Brinker International Inc (EAT) 2003 Q3 法說會逐字稿

Good morning. Welcome to Brinker International third quarter call. All parties have been placed on a listen-only call.

It is my pleasure to turn the floor over to the Senior Vice President and assistant general council of Brinker.

Good morning. Welcome to the April 23rd, 2003, Brinker International third quarter fiscal 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 statement within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are subject to risks and uncertainties that could cause actual results to different 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, consumer perceptions of food safety, changes in consumer taste, changes in demographic trends, availability of employees, terrorist acts and other acts of God, unfavorable publicity and other factors more completely described in the company's filings with the Securities and Exchange Commission.

With me today or Doug Brooks, Chuck Sonsteby and Starlette Johnson. Now, let me turn it over to Chuck.

Thanks, Jay. Good morning. Thanks for joining us today.

The third quarter began with an uncertain external environment in declining consumer confidences. The third quarter also gave us a blast of winter. Many of the areas of the country experienced a new ice age, one that lasted into April. So much for global warning. Consumers did stay home whenever there were dramatic developments. But, soon, consumers returned to their new kitchens, casual dining restaurants. The external events had an impact on sales and the efficiencies of operating a restaurant. In short, it was a quarter that had many built in excuses, but our team delivered for our guests and investors. Despite ongoing challenges, Brinker and casual dining continue to prosper.

Let's take a look at third quarter results. Chili's posted comp sales increase. Pricing represent 2% of the increase and positive traffic with the balance. Sales and traffic were negatively impacted by almost half a percent due to weather. Chili's is impacted by weather the least of our brands due to the broad geographic presence. There's one statistic about Chili's. This quarter marked the 24th consecutive quarter of positive sales. Over the six years the annual volume has grown from $2.3 million to almost $3 million. The brand has grown by almost $65% adding 350 restaurants during that time. These accomplishments provide evidence of the appeal. Our development team continues to deliver aggressive company store growths, opening 16 new company owned restaurants during the quarter. 12 with the typical prototype 10. Fiscal year to date Chili's opened 51 restaurants. Todd Diener and his team continue to deliver the great experience to the guests and for Brinker.

Congratulations to John Miller and the entire Macaroni Grill team for winning the award for the fifth consecutive year. Macaroni Grill posted quarterly negative comps of 1.4%. While the brand was adversely affected by weather, more than 1%. This quarter marks the first time in quite some time where mix was positive. And, in concert with our initiatives to reinforce the value, year to year increases are under 1%. Macaroni Grill continued testing national cable advertisers. We had a tough walk. Our ads ran during the worst of the weather. While we were excited about the process of total market coverage, the numbers of weeks of coverage are small in comparison to other national brands that advertise. However, as we continue to build more restaurants, we will have more dollars to put to work, showing our guests the award-winning experience that awaits them at Macaroni Grill. Macaroni Grill opened three new restaurants and are on track to open 20 to 21 this year. They continue to produce higher sales with lower square footage and less invested capital. That's a nice combination. We also continue to see positive results for the remodel and are targeting a few more locations that may benefit from a face lift.

On The Border had a negative 1.38% for the quarter. Weather had a negative impact on sales of about 1%. Pricing constituted about one half of 1%. Mix was slightly negative due to the successful introduction of a limited time offer called fiesta trio. This combination of a salad, fajitas and a dessert for $8.99 improved traffic. There were no new openings during the quarter. They continue the imaging campaign. Today 63 restaurant have been upgraded and another 23 restaurants will be completed in the fourth quarter.

Maggiano posted .3% for the quarter despite being impacted by weather. We opened one new restaurant in San Jose during the third quarter, the fourth this year. Mark and his team have shown they are a double threat with small markets and multiple locations in multiple markets. It's a bright future for our newest brand.

Corner Bakery opened three new restaurants utilizing a guest friendly market where food is delivered to their table. We have 17 restaurants with this service style. Currently we have retrofited three Dallas locations, and the rest of the market will be finished in the next couple of months. We also get a proved financial situation resulting in lower labor and food costs.

Bill Bowl opened two new restaurants and added one new market, North Carolina. Development plans are on track for seven to eight openings including a couple that were originally scheduled for next fiscal year 2004 that have been moved into this year. Wilson Craft and his team have focused development within existing markets, building towards chip and scale.

