Brinker International Inc (EAT) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Brinker International's second quarter fiscal year 2003 earnings conference call. At this time, all participants have been placed on a listen-only mode and we will open the floor for your questions and comments following the presentation.

It is now my pleasure to turn the floor over to your host, Mr. Jeremy Wilson (ph), director of investor relations for Brinker.

Mr. Wilson, please begin, sir.

Good morning, and welcome to our second-quarter earnings conference call. During our opening remarks and in our responses to your questions, certain items may be discussed which are not based entirely on historical facts. Any such items should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ from those anticipated. Such risks and uncertainties include business and economic conditions, the impact of competition, adverse weather conditions, future commodity prices, the seasonality of the company's business, fuel and utility costs, governmental regulations, inflation, consumers' perception of food safety, changes in consumer tastes, changes in demographic trends, availability of employees, terrorist acts and other acts of God, and favorable publicity, the company's ability to meet its growth plans and other factors more completely described in the company's filings with the SEC.

Now, with me today are Ron McDougall, chairman of the board and chief executive officer; Doug Brooks, president and chief operating officer; Chuck Sonsteby, EVP and chief financial officer; and Starlette Johnson, EVP and chief strategic officer.

And with that, let me turn it over to Chuck.

Thanks, Jeremy. Well, good morning and thanks for joining us today.

Our second quarter began with a great deal of uncertainty. Concerns about economic growth and global unrest cast a shadow on forecasts for consumer spending. In addition, a shortened Christmas shopping season and weakening consumer confidence made a gloomy outlook for most businesses. When reviewed in that light, our second-quarter performance is even more impressive. Excluding the asset base charges, net income was up 44 cents per diluted share, an increase of almost 26%. Lifestyles now revolve around dining out. It's a necessity. Our guests don't have the time, desire, and for some the know-how to cook at home. The casual dining industry and Brinker concepts continue to benefit from broad consumer trends, but those trends aren't enough. We know it takes hard work, consistent execution, and focus on the guests to be successful.

Let's take a closer look at the second-quarter results. Chili's posted a 4.1% comp sales increase driven by strong traffic during the second quarter. With the highest average annual sales in the grill and bar segment at almost $3 million, that's quite a feat. The successful introduction of our fajita trio entree and the marketing of the triple play appetizer gave our guests a reason to come to Chili's. And contrary to common logic, yet consistent with prior quarters, mix remained positive. This quarter marked the 23rd consecutive quarter of positive same-store sales at Chili's, an impressive record. The team opened 17 new company-owned restaurants during the quarter, 12 typical size prototype 10s, and five small-town prototype 12s.

Fiscal year-to-date, Chili's has opened ten more restaurants, 35 versus 25 during the same time last year. Our development team continues to deliver on already lofty goals. While Chili's is the largest brand in the portfolio, they aren't resting on their laurels or showing signs of aging. Todd Deaner (ph) and his entire team remain focused on improving guest satisfaction and the overall guest experience. Macaroni Grill posted second-quarter comp sales that were well above the last few quarters, but still slightly negative with sales off .6% and traffic down .5%. Mix remains down as a side effect of the conscious effort to broaden the number of Macaroni Grill occasions.

We've also experienced some changes in advertising. In order to fund Macaroni Grill's national cable advertising test which began late in the first quarter and which lasted into October, we had to rebalance the advertising schedule. This resulted in virtually no advertising for - in November this year versus the normal local ad campaign conducted last year. The residual impact from national cable advertising provided the boost to comp sales that lasted well through November. These results gave us confidence in our basic theory -- increased awareness translates to higher sales performance and ultimately better financial performance. As a result, national advertising is definitely part of Mac's strategy. In the short term we will continue a national cable advertising program. Our ultimate goal is to be a national network advertiser, which we'll achieve over the next couple of years. The missing ingredient is more restaurants to pay for the advertising.

It's not just about building restaurants, but building profitable restaurants. John Miller (ph) and his team have put in place an organization to increase the number of restaurant openings, and it's paying off. This quarter, Mac opened nine new company-owned restaurants, a record. In addition, our fiscal year openings will be 20 to 22 versus our previous forecast of 18 to 22. These new openings continue to produce higher sales volumes with lower square footage and investment costs.

We also announced the signing of our first U.S. franchise agreement. Waterloo Restaurants will develop the Macaroni Grill brand in the Pacific Northwest. The agreement takes a great brand to a new territory and helps gain media efficiency a little faster. Our Mac Grill remodel test continues to produce favorable results. We will evaluate consumer response and financial returns over the next few months. Macaroni Grill provides an award-winning high-quality guest experience. The hospitality and experience of Macaroni Grill has never changed. We're just inviting more people to the party.

On the Border had a negative 2.4% comp for the second quarter. On the Border has consistently outperformed the casual Mexican sector. However, the team has been working to improve sales performance by focusing on ambience, food, and service. Changing the look at existing restaurants has been the primary development objective for the OTB team. We completed the reimaging of another 19 restaurants during the quarter, bringing the total number of remodels to 49. Maggiano's has rapidly become another powerful brand in the Brinker stable, posting strong quarterly comp sales gains of 1.5% -- quite an accomplishment when you consider the headwind they faced this holiday season. The shorter time between Thanksgiving and Christmas took away several days of banquet opportunities.

