Brinker International Inc (EAT) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Brinker International fourth-quarter results conference call. At this time, all participants have been placed in 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, Lynn Schweinfurth. Ma'am, the floor is yours.

Good morning and welcome to the August 11, 2004, Brinker International fourth-quarter fiscal 2004 earnings conference call. Let me get some of the legal requirements out of the way. During our opening remarks and in our responses to your questions, certain items may be discussed which are not based entirely on historical fact. 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 factors more completely described in this morning's press release and the Company's filings with the SEC. With me today, Doug Brooks, Chief Executive Officer and President; Todd Diener, Chief Operating Officer; Chuck Sonsteby, Executive Vice President and Chief Financial Officer; Starlette Johnson, Executive Vice President and Chief Strategic Officer.

Before I turn the call over to Doug, I want to remind you that fiscal year 2005 has started a week later due to the 53-week fiscal year that is just concluded. This will cause some lapping issues throughout the year. Please refer to our website, www.Brinker.com, where we have posted fiscal-year calendars for 2004, 2005, and 2006. It also contains related release dates for your reference.

Please be aware that we expect periods 2 and 3 will be negatively impacted by seasonal trends given the quarter has started later in the summer. But the more material holiday shifts during the year, Christmas falls in the second quarter this year versus third quarter last year and Easter falls in the third quarter this year versus the fourth quarter last year. And with that let me turn the call over to Doug Brooks.

Thank you, Lynn. Good morning, everyone, and thank you for joining us today. As we reported earlier this morning in our press release, fourth-quarter fiscal-year 2004 earnings were 64.5 million or 67 cents per diluted share. Excluding charges, earnings per share was 71 cents, meeting the lower end of our guidance range. Next Chuck will take you through the financial results for the quarter, as well as our guidance for first quarter and full year 2005.

Before I turn the call over to Chuck, I wanted to give you my perspective on where I see the business today and what we are doing to drive consistent positive earnings growth over the long term. As you saw in the earnings release this morning, we are experiencing sales that are lower than what we initially expected and softer versus our competitive set; and we are greatly focused on improving our sales trends.

The processes we have used in the past have been successful, as evidenced by Chili's 29 consecutive quarters of positive same-store sales growth and by $3 million average annual volume per restaurant, the highest in its category. However, these familiar processes that created the success we have all come to expect are no longer creating the kind of traction we need given the more competitive casual dining environment.

We built our brands on innovation, quality, and customer service; and we remain committed to those operating principles as our foundation for growth. However, the reality is that the customer experience gap between our brands and our competitors has been narrowing over time. It is time to re-establish Brinker International as the clear leader in these characteristics, and we will spend most of the fiscal year instituting a number of initiatives with the sole intent of getting closer to the customer and driving traffic.

In addition, we're taking a critical look at the Company and are making some tough decisions along the way. As you saw last quarter, we closed 30 restaurants that were not meeting our return requirements. We're committed to growing earnings consistently each year, and this was the right long-term decision for our customers, for our employees, and for our shareholders.

To establish a foundation of change we're committed to ensuring discipline and process in everything we do. While this may sound like a very broad statement, the practical application includes building upon our existing methods and in some cases building new process disciplines to improve the way we manage the business with predictable results.

For example, we have refined our new product development process based on the successful model implemented at On The Border. In the past we have used consumer research and market tests to drive new product introductions. But by improving this process, we have developed a system to build a more robust pipeline with predictable results. On The Border has experienced consistent positive same-store sales and traffic growth since April of 2003 and shows no signs of slowing down.

We added steps to our original process, including increased research and testing and measuring consumer feedback earlier in the process, increasing our probability of success. We also are getting a broader read of consumer taste and purchase intent upfront. In addition, the process effectively increases the number of products being tested at one time. This will allow us to have a continuous pipeline of products to build greater excitement and drive additional traffic into our restaurants. Now don't expect a lot of new products to be introduced in the short term. However by the end of the fiscal year and beyond, we expect to have a steady stream of new products at each of our core brands.

We also continue to focus on advertising quality and effectiveness so that we can communicate and reach our customers with compelling new product news. We're aligning our culinary and marketing disciplines much more closely as we continue to pursue this goal.

Finally, we're not afraid to invest appropriately but prudently in the business today, potentially reducing our short-term results while building a stronger business for the long term. At Chili's we have raised the bar on own expectations at our restaurants. For competitive reasons I do not want to get into specifics, but we are investing in additional labor at our restaurants to give our customers an even better Chili's experience. After testing this process with successful results we have rolled it out nationally. We have already begun to experience improved guest surveys scores across the Chili's brand. Our most recent external NPD press data has also shown improvements as well.

However, we do not expect that you will see a quick uptick in traffic pends (ph) on this service initiative in the short term. We do believe, however, that to build traffic growth over time this is the right thing to do. Service standards in casual dining have risen to a higher level, and we want to continue to offer an exceptional experience to our guests along with compelling food and marketing.

This is very reminiscent to me going back to the mid-1990s when I was president of the Chili's brand and our results a gotten soft after 11 consecutive years of growth. We evolved a number of processes at that time, (indiscernible) of investment spending in a number of areas of the business; and those decisions were the catalyst of the recent 29-quarter positive sales run that started in 1997. So those methods fuelled a great run, but it's time for change; and the Chili's team is excited about these new initiatives.

