Brinker International Inc (EAT) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to Brinker International’s Third 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, Mr. Hil Davis. Sir, you may begin.

Yes, thanks, Jen. Good morning, and welcome to the April 20th, 2004 Brinker International Third 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 of 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 plan, and other factors more completely described in the company’s filings with the SEC.

In addition, we are required to disclose that a discussion of our cash flow that we will present uses a non-GAAP financial measure and that a reconciliation for the GAAP financial measure is available at the company’s web site, www.brinker.com under the Investor Relations tab.

With me today are Doug Brooks, CEO and 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, Hill. Good morning, and welcome to Brinker’s Third Quarter Fiscal 2004 conference call. We are very excited with our third quarter results, highlighted by a 17 percent increase in earnings per share excluding the charges. The macro environment over the past few months has been positive for the restaurant industry and for Brinker, as well. Our brand presidents and their teams have done an excellent job of creating and marketing compelling menu items.

Chili’s featured two new menu items in March, the steak and portabello mushroom fajitas and the boneless buffalo chicken salad. Both items were well received by guests and the feedback has been very positive as evidenced by a 3.3 percent increase in guest counts at Chili’s during March.

We also took the opportunity to review our underperforming restaurants during the quarter, and made the decision to close 30 restaurants. This decision while difficult is the right decision for Brinker and its shareholders. As Chuck will discuss later, there are many positive long-term implications of this decision, including the opportunity to move some strong employees into stores with higher potential where we can better utilize their talents.

Included in the restaurant closings are seven Big Bowl restaurants. Therefore, we decided to revisit the goodwill associated with Big Bowl. Upon a comprehensive review we decided to take a write-down associated with Big Bowl. We still believe in the Pan-Asian category in general and, more importantly, Big Bowl’s Asian Kitchen, specifically.

Before I turn the call over to Chuck to go through the third quarter review I want to stress that we are making some tough decisions that had a negative impact on this quarter’s financial results, but these are the right decisions for the future in terms of one, our human capital which we know is so important in the restaurant industry, two, our existing asset base, and three, our future growth and performance. And let’s not forget, we had a great quarter from both a top and bottom line perspective. We are excited about our business and we are focused on making sure our brands are focused on tomorrow, as well.

And now, let me turn it over to Chuck to go through the third quarter review.

Well, thanks, Doug. And you’re right, it was a great quarter. Consistently strong sales throughout the quarter helped fuel earnings per share of 55 cents, a 17 percent increase in diluted earnings per share. A positive macro environment, but also hard work at the brands translated into good sales and traffic trends. The results are exciting.

Chili’s new advertising, showing a fun atmosphere inside the restaurant and featuring exciting new products drove traffic and sales higher. On The Border continues to effectively combine exciting new products and on target marketing to drive double-digit comps in March. And [Maggiano’s] [ph] quietly had yet another great quarter.

During the quarter we took the opportunity to make decisions for the long term. As Doug said, we’re focused on improving our return on capital, and the first step was to take a hard look at the portfolio, restaurant by restaurant, to ensure we’re getting proper returns from every location.

Based on our analysis we made a tough decision, to close restaurants and take an impairment charge against Big Bowl’s goodwill. Our press release announced the $23.5m after-tax charge for long-lived asset impairments recorded in the third quarter. This charge involves closing about 30 of the company’s 1,475 restaurants, and so that’s about two percent of our restaurant base.

A breakdown of the closures, there’s six Chili’s, five Macaroni Grills, six On The Borders, six Corner Bakery Cafes, and seven Big Bowls. Ten of the total are company owned locations, and 20 are leased sites.

Now there are many positive long-term implications of this decision. First, it allocates our resources to better performing Brinker Restaurants. Second, it provides cash from the tax benefits and the asset sales. And third, it improves our ongoing metrics, and that’s cash flows, margins, and operating income.

To that point, the store closures will generate cash of about $13m net of the cost to close, and operating income will improve about $4m per year. As a result of the seven Big Bowl closings and a review of the brand’s positioning and future development plans we recorded a $27m impairment to goodwill.

The underperformance of restaurants located in suburban markets and our consumer and brand positioning research indicate future openings must be concentrated in high density, high quality areas. [J.J. Betkin] [ph] and his team now have a stronger platform to grow the brand, and also a better understanding of the demographics and [psycho graphics] [ph] required for success. The remaining Big Bowl restaurants have average annual volumes of about $2.9m which demonstrates the breadth, the brand guest appeal.

In April we settled all outstanding notes receivable related to the sale of Cozymel. As a result the company received a cash payment and recorded an after-tax charge of $4m. The sum of the charges for asset impairment, restaurant closings, and Cozymel’s note totaled $54.5m. During the fourth quarter we will record most of the costs for closing leased restaurants. However, we may have a slight ongoing affect on earnings beyond the fourth quarter.

Let’s discuss the operating results. Third quarter revenues increased 10.8 percent to $931.9m. Capacity growth was 7.6 percent year-over-year which includes Cozymel’s in the prior year base. Now excluding Cozymel’s pro forma capacity growth was 9.1 percent. Brinker’s same-store sales increased 3.2 percent for the quarter, and that’s our strongest quarter of comp growth since 2001. And those results are even more impressive considering the negative impact of approximately one percent due to the Christmas Day calendar shift.

To Go continues to be a part of our business model. In fact, we had our largest day for To Go sales, almost $1.75m on a single day during the quarter. And by the way, that record setting date isn’t Super Bowl Sunday, it’s Valentine’s day.

For the quarter Chili’s posted a 3.2 percent comp sales gain, composed of 2.4 percent price increase, a .5 percent decrease in mix, and a healthy 1.3 percent increase in traffic. This is the 28th consecutive quarter since 1997, since a positive same-store sales of Chili’s.