The team opened three new restaurants during the second quarter in Minneapolis, Denver, and Dallas, and that's also a record. Those three restaurants are anticipated to boost annual revenues by more than $25 million. The success in second-tier markets, Tampa, Boca Raton, and Raleigh has been widely discussed. However, the performance of additional openings in Philadelphia, Southern California, Atlanta, Denver, and Dallas shows Maggiano's can successfully open multiple restaurants in markets outside Chicago. The ability to be a double threat, success in small markets and the ability to open in multiple locations in large markets demonstrates a bright future for our newest core brand. The brand has succeeded by taking exceptional care of the guests and the employees.

For the third consecutive year, Maggiano's was recognized at the People's Report Annual Conference for having the best retention and management diversity for concepts in their category. Corner Bakery was awarded the same honor for concepts with average annual volumes of less than $2 million and an average check of less than $10. Congratulations to both these brands. Corner Bakery has been building new restaurants utilizing a different delivery style where guests place an order at a register and food is delivered to their table. In addition, we've had three remodeled locations in place for almost a year. In our experience in both new restaurants and remodels has shown the new delivery style is the right thing for the brand. It offers a guest experience that is superior to the old cafeteria style line and improves financial performance.

And based on these findings, we formulated a plan to retrofit virtually all prototype one bakeries. All Dallas restaurants will be remodeled in the next four months and we will retrofit the other markets thereafter. The decision of focus on the new prototype, however, comes at a price. The $2.8 million after-tax impairment charge relates to the trademarks, trade names, and recipes associated with Pizzuh (ph), a mall-based pizza outlet which was being run by the Corner Bakery team. Two factors led us to taking an impairment charge for Pizzuh. First, in order to focus on the Corner Bakery brand, we will be disposing of our interest in the Pizzuh concept. Second, the new format Corner Bakery will not use utilize the recipes and systems from Pizzuh, therefore the related tangibles would have no significant ongoing value.

Big Bowl opened two new restaurants in existing markets during the quarter in Littleton, Colorado, and Sterling, Virginia, as we continue to build toward market efficiencies. Development plans are on track for four to five more openings this fiscal year. And Rockfish opened its second restaurant outside Texas in desert rich, Arizona, its 16th. Development plans are coming more into focus for the fiscal year. We're increasing our range from 102 to115 company-owned restaurants to 108 to 118 restaurants. Real estate availability, willing contractors, have allowed us to increase the pace of openings and also decrease the cost of our new locations.

Let's review the income statement for the quarter. Total revenues grew15.9% and capacity growth as measured in sales weeks was 13.7% as we operated 115 additional company-owned restaurants versus last year. And as a side note, this is the last quarter where comparability was impacted by the Sidron (ph) acquisition and that will make life a lot easier. The momentum in sales which began in September continued to build in the second quarter. Brinker comparable store sales increased 2.1% for the second quarter, the best gain we've seen in six quarters. December also marked our third year to offer our unique multi-concept gift cards, which can be used at any of our locations. Despite a shortened shopping season, sales of cards increased almost 30%, almost twice the growth rate of restaurants. Of course, we recognize the sales when the cards are redeemed, not sold.

The cost of sales remained lower year over year, coming in at 27.4% of sales or approximately 40 basis points better than last year's second quarter. The decrease was driven primarily by favorable commodity prices on ribs, dairy, and cheese. Our purchasing department has done a great job locking in those lower costs to ensure favorable comparisons. Restaurant expenses were up only 10 basis points to 55.1% of sales after adjusting for the charges. We wrote down impaired assets for Pizzuh and a Corner Bakery location in addition to the costs for nine closed locations. Including in those charges, restaurant expenses were 56.3% of sales, 130 basis points higher than Q2 last year. Opening large numbers of restaurants has a revenue benefit. However, it can make leverage in the restaurant expense line more difficult. For example, as a direct result of opening 12 more company-owned restaurants during the quarter versus last year, total pre-opening expenses increased $2.2 million, or 30 basis points.

The large number of openings also added to our labor costs. New restaurants are more inefficient when they first open. However, a slower economy has resulted in lower wage rate increases, about 1.5% to 2%, and that's the lowest we've seen in some time. The net result was we were able to keep labor costs flat as a percentage of sales. Our businesses face the same type of pressures as other industries. Health insurance premiums continue to increase at about 20% per year. During the quarter, restaurant expenses were up 10 basis points to adjusted health insurance. Depreciation and amortization expense was 4.9%, 50 basis points higher than last year's second quarter due to the addition of 115 more restaurants. General administrative costs came in at 4%, a 50-basis point decrease from last year. And as I mentioned last quarter, each department head was urged to find ways to decrease nonessential spending and the team responded.

Operating income improved to 8.6% compared to 8.3% for last year's second quarter, a strong performance. Interest expense was $2.5 million this quarter due to low interest rates and higher seasonal cash balances from gift card sales. Other net was a $760,000 expense for the second quarter. And the tax rate decreased to 33.3% from 33.6% in the first quarter. During the quarter we repurchased 615,000 shares for approximately $17 million. At the end of the quarter, approximately $41 million remained in the current repurchase authorization. Net income increased to 5.5% of revenue versus 5.1% last year, a big improvement in margins and flow-through. Our earnings per share of 44 cents was a 25.7% increase over last year.