Our joint venture partner, Rockfish, continues aggressive plans hoping four new restaurants, three in Texas and one in New Mexico. Development plans are almost set for the fiscal year. Last quarter we increased the target range for company owned restaurants to between 108 and 118. We'll probably be at the high end of that range. Real estate availability and willing contractors have allowed us to increase the pace of openings and decrease the cost of our new locations. In total we have almost 10 restaurants ahead of their construction schedule that will open in fiscal 2003 versus 2004. That has a few implications. While openings in 2003 will be accelerated, it will reduce the number of restaurants we open in 2004. We anticipate opening between 110, between 100 and 110 restaurants and a 10% increase in capacity.

Let's review the income statement for the quarter. Total revenues grew 12.7%. Capacity growth measured in sales weeks was 11.6% as we have opened 106 additional company-owned restaurant in the past year. Sales trends were often difficult to judge with calendar flips, adverse weather and the impact of war. Brinker comparable sales increased for the third quarter. Good results when you dial out all the static. Cost of sales remained lower year over year, coming in at 27-1/2% of sales or approximately 40 bases points lower than last quarter. The decrease was driven primarily by favorable commodity prices on ribs, dairy, and poultry.

Restaurant expenses were 110 bases points favorable. That's 54.9% of sales. Last year we incurred a 10.9 million dollar expense to settle a California wage issue. Excluding those charges, restaurant expenses were 40 bases points higher than Q3 last year due to higher health insurance, worker comp costs and lower productivity and labor due to poor weather. We've also implemented a program to increase reported tips which has created higher payroll taxes. Those higher taxes are partially offset by a federal income tax credit. The benefit will result in a lower overall tax rate in the fourth quarter. If there's any silver lining to a slower economy it is reflected in lower wage rate increases and ours is the lowest in some time.

Severe winter weather made daily staffing difficult and contributed to higher labor costs. Because of this we were unable to gain leverage on labor costs. They were up 20 bases points. Depreciation and amortization expense was 4.8%. 20 basis points higher due to the 106 additional restaurants. General administrative costs came in at 4.1%, a 10 bases point increase from last year. Operating income was 8.3%, same as last year's third quarter, excluding the California charge. Interest expense was 3.7 million this quarter, up from the second quarter of relatively flat the prior year. Other net was a $237,000 expense for the third quarter. The tax rate was 33.3% in the quarter, which was flat.

During the quarter we repurchased 435,000 shares for approximately $13 million. At the and of the quarter approximately 29 million remained in the current repurchase authorization. Net income was 5.5% of revenue, essentially flat to 5.6% last year excluding the California charge, a strong performance considering all the external events that were thrown in our operations team. Our earnings per share of 47 cents was a 14.6% increase over last year and a 38.2% increase on a GAAP basis.

Now our outlook for the fourth quarter. Top line revenue is anticipated to grow around 10% and will continue to be driven mostly by capacity gains. We have now lapped our franchise acquisitions. Our growth rate will be from new restaurant openings. Our short term same store sales forecast for the coming quarter is this one to 2%. Remember, the impact of winter weather and the consumer response to the war will still have a slight impact on April's results. However, we've seen strengthen strengthening over the past couple of weeks which still gives us confidence in our 1 to 2% forecast.

Maybe the best thing about the fourth quarter is that there are no calendar shifts or trade day differences to have to explain or reconcile, something we haven't had since last October. Cost of sales will be up versus last year as we begin the lap the lower costs enjoyed through out the 2003 fiscal year. We haven't seen pressures in underlying commodity prices. It allows us flexibility as we aren't tied to any one product. Restaurant expense should be up 20 to 30 bases points primarily from healthcare costs and the increased reporting of tips, which will increase the amount of payroll taxes. As I said earlier, these payroll tax costs will be offset, some higher. Utility cost in deregulated markets may increase and have some impact on restaurant expense by a few bases points. Depreciation and amortization on a dollar basis will be up to the new restaurant openings and we anticipate general and administrative expenses to be approximately 4% of revenues. Interest expense will decrease and should be similar to last year's fourth quarter on a dollar basis. Other net should be less than $1 million in expense. The tax rate will fall to around 342% for the fourth quarter as a result of the previously mentioned payroll tax credits, making hour full year rate 33%. The purchase continues to be an effective way to use excess cash to deliver value to our shareholders. The program will continue and is likely to keep will the rate flat for the fourth quarter. So based on these assumptions, we anticipate earnings to be 55 to 56 cents.

