Brinker International Inc (EAT) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Brinker International’s fourth quarter earnings release conference call. At this time, all participants have been placed on a listen-only mode. We will open the floor for your questions and comments following the presentation. It is now my pleasure to turn the floor over to Mr. Hil Davis, Director of Investor Relations for Brinker International. Sir, please begin when ready.

Good morning and welcome to the August 6th, 2003 Brinker International fourth quarter fiscal 2003 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, 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, the company’s ability to meet its growth plan, and other factors more completely described with the company’s filings with the SEC.

With me today are Doug Brooks, President and Chief Operating Officer; Chuck Sonsteby, Executive Vice President and Chief Financial Officer; and Starlette Johnson, Executive Vice President and Chief Strategic Officer. And now let me turn it over to Chuck Sonsteby.

Well thanks, Hil, and good morning. The fourth quarter experienced significantly fewer external events than previous quarters. The weather, war and holiday shift, gave us our first real glimpse into consumer sentiment. And as evidenced by our healthy top-line growth in the fourth quarter and success in the industry overall, consumers continue to incorporate dining out as a necessary element of their lifestyle.

Consumer demand is out there and our goal is simple; provide our guests with an outstanding dining experience at a great price point.

Today we’ll discuss the results for fiscal 2003 and quarter four, give a brief overview by brand, review our Q4 expenses, and then outline guidance for 2004. Then we’ll discuss July sales results before we move to Q and A. But, before we begin, we would like to thank each and every one of our 94,000 employees for an outstanding 2004. It was a year marked by a number of notable achievements and without them, we would never have attained these results.

Revenues for fiscal 2003 exceeded the $3 billion mark for the first time, at 3.3 billion, a 14 percent increase. Capacity growth, as measured in sales weeks, was 12.6 percent. Our store development was above target, opening 118 company-owned restaurants. In a year that offered numerous external challenges and the opportunity for excuses, we delivered.

Brinker same-store-sales increased 1.5 percent for fiscal 2003, in line with our original forecast. Same-store-sales for our four core brands, which comprised 96 percent of our revenue and virtually all of our operating profit were as follows; Chili’s comps increased 2.8 percent, Macaroni Grill posted a 0.3 percent decline, On the Border comps declined 1 percent, and Maggiano’s posted a 1.6 percent increase.

Now, looking specifically at Q4, revenues increased 12 percent to $876 million. Capacity growth was 10.1 percent, with the addition of 29 new restaurants. Brinker same-store-sales increased 2.1 percent, versus an increase of 1.9 percent a year ago. Earnings increased 12 percent, to $0.56 per share, excluding the asset impairment charges related to Cozymel’s, in line with our guidance of $0.55-$0.56.

And for the quarter, Chili’s posted a 2.7 percent comp sales gain, driven by a 1.3 percent price increase, a 0.8 increase in mix, and a 0.6 increase in traffic. We’re happy to say that this marks the 25th consecutive quarter of positive same-store-sales at Chili’s.

Our development team opened 16 company-owned restaurants in the quarter, two of which were the small town proto-12. Todd [Deer] [ph] and his team rolled-out six new menu items in June. Notable additions were a Hawaiian steak, which we featured in our advertising campaign, Shanghai wing, and a citrus glazed salmon. These new menu items were created to meet evolving consumer desires and expectations and to expand our menu appeal.

And in June, we announced the appointment of Wilson Craft, to President of Chili’s. For those of you who don’t know Wilson, he is a Brinker veteran of 19-years, 17 of which were with the Chili’s brand, including the COO role.

Macaroni Grill same-store-sales increased 1.6 percent, driven by a 0.4 percent increase in pricing, a 0.1 percent increase in mix, and a 1.1 percent increase in traffic. For the quarter, we featured create your own pasta on media, utilizing five weeks of national cable and one week with spot media. And that went against six weeks of spot media a year ago. The traffic gained at Mac Grill has been the result of our strategy to emphasize customer count. And Mac Grill posted positive traffic counts every month this quarter.

On the development side, Mac Grill opened six new restaurants during the quarter. The new Mac restaurants are more comfortable and also continue to produce higher sales, with a lower cost per square foot. The remodels continue to demonstrate positive results at our initial seven remodeled restaurants.

So our current plans are to remodel another 11 restaurants this quarter. Recent results have shown our concept positioning initiative, revolving around the approachability of both menu and ambiance, are taking hold with consumers. John Miller and his team have done a great job guiding Mac through this transition.

OTB posted same-store-sales gain of 1.5 percent, driven by a 0.3 percent increase in pricing, a decline of 1.2 percent in mix, and a healthy 2.4 percent increase in traffic. During the quarter, mix was negative due to the limited time offer of the Fiesta Trio. Now this offer is a combination of a salad, a lunch portion of fajitas and a dessert, all for just $8.99. And it brought guests into the restaurant. This was the best traffic results for several periods and is the product of effective marketing, coupled with the re-imaging campaign.

Today more than 80 percent of these restaurants have been remodeled and we expect to finish the balance over the next two quarters. The OTB team is well aware that customers are responding to the marketing and the new look and that the guests need to have a great experience to ensure ongoing success.

Maggiano’s posted a same-store-sales gain of 1.1 percent, driven by a 0.4 percent decline in pricing, and a 1.9 percent decline in mix, and an impressive 3.4 percent increase in traffic. The decline in mix and pricing was due to the decision to offer a special weekend lunch menu. After evaluating consumer research, Mark and his team implemented a weekend lunch menu, providing guests the same high-priced value experience at lunch as they already get at dinner.

On the development side, we opened one new restaurant in Indianapolis, Indiana during the quarter and the results have been above our expectations. The development pace increases in Q1, as we add three new Maggiano’s. The strength of opening, consumer acceptance and great comp performance demonstrate why we are excited about this brand.

We’re proud to announce the addition of Jean Birch, as President of Corner Bakery. Jean spent almost 13 years in the YUM! Organization, serving in a wide variety of operations and corporate roles. Her most recent position was Vice President of Operations for Taco Bell, where she was responsible for over 2,200 company-owned and franchised restaurants. She brings a wealth of experience and knowledge to the team. Corner Bakery opened four restaurants during the quarter, all proto-3s.