And now our outlook for the third quarter. Top-line revenue is anticipated to grow at around 12% and will continue to be driven mostly by capacity gains. As I mentioned earlier, we've now lapped all the acquisitions. Our organic growth rate will now be around 8% to 10% and consist of new restaurant openings. We plan on opening 25 company and nine franchise restaurants in the third quarter. Our same-store sales forecast for the coming quarter gets raised slightly to 1% to 2% due to the strong performance at Chili's. And remember, as always, there are external events that impact sales. First, the Super Bowl, a slow sale day for casual dining, moves from February last year back into January this year resulting in a negative impact to period seven and a positive impact to period eight, and this has no effect on the quarter. Second, Valentine's Day fell on a Thursday last year, it falls on Friday this year, which is normally a strong day of the week, resulting in a negative impact of February but minimal distortion for the quarter.

Cost of sales continued to provide a positive comparison to the previous year and the commodity contracts already in place give us good visibility for the balance of the fiscal year. Price outlooks report, poultry and dairy indicate they remained lower year over year so cost of sales should continue the same favorable trends in the third quarter. Restaurant expenses should be flattish year over year as a percent of sales despite the manageable pressures from the inefficiencies of new restaurants and health insurance costs. Depreciation and amortization on a dollar basis will be up sequentially due to new restaurant openings. We anticipate general and administrative expenses to be 10 to 20 basis points higher than last year due to additional headcount and higher health insurance costs. Interest expense will increase sequentially. It should be flat to last year's third quarter on a dollar basis. Other nets should be up approximately $1 million in expense and the tax rate will be 33.3% for the balance of the year.

Share repurchase continues to be an effective way for us to use excess cash to deliver value to our shareholders. Due to the strong performance of the stock, the share account will increase sequentially but still be down year over year. Based on these assumptions, we anticipate third-quarter earnings per share to be 46 to 47 cents, and anticipate fiscal 2003 to be around $1.88 to $1.92 per share. Well, today we discussed a number of reasons for optimism. Chili's continues its strong performance. The consumer is responding favorably to Mac Grill due to both media and a higher approachability factor. And Maggiano's success in both large and small markets shows the strength of that brand. While we can't control all the external forces that impact our business, we know lifestyles don't change overnight. The basic tenants of casual dining still ring true, concepts to provide a consistently great guest experience combined with a high price value increase our chances for success in today's world.

Therefore, as we enter into another quarter, we acknowledge the uncertainty in consumer spending but remain confident in our business.

And, John, we're ready for questions.

Thank you, sir. And, ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press the numbers one followed by four on your touchtone telephone at this time. Pressing one four a second time will remove you from the question queue should your question be answered. And lastly, we do ask that while posing your question that you please pick up your handset if listening on speaker phone for optimum sound quality. Please hold one moment while we poll for questions. Thank you.

And your first question is coming from Joe Buckley of Bear Stearns. Sir, your line is now live.

Okay, thank you. Just had a couple of questions. First, the Macaroni Grill, you mentioned plans to resume the national cable advertising. Just kind of curious on the timing of that. And then I guess also at Mac Grill, you expressed some satisfaction with the remodeled markets. Wondering if you could be a little more explicit and maybe talk about any additional plans for more remodels?

Starlette, you want to talk a little bit about cable advertising?

Sure. Hi, Joe. We right now are looking at the last two weeks here of January of going back into national cable with Macaroni Grill and then throughout the rest of the year we're looking at approximately about another ten weeks also on national cable.

Ten weeks through the balance of your fiscal year?

Yes, the balance of fiscal year.

Okay.

Doug, you want to talk about remodels a little bit?

Sure. Joe, on the Macaroni Grills we've done six of those remodels that we keep talking about, and I think one of the things that gets us excited about the elements of the remodel, most of those interior elements are the same ones that are also in the new prototype nines and prototype tens - more booth seating, kind of a warmer ambience and a lot of those treatments we've spoken of. But we've done it in three different markets and we're basically showing some mid to high single digit increases versus control group restaurants in the same markets. In fact, traffic's running about 200 additional customers per week in those locations. So we're going to continue to sit back and watch the remodels as well as watch the opening sales in the proto nines and tens, which as we said in previous calls have been above system average.

Okay. Thank you.

Thanks, Joe.

Thank you. And your next question is coming from Andy Barish of Banc of America. Sir, your line is now live.

Hey, guys. Continuing on the remodel side of things on OTB, I know that's been taken out of the Dallas market in terms of the remodels. Do you have enough data yet to give us a sense of how those are looking in terms of returns or sales increases, or at least maybe relative to what you saw in the Dallas blitz?

Andy, we really don't yet. We're confident about the look, because again, just like at Macaroni Grill, a lot of the things we're doing in the remodels are things that we're putting in the new prototype buildings. Trying to create a little bit more contemporary Mexican dining experience. But in the new markets we have seen some increase in traffic, but in those same new markets you have less Mexican trials versus the competition. So we don't see any measurable change in On the Border sales in the next -- rest of this fiscal year. We're going to sit back, continue the remodels. We still see when you look across the fact that there's not a single strong casual Mexican competitor, we still see that as an advantage down the road and we're going to continue to keep the strategy on plan.

And have some of those new OTB openings been stronger than system average?

Yes, some of those -- we've only opened four this year. Again, as we mentioned in Chuck's notes, most of our strategy this year is based on the existing restaurants and remodeling those, not necessarily opening new locations.

Thanks.

Thank you. And your next question is coming from Coralie Witter of Goldman Sachs. Mam, your line is now live.

Hi. With the Corner Bakery brand, it seems like you're reaching a point of much greater confidence in its future. Over what time period can we expect the remainder of those bakeries to be remodeled? And what's the impact to cap-ex and at what point can we expect you to accelerate new unit growth there?