At Macaroni Grill we have recently completed training our restaurant employees to provide a highly quality service experience to our guests. It is a process that was developed not only to provide a specific roadmap of service standards to follow, but has an element of empowering our employees to maximize the service experience they are providing each customer. With the exception of the initial training, this program -- which we call beyongio (ph) service or service from the heart -- will not increase labor costs.

More importantly, guest satisfaction scores are improving and are continuing to be industry-leading both from our own internal guest satisfaction scores and NPD CREST data. Again we do not expect immediate results from these efforts but expect they will be long-term drivers of traffic and sales growth in our restaurants. With that I will hand the call over to Chuck to go through the financial results for the quarter and lay out our expectations for fiscal 2005.

Thanks, Doug, and welcome, Lynn; we are glad to have you on the team. Fourth-quarter results were in line, but at the low end of our range as quarterly sales were also in the low end of our range. We were encouraged by a rebound in sales in June, after a softer May impacted sales performance throughout our industry and retail in general.

Earnings per share for the quarter increased 27 percent over last year to 71 cents per share, excluding charges for the restaurant closures, which were announced in the third quarter. Excluding the 53rd week, which we estimate contributed approximately 8 cents to earnings per share, EPS grew 13 percent versus fourth-quarter 2003.

Let me give you a brief rundown of brand performance for the quarter. But before I do, please note that comp sales numbers exclude the 53rd week for the June period this year. Chili's posted a 1.7 percent comp sales gain in the fourth quarter comprised of a 2.1 percent price increase, a 0.9 percent decrease in mix, and a 0.6 percent increase in traffic. As Doug mentioned previously, this was the 29th consecutive quarter since 1997 of positive same-store sales at Chili's.

Our development team opened 15 company-owned Chili's restaurants in the quarter including 2 small town Proto 12; and our franchise partners opened 8 restaurants. The brand also recently completed the refranchising of 9 restaurants in Alabama and Mississippi to Valenti Management, a company with a seasoned management team currently operating a group of 120 national chain restaurants. Under this agreement, our newest partner will open at least 20 new Chili's throughout their territory.

This sale is an ongoing part of our long-term strategy, partnering with highly qualified organizations in order to shift the mix of restaurant ownership toward 75 percent company-owned, 25 percent franchise. Our dedication to improving return on investment is assisted by a larger franchise base. Accomplishing the 75/25 split will not be realized overnight. But it will continue to be our goal.

On the marketing front, Chili's featured the rib and chicken combo and triple play appetizer in May and June, versus citrus fire chicken and shrimp and triple play during the same periods a year ago. In April, Chili's featured the steak and portabella mushroom fajitas and boneless buffalo chicken salad versus to-go, triple play, and citrus fire chicken and shrimp that were promoted a year ago. Wilson Craft and his team have focused on rolling out a new service initiative to the field, which Doug mentioned previously.

Macaroni Grill same-store sales decreased 1.7 percent, driven by a 1.6 percent increase in pricing, little change in mix, and a 3.3 percent decline in traffic. John and his team are very focused on building consistent, positive traffic and sales at Mac Grill. For the quarter, Mac Grill promoted the chicken scaloppini in April versus last year when the brand featured create your own pasta. In May and June there were no nationally featured promotions versus create your own pasta last May and twice-baked lasagna in June of last year.

Maggiano's posted a same-store sales gain of 2.5 percent resulting from a price increase of 1.9 percent, a 0.6 percent decrease in mix, and a 1.2 percent increase in traffic. Maggiano's will open 5 new restaurants in fiscal year 2005. The newest opening was in Scottsdale, Arizona, and the first few weeks' sales performance have been above our expectations. Mark Tormey and his team continue to offer a unique upscale dining experience at Maggiano's for both the guest in the dining room, to-go, or in one of our banquet rooms.

OTB continued its momentum and posted same-store sales gains of 5.6 percent driven by 1.2 percent increase in pricing, a decline of 0.6 percent in mix, and a 5 percent increase in traffic. This marks the fifth consecutive strong quarter of sales and traffic gains for OTB. OTB has featured the Mexicali combo throughout the quarter, versus the fiesta trio promotion for the fourth quarter last year.

And guests continue to respond favorably to our new Proto 9 restaurant. Our latest opening in Wichita, as well as all new restaurants opened in the third quarter, continue to perform well above forecasted hurdle rates. As Doug mentioned, the OTB team has done a great job integrating new products and on target marketing campaigns. OTB president Dave Orenstein and his team are successfully executing the vision of a fun, festive dining experience with consistent and compelling financial results.

We continue to focus on the potential for each of our emerging brands, Corner Bakery, Big Bowl, and our partnership with Rockfish, to become the future growth vehicles for the Company.

Now, let me give you more detail on our fourth-quarter results. Fourth-quarter revenues increased 16.2 percent to $1,018,000,000. Capacity growth was 14.6 percent year-over-year; 8.2 percent that was due to the additional week in the fourth quarter, and 1.6 percent increase in overall comp sales. Comp sales for Brinker were driven by a 1.9 percent increase in price, a 0.7 percent decrease in mix, and a 0.3 percent increase in traffic.