Our balance sheet continues to be strong. We're committed to maintaining our investment grade rating. Our operating cash flow will out pace the capital spending. Debt, including lease is now 52%, which remains well within our target range of 50% to 60%. While our optimism burns brightly, we acknowledge the realities, but we continue to see cautious optimism. Chili's continues to demonstrate its strength. Mac Grill is providing a great experience at an affordable price, and its guests are responding. On The Border has gained from the initiatives implemented over the past few quarters. Maggiano's has seen continued success in the higher end of casual dining during a tough environment. And, our emerging brands are positioned in some of the fastest growing areas of casual dining. Our company is built around a portfolio brand in the sweet spot of casual dining, focused on providing our guests a great experience at a reasonable price, and we have a team that has delivered great results during difficult times. We strongly believe our long term game plan is right on target for today and for the future.

So, John, we're ready for questions.

Thank you, sir. 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 touch tone telephone at this time. Pressing 1,4 a second time will remove from you from the queue should your question be answered. We ask that you pick up your handset if listening on your speakerphone for optimum sound quality. Please hold one moment while we poll for questions. Your first question is coming from John Glass, CIBC World Markets. Sir, your line is now live.

Thank you. I have two questions, I guess, related to Macaroni Grill. One is, Chuck, you raised an interesting issue in the choice of chain award, winning that award at Mac Grill, does that change your thinking or has your think evolved on how you want to reposition the brand? Is it advertising maybe the more component and not changing the format? Can you update us on your thinking, there. And then secondly you mentioned very quickly a remodel test at Mac Grill. Can you just remind me how many units you remodeled at what cost and perhaps how many more you plan to do in the near future? Thanks.

I'll take the second part first. Doug, you want to stalk about both the remodel and the position?

Okay. John, thanks for the question. As far as the choice in chains, we're already excited when we get some consumer feedback on how the brand is doing. I guess one of the highlights in that this year was the higher store value, which was one of the initiatives that we tried to create at Mac Grill. One of the other real interesting results at Mac Grill this past quarter has been the positive mix shift. Some of the things are actually internal within the four walls. We've relaid out the menu which we talked about in previous quarters. We got food photography. There are some nice things happening. Our feature sales are up. Again, there's food photography as you open the menu with those features, and also our CYOP, the create your own pasta, which we haven't advertised, has grown into sales. We have a nice combination of new value items selling well as well as sort of the chef-driven feature items that Mac Grill has always been famous for also selling well. We also added some combo appetizer dish. Side salad sales were up, particularly with create your own pasta. Value scores are better but we're still building on the past success. As far as the national cable advertising. As Chuck mentioned in his prepared comments, we had a little bit of bad luck. It seems like every time we ran a commercial is when the bad weather hit. In the markets that weren't impacted by bad weather we did see nice positive movement. We'll continue to kind of increase that spending, that percentage wise throughout the years, but no increase in year over year spending. As far as the remodels, that is not actually an initiative right now. We're doing some of the things with the restaurants that matches up with the looks of our new prototype 10, more comfortable, more family friendly, booth seating, more colors, kind of a warmer interior. We've done six so far. But honestly, the new prototype 10 which we're excited about as we get higher sales volumes with a little bit lower square footage, and some of those same features are showing good topline sales growth. But as far as the remodels, the six we did was about 175,000 each. We're going to sit back and kind of watch that over a period of time. We have seen some nice short term results.

Thank you.

Thank you. The next question is coming from Coralie Witter, Goldman Sachs. Please go ahead with your question.

Hi. On The Border looks like you have improvements there. You've done a lot of remodels so far. Could you remind us how far along you are and just provide more detail on what you're seeing in the different market and whether the strengths or the improvement is due to the remodels or whether there are other initiatives.

Coralie we've done eight to five, I believe. So far, recorded to date. Starlette, you want to talk a little bit about what has changed?

Sure. We have a little over 68% of the system currently complete. As Chuck said earlier, we are seeing positive traffic in those markets. We've supported it with some local media and print along with the fiesta trio that we had on TV along with in print over the past quarter, and we've seen encouraging results, particularly in the some of their lower volume markets and newer markets as well.