Well, each one is a different layout, so it takes a little bit of time to get the designs put in place. We anticipate it being about $50,000 per location, so in terms of total dollars, it's not a huge amount, not enough to really throw cap-ex way off the mark. We'll have - as I said we'll have Dallas done in the next four months and then we'll be continuing to draft plans to see how long it will take us to do Chicago, Atlanta, D.C., and Southern California. Did that answer it, Coralie?

Yes, it did. I'm also -- at what point will you feel comfortable expanding new prototypes?

Accelerating development?

Right.

We're still not ready to push the button on that. I think we feel very good about the sites we've got in the pipeline. We do have increased openings planned for later in fiscal year 2004, but we're getting there.

Okay. Thank you.

And thank you. Your next question is coming from John Glass (ph) of CIBC Oppenheimer. Sir, please pose your question.

Thanks. Good morning. Can you talk about the advertising efficiency at Chili's now. I know you're national, but is there an opportunity to use incrementally more network TV than you do right now? In other words, is there some inflection point coming up for step function in that brand? And then secondly, just sort of a knit on the guidance. You did beat by 2cents versus your original range, and you only took your guidance up by a penny. Other than the prudence and the consumer environment, is there anything we should be aware of in the cost environment, or something specific to the business in the second half of the year that we should note? Thanks.

On the guidance first, no, not really. I think, again, with all the uncertainties that are out there, we're reluctant to get too far out ahead. I wouldn't put too much into that, you know, 1 cent versus 2 cents kind of guidance out for the fiscal year. In terms of Chili's, their advertising efficiency has been moving more towards national network and away from local. We're trying to get more and more restaurants and markets into what we call tier one, which gets the absolute balance, best balance of both national media and local advertising. So they have been allocating more dollars to national media and less away from just local spots.

And does that step function at any point in the near future? Is there an inflection point, or is it just a continuum?

It's a continuum.

Thank you.

Thanks, John.

Thank you. And your next question is coming from James Morgan (ph) of Wachovia Securities. Sir, please go ahead with your question.

Thank you. I was wondering if you could elaborate a little bit on your - on the commodity outlook and the extent of your contracting, please?

Okay. And really again, commodities looked pretty good all the way around. We locked up prices for several different commodities. I know seafood's contracted through Q1 of fiscal year 2004 with price outlook really flat to slightly favorable. Beef and pork we've got locked -- fajitas until December of '03. Other beef is going to be slightly unfavorable, we think. Baby back ribs are favorable and they're locked to January '04. Tenderloins look to be up slightly. Poultry we've got prices locked in for quite some time. And then dairy, wheat, and flour and produce we have contracts that are locked in at various points, but again, the outlook for all of those look pretty good.

Okay. Sounds good. How about your advertising and promotional strategy for Chili's going forward? It seems like that you're really focused on the baby back rib spots right now. What's -- is that going to be status quo, or what's the outlook there?

I think for Chili's we always look to emphasize the things that we're famous for, and things that are consumer favorites, and baby back ribs certainly lead the list. If you look at how that's become an icon and representative of that brand over the last few years, you'll see that it makes a lot of sense to go ahead and back that.

Yes. I think we also try to within the famous and favorites also try to drive sales of new products. And if you look back at what happened in November and December, we had steak sales with our new flame broiled rib eye. In fact, all around the Christmas time we were selling up to 35 steaks a day. So again, this is a concept that five years ago a customer didn't see as a place to have a steak. The fajita trio as well, which we advertised early in the second quarter, we've expanded the use of shrimp. But -- and also expanded the fajita as a category. So we're going to keep pushing the button of the famous and favorites, but also try to expand the way the consumer sees them in your Chili's.

Okay. Good. And then on Macaroni Grill, what kind of returns are you seeing at the unit level on the new units reopening?

On the New Year's -- higher than system average. We see sales in at least 10% to 15% better average annual volumes with lower investment costs, which translates to a higher return in the 20% to 25% range.

Twenty, 25% cash on cash return?

No better than what the annual returns have been.

Which are 20% to 25%?

Right now, yes. And that would be a return of invested capital, not cash on cash.

Okay. All right. Thanks very much.

Thank you. And your next question is coming from Janice Meyer of Credit Suisse First Boston. Mam, please go ahead.

Hi. Thank you. You said in the beginning that Chili's isn't resting on its laurels. Can you give some examples without obviously being too specific as to what you mean by that? What you're doing? And is the -- for the last few years, you've certainly, you know, put new items on the menu and have done things at Chili's. Is the pace of that accelerating over the next few years?

Well, Janice, I don't think we're going to change the strategy we've had. We've always had a couple menu (inaudible) a year. We've had great success in evolving the menu. Probably the biggest thing we've done is add some very talented people. Last summer, we added four new chefs, a couple from some pretty strong competitors of ours, and they brought some great new ideas. Recently, we added some new salads. The fajita trio I mentioned a few minutes ago. And in fact, we have a number of new items that are getting ready to go out into some test restaurants across the system, so we don't like to disclose specific items. We're just going to keep adding as good a new stuff as we can find and build on the success, but we have hired some very talented new culinary folks that we're already seeing in test restaurants and neat items.

So the changes really center on the new items as opposed to upgrading existing items or doing some other things with the menu or the service?

It's really both. And we've talked, Janice, also about this KDS system that has helped organize the food coming out of the kitchen. It's particularly helped with the increase in to-go business, making sure that the hot food comes out hot and the cold food comes out cold, and using technology to help the execution of these new items. So I mean, we've always tried to improve existing items and add new items and we'll let the customer continue to kind of take us-if we can start selling steaks and shrimp, it opens up bigger horizons for Chili's. But we do have some neat items, can't talk about specifics today, but a couple rollouts this year, you'll see some neat new items.