Currently, we have retrofitted all of our Dallas restaurants and we’re receiving the financial benefits in the forecast. But the best news is, the remodels provide the guests with a more consumer friendly dining experience.

Big Bowl opened one restaurant in South Lake, Texas during the quarter. JJ Buettgen was named President of Big Bowl. And we believe his marketing background and knowledge, layered on top of the foundation that Wilson laid, will take the brand to a new level.

And finally, our Rockfish joint venture ended the year with 20 units and the restaurant openings exceeded original estimates.

As I mentioned previously, we pulled forward 10 restaurants from fiscal 2004 construction schedule into Q4 of 2003. Therefore, it will reduce the number of restaurants we open in fiscal 2004. For fiscal 2004, we anticipate opening between 107-118 restaurants, which translates to approximately a 10 percent increase in capacity. We will revisit our development schedule throughout the year, to see if the same opportunity to pull openings forward presents itself.

As for expenses, cost of sales as a percentage of revenues were 27.5 percent, versus 27.1 percent a year ago, a 40 basis point increase year-over-year. This increase was driven primarily by higher Romaine lettuce and onion prices at the beginning of the quarter.

We indicated in our press release this morning, we’ve been in active negotiations with several parties to sell our interest in Cozymel’s. It’s our intent to have the transaction closed by the second quarter of the fiscal year. At the end of the year 2003, we compared the active value and the associated goodwill on our balance sheet with the estimated fair value of the assets.

Because of the difference, a write-down under FAS 142 for goodwill and FAS 144 for fixed assets, was required. In the fourth quarter we recorded a $20.3 million charge and this is an increased restaurant expense, to 56.6 percent of revenues. So, for the purposes of comparability, we’re excluding the one-time charges associated with the write-down on Cozymel’s this year and Eatzi’s last year.

Restaurant expenses as a percent of revenue were 54.3 percent, versus 53.8 percent, a 50 basis point increase. As we mentioned last quarter, the expected increase was primarily due to higher payroll taxes resulting from increased tip reporting. Importantly, these higher payroll taxes are partially offset by federal income tax credit and do lower our tax rate.

Utilities and credit card fees also had a negative impact on this line. Labor costs as a percent of revenues were relatively flat, as modest rage rate pressures of 1-2 percent have become the norm. D and A as a percentage of revenues was flat year-over-year, at 4.8 percent, as the benefit from higher total sales offset the costs of 118 new restaurants. G and A was 3.7 percent, versus 4.3 percent a year ago; a decrease of 60 basis points year-over-year. The decrease was driven by lower profit sharing and bonus payouts, versus a year ago.

Operating income was 9.6 percent, versus 10 percent a year ago. These results exclude the Cozymel’s charge this year and the Eatzi’s charge a year ago. Interest expense was $2.3 million, which was lower both sequentially and year-over-year. And other net was 1.2 million, versus 0.5 million a year ago. The tax rate was 33.8 percent, versus 33.5 percent a year ago. The rate was impacted by the Cozymel’s charge and would have been lower versus a year ago, at 31.7 percent. The rate change is due to higher credits from additional payroll tax payments.

During the quarter we repurchased 330,000 shares of stock for approximately $11 million and a total of 2.2 million shares for $64 million during the fiscal year. In June, the Board of Directors approved an additional $100 million for share repurchase. At the beginning of the quarter, there was $118 million available able under our repurchase program.

Net income as a percentage of revenues on a comparable basis was 6.3 percent, versus 6.4 percent a year ago. Actual earnings per share were $0.40, versus $0.44 cents, but exclusive in the Eatzi’s and Cozymel’s charges, earnings per share increased 12 percent, to $0.56, from $0.50 last year. And now for our Q1 outlook.

Our estimates are for top-line revenues to increase about 11-12 percent, driven by capacity gains of 10 percent and same-store-sales growth of 1-2 percent. Softness at Chili’s in July has lowered our comp expectations for the quarter. Today we discuss brand initiatives, which is primarily focused on driving traffic. In order to support these initiatives, we remain conservative with price increases. This focus on driving traffic is the right long-term strategy, however, it does have a short-term impact, and that is lower flow-through on comp gains.

Cost of sales will be flat to slightly higher than last year, as Romaine lettuce and onion prices have returned to more normal levels. Our portfolio brand is not tied to any single commodity and this flexibility offers us the opportunity to advertise around menu items when commodities spike.

Restaurant expenses will continue to be higher until we lap the increased tip reporting. And that will occur in the later half of the fiscal year.

In the quarter we’ll see higher pre-opening expenses from opening three new Maggiano’s, versus none a year ago. And higher utility costs are affecting us, primarily in the regulated states. As I mentioned earlier, costs increase as we serve more guests, which gives us a lower flow-through from comps, traffic gains and price increases. In short, we expect Q1 restaurant expenses to remain around 50 basis points higher, versus last year.

Depreciation and amortization, sequentially, will be up on a dollar basis, due to new restaurant openings, and probably up a bit as a percent of sales. We anticipate General and Administrative expenses to be approximately flat with last year’s 4.2 percent of revenue. Interest in dollar terms will be flat with last year and other net should approximate a $500,000 expense.

As we discussed last year, other net was $2.2 million better in 2003, from a one-time insurance gain. Tax rate should approximate 32.3 percent for the quarter and the fiscal year as a result of higher payroll tax credits. Finally, we expect diluted shares to remain flat to down sequentially.

So, based on these assumptions, our initial forecast of the first quarter earnings is in the $0.45-$0.47 range. We’re aware our first quarter financial forecast may not be in line with current expectations. However, our goal is simple; increased comps through traffic, not by price. This strategy offers the best long-term way to increase shareholder value.

Our fiscal 2004 outlook gives top-line revenue growth of approximately 14 percent, driven by capacity gains of 10 percent and same-store-sales growth up 1-3 percent. The initial forecast for fiscal 2004 earnings is $2.19-$2.23, which includes the benefit of a 53rd week. And we anticipate that the 53rd week will be accretive by $0.05 to $0.07.

