達登餐飲 (DRI) 2016 Q2 法說會逐字稿

Welcome to the Darden FY16 second-quarter earnings conference call.

(Operator Instructions).

This conference is being recorded.

If you have any objections, please disconnect at this time.

I will now turn the call over to Mr. Kevin Kalicak.

Thank you, you may begin.

Thank you, Gabby.

Good morning and welcome, everyone.

With me today is Gene Lee, Darden's CEO, and Jeff Davis, CFO.

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 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 available in the investor relations section of our website.

In addition, we are simultaneously broadcasting a presentation during this call which will be posted in the investor relations section of our website at the conclusion of the call.

We plan to release FY16 third-quarter earnings on Tuesday, April 5, 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, and good morning, everyone.

This morning we want to take time to discuss several things with you.

First, I will review our quarterly performance and brand highlights, then Jeff will provide for more detail on our financial results from the second quarter as well as our dividend and share repurchase plans and will provide an update on our outlook for the fiscal year.

And then I will close by sharing our framework for the long-term value creation.

Before we get started, I want to note one point that will help frame our performance.

It's important to look at our same-restaurant sales performance on a comparable calendar basis.

Due to the 53rd week last year and the shift in key holidays such as Thanksgiving moving from Q3 last year to Q2 this year, we report same-restaurant sales on both a fiscal and a comparable calendar basis.

Our brands significantly outperformed the industry during the quarter with strong same-restaurant sales growth of 2.9% on a comparable calendar basis and positive same-restaurant sales at each of our brands.

We also added 14 net new restaurants, which takes into account the six Longhorn San Antonio restaurants that were part of the Four Corner Property Trust spinoff.

Second quarter adjusted margin showed strong improvement for the fifth consecutive quarter, and benefited from both our topline performance and ongoing disciplined cost management that is focused on non-guest facing elements of our business.

The momentum we've built at Olive Garden continued during the quarter.

Same-restaurant sales grew at 2.8% on a comparable calendar basis, outperforming the industry by more than 300 basis points.

This was our fifth consecutive quarter of growth.

In addition, same-restaurant traffic was positive on a comparable calendar basis.

These results are a reflection of our continued focus on operating great restaurants along with developing relevant, integrated marketing initiatives that reach our guests more effectively, equally as important is the work we are doing to evolve how our loyal guests experience Olive Garden.

During the quarter we completed the systemwide rollout of tabletop tablets which enhances the guest experience.

Additionally, we continued our emphasis on OG To Go sales which addresses a key need state for convenience.

Overall, we exceeded fantastic results with a two-year growth rate of more than 30% for OG To Go.

Finally, the team at Olive Garden continues to make great strides on culinary innovation, filling the core menu pipeline with a number of exciting new dishes that will roll out in the coming.

Longhorn maintained strong top line momentum during the quarter and delivered solid profit growth.

Same-restaurant sales grew 3.6% on a comparable calendar basis, outperforming the industry by more than 400 basis points and same-restaurant traffic was positive on a comparable calendar basis.

Longhorn's results reflect a relentless focus on in-restaurant execution.

That focus was strengthened by continuous simplification of the core menu, which allows our restaurant teams to execute against menu items with the highest guest preference.

Longhorn also continues to benefit from the success of its You Can't Fake Steak marketing campaign, which drove excitement for two compelling promotions that featured popular steaks at a great value.

Turning to our specialty restaurants.

All five brands had same-restaurant sales growth on a comparable calendar basis, led by Bahama Breeze at 5.8% and Seasons 52 at 3.8%.

Especialty restaurant brands remained focused on culinary innovation, providing unique guest experiences and creating personal connections with their guests, which was further enhanced by the launch of new websites at each of our brands.

These five strong brands continue to perform well and increase share as consumer demand grows from our polished dining experiences.

Before I turn it over to Jeff, I would like to briefly comment on wage rates.

There are two key factors at play: State and local mandated minimum wage increases and the improving employment environment.

First, we expect the mandated minimum wage increases which were set to take effect on January 1, will inflate our hourly wage rates by 1.2%.

Each of our brands will be impacted differently, based on their geographic footprint.

The overall impact at Darden is mitigated compared to others given our geographic diversity.

Second, lower unemployment is creating increased competition for talent, and we expect it will put additional pressure on wage rates in the future.

We continue to be well-positioned to deal with this competitive labor market, given our strong employment proposition and industry-leading retention rates.

Further, we will continue to find productivity enhancements through our simplification efforts that will enable us to effectively manage future wage inflation.

With that, I will turn it over to Jeff.

Thank you, Gene, and good morning, everyone.

Adjusted diluted net earnings per share from continuing operations were $0.54, an increase of $0.26 or 93% versus last year's adjusted EPS.

Key drivers of the $0.26 of EPS growth were continued improvement in core operating performance which accounted for $0.27, favorable settlement of legal matters added $0.05, as reflected in G&A.

This was mostly offset by $0.04 of expense from three restaurant impairments.

Additionally this quarter we began realizing the effects of real estate transactions resulting in $0.02 of net incremental expense.

Adjusted EBIT margins expanded 300 basis points in the quarter, principally from leveraging positive same-restaurant sales, commodities deflation driven by dairy and seafood, accelerated progress with cost and expense reduction initiatives, and reduced marketing spend in line with annual expectations.

Our reported tax rate for the quarter was a credit of 23%.

This was driven by the discrete tax impact of expenses incurred related to the execution of our real estate transactions.

On an adjusted basis, our effective tax rate was 22.9% for the quarter.

Before reviewing our performance by segment, I want to point out that FY16 segment profit now includes incremental rent and other tax expense associated with the completed real estate transactions while the benefits of lower depreciation and interest savings are not recognized in segment profit.

Starting with Olive Garden.

Olive Garden segment profit grew $16.6 million.

