Brinker International Inc (EAT) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to the Brinker International First Quarter Earnings conference call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments following the presentation.

It is now my pleasure to turn the floor over to your host, [Hil Davis] [ph]. Sir, the floor is yours.

Thank you very much. Good morning, and welcome to the October 21st, 2003 Brinker International First Quarter Fiscal 2004 Earnings conference call. During our opening remarks and 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 in the company’s business, fuel and utility costs and availability, governmental regulations, inflation, consumer perceptions of food safety, changes in consumer tastes, changes in demographic trends, availability of employees, terrorist acts, acts of God, unfavorable publicity, the company’s ability to meet its growth plans, and other factors more completely described in the company’s filings with the SEC.

With me today are Ron McDougall, Chairman and CEO, Doug Brooks, President, Todd Diener, COO, 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 Doug Brooks.

Doug Brooks. Thank you, Bill. Good morning, everyone. And thanks for joining us today.

Our first quarter earnings while it was in line with guidance were not as strong as we would have liked. The quarter started slowly with July sales before our expectations, but sales picked up briskly in August, and September sales were in line with our expectations.

The consumer environment remains relatively unchanged, and long-term trends remain favorable for the restaurant industry. People continue to dine out, as evidenced by our 12.5 percent top line growth and 1.9 percent blended same-store sales growth.

But the cost environment made our earnings growth difficult. Our business is experiencing cost pressures that are macro in nature and more mid to long-term oriented. And we believe there are opportunities to offset these rising costs, and we’re focused on doing just that.

Today’s announcement of expected flat second quarter earnings are principally the result of an increasingly difficult cost environment. While these rising costs have accreted near-term difficulties which our team is hard at work addressing, we do remain committed to increasing profitability and retaining earnings growth in the second half of the year.

In closing, we remain committed to our long-term goal of 15 percent earnings growth, and our brands remain well-positioned to serve the growing needs of consumers.

Now, I’ll turn it over to Chuck who will take us through the quarter.

Well, thanks Doug. Let’s review the first quarter highlights and our second quarter outlook before we take questions.

The first quarter revenues increased 12.5 percent to $871m. Capacity growth was 10.6 percent driven by the addition of 27 new company owned restaurants. Brinker's same-store sales growth, as Doug said, increased 1.9 percent for the quarter, which was good top line growth despite the negative impact of the August blackout and September’s hurricane. Earnings were 45 cents per share, in line but at the bottom end of our previous guidance.

For the quarter Chili’s posted a 1.9 percent comp sales gain, composed of a 1.3 percent price increase, a .2 percent increase in mix, and a .4 percent increase in traffic. This marks the 26th consecutive quarter of positive same-store sales at Chili’s.

Our Development Team opened 18 company owned Chili’s Restaurants in the quarter, including three small town [proto 12’s] [ph]. The brand also opened the first Chili’s on a college campus, at [Bailer] [ph] University during the quarter. Chili’s broad appeal and ability to operate in different venues is the primary reason we recently increased Chili’s potential universe to 1,750 restaurants, from 1,500.

On the advertising side, Chili’s featured boneless buffalo wings and the infamous Hawaiian steak, versus baby back ribs, boneless buffalo wings and to go in July. Boneless buffalo wings versus baby back ribs, boneless buffalo wings and to go in August. For September and October Chili’s is featuring the fajita trio and our convenient to go, versus the same promotions a year ago.

Wilson [Kraft] [ph] and his team did an excellent job keeping Chili’s focused and building momentum through the quarter after a very turbulent July.

Macaroni Grill same-store sales increased .9 percent, driven by a one percent increase in pricing, a .2 percent increase in mix, and a three-tenths of a percent decline in traffic.

For the quarter we featured twice-baked lasagna with meatballs, a new menu item, in both July and August. [Mac Grill last] [ph] the highly successful introduction of create your own pasta, and the initial launch of national cable advertising during the last week of August and September.

First quarter media utilized 10 weeks of national cable, versus three weeks of national cable a year ago, as we continued to shift dollars toward the national budget, and away from local.

For the month of September, the first full month of the [lap] [ph] natural advertising, Mac featured three weeks of national cable versus three weeks a year ago. In October, however, the national cable advertising schedule will be unfavorable with only one week of national cable versus three weeks a year ago.

On the development side, Mac Grill opened four new restaurants during the quarter, and remodeled 11 restaurants, bringing the remodel total to 18. Based on favorable results so far, 11 more restaurants will be given the more updated, more comfortable look this quarter.

John Miller and his team continued to execute at a high level, while increasing the approachability of Macaroni Grill.

Maggiano’s posted a same-store sales gain of 2.4 percent, resulting from a price decrease of two-tenths of a percent, a seven-tenths decline in mix, and an impressive 3.3 percent increase in traffic.

As in the previous quarter the decline in mix and pricing was due to the decision to offer a special weekend lunch menu, which provides guests the same high price value experience at lunch as they already get at dinner.