Can you say how much the media is up year over year at On The Border?

It's flat year over year.

Thanks.

Thank you. The next question is coming from Brian Elliot of Raymond James. Mr. Elliot, please go ahead with your question. Mr. Elliot, please go ahead.

Can you hear me.

Yes, we can, Brian. Sorry.

A couple of housekeeping items. Capex in the quarter?

On the quarter, $84 million.

And with the acceleration and some of the openings what are you looking at for the fiscal year now?

Really won't change it dramatically. Most of the costs in those buildings were going to be en incurred at one quarter. We're still targeting, in terms for the year, somewhere around three -- somewhere around 360 to 365 would be my guess.

Okay. Fiscal year basis. Probably flattish for '04 or down a touch.

For '04 it will be up about 10%. We'll still be building more restaurants next year. They aren't going to all fall in the calendar year.

I thought I heard -- maybe I got it wrong, that we're going to open a few fewer stores in fiscal '04 than in '03 because of the pushing of the '04 plans into '03 actuals.

That's right, Brian. But what we'll have is we'll also spending capex on '05 openings.

Gotcha.

When we get back to '05, we'll have to pass the gains, 10% to 12%, and that's our long-term target. It's more about the count of the restaurants opened than dollars spent.

Thank you.

The next question is coming from Dennis Forrest of McDonald Investments. Sir, your line is live.

Hi, Chuck. I wanted to ask the amount of debt at the end of the quarter, first of all?

Hold on here.

Okay.

Long term debt was at $17 million. That was the current installment. Then long term, less those current installments was at $395, a total of $412.

Basically the same as the end of December. I think December was 418. That number will continue to move down a bit depending on the stock you buy back?

Yes. It is dependant upon share repurchase. We are generating excess cash, and to the extent we buy back more shares, that would be the wild card.

Okay. And the other question. You said business was strengthening the last couple of weeks. Can you quantify that?

It's just gotten better since the war was finally over. Once the troops went into Baghdad, business really started getting better. I would say we were down about 4% during the war, at least in the initial period. Everybody wanted to listen to the speech. Everybody was interested in the countdown, and then business has been coming back over the past couple weeks.

Then you said there were no calendar switches. Easter fell this month versus March a year ago. Is Easter a factor for your chains?

Somewhat. It still fell in the April period for us last year and this year.

It did?

Yes.

You're talking about the Easter spring break or the holiday itself?

The holiday itself.

Oh. Okay. And then when will you announce the April numbers?

We'll announce those on, I believe it May 7th.

Is that a five-week month?

It is. The first period of our quarter is a five-week period.

That five-week period ends what day?

The last Wednesday, the 30th.

The 30th. Okay. Then you'll announce this about one week later.

Yes.

Terrific. Thank you.

Sure.

Thank you. The next question is coming from Joe Buckley of Bear Stearns. Please go ahead, sir.

Thank you. I have a couple of questions as well. First, just on the March sales numbers. You mentioned the impact, I guess, the week the war started. Could you walk through what you saw in March maybe a little more detail in terms of the early part of the month when the war started, how fast business came back and talk about the Macaroni Grill advertising? Were you on national cable for three weeks of the month, for example?

March was so hard to read because, again, snowstorms, everywhere in March. Also, you did have some nonmatching of what I would call Easter holidays here and there and the war. So when you take into account all three of those things we were trying to find out where consumer trends were and really had a tough time. About the only thing we could really find was that once -- once the war seemed to settle down a bit once we got into Baghdad we saw sales start to pick up again. I know I'm not answering your question exactly, Joe, but I can't tell you week by week of where we were in March.

Were you on the air for Macaroni Grill for three weeks on national cable?

We really did not change any of our advertising schedules. I don't know if we were on for three full weeks during the March period or two. But I do know we stayed with our advertising plan throughout the whole period, both Chili's and Mac.

Would you go through the expansion numbers again, what's sort of being accelerated into the fourth quarter and comment on the preopening expense impact. I'm sure it's in your guidance, but maybe just walk through that.

Yes, preopening will be pretty flat. We did open up a number of restaurants last year in the fourth quarter. Chili's and Big Bowl are going to be the prime beneficiaries of that and a couple Macaroni Grill.

Okay. Thank you.

And thank you. Your next question is coming from Janice Meyers of Credit Suisse First Boston. Ma'am, your line is live.