Cost of sales as a percent of revenues was 27.9 percent versus 27.5 percent a year ago. That was 20 basis points higher than the forecast we shared with you in the third quarter. The increase in cost of sales was driven by pressures from higher commodities. We experienced unfavorable commodity price increases for burger meat; pork, which would be ribs; dairy and cheese; and they were partially offset by favorable commodity price comparisons in poultry.

Pressure on expenses as a percent of revenues were 53.4 percent versus 54.3 percent a year ago. That was due to better fixed cost leverage because of the extra week and some favorable preopening costs versus last year. That was offset, however, by higher labor cost and training for our new service initiative. Just as a side note, wage rate pressures have been relatively modest at about 1 to 2 percent.

D&A as a percent of revenues was 40 basis points better as a percent of sales due to the extra week, but higher on a dollar basis compared to the prior year due to more restaurants in the base.

G&A was 4.3 percent versus 3.8 percent a year ago, an increase of 50 basis points year-over-year. It was higher than we had anticipated due to our efforts regarding consumer and brand research.

Operating income was 9.5 percent versus 7.3 percent a year ago, as fourth-quarter fiscal 2004 had the benefit of an additional week.

During the quarter, we issued $300 million of 10-year Senior Notes with a 5 3/4 coupon; and this issuance generated higher interest costs during the quarter which were offset by a $2.4 million gain on an interest rate lock related to those Notes. The net result was interest expense of $2.6 million, which was slightly higher than a year ago. Other net was a $231,000 benefit versus a $1.2 million cost a year ago.

The tax rate was 31.4 versus 33.8 percent a year ago; but it still was about 40 basis points higher than we had forecasted at the end of the third quarter due to a lower-than-expected restructuring charge.

The Company continues to be active in the share repurchase program, acquiring approximately 6 million shares during the fourth quarter. At the end of the quarter, approximately $295 million was available under the Company's share repurchase authorization. We will continue to evaluate our options on the convertible debt as we approach the October 2004 call date and will take actions, which will build long-term shareholder value.

Our financial position continues to be strong. We generated cash from operating activities estimated at $480 million in fiscal-year 2004. This fully funded our capital expenditures and provided excess cash for share repurchase. Net income as a percent of revenues was 6.3 percent versus 4.6 percent a year ago.

As you saw in our earnings release, we revised our guidance for fiscal year 2005, principally as a result of lower-than-expected sales trends. While our July performance was within the 1 to 3 percent previous guidance we provided for fiscal-year 2005, July last year was a very easy comparison. We had anticipated stronger performance from Chili's and Macaroni Grill during July. Based on tougher comparisons for the balance of the quarter and sales trends through the end of July, we anticipate sales being in the flat to 2 percent positive range.

As Doug shared with you, we are aggressively pursuing new food products; and after the proper testing they will be rolled out to the system. We are reluctant to forecast any significant uptick in sales until we can get better clarity on the impact of those new programs. Currently, we need higher sales in the 2 to 3 percent range to produce leverage based on the current commodity and cost environment.

Additionally, we took down our original development numbers of 130 to 135 stores that we previously provided in June as we continue to make decisions based on return requirements. Please refer to the table provided at the end of the earnings release for our current projections.

Now, specifically for our Q1 outlook, our estimate for top-line revenue growth is approximately 5 to 7 percent. This is driven by sales weighted capacity gains of approximately 4 to 5 percent. For comparison purposes please remember that last year's base included Cozumel, which was sold midyear and other restaurants, which were closed throughout the year.

Comp sales should be flat to up 2 percent as I mentioned earlier. Cost of sales will increase about 30 to 40 basis points primarily driven by increased commodity costs for ribs, dairy, and chicken. Pressure on expenses will be approximately 40 to 50 basis points higher due to the additional labor costs for our service initiative. While the news for labor and utility costs are higher, most other costs seem to be in line.

Depreciation and amortization sequentially will be slightly higher at approximately $46 million and about 5 percent of revenues. G&A should approximate 4 percent. As we mentioned in the press release, there may be a slight ongoing effect in fiscal 2005 associated with the store closures we announced in April. We will continue to isolate those on our income statement.

Interest expense in dollar terms should be higher than last year, due to higher debt balances and an increased interest rate. However, other net should approximate a $500,000 cost. The tax rate is expected to be 32.3 percent, which is higher than the 31.4 percent tax rate we ran in the fourth quarter due to the restructuring charge booked in that quarter.

Based on these assumptions and a share base that is 6.5 million lower than the prior year, for approximately 93 million shares outstanding, our estimate for first-quarter earnings per share is 45 to 47 cents including a refranchising gain of about 3 cents per share.

The forecast we outline today does not meet the high expectations we have set for ourselves. Our team is highly motivated and challenging all aspects of the business with an eye on improving our guest experience and ultimately shareholder return. Now, Pete, we will open it up for questions and answers.

(OPERATOR INSTRUCTIONS) Matt DiFrisco, Harris Nesbitt.