Okay. Thank you.

Thanks, Janice.

Thank you. And the next question is coming from Jonathan Waite (ph) of McDonald Investments. Sir, please go ahead.

Yes, good morning. I had a question on the non-recurring charge here. I think you had $9.5 million pretax. Outside of the pizza charge that you had, what else is involved there? What restaurants were closed? Where were they?

Well, we closed -- we haven't closed every restaurant that's on that list. But it covers a million-dollar impairment charge on one Corner Bakery we had and then nine restaurants which have either closed or will be closed or upcoming to be closed. The breakdown really is there are a couple Macaroni Grills, four Chili's, an OTB, a Cozy's and a Pizzuh, and some of those had reached the end of their lease life and were in trade areas that had declined or were otherwise not where we wanted to have the restaurant locations. So some of those were a little bit more normal in their ordinary lifecycle, but we accelerated a couple openings to be in this quarter along with that trademark impairment.

Okay. And any more that you foresee in the future?

We kind of went through and gave the concepts and opportunity to accelerate some closings, as I said. But for us, you know, changing restaurants and -- it's just a normal part of our philosophy.

Okay. And then in the prior year, did you have any closing or impairment charges?

We had three or four restaurants that we closed last year.

And how much was that on a pretax basis?

Really don't have that number available right away.

Okay. And on the Mac grill, the new prototype nines and tens, what are the average weekly sales running on those?

Pardon?

I'm sorry. Go ahead.

Nines and tens are about 10% to 15% above system average.

Okay. And then just one last question. I know that in the last year, your fourth quarter of '02,you had some bonus accruals that caused G&A to be up to about 4.3%, a little higher than we had been expecting. Wondering if as you look into your financial crystal ball here and assume maybe a 1% to 2% comp and maybe flat restaurant margins, what -- are we going to see a similar kind of accrual in the fourth quarter?

I would say we're probably a little bit more on track. I think as we look at the Q3 we would expect to go up 10 or 20 basis points. Part of that is for some better fuels for profit sharing.

Okay. All right. Thank you.

And thank you. Your next question is coming from Howard Penney of SunTrust. Sir, please go ahead.

Hi, thanks very much. About a year ago in your analysts meeting down in Dallas, I walked away anyway thinking the company was in a fairly defensive mode having to defend your concepts. It appears that the momentum has shifted and you're more aggressive, and the trends are more in your favor. What do you think has happened competitively in the past year to allow the Brinker momentum across the board to pick up? And if you could be more specific as to maybe Macaroni Grill, talk about Chili's but also Macaroni Grill. Also, it appears that your sales of Macaroni Grill have picked up at the time one of the chief competitors' sales have slowed a little bit. And also OTB seems to be in perpetual turnaround. I know this is kind of a rhetorical question, but if the category doesn't deserve investment, why do you need to be deleting chain in a category that probably doesn't deserve to be invested?

Okay. Let me see if I can divide out the questions. Doug, you want to talk a little bit about any of those?

Sure. Howard, I guess, you know, it's easy to sit here and look back over almost 28 years at this company and - you know, the last 15 with a multi-concept portfolio. And there is this evolution that's sort of a -- it's a morphing of the marketplace, our brands, the consumer, demographics, everything, and I guess if you felt there was something different happening now than there was a year ago, maybe some of the initiatives, and our brands are stating to kick in. And, you know, I can maybe speak to Mac grill - you know, we're trying to do some things with the menu, trying to do some things with the feel of the building and -- for instance, 50%of the menu items currently sold weren't on the menu four years ago. Part of that is adding some more American favorites, some of the red sauce dishes.

At the same time, our features are up 20%. If you've seen the new menu that rolled out in January, we we've got some great food photography and so we think we're -- the strategy is working. We're expanding the use of Mac grill for more people, but we're still holding on to that great chef-driven food culture and reputation we've always had. So I think it changes as the market changes, but we are excited about a lot of things going on in the brands.

And On the Border, that rhetorical question that it's always in a constant turnaround, we're still disappointed in the actual results, and the only reason to do it is not because there's not another competitor -- the returns are still above our cost of capital and we are internally very excited about a lot of the things going on. But the customer hadn't had a chance to see some of that stuff. The remodels aren't finished. And when -- at some point in time if those things don't kick in they're going to look at it differently. But today we're still excited about the brand, and luckily, Chili's and Macaroni Grill and Maggiano's are performing quite well, while we're still tweaking with On the Border.

And if I could add to that, Howard, I think also when you look across the environment and landscape and there's still a trend towards more flavorful food profiles, and that plays so well in the Mexican segment. It is a segment that is still a little difficult to get our arms around, but certainly the food that is offered, there is a demand for it out there. We just need to, I think, focus on it a little bit more and try to break through and gain that number one status. I think also if you look at where we were last February and where we are today, internally, there's been a lot of success with all of the initiatives that we did layout last year, and we've been real focused on doing what we said we were going to do, and in terms of what our competitors have been doing, that's a different -- their story. But we feel real good about what we've been doing over the last year.

Did we get them all, Howard?

Yes, you did. Thank you.

Thanks, Howard.

Thank you. Your next question is coming from John Ivankoe of J.P. Morgan. Sir, please go ahead.

Hi. We haven't heard much about Big Bowl. Could you just give us kind of a state of that concept in terms of menu, pricing, development, locations, how you feel about the brand today and what you'll do with it in the future? Thanks.