Our Development Team opened 18 company owned Chili’s restaurants in the quarter, including one small town [proto 12] [ph], and our franchise partners opened two restaurants. The brand also announced the franchise development agreement with [Bonaru Restaurant Group] [ph]. Our newest partner will bring up to 15 new Chili’s to non-metropolitan cities and towns in South Carolina and Southern Georgia.

We continue to execute our long-term strategy, partnering with highly qualified organizations in order to shift the mix of restaurant ownership toward 75 percent company owned and 25 percent franchise. This will not be accomplished overnight, but will be a continued focus for the next few years.

Chili’s featured baby back ribs and Shanghai wings versus baby back ribs and ribs to go in January. In February it was steak and portobello mushroom fajitas, and boneless buffalo chicken salad in March, versus the fajita trio and southwest egg rolls a year ago. These new menu items have been well received by consumers. They’re both delicious and have broad based appeal. Our new adds have focused more on the Chili’s experience selling great tasting foods served in a fun environment. In April, Chili’s continues to feature the steak and portobello mushroom fajitas and boneless buffalo chicken salad versus citrus fired chicken and shrimp, and triple play last year.

[Wilson Craft] [ph] and his team have done an excellent job of recreating a pipeline and driving excitement around the new Chili’s brand. Macaroni Grill same-store sales increased 1.3 percent driven by a 2.1 percent increase in pricing, a .1 percent decrease in mix, and a .7 percent decline in traffic.

For the quarter new marketing focus was on Celebrate the Grill, featuring chicken scaloppini during the entire quarter. Last year the brand featured Mama’s Trio during the entire quarter, along with To Go in January and March a year ago, and Create Your Own Pasta in February.

Third quarter media utilized one less week of national media during the quarter. Seven weeks of national cable versus eight weeks of national a year ago. On our ongoing quest to find the optimum balance between national and local marketing to achieve maximum effectiveness will continue. The latest addition to the Mac Grill Team, Elizabeth Foster, the new Marketing VP, brings a broad based consumer products skill set, and we look forward to her contributions. John Miller and his team continue to deliver a great dining experience to our guests.

Maggiano’s posted a same-store sales gain of 3.7 percent, resulting from a price increase of 2.3 percent, a 1.5 percent increase in mix, and a .2 percent decrease in traffic. The decrease in traffic was due to the calendar shift, and its impact on the banquet abusiveness which pushed several banquets out of December and into January last year.

One of the unique features about Maggiano’s is banquets are an important part of their business model. It represents about 20 percent of the total sales, and it’s a great alternative to the rubber chicken experience most hotels offer. Our next opening will be in Scottsdale late this summer and the pipeline of ’05 openings is completed. [Mark Torme] [ph] and his team continue to infuse Maggiano’s with a great attention to detail and remain focused on the total guest experience.

OTV posted same-store sales gains of 6.6 percent, driven by a 1.4 percent increase in pricing, a decline of .9 percent in mix, and a 6.1 percent increase in traffic. This marks the fourth consecutive strong quarter of traffic gains for OTV. OTV featured the Fiesta Trio in February and March, versus the same promotion in the same month last year. Our guests’ favorable reaction to the Fiesta Trio message was above even our own lofty expectations.

OTV opened two restaurants in the quarter, in Little Rock, Arkansas and Lawrence, Kansas. In fact, these restaurants are the first of our new prototype nine and guests are responding favorably. Little Rock is averaging over $102,000 a week during its first nine weeks of operations, and Lawrence is over 80,000 per week. That’s well above our forecasted hurdle rate.

[Christi Gibson] [ph], OTV’s head of Marketing and Culinary, has done a great job integrating new products and an on target marketing campaign which provide guests a compelling reason to use the brand. OTV President, Dave [Warrenstein] [ph] and his team are successfully executing the vision of a fun, festive dining experience.

The Corner Bakery Team led by [Jean Burscht] [ph] continues to build on their recent sales momentum. Southern California has just completed the remodel process, and Chicago is underway. Currently, 55 percent of the Corner Bakeries feature the new system, that is the [proto three] [ph] which utilizes a menu board and food delivery, and it’s working. Everything we measure, guest satisfaction, margin efficiencies, and sales performance validates the new service style. Jean continues to apply her knowledge of speed of service and the efficiencies associated with it while maintaining the quality Corner Bakery Café is known for.

Big Bowl opened one new restaurant in Wheaton, Illinois, and it’s performing well. Also, our Rockfish joint venture opened one new restaurant during the quarter in the Woodland, Texas.

So that’s the latest on the brand. Now, Q3 expenses. Cost of sales as a percentage of revenues was 27.4 percent versus 27.5 percent a year ago. That’s 30 basis points better than our forecast. The decrease was driven by sales leverage and some favorable product mix shifts. As we stated previously, we remain in the spot market for beef, and are currently contracted for about 80 percent of our beef needs. Commodity prices for beef and dairy were higher than year ago prices.

Restaurant expenses as a percent of revenues were 54.6 percent versus 54.9 percent a year ago, in line with our forecast and much improved versus Q1 and Q2. This quarter marked the anniversary of several cost increases. Payroll taxes from increased cash [dip] [ph] reporting and will fully lap this increase in the fiscal fourth quarter. And insurance costs are similar on a year-over-year basis. Wage rate pressures have been relatively modest at only one to two percent.

D&A as a percent of revenues was flat, but higher on a dollar basis versus the prior year due to more restaurants in the base. G&A was 4.2 percent versus 4.1 percent a year ago, an increase of 10 basis points year-over-year. Operating income was 8.9 percent versus 8.7 percent a year ago, and that’s a big year-over-year improvement. These results exclude charges associated with the long-lived asset impairments, Big Bowl goodwill, and Cozymel’s for comparability.

Interest expense was $2.7m, lower than a year ago due to lower debt balances. And other net was a $1.1m charge versus $237,000 a year ago.