I'm sorry I missed a couple of minutes of the call, so this may be a repeat. It's a question for Chili's. We know that Applebee's has been continuously changing its menu, upgrading the items, working hard to improve the experience at Applebee's and its take out. I was wondering how do you track the impact relative to Chili's other than watching customer traffic, which once it starts to deteriorate, it's too late? How do you be anticipatory in that situation so you can determine if they're making inroads?

Well, we try to look at scores that we get through research. We try to make sure the guest experience stays true to what our expectation are and the guests doesn't have a change on where they rate the Chili's experience. We also try to research on our customers to see if we're seeing changes in any of our brands, not just Chili's, up or down. In terms of what we do against the competition, I would say that we were shop them and we continually look at new products that they might bring on to see how they're doing, but I don't know that we have any fundamental way to measure what their scores are.

Have you sensed any changes since Applebee's has been doing this? It's been probably a couple of years since they started.

I think we just look at what we're doing. Chili's is still at a six-year string of positive comps, and I couldn't tell you, wouldn't want to talk about where they were.

This is Doug. We're probably getting more of our own consumer data through internet based credit card, consumer follow up and 1-800 consumer credit card follow-up. Before we creat any advertising we always do create focus groups and take advantage of the consumers not just on the new creatives but also to follow up on things that are going on in the restaurants. I think we talked about this on the last call. Chili's is continuing to do add new things to their menu and we have new items rolling out in the next 30-60 days that expands all sorts of categories, appetizers, salads, steaks, seafood. We probably do more of watching ourselves other than shopping and watching the neighbors next door.

Thank you.

Thank you. The next question is coming from Jeff Omahandro of Wachovia Securities. Sir, please go ahead.

Yes. I wonder if you could run through your labor trends. In particular, your victory concepts, management turnover trends. Are there any changes going on there among the three concepts?

Doug, you want to take that one?

Sure, Jeff. This is a continuation of a good trend. All of our concepts and particularly the big three or four have continually had management turnover numbers stay the same or get better. The all-important general manager turnover numbers are in the single digit in the teens on average. A lot of that has to do with uncertain times our companies, great people orientation, the culture, the success of the brand. It all makes up for the track of the employer. We talked about this before, the biggest single metric in terms of productivity of labor and sales building and control of cost and restaurant is experience at the management level. So we continue to be able to keep and find great new managers. That's a trend that's been going on for quite some time.

On the hourly side, how is that tracking, and how are wait trades?

If you look at the past quarter it's some sweet and some sour. We see wage rates slowing down, as Chuck mentioned 1 to 1 1/2%. Which had the most difficult and challenging environments to take advantage of that because of the weather and the war. You have to staff your restaurants, but when consumers showed up and didn't show up this time was unpredictable. Therefore, the management team, experienced management team had to have people there. As consumers did or didn't show up, they could make the cuts as necessary, so we didn't get the productivity we certainly would have liked.

I understand. Thank you.

Thank you. The next question is coming from Peter Oakes, Merrill Lynch. Sir, please go ahead with your question. Sir, go ahead with your question.

Hi. Good morning. I have a couple questions at Mac Grill. Between the new builts and the remodels, how far along are you with the prototype 10?

Peter, we have nine prototype 10 openings. But every one we build at this point will be the prototype 10, so we feel good about the ambiance, the environment and the total layout of the building. It's a slightly smaller building, slightly less investment but we get a higher sales volume.

Those include the six remodels that you were talking about before?

No, I was just speaking about brand-new ones. The remodels we wouldn't call a proto 10.

Between the new and the remodels, it's relatively insignificant to the whole.

Add them together, it's about 15 restaurants.

In the case of the remodels, are those market specific or a scatter shot, whenever you feel appropriate to update the facility?

In terms of general care and maintenance, every couple of years we go through and repaint. In terms of these elements we've done the restaurants in three different markets. We haven't made a decision. We're sitting back and watching and making sure we get a return on the investment and that we see sales growth more changes in the use of the buildings. In new ones we certainly feel good about the atmosphere we've created. In the older ones at $175,000 per restaurant, we want to make sure we're spending that money wisely.

I don't want to belabor the proto 10, I just happen to have seen a couple and it left an impression on me. Unfortunately, with the consumer driving by, I'm not sure there's much of a signal anything has changed inside. Is that something you might want to consider down the road?