Before we turn it over to Q and A, let’s discuss July same-store-sales results. While we’re excited about the positive trend at Mac Grill, On the Border and Maggiano’s, we aren’t satisfied with the results from Chili’s. We’re working to understand the reasons for the softness and can point to two events, which had a negative impact on July costs; one, an Independence Day shift from Thursday to Friday, which impacted sales at all brands by about 50 basis points.

And two, a salmonella outbreak at a Chili’s in the Chicago market. The incident received a great deal of negative publicity and impacted sales throughout the upper Midwest. This event reduced Chili’s comps in July by about 50-70 basis points and may have some small lingering effects for the next couple of periods. The team is looking at every facet for the Chili’s business, to determine why there was a change in trend, but we’re not prepared to date to point to any additional single factor for July’s softness.

Chili’s same-store-sales did trend up throughout July and we expect the balance of the quarter to return to the 2 percent range.

In closing, we believe the steps we’re taking are the right ones to enable us to hit our long-term objectives. Our unique portfolio brands permits us to offer customers dining experiences not only in the bar and grill segment, but also in some of the fastest growing areas of casual dining.

Now to Q and A. So we’ll take the first question, John.

Thank you. Let me give the instructions before we take the first question. Ladies and gentlemen, if you have any questions, please press numbers 1, followed by 4 on your touch-tone phone at this time. Pressing 1, 4 a second time will remove you from the 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 speakerphone, for optimum sound quality. Now just one moment while we poll for questions. And thank you. The first question is coming from Coralie Witter, of Goldman, Sachs. Ma’am, your line is now live.

Hi. I just wanted to follow-up on the situation at Chili’s, and what percentage of your store base is actually in the upper Midwest and did you see significantly stronger comps in the rest of the country, versus that area?

We think the incident affected probably about 10 percent of the restaurants in the comp base for Chili’s. So obviously, we did have stronger performance outside the area that wasn’t affected by that publicity.

Okay, and are you reviewing your marketing strategy for Chili’s at this point?

I think we’re looking at everything. Doug, you want to talk a little bit about that?

Well, I think, Coralie, we feel real good about the marketing theme that was part of the commercials in July. In fact, we’ve used that same theme music commercial over some previous periods and had good results. Obviously, we felt good about the locations of the commercials. The item that we advertised might not have had as large of a consumer base as other items we’ve advertised in the past. But as Chuck said, we’re looking at that, we’re looking at everything to see if we can figure out why we were soft in July.

Okay. And then just one other question. On Cozymel’s, you sited incremental closure costs flowing-through into the first quarter of fiscal ’04. I guess I had assumed most of that would have been in the charge for ’03. Can you help me understand what is still flowing-through in ’04?

Sure. There’ll be some transition costs. Really, the charge that we took for last year was related to the asset balance; any ongoing costs related to these pay bonuses or severance payments, also legal fees. Those items will flow a little bit in Q2 and maybe some in Q1 also.

Okay, thank you.

Thank you and the next question is coming from Janice Meyer, of Credit Suisse First Boston. Ma’am, your line is on.

Two questions; one is, Doug, I think you mentioned maybe the Hawaiian steak didn’t have broad appeal. Can you just talk about how that did when you tested it, versus nationally? Did it do something different? And is that the first time you’ve seen that? Do you think that maybe there was something at issue with how you tested it?

And then secondly, on On the Border, can you talk about the trends of the oldest remodels? Are the traffic gains there holding and even accelerating? That's it.

Okay, thanks Janice. As far as the Hawaiian steak, it did well in tests. And I think part of the challenge – if you look at the Chili’s menu and how its evolved over the years, it’s a pretty basic menu in the early days; hamburgers and sandwiches. And as the consumers – as we’ve gotten more dinner business and we’ve grown the experience, we continue to push the line a little bit on the type of products. For instance, the Shanghai wings, which we rolled out, are kind of an Asian version of our old boneless buffalo wings.

So, we’ve had great success with steaks in the past. This was a type of steak that we thought would push the menu a little bit, expand it to consumers’ different needs, and hopefully attract different customers to Chili’s than maybe the core customer base has been in the past. But it didn’t do as well, actually, in July as it had done in the test restaurants. We still think it’s a great product. It just might not have been the smartest product to advertise.

Starlette, you want to take the OTB question?

Sure. Hi, Janice, this is Starlette. In terms of On the Border and our traffic gains there, we’ve been real pleased over particularly the last quarter and into July, with what we’re seeing in terms of increasing traffic at On the Border. The combination of the marketing, the remodel that we’ve had, improved execution in the store, we think are beginning to translate into some nice traffic for us across most all of our markets.

But how are the older stores doing that have been remodeled, six or nine months now? And how are you confident that you can disaggregate what gains are coming purely from a remodel and what’s coming because of the execution?

Well, certainly the oldest stores that were remodeled, Dallas, back a little over a year or so ago, those gains-lifts are still positive. At the same time, our newer markets that have been remodeled, with the combination of the marketing, the FSIs, have been coming on real strong. So we feel like it’s a combination of the remodel. And over 80 percent of the systems combined with the marketing that we’re doing, give us confidence that we’re doing the right things with the brand now.

Okay, thanks.

Thank you. And the next question is coming from Andy Barish, of Banc of America Securities. Mr. Barish, your line is now alive, sir.

Hi. Two quick questions. Can you give us a quantification on pre-opening, either how much a Maggiano’s cost, so we can kind of get a sense of what that number is, year-over-year in the first quarter? And then a little peak into the promotional calendar as much as you’re willing to talk about for the current month or upcoming? Is Chili’s still doing Hawaiian steak or kind of where do you go at Chili’s and Mac?

In terms of quantifying the pre-opening, Maggiano’s pre-opening runs about $300,000 a restaurant. So, that in and of itself would be a little over 0.5 percent. But, maybe this is a pretty good time to talk about a little bit of what I call reconciliation from Q4 to Q1.

Last year our Q1 was $0.45 and that included $0.02 insurance gain - $0.02 after-tax insurance gain. So, really from ongoing operations we did about $0.43. If you look at the fourth quarter, our growth rate was 12 percent in earnings – that $0.56 that we earned. If you apply that back to last year, we should have come in somewhere around $0.48. With Chili’s sales being a little bit light in July, and the Maggiano’s pre-opening expenses being higher on a year-over-year basis, we sort of took the top down to somewhere around $0.47. And then we’re trying to leave it conservative on the bottom range, in case there’s a chance that Chili’s sales remain soft. Does that help a little bit maybe with Q1 numbers, Andy?