Our tax rate was 94 percent versus 33.3 percent a year ago. Our tax rate for the first half of the year was 32.3 percent. But two factors affected the tax rate in the quarter. First, the rate was affected by the goodwill impairment which is not tax deducible. Second, the tax rate was affected by the long-lived asset charge at Cozymel’s disposal. In fact, the effective tax rate used for those two items was 30.4 percent.

Brinker’s strong balance sheet and cash flow has led the company’s Board of Directors to increase the share repurchase authorization by $500m. Now this action will allow the company to minimize the long-term potential impact of the outstanding convertible debt, execute its current share repurchase program, and just as important, maintain its investment grade standing. The company continues to be active in the share repurchase program, acquiring approximately 432,300 shares during the quarter.

At the end of the quarter approximately 12.7m was available under the company’s previous share repurchase authorization. It’s our intent to use this increased authorization to directly reduce the potential impact of a call of the convertible debt by repurchasing shares over time. We will continue to evaluate our options as we approach the October 2004 call date, and will take actions to build long-term shareholder value.

Our cash position continues to be strong. Over $90m currently, and we expect to generate about $100m in excess of capital expenditures over the next 12 months.

Net income as a percentage of revenues on a comparable basis was 5.8 percent versus 5.5 percent a year ago, again, an outstanding quarter.

Actual earnings were one cent versus 47 cents per share, but exclusive of the charges earnings per share were 55 cents versus 47 cents a year ago, an increase of 17 percent and a return to our expectations of 15 percent plus EPS growth.

Now for our Q4 outlook. Our fourth quarter will make comparisons difficult due to the fact we have an extra week, thus the quarter will contain 14 versus the usual 13 weeks, and with that in mind, our estimate for top line revenue growth is approximately eight to 11 percent based on a 13-week versus a 13-week basis. This is driven by sales weighted capacity gains of six to seven percent, and same-store sales expectations of two to four percent. Fourth quarter’s capacity growth is not comparable due to Cozymel and the base of last year and store closures.

Adjusting for these items capacity growth would approximate our long-term goal at nine to 10 percent. Our estimate of same-store sales is in the two to four percent range, as I’ve said, a higher estimate than before based on the expectation of continued momentum we created during the third quarter.

Cost of sales will be about 10 to 20 basis points higher than last year due to the anticipated impact of higher beef and dairy costs. Restaurant expenses will be approximately 110 basis points lower on a 14 versus 13 week basis. However, it will be 40 basis points lower on a 13 week versus 13 week basis excluding last year’s Cozymel’s charge.

While the news for utility cost is higher most other costs seem to be in line. We finally fully lapped the higher payroll taxes in the fourth quarter, and our outlook for employee costs are flat. Depreciation and amortization sequentially will be higher on a dollar basis, but about 40 basis points better than last year due to the additional sales week. G&A expenses should approximate four percent.

As we mentioned in the press release we expect to record an additional after-tax charge of approximately $5m to $6m primarily associated with closing leased restaurants. These lease costs will be primarily recorded in the fourth quarter, but may also have a slight ongoing affect beyond the fourth quarter. This charge is in accordance with a statement of accounting standards number 146, ‘accounting for costs associated with exit or disposal activities which requires an estimate of leased obligations to be recorded during the quarter a restaurant ceases operations.’ We will continue to isolate these costs on our income statement to assist in comparability.

Interest expense in dollar terms should be slightly higher than last year due to higher interest rates. And other net should approximate $500,000 cost. The tax rate will drop to 31 percent which is lower than the 32.3 percent tax rate we ran in the first half of the year.

Based on those assumptions of sales and costs and a flat year-over-year share base our initial forecast of fourth quarter earnings per share is 71 to 73 cents, which includes the benefit of the extra week. And we anticipate that extra week will add to earnings per share of about five to seven cents.

On a GAAP basis our initial forecast for earnings per share is 66 to 67 cents. This estimate includes the $5m to $6m after-tax lease obligation charge, or 5 to 6 cents in earnings per share. Second, the benefit of the extra week. And third, the effective income tax rate change.

And now, Jen, let’s open it up for q and a. And give me a chance to get a drink of water.

[Caller instructions.] [ph]

Our first question is coming from John Glass. Please state your affiliation, then pose your question.

Thanks. It’s CIBC. Two questions, one at a time maybe. On Mac Grill how should we look at comps and traffic, maybe expectations for the fourth quarter? Comparisons get harder, and traffic has been under some pressure. Are you doing anything different, for example, in the media that would perhaps allow you to drive better traffic in the fourth quarter?

Hi, John. This is Todd. As Chuck mentioned earlier, we do have a new Vice President of Marketing, Elizabeth Foster, who brings an incredible amount of insight about branding and positioning from her prior positions, most recently at [D’aggio] [ph]. We still recognize that there are some recent recognition issues with Macaroni Grill, and knowing what the proper media mix needs to be between spot, national, radio, as well as print.

The current created that we have tested very well, and the chicken scaloppini mix was very, very strong. But we also recognize the momentum that we saw in February trailed off a bit in March, in the March period. Some of that due to media weight levels being a little bit lower in March versus February.

But, you know, the good news about Mac is that guest scores continue to still be very, very high. You know, you look back over the past few years and the amount of awards that they’ve gotten, and the focus that they continue to have on food quality and service, we’re still very bullish about Mac and we feel confident in their future going forward.

Okay. And then, Chuck, on the convert I know you said you were evaluating your options. One, maybe could you give us just a list of what the potential options are? And then, secondly, you’ve authorized a larger share repurchase, does that suggest you’re more willing to buy-in and offset the dilution through repurchase, or is still a refinancing of that possible, and you’re just doing that as a protection in case that doesn’t work out?

Well, I think as we go through the next six months, John, we’ll take a look at where the stock price is. And given market conditions would probably look to try to call the convert. And we realize that once we call the convert there will be dilution, and so what we’re trying to do is have a share repurchase authorization in place that can minimize the long-term impact of that dilution.