Well, Big Bowl has been spending a lot of time this year opening up in a couple of new markets, and the team has been focused on getting the right combination of look and feel to the menu, the investment, the logo, and they're working on the price points. They've tested quite a few things. And we're still real confident in that brand and our ability to expand it nationally, but we aren't going to rush the pace of development, going to do it in a very disciplined approach, and we've learned a whole lot over the last two years on that brand. So, in the process now of applying it. We've got seven to eight openings this year and can look forward to continuing the growth of that brand. We learned a lot about it.

What have been the real sticking points to its perhaps greater success than it's already realized? I mean, in other words why isn't this a concept at this stage in your ownership of the brand to be ready for more rapid development as you see it?

Well, I think it's growing at a pace that we feel real comfortable with and confident in, and again, keeping it at a very disciplined growth rate. As you go through a small brand, the learnings and the changes that you need to make, you don't want to do that too fast. So we feel good about the pace we've been on with them at this point and it is still about a 50% growth rate over what it has been. So I don't know that there was any major fundamental flaw or change that needed to be made to the brand. We just had to pull all the pieces together from our position and perspective.

Okay. Thank you.

Thank you. And the next question is coming from Mitchell Speiser of Lehman Brothers. Sir, please go ahead.

Thank you. Various questions. First on Chili's, can you give us a sense of where takeout sales are as a percent of the mix, and if takeout was above the overall comp for Chili's. And maybe if you can comment on the Macaroni Grill and I think On the Border has takeout as well. And just secondly on the smaller stores of Chili's, just wondering if, you know, this smaller town focus is it working within expectations? Do you expect over the next couple of years that smaller town unit growth will accelerate versus traditional store unit growth? Thank you.

Sure, Mitch. This is Doug. As far as to-go, again, the Chili's pretty much have all been remodeled and all new ones open that way, and it's almost 9% of sales versus about 7 1/2 a year ago. The Macaroni Grill, they basically have all been remodeled as well with the curb-side delivery, and it's grown now to over 6% of sales versus about 4.5 a year ago. On the Border, the to-go piece is part of those remodels that we've been talking about earlier in the call. It's only about 35% of the On the Borders currently have the to-go, and it's about -- a little over 4% of sales and it was a little -- slightly less than 3 a year ago, so that's growing as the remodels grow.

As far as the smaller Chili's proto 12s, the results continue to give us reason to believe that we can have success in the small towns, and I think we mentioned before we see this as a good potential franchise vehicle as well. So, nothing has changed in regards to the growth there.

Right now we're planning on about 25% of (inaudible) growth (inaudible) proto 12. Did we get it, Mitch? Anything else?

That's all. Thanks.

Okay. Thanks.

And thank you. Your next question is coming from Matt DiFrisco of Gerard Klauer. Sir, please go ahead.

Hi. Just a couple of questions on Corner Bakery. Can you give us an update on year-end '03, how many you expect to open and then also your '04 plan currently? And then also just a little bit of comparison, similar to what you gave us on the numbers for Mac Grill and the remodel there. With respect to Corner Bakery, what are you seeing on the sales volumes with the new delivery system versus the average? And then lastly, is there --besides a $55,000 in cap-ex that looks like needs to be done for the remodeling, is there anything fundamentally different or meaningfully different to the way the store operates, i.e., more labor, anything different with the counter or something that might effect the margin side of it?

Well, Matt, the benefit has been we've seen much better margins. We haven't necessarily seen higher sales for this new delivery style. We think it's better for the guests. But the system average for sales for Corner Bakery have been high. I mean, they've been pretty much equal to what others in that segment have done. But the way that the line set up is, it's much more different. Food gets cooked fresh so there's not the display that you see at the Corner Bakery currently. There's not as much waste. We don't have to go through the line a couple times a day and remove sandwiches and throw those away. So cost of sales is actually lower. Labor is better, because we don't have to staff all those stations both with high-quality employees who interact with the guests. We can use more back of house type labor that we use in casual dining currently. So we found margins to be 2% to 3% better on these proto threes than we've seen in proto one. So it's really more of a margin initiative than it is a sales building initiative. We think it's better for the guests, but haven't necessarily noticed a big improvement in guest counts on the remodeled stores.

Can you give us -

And that cost would be closer to $50,000, not $55,000 per location for remodel.

Okay. And can you give us just an absolute AUV since that is sort of -- that category is pretty wide ranging. I mean, you got Panera (ph) up around $2 million in AUV.

Right now we're doing a Corner Bakery right around $1.7 million per location and that varies. I mean, if you look at -- the ones that are full size will be a little closer to $1.8. Some of the kiosks in smaller locations they do keep that average down. But right now it's currently just over $1.7 million.

And the new store development question on '03 and '04, what your plans are?

Well, we haven't disclosed the '04 numbers yet, but we'll do 10-12 this year.

Okay. Great. Thank you.

And thank you. The next question is coming from Hil Davis of Thomas Weisel Partners. Mr. Davis, please go ahead.

Hi. I was just curious, when you kind of look at the Mexican landscape and you talked about an opening there, I was wondering how you looked at competitors like Baja Fresh (ph), Cadova (ph) and DePalte (ph), which are all owned by major QSR companies and how that would affect it. Granted, it's a slightly different dining experience, but (inaudible) on OTB versus 7 to 8 at the other concepts - and if they have equal quality food, how do you kind of see the consumer choosing between those two and how that impacts the way you look at OTB's potential? Thank you.