Yes.

Hey Andy, I can speak to marketing that happened in period one, the sales we just released. Chili’s had the Hawaiian steak as well as boneless buffalo wings, so we turned an appetizer as well as an entree. Macaroni Grill had some nice success from a new product; a twice-baked lasagna with meatballs in the first quarter – an excellent entree that we got great trials from. And On the Border has had some nice success with some advertising of a new line of fajitas that customers seem to be very happy about. I’d rather not talk about any further than that, other than the period we just announced. But we’ll continue to have some different items and we’ve got some new products that we’ll advertise.

Thanks.

Thank you. And the next question is coming from Joe Buckley, of Bear Stearns. Mr. Buckley, your line is now on.

Thank you. I have a couple of questions as well. You mentioned a couple of times, emphasizing traffic as opposed to price. Could you share with us what you’re thinking in terms of menu prices as the year progresses, when you lap last year’s increases, things like that? And then secondly, would you talk about to-go, how the mix was with the major brands? And then lastly, I think you mentioned 11 first quarter remodels at Macaroni Grill. Is this the beginning of a stronger commitment to the Macaroni Grill remodel program? And how many do you think you’ll do for the full year?

First of all, on menu prices, I think what we’re trying to do, particularly at Mac Grill and OTB, their traffic has been soft for a couple of years. So we’ve been trying to stay away from doing any price increases. What’s real important for us now is to try and build those brands with more customers coming in. And so, we refrained from doing price increases.

In terms of what do we face as we go down through the year, we’d rather not talk about any pricing increases that might be planned, simply because we’re still reading the tests and still reading information from what we’re getting on a current basis. And by that I mean, as we continue to get stronger and stronger customer traffic, that will give us the ability to go through and maybe put some price increases in throughout the year.

In terms of what do we lack with price increases, I think Chili’s and Mac Grill really are pretty constant for the balance of the quarter. And then I’d have to look back to see what else we have from there. Doug, do you want to talk a little bit about to-go?

Yes, Joe, as far as to-go, I think we’ve mentioned in past calls, Chili’s has pretty much 100 percent of their restaurants with the park and walk-in to-go. We do have some remodels going as we’re, I guess, upgrading or expanding our Chili’s to-go experience to a curbside experience. We’ve seen, of course, at Mac Grill, consumer satisfaction even higher, because you don’t have to leave your car. So, we have about 200 of the Chili’s that will upgrade from the traditional to-go, to a curbside.

Macaroni Grill has 100 percent of their restaurants with the curbside already showing great success with that. And On the Border is at about 85 percent. The to-go remodels follow the restaurant remodels. Chili’s is sitting at almost 9 percent of sales now in to-go. It’s still growing, although not as quickly as it has in the past. Mac Grill is at about 6 percent of sales and On the Border, about 4 percent of sales.

And then you also asked about the Macaroni Grill remodels. I don’t think I’d be ready to make a statement that we’re making a commitment to remodeling more than just those 11. The seven we’ve done have been in some different markets and we’re still reading those tea leaves. It’s a pretty big investment, as we talked about on the last call. But we are seeing positive counts and sales in the ones we’ve done. And it does give the atmosphere – that more comfortable feel to the guest, more family friendly. We’re going to do those 11 and honestly, we’re tweaking a little bit from the first seven, to try to look at the new prototype [kids feel] [ph] as we all try to balance that with the older restaurants.

Okay. One last question, if I could. Remind us when the salmonella outbreak in Chicago occurred. And have you seen the gap between the Midwest and the rest of the system narrow in recent weeks?

It happened June 26th through the 28th. And when did the gap narrow? Was that the second part of the question, Joe?

Yes, just confirming it has narrowed in recent weeks.

Yes, really it has. It’s almost gotten better. It hit its absolute worst for the week following that incident. And then it started climbing back throughout the July period.

Okay, thank you.

And thank you. The next question is coming from Jonathon [Waite] [ph], of McDonald Investments. Sir, please go ahead with your question.

Good morning. I wanted to know on the Corner Bakery, if you could update us on the new service initiative, where you stand as far as the other markets outside of Dallas? What’s your scene in Dallas, as far as the sales? And then, what will it take for you to expand that at a quicker pace?

Okay, you want me to take that one, Chuck? In terms of the Dallas remodels, we just finished the final one, really the end of the quarter here in the Dallas market. So we’re still reading the results of the remodels. For early indications we feel real good that they are hitting what our expectations were in terms of our return requirements. A little bit of an increase in traffic, but it was really designed more towards saving cost of sales and some labor, which we are feeling good about.

We have 15 currently remodeled, in total. And we have 17 of the proto-3s currently in the system. We are making some modifications based on what we’ve done in Dallas. Again, similar to what Doug was saying with Mac Grill, in terms of reading the results with the customers and tweaking what we need to before we move into other markets. But, the plan would be to go in later in the year, in the California market next.

Okay. And then, remind me on to-go in Chili’s, what you spent to date to retrofit them all to have to-go and then how much will you spend perspectively adding curbside to-go?

Really, the costs for that were around 35,000. And we’ve had to as a big initiative for a couple of years. So all those costs are pretty much gone. In terms of doing curbside, we don’t think there’s that much of an additional cost.

Okay. Oh, and I’m sorry, on Corner Bakery, my last question of what will it take to get that to grow at a quicker pace? I didn’t get an answer on that one.

Well, I think, again, what we’re trying to get is better financial results. If we can get a business model that meets our hurdle requirements, then we would be able to expand it faster.

What’s the piece that’s missing? Is it more the top-line, the margin, the investment cost – what do you think needs to be tweaked?

Yes, all of them. I mean, the volumes are good. I think we’ve got a pretty high hurdle requirement too. If you look at our 25 percent ROIC for a core brand, and then we ask emerging brands to hit a hurdle higher than that, that’s a pretty strong requirement for any brand to continue to grow. But we think that’s the right hurdle for us to have for return on vested capital. So, we need to improve sales top-line. We also need to get margins a little bit better and keep trying to tweak the building to see if we can reduce costs.