Excluding the incremental rent from the real estate transactions, segment profit grew $23.9 million or 17%.

This growth was primarily the result of leveraging positive same-restaurant sales, dairy and seafood cost deflation, and continued progress on cost reduction initiatives.

Longhorn segment profit increased $12 million.

Excluding the incremental rent from the real estate transactions, segment profit grew $13.4 million or 31%.

The growth was supported by leveraging positive same-restaurant sales, improved cost of sales and lower marketing expense.

Fine dining segment profit grew $1.3 million by leveraging positive, same-restaurant sales.

And then finally, in other business, segment profit grew more than $9 million this quarter.

Reduced food costs and improved labor productivity at Seasons 52 and Yard House were the key drivers to this quarter's segment profit growth.

Turning to our real estate plan, we completed the spinoff of Four Corners Property Trust.

Additionally, we finalized the sale leaseback of our restaurant support center in Orlando and an additional 15 restaurant sale leasebacks bringing the total to 62, with two more properties remaining.

We received net proceeds of approximately $631 million related to these transactions.

These proceeds, in addition to existing cash on our balance sheet, were used to retire approximately $1 billion in total debt.

$270 million was retired by the end of the quarter and $743 million was retired after the close of the quarter.

This strengthens our balance sheet and credit profile and is expected to position us within our adjusted debt to EBITDAR targeted leverage range of 2 to 2.5 times.

For FY16, we expect to realize a net $0.08 per diluted share from net incremental expenses related to the real estate transactions.

On an annualized basis, we anticipate net incremental expense from the real estate transactions to be approximately $20 million to $25 million.

This includes approximately $130 million to $135 million from incremental rent and other taxes, a $60 million reduction in depreciation and $50 million in interest savings.

Completing our strategic real estate plan was a key part of our commitment to deliver value to shareholders, and given the current trading multiples of those Companies, we believe we've created significant value.

And in addition to providing an approximate $7 stock dividend value from the spinoff of Four Corners, the Board of Directors declared a regular quarterly cash dividend of $0.50 per common share this quarter.

This represents a 14% increase compared to the minimum post-spin dividend of approximately $0.44 per share which was disclosed on November 9.

Darden's Board of Directors also authorized a new share repurchase program.

Within this program the Company may repurchase up to $500 million of its outstanding common stock.

This, combined with our dividend program, demonstrates our confidence in the strength of our business and our commitment to returning capital to shareholders.

For FY16, we are increasing our outlook for same-restaurant sales to a range of 2.5% to 3%, and we are increasing our outlook for adjusted diluted net earnings per share from continuing operations to a range of $3.25 to $3.35.

This includes approximately $0.08 per diluted share of net incremental expense related to the real estate transactions.

Finally, we are raising the range for our adjusted effective tax rate to 23% to 25% to reflect a higher earnings outlook.

We are not in the practice of giving quarterly guidance, but we do expect Q3 and Q4 EPS to be similar, not unlike what we saw last year, once you adjusted for the 53rd week.

In addition to improvements in our core operating business, we continue to realize savings from specific cost and expense initiatives.

We are on track to deliver an additional $30 million to $35 million of savings from our previous outlook of $50 million to $55 million for a total of $80 million to $90 million for FY16.

To date we have also identified savings of $30 million to $40 million in FY17, which will bring the total identified annualized savings to $145 million to $165 million, which is $45 million to $55 million more than our previous outlook.

Now I will turn it back over to Gene for some closing remarks.

Thanks, Jeff.

The Board of Directors, along with our executive leadership team, has spent the last 12 months developing and implementing several strategic priorities, most significantly our comprehensive real estate plan.

Recognizing that our Company looks different today, I would like to spend a few minutes providing some perspective on our framework for long-term value creation.

At its core, our business is relatively simple and success for us is really predicated on two key areas.

First, we must remain laser focused on executing against our operating philosophy at all times.

This means relentlessly pursuing perfection across four key elements: culinary innovation and execution, attentive service, engaging atmospheres, and integrated marketing.

Second, we must support our brands by leveraging our four competitive advantages that drive sales and expand margins.

These advantages include: significant scale, extensive data and insights, rigorous strategic planning, and our results-oriented culture.

Doing so provides a value-creating business model that generates significant endurable cash flow to fund growth and return capital to shareholders.

Looking at our framework, our goal is to deliver long-term, total shareholder return of 10% to 15%, which we believe is a compelling and attractive investment for our shareholders.

Achieving this type of return will come through a combination of our business performance and returning cash to our shareholders.

Looking at the components of our long-term operating targets, we expect same-restaurant sales growth of 1% to 3%, driven by the strategy I just outlined; new restaurant growth of 2% to 3%; and EBIT margin expansion of 10 to 40 basis points while leveraging sales growth and our scale.

This should result in approximately 7% to 10% growth in earnings after tax.

It's important to remember that the growth in the individual components will vary year-to-year based on several factors, including but not limited to the macroeconomic environment and commodities.

In addition, we are committed to returning capital to shareholders.

We anticipate a dividend payout ratio of 50% to 60% and $100 million to $200 million in share repurchases, which would deliver a return of cash in the 3% to 5% range.

This framework is meant to be long term in nature and we will continue to provide annual guidance as well.

Before we move into Q& A, on behalf of the Darden Board of Directors, I would like to conclude by acknowledging the 150,000 hard-working women and men across our Company.

The holidays are the busiest time of the year for our restaurant teams as they create exceptional experiences and lasting memories for our guests.

Thank you for all you do to make our Company successful.

We've made great progress together and I look forward to making even more in the new year ahead.

Now we will open it up for questions.

(Operator Instructions)

Brian Bittner, Oppenheimer & Company.

Congratulations on a great quarter, guys.

A quick question on the reporting first, just if you could clarify this.