Actually I just had a quick question regarding on the G&A side. You brushed over that a little bit, saying that it was research or I guess that is the NPD data that you were talking about and some of your initiatives in customer feedback. I am a little concerned. Have you seen some of your other competitors, such as Darden and Red Lobster in particular, they have seen good customer satisfaction scores yet we have seen a meaningful pullback in their traffic.

Do you think that we -- are you fearful that we might be relying a little bit too much on the customer satisfaction scores, and that you don't look for that immediate impact on traffic? Can you detail a little bit more what you are talking about as far as some of the new initiatives we might see in the store there?

I guess I will start out to say that we are aware that you can have great customer scores and not have same-store sales gains. We've certainly seen that at Macaroni Grill. We get great consumer feedback on how the brand is, and same-store sales there have been soft. But we think that is a very important component to running a successful business. Guests have to love you if they are going to keep coming.

But we think there are other parts of it. And part of the consumer research we're doing is to isolate that. You have got to have compelling new food products. You have also got to be able to execute that. Some of the research we're doing is well rounded around food, around the guest experience, and also around getting feedback. I don't know; Todd?

The only thing also I would add to that is when you're looking at every brand you have to have multiple measurements. Certainly guest satisfaction, whether it's internal or external, is one of those. But at the end of the day, certainly, customer count and same-store sales will be the ultimate measure. But we think we really have to rely on our customers telling us how we are doing. The most recent feedback we're getting has been positive, so that gives us positive (indiscernible) think that we're moving in the right direction.

I guess as a little bit of a follow-up, do you have in place ways to articulate the impact from each of these initiatives? It seems like you doing a lot of things, adding the labor, doing new products, even maybe tinkering with the advertising campaign it sounded like. Then plus the new smaller prototype being rolled out a little bit more. How are we going to be able to articulate the impact from each of these?

I think we're early on in that stage. That leads some to the uncertainty for us, trying to predict and project same-store sales as we go forward. We do have all those things in-process. I think the Proto 12, the smaller restaurant, has actually been in place for a while. We are just continuing to execute against that strategy.

But looking at the way we do advertising spend, also reviewing all aspects of our business, trying to build long-term growth. So in the interim there may be some difficulties for us to peg when we see the returns for that, but we think it does bring long-term benefit for us.

Just a bookkeeping question. Can you tell us what you're to-go sales were as a part of sales at Chili's?

I got that. Chili's to-go sales were just north of (inaudible) percent year-over-year.

Okay. Thank you.

Mark Kalinowski with Smith Barney.

Two things I wanted to ask about. First, a lot of the discussion about Chili's has focused on the food. I just wanted to get your thoughts about current marketing and any plans to potentially revamp that.

And second, just looking at the First Call consensus estimate of 15 percent long-term annualized EPS growth, do you view that as realistic or not?

Todd, do you ant to talk first about the Chili's brand?

Sure. As far as the marketing goes, I think first and foremost we have to have a pipeline of products for marketing to be effective to begin with. Secondly, we need to be sure that we do have the proper creative messaging, if you will. We also have to be sure that we have the right mix in terms of media too, between television, radio, and the potential for any print.

So, they all kind of coexist at the same time. But at the end of the day it does start with having new and innovative food products that we can get out on the airwaves.

I will take the second half. Our long-term business model that we have articulated has been trying to get capacity growth, 10 to 12 percent. If you look at this year, capacity growth is somewhat difficult to track, because we had Cozumel and the 30-some restaurants that we closed over last year.

But if you look at new restaurant additions, we are going to add over 100 restaurants on a base of about 1,200 restaurants that our company owns currently. So we are in that 10 percent range. So we think we can still build capacity growth on a pretty predictable pace.

Next from that would be trying to drive same-store sales growth of flat to 3 percent. I would have to say that right now we're probably on the lower end of where we would like to be in that spectrum, given what our cost concerns are. Commodity costs are a bit of an issue for us, as well as everyone in the industry, which makes margins tougher to maintain.

So, we think you can get 10 to 12 percent capacity, drive same-store sales that can keep markets flat, we think that is somewhere in the 0 to 3 percent range, we should be able to deliver 15 percent growth. We haven't done that lately, and we're certainly challenging ourselves to see why.

We can get the capacity. We get same-store sales, but haven't been able to get the flow through. So it is a matter of either getting more robust sales or maybe looking at where we might be given some costs up in terms of margins. But we still think 15 percent -- right now we still think 15 percent is an achievable goal.

Okay. Thanks for your thoughts.

John Glass, CIBC World Markets.

I wanted to go back to your comments, Chuck, on the full-year forecast. It seems as if your capacity growth didn't change in your new assumptions; and your same-store sales didn't; but your estimates obviously came down. You talked a little bit about the first quarter. Could you address some cost trends throughout the year specifically? Maybe talk about what your food cost expectations are for the full year?

And also, if you're willing to be more specific on the cost of these new initiatives, is the first quarter frontloaded for example able at Chili's? Or does that rate of increase in store level expenses continue throughout the year?