Okay, well, I guess I'll take that one. I think, well, first of all, there is a way for quick casual and casual dining to co-exist I think within any segment. And I think in Mexican we're not noticing a mass exodus from casual dining down to quick casual in terms of their consumer base, because we are more dinner versus lunch. At the same time, the alcohol component plays, particularly in the Mexican segment with margaritas in place, we think to our advantage long term. And if these are two separate dining occasions we feel like we have the ability to capture the casual dining occasion.

Great. Thank you

Thank you. And the next question is a follow-up from Joe Buckley. Sir, please go ahead.

Thank you. I had somewhat a similar question based on the Cadovea (ph) and Jack-in-the-Box (inaudible), but I guess you answered the OTB part, but I also had a question with respect to your plans for Corner Bakery. There seems to be a lot of activity in quick casual, most of it, the vast majority of it is from quick service chains, sort of pushing up as opposed to casual dining chains pushing down. And I guess I'm curious how confident you are that Corner Bakery's part of the Brinker story going forward or might it be better off part of a quick service restaurant's portfolio?

I think for us we do realize we have to do some learning on Corner Bakery. We've been trying to get margins improved. We certainly spent some time doing that. And I think quick casual will be sort of the elements from both. It will take margin focus and cost focus that comes from QSR and also the quality components that casual dining bring. So I think quick casual is going to be a marriage of those two things, and maybe we need to take a look at Corner Bakery and how we can improve margins and make the financial returns look a little better than they have. So we've been trying to look at it in a different light than maybe we have in the past.

Is there any thought of going to a franchising business model with Corner Bakery?

I think for us we want to get the box economics to where it is something that we would be confident in franchising, and until we do that we really don't want to sell restaurants with the hope that we would get margins better. We want to get them in place now and then look to market it in the future. I think the first step for us is this proto three. The remodels do help our margins. It's a better guest experience, we think that it's one of the keys to the future for Corner Bakery.

Okay. Thank you.

Thank you. And the next question is coming from Peter Oakes of Merrill Lynch. Mr. Oakes, please go ahead.

Yes, good morning. I actually have a few questions. I'll do them one at a time. First, I wanted to follow up on the impairment charge discussion. Chuck, is it your sense that all the money losing units have been addressed, or is there some material underperformers that are still out there that we could be talking about down the road?

Well, there's no other units that we're considering closing anytime soon, and those also weren't all money losers. They may have been restaurants that still were cash flowing positive, but the market had moved away, and we wanted the ability to go in with a new restaurant maybe just a mile or so down the road, and just was mostly a trade area decision. For most of those locations, I think we may have had one or two underperformers in there, but on the whole, they were more restaurant relocations or exit of a bad location than they were getting rid of an underperforming restaurant.

Hey, Peter, and I'll add, too, a lot of the growth of this company started in the mid-'80's back when we first went public, and many of those leases were 20-year leases, some 10 with five-year options. So the market changes that Chuck described will be part of business decisions we'll make in the future. So they may not be money-losing restaurants, but we don't see growth in sales or the customer moving the way we want to in a lot of those locations. So that will be part of our ongoing business strategy, is not just new locations but moving from old locations that don't meet the consumer targets anymore.

But we also understand your question, Peter, there's not, you know, we're not going to do 9.25 for the next four quarters.

Okay. Next thing -- where I was going with this was On the Border, because I think if I remember, and I don't want to make On the Border too big of an issue here, but if I remember at the analysts meeting, you had suggested that it was underperforming as far as the portfolio on the ROIC basis and yet the comps have been difficult to come by, and my sense is that that's probably a little bit worse. So I was curious how, Chuck -- Doug, I guess you had mentioned that the returns are actually exceeding your cost to capital there?

Of our four core brands, On the Border has the lowest returns, and we said that at the conference last year. Cost of sales has certainly helped that brand. Cheese, some of the main ingredients of the core menu have been fine, but certainly we want sales and guest counts and to improve On the Border. If that happens we'll get those returns closer to what the other three core brands are doing.

Okay. Just moving on. Two others real quickly. December for you and obviously for the industry, there was a little more adverse comparison that we experienced. Would you care to take a stab as to how much you think that might have impaired the December results?

Yes. Peter, for us, we had the biggest calendar anomaly of anyone, because for us our December period is a four-week period, maybe some of the other people in the industry had five-week periods. And our period also begins on a Thursday and ends on a Wednesday. So for the 28 days of December, we were closed two days, Thanksgiving and Christmas, so for us we had the absolute most negative impact of anybody in our segment. So for us we think that impacted us somewhere around 3.5% to maybe even 4% on a calendar shift basis. And then again, also in December we did see some weather impact, but I would say it was relatively minimal, less than 1%.

Okay. And lastly, on the KDS, you've got that much more experience under the belt. I'm curious, can you pinpoint any productivity improvement that you're seeing from that shift that all of a sudden you're able to turn tables maybe just a little bit more quickly as the whole team is able to integrate and be a little more seamless in the execution?

Probably on to-go, as I mentioned before, is the area where the restaurants that we have spoken to have seen the, I guess, biggest ability to handle more sales and do it in a less chaotic situation. If you're in the restaurants, it's much more organized for the servers. Pure productivity, don't have numbers to blow you away, about half the Chili's system has been done now so we're certainly looking for those economic values as well. But you talk to the employees that run the restaurants, they definitely see it making the restaurant easier to operate. The servers make it easier to get the food out of the kitchen, and on the to-go side it's allowed us to do 9% of sales and still give a great customer experience both inside and outside diners - a lot of intangibles.