There’s a number of things that could happen to the markets between now and then, and so we’ll continue to evaluate it every day, whether it makes sense to be buying shares in advance of the potential conversion and then making the decision to convert the bond.

If you call the converts do the holders have the option to convert at that point, or must they just, can you just buy them out at, you know, whatever the accretive par value is?

We would have to distribute the shares.

Okay.

So they would get shares.

Great.

There would not be a cash versus stock option.

Okay, thank you.

Thank you. Our next question is coming from [Dean Haskel] [ph]. Please state your affiliation then pose your question.

Good morning, Doug and the rest of the team. Great quarter.

Hi, Dean.

My question is in regards to the 30 properties that are being closed. They seem to be evenly distributed across the brands, which is good. Other than the psycho graphic or demographics that you alluded to are there any other geographics commonalties or similarities between all of these stores?

Dean, I’ll tell you, there’s a different story to every restaurant. Some of them they’ve been open for a long period of time, they’re in different parts of the country. We just basically looked across the entire portfolio and tried to identify the restaurants that were underperforming, and there’s no real geographical significance, it’s a hodge-podge all over the United States.

Okay, thank you.

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

I’m with Bear Stearns. And had a couple of questions. Doug, the 30 store closures, I’m wondering what it reflects in terms of, you know, maybe a slight shift in velocity in your tenure as CEO, you’ve been CEO since January 1st. And, you know, this, it seems a little bit more aggressive than the company has been in the past in kind of weeding out underperforming units. And so would you kind of address that from a broader perspective, you know, whether I’m right in concluding it reflects somewhat of a shift?

Well, Joe, I just think our Management Team as we sat down since the start of the year we want to be better stewards of our capital while continuing to manage and grow the portfolio of restaurant brands. And whether that’s a shift, we just want to make sure that we’re increasing shareholder value. And we have restaurants that we feel like don’t have a chance of being successful it makes no sense from a human capital perspective, from our portfolio perspective to keep them operating. And so, we’ll continue to do that and move forward.

Chuck, going back to the share repurchase authorization, just want to clarify what I think I heard you say, you call the debt, in effect you’ll have to issue the stock, is that correct?

That is correct. And so the share repurchase is in place so that we can be buying those shares that would either be in advance of the call or after the call so that we can minimize solutions.

Okay, and your goal would be to offset the dilution, you know, it’s not exactly at that moment, eventually? As quickly as you could?

Yeah, I mean if you look at what the $500m would do, it actually would not just eliminate the dilution from the convert, but actually would be part of our ongoing process of shrinking the share base. So it would even be a little bit more than, it would be more than just offsetting that dilution. Just because of the way the markets move it may take us a little bit of time to do that, because you know, we’re intent on maintaining a balance sheet that is BBB, but so we’re not interested in decreasing our leverage but we’re not also interested in losing our investment grade status. And so.

Have you set any timeframe over which to execute the $500m?

No, we have not.

Okay.

But, again, we understand the potential dilution from the convert. And we’re trying to get in front of that. And make sure that we minimize the impact and take care over a longer period of time to be sure that there is a dilution from it.

Okay, and then, you know, just the comment about potential ongoing earnings impact from the lease closures beyond the fourth quarter, any quantification of that? I mean is that something that would be significant or pretty minor?

We don’t anticipate that to be significant. We put that in there just as a placeholder. We’ll have continual true-ups from time to time on our estimates, and you know, whether we were right or wrong. And we’ll actually give that a line item in the income statement going forward so that we can, you know, everybody get a chance to see how much that is. But, again, Joe, we don’t expect that to be material now as we get past the fourth quarter.

Okay, thank you.

Thank you, our next question is coming from Bryan Elliot. Please state your affiliation, then pose your question.

Good morning. With Raymond James. A couple follow-ups and then a question. First of all, I missed the tax rate guidance for Q4. What was that number again?

31 percent.

31, even. And was that ’05 forward, sort of long-term guidance, as well?

No, our tax rate will pick-up in ’05. The reason the tax rate came down for the two quarters was the tax credits that we get from paying the FICA tax on dips, you know, that remains constant, pretty much. That the closures of the …

And the dollar amount, right.

As a dollar amount, that’s right. The closure of the restaurants reduces our taxable income, and so therefore, our effective tax rate decreases. And so next year we’ll get back to our normal run rate pretty close to where we were this year, at around 32, 33, or 32 to 34, somewhere in that neighborhood.

Okay.

We’ll be looking at ’05 and announce that in August.

Okay, very good. The – you gave a projection for the annual operating income benefit from the decision on the asset rationalization. Did you assume a full elimination of, you know, leases in there? Or is there some continuing rental expense on closed leased units in that number?

Well, we assumed the $5m to $6m that we will have in the fourth quarter would take care of those lease costs.

Okay, so that’s kind of, if any, net present value or full elimination costs. And so the $4m is sort of a pre-rent number?

The $4m is what we have been seeing as a loss under the current operation of those restaurants, and we’ll eliminate that going forward.

Okay, after rent, and so it actually includes the impact of the rent savings? Okay.

Yes.

Okay. And finally, my question. You gave us kind of an adjusted and apples to apples capacity outlook for the fourth quarter. Could you give a little color, given expected timing of closings, et cetera, as we move into the new fiscal year, and we have a lot of moving parts on capacity, sort of what range might be reasonable to be looking for over the next few quarters?

Well, we can talk more fully about that as we get to ’05, but obviously, this is 2% that comes out of our share base, or out of our store base, excuse me. So, we would still expect the pass to be somewhere in that 10 to 11% range as we go forward.

So 13-ish minus the 2 – the 10 to 11 after the impact of these closings?

Yes.

Okay, thank you.

We don’t see any real change in our store-opening rate. Everything is pretty much in the pipeline and still going forward.