On the development side we opened three new restaurants during the quarter. The new locations are in Milwaukee, Wisconsin, Richmond, Virginia, and Charlotte, North Carolina. And so far, results have been above our expectations.

Mark [Tormey] [ph] and his team have successfully balanced the difficult task of opening multiple restaurants while staying focused on the consumer experience in their existing restaurants, a very difficult feat.

OTV posted same-store sales gains at 3.2 percent, driven by a .7 percent increase in pricing, a decline of 1.8 percent in mix, and a 4.3 percent increase in traffic. This marks the second consecutive quarter of strong traffic gains for OTV. The fajitas favorite which consisted of jalepeno barbecue chicken fajitas, ranch chicken fajitas, and the seven pepper steak fajitas which were featured in July and August provided guests with a differentiated and cravable dining experience. The border sampler, a guests’ favorite, was highlighted in September, and is currently the October feature.

The OTV Team is building on their success, driving customer traffic, and the Team remains focused on providing guests a great experience.

At [Corner Bakery] [ph] the [press to the guest] [ph] program, new ordering process and delivery system have raised the consumer experience while improving financial performance.

On the development side we opened one restaurant during the quarter in Valencia, California, north of LA.

[Big Bowl] [ph] opened one restaurant during the quarter in Middletown, Wisconsin, a new market. We plan to open one or two more units this year, and we continue to evolve the brand for a long-term success.

Also, our Rockfish joint venture opened two new units during the quarter in Mesquite and Lubbock, Texas.

So that completes our brand review. Now, I’ll flip to Q1 expense.

Cost of sales as a percent of revenue was 27.5 percent, versus 27.2 percent a year ago, a 30 basis point increase year-over-year. This increase was driven primarily by higher commodity prices for dairy and produce. In addition, the introduction of new products and recipe changes where we’re giving larger portions to the guests, produced a higher cost of sale. Chicken prices have been favorable, and helped partially offset the impact.

Restaurant expenses as a percent of revenues were 55.8 percent, versus 54.7 percent a year ago, a 110 basis point increase over last year. Contributing cost factors were higher payroll taxes from increased cash tip reporting, and we’ll finally [lapse] [ph] this in the fourth quarter.

Utilities, principally natural gas, insurance, and property tax costs, labor costs as a percent of revenue increased 40 basis points, driven principally by higher than expected management spend. Currently wage rate pressures have been modest at only one to two percent.

D&A as a percentage of revenues increased 10 basis points to 4.9 percent, versus 4.8 percent a year ago. The slight increase was due to the investment in 107 new restaurants.

G&A was 3.8 percent, versus 4.2 percent a year ago, a decrease of 40 basis points year-over-year. Lower performance based expenses versus a year ago drove the decrease in G&A.

Operating income was eight percent, versus 9.1 percent a year ago. And as Doug said earlier, we’re committed to improving this comparison.

Interest expense was 3.3m, slightly lower than a year ago. And other [net[ that was the $257,000 credit versus a net $1.6m credit a year ago. And, of course, last year’s result included a life insurance benefit of $2.2m or two cents per share.

The tax rate was 32.3 percent, versus 33.6 percent, as Federal tax benefits from those increased payroll taxes have helped to reduce our rate.

During the quarter we repurchased 1.6m shares of stock for approximately $52m. And at the beginning of our second quarter there was $66m available under our share repurchase program.

Net income as a percentage of revenues was 5.2 percent, versus 5.9 percent a year ago. And excluding last year’s insurance gain net income was 5.2 percent this year, versus 5.5 percent a year ago.

Earnings were flat at 45 cents a share, however, on a comparable basis earnings actually increased five percent when excluding last year’s one-time insurance gain.

And now, for our Q2 outlook. Our estimates for top line revenue are an increase of approximately 12 percent, driven by sales weighting capacity gains of nine to 10 percent. As noted in the press release, there’s a holiday shift that will help December and second quarter comps. Christmas day shifts from the December reporting period to the January period. As a result, second quarter sales will be approximately one percent higher.

In addition, in order to combat rising costs, we’re in the process of implementing modest price increases at our brand. The combination of these price increases and the calendar shift raises our same-store sales forecast for the quarter to be two to four percent.

Cumulative price increases will approximate two to 2.5 percent once implemented on November 1st. So sales in October will not receive the benefit of the price increase, and so our expectation is for comp fees below that two percent range.

Cost of sales will be about 30 basis points higher than last year due to the impact of higher beef and dairy costs.

While the Canadian border partially opened on September 10th the ban remained on importing live cows. The result has been pressure on supply, driving spot market prices meaningfully higher. Additionally, the majority of Chili’s beef contracts expired the end of this calendar year, making it difficult to forecast beef prices for the balance of our fiscal year.

Restaurant expenses will be approximately 80 basis points lower than a year ago, including the one-time asset impairment and restaurant [closing] [ph] charges. Excluding those one-time charges restaurant expenses should be 40 basis points higher than last year as we gain some leverage from price increases in the additional sales day.