So the profit leverage that you got this quarter, should we think of that as leverage you got on the fiscal comps or is that on the counter comp or maybe it doesn't matter.

If you could clarify that?

Brian, it's on the fiscal comp.

Okay.

I want to go back to Olive Garden.

I realize that you guys really changed up the incentives for store- level managers at the beginning of this fiscal year.

Can you talk about what it is that you exactly did there and how you think that may affect the business performance for Olive Garden as we look forward?

Brian, what we did was we simplified the bonus program.

The emphasis on our bonus programs have always been sales and profit growth, but prior to what -- the big change was, we really just simplified it.

And it's on -- I would say the framework is on a 3% for the managers for what they gross same-restaurant sales year over year.

And then they get a percentage of the profit growth also.

That's what we were doing in the past.

It was just much more complicated.

Today you can walk in the restaurant and the managers understand what their bonus program is.

There is also a competitive component of the program today that's really helpful is that we are basically ranking the profit performance of every restaurant and the ones who are at the top end of that curve will get a kicker in their bonus.

So there's competition amongst the general managers in the system.

Brett Levy, Deutsche Bank.

If you could do me a favor and talk a little bit about where you are in terms of unit expansion, remodels, refreshes.

What do you think you can still do for this year, next year and what kind of sales lifts we should expect?

I'm not going to comment on -- we will give guidance in June for the following year, but let me give you an update on where we are in the Olive Garden remodels.

To date, we have remodeled 32 locations at various investment levels.

The lift is about 5% in guest counts.

We have 13 more that we're going to do in 2016.

I think the team has done an exceptional job of developing different packages for different sites.

We're still reading some of the last work that we've done, but we're optimistic about the lift that we're going to get from these remodels in the future, so it's been successful.

We've done one other thing that's been helping us is that we've gone into 40 restaurants and we've just refreshed the bar and spent minimal money.

However, we're getting a 1% lift just from that exercise as we turn that area into a much more functional area.

Today in some of our older restaurants, it's not as functional.

And Dave and the team have done a great job of going in, putting in some tables and making a much more comfortable place to enjoy an Olive Garden meal.

Any other questions, Brett?

I'm sorry, I wasn't going to do a follow-up.

Any thoughts on -- I guess we will leave it at that.

Thank you.

Will Slabaugh, Stephens Inc.

Curious if you could speak to the cost savings you mentioned earlier and the addition.

So can you remind us now of the general buckets and the size of those buckets for the savings that are going to fall out given the update you made this morning?

Yes.

Thank you for your question.

The size of the buckets, once again we've increased for the quarter going from $50 million to -- actually for the year, going from $50 million, $55 million, we've increased that to now $80 million to $90 million.

So that's about a $35 million increase.

The buckets that we talk about was basically food and beverage, also in our restaurant expenses and G&A.

We did not necessarily break that down, if you will, between the three.

But what you can see from the presentation that we've included and I would refer you to maybe take a look at that, it's about now about a third, a third, a third as to how we see those savings actually being realized during the course of FY16.

Got it; that's helpful.

And a quick call, if I could, just given on what we've heard from some of your peers and seen from some industry data, in that you have concepts reaching across the full-service spectrum, I'm curious to hear your thoughts on how the restaurant consumer is behaving right now.

Are there any notable changes to consumer behavior through particular purchases or (technical difficulty).

Clearly you are outperforming the industry.

I'm just curious if you have any sort of maybe your rationale for why the industry has seen some slowing here recently?

And what you've done better than most to outperform?

This is Gene.

I would say the consumer's been consistent quarter to quarter in our observations.

They're still buying a little less on daily, using the whole menu, they're buying appetizers, they're buying desserts.

They are buying high-value items.

We're seeing a lot of migration into the $9.99 Cucina Mia in Olive Garden.

But an interesting dynamic with that is that over 50% of people that buy that item will add on to it and turn it into a $12.99 entree by adding some protein.

So we have seen consistency.

Obviously I am aware of the slight turndown in October in the NAP track numbers in Black Box.

I really don't have an idea of what caused that, but I would say that it feels -- from our standpoint, it feels pretty good out there right now and I like the environment we are operating in.

I think the consumer is going to value, but value today isn't all about price.

We are seeing consumers do some things in Longhorn where we've got -- actually we've increased the size of our filet.

We've got a 10-ounce filet on the menu that's doing really, really well.

So I would say the consumer's rewarding high-quality execution and so we will continue to monitor it.

But right now, I'm pleased with how the consumer is behaving in our restaurants.

Matthew DiFrisco, Guggenheim Securities.

One quick question on the commentary from the call, the script, as well as just your outlook for some potential future business opportunities.

One on the marketing side.

It sounds like across the board the brands pulled back a little bit on marketing dollars in the quarter and helped out margins.

Is that an ongoing thing in the initiative to sort of use marketing dollars more efficiently or is it a reflection that perhaps the marketing dollars are shifting to more efficient, cheaper ways such as mobile apps and mobile advertising or digital rather than TV?

And then I do have a follow-up question.

What I would tell you is that the savings in advertising dollars in the quarter was strictly at Longhorn and they were driven by moving from our national cable strategy back to a spot market strategy.

From a media standpoint, we're being much more effective with that.

We've eliminated a lot of waste that was in the national cable buys and that's -- we're into -- this is about our second or third quarter on shifting on this strategy.

So that's the primary reason for the savings.

Following up a little bit on what you're talking about, we are migrating dollars from traditional television media into digital.

And we are continuing to find that to be effective, but we're also continuing to find that television advertising is effective.

You did see some choppiness in Olive Garden sales throughout the quarter as we started to play a little bit with reduction in TRPs or moving our TRPs from different points in a promotional cycle to understand if they're really driving consumer traffic and through that promotion we found out that television is still a very, very effective medium to drive traffic.

Lastly on digital, digital is very effective because we can get very targeted.