Advertising certainly creates the creative picture. Rod Stewart once said, "Every picture tells a story." If we can advertise more, we can let consumers get a feeling of what's going on in the building. The awnings are of a softer material. What we try to do is soften all that hard stone, but there's more warmer colors. There's again, fabric awnings. But you're right. Sometimes you have to enter a building which plays to what we talked about. Part of the reason to reposition the brand, you can't make this happen overnight. If you can get a guest inside, then they can get a feel for the environment changes. But on the outside there is only so much you can do. I think the advertising will help.

Okay. As far as to-go, can you update us on how that's progressing and how did that move during the war? Can you give us a little sense?

To-go in general at all of our core brands continue top trend positively. We can't say we saw a spike because of the war, although Chili's and Macaroni Grill both ran some television advertising promoting to-go. Chili's is up about 9% of sales now. Macaroni Grill grew almost the same. They're slightly over 6% of sales. On The Border's to-go sales which are driven by the remodel program, about 705 of those buildings now have the to-go station. They're now getting close to about 4-1/2 percent of sales.

Okay. And lastly, on the corporate end are you seeing anything discernible, week day versus weekend, or lunch versus dinner?

No, we really haven't. Maybe Maggiano's has seen a little bit of stronger business during the weekends than during the week. But overall, Peter, we really haven't seen any change in the way consumers utilize casual dining.

Thanks.

Thank you. The next question is coming from Andy Barish of Banc of America Securities. Mr. Barish, please go ahead, sir.

I have two quick questions on Macaroni Grill, the marketing, as I recall you said you would be on national cable about half of the 26 weeks and the second half. Was that predominately weighted in the March quarter, or was it kind of even for the June quarter without giving away your full marketing plan there? Secondly, on Chili's, the smaller-town prototypes, I think about $2 million or so. Can you give us a sense of where the actual volumes are coming in?

I'll take the second part first. On the proto 12s, right now, they are hurdling above that $2 million range. They're between 2.2 and 2.3. So, we're real pleased with most of those restaurants. Doug you want to take the Mac Grill question?

Again, the weights, Andy, really haven't shifted that much. We're following pretty much even Steven, I guess, throughout the quarter trying to sprinkle the national cable and impact sales as best we can despite the pretty unfortunate timing we had last quarter. We'll have a little bit more the third quarter in terms of advertising than the fourth quarter. That's the way that 13 weeks split out.

Thank you.

And thank you. The next question is coming from Mark Sheridan of Johnson. Please go ahead, sir.

Yes, a couple of questions. Chuck, first, since the convert deal you did a couple years ago was a zero. Is the conversion price on that debt to equity now just under $40? And remind us of the impact on the fully diluted share count and earnings expected when the stock approaches that level.

Right now the conversion price really will be somewhere around $33 is where it converts. It gets included in the share base around $40 for us. It has to be 120% above the conversion price at that time. If those shares came in as equity, it would dilute us by about 7%.

To follow up on the capital spending question, the 10% increase that you said you planned in '04 is $36 million or, you know, 10-15 restaurants, depending on what you're building. With reduction of about that many planned in the '04 plan because of the acceleration in '03, is there anything else going on in '04 in terms of accelerated remodels or major POS or some other other types of corporate upgrade that reconciles those differences?

I think for us, Mark, when we look at it over a year to year basis, it's increasing with capacity. So we expect a 10% increase next year. That's why said it would be up about 10%. We still don't have all the costs in for 2004. We're currently going through those rollups. I was just making a guess that our capex would go up.

Okay. Thank you.

Sorry to be so noncommittal.

No. That's fine. It helps me to think about it that way.

Okay.

Thank you. The next question is coming from John Ivankoe of JP Morgan. Sir, your line is live. Sir, please go ahead.

Hello?

John, we're here.

Great. Looking for an update on Big Bowl, if you could walk through the older markets. Minneapolis, Chicago, for example, in terms of how the units have been comping or ramping over a period of years as well as your success in the newer markets, and again whether you think that concept is positioned properly to be rolled out in the next two to four years. Thanks.

Starlette, you want to take Big Bowl?