And one last question. What are your thoughts on Rockfish? It looks like you’re opening up less in fiscal ’04 than ’03.

Well, our long-term prospect for Rockfish, we feel real good about. They’ve gone into some new markets over the past year and as with any new brand, we want to give them some room to breath. And it’s still a joint venture for us right now. But we’re feeling good about the latest round of store openings. But again, we want to have them grow at the right pace for the brand and not push them too fast.

Okay, thank you.

And thank you. The next question is coming from Jeff Omohundro, of Wachovia Securities. Sir, your line is now live.

Thanks. I wonder if you could elaborate a bit more on this Cozymel’s charge – that impairment charge of 15.1 million? Which, I guess, is pushing $1 million per unit. It sounds like you don’t have a letter of intent yet on the sale. I guess you have some estimation of market value. Perhaps you can just elaborate a bit more about the magnitude of the charge and how you arrived at it.

Well, we did take what we thought was a good estimate on our sales proceeds and evaluate that against what we were at in procuring value of both the fixed assets and then also we had about $7 million of goodwill for that also. So, the breakdown of assets and the charge off of goodwill was what made it grow to $20 million. Anything else, Jeff?

Well, I mean, when you look at it on a per-unit basis, that seems rather high. Any explanation for that?

No. It was about $13 million when you exclude goodwill.

All right, thank you.

And thank you. The next question is coming from Mitch Speiser, of Lehman Brothers. Sir, your line is now live.

Thanks very much. A few questions; first, on Macaroni Grill, those comps did slip a little bit, versus last month and on a two-year average run rate. You did go through Chili’s and what you think may have affected that. So anything you can go through, maybe to give us a little more information as to why you think Macaroni Grill decelerated somewhat more than I think most of us expected in July. Then I have a follow-up. Thank you.

Mitch, we got off to a rough start. That trading day, July 4th is about 50 basis points. Chuck’s original comments; it really was kind of all brands. The good news is, those sales did accelerate through the rest of the period.

Well, then too, they had a little bit of negative advertising mix. They advertised last year prior to the fourth of July weekend and didn’t do any of that this year. And as Doug said, that 50 basis points is even magnified a little bit more for the other brand. So Mac Grill would have been higher than 50 basis points. That 50 basis points was really Chili’s.

So we dug ourselves a hole and it looked better as the period moved on.

Well, business at all the brands has been looking better as we’ve gone through July.

Would you attribute maybe like the real strong comps at Olive Garden in July or is just the category too big to have that have an impact on Macaroni Grill?

Well, we still don’t feel, Mitch, that it’s a market share gain, so we’re going to look within our four walls and elements that would impact us, not really related to Olive Garden.

Okay. And secondly, on just your cost outlook, you didn’t really mention cost pressures too much in the fiscal first quarter or going forward, just as it relates to your earnings guidance. Just give us maybe a rundown on food costs – maybe beef, as well as advertising costs. And how those cost trends may have affected your forward guidance.

It really didn’t have much impact. I think again, if you look at where we were in terms of for the fourth quarter, we’re looking at basically the same scenario in Q1. Restaurant expenses are higher because the utilities maybe 20 basis points there, 10 basis points on credit card fees. But again, those were expenses we saw back in Q4 also. So I don’t think there’s a big change. I think the biggest issue is we’ve probably got a little bit more pre-opening that will hit us in the quarter. I would anticipate we’re going to have some costs from the closure of the Cozymel’s deal and maybe some stay bonuses.

But I can’t say that necessarily we dialed that into the guidance exactly. We’ll try to quantify that as we go through the quarter and get closer to closing the deal. But it’s basically the outlooks for costs, relatively similar to what we saw in Q4. We had softer Chili’s sales in July, and so that’s going to hurt us a little bit on EPS.

Okay. And lastly, just on unit development, it looks like the fiscal ’04 unit development is increasingly skewed towards Chili’s. You are slowing development at Big Bowl it looks like, either talk about Corner Bakers. I’m just wondering, at Big Bowl, I think you’re only expecting two to three openings. What are you seeing at Big Bowl and why wouldn’t you want to grow quicker at that concept. Thank you.

Okay, I’ll take the Big Bowl question there. If you’ll look back over the history of Big Bowl, we’ve experienced about a 50 percent growth in that concept in a year-over-year basis. We’ve gone into some new markets and with each market we have gained some additional learnings for the brand. Again, similar to Rockfish, each of these model brands needs a little bit of breathing room to kind of asses what they have learned and what changes need to be made going forward.

So, we feel real good and positive about the brand and its long-term potential. I think with JJ in place now and the two to three openings over the next year and the foundation that Wilson and the team have put in place, I think we feel real positive about it. But again, I’ll give them a little bit of breathing room from that 50 percent growth. And again, since it takes us about 14-18 months from development cycle perspective, again, giving us the opportunity to read those markets and then what adjustments we need to make, two to three is about right, given that development cycle time.

Great, thank you.

And thank you. The next question is coming from Matthew DiFrisco, of Harris Asset Management. Sir, your line is now live.

It’s actually Harris Nesbitt. Just two quick questions here. For one, I guess, when you look at the long-term model that you guys have been 10 percent capacity, 1-3 comps. I’m just trying to figure out exactly why we’re not getting the prescribed 15 percent EPS or organic EPS for the full year ’04? If you back out the $0.5-$0.7 incremental cents from the extra week, at best, you guys are modeling 13 percent EPS. I’m just trying to figure out, is that conservativeness or are you also in there incurring, or plan to incur the one-time Cozymel’s cost in there?

Well, there is a couple of cents that would have been contribution from Cozymel’s that we won’t see. And we have to take that out of what we think is our full year guidance. So we’re a couple of pennies light due to that. I guess it’s closer to 15 percent. But I think really, Matt, what we’re trying to do now is not take price increase. And so, if we took a 1 percent price increase during the first quarter, it takes $8.5 million for $0.06. So you can make that up pretty quickly. But that’s not what our intent is. Our intent right now is to build long-term brand – really brand goodwill, by trying to keep prices under control and trying to deliver a great dining experience at a low price market.