Excellent.

And we can measure that.

So that's why the advertising expenses were down 40 basis points in the quarter.

Shifting gears to Olive Garden or OG on the go there.

Where do you think that could be -- top out as a percentage of sales, if you have sort of a goal in mind as well?

Is this an avenue that maybe you would test delivery with potentially third-party sources out there on a broader more approachable basis than just some select opportunities?

Good question.

We started off this OG To Go journey thinking that 20% was going to be a great target.

20% of over $4 million is a heck of a business inside an Olive Garden.

We are over 10% now and growing rapidly.

We are very in tune to what's going on with third-party delivery.

We are studying that very, very closely.

As you know, we are also testing our own delivery for large catering parties and having some success with that.

But we are monitoring the situation.

We believe that there's going to be some sort of massive change in third-party delivery.

There are a lot of people that are playing in that environment today and we're looking for -- to partner with who we think is going to be the clear winner.

But that is going to be an avenue for continued growth in Olive Garden.

I want to keep reiterating the fact that the type of food -- the cuisine that we serve in Olive Garden travels extremely well, and when we follow back up with our consumers who use an Olive Garden To Go experience, their satisfaction level is very, very high.

And so we're excited about this business.

Our people are doing a great job.

Excellent.

Good luck in the new year.

Joseph Buckley, Bank of America.

Just to follow up on Matt's question.

Do you have a sense of how much third-party delivery is going on now in terms of your sales mix?

I would say 50% of our Olive Garden's are being covered by some third-party where it is a local deal, but I'm not sure it's as productive as it can be.

I'm not sure that we're a preferred provider in some of those arrangements, and so we've got tests -- we're working with Post Mates, we're working with Google.

There is -- Uber is going to come into the play.

We're working, from a Corporate standpoint, at 50,000 feet here trying to determine where do we want to set up a partnership and how does this wall play out?

A fragmented system is not going to be the way to go.

It's going to be some sort of national system where we can cover 70% or 80% of our Olive Gardens with one provider so that we can use our scale to drive the best possible financial outcome for both parties.

Gene, your long-term or normalized guidance, I don't know how you would characterize it, for 7% to 10% -- I can't remember now if it was EPS, I think it was EPS growth.

Talk about the timeframe for that versus these terrific numbers you're putting up currently.

Joe, as we look at this portfolio today, and consider the operating -- we're using kind of the operating environment that we've operated in the last three years as kind of a backdrop to say, okay what is it that we can do over the next four to five years or so?

What do we think is available to us?

And we think that we can drive earnings after tax from 7% to 10%, and we're going to drive that through same-restaurant sales growth.

We think we have -- the portfolio gives us 2% to 3% new unit growth, and we think we can leverage margins anywhere from 10 basis points to 40 basis points depending on what's going on in the environment.

We think we can supplement that with a dividend that's 50% to 60% of our earnings and a significant share repurchase program to get us into that 10% to 15% EPS growth.

And we think with the portfolio we have today, the environment that we're operating in, our brands -- we have some really strong brands that are really well-positioned.

And when you look back over time, when you look back over the last 10 years, Olive Garden has outperformed NAP track by close to 20%.

Over the last seven years, Longhorn has outperformed NAP track by over 20%.

So we have really strong brands.

We think we can compete in any type of economic environment.

We're going to use our scale and our insights to give our brands an advantage in the marketplace.

So we think this is -- a good framework is how we're describing it is a framework.

We will continue to give and provide yearly guidance.

And so we're focused and we believe this is a good framework for us.

John Glass, Morgan Stanley.

If I could just come back to this quarter in the beat, maybe it's a two-parter, but one is, relative to your expectations, where do you think you outperformed the most?

And I'm asking that in the context of SG&A or G&A specifically seem to be significantly lower.

Once you strain out the one-time items in your adjustments here, it's 4.4% of sales, what I think would suggest a $70 million number or something, which is materially lower than the last quarter and also a year ago.

Is that the now ongoing run rate of G&A?

Or were there some one-time items in that or seasonality or something that affected it?

There were a couple of things going on with G&A this particular quarter.

First off, as we had mentioned earlier, we had the legal settlement that added approximately $0.05 to G&A.

We also would have had -- as it relates to those impairments, offsetting by $0.04, but that's in a separate line item.

The G&A rate that we're seeing right now is where we would believe we'd start to moderate to through the end of the year.

The adjusted 4.4%, that would exclude legal settlement or did it not?

No.

That did not.

I'm sorry -- the 4.4% was net of the $0.05 of legal settlement.

Got it.

Okay.

So it could be higher in the future.

And then on the capital structure side of the business, you had mentioned on a rent- adjusted basis you were kind of in a range you were comfortable with.

Can you talk about your willingness to use debt in the future?

Does your share buyback that you announced today assume just using free cash from the cash from operations or leverage in the future?

How do you think about capital structure going forward?

I think in the near-term we're going to use free cash flow to do our share repurchase.

We will continue to look at the capital structure going forward.

Right now our objective is to firmly get in between the two 2% to 2.5% adjusted debt to EBITDAR and we're really focused on maintaining our investment grade credit profile.

David Tarantino, Robert Baird.

Gene, a couple questions.

First, maybe on your outlook for the second half, raising the comps guidance for this year, seems like you're feeling very good about the trajectory of the business.

But that being said, it looks like the comparisons on an absolute and relative basis start to get a little tougher.

So maybe frame up your thoughts on your confidence level in achieving that implied second-half guidance in light of the more difficult comparisons.

I think the confidence comes from the momentum we have in the business.

When we look at what's going on in Olive Garden between the promotional schedule that we have coming, the value and the feedback that we're getting from consumers, the trajectory in the to- go business, we believe that Olive Garden is set up and has done a tremendous amount of work over the last year to really position that brand to be able to compete effectively.