Okay. Great. Thanks a lot.

Thank you. And the next question is coming from Paul Westra of SG Cowen. Sir, please go ahead.

Great. Thank you. I also have several questions. I'll ask them one at a time. If we can go back to the December same store sales, can you give us the performance by concept and then really comment that even with that 3.5% to 4% adjustment, seems as though December was certainly a couple hundred basis points worse than October and November. And it seem likes you're guiding for the first quarter for -- I mean, the third quarter, March quarter, to be rebounding back 100 or 200 basis points. Is that correct? And if so, why?

I can give you the exact numbers for December. Chili's was down 1%. Mac Grill was down 6.1%. On the Border was down 7.7%. Maggiano's was down 3.7%. And Brinker overall was down 3.1%. So if you were to take a 3.5% to 4% range, Chili's would have been up 2.5 to 3, Mac would have been down 2.6 *to 2.1, OTB 3.2 to 3.7 negative, Maggiano's would have been either negative .2 or positive .3, it would have made Brinker overall positive .4 to . 9. So, pretty much right in the range that we're looking at when we say 1 to 2, because we were hit with a little bit of weather in December and I still believe that a shortened Christmas season had some impact. We can't quantify it, but certainly coming out of that we feel pretty confident in that 1% guidance.

Great. Fair enough.

I'll just add Maggiano's, particularly, just less banquet sales. Everyday in December they lose -- there's -- every banquet room normally that's full.

Okay. Second question on the G&A span, you said I think this quarter, you obviously -- the division had to cut back and they did. And now they're adding headcount now again. Was it more of a delay in spend? Or can you give us some examples of what is going on with the G&A since it seems to be up or down 20 basis points year over year?

I think for us, you know, we really cut back as we got in the second quarter. Our first quarter was a rough one. So we delayed some hires into the second quarter. Now you'll see some full quarter salaries hitting where you only saw partial quarters in the second period or second quarter for us. So those numbers are going up a little bit. Health insurance premiums is - we're on now a new insurance contract with increased premiums. That will also hit the G&A line. I'm still hopeful that everybody will stay focused and maybe we can recapture a little of that 10 to 20-basis point increase, and it won't be quite that high. But I want to set expectations on a realistic basis also.

Okay. And the last question was a follow-up to an earlier question. The cable advertising on Mac, you said you had two weeks in January and then 10 more? Is that 12 for the whole second half of your fiscal year here, or is that 10 in fold? And what does that compare against the second half of '02?

That is 12 in total for the balance of the year, for the rest of the fiscal year, and how that compares to last year, given we were doing just spot TV, I think we'll obviously reach more people. In terms of number of weeks, I don't have that in front of me right now, that's probably close to the same in total weeks, just more reach.

Just more reach. Right. Okay. Great. Thank you.

Okay. I'd like to thank everyone for their questions. Unfortunately, we only have time for one more, which is a follow up from Mitch Speiser. Please go ahead with the final question, sir.

Thanks. And the final questions are, just on the Sidron and local acquisitions, (inaudible) can you talk about -- you said that you were -- when you first - upon acquiring them that there were operating efficiencies to be reaped. Do you think you can drive margins to the company average and where do they stand today? And if the improvements are going inline with expected -- with expectations? And secondly, just on On the Border, I was just wondering, you know, Chili's is very much a Mexican type concept and I'm sure wherever you put up an On the Border there is probably a Chili's down the block -- I was wondering how you are planning to differentiate On the Border from Chili's and do you think Chili's does have an impact on On the Border sales? Thanks.

I think Chili's and On the Border are two totally different experiences. Chili's offers a number of items such as ribs, steaks, along with some things that might be perceived as Mexican. But Chili's is definitely more broad-range menu and varied menu in terms of its category where On the Border is more Mexican. It does offer things like burritos and enchiladas that you can't get at Chili's. So while indeed we think one of the benefits of our company is that by having Chili's everywhere we can find out where good casual dining locations are. We think that while they do compete, On the Border still can stand on it's feet offering a Mexican experience against Chili's varied menu. Doug, do you want to expand on that?

Well, there's a whole bunch of different items at Chili's, so that's the beauty of the Chili's brand, and Maggiano's and Mac Grill and On the Border, it's more simply focused on a certain type of food. So they have completely different strategies, and at On the Border it's about making it as good as it can be, casual Mexican, and Chili's expanding to as many different types of food as we can get people to eat, and steak and shrimp are two exciting additions recently.

... talked about efficiencies in the acquisition, I think we're getting there. Certainly, New England has been becoming more and more efficient as we've gone (inaudible) focused on bringing down costs in that region. I think all in all it's a high-cost region. Real estate is more expensive. Taxes, labor, some of the other operating costs -- they have a tendency to make it lower in terms of margins that our normal company operated, but still give us the kinds of returns we would expect. So have we reached the ultimate in efficiency? I'm not sure, but I think we're making great progress and we're getting there. Any other questions?

No. Thanks.

Okay. Ladies and gentlemen, that was in fact our final question. Do you have any closing comments you'd like to finish this call off with?

Yes. Well, thanks for calling in today. We'll release our same-store sales for the January period on February 5. If you have any questions, feel free to call Jeremy (inaudible).

Thank you.

And thank you, ladies and gentlemen, that does conclude Brinker International's second quarter fiscal year 2003 earnings conference call. You may disconnect your phone lines at this time, and have a great day. Thank you for your participation.