I will take that question. John, there's a lot of different components there, so please ask me if I miss anything. We would expect cost of sales for the full fiscal year to be up 40 or 50 basis points. We are seeing pressure up on ribs; that is something that has been relatively new. It comes to us almost since we last did our forecast. Our rib prices spiked up a little bit more than we would have expected.

We're also starting to renegotiate a chicken contract, and actually have made some progress there, that expires in February. Part of that negotiation was we would take a little bit higher chicken price currently, but extend what is favorable pricing versus the market over for a longer period of time. So that pushes up commodity costs also. A little bit of pressure on just some dairy, although it's gotten better lately. Certainly burger meat has been a little bit up on a year-over-year basis. So all those combined to be 40 to 50 basis points higher on cost of sales.

You asked about service initiatives. We did experience higher labor costs in the fourth quarter, and project those higher labor costs at least for the first couple quarters of the fiscal year. We would hope to get some same-store sales leverage for that as we get to the back half of the year, so that that would be less of a pressure when we start to actually be able to offset those costs.

Okay. In your share count, you're now 93 million shares. Do you expect to maintain that level throughout the year, or would that go up by the 7.8 million shares if the convertible was converted?

Well, we still think we will do 93 million as an average share for the year. Whether we call the convertible certainly would be dependent upon market factors and where our stock is on October 10. Convert price at that date is about $34.77. So we would have to be somewhere around that price to convert.

What we would try to do though is keep the share count from the issuance of those shares to pull the convertible; we would try to go ahead and keep that share count flat. So we try to make anything we do with the convertible not impact outstanding shares over a long-term (inaudible).

Just to be clear, you would have to repurchase an additional 7.8 million shares from here in order to do that. Is that correct?

I wouldn't say from here, because we are projecting what our share base would be through the fiscal year. Okay?

Okay.

We may have made share repurchases in the first quarter already.

I see. That's great.

So exclude that from commentary and just say we're looking at the period from the first day of our fiscal year to the end of the year. We expect our average shares to be 93 million. And we have got to be able to convert. So if the convertible notes are taken out by us issuing shares, we will work to still make the average 93 million.

Great. Thank you.

David Palmer, UBS.

Given the fact that your prices at Chili's, your menu prices at Chili's are very competitive already, and that independent competitors and many of your chain competitors will have to raise prices due to their higher costs -- in other words, many of the things you're talking about today are not unique to you -- why wouldn't you take up prices a little bit more aggressively? Say 3 or even higher, 3 percent or higher? Give me your thoughts -- that you wouldn't mind giving thought to kind of price elasticity of demand, kind of the cross elasticity of demand, from doing such a thing?

It all comes down to really keeping balance. Plus we are currently right now at around 2.4 percent in price, and we will be rolling off some price coming up in the fourth period of our fiscal year which is October. We will look at that at that time. We typically do menu reprint a couple times throughout the year, along with the menu rollout. And we want to be sure that, from a consumer standpoint, that there is a benefit to what we are offering them on the menu, and that price comes second to that.

With regard to recent trends, July was a pretty rainy month for you guys I think in some of your key markets. I mean, I'm a little curious as to know; you're extrapolating some of that recent trends. I guess we are looking -- I guess you guys are seeing August as well. Maybe you can give us some of your thoughts as to what you think we can extrapolate in terms of your near-term sales from July; and maybe what you're seeing in August?

First of all, we don't want to talk about August, because we have only released data through July to the public. When we look at July -- I mean, and we're a national brand. It might be raining in Texas, but it is sunny in Florida. So one of the benefits of our brand is that we get offset from different reasons. Weather usually doesn't have an impact unless it is a huge snowstorm or something else.

But the biggest issue that we see is if you look at our 2-year run rate, as we looked at it in June -- and May was a bit of an anomaly, because we cut back on some advertisement at Chili's, maybe made comps non-comparable. But when you look at June, and then month of July we saw about a 200 basis point declined sequentially in same-store sales performance.

So we had expected Chili's to do pretty close to 4 percent, because of the much, much easier comparisons we had from last July. Chili's posted a solid individual number, well over 2 percent themselves. But based on what we had expected to do in July, it made us pretty nervous. Then coupled with store lag time in getting some new food products on the plate, it has caused us to reevaluate our sales forecast.

Okay.

Janice Meyer, Credit Suisse First Boston.

Doug, you mentioned in the beginning of your comments that what you're seeing at Chili's is reminiscent of what you went through in the mid-90s. I was around then. I hate to say it, but I was.

You're aging both of us, Janet. I opened this, so I will take full responsibility.

But in sort of past conversations, you did feel that maybe back then in the mid-90s, Chili's hadn't kept up with menu initiatives, and there was some other things going on that weren't going on this time. Do you feel that the situation now is as challenging for Chili's as it was in the mid-90s? Or do you think the hill just isn't as big to climb?

I think there are a lot of things that are different, Janice, but a lot of things are the same. It is hard to look back, whatever we're talking about. The competitive segment at that point probably felt just as challenging as it does today. Even at that point, the brand was 20 years old; and I remember some of the dialogue we had about the history of the brand and how it's been around. One major difference was we did have negative sales then; and right now we still have positive sales.