We think that we're getting more effective in our digital marketing efforts.

We're much more segmented in how we're talking to our consumer.

We think we've got relative messaging out there, and we just believe that this momentum will continue into the back half of the year if the environment stays the way it is right now.

We really think one of the big changes that we made was anchoring every menu with a $9.99 price point at lunch and $6.99 at -- excuse me, $9.99 at dinner and $6.99 at lunch.

And that provides our guests that are looking for value the everyday option to come to Olive Garden and eat a full meal at a price that is a great value and one that's extremely competitive in the casual dining segment.

And Longhorn's got some great momentum too.

And I think that business is really focused on improving the overall experience and we continue to make subtle improvements to our menu.

We've simplified.

We've gone from 125 menu items back down to 100.

We're focused on moving a lot of high-volume items and doing it very, very well.

We're confident -- not overconfident, but we believe that our hard work is starting to play forward and we've got momentum.

The thing that I've been saying to a lot of you over time is when you get 100,000 people in the Olive Garden system trying to do the same thing, they create great dining experiences and that creates great feelings in communities.

Olive Garden right now feels as though it's very relevant with the consumer.

Thank you.

And then a separate question.

On the long-term value-creation framework, the unit growth requires a step up in the number of openings.

And I was wondering if you could comment on which brands do you think are really going to drive up the step-up as you look at the next couple of years?

I think we're going to get back on a path where we're opening somewhere between 8 to 12 Olive Gardens a year, so that will be a big boost to our numbers.

Olive Garden is still an incredible investment from a new restaurant perspective.

There will be some cannibalization, but we think that Dave and the team have a strategy to identify trade areas that could support an Olive Garden, but without so much cannibalization that we can't make the returns work.

So we think that we can do there.

Obviously, we're going to continue to push on Yard House.

And we think Longhorn can get back up to low double digits also.

And so with those types of new restaurant development, we can firmly be in that 2% to 3% range.

Great.

That's very helpful.

Thank you.

Jeffrey Bernstein, Barclays.

Two questions.

One, theoretically, if you look out over the next 12 months, seems like we're talking about higher labor costs, presumably offset by lower commodity costs.

I know over the past few years perhaps most would agree that was the reverse.

I'm just wondering which is preferential when you think about it as an operator?

Do you prefer the outlook we have going forward versus what you had before?

Maybe just in the context of your ability to price to offset it?

It would seem like you have had greater might opportunity to price to offset commodity inflation, less opportunity to do so on labor, but just wondering how you think about the dynamic of the two of them?

Good question, Jeff.

First I want to clarify that we -- at this point in time, we are not seeing a whole lot of wage rate inflation and our direct labor is actually less than it was last year.

What you're seeing in our labor costs is bonus payments this year are up for our managers.

So when I think about the dynamics that you outlined, which I think are really a good way to describe the situation that we're operating in, historically when there has been wage pressure and wage growth, that has been good for the demand of the casual dining restaurant business.

When we try to regress variables back, wage growth is much more favorable than discretionary income.

And so that in environments where we've seen significant wage growth in casual dining, we've been in environments where we've had stronger demand.

And so that's been a more preferable environment than having food inflation and not having wage growth.

So I guess the crux of your question is which environment would I personally prefer to compete in is the environment that we are in today.

Got it.

And then just as a follow-up that ties into the cost savings, I know you mentioned some of the wage rate inflation you're anticipating going forward, you can mitigate the cost-saving initiatives.

And I think it's quite impressive that, even for this fiscal year, you raised your cost savings from $50 million to $55 million to $80 million to $90 million.

I mean, we're halfway through the year.

It seems like a big increase.

I know you have that chart that shows, it looks like it's a third, a third, a third between the three components, but is there any meaningful buckets?

It's just surprising that you can see such a big increase.

Like what's been the biggest driver to raise not only this year's but effectively you've now raised your cumulative numbers pretty meaningfully.

Looks like they're up -- I mean, just a couple years ago you guys were thinking of $50 million cumulative, now we're talking about north of $150 million cumulative.

Jeff, the dynamic there is what's happening is we're actually capturing some costs quicker than we thought we would.

We've had an incredible relationship between the supply chain and operations.

They have partnered very effectively to move these costs forward into this year.

And additionally what we've done is we've identified additional costs in the last quarter that we've been able to tack on to FY17.

For me, what's really impressive is the job that both teams, our supply chain and our operations teams, have done to be able to implement these effectively at a pace that we didn't think that we could get to and so that's what's really happening here.

We're pulling forward and we've identified new ones.

So it really wasn't new cost saves that were identified that were pulled into FY16, they were identified for 2017.

We pulled them forward, but subsequently we've identified additional ones for 2017.

Everything that we're doing -- I want to reiterate this.

Everything that we're doing is transparent to the guest and that every conversation we have around some sort of cost save is -- the first thing we ask is how does it affect the guest and if it affects the guest, it's off the table.

So this is all stuff that is not affecting our guest and the guest experience.

Keith Seigner of UBS.

Thanks, and happy holidays, everybody.

Just a follow-up on that last question, or one of the last questions.

So we have the wage inflation, should be better for demand.

About the pricing piece of it, though, right?

So Olive Garden has been in roughly 1% pricing for the last two quarters, a little below the prior trend.

Longhorn actually is a little above the trend of, say, 4Q and 1Q, now running in the low 2%s.

Pulling all these pieces together, how do you think about the pricing?

And I ask because one of the most frequent questions we've been getting is is the industry at risk of losing pricing momentum as we head into next year?

So just pulling all of those pieces together, how do you see pricing going for the brands and even for the industry?

Thanks.

I think pricing -- in any competitive environment we're in, pricing is going to be cautious.

I think we need to continue to price at or below inflation, but I think there's a couple of components the way we think about it.

You've got to use price effectively on your core menu to help offset some of the inflationary costs you're facing.