Sure. With our some of our older units particularly in Chicago and Minnesota, the initial volumes are holding pretty well. They've had, obviously, some same similar patterns compared to what's happened with the weather and the war that we have experienced in our other brands, but long term we're still very good about the brands. We have been refining the positioning. You're aware of the fact we made changes to the menu and menu price in order to make this more approachable and evolve it as we need to to make it a national brand. We're on pace with development for where we expect to be at this point in time and continue to see good results as we go into good markets like North Carolina.

And could you talk about maybe the success of Denver, for example, or the initial opening in North Carolina? How that's been doing?

I think our expectations in Denver -- Denver is a tough market right now. We like what's going on with Big Bowl, still feel good about the brand. When we look at North Carolina we had a great opening there. I think that's a market that's more normalized in terms of their economy. Big Bowl has done extremely well in Raleigh.

One final housekeeping question, Chuck. The tax rate for '04?

We're still trying to get roll outs for '04. We're trying to see where that will end up. If I had to make a guess I would say somewhere around 33%.

Okay. Great. Thanks.

The next question is coming from Mitchell Speiser of Lehman Brothers. Please go ahead, sir.

A couple questions. First, on the food cost outlook in fiscal fourth quarter, you said year over year the benefits are going to dissipate somewhat. Do you expect favorable food costs in the back half of calendar '03 or more on the flattish side or maybe just generally what your food cost outlook is by the key commodities. Then, second, on Corner Bakery I think you said 17 that are upgraded. Can you give us a sense of the sales trends there? Seems like the margins have improved. Has there been an improvement on the sales side? Thank you.

I'll take the commodity prices. Right now they look favorable. We begin the lower prices as we get into the fourth quarter. They look pretty flat through the balance of the calendar year. We don't see any one commodity that would be down. There were fears that beef prices might spike up, but our consultants have been telling us that beef next year looks pretty good. We're locked in for chicken, which is our high protein cost for us. And we got a lot of our commodities already locked in. I don't know. Did I miss anything there, Mitch?

Seems like you covered it. Seems generally favorable for the back half of the year. It's looking better than a lot of people thought. Then just on the Corner Bakery question.

Starlette, you want to take the Corner Bakery?.

Sure. In terms of Corner Bakery and the remodel, we have six remodel, three in the Dallas market. We are seeing margin improvement but sales are flat. It's a little bit early to read long-term sales trends. We are meeting our margin expectations s for the remodels.

And if I could just add another question. Can you give us what the March comps were by concept? Looks like On The Border might be slightly positive. If you could just list the March comps, please. Thanks.

Chili's was up 1.8%. The price increase was 1-1/2% and mix was .7. There were weather impacts here. Mac Grill was at .1% negative. Price increase 7/10ths of a percent. On The Border was flat. Their price increase was about 6/10ths. Maggiano's was negative point 1. Their price increase was basically flat. Overall for Brinker comps were 1% for the quarter. Excuse me. March period. Price increases constituted about 1.2%. Mix was positive.

Thanks.

Thank you. The next question is coming from Matt DiFrisco. Sir, please go ahead.

A quick question on the bar mix. Year over year, can you compare that with what you've seen at Chili's? Was there anything meaningful, a change in traffic there?

Actually we tracked that by sales per 100. Sales are slightly up. Although if you look at percentage up against the 1.5% price increase, it would look negative as a percentage sale, but actual sales are up. As to go sales increased, that liquor percentage goes down because we haven't figured out how to sell alcoholic beverages legally out the side door yet. Actually, the state of Louisiana can do it, but that's it.

Total sales for fourth quarter was your guidance 13% did you say? I didn't hear you there.

Fourth quarter guidance was 10%.

For total sales growth?

Yes.

Lastly, more of a longer term question here. With regards to Big Bowl, Corner Bakery, I know there's some investors that are anxious to see the returns up since the segments seem appealing. Has the real estate market, there's more availability out there. I guess that implies also better values for you out there if the supply of real estate is higher. Could we be getting closer to seeing Big Bowl, Corner Bakery or Rockfish take on the returns you might need to see this become another Maggiano's and join the core group?