So, we know there's some evolution and we know there's some innovation that needs to happen. And trust me there is a sense of urgency around here in challenging all parts of our business. But we also want to make sure we use the new processes in a disciplined way. Not always being disciplined (inaudible) in the past.

So to answer your question there's a lot of things that are similar, but it's a new world right now. The competition is different. But the brand has been on a great roll. We're going to look at every part of the business we can -- food pipeline, marketing, service initiatives, our relationships with the consumer, data points as we talked about earlier on the call -- all that to try to make it better.

When you responded the last time, it was more of a portion size and flavor formulation, product formulation, et cetera, issue. And you took your food cost up pretty substantially and took your margin guidance down. Whether it's on the food line or the labor line, you mentioned that you're not afraid to reinvest.

Could you see envisioning putting a point or more in the cost side? If I look at frankly your operating expense side for the first quarter, you're saying it is maybe up 50 basis points. I think last year, I am not mistaken, in the first quarter you had the 40 basis points penalty from that manager glitch at Chili's. Are you putting in about a point in labor to help fix the issues?

The manager glitch last year wasn't exactly a strategy. We had just an influx of great people we hired (multiple speakers) them across the system. Right now, it is 30 to 40 basis points. Whenever you put in some new initiatives, those things evolve as we see what kind of traction we get with consumer data, as well as our operators get better at executing that strategy.

So I hate to predict. I guess all I would say, as we said in the beginning, is we are not afraid to continue to invest in a long-term brand that is close to being 30 years old and has a great legacy of great food, great service. Right now we're just evolving some of those processes to make sure we stay on top.

A couple of things I might add to that, going back to the mid-90s. Because I too was there and have aged along with you and Doug. I think the commonality between then and today is that we are raising the bar on ourselves. We didn't feel as though that we took a step back, back in the mid-90s; nor do we think we're taking a step back today.

We just recognize the fact that the industry is more competitive than it ever has been before. We have to be more innovative with food and marketing and service initiatives. We also have to do a better job of executing. And we're trying to do what we do best. It is not the fact that we have not done a good job. We're just trying to doing an even better job.

Okay. Thank you.

Peter Oakes, Piper Jaffray.

Actually a couple questions. First one was something we could explore a little bit, the reduced '05 earnings guidance in the press release. As you have repeated here on the call this morning, it is primarily due to the softer sales trend. Yet, the press release cites comp sales assumption of 1 to 3, which is consistent with what you said back in early June.

So, should we think of the prior guidance embedding more like a 3-ish and now more at the 1 end of the spectrum? I would just be kind of curious, if you would reconcile that -- you know, 1 to 3 versus what you are calling for is at least short-term some softer sales?

I think Peter, with higher commodity costs, if we go against the previous forecast, we probably had about 13 or $14 million in additional commodity cost over what we had previously forecasted. So, what would have given you some leverage in terms of same-store sales performance no longer gives you leverage.

So, then we were looking at sales probably being closer to the midpoint of the range. Now I think they need to be closer to the high point of the range just to get some margin expansion. That given the fact -- again we had very easy comparisons in July and face much tougher comparisons in August and September. We are probably going to be on the lower end of our guidance for the quarter; and we said flat too (ph) for the first quarter. We're going to start out a little bit soft.

So, as we go through the year, the initiatives we hope to have in the second half of the year we think will drive traffic at that point.

But, Chuck, just to kind of encapsulate here, for the full year, the comp guidance really hasn't changed of any material nature?

No.

All right. Speaking of contributors or maybe lack of contributors to sales success, if you go back the last couple of quarters or maybe even the last couple of years, I would be kind of curious if you could share with us the trend of promotions. As you have cited in the call here this morning, you gave us kind of month by month replay of what the promos were at the two core brands.

If you look at these sales contribution from those promotions, I don't want you to give up anything here competitively, but if you can kind of in the spirit of the question share with us. Is your marketing and are the promotions providing the same pizzazz that maybe they did 3 or 4 years ago?

Todd, you want to talk a little bit about that?

I think there is no question, Peter, that they're not providing the pizzazz that we would like to. The brand, you look at Chili's in particular, the AAB (ph) has grown over the past few years to almost 3.1 million. But at the same time, we do want to have more effective marketing. We do want to have a more effective message. And along with that, we need products that cause customers to think about the brand even more broadly that maybe they have in the past. So, I'm not sure if I am answering your question, but yes, we do need more effective marketing that drives the message home to people to come to Chili's for new and innovative food product.

Todd, maybe another way to ask that is, your impression that the sales mix associated to the promotions -- I don't mean 1 or 2 specifics but the trend -- is it down maybe a third to a half relative to what kind of contribution you would have seen 3 or 4 years ago?

I am not sure if I can quantify that.

Okay. Okay. Just one last one if I may. I think you gave us the 10-plus percent as far as the to-go mix year-over-year.

Right.

Sliced somewhat differently, where is the Chili's brand as far as delivering product to the car for the consumer? Is that pretty much rolled out? Or does that still have some ways to go? How is that impacting that to-go number?