But how we introduce new products and what price point we introduce new products to create a mix is very, very important.

We have been -- over time been able to use our menu mix as a lever to increase our pricing.

As we pull back on some of the heavily discounted or lower price point promotions by moving up $1 or $2, you are effectively getting a positive menu mix, but you're not really increasing pricing.

You're giving the consumer the choice to purchase at whatever price point level they want to purchase at.

And so I think as we move forward, I think there will be pressure on our ability to price.

However, I want to come back to what I think is really important in our business, which is execution at the restaurant level and if we create an environment where we're executing our food, we've got great service and our atmospheres are compelling, overall value will be defined by much more than price.

And we talk a lot about that in our organization.

And that is that we're not going to compete just on price.

We're going to create (sic -- "compete") on creating a great experience.

And the better the experience, the more tolerance you have for pricing.

And so that's how we're thinking about it.

We've got to continue to improve our experience so that we can price effectively and be able to still drive our topline sales and drive our guest counts.

That's good perspective.

Thank you very much.

Karen Holthouse, Goldman Sachs.

This is actually Greg on for Karen this morning.

With tablets rolled out at Olive Garden, do you have some early data on how it might have helped survey response rates, maybe satisfaction scores for tablet versus non-tablet users, check, or the number of email club sign-ups?

Great question.

We are excited about what the team did to be able to get this rolled out as quickly as they did.

This has been incredibly positive for our guests.

Guest satisfaction scores are really high with people who use the tablet.

The other thing, and you mentioned it, that's been very positive is the fact of the email club sign-ups.

We're getting 80% of the guests that interact with the device are signing up for the e-club, and over half of those are new sign-ups.

So we continue to build this database that allows us to communicate more effectively with those guests.

Game revenues have been stronger than we thought and our servers are embracing this as an enhancement to creating a better dining experience for the guests.

But most of all, I think as we've said, one of the biggest upside surprises of this was our ability to get instantaneous feedback on the server's experience that that server's providing.

It allows us to coach and help those servers become more effective.

So Ziosk in our tabletop tablets has exceeded our expectations and now we have spent the last nine months working to get those on the table.

Now the Management team needs to develop plans to further enhance their productivity and how they create a better dining experience for the guests and how they merchandise on that device, how they advertise on that device, and how they keep the games relevant and up-to-date so the consumer wants to interact with them.

Chris O'Cull, KeyBanc.

I had a question regarding the long-term framework.

Gene, should we assume there are no other strategic options that are being considered at this time such as brand divestitures?

No.

Our primary focus right now is running the business and executing at a very high level and I'm really proud of the work that the team has done over the past year.

Our Management team and our Board will sit down and regularly evaluate alternatives we have to manage our business more effectively and to be able to achieve our financial goals.

But as we think about this framework, this is within the current portfolio.

If something else was to change, we would adjust the framework.

Fair enough.

Could you give us more color on what future productivity enhancements you mentioned that you plan to implement to help mitigate wage inflation?

It's going to be all based on simplification.

I believe over time our menus and process and procedures have just become too complex.

And both Olive Garden and Longhorn have done a great job in initial efforts to continue to simplify.

But when I look at who I really admire in this business, it's folks who are -- have real simplified operations, the execution level is designed in a way that's simplified that allows for the product to be delivered at a really high quality level.

And so we're going to continue to push to simplify our menus to ensure we have the right range of menu products on our menu.

But more importantly behind that, that as we develop the recipes and we think about how we operate inside the restaurant, have we made them as simple as we possibly can while increasing the quality of the menu item itself?

And I believe that's where this future productivity enhancements.

One last one.

Jeff, could you remind us what debt remains outstanding on the rates on each of those notes?

The remaining debt would be approximately $450 million spread between two tranches of long-term debt, the 35 bonds being $150 million and the 37 bonds being roughly $300 million.

Sara Senatore, Bernstein.

Just a couple of follow-ups.

First is on the overall competitive environment.

It feels like what you're seeing is different than a lot of others and in particular we've heard some pretty big competitors say they're going to get more aggressive on value, whether it's price-point value or kind of bundled value.

Have you see that and has it affected your business at all?

It certainly sounds like you don't think so, but I'm just trying to gauge whether it's already sort of manifested and you feel like you're insulated are you haven't yet seen a big tick-up in aggressive kind of price and value competition.

And then I have another follow-up on margins, please.

Sara, what I'm seeing and what we're seeing is that, yes, our competitive set is getting a little bit more competitive and going back to some of the tactics that were used three or four years ago with bundles and what we're -- we're monitoring it.

We're watching closely what others are doing, obviously, as they're watching what we're doing, but we're focused on value just not price.

And that's where we are having our most success right now.

And especially in Olive Garden, we are able to offer our consumer great value and it starts with soup, salad and breadsticks.

And I think that really creates a value gap.

And the consumer is telling us through our offers that they're not that interested in the bundles.

We had an actually an interesting dynamic in the fall when we ran never-ending pasta bowl.

We actually saw Cucina Mia actually have a pretty good preference through that promotion when, in fact, we thought it was going to basically go to nothing.

And that tells us that the consumer is more interested in ordering what they want to order and want to be able to customize their order versus being told this is what I have to order to receive value.

And there's so much value on our menus.

So we're monitoring it and we will stay on top of it.

That's very helpful.

On the margins, you said you're capturing costs more quickly than you thought you would.

Yet if I look at the restaurant margins, they are largely in line with consensus, maybe not with what you expected, but the beat, again, seems to be below that line.

The two questions are, are the incremental cost saves, is that more heavily weighted to the back half of your fiscal year as opposed to what we've seen in this quarter?

And second, are there inflationary pressures that you didn't expect that might be offsetting those incremental cost saves?

Because again, the restaurant margins look pretty consistent with where I think many of us thought they would be.