And then I guess when you say traffic though has added cost to it, can you just describe or rank and file what those added costs are? Is it marketing dollars that you’re spending to get that traffic? Is it extra labor in the box? Can you just draw us that picture?

No, Matt. It’s just the difference between – if you take a 1 percent price increase, that all flows to the bottom line. You get more money from – you don’t serve any more customers, your costs don’t go up at all. If you push traffic, you’ve now got to serve that guest. You’ve got to give them a meal, you’ve got to take care of them. So now you have associated costs. [Multiple speakers] traffic increase as a much lower [inaudible].

I realize that. But I mean planning for the comp to be from traffic ahead of time, what I’m trying to figure out is, are you guys also planning on spending incrementally on marketing dollars?

No, we really haven’t changed anything in that regard.

Okay. And then lastly, how much of the Cozymel’s – can you put it in EPS terms, do you have baked into the first half of ’04 in cost – in exiting the brand, of your 219-223 estimate for the year?

We really don’t have many costs included in exiting the brand. We do have about $0.02 [light] [ph] for the year, from the contribution that they would have given us.

Okay great. Thank you.

And thank you. The next question is coming from John Ivankoe, of JP Morgan. Sir, your line is now alive.

Hi. I think you just answered the one question. You said Cozymel’s contributed $0.02 to fiscal ’03 earnings? Is that correct?

They would have been a little bit higher, but since we’re losing 4, we think the latter part of the second quarter, we think it’s about $0.02 light in ’04 is about what they would have added – about $0.02 worth of earnings is what they would have added.

Okay. That’s very important. And secondly, could you, I guess review for me, or perhaps us, your commodity purchase practices and specifically give kind of an outlook for maybe the next six or 12 months as you see it, for hamburger, steak cuts and chicken in the current market? Thanks.

Our commodity practices, really we try to lock in product and price anytime we think the market is advantageous to it. In terms of our outlooks for our cost of sales as you go out through ’04, we really don’t look to see a big increase over ’03, maybe 10-20 basis points at the most. Beef might be a little bit – at least the outlook from beef that we hear from folks is that it might be a little bit negative on a year-over-year basis. We’ve got chicken prices locked in for quite a while into the year. So, commodities really don’t look like they’re going to be [inaudible].

And Chuck, how long are you locked in on your hamburger and steak cuts?

We can’t lock in on hamburger, but steak cuts, we’re out through the calendar year and then we’ll go ahead and look at what might be a good time to re-up for those.

Thank you very much.

Thank you. And the next question is coming from Paul Westra, of SG Cowen. Sir, your line is now on.

Great, thank you. I was wondering if you could provide us with a little more color on the salmonella breakout in Chicago. You mentioned 10 percent of your comp base was impacted, overall comps 50 basis points. So we could assume comps were down 5 percent in the month, by assuming you had more acute hit in the beginning. And basically, can you just try to give us a quantification of the earnings impact relative to the comp impact, which I assume was more.

And second, if you’re going to spend some more one-time dollars to maybe grow [indecipherable] and then market to boost sales in that market. And then second, related, when you talk about Chili’s comp outlook, I think that you just confirmed that you said you expect comps to kind of return to the 2 percent run rate for the remainder of the quarter. And is it that rate that you seem a little disappointed in, in this 2 percent run rate?

To talk about the cost a little bit. Yes, it probably cost us a penny and a quarter by being soft for the month. We don’t want to talk about really our plans in the Chicago area. We obviously want to build goodwill and get customers to come back.

In terms of the run rate going forward, I would say yes, we’re a little disappointed with 2 percent. That’s pretty much where Chili’s is forecasted, but we’re always hopeful that they can beat that number. And they have been trending up as we said, throughout July. They started out down in that market – the specific Chicago market, obviously, were down 15-20 percent right off. And then it’s been slowly coming back some.

But in that market, you said it was only – well, if it’s maybe down 5 for the month, is that [inaudible]?

We had the biggest impact directly in Chicago, which would have been about half of maybe the total restaurants. It was in about 5 percent of [the system] [ph], maybe. And the other outlying areas that got Chicago television stations – there was some coverage on WGN, which is a national station and then also in the Chicago newspapers. We saw lesser impact in surrounding areas, but we could correlate with a pretty high degree of probability that there were sales declines directly related to that publicity.

Okay. And just one more follow-up question on Macaroni Grill, can you just again remind us what you expect from the refurbishment as far as the sales or you’ve seen in the past where sales pop? And what would it cost again? And confirm again, you do not take these stores out of the comp base as they’re not closed, is that true?

They still stay in the comp base, because they aren’t closed. It’s a tough thing on the management teams is we don't close the restaurants to do the remodel. It’s all done at night and it’s a lot of work in the mean time. We try to get a sales lift somewhere in the single digits. That's what we need to get paid back on the initiative. And so far we’ve seen those kinds of results.

And last then, the cost of refurbishment?

About $180,000 per restaurant.

Great.

And thank you. Your next question is coming from John [Glass] [ph], of CIBC World Markets. Sir, your line is now live.

Thanks. I wanted to go back to the – I presume your comments on traffic versus price also pertains to the Chili’s brand. In other words, you don’t want to take pricing there. And if that’s the case, when have you changed your view on pricing there? It seems like you used to have it both ways; pricing and traffic. Do you feel as if your value proposition’s diminished, vis-a-vis the competition? Do you feel like you’re more pessimistic about the consumer? Is there anything about that brand you feel more negative about pricing on going forward?

I think when we talk about not taking price, we’re primarily talking about Mac Grill and On the Border, ones that have had negative traffic for some time. Chili’s has had lots of traffic. At least as far as I can remember back. It’s been years – quarter-on-quarter they’ve had positive traffic. So we do believe we’ve had pricing ability at Chili’s. But maybe some of the other brands where we’ve seen weaker traffic, we think the right thing is to stay away from putting our thumb on the scale and just trying to take price increase.

Right. So you do intend to take pricing at Chili’s in the coming year?

We’ll look at it as all [technical difficulty]. I don’t want to disclose what our strategy might be going forward.