We do some form of curbside or another in about 90 percent of our restaurants; and that is a mix of actual curbside, speaker boxes, video, that the to-go people can see the cars when they pull up and see either the license tag or the make and model of the car. Drive up cell phone; and in some cases actually a drive up queue, if you will. And all of that is determined on how the restaurant sits on a pad; what the landlord will allow; what the city will allow. So the easy answer is the vast majority of our restaurants have some type of curbside service available.

Okay. Thanks a lot.

Joe Buckley, Bear Stearns.

I have a couple questions as well. First on the comments about service standards and labor costs. Could you share with us if it involves more people in the restaurant on a permanent basis? Or is it better training, something that would be a little bit more transient?

Todd, do you want to take that?

Honestly, Joe, it is a little bit of both, but it is more of a focus on the initial training of the staff coming onboard. But then also being sure that we are providing the level of service that we need to provide, whether it is at the hostess stand or whether it's on the floor, whether it is bussers. So it really is determined by the individual restaurant, the sales of that restaurant, and then the experience level of their staff.

Okay. Question on marketing, kind of update us where you are on Chili's. One of the comments on marketing kind of implied that it was dependent on the new product flow, which I think you have said previously might be 6 months or more out. I guess I am curious if there is any near-term changes planned with the marketing? Or is it further out, after the new product flow picks up a bit?

I don't think we actually gave a time line on marketing or food, but it's an ongoing disciplined process that we are undergoing right now, Joe. I think it does start with the food. People come to our restaurants to eat, and I think they're motivated to come to our restaurant when there is new products or there is familiar products from the Famous and Favorite categories being marketed to them effectively.

So we don't, as Doug said in the opening statements, ant to put a time line on where we're at. But I can assure you that the discipline processes that we have in place are underway, and we're very, very impatient for results.

Okay. Just last question. Chuck, talk a little bit about the dynamics on the convert. You mentioned the $34.77 conversion price around October 10. If the stock is below that, do you not call the convert? Maybe in conjunction with that, if you talk about the average cost of the shares repurchased in the fourth quarter.

Joe, I think we have to figure out exactly where the share price is. If it is close, we may consider calling it for cash. That might be a consideration; go ahead and pay a slightly higher price. Because if the stock price is below, we would have to pay cash to the holders of the Note to get out of the Note.

So, if the share price is at $34.77 and the conversion price is $34.77, it might still make sense to go ahead and pay cash. It may not make sense if the stock is at $32. So, that would be a determination we would have to make and talk to the Board about, in terms of whether we should call those based on where the share price is at that time.

The average share price that we paid in the fourth quarter, we paid about $35.98 on the 6 million shares we repurchased.

Okay. Thank you.

Dennis Forst, at Key (ph) McDonald.

I wanted a little more color on the interest expense in the fourth quarter and the other income line. Can you go into that a little bit, Chuck?

Sure. In what sense, Dennis?

I think you said the interest expense included a couple million dollars of profit from the swap.

Yes. We did a bond deal in mid-May and obviously began incurring the interest expense from that $300 million issuance. It wasn't in our forecast that we gave out in third quarter. We also did an interest rate lock once we were certain we were going to forward with the deal. We were nervous that rates might tick up -- and actually had a gain, about a little over $2.5 million or right around $2.5 million from that rate lock. Coincidentally, that also was the amount of the additional interest that we incurred from the issuance of the bonds from mid-May to the end of the quarter. So, those two netted together actually had no effect.

Okay. Then, looking into the first quarter then, we should assume something over 7 million of interest expense?

Yes, we will have full carrying cost once we get to this quarter. It will be somewhere around $7 million for the quarter. Yes.

Then you said the other income, it was actually a small amount of income. The previous couple quarters you had a cost of over $1 million. What is that net? I think you also said the first quarter is going to be a loss of a half million. That is somewhat of a swing.

A little bit of a gain because we did have some interest income from the excess cash that we had invested prior to the time we bought the stock. So that was one of the reasons why that made that a gain. As we continue to buy shares, we will decrease our cash balance.

So that line normally is a modest loss?

It has normally been a modest loss, yes.

Then the number of shares, you said 93 million. That is the diluted number of shares?

It is.

So the actual is usually a couple million below that?

It is.

Okay. That is all I needed. Thanks a lot.

John Ivankoe, J.P. Morgan.

Actually a somewhat broader question, then I have a specific one for Chuck. But I think this first one is for Doug. Over the last year, maybe year and a half, we have seen some shortfall in new products and marketing. Some shortfalls in development at least relative to what was expected on the Street. And most recently a shortfall in operational standards.

What I think would be great is if you could talk about whether any structural or organizational changes to actually stay on top of what I would consider to be 3 of the most important parts of running a restaurant company needs to happen. And maybe you could put that in the context where -- I seem to remember many years ago you kind of went from a function to a brand management type of mentality, where certain brands just aren't sharing with one another or what have you.

So maybe talk about it from a structural point of view; make comments on your organization. And actually maybe you can be more specific in terms of talking about accountability. If accountability wasn't there in fiscal 2004, why by definition is accountability going to be there in fiscal 2005? Thanks.

That is a big question, there. As far as our organizational changes, we have made changes throughout the years, and we don't always speak publicly about those. One of the things we mentioned on the call earlier is closer alignment within the brands between the marketing and the culinary groups.