The cost pressures will continue to come from higher payroll taxes, management expenses, utilities, and healthcare costs.

Depreciation and amortization sequentially will be up on a dollar basis, and as a percent of sales due to continued new restaurant openings. General and administrative expenses should be slightly higher as a percent of sales than last year. And interest expense in dollar terms should be slightly higher than last year, and other than that should be about $1m expense.

The tax rate should have be approximately 32.3 percent due to tax credits relating to higher payroll taxes, and it should remain there for the balance of the fiscal year.

Based on these assumptions our initial forecast of second quarter earnings is in the 44 to 45 cent range. And for the year previous guidance was $2.19 to $2.23. Based on our Q1 performance and our revised expectations for Q2 our new range would be $2.13 to $2.17 on a 53 week basis, or $2.07 to $2.11 on a 52 week basis. We understand that our earnings forecast may not be in line with current expectations, but it is based on where we see the business.

In closing, we still believe out target long-range growth of 15 percent is achievable. We have a talented, experienced management team that is focused on achieving a healthy balance between driving results today and the long-term positioning of our brands for tomorrow.

And now, we’ll take the first questions.

Thank you. Ladies and gentlemen, the floor is now open for questions. (Caller Instructions.)

Your first question is coming from Coralie Witter. Please note your affiliation, then pose your question.

Hi, I’m with Goldman Sachs. The question I have is we have known for some time that there were a variety of industry cost pressures ranging from insurance, to workers comp, to payroll, et cetera. And the question is what’s really changed in the last few months to drive the guidance down further?

Well, really what had happened is, you know, we’ve been trying to drive traffic and not gone towards price increases. And so when we looked at our business we had felt that we could control those costs and keep them in check based on just driving higher comps from traffic. As we looked at it again, got some more visibility through the last quarter it’s become apparent that really we need to take another point in price.

Right, but it’s really the restaurant expenses that seem to be trending higher, so what is driving that higher versus initial expectations?

Well, I think just not being able to get much leverage, a 1.9 percent comp sales gain. We had hoped to get better leverage on that, and we have not been able to do that. You know, if you look at the break-down of expenses, what’s higher on a year-over-year basis, Coralee, you’re right. I mean payroll taxes are up 30 basis points year-over-year, utilities are up 20, property taxes and insurance combined, another 20 basis points, all those things have been continued, ongoing pressure. We had just hoped to get some leverage at current sales volumes, and we’re unable to do that.

Okay, so I’m understanding that costs haven’t gone up more than you had expected, you had just hoped to be able to cover it better with sales increases?

That’s right. We thought we’d get better leverage at the two percent than we did.

Okay, thank you.

Thank you. Your next question is coming from [John Glass] [ph]. Please announce your affiliation, then pose your question.

Thanks, it’s CIBC. Just going back to the cost issue. First of all, I still just don’t understand why, I mean if sales are where you thought they’d be, pricing is where you thought they’d be, why you wouldn’t be getting leverage? Unless it was maybe just a miscalculation? But maybe if you could just elaborate a little more?

And then, are you seeing cost pressures on one brand more than the other? In other words, are some of the emerging brands dramatically under performing and dragging down the average? Or are we seeing this spread ratably across all of the brands?

And then, finally, can you talk a little bit about some specific programs you have to address some of the cost issues, given the environment, besides the pricing, I guess?

Well, I believe, again, we had hoped to get some leverage on fixed costs, and on some of the cost pressures that we had seen in that two percent range. And when we got through the actual results we did not get leverage. And so if you want to call that a miscalculation, I’m not sure, we just didn’t get the leverage we thought we would get.

In terms of it being a brand issue, I think we’re seeing the cost pressures that we’re talking about, payroll taxes, utilities, property taxes, and insurance, they really go across all brands.

The management expense has been a little bit higher at Chili’s as we’ve been staffing up for higher growth. We had some relocation expenses, and we’re averaging a couple more managers, or two-tenths of a manager more per restaurant than we’d really care to have right now. But, again, those are just costs of growth, and getting ready to try to transition to higher growth [utilities] [ph] that we outlined at the investor conference.

Did I answer the question?

Yes, if I could just throw in another one in? And what is the status of [Kozemel] [ph], and did that have any adverse impact on the quarter?

We’re still in negotiations with Kozemel, and they did not have any adverse impact on the quarter.

Thank you.

Thank you. Your next question is coming from Matt DiFrisco. Please announce your affiliation, then pose your question.

Matt DiFrisco Thanks. Matt DiFrisco, Harris Nesbitt. I guess following up on also on the margins, one of the other things that you didn’t get leverage off of, which was surprising, was depreciation and amortization. You had capacity gains of 10 percent, yet you had D&A grow at about 15 percent. Are you – is this Chili’s going into more expensive locations, is it the skew of a brand, that you’re not getting as much leverage off on the D&A side, potentially Maggiano’s? Can you just address that?