I think each brand has different things that we are working on. With Big Bowl we've been growing extremely fast. I know people would like for us to grow much faster. We've been growing the brand at 50%. We want to make sure we're delivering a great experience. So we're building them as fast as the infrastructure will allow. It's more dependent upon people in terms of being speed that we scan open up restaurants and how often we get people trained. It's more of a determinant than real estate or capital. With Corner Bakery, we're trying to get the returns right for us. We're trying to guarantee a good return for the brand. We do believe that the remodels will help us get closer. We need a little experience to see if that's the case. Rockfish seems to be doing real well. It is a joint venture, so they control their development a little more than we do. We may have some input, -- and some advice. They're basically on their own development plan and they've been doing a good job. It's all about finding the right managers and finding the right people to open up restaurants more than anything else.

In the third quarter. Can I go back to restaurant expense line a little. How much did utilities play into effect year over year? You called it an ice age. Natural gas prices were higher, oil prices were higher. You had a lot more wood to burn. How much of that was a product of the weather and if we're look at year over year increases for helping model the fourth quarter, not to expect an increase going forward. Weather won't play a role in the fourth quarter hopefully.

Hopefully. Our utility costs were flat year over year. We do have a hedging program where we have locked in natural gas prices and electricity prices in states that have deregulated markets. In states that don't have regulated markets -- sorry they do have regulated markets. There could be price increases coming later. I wouldn't expect that to be a major issue. It might tweak us for maybe four or five bases points just until we see what happens when they go back to the public utilities commission but I wouldn't expect it to be a major swing factor.

One last quick question. Sorry to monopolize your time here. U.S. food service with Chili's, are you still in the same standing with them 100%? Have you migrated some of your sales over to Cisco?

U.S. food service is our primary supplier to Chili's. We use other distributors and various other brands. We are aware of the situation they are going through right now and we are monitoring it. We've got several discussions. We continue to do channel checks with suppliers. We sell to them to see if they're getting paid on time. We also look to see if there's been deterioration at service levels in our restaurants. We're happy to say we've been comfort while going through the channel checks that U.S. food service continues to do a pretty good job delivering to us. Having said that, we also aren't hiding hour head in the sand. We've looked at other alternatives to see if there are other possibilities. Right now U.S. food service is doing a pretty good job for us.

Okay.

The next question is coming from Andy Smith. Sir please go ahead.

My question has been answered.

The next question is from Paul Westra, SG Cowen.

Thanks and good afternoon. Most of my questions have been as well. But just following up on the labor line in the third quarter. You mentioned did labor hurt you 20 basis points. Is that because of the tough scheduling and what would you have -- would it help you normally? Give me some information on that.

We've been pretty flat with labor over the last couple quarters, and I think staffing hurt us that 20 basis points. With very low pricing right now in all of our brands, I don't know if we'll get leverage off of labor at 1% comps. I think that's asking a lot. If we, you know our comp gains and based on mix and traffic, those don't necessarily have as good a flow. I would say it would be tough for us to leverage on labor, particularly given the reported tips issue that we have.

But in the third quarter it was flat. You wouldn't have had it in the first quarter, or third quarter.

In the third quarter, labor was up 20 basis points. In the first two quarters of this fiscal year, really, labor has been flat. So, in our second quarter this year we had a comp that was about 2.1%. We were pretty flat in terms of, I guess, labor.

Great. All of my questions have been answered. Thanks.

The final question is a follow-up question from Joe Buckley, Bear Stearns.

Yes. Up 20 points. Can you hear me.

Yes.

Just a couple final questions. The 10 unit openings that are going to be '03, is that in the 108 to 118 range?

It is. We'll probably be closer to the 115 to 118 range.

Okay. And then just a question on the capex, and I realize you have 10%. I know this sounds like a general ballpark kind of number. Is there any thing for the remodels at Macaroni Grill? If not, I'd ask why, what you're waiting on.

There's a little bit in there, I think. We did spend some money doing to be to be this year. I think we're waiting on trying to get a good read on where things are. We have to make an announcement. We're not getting ready to do a brand-new remodel program until we've seen enough results that give us confidence that it's going to work.

Have the comp sales at the remodel stores subsided?

They're doing very well. For us it's a matter of we don't want to get too far ahead of ourselves. We'll continue to schedule some restaurants for remodel. We're not ready to announce this huge makeover of the brand.

Okay. Thank you.

That was our final question. Do you have any closing comments?

I do. As we said earlier we'll release same store sales for the April period on May 7th, and I would like to make the announcement of Hil Davis who will be on board shortly as our new head of relations. In the mean time, if you have any questions, please feel free to call me. Thanks.

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