Got it. And then, you used to give kind of a gauge of what comps needed to be in order to leverage expense at Chili’s. Do you still see that in the 2-3 percent range, or going forward, given cost environment, etcetera, where do you see the leverage point in Chili’s comps?

I think when I look at an overall breaker comp, I think it’s 2 percent to 3 percent again. It hasn’t changed. Really the expense outlook has been about the same now for a couple of quarters and if we’re going to do the 2 percent plus kind of comp range, primarily built upon building traffic, it will take comps north of that to get leverage. But the good news is we have that fixed in our [technical difficulty]. We’re looking at lower year-over-year margins, both in Q4 and in Q1.

Great. Thank you.

And thank you. The next question is a follow-up from Janice Meyer, of CSFB. Ma’am, your line is now live.

Actually, along those same lines on the pricing, I wasn’t sure which brands you were talking about either. So, if I could follow-up on Chili’s, does your research show, sequentially, over the last few years, any change in the value perception or have any of your competitors, specifically Applebee’s with their menu upgrade, do you see them making any inroads? And then maybe even as a follow-up to that, is your research usually a good indicator of changes in traffic – is it a leading indicator or a lagging indicator, if any indicator?

Well, I think, Janice, over the years, Chili’s of course, has had a tremendous price value reputation among consumers. And we are getting more consumer feedback than we’ve ever gotten. We even have a new web-based technology. We’re getting lots of customer feedback. And we haven’t seen any deterioration in the consumers’ feedback about the price value quotient at Chili’s.

Back to Chuck’s comments to John, we’re going to just watch. Obviously if traffic doesn’t pick up, we’d be less likely to take price at Chili’s. I mean, we’ll look at each brand individually, but also weigh that with the economy in general. If you look at the Maggiano’s numbers, we looked at some prices on the weekends to give better value on the lunch menu. And that’s done some nice things for traffic, but you see some change there.

We have an overall feeling that now’s not the greatest time to take price increase, but brand by brand we may look at it differently. But we still feel very good about the price value quotient at Chili’s. And again, look at July as kind of just one month with a brand that’s had years and years of great success in this area. And again, we saw sales trending up the back half of July. So we still feel good about it.

Yes, Chili’s certainly is just one month. But I’m still interested in this price thesis you have. Because if I look at ’01 and ’02, between price and mix, Chili’s was up 3 and ’02 On the Border was up 4. And yet you took pricing and mix during recession, during war. So now, it’s sort of interesting with all that behind us and you and other managements actually indicating you think the tone of the customer has gotten better, why now you’re getting more cautious on pricing? Or are you reacting to the one month softness or is there something else you see that’s longer-term?

Well, our strategy on price was at this table long before we saw July’s sales at Chili’s. And Janice, trust me, we will take price when we feel like it’s prudent. We just want to make sure we have a long-term positioning for the portfolio in general. We love the check average of most of our brands, kind of that sweet spot where you have great food in a casual environment and you just don’t want to upset the apple cart. And again, the decision on On the Border and Macaroni Grill are relatively simple. We had weak traffic. We didn’t want to do anything to risk that. We wanted to improve traffic.

Chili’s is a little bit trickier. And so we’re reading the tea leaves, looking at the economy, looking at customer feedback, looking at current traffic. And if we get the opportunity, as Chuck described earlier, you can float through your costs much better if you can take some price. We just want to stay relevant to the consumer and make sure that they feel like they’re getting the same value they might have gotten five or ten years ago for Chili’s brand.

Sure. And just again, on your customer research, have you found in the past that it’s a good leading indicator of things to come in traffic or no?

I don’t know if I can look back and connect the dots completely. The good news in this current web-based information is we can get it by individual restaurants. So the management can use it by restaurant, by market and by brand, to focus on whatever those points might be. Since Chili’s had normally had positive traffic and sales over the years, and we’ve usually gotten good feedback from the consumer, I guess they’re connected. But we’re looking at them closer than ever.

Okay, thanks.

And thank you. Your next question is coming from Bryan Elliott, of Raymond James. Mr. Elliott, please go ahead, sir.

Thank you. When do we lap Chili’s prices through the new fiscal year? You were working on a 1.1 currently? Is that it?

Yes, I think we lapped some price – about 0.7 throughout the first quarter. We would lap about 0.7 the first quarter and then that would stay pretty flat really through the balance of the year.

Okay. And I hate to beat a dead horse. Well, actually one before I beat the dead horse. You mentioned a couple of times, the Cozymel’s flow-through costs, the stay bonuses and that sort of thing. That would seem to be a measurable number in EPS that’s in the first quarter guidance. Is that a penny or two, it would appear to me?

No, we have not put any costs for Cozy’s into the Q1 guidance. Again, it’s not measurable, because we still don’t know what legal fees we’ll have to pay and what other costs.

Okay. Why are we not able to, once we declare it as a property for sale, why are we not able to make a one-time estimate of cost leading up to that sale and have that all be in the charge and then have it be a discontinued ops from a go forward basis? Why are we seeing flow-through until it is sold.

There’s been some changes in accounting literature that has stopped people from doing that.

Okay. I mean, given that and given that the market is used to it under the old regime, under the new regime, could you help us out and give us some estimate of what you’ve included in your guidance for those ongoing flow-through costs, even if it’s just a rough range?

Sure. I think we have not baked anything into the Q1 estimates, because we’re anticipating these closes in Q2. We’re not sure whether legal fees will be a Q1 expense or a Q2 expense. It will depend upon how negotiations go and when we close the transaction.

But the stay bonuses and all are ongoing. They start right away, don’t they?

Yes, they do. And I don’t think that that’s really going to have any material impact on the quarter.

Okay. The dead horse would be this pricing decision. I mean, this is very contrary to and goes against the grain of a lot of history and in this industry and with your company and is very different from commentary among other players in the business as well. And I think you need to flesh-out for us, if you can, a little bit more as to what is really driving this pricing decision other than gee, we kind of feel like now’s not the right time to take price. You know, that’s what I heard as the answer, and if you could flesh that out a little more – and there seems to be more. It’s a strategic decision, so what are some of the factors that lead you to this strategic decision, particularly on Chili’s?