Thank you. Our next question is coming from Janice Myer. Please state your affiliation, then pose your question.

Hi, thank you. It’s Janice from CSFB. Two questions, the first one’s on Macaroni Grill. You mentioned twice in your remarks that your guest scores are high, that you’re doing a good job servicing the guests. But for the last couple of years your traffic’s been down and that’s been despite more national ads, remodels, tweaks to the brand message. Why do you think there’s a difference in what your research is saying, versus what the customer traffic trends are and how do you plan to identify what the issues are at Macaroni Grill if your research seems to be saying that there aren’t issues?

Janice, this is Todd. I think what we continue to find with Macaroni Grill is that there is still a large group of what we call aware non-tryers of Macaroni Grill. The customers that use us regularly, medium and heavy users, love the brand, love the service, they love the food, they love the atmosphere. But there’s also still a very large group of people that we have somehow not been able to connect with, whether it be via media here, via just drive up the field, whatever the case may be.

And we’re obviously frustrated by that too, because we think internally, and again, based on feedback we get, externally too, that we have this incredible brand that is vastly unappreciated by a lot of people that have not had an opportunity to come in and give us a try. That’s kind of where we stand with it right now.

And any reason why the increased national cable media didn’t help in that regard?

Well, I think it’s the balance of having the right weight levels of national cable, versus the spot markets.

Okay. And on Big Bowl, I think you indicated that the closures all were in suburban stores. Can you talk about how you are evolving the Big Bowl brand? You had thought it would be more, I guess, suburban and family friendly. Are you now sort of thinking it’s going to be more of an urban or high-end suburb? And does that change the menu, the price points, does this change the positioning of Big Bowl going forward?

Janice, hi, it’s Starlette. Let me see if I can take that. In terms of our research with Big Bowl, yes, if I could kind of step back just a little bit and look at how we’re approaching concept development now, with this portfolio. We’ve learned a lot through the years with our merging concepts. And one of the things that we have learned is that we do need to sort of deepen our understanding of the consumer and the concept’s unique positioning before aggressively rolling it out. And at times I think we’ve probably been guilty of maybe growing a concept a little too fast and then also trying to fix it on the fly.

And we’re consciously now trying to better refine and define our concept development process and applying these lessons that we've learned through the years. And that’s exactly what we’re doing here with Big Bowl. Because we don’t want to repeat those same mistakes.

And our research, yes, says that right now we may have hit the rewind button a little bit. We believe very much in the segment and that there is room for growth and it’s a segment that we want to play in. But definitely, our consumers are telling us that the greater chance for success with Big Bowl lies in refining its positioning in a way that really captures the essence of its roots.

And even though we’re closing these under-performing restaurants, most of them in suburban areas, the team now can focus without the distraction and additional resources to fix some past mistakes. We’re still working a little bit on the menu and on design elements. But future site development is certainly more focused on areas that are high quality, high density, kind of the higher end suburban and lifestyle center trade areas, more similar to those original stores in Chicago and Minnesota, versus more prototypical development. And we feel really good that JJ and his team are going to be able to make the necessary adjustments to allow Big Bowl to be successful in the Pan-Asian segment.

But does this change the absolute number of stores that you think Big Bowl can carry?

No, we have not yet changed our expectations in terms of universe size. All we’ve changed is really the timing of our long-term expectations and when we expect to reach it. But we haven’t changed the universe.

And is that reasonable? I mean, it seems to me your old plan was to be able to penetrate more areas.

We’re going to go at this very disciplined and consciously, but right now we believe with this process, kind of looking out in the long-term, we still have the ability to reach that full universe at the appropriate pace.

Okay, thanks.

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

Thanks, Lehman Brothers. A few questions. Hey Chuck. First on pricing at Chili's, I believe it was about 2.4% in the March period. You took 1% in November. When will you be [lapping] that? And I take it you’ll be taking pricing again to maintain that 2.4%? That’s my first question.

Hey Mitch. We learned, what was it, two conference calls ago, we don’t talk about pricing going forward. So let’s just leave it at that.

Mitch, in terms of pricing – this is Hil Davis – it was 2.2% in March, it was 2.4% for Q3. So in January we ran 2.4%. In February we ran 2.5%. In March we ran 2.2%.

Okay, thank you. Moving along, it seemed like the mix was down a little bit at [a couple of your] concepts. Traffic was strong. You said a couple of times the improved macro outlook. I was wondering, it sounds like that you’re kind of quantifying that through traffic. I’m just wondering why you think that the mix side of the equation hasn’t improved?

Mitch, this is Chuck. Sometimes mix is down because of the increase in to-go business. So when we do get that sale that goes out the side door or is delivered to the car, a lot of times they don’t have a non-alcoholic beverage and almost certainly they don’t have an alcoholic beverage. And so that can impact mix.

Other times, for instance, OTB is a little bit different. They put up some really compelling offers. And by that, not a discount, but really just promoted in different media and marketing messages, a product that’s a little bit lower in price. And it’s really brought a lot of guests in. So we’ve been real happy with what’s happened there. But I think it’s all brand-to-brand and primarily driven by the way customers have been using us, versus any economic sensitivity or anything related to an economic downturn or anything like that.

Okay. And lastly, at On The Border, it was I guess demoted to emerging concept status and the concept [being] real strong of late, I’m just wondering what it would take for you to kind of bring it back to core concept status? That’s the question. Thanks.

Well Mitch, gosh, I hate to use the word “demoted” from core to emerging. We kind of reassigned it to focus a little bit more on the positioning and on the business model to make it a higher growth vehicle for the future. And I think what we’re seeing here has been a result of that focus from the team. The continued traffic, continuing to refine the economics, the new store openings, are all, I think, indicative of some very positive changes going on with On The Border. And we feel real good about where it’s going. But we don’t have a definitive timeline on when something goes back from emerging to core, but we feel very good about the progress we’re making.