That's part of this whole research and development process -- that we make sure that the marketing function, which really is the home to the consumer, whether it be the building, the menu products, the whole experience -- and that really is a role model that is On The Border paid for us over the last 2 to 3 years. They were the first ones in the organization to do it. And we have put in place similar relationships and organizational structure in the brands throughout the rest of the organization.

So that is probably I hope a good example where moving forward we will see similar results out of the other brands as we get closer to the customer, we do more research and test more upfront, we pick the products the customers are looking for, and our marketing becomes much more of a call to action. We have food pipeline. We have positive sales growth, and that is a kind of results we're looking for.

Accountability happens every day around here. As we have already said this morning, historically we have been an innovator in casual dining, and we are hungry and anxious to have change. But we also want to make sure that the new process and discipline have a chance to get the proper information so that we can use it appropriately moving forward.

We have brought in a number of very talented new people in the organization. We have a new recent head of culinary at Macaroni Grill. We have brought in a number of new marketing folks.

We do have different discipline in different spots in the organization. Historically, some of our presidents have been operators only. Now in some of the brands we have folks that have come up via different career paths, and I obviously feel that we are using the information betterly (ph).

We recently hired a new Senior Vice President of Human Resources, Valerie Davisson, and she brings a wealth of experience with multiple brands, a similar matrix-type organization, is going to help us with compensation programs. It certainly will drive pay-for-performance and accountability throughout the organization. So, all that is going on, and believe me, we're having discussions about it every day. The goal is to have more customers come into our restaurants and drive.

Is there anything that changes in terms of ensuring, I guess, Brinker-wide that the operational standards are maintained? Or that you did development -- maybe you don't view development as an issue, or that the development pipeline is on track for each individual brand?

Every brand is in a different lifecycle. If we are not seeing great results we're going to slow down development, because we are not getting a return on investment. Chili's pipeline right now is moving along very nicely. But in some of the other brands we're letting the success of the brand be the lever or the driving force for how we quickly we build new restaurants out in the marketplace.

What about the operational scores, the customer satisfaction scores? How does that not become something that becomes an issue? How can we evolve into that as opposed to -- in other words, have like a kind of a recognition that something that is actually wrong?

As we said earlier in the call, we are paying close attention to our consumer measures both internally in our restaurants as well as organizations like NPD CREST. That is part of the barometer of what happens. At the end of the day, it is traffic gains that we need. But we think that is an outgrowth of service, food quality, and the customer experience. And as Todd mentioned, we've seen some improvements in our 2 major brands. And part of the initiatives we have put in place are to keep those improvements moving in the right direction.

Finally, just a really quick question for Chuck. In terms of the earnings guidance for fiscal '05, how much gain of sale is in that number for the year?

In terms of?

I guess refranchising, I think, is how it was worded. Excuse me?

About 3 cents.

Okay, 3 cents for the year. All right, great. Thanks.

Larry Miller of Prudential.

Most of my questions have been answered. I just want to follow-up maybe on the Italian brands. Both of those seemed a little lighter than expectations. With Mac Grill you said you were facing easy comparisons. Was there anything you were seeing sector wide across the Italian brands that might have been consistent with the performance there? Also I have one follow-up for you, Chuck.

As far as the Italian brands, nothing that we can really point a figure on in terms of any commonalities between the two. I have gotten a lot of anecdotal questions over the past couple of months about low carb and all that kind of stuff. We honestly do not feel that that is having any kind of effect on their sales. The Macaroni Grill, still the issue of marketing and understand what the proper mix is for that, and how to best motivate customers come into the restaurants.

With Maggiano's in particular, looking most recently we have seen some softness in dine-in. Banquet sales continue to be very, very strong. To-go sales also have taken a nice step up over the past year as well, which may in fact be hurting some of our weekday dining in customer, as people learn more about coming to a brand like Maggiano's for to-go food.

On the remodels for Mac Grill, can you remind us where you are and how you account for that in the comp? Chuck, I was wondering if you wanted to provide any guidance for the restaurant operating census for the year. You did for the first quarter, but maybe not for the year.

As far as Macaroni Grill remodels, we have just over 40 restaurants that have been remodeled to date. And as Doug was talking about earlier, taking a look at out capital expenditures, and making sure we're getting a return on that. If we're not then we're going to see about slowing that down.

Are you saying that they are not doing the kind of volumes that you had initially seen several months ago, several quarters ago?

The earlier ones were, but most recently we have seen a slowdown in that. We have got that program on review right now. (multiple speakers)

As far as the restaurant expense for the year guidance?

In terms of restaurant expense for the year, we are going to be up I think somewhere around 10 to 20 basis points. That is going to be again based upon if we can get comp store sales guidance toward the upper end of that 1 to 3 range.

Thank you very much.

Jason Whitmer, FTN Midwest Research.

This is Brad Herger (ph) sitting in for Jason this morning.

Brad, could you speak up a little please? We have a bad connection.

Is that better? Most of my questions have been answered. But looking in the broader scope here, I'm wondering if you can give us your thoughts on your biggest saturation issues you're seeing right now, and in the intermediate term, with the bