that the consumer is more aware of Olive Garden today than it was a year ago.

I think we've done some pretty interesting marketing campaigns.

As we look out, we think that although the comparisons were -- are a little bit more difficult.

They're a little bit more difficult on the sales side.

We still have some weak guest counts in the back half of last year.

So I think that we will continue to outperform the industry as we move forward.

Great.

Thanks.

Just one quick follow-up.

You've talked about paying down debt obviously and the dividend of the two combined companies, but any thoughts on maybe doing a share buyback?

By our math, it seems like you'll have plenty of capacity leftover to either do a dividend raise that pro forma Darden, or doing some buybacks?

Or any thoughts there, please?

We will look at the capital structure after we complete the deal -- after we complete the spin out.

Okay.

Thank you.

Brett Levy, Deutsche Bank.

If we could spend a little bit of time talking about the labor situation.

Obviously, strong improvements across all the other line items.

But can you give a little bit of your thoughts on wage retention turnover?

What kind of productivity you are making at the unit level?

We continue to make strong productivity improvements at the direct labor line.

I think our overall direct labor performance was really strong in the first quarter.

I think the increases we saw were indirect labor, as last year, we weren't accruing a lot of bonus payouts, because the performance was weak.

We had good performance in the first quarter.

So the majority of the labor -- there was an increase.

I believe labor was actually slightly less than last year, but it was mostly in the indirect line as we accrued bonuses from management.

Wage pressure continues to be a problem.

We'll continue to monitor it as we monitor the different states and the different cities and what they're doing with minimum wage.

The job market does improve -- is improving.

We are seeing in certain markets today, it becoming a little bit more difficult to hire help.

So that will eventually put some pressure on our average wage.

But right now, I believe that we are managing this very, very effectively.

Would you be able to give us any sense as to what your rate wage rate inflation is?

Are you seeing any increases in turnover?

Is that something you can quantify?

Also can you give us a little bit more details on where you stand on your commodity basket, not just for the next quarter but for the full fiscal year?

Sure, I'll comment quickly on the wage rate.

Wage rate is somewhere between 1% and 2%.

I think as we -- especially in Olive Garden, as we continue to simplify the operation, we're able to remove hours and that changes the mix of labor hours.

If it's done correctly, allows you, through that mix, to keep your wage rate at or below last year as we take out some of the higher cost production labor in the back of the house.

Jeff, do you want to talk about the commodities basket?

Yes.

As we think about the commodities basket and what we've seen, if you take a look at -- you're questioning about the full year.

What we're seeing right now is that we still expect our food and beverage cost to see inflation about 1%, 1.5% which was our original guidance for the year.

The front part of the year, we're actually seeing a little more of that inflation.

The expectation is it would continue to wane as we get through the second half of the year.

Lastly, can you quantify what your G&A savings were for the quarter?

What your outlook is for the rest of this year?

Thank you.

We'll get back to you on those specifics.

We'll have Kevin get back to you on the specific G&A savings.

It was 30 basis points quarter-over-quarter.

But there are some savings in there.

There's some offsets to those savings.

But overall, we're making great progress with our G&A.

We believe our run rate G&A for the year will be somewhere between 4.6% and 4.8%.

Does that answer your question?

I'm sorry, thank you very much.

Jeffrey Bernstein, Barclays.

Two questions.

Just one, I think you made a comment in your prepared remarks about the lumpiness quarter-to-quarter.

Obviously, we saw that with the earnings effectively doubling the first quarter.

So I'm wondering if you could give some thoughts -- I think you said the second half margins versus the first half were going to be significantly less of an uptick?

Can you just give a little more thoughts in terms of the magnitude of that?

How that might translate into earnings?

It seems like just on a quarterly basis, the Street has struggled at least in the first quarter to nail down the earnings.

I'm just trying to figure out the outlook for margin and earnings as we move through the four quarters of FY16?

Jeff, we expect to still have margin improvement in Q3 and Q4.

It just won't be at the same rate as it has been since the last half of 2015, so we made great margin improvements in Q3 and Q4.

We obviously had great margin improvement in Q1.

We expect that we'll see some more significant margin improvement in Q2, but then it's going to moderate in the back half of the year.

But when you look at a two-year stack -- we have it in the presentation, we expect there still to be margin improvement in the back half of the year.

As we've stated, the big part of the earnings per share growth for the year will be in the first half of the year.

We expect the second half of the year to moderate, although we still expect EPS to grow in the back half of the year.

Got it.

Then just a follow-up on the earlier question around the cost savings.

There was no mention in there but I'm assuming it's still the $50 million to $55 million in FY16?

Just wondering whether you achieved more than your pro rata share in the first quarter?

Because it seemed like, at least from an earnings guidance perspective, you raised the full-year guidance of earnings without necessarily raising the comps.

I'm just wondering whether the cost savings are still the same?

Or whether there's been a shift in terms of when they're being achieved quarter-to-quarter?

So our estimate for the year still remains $50 million to $55 million.

As it relates to those savings during the course of the year, as Gene had mentioned earlier, there were some items in G&A that offset some of those savings as a result of more discrete types of items.

But we expect the $50 million to $55 million for the entire year.

Got it.

Then just lastly, Gene, you often talk about the Italian segment.

It seems like you have a pretty good view, kind of a state of the union.

I'm wondering how you think about the segment versus Olive Garden?

Specifically, it seems like Olive Garden's getting better, but the broader segment --do you see the entire segment getting better?

Or do think it's Olive Garden specific?

It seems like the segment's been challenged by the view of just being more celebratory, more heavy and just not necessarily in line with consumer trends.

Yes.

I don't really want to comment too much on the segment.

The segment continues -- it does -- however, it does continue to struggle.

I just think that we have worked hard in Olive Garden over the last couple years to improve our overall value equation to the consumer.

I believe that we've simplified the operation.

We've added more value with the $9.99 Cucina Mia, which is getting approximately 6% of sales today.

We have more effectively communicated the appropriate message to our consumer and don't underestimate what we're doing from a convenience standpoint and really capitalizing on to-go, which I believe is exposing new guests to the Olive Garden experience.

It's an experience that they really enjoy using Olive Garden for.

So I think about those four things I think that Olive Garden's executing at a high level.

It's a culmination of a couple years' worth of work.

Great.

Thank you.

Priya Ohri-Gupta, Barclays.

Jason West, Credit Suisse.

Just going back to the real estate transaction.

Can you guys talk about why you made some of the refinements and some of the store counts and things like that?

Then secondly, given the chatter out there around the IRS and their no-rule position, do you think you could move forward with this without an IRS sign-off?

Just using private counsel?

Thanks.

Jason, this is Bill again.

The refinements we made -- there were some, just a handful of restaurants that we did exclude from the individual sale lease-backs as well as the Four Corners REIT spin just to ensure full compliance with the covenant.

Then the question about pressing forward, yes, what we would refer you to is some of the Form 10 filings that we've made around details of our plans.

We don't really have any specifics to say about going on just opinion or anything otherwise, but we can say is that we're going to be fully compliant with all the laws in place and that we're pressing forward with the spinoff of Four Corners.

Just one quick one.

Would you be able to say given the timing you guys have proposed of November-December, what would that imply in terms of the IRS ruling timing to get that done on that schedule?

I think we believe that we're going to be in full compliance.

What we can say about the IRS is that the laws haven't changed with the revenue procedure bulletin that they've issued, so it suggests that there's not -- that a retroactive application of any new laws, they would contemplate would not take place.

So we're expecting to be able to complete our transaction by calendar year end.

Thank you.

Andy Barish, Jefferies.

Just bouncing back on the strong Olive Garden to-go growth, can you give us a little color maybe on how that impacts the overall quarter in terms of same-store sales with mix and traffic?

Andy, it's Gene.

I think we look at to-go sales as definitely having a big impact with the overall quarter for Olive Garden.

We believe of any cannibalization it's creating, from our dining room businesses, we are able to fill that with the extra demand that we have for the business.

So to-go is representing about 9.5% of our sales today.

We've seen a 40% increase in the large party to-go sales, which we think is a huge opportunity.

I would remind everyone on the call that for a large party take-out to-go, we are not attributing any guest to -- for us.

That really equates to approximately 50 basis points in guest traffic that we are not accounting for.

So it's all part of the strategy now, as the way we look at it, is it's both what can we do in-restaurant?

What can we do from a take-out standpoint?

We are testing delivery.

We think that is -- a large party delivery, we do think that's another avenue for us to really leverage, to meet the consumer's demand for this convenience.

We just have a great brand at Olive Garden because our food travels so well.

It's a great brand to take advantage of what the consumer wants today.

I think that says so much about its flexibility and so much about the strength of the brand that it can pivot from being an in-restaurant experience to a take-out experience and do really well.

Then back to what I said earlier, I think it attracts a little bit of a different consumer.

Thank you.

Keith Seigner, UBS.

Just a couple questions on all this digital.

Just to follow-up on that last one, can you talk about where the orders for to-go are coming now?

Is this still a large component via phone?

Is it via web?

Do you have plans to launch enhanced mobile?

Could this make the to-go growth -- could this continue for a while as you roll some of those things?

Most of the to-go orders today are still coming through the phone.

We are incentivizing people to move over to the web.

We're up to approximately 20% online.

We continue to work to develop technology to make it easier for our guests to access our website.

We've introduced mobile.

The adoption rate continues to rise.

We know that when a consumer orders online that their order is going to -- check average is going to be approximately 20% higher.

So we are trying to incent more and more people to use that way of ordering.

Hopefully over time, we can continue to get that to migrate closer to 50% and even hopefully past that.

So we've got some technological things that I don't want to really into a lot of detail from a competitive reasons today, but we want to continue to enable our guests to be able to access Olive Garden from a take-out standpoint very easily.

Okay.

So then another area I wanted to focus on was the in-store tech.

It sounds like the rollout of the tabletop tablets is going very well.

You highlighted all the benefits.

Was just wondering, it seems like there's a little bit of debate let's say in the industry about full service and loyalty programs.

Can that work?

Could it not work?

Some are trying it, some are not.

How do you think about the potential for loyalty integrating into tabletop tablets?

Is this something you're considering?

Thanks.

Yes.

We are considering the best way to implement a loyalty program.

We think that we are in a unique position because of our seven brands.

With that, we think we can offer something that others can't offer.

I don't want to get into a whole lot of details from a competitive standpoint, but it is something that the team is working on.

I would say that's Rick Cardenas' top priority as the Chief Strategy Officer for Darden right now, is developing an effective loyalty program across all our brands.

All right.

Thank you much.

Chris O'Cull, KeyBanc.

Gene, the Company looks to be on track to have high single-digit EBIT margin this year.

Where do you think the long-term margin should be for Darden, excluding the impact of future real estate transactions I guess?

Chris, you were breaking up.

I couldn't hear the question.

Let me try that again.

It looks like the Company is on track to have high single-digit EBIT margin this year.

Where do you think the long-term margin should be for the Company, excluding the impact of future real estate transactions?

I think that -- I don't want to put a number out there that I think that we are trying to get to.

Because I think the competitive environment dictates that.

I think the commodity environment will continue to have impact on that.

What I do believe is that we can still grow our margins through a few levers.

Obviously, being able to leverage same-restaurant sales is the most important piece we can do.

I think there's still work that can be done with our menus.

We can yield a better -- whether it's a food costs percentage or a gross margin dollar at the food line.

Chris, you know how I think about that and how I think about revenue management.

That's important.

I think there's work that can still be done there.

I think there's still more efficiency in labor, which could be offset by some headwinds with wage rates.

But overall, I still think there's additional costs that can come out of the system.

So I'm not going to put a number out there where we think we can get to, but I do think that there's still a lot of margin enhancement that can be accomplished over the next few years.

With your primary focus being on leveraging same-restaurant sales growth.

Sans beef inflation, are you pleased with the margin performance at LongHorn?

I think, when I look at the LongHorn history over the last 18 years and I look at where beef prices are compared to its history, I think the margins -- I think the operating margins are okay.

I do think that they will improve dramatically as beef come down.

The real challenge when I look at the LongHorn business and what I've charged Todd with is, we've got to raise the average unit volumes.

We're at approximately 3.1 today.

I believe that even as well as the brand has performed all last couple years, we need to get those top-line sales closer to $3.4 million and $3.5 million and then the operating margins will be right in line to where we want them to be.

Great.

One last question.

Bill, what gives you confidence that six LongHorn's will represent a sufficiently meaningful active business in the eyes of the IRS?

We're not going to comment on the specifics around that.

We think we've got a substantial business purpose.

All the -- a big component of that is the taxable REIT subsidiary that you're alluding to, the six LongHorn's franchise restaurants.

So we think it all holds together very well.

It's a compelling story for both Four Corners and Darden for a very promising future growth story.

Okay.

Great.

Thanks, guys.

Peter Saleh, BTIG.

Congrats on the quarter.

I just wanted to ask about the advertising budget and the plan for the rest of the year.

Can you just give us an update on where you stand today in terms of percentage of sales on the advertising budget?

What you're thinking for the rest of the year?

If there's been any changes in the media mix and/or the focus from the advertising perspective on either lunch or the to-go business?

Yes.

There's a lot in that question.

Let me start off by saying that, we continually move the media mix every single quarter to try to see which lever is working.

So when you think about Olive Garden, you think about media mix.

We've got promotional television.

We've got brand television.

We've got lunch television.

We've even got a little bit of take-out now.

So we think about that.

We're constantly moving how much we have in promotional, how much we have in brand, how much we have in lunch to see which vehicle is driving the most guest count.

So we will continue to monitor that.

We would expect our advertising spending throughout the rest of the year to be slightly below last year, basically the same.

What we're doing there is -- we're able to -- the big thing is we're able to cover the inflation.

That's what I've charged the team with is, how do we cover the 7% to 8% media inflation and not raise our overall costs?

We expect our all-in advertising to be approximately a little bit less than 4.5%.

It will be 4.5% for Olive Garden.

We'll leverage it down with the other brands from there, LongHorn is going to finish the year about 3.5%.

Great.

Thank you very much.

Diane Geissler, CLSA.

I wanted to ask about the remodeling program, which is something you put on hold while you were doing a little bit more investigative work.

It sounds like you're ramping that a little bit more aggressively this year with the 25 units.

Can you talk about your comfort level in terms of what you think you'll see in terms of an uptick?

Then in terms of the total portfolio, I think, we were always thinking it was about 250 to 300 restaurants that need to be refreshed.

Can you talk about the sale lease-back?

Will that impact the number of units that you potentially will remodel?

Just how that might impact your plans on that front?

The sale lease-back will have no impact on our refreshing our restaurants.

We continue to be pleased with the initial 19 restaurants.

We've got a good read on approximately 10 of those restaurants.

We're seeing approximately 7% lift in those restaurants.

We've got a couple things going on right now.

As I mentioned in the last call, we have this Olive Garden -- what we're calling the Olive Garden of the Future under development, where we are going to try to build an Olive Garden that would be extremely -- obviously very competitive in 2025.

So we believe through this process, as we redesign the Olive Garden of the Future, not dissimilar to what was done back in the late 1990s with the Tuscan Farmhouse, we believe this is going to become some inspiration in that process that will help us with future remodels.

So we are going to move forward and do another 25 this year.

We've got some restaurants out there that we think that can significantly benefit from this capital investment.

Dave and the team are being very strategic in which restaurants they're refreshing.

In those restaurants, there's some deferred maintenance that needs to be taken care of.

So we need to get in there and do those before we get the inspiration from what we're calling this Olive Garden of the Future.

Okay.

I think part of the previous plan was that you would do it on a geographic basis, so that the consumer would see the new plan at all of the local restaurants.

It sounds as if it will be more pick and choose in terms of what marketplace you go into.

Is there a way we should be thinking about in terms of the number of units total that need to be remodeled?

How that might be staged over time?

Then, how do you deal with consumer confusion if the restaurants look vastly different than what they've looked previously?

I think the plan still is to do this by market.

Each market has different needs.

It depends on how many Revitalias we have in certain markets versus Farmhouses so I think that there's a lot of efficiencies by doing the refreshes.

Market by market, we can put one team in there to manage the process.

So I would look for it to still be done on a market to market basis.

As we look forward, we haven't really determined what the pace will be.

We want to get some more -- continue to get learnings from this.

I think after we get this Olive Garden of the Future done and up and operating and we get the inspirations from that, I think we'll be in a better position to lay out exactly how we're going to move forward, refreshing these Revitalia restaurants.

Okay.

Great.

I appreciate the additional detail.

Sara Senatore, Bernstein.

One question and then a follow-up if I may.

You talked about beef favorability in 2016 and certainly 2017.

One of the things I think we've noticed is that the whole steak category has been quite strong.

It seems to be correlated with how much inflation we've seen in beef prices just because the relative value versus grocery stores has gotten so much better.

Maybe, can you give a little bit of historical perspective, is that the case?

I guess, if so, as you look out to beef dis-inflation or deflation, would you expect to see potentially moderating top line, but better margins?

Sara, I'm not sure that I'm going to subscribe to, as the beef market comes back we're going to have some top-line pressure.

I do think we're going to have some margin improvement with that.

I think overall the steakhouse category from a value standpoint has done a better job than the bar and grill and some of the other full-service dinner houses with the overall value equation.

I think it's something that over time Olive Garden had struggled with, with the price point for an entree without protein versus a protein-centric entree that a steakhouse restaurant is selling.

That was one of the real reasons we went back to Cucina Mia at $9.99.

We felt we had to have something that competed effectively against the steakhouse category.

So, I think -- when I think about steakhouse, I think that there is a consumer out there that's a little financially healthier that is opting into the steakhouse experience because of the quality and the value that you're getting in that experience.

I think that's what's driving that category right now.

I think we've done a better job in the steakhouse category with culinary innovation and creating overall value to the consumer.

So in that context, you mentioned needing to get volumes higher.

To your point, the category's actually been -- LongHorn in particular and the category generally has done a good job.

What else can be done then to grow volumes given that the environment actually seems pretty salutary at this point for steakhouses?

So, can you just talk a little bit about when you look at it, is it the value proposition could be better still?

Is it the brand messaging isn't perfect yet?

The focus on getting volumes higher, clearly the right one, but given that the performance has actually been very good, I'm trying to figure out what other levers you have to pull?

When we think about LongHorn, the issue is a little bit more geographic than overall brand.

We have -- where LongHorn has a dominant market position and has a lot of legacy, we've had strong average unit volumes.

We've had a little bit more growth in those markets.

What's weighing on LongHorn today is some of the newer development that has happened over the last couple years.

LongHorn has a history of taking a little bit longer to break into new markets and for the consumer to really understand the value equation of that brand.

So the big challenge for LongHorn right now is effectively competing in market places where there they are the third or fourth steakhouse in the market.

Our ramp-up time is taking longer than we would like.

But in our heritage markets, where we've got a strong foothold, we have -- our average unit volumes are where they need to be and the margins of that business are where they need to be.

So LongHorn's more about really the geographic challenges we have as we've been growing the brand.

Great.

Understood.

If I may, just one quick follow-up for Jeff.

We talked about moderating margin expansion.

You and I have talked about, you have some real supply chain expertise.

Now that you've been there a bit longer, are there any particular areas you could talk about what the opportunities look like to you?

No, I would like to just go back to the fact that one of the opportunities we have is to leverage our scale.

As we think about how we continue to look to our supplier base, to go out and continue looking at our contracts and using that scale to be bring better costs to our overall organization.

Thank you.

Andrew Strelzik, BMO Capital Markets.

I'm wondering how you're thinking about the multi-year growth profile of the business going forward?

Given the stabilization and operational improvements that you've seen, are you getting more comfortable with potentially talking about longer-term metrics and targets going forward?

If not, why not?

I think that's a really good question.

We are really focused right now on two things: improving the execution of our brands and then secondarily, completing the REIT spin.

I think once we get the REIT spin behind us, we will look at where we are as a Company and determine -- look at where we are as a Company but also look at the overall operating environment and determine what our longer-term sales and EPS targets are as we move forward for the organization.

We believe as we look at this today, we've made tremendous progress in the last year.

When we look at our opportunity today, we believe that there is a chance for us to increase new restaurant growth into 2017 and 2018.

From there, be able to really determine what our long-term EPS targets would be.

We need to fully understand where the capital structure's going to be.

How we're going to use our cash flow to drive shareholder value.

Got it.

Thank you very much.

Howard Penney, Hedgeye Risk Management.

I have two questions.

The first one is on the Olive Garden assets.

The phrase or the word refresh has a different connotation to it than remodel.

It's a softer term if you will then maybe expresses a little less urgency.

I was wondering if the momentum that you're seeing in the business if I'm reading that correctly the momentum you're seeing in the business less of a need to remodel the stores as much as you did the last two years or three years?

Thanks very much.

Howard, no, I don't think it's changing the sense of urgency.

I think what it - where we're at is we want to make sure if we're going to invest this capital to refresh, remodel, whatever we want to call it, we want to make sure it is -- first and foremost, it is the appropriate amount.

Second, it's going to have the desired outcome that we want it to have.

From there, we have to pace it.

We have to ensure that we continue to improve and evolve with current learnings on how to make these investments more valuable to us.

What we want to guard against is designing a look and a feel and rolling it out taking two or three years to do that.

You get to the end of year three and realize what you are rolling out really isn't where you need to be today.

So I'm a proponent of more of this evolving, rolling refresh over time and using your current knowledge to make those dollars work as hard as they possibly can at the time you're making the investment.

I think it would just be wrong to lock in on a certain look and feel and just roll it out to 300 restaurants and try to go as fast as you possibly can.

I want to get into the system where we are rolling in X number of refreshes every single year.