A couple of things there, Sara.

First, remember that we have rent in the restaurant expenses that wasn't planned to be there from the real estate transaction, which was a big offset to some of our restaurant expenses.

We picked up 60 basis points in restaurant expenses throughout the quarter.

We picked up 110 at the food and beverage line, so there was some consolidation there.

And were getting some pretty good savings in G&A, so it's being spread out amongst the buckets.

The restaurant expenses when you adjust for rent would be a lot more significant than 60 basis points.

Okay.

So it's not the case that these cost savings are going to be offset by unexpected inflation and -- I think many of us did adjust for rent, so just trying to gauge whether anything else besides that may have been a headwind.

But it sounds like you're pretty much able to benefit from the entirety of the cost saves that your identified, okay.

Yes.

We're giving you on a cost save, the net basis not what we're -- because we are investing some of this money back into our -- our savings back into the business, but we're giving you a net number.

Howard Penney, Hedgeye Risk Management.

I have two questions.

One, can you comment on your process of the new unit openings relative to the prior regime and what kind of returns you expect?

In the past, obviously that didn't work out too well for them, so just kind of your philosophy on returns in new units and that process going forward.

And then to follow up on a previous question about the portfolio, will you rule out making acquisitions to add to your portfolio?

Thanks.

Good morning, Howard.

Our philosophy on new restaurants is that we want to exceed our cost of capital which we have as approximately 9%.

We are looking at the risk-adjusted return on investment.

I would say that from a process standpoint we've established a committee that oversees the investment in all new restaurant properties.

I personally look at every restaurant property that we're going to make an investment in.

And we talk about it with the brand presidents and our development department, and we're using our collective knowledge of developing restaurants for 20, 30-plus years to ensure we're making the best possible decision.

More importantly, on new restaurant performance, we have a detailed tracking methodology from month-one on every new restaurant that we open.

And I personally get that report every 30 days to understand what the performance is and there is the appropriate pressure on our operating teams to ensure that these restaurants are performing at a high level.

I think that's really what's different today.

A lot more engagement at the senior levels.

A lot more follow-up and we're reacting quickly when we may have a restaurant that's not performing.

As of now, all of our restaurants in all of our classes are performing above their required return on investment.

As far as the portfolio question goes, as I've been saying, we're not going to rule out anything.

We will continue to meet with the Management team and the Board and we will evaluate all the alternatives that are there for us to create value for our shareholders.

Which includes potential acquisitions.

Includes everything.

Going back to the previous question about units, how was it done in the past, out of curiosity more than anything else?

I'm not sure I want to define the process in the press.

I think what I would say, it was handled a little bit more at the brand level.

And it's still a brand-level decision.

I'm just heavily involved in it.

David Palmer, RBC Capital Markets.

Thanks.

Good morning.

Protein players in food think that beef costs are going to be going down for the next few years.

One supplier was saying that it's going to be the most meaningful multi-year move in terms of a beef cycles since the early 1990s.

What do you think this will mean for Darden?

Does this mean the supermarket becomes more competitive essentially with eating and there's more protein-oriented deals from competitors and it's a little bit more of a knife fight, ultimately sales are less?

Or do you do think of this as a more of a tailwind for margins in Darden earnings ultimately?

Thanks.

Good morning, David.

Here's what I think about where we are in the beef market.

Beef has -- the animal itself has been declining in price.

Middle meats continue to be strong.

We haven't seen that much decline in the overall cost of the middle meats, which are your strips, your tenderloins, your short lines and such.

We have seen some weakness in ground beef, which is really good for the hamburger players.

We do expect there to be some tailwinds.

We do expect to be able to purchase beef in a deflationary environment for the next couple of years as the herds continue to build and the cycle starts to change.

I don't believe that beef is going back to levels it was at 10 or 15 years.

I do believe it's coming down year-over-year, but beef is still going to be a very expensive commodity in comparison to the other options.

Now, does some of this beef get back into retail?

Maybe.

But I'm not sure.

I still believe that a steak house -- people come to a steakhouse because a steakhouse has the capability of preparing a steak in a way that they [can't] at home.

And they're much more comfortable making that purchase, that more expensive purchase, and trusting that experience to professionals who cook steaks every single day.

So will there be a little bit more pressure from retail if this pulls back?

Yes.

However, I see this as a positive tailwind for primarily Longhorn and, therefore, a tailwind for Darden.

Jason West, Credit Suisse.

Gene, you had mentioned that you guys saw some choppiness during the quarter at Olive Garden as you were sounded like testing some different levels of TV advertising.

Can you talk about what was going on there and what you learned from that?

And was it a material change in the TV weeks during the quarter and how do you think about that going forward?

A couple of things at play here.

First of all, never-ending pasta bowl started a couple weeks later on a calendar basis than it did at the prior year.

We didn't heavy up as much on the TRPs on the front end to see what would happen if we took a promotion that everybody really knew and understands and we didn't load it up with TRPs.

What we learned in that is that the TRPs still matter and kicking off a promotion with a little extra heavy weight does get things going a little bit quicker.

So we were trying to go in with a more balanced approach and a few less TRPs and try to switch some of that into digital.

Digital -- throughout the quarter, our digital efforts were much more targeted.

One of the things that we're trying to do is we're trying to get into the shorter redemption periods to understand how quickly we can get a message out there and get a consumer to act.

The consumer dynamic's changing dramatically in how they use an incentive to come into the restaurant.

It's getting to the point where if it has any age on it at all, it's forgotten.

And so what you're seeing us try to do it and understand is if we put a message out for a couple of days and we talk to a guest and we know this guest likes this offer, what's the likelihood of them utilizing that offer?

And we continue to learn.

When we talk about data and insights, that's where we are really creating some great capabilities.

That's really helpful.

And then one other.

You guys had mentioned that you tried out some bar remodels that were pretty minimal expense, but had a nice lift -- I guess 1% lift on comps.

Is that something you think you could move quickly on going forward and maybe would do separate from the full remodel program or is it something that would be sort of a one-off here-and-there situation?

Great question, Jason.

That's something we believe we can continue to do.

We're not doing anything in these bar remodels that we'd have to undo when we would go in and do more of a full refresh in the restaurant.

So it's just we have some restaurants out there where that center dining area in the bar is just not very comfortable.

And the team can get in there for a minimal amount of money, make it much more comfortable to have a meal.

And it all of a sudden becomes very productive on the high-volume nights.

And so Dave and the team are going to continue to do some more of that here as we move into 2017.

And, again, I will give you much more guidance on that in June.

Great.

Thanks a lot.

Thank you.

Diane Geissler, CLSA.

I wanted to ask a follow-up on the remodels and it's really from the perspective of capital allocations.

So it sounds like you're planning to open more new units, increase your dividend, increase your share repost.

So where does the investment behind remodeling fit within the overall capital plan?

And maybe you could just frame it up a little bit in terms of your -- how the costs -- I know you have different packages that you can utilize in different store bases, but how should we be thinking about the range of potential spend on a per- unit basis?

I will start with the range on a per-unit basis.

It's anywhere between [$250 and $450], depending on the size and the age of the unit.

And then also has a little bit to do with once we start opening up walls and moving things around, what we might find in some of these 20, 30-year-old restaurants.

As we think about this in our capital plan, we've got it on our slide in the deck.

We've got [$145 to $170] designed this year for our refresh in our maintenance cap.

We believe we have ample capital to be able to both increase new units slightly and continue to reinvest in Olive Garden over the next 2 to 3 years.

And we will give you some more details in June on the exact capital expenses for FY17.

Peter Saleh, BTIG.

I wanted to circle back on the tablets.

A couple of things.

Are you seeing any throughput benefit from the tablets at some of the higher volume locations on Friday and Saturday night?

Good question.

We're seeing, Peter, 6- to 7-minute decline in the overall table turn.

So something that was a minute-seven, now is down -- one hour and seven minutes is now down to an hour.

So we're picking up seven minutes.

Primarily that savings comes primarily on the back end.

However, as the consumer becomes more comfortable with it, we will pick up some time in the front end too.

Excellent.

Are the implementation of the tablet, is that helping to drive any of the cost savings that you're forecasting either later this year or into 2017?

No.

No, it's a service enhancement.

We're trying to improve the quality experience.

Excellent.

Thank you very much.

Andrew Strelzik, BMO Capital Markets.

We've seen on a two-year basis the Longhorn traffic decelerate a little here and you've already been asked about a step-up in promotional activity and the value equation at steakhouses, lower beef prices.

It doesn't sound like you think those components are really playing a role.

So what would you attribute that to or do you think it's kind of much ado about nothing?

I think we've backed off a little bit on our lower price point promotions.

We're trying to back off the $11.99 top sirloin -- 6-ounce top sirloin promotional activity.

Some of that activity wasn't as profitable as we probably would've liked.

So I think it's -- there's some slight pressure there, but nothing to be concerned about.

I think you are seeing that in the margin improvement too as we back off some of that stuff.

Steve Anderson, Maxim Group.

I wanted to ask about any kind of recent discrepancies you saw in your data?

And I wanted to also point out, I guess the -- what you saw in the increase at Capital Grille.

Probably less than maybe some of us were looking at.

And I just wanted to see if you saw any broader trends in the higher end steakhouse category that points to a deceleration in business trends?

Good question.

We are seeing some weakness in Texas in both Capital Grille and Eddie V's, as some of our other competitors have noted.

In Cap Grille, we've had a couple of big restaurants that have had some significant competitive intrusion.

We've also had some other one-time events that were significant in the quarter that won't happen again that affected same-restaurant sales for Capital Grille.

These brands are well-positioned.

They are executing at extremely high level and I'm confident that they will continue to take market share in the future.

Todd Duvick, Wells Fargo.

Quick question for you on the balance sheet.

You've been very busy there and have done a really nice job of taking down the debt.

You do have two bonds outstanding with relatively high coupon still.

I'm just wondering are you considering liability management for that to potentially reduce your coupon?

Is that something that you're looking at?

No.

Not at this time, we are not looking at doing anything additional to what we have already done.

Related to that, with the share buyback program that was announced today, you do have an elevated cash balance as of the most recent quarter.

Can you tell us -- and I think some of that was probably used to take down some of the debt, is there a minimum cash balance that you like to run with to keep on hand for working capital purposes?

As you mentioned, yes.

At quarter end, we had an elevated cash balance.

And as I had mentioned, we had actually shortly after the quarter, paid down approximately $740 million of additional debt.

As it relates to minimum cash balance, we do take that into account as we think about running the business and that's in a range of approximately $100 million.

That's helpful.

Thank you.

Joshua Long, Piper Jaffray.

I appreciate all the color on a lot of the restaurant-level initiatives that have been going on.

A lot to get excited about there, but I was curious if we could take a step back and talk about the opportunity for your branded products at the grocery level in the CPG category?

Maybe perhaps an update there or at least a recap in the opportunity to expand that into new products and new SKUs going forward.

Josh, we have a small presence in the CPG market, primarily Olive Garden salad dressing.

It's a strong performer and does very well.

At this time, we are not pursuing any other alternatives or options with CPG.

(Operator Instructions)

Any more questions, Gabby?

There are no questions at this time.

Thank you, everyone, for your participation in Darden's second-quarter earnings conference call this morning.

I want to remind you that we expect to release our third-quarter results on Tuesday, April 5, before the market opens with a conference call to follow.

Thanks again and happy holidays.

Thank you.

That concludes today's conference call.

Thank you all for joining.

You may now disconnect.