Great. And just my last question is with food costs continuing to escalate, do you think that your ability to leverage the top line can continue, given pricing and overall operating leverage? Thank you.

We think the business – all dining out is positioned really well. People continue to want more convenience and whether it be in casual dining or quick service, people just don’t have time anymore. And I think the fact that our industry is supplying a convenience, allows us to have a good pricing power.

So, while we do see some pressure on commodities, I think the good news is that it’s a lot more visible to consumers than what I call soft costs are. So, all substitute products, whether you go to buy a steak in the grocery store or go to buy steak in the independent restaurant down the corner, they’re all going to be more expensive. And I think consumers understand that and give you a little bit of a leeway.

I think the tougher thing to pass through, just for the industry or anyone else, are costs such as health insurance or D&O liability, those softer costs they just don’t see, and they could be more company to company specific. Those are a little bit tougher to pass on, just in general.

So, while we do see higher commodity prices, we’re hopeful that, again, us proving convenience to the guests gives the industry pricing power.

Thank you.

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

[Indecipherable] McDonald. Chuck, I wanted to get a clarification on what you said about cost of sales. You said you were still working in the spot beef market, but you had 80% of your beef contracted? I think that’s what you said.

Yes. And really the difference there, Dennis, is that normally we would contract for a longer period of time, perhaps a year. So just to give you an idea of where our timing is, it’s much shorter. So we’re 80% locked today, but I think at the end of this quarter we’ll be about 65% locked. And then as we would go into the first quarter, we might be 40% locked.

So our contracts are much shorter in nature, just due to the nature of the beef market right now. We had some good news yesterday with Canada opening up the export market for bone-in beef. We’re not sure how that’s going to affect the overall commodity price, but we think that’s a favorable indication.

Okay. But you still are buying some beef in the spot market from your supplier?

We are. We’re contracting for shorter terms.

Okay. Maybe on the August call you’d have an update on where you stood contract wise? You said it would be 65 at the end of the quarter, then maybe even less than 50% after that. But by August you could have contracted 100% for a period of time?

Yes.

Okay. And then the other question had to do with the actual closing of the 30 stores. Do you have a timetable for when those stores will actually close?

We do have a timetable. And most of them have either closed or will close in the next couple of weeks.

Oh, okay, so they will be closed. And they will not be going through the income statement as of today though, because of the reserve?

Their sales would be reported.

They still will, even though you’ve already taken a reserve and they’re discontinued operations?

Well, yes. They would not be considered to be discontinued operations, from an accounting perspective. Because we’ll still be operating those brands.

But the 30 stores should all be closed by, say, the end of the month?

Yes, pretty much. We’ll continue to have some lease charges that may flow into Q4.

Thank you. Our next question is coming from Glenn Guard. Please state your affiliation, then pose your question.

Hi, Legg Mason. One question, then a follow-up on the closures. With Chili’s, where is the incremental comp coming from at Chili’s? I mean, to-go is already 10% of sales at Chili’s. It’s less than that at some of your piers and your piers are kind of siting to-go as one of the major drivers of their same-store sales performance. And I’m wondering, where is it coming from?

Well, we think in this quarter we had compelling new products. The new fajitas, the new salad, really are great products. And so they’ve helped drive traffic. And I think the advertising message, reminding people how much fun it is to come into a Chili’s restaurant and have a meal, we think that that has helped to drive guests in.

Okay. And going forward, are there any initiatives, for instance, kitchen efficiencies, other things that could help [you to see peak] time table turns? Anything that you can kind of point to, aside from advertising, that’s going to help us get the incremental comps going forward?

Well, I think all those items, we’re always interested in trying to increase table turns and getting more people through the restaurant as quickly as they would like. But we hate to sit here and tell you what all our initiatives are. Because I guarantee you we’ve got all of our competitors on the line right now, listening for those same kinds of blueprints.

Okay, fair enough. And in terms of the store closures, you said it’s a comprehensive evaluation, does that mean that you’ve looked at each and every restaurant and so this isn’t going to be an ongoing – I’m not saying 30 stores a quarter, but many of your piers do an occasional closing here and there as the normal course of business. Have you looked at every restaurant?

We have looked at every restaurant. In fact, this is probably just a little bit more aggressive. We looked at, since it was going to be a large number, things that maybe were on the horizon and might be restaurants that were in a deteriorating state, because the market had moved away from them. We also included them in this closure.

But I think it really does, as Doug said before, indicate for us a difference in the way we’ll look at restaurants and closures. We’ll probably be a bit more aggressive in closing restaurants. We’ll be less likely to let restaurants kind of hang on and look for increased performance. I think we’ll be a little bit more disciplined in how we do store closures.

Okay, great. Thanks a lot.

Thank you. Our next question is coming from Jason Whitmer. Please state your affiliation, then pose your question.

Midwest Research. Good morning. Doug, your business is clearly accelerating in the past few months. What would you say is your most energized buyer or what’s working the best across all your businesses?

Well, the environment’s helping us, as we talked about a couple of times this morning. The consumer – I think Chuck answered a few minutes ago, what all of restaurant industry is selling is convenience, better use of consumers’ time. And across all of our brands we think we’re coming up with some new product and basic execution.

We’re really focusing on how to provide whatever the customers’ needs are. Because across our portfolio we’re looking for the same consumer that may have different dinging needs. Some days it may be a relaxing meal inside. Other days it may be something out the side door for a to-go experience. So, I think the focus on execution is probably the number one thing I’m proudest of that the teams are working on right now.

And that seems to be a common denominator, really, for the whole industry on execution or people. What do you think that Brinker’s doing differently, versus the casual dining industry? What would pull you away from the pack?

I don’t know if I can speak to what the competitors are doing. I think a lot of it’s the quality of people we have in our organization. We have a pretty tenured management team. We’ve also hired some new folks like Gene [Burch] at Corner Bakery recently, JJ Buettgen at Big Bowl. I think the accumulation of the talent of those people, as well as contemporary, relevant brands, that’s part of the equation. And we’ll continue to make adjustments moving forward.

But the consumer is short on time and the brands that have the most appeal that can most take care of their needs will be the most successful.

Good. And lastly, Chuck, can you remind me where we are on the remodel program? With Chili’s just starting out, Mac Grill somewhat ongoing and On The Border’s had really good success there, can you just give a progress report on units, sales lift, et cetera?

Well, On The Border is completed. Sales lifts were at a rate somewhere around mid-single digits. We got the returns we expected. Macaroni Grill, Todd, you want to update us on where Mac Grill is?

Yes, Macaroni Grill, let’s see, this past quarter they finished up – I’m sorry, we have 41 compete. We finished 16 more remodels in Q3, and we have just a couple planned in Q4. We have about 10 or so on hold. We’re working on some seat count improvements in the remodels. But the guest feedback and [GDS] scores have been very good on them.

It’s a little harder to quantify the sales lift at Mac Grill, because if you drive by the restaurant, it’s not like the On The Border remodel, where it was in your face. You could see the difference street side from what was happening at On The Border.

With Mac Grill, it’s more an interior remodel, so we haven’t seen immediate sales lift. But we didn’t expect that either. You have to come in the restaurant, see the fact that there’s a difference in the walls, there’s a difference in the ambiance, it feels much warmer. Restaurants that have been open for a while still do see some lift.

And then Chili’s is just part of, again, an ongoing refurbishment. We want to make sure that that brand never gets old, never gets deteriorated. So we try to reinvest back in the brand rather than really try to move the needle to be anything different. It’s just trying to keep Chili’s where it’s always been; contemporary, in the minds and in the position of consumers’ minds, as a place to go and have a fun meal.

Thanks a lot.

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

Sure, Harris Nesbitt. Just a couple of clarifications regarding the closures. Can you give us the aggregate annual sales dollar – sorry if you gave that already, on how much those stores represented?

It’s somewhere around $45m per year.

And then, they will not be included in the April comp, but were included in the March comp, is that true?

Well, whenever the restaurant closes, it will just be out of the comp base.

So they were in the March comp?

Yes.

None of them were closed in the month of March?

We had a couple close.

Were they On The Borders?

Yes.

Is that part and parcel why that large comp was there?

No, not at all. The base is way too big. It was two locations. Because two restaurants in March, they did not close at the beginning of the month either. They closed toward the end of the month. And again, the number of On The Border restaurant is so much, that that would be just a small percentage of the total base. In fact, I think we’ve got, at the close of the quarter it had about 116 locations.

Okay. On Macaroni Grill, I know you’re not going to talk about pricing going forward, but pricing in the past, in February you had a price vector of 2.5, in March, 1.9. Can you explain the difference in that drop-off? Was that the consumer maybe steering away from some of the menu items that you might have taken up?

No, it’s just the lapping over prior year pricing.

Okay. So the 1.9 is a nice benchmark? I mean, can you at least give us that guidance? Or is it the 2.5 is done with and --?

That’s where we’re running right now, is 1.9.

Okay. And then last question, in the past I’ve heard you talk about it in meetings, the Chili’s brand and the bar business in particular was somewhat affected by the rollout of the stricter DWI laws across our country, as well as a little bit maybe, bar business being a little bit more discretionary. Are you seeing the bar business pick up at Chili’s? Is that part of the most recent comp in the last couple of months, maybe driving that?

No, not at all. Our liquor sales overall have been, if you look at percentage of sales, it’s been trending down over the past year or so. Some of that’s driven because of the high mix of to-go. But we are seeing liquor sales soften a little bit really across the brand. Not too terribly much, but they are down year-over-year.

Matt, as a point of clarification, February price at Macaroni Grill was 2.1%.

Okay.

Thank you. Our next question is coming from Jeff Omohundro. Please state your affiliation, then pose your question.

Wachovia. Just a quick question on Maggiano's. With this continuing good performance there, I’m just curious how we should look at the growth outlook on that concept, how you think about it and what might be some of the limiting factors?

This is Todd. We’re obviously very excited about Maggiano’s. It’s a great concept. It’s a great stand-alone restaurant, but then the uniqueness that Chuck talked about earlier in regards to the banquet facilities. They really don’t have any direct competition in that regard, other than hotels or maybe even a country club, for a dinner party or a wedding reception. We have 28 locations open right now and we have plans to open up five in fiscal ’05.

The key thing that’s very important about this brand is that the real estate is the most important aspect of their success. And they’ve got to be an A++ type site, which does limit our ability to rapidly rollout a brand like that. Not to mention just the complexity and the size of the concept as well.

Very good. Thank you.

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

Hi, with Smith Barney. Two things I wanted to ask about. First, your same store sales target for fiscal Q4’s 2 to 4%, and I understand that reflects at least in part, the strong sales momentum we’ve seeing? I also want to make sure, is there any calendar shift built into the number at all? I don’t think so, I just want to make sure. And is any part of the extra week built into the number? Again, I don’t think so, but I want to make sure.

And then the second question is just on the On The Border comp in March. If you ran the same promotion that you did last March and saw just tremendous acceleration from February in the same store sales number, I would just like a little bit of your take on why maybe that acceleration was so sudden and so strong? Thanks.

On the first question – this is Chuck – no, there is no calendar shift and no, the extra week is not in that comp guidance. In fact, if you add the extra week, comps would be up substantially higher than that. So, we’re trying to keep that 2 to 4. It’s just on a comparable 13-weeks, the 13-week basis, with no calendar shift.

Okay. I was just wanted to make sure.

No, I’m glad you asked that question, Mark. And feeling pretty good about where the business is. Starlette, you want to talk about On The Border.

And yes, with respect to On The Border, we were very excited about our performance in March and we feel like it’s a combination of everything the brand’s been doing over the last year, and consistent and better execution in the stores, in addition to an offer that’s very appealing to our guests.

I can’t wait to get me out to one then.

I hope you have one nearby.

Thank you. Our next question is coming from David Palmer. Please state your affiliation, then pose your question.

Hi, UBS. Congrats on a good quarter, guys. What does your research suggest that low carb dieting meant to traffic and mix at Mac Grill? Particularly, do you think it was an inhibitor to traffic? And secondly, at Chili’s what percentage of sales is that new low-carb menu capturing and do you think that it’s capturing any incremental sales? And do you think it’s worth advertising or just best left to in-restaurant merchandising? Thanks so much.

Hi, this is Todd. As far as Macaroni Grill, we don’t see any effect in the restaurant in terms of traffic. People can modify their entrees on any particular product within our menu. Menu mix has not shifted much. We have seen people move from maybe getting a pasta as a side dish, to a grilled vegetables. But that’s something they’ve always been able to do, so we haven’t seen any real effect on that most recently.

As far as Chili’s goes, the It’s Your Choice menu is staying pretty constant with where it was last quarter. It was selling combined between Guiltless Grill and the lower carb items, around 40 a day. And we think right now, utilizing just in-restaurant point of sale material is the best way for us to capitalize on that. Again, people in all of our restaurant brands, can modify every product we have to suit their particular needs, but by having these other specific items I think has fulfilled their needs as well.

Great, thank you.

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

Thanks, it’s with JP Morgan. Actually, maybe a simple one, on Corner Bakery – hi – you closed, I think, six units, relative to 89, I think, opened at the end of the quarter, which is a higher percentage than many. Is there anything specific that we should look for, for Corner Bakery going forward? I mean, is the site profile changing like it is at Big Bowl? What is endemic to those units that were not the same characteristics relative to the rest of the system? Thanks.

John, hi, it’s Starlette. In terms of the Corner Bakery sites, those were all real estate driven, in terms of location. We’re not changing dramatically at all our site characteristics or what we’re looking for, for the bakery.

As you know we have remodeled our delivery system for Corner Bakery and our [Proto 3s] are working very well. So we’ll continue with that approach to development. But these six locations were real estate driven.

Thanks.

Thank you. Our next question is coming from Peter Oakes. Please state your affiliation, then pose your question.

Hi, good morning, Piper Jaffray. Actually I have a couple of questions. First, if we look at the balance sheet, and specifically goodwill, can you give us a sense how material is Big Bowl’s residual there of what’s still left?

I believe the remaining balance that we’re carrying right now is about $22m remaining on goodwill, remaining for Big Bowl.

Okay. Thanks, Chuck. And of the 1,200 or so company-operated units still in the portfolio, approximately how many are losing money on an operating income basis, not cash flow, but on operating income, after the 30 closures?

I couldn’t give you the exact number, but very few. That was really the list that we started at. We took restaurants that had negative operating profit and then moved up to ones who were marginally contributing, to see if maybe sales trends weren’t where we wanted to see them or operating margins were deteriorating. And we tried to get aggressive. That’s why the number’s 30. It is probably a bigger number than we would have expected, but we tried to get in front of some of these restaurants where markets may have moved away from us, to try and take care of that in advance.

Yes. And Chuck, if I heard it right, of the 30, only 10 were company, so the other 20 are franchise? Is that correct?

No, it’s 10 company-owned where we own the real estate and 20 leased restaurants. This is all company owned. And the difference, really, in explaining that Peter, is just that depending upon whether it’s owned or leased, it impacts when we record the charge. Owned restaurants, we had to record the charge in the third quarter. However, for the costs to settle the leases, won’t hit until fourth quarter. So, that’s really why we were giving people the breakdown. And that’s just accounting rules that they require us to treat it that way.

Good. Big help. At Mac Grill, can you give us an update as to how lunch, versus dinner, is breaking out and how that’s progressing?

No change really, quarter-over-quarter.

It’s about 67% dinner, 33% lunch. Really no big change.

Okay. And lastly, can you remind us as to what the to-go number was, year-over-year?

For all the brands, Chili’s is 10.3%, Peter; Mac Grill, 6.5; Maggiano’s, 8.2; and On The Border is 4.8.

Okay, thanks a lot, guys.

Thank you. We do have a follow-up question from Joe Buckley.

Thank you. I just have one clarification question. Todd, you mentioned the Guiltless Grill and It’s Your Choice are doing about 40 per day. Just what percent of sales might those two run together?

I’m sorry, I don’t know that number off the top of my head.

We do about 660 guests a day.

Okay, that puts it in perspective. Thank you.

Thank you. We do have another follow-up question from Mitch Speiser. Your line is live, sir.

Thanks. Just one follow-up. On unit growth, it looks like the projected openings are going to come in at 126. The range was 126 to 145. I just want to make sure that doesn’t – this is a gross number, so I think the closures aren’t included in that. Just any reason why it is going to come in at the lower end? And will those incremental stores be opened in fiscal ’05 or is it just you’re just simply coming in at the lower end? Thank you.

We’re simply coming in at the lower end. And yes, those are gross openings. They’re not netted by any closures that we have.

Is there any reason why you couldn’t put up stores, I guess, more in the middle of that range? It seems like almost every year you do seem to come in at the lower end.

That’s just the way construction schedules or whatever work.

Okay, thanks.

We’re still within our range on capacity growth. Most of those would have been last of the year, last week types of openings. So really the change in the opening schedule to be down toward the bottom of the range doesn’t have a big effect on capacity growth.

Well, that’s it for questions. Thanks for joining us today. We’ll release April sales on Wednesday, May 5th. And if anyone has any questions or comments, please contact Hil or myself. Thank you.

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