Great.

Thank you.

Then just hanging onto that last question about longer-term targets, I assume, Gene, as you took over the role of CEO, you made a presentation to the Board as to a three to five-year plan as to where you saw the business?

I was wondering in that plan, if you presented long-term targets in growth and profitability and revenues and if you could share what those targets were?

Thank you.

Well, yes, Howard I did present a longer-range plan and potential for the Company.

But at this point in time, with pending spin and where we're at, I'm not at the point where we want to give out our long-range targets.

I will commit to the investment community that we will get those out in the next three to six to nine months on what we think this business can achieve.

But I want to get through this spin and understand where we are post-spin and determine what the opportunity for Darden is moving forward.

Thank you.

Priya Ohri-Gupta, Barclays.

This is actually Diana Chiu on for Priya.

I was wondering if you could give us an update on the consent solicitation for the 2035s and 2037s and speak to where you are in that process?

Thank you.

Yes.

Diana, this is Bill White.

The update we would tell you is, we did not get consent for the modest increase we were seeking for the covenant basket size.

But as we've said previously, that was not a condition to pursuing the real estate transactions that we're marching forward on.

So really with some pretty minor modifications in those plans, we're fully covenant compliant.

We simply don't have the extra room we were hoping to accommodate for future transactions, whether they be the roughly 80 or so properties -- fee simple properties left behind or others from future acquisitions.

20 years is a long time, but we are perfectly comfortable moving forward without consent.

I see.

Great.

Thank you so much.

John Ivankoe, JPMorgan.

The question was on labor, Gene.

I think you touched on it a couple of different ways saying you think you perhaps have an opportunity to just be more efficient at the store level, but you're acknowledging the reality that wage rates are increasing in various parts in the United States, I guess anywhere from moderately to very significantly.

So just asking about your experience, having lived through hot labor markets and changing labor markets before in the past, does it make sense for Darden to lead by example?

Or just lead from an employee perspective and start to change the way that employees are compensated or what their incentive structures may be?

Especially, as we think about maybe some significant cost of goods sold relief perhaps into 2016, reinvest even more in labor then maybe some of your peers are, to differentiate the business through that stand?

John, I would just say that we believe that our employment proposition today is really strong.

We compete for talent every single day.

When you look at where the average Darden employee is today, it's approximately $15 an hour, which is double the federal minimum wage.

We think that through a few avenues, that our employment proposition is incredibly strong.

We have a great opportunity for hourly employees to grow into management.

Last year, we promoted 1,000 hourly team members into management.

We have programs that allow our team members to move up through the restaurants.

Our team members to go across brand if they think -- after they become proficient in maybe a casual environment, they can move to a more polished or even a fine dining environment.

So as we look at this today, we keep coming back to, there's so many things that we do for Darden team members.

It's a compelling proposition.

Our turnover rates are 20% lower than our competition.

We continuously win best employment practices for the majority of our brands.

We think that our employees are really in a good position.

We're going to do what we need to do to ensure that we have the best talent at all levels in our organization.

That will be -- we'll be at the forefront of that.

We believe today, we are getting the best talent.

Understood.

Thank you.

Todd Duvick, Wells Fargo.

Michael Walsh filling in for Todd.

Appreciate getting us in.

Just another couple quick bondholder questions.

I think in the past, you've noted that you like to maintain an investment-grade profile.

We've got a number of months here before the REIT transaction takes place.

At which time, you would look at your capital structure.

But do you foresee, within that capital structure, still maintaining investment-grade profile?

With that, is there any type of credit metrics that you use, whether it is a lease-adjusted leverage target that you would managed to?

Yes.

Michael, this is Bill.

I think just to address the last part of your question first, I think you hit the nail on the head.

Lease-adjusted -- really a lease-adjusted debt to EBITDAR is probably one of the more key metrics we focus on.

We would be targeting in the range of 2.5 times or less.

Certainly, the agencies are quite comfortable that where we're moving in that direction is, if not neutral, a positive to the credit profile.

So maintaining, preserving and solidifying the investment-grade credit profile is a priority.

Got you.

Thank you very much.

Appreciate it.

At this time, I'm showing no additional questions.

All right.

I think we're done.

Thank you for your questions.

I want to remind you that we expect to release our second-quarter results on Friday December 18 before the market opens with a conference call to follow.

Thank you all.

Have a great day.

Thank you for joining today's conference.

That does conclude the call at this time.

All participants may disconnect.