In terms of depreciation expense being higher on a year-over-year basis, it’s just basically due to growth. Some of it is the fact that we’ve been growing more Maggiano’s, which, of course, have a higher dollar depreciation cost. And then with Maggiano’s, as they build, not getting banquet business originally, some of the depreciation does end up affecting Brinker overall in an adverse way.

Matt DiFrisco And then I guess just as a follow-up, if I can get one in there? Regarding the – can you detail a little bit more your two-tenths of a manager per store, was that? And was that a conscious effort, or is that something that’s sort of, you just mistimed, and it came across. Should we see that coming off when you get back down to more efficient levels?

This is Todd Diener. As far as the management levels at Chili’s, in particular, right now, we’re averaging around 4.4 managers per restaurant, where the optimum to be prepared for growth going forward is probably more in about the 4.2 range. We have been staffing up. Just a couple of years ago we opened up 37 restaurants. This year we’re going to open up 70.

I’ve been in a situation where we were behind the curve on management staffing, and I can assure you while we want to be at optimum levels I’d much rather be ahead in terms of managers than behind. You want to open up your restaurants with trained and prepared managers, you don’t want to take your existing restaurants and have them be shorthanded.

Our turnover is very low, which we’re very happy about. We have had some increased relocation costs because of the growth, and with 18 restaurants we just opened up in the first quarter, and 17 staring at us in the phase here in Q2 we needed to staff up.

Now, we are from a seasonality standpoint, going into a time of the year, particularly in November, December where hiring tends to slow-down because people don’t tend to move around in terms of job hunting during the holidays. And so I’m pretty confident that number is going to level out over the next 60 to 90 days.

Matt DiFrisco Okay, thank you. And then, I guess, can you give us a little guidance on what you’re expecting from [macro] [ph]? It sounds like you’re expecting, or we should expect, further deterioration in traffic? I guess the last two months have been an implied traffic decline, and you’re now saying that we’re going to be lapping into a [disfavorable] [ph] cable campaign in October. What is your outlook or your specific guidance for that brand? Should we expect positive comps to return some time soon?

Well, I think for us, we do face a conscious mismatch on advertising. We would expect October to be a tough month for them. But we would expect November, December that they’ll then get a favorable match-up with advertising in both November and December. And we would expect sales to rebound accordingly.

Matt DiFrisco Thanks.

Thank you. Your next question is coming from Janice Meyer. Please announce your affiliation, then pose your question.

Hi, thanks. It’s Janice Meyer with Credit Suisse. On the flip side of the cost increase you announced that you are going to take some pricing, and so can you talk a little about the potential ramifications from that? You had been reluctant to want to take pricing, given the environment. Now you’re going to take it. You know, how are you thinking about putting through price increase so the consumer won’t react to it on one hand? And on the other hand, with you having now more pricing going forward than maybe you thought why aren’t we getting a little better flow-through on the cost of goods? Why are you still looking for, you know, cost of goods pressures?

Janice, if I can just – again, I think our number one priority is always the guest experience and the guest price value perception of their visit to a Brinker International Restaurant. In our last call we had a lot of conversation about when is the right time to take price. I think first we want to make sure that costs aren’t temporary or they’re not fixable by our management teams before we get close to existing top line sales.

But since our last call it has become apparent to us that many of the costs that Chuck mentioned are more permanent in nature and are going to be more ongoing cost of doing business in the future. We do feel comfortable that we’re not leading against the industry.

Most of our casual dining competitors are in that two percent range, which is back historically is where we’ve been. If you look back even in fiscal 2001 we’re at about a two percent price increase that year, and after 9/11, as we got more squeamish and concerned about the economy we’re more in the one percent range. And we also had commodities cooperating during that time.

And so what’s happening now, we see some of these costs, the health insurance, the property taxes, utilities, payroll taxes happening, as well as we see commodities potentially getting negative moving forward. So, you know, price increases are always reluctant, but we do hope now that from November on as these external one percent or so gets baked into the system that we will get better flow-through.

You asked about ‘how we do it?’ We do look across all brands and across all menus. And so it’s not as simple as just throwing a percent out there. It’s an item by item evaluation of each brand, even regionally across the United States.

And so we may say it’s a two to two-and-a-half percent price increase, there may be certain menus that have no increases in certain parts of the country, some brands that may have no increases, and others that will. And so we still are very diligent in getting comfortable that brand is positioned, and that individual product versus the competition is something we’re comfortable that can take more price.

And ‘yes,’ we’re hoping to get better flow-through now that we’ve made these decisions to add price.

It doesn’t sound like it’s a very aggressive price increase which is good. How confident are you it’s even enough?

Well, that’s the million dollar question, I think, that every restaurant and company or every retail business struggles. You hear us talk sometimes almost robotic around Brinker about, you know, we want to be around a long time, but we have a long-term relationship with our customers that we feel like we give a good price value. And so, you know, we’ll evaluate it. We’re doing more and more research than ever, as you know, and we’ll evaluate consumers, and we’ll watch traffic. And then play it from there.

Okay, thank you.

Thank you. Your next question is coming from Joe Buckley. Please announce your affiliation, then pose your question.

Hi, it’s Joe Buckley with Bear Stearns. A couple of questions on the cost side, as well. Doug, you just described some of the cost pressures as being more permanent in nature. When you ran through kind of the quick laundry list there, it sounded like there were a lot of things that may not be that way. The management labor expenses, being up 40 basis points. It sounds like it’s the Chili’s staffing issue, you know, in preparation for the faster growth. Payroll taxes, it sounds like you lap after this quarter. Are there other things that you’re considering in that factor, in that comment?

And then you talk about the whole beef issue, because you did mention beef is a second cost issue. But your contract, I think, is in place through this quarter, and what are you looking at in term of renewals there?

Well, I think you’re right, Joe. Management expenses of the laundry list is probably the most controlled by those. But everyone we’ve talked to about utilities looks like that price of natural gas is going nowhere but up. The property taxes, payroll taxes, credit card fees, health insurance, those do look like they’re going to be a part of our business program moving forward.

The commodities, you know, it’s more into the third and fourth quarter where there’s more concerns about beef. Now it’s been more produce and cheese that has impacted us in the short term. But you’re right, management expense at Chili’s is probably the one that’s most controllable.

And as Todd said, normally we’ve been great at predicting and forecasting those costs. You hire a manager, six to nine months in advance, you want to have them trained. And as we’re ramping up we possibly got slightly aggressive in the short term.

Just going back to the change in guidance, you know, you say you weren’t able to leverage the expenses. It kind of implies that the expenses did run higher than you expected. Anything special there? Or was it, you know, was it Chili’s staffing then kind of a creeping issue that got ahead of you?

I think, Joe, you know, we’re confident in our management team. We’re confident historically in being able to control costs and getting leverage off our top line sales. And so, you know, whether we weren't as accurate with Chili’s management in the past is possible, and that’s probably a true statement. I think, you know the rose colored glasses around here were that we thought we could manage it. And it’s an accumulation of a bunch of costs that sort of ganged up. And when you add them all up, you know, 70 to 120 basis points we just didn’t get the leverage at the restaurant level that we normally expect to get.

Okay. And then just a question on Macaroni Grill. I’m a little bit disappointed to see the comps flip back into negative territory, again. I know the advertising is obviously a swing factor for the sales, but is the turnaround reliant on the advertising mix moving up to be sustained, do you think? Or what are your thoughts on where the brand is right now?

Well, Joe, I think – this is Todd, again – I think it relates to really everything that we’re doing in the brand. From the advertising, to the food introductions, to the remodels, to the new building prototype. And certainly, advertising plays a big part of that.

One of the things that should be noted in September was we launched the create your own pasta last year, and it was the first time we also had any kind of national media. And so those stores got big jumps. And so in terms of being able to lap that, it was a pretty tough in September. And we also had a little follow-through, a little carryover into October, and then again, having a mismatch on advertising October will be tough. We expect to get better as we get through the balance of the quarter.

Okay, thank you.

Thank you. Your next question is coming from John Ivankoe. Please announce your affiliation, then pose your question.

Yes, hi. With JP Morgan. Thanks. Two questions, and I’ll ask them separately. One is on G&A. Just from a guidance perspective, I think you were down 40 basis points in the first quarter, and yet it’s going to switch all the way back, or swing all of the way back. And actually be up slightly in the second quarter.

I mean was all the 40 basis point decline just due to the fact that presumably not much incentive comp was accrued in the quarter? And does that swing assume that there’s going to be a full accrual in the second? Or is there something else that’s kind of happening within that line that we should be aware of?

No, John, I think you’ve said it well. We have not accrued any performance bonuses because our achievement has been below our expectations. And as we look into Q3 we think we see things getting better, getting back on track, demonstrating earnings growth again. And so there’ll be an accrual for profit sharing.

And what about in the second quarter? I mean does that increase in the second quarter assume a full accrual, or not a full accrual?

It assumes some accrual, but if we end up delivering flat there wouldn’t be accrual.

If flat there would be?

If flat there would not be.

Okay, all right. That’s fine, that’s what I wanted to get a sense of. And secondly, I think there were some, an unusual I guess for you, mention of October comps. You had mentioned that Macro Grill would be a little bit soft, or at least implied that, and that you expect on a system wide basis to be below two to four for the quarter? On an adjusted basis, of course, it’s one to three. Could you make some comments either A, in terms of, you know, you’re going to meet the one to three percent range? And secondly, if you could comment on Chili’s in the month of October? Thanks.

You get into total comps around brand by brand, but I think for us October will probably be tough because we don’t have any pricing flow-through. It actually laps off a little bit on some brands. But I think just October we look to be a soft month overall.

Okay, thanks.

Thank you. Your next question is coming from Mike Smith. Please announce your affiliation, then pose your question.

Mike Smith with Oppenheimer. A couple of questions. One, could you review by concept the year-over-year to go sales, and how you’re doing there? Secondly, it seems like your interest expense bounces around more than you would anticipate from the changes in the debt levels. And if you could deal with whatever might go into that category?

Hi, Mike. This is Todd. To go sales at Chili’s this past quarter about nine percent of total sales, up around 7.6 a year ago. Mac about 6.4 percent of sales, up from 5.6 a year ago. And Maggiano’s 7 percent, up from 5.6 a year ago.

And Mike, on the interest expense, and this is Chuck. We have some settlements of some swaps that we have on our senior notes, that settle semi-annually, twice a year. So that’s why you see, you know, between Q1 and Q2, some changes in interest expense, along with just normal seasonality.

Thanks.

Thank you. Your next question is coming from Bryan Elliott. Please announce your affiliation, then pose your question.

Good morning. Raymond James. A couple of balance sheet or housekeeping items. What was, I didn’t get a chance to calculate it, where are you on your economic debt to cap ratio at the end of the quarter, capitalizing leases, et cetera?

In terms of debt to cap we are right now at [51.1 percent].

Okay. And cap budget for ’04?

Right about [$350m].

Okay. You talked bigger picture, now. You talked about, you mentioned part of the cost of goods going forward is sort of putting more on the plate, if you will. Are there some similar customer service kinds of costs that are in the, you know, budget on a go-forward basis, or are there some other things at the store level where you think maybe you need to improve or spend some money to work on the customer experience, or maybe computer systems, that sort of thing?

Well, actually, as far as customer service scores we rolled out about 60, 90 days ago, an internal internet based customer service survey for the three primary brands, Chili’s, Mac, and Maggiano’s. And just looking at the results from the past couple of periods based on the scores on food, on service, on revisit intent, all of those attributes are trending up.

And so we feel as though we’re doing all the right things there, and don’t have any investment plans per se to go in and try to put any money towards new training programs, or anything else in particular right now, based on the current positive trends that we’re seeing.

Why then more food on the plate?

I think that was mostly an issue where we tried to reformulate some of the items that were on the border, and Starlette do you want to talk about that at all.

Yes, I mean, the border sampler with the new fajitos, and three different fajitos that Chuck talked about earlier, those things I did add more product to the plate. And on the border, again, that was a conscious effort by the team to, again, stimulate traffic and drive traffic in.

Okay, fair enough. Last question, from an investor relations philosophy kind of standpoint why was the change in EPS guidance not part of the press release like it was last quarter for the full year?

We had, again, had difficulty with where prices were, and didn’t think folks would be that focused on the yearend numbers. When we got feedback and heard an outcry we’ve tried to respond to that on the call.

Okay, thank you.

Thank you. Your next question is coming from Mitch Speiser. Please announce your affiliation, then pose your question.

Thanks. Mitch Speiser, Lehman Brothers. A couple of questions. First, on the price increase, this level of price increase, do you expect store level margins to improve in the back half of the year? Or you know, that will only partially offset some of the cost increases? And then I have a follow-up.

Well, Mitch, part of what we want to see, of course, is where this commodity market goes. I think we’re confident that the price increases will at least get us flat margins, particularly on some of these new macro costs that we’ve been discussing a lot on the call. And what happens with commodities will probably have us taking a hard look at more price or the price in general as we get into December and January, because of the real uncertainty of this whole beef thing.

Got it. And with the price increase it seems like company wide it’s been about one percent. And so you’re looking at an all-in company wide pricing of about two percent going forward?

Not on an all-in basis. Some brand will carry two to two-and-a-half. But we don’t want to get too detailed on the break-out.

Okay, got it. And then, lastly, just on the consumer environment, you mentioned that it’s been relatively unchanged. What would you be looking for in particular to make you say that the consumer environment has improved or has gotten worse? Thank you.

Again, I think just top line sales and [inaudible]. I think our top line has been relatively soft since the [inaudible] October, and may be a bit soft with the advertising expense for Mac. I think also we haven’t seen really a big change in the way the consumers have been acting.

Is there anything just in terms of mix that would get you more encouraged that the consumer environment is improving, versus just the pure comp number?

Now when we look at mix, you know, Chili’s has been up through most of the quarter. Mac growth [fixed] [ph] composite in mix, also. OTV has been seeing negative mix, but that’s really been a product of the items that they’ve been marketing and trying to focus on. Maggiano’s has also seen some negative mix for the same situation. So all in all, mix for Brinker has been pretty flat.

Great. And just on the pricing, it looks like two to two-and-a-half percent pricing. Given food costs don’t totally go out of control you think flattish margins on a company wide two to two-and-a-half percent price increase?

Yes.

Okay, thank you.

Thank you. Your next question is coming from Dennis Forst. Please announce your affiliation, then pose your question.

McDonald Investments. And wanted to ask about capital expenditures in the first quarter. You said 350 for the year, what were they in the first quarter?

First quarter capex was $69m.

Okay, and then, Chuck, on the pricing what was the trend in the last year? It was around, for the company, I think around one percent? Is that right?

Yes, if you go back on a quarter-by-quarter basis through fiscal ’03 Brinker overall, we ran about a 1.6, a 1.4, 1.3, and then a 1., all through our fiscal year ’03. And then in the most recent quarter we were carrying 1.1 percent.

Yes, 1.1 in this first quarter. And then you said in October some of that runs off, so there’ll be very little price increase in October?

I might be mistaken on where October is, because of some of the changes we’ve made. And so I’m not quite sure where we’re at for October.

Okay, but we know in November it’ll be two percent plus?

We’ll be running somewhere around 2, 2.5 of some brand.

Okay. And then, lastly, can we just review one more time the 110 basis point increase in restaurant expenses? What were some of the numbers you threw – I think you said ‘property taxes up 20 basis points, insurance?’

That would be property taxes plus insurance, we’re up about 20 basis points.

The two, combined?

The two combined, yes.

Okay, and then natural gas?

Utilities cost about 20 basis points. Payroll taxes on the increased tip reporting was 30 basis points. And then management expense was up 40 basis points.

That’s at the store level, not the corporate?

That’s correct.

Okay.

So it would be on operations.

And then, there should be – if it was 110 in the first quarter, and you said I think 40 basis points in the second quarter?

Yes.

Where is that improvement?

Leverage off of price increase.

Okay. That should account for as much as 70 basis points?

We’ll get some of that back, and as Todd said they’re trying to get that management expense a little bit more in line.

Got you. Okay, thanks a lot.

Thank you. Your next question is coming from Mark Kalinowski. Please announce your affiliation, then pose your question.

Hi, it’s Mark Kalinowski with Smith Barney. Just doing a little back-of-the-envelope calculations here. It looks like the stated earnings target of, that you stated, generally implies a mid to high teens earnings growth rate for fiscal Q3 and Q4, combined. Given that you’ve already said that some of these cost pressures you’re facing are mid-term to the long-term in nature, maybe you could rank the factors in order of importance, that you think can allow you to get to mid to high teen earnings growth for the back half of the fiscal year?

Well, I think, Mark, one of the things we’ll be doing is taking a price increase.

Is that the most important factor, that you think can help get you there?

It is. I mean we’ll get more in line with where the industry is, between two and two-and-a-half percent.

Is there any built-in traffic fall-off accompanying that two to two-and-a-half percent that you’re factoring in?

Not particularly. But again, we feel like we’re still, and with where the industry is, we don’t expect to get 100 percent flow-through. But you know, a one percent price increase does make-up quite a bit of that margin pressure.

All right. Any other factors of importance that can get you to that type of earnings growth, in your opinion?

Well, I think if you look at it, costs have been good. You know, when we look at capacity, that capacity is built in right around 10 percent, and that’s been in our forecast. Comps, we’re talking about being flat to three percent range in our business model. We’ve done that. We just haven’t had margin control. We think a combination of focusing on where margins are currently and taking some rational price increases that are within where the industry is, that’ll give us margins back to where [we’ve been].

Okay. Just a very quick follow-up. Fiscal Q3, is that the reverse of the timing benefit that the fiscal Q2 comps will get in December?

Yes.

Okay, just wanted to make sure. Thank you very much.

Yes, Q3 will be impacted negatively by one percent due to that calendar float.

Okay, thank you.

Thank you. Your next question is coming from [Trey Huff] [ph]. Please announce your affiliation, then pose your question.

US Bancorp Asset Management. Chuck, could you talk about ad expense, just a little bit, your ad costs, and if you see those going up, and if those are going up next quarter to maybe help drive the comps, as well?

Ad prices, we’ve seen up on a year-over-year basis, somewhere between seven and 11 percent. The spot market has been a little bit soft lately, but a lot of the [buys] at Macro and Grill have already been put in place earlier, they’re in the [up front market] [ph].

Okay. And overall for the company essentially what kind of percent of sales are you writing currently?

Well, we’re at flat percent of sales. We have not upped our ad spend in terms of as a percent of sales. We’ve stayed flat. We don’t disclose what the percentage is.

Okay, but it’s flat year-over-year, and it’ll be flat going forward?

It’s flat on a percentage basis, but because we’ve been getting additional restaurants, and also positive comps.

Right.

It does give us more dollars to spend.

Okay. Thanks.

Thank you. Your next question is coming from Mark Hudson. Please announce your affiliation, then pose your question.

Yes, Mark Hudson from Merrill Lynch. Given the 13-year spike up in PTI, finished food, can you just talk about the supply chain, and how quickly those increases get passed down to you? And if there are lags in there which could mean there’s more coming down the pike you can’t yet see? And the second question is to what extent can you push back on the supply chain to offset these product price increases?

Well, we do contract a lot of the products that we do have, and so we’re going to have some from short-term [blips] [ph]. And we continually look at what our prices are going to be as we go forward. Right now, I know in the back half of the year we’ve got 30 to 35 basis points forecasted in increasing cost of sales, in the back half of the year, from just higher beef prices.

In terms of what can we do to push back, we’ve got a great purchasing department that’s been able to use our leverage in size when we buy products. So we don’t just buy chicken for Chili’s, or chicken for Macaroni Grill, and we utilize the impact of the full order to get a good [price] [ph].

Thanks very much.

Thank you. The next question is a follow-up question from Joe Buckley. Please announce your affiliation, and then pose your question.

Hi, Joe Buckley at Bear Stearns. Chuck, I just wanted to ask further about the beef situation. You know, you just mentioned 30, 35 basis points of actual food cost pressure. What kind of costing or pricing assumptions are in those numbers? What are you hearing from your suppliers on the -- you’ve given, the spot prices?

Hey, Joe, one of these things, back to this whole Canadian border, they talk about 10 to 12 percent of the beef that was used in the United States historically had come across the Canadian border. And so there’s been a supply-and-demand pressure in the U.S. Cattle are going to slaughter earlier, and you know what that does to drive price.

And so a lot of what they’re telling us in October is still they think a lot of it has to do with whether or not that border opens completely, and when that normally happens. Traditionally, the spike in beef prices happen in the summer and in the holidays because of increased family gatherings, and it drops in September and January. This year, obviously, it didn’t drop in September, and we’re hopeful that they can open that border some more, we’ll see traditionally what’s happened in January and February.

But buying on the spot market, as Chuck just alluded to, we’ve been spoiled. We have had contracts in place over the last couple of years in a benign commodity marketplace. When you’re buying spot that’s obviously it’s not as favorable, it’s also currently not the best time to sign-up more contracts.

And so we’re really at the, sort of at the, not a great position in terms of buying right now, unless something changes regarding I think the border, most importantly. We have signed some contracts on some shrimp, and some chicken, and some other products, but we probably have the least percentage of contracts signed right now because of the beef.

We will change products that we advertise, obviously, in fact, we’ve made a decision on one of the brands in November and December, to advertise a chicken item versus a beef. We’ll do everything we can to drive the consumer to the products that have a more favorable commodity price. But right now, it’s just very difficult to predict what’s going to happen after the first of the year.

Are your suppliers talking big double-digit type increases? Or can you put any numbers around it?

We’re seeing large increases – we just tried to put it into context what we have come off of contract at the end of the calendar year. It’s about two percent of our cost of sales will be coming off contract. And so while we are talking about something that is significant, in terms of looking at our margins it’s not catastrophic. Again, as Doug said, we’ll take all the opportunities we can to try to drive consumers to things that we are locked in, and we do have an opportunity to take care of. And, again, that two percent was sales, not two percent of our cost of sales.

Okay, thank you.

Thank you. Our next question is another follow-up from Matt DiFrisco. Please announce your affiliation, then pose your question.

Matt DiFrisco from Harris Nesbitt, again. Actually, just getting back to that 110, where you outlined, or how you broke that out, was there, or if you can go down the margin line, pre-opening expense, what does that have as an overall increased affect as a percent of sales this year?

I don’t have that number with me right away. If you want, we can cover it in a follow-up.

Matt DiFrisco Okay, thanks.

Thank you. Our final question today is coming from Paul Westra. Please announce your affiliation, then pose your question.

Good afternoon. Hello.

Paul, are you there?

Yes, hi. It’s Paul Westra. Great. Just wanted to follow-up – are you still there?

We’re here!

Oh, great. Just wanted to follow-up again on reconciling fourth quarter earnings guidance with the second half earnings guidance. Again, you point out that the second half you have a two to two-and-a-half percent increase which should drive flat to a level margins and a 15 percent EPS growth. I guess to reconcile that with the fourth quarter guidance, despite having for two-thirds of the quarter, you’re going to have that two to two-and-a-half percent price increase, yet you’re telling us [level] [ph] margins will be down 70 basis points and a flat EPS? If you can just sort of recap, again, what is going to change in the months around December that should reconcile those two guidances?

I think if you look at first quarter we were off 110 basis points. We’re committed to getting that to a 40 basis point difference on year-over-year basis in the second quarter. And again, that’s a 70 basis point improvement that will come from some pricing that we’ll have in November and December. And then, also, will come from us improving sort of where we were on management spend at Chili’s.

As we get into the back half of the year we’ll have full force of one quarter’s worth of price increase in the third and the fourth quarter, which will give us the ability to get closer to flat margin. Plus we’ll also lap partially in the third quarter because of the property tax pressures we’ve seen, and we’ll lap at 30 basis points fully when we get to the full and fourth. And so it’s a combination of those items, Paul.

And then on the food costs, though, you had 30 basis points decline, and I guess the price increase should help that in November and December. Would you think food costs are flat to down in November and December?

Food costs we’re projecting right now to be up slightly.

Okay, thank you.

Thank you. Mr. Davis, do you have any closing comments you’d like to finish with?

Well, thanks for joining us today. We’ll be releasing our October sales on November 15th. If anyone has any questions or comments, please contact Bill or myself. Thank you.

Thank you, ladies and gentlemen. This does conclude today’s conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.