Well, first let me just say that we didn’t just build a brick wall that can’t be torn down. Change in pricing decisions can be made very, very quickly. So, we didn’t say never. And we have historically taken those prices. We’re just watching the traffic at the restaurant, making sure we provide the best price value experience on each brand, vis-a-vis the competition, vis-a-vis the guest commentary that we get.

But it is very easy to put a price increase at some point in time. We’re not, I guess, creating an edict here that we will not do it the entire year. Today, that’s how we feel and we’ll watch the results over the next few periods and it’s easy to plug in a price increase if we think it’s appropriate at that time.

Fair enough. Thank you.

And thank you. Your next question is coming from Maryann [Coltus] [ph], of [Munder] [ph] Capital Management. Ma’am, your line is now live.

Thank you. With regard to Rockfish, as you’ve looked at the new stores, have you come upon an ideal square footage size for this concept and come up with an estimate of how many stores you could potentially build? Thank you.

Well, in terms of ideal square footage, a footprint, we’re still experimenting and tweaking the brand. We’ve got them at the 4,000 square foot level and at the 5,000 square foot kind of prototype. And somewhere in between, not any larger than that, but that 4,200-4,500 square foot model we think works real well and gives us a lot of flexibility with Rockfish in terms of locations. And we’re still assessing the overall, ideal prototype there. Again, that’s why it’s still in R and D and part of our joint venture.

In terms of our potential universe, I believe we’re still kind of holding to what we initially thought, in our 200-250 sort of neighborhood, at this point.

Okay, thank you.

And thank you. The next question is coming from Adam Weiss, of [Chilton] [ph] Investment Company. Adam, your line is now live.

Thank you. Can you talk about the contribution to the comps that came from the take-away or to-go business?

To-go has been up somewhere around a point each and every year. So I would say just as a rule of thumb, it’s probably been about 1 percent increase on the comps for Brinker overall.

Okay. And can you talk about what the CapEx was for fiscal ’03 and what you’re looking at next year?

CapEx for ’03 was $332 million, and we’re looking somewhere around 348 million for fiscal year ’04. So that’s about 5 percent increase. There’s a couple of reasons for that. Number one, three Maggiano’s which have a big capital investment to us will be built in the first quarter. So we’ve already incurred a lot of expenses to get those done. The OTB remodel is complete. And then we see some good things too, Mac Grill prototype is about the same price. It hasn’t really gone up in price. So that’s helping us keep CapEx in check. And then we’re also done with the [KBX] [ph] rollout at Chili’s.

So how much of CapEx is for new units, roughly?

Somewhere around $280 million.

Okay. And looking out into this year, can you talk about the advertising cost environment and what impact that’s going to have on your budget or your coverage and so forth?

Well, in terms of our overall coverage, I don’t think we’re expecting any material change. We’ll see with some of the brands, moving more up into the tier one from the tier two or from tier three into tier two, across the brands. Our overall spending as a percent of revenues will be constant. Again, at Mac Grill you see a move to more national cable, versus spot. And overall, media inflation in the kind of lower double-digit range. That kind of 10-12 percent.

So the fact that the cost of advertising has gone up, you don’t think it’s going to negatively impact the visibility of the brand?

We still believe we’ve got a schedule that matches as well as we’ve had over the last several years. We’re just getting more efficient with our coverage. Again, as we move in through development up in to tier ones and tier two. Again, that capacity growth that we’ve gone through and the 118 stores we’ve added this last year, continue to contribute to our advertising spending.

And when you look at the new locations that you’re getting, are you seeing inflation in your cost to open stores, build stores, rents, etcetera?

Really cost to open stores has been pretty good. Our development team has done a great job taking costs out of the building. Most of the buildings we’ve been opening have been either flat or even lower at cost, in terms of square foot. We’re constantly working on ways to get the party sizes more efficient, get more seats in the restaurant and more people fed at a lower cost.

We also, since Chili’s is in so many markets, we have relationships with general contractors in most places and have had experience with them and they’ve done a nice job of [indecipherable] costs, whichever brand it is they’re building.

That’s all. Thank you.

Thank you. And our next question is a follow-up from Jonathon Waite, of McDonald Investments. Mr. Waite, please go ahead, sir.

Yes, just one quick question on the same-store-sales. Kind of the tone that I’m getting from you is kind of a conservative approach to the first quarter. But you’re talking about the comps accelerating near the end of July. I’m wondering if you can kind of reconcile that. Are you being conservative in the 1-2 percent guidance for the first quarter? And then an additional question would be, is there still a sizeable gap between the Midwest Chili’s and the rest of the Chili’s comp base?

Going a bit backwards, Jonathon. Yes, there is still a gap between what Chili’s is doing in the Midwest and what Chili’s is doing on the Coast and maybe down in the Southwest. In terms of are we being conservative with guidance, I think we’ve always been looking to put up a number that we can hit all the way around. And Chili’s did recover throughout July and did put up numbers to make us think that 2 percent is achievable in the balance of the quarter. But, we don't want to get too far out in front of ourselves. We’ve definitely got the opportunity – on September 4th, when we announced August sales, to give you a better outlook as to what we’re seeing in August. And also, where our EPS guidance will sit at that time.

Thank you.

Thank you and unfortunately, we only have time for one more question. And the final question is a follow-up from Joe Buckley, of Bear Stearns. Sir, please go ahead.

Just curious, on the curbside to-go at Chili’s, as you’ve tested that, have you seen a lift in to-go sales?

Joe, honestly, it’s so new we haven’t seen a lift yet. We haven’t even had a chance to really evaluate it. We’re moving as quickly as we can go make the transition, because we know for consumers it’s nicer. I mean I like going to Macaroni Grill for curbside, because I don’t get out of my car. But we haven’t had a chance yet to see sales increases, but obviously the customers that are regulars in those restaurants have commented to the folks that deliver to the car that they think it’s a great, neat upgrade and a better experience.

Thank you.

Okay. Well, thanks for joining us today and we’ll release August sales results on September 4th. If you have any questions, please feel free to contact Hil or myself. Thank you very much.

And thank you, ladies and gentlemen, that does conclude Brinker International’s fourth quarter earnings conference call. Please disconnect your phone lines at this time and have a great day. Thank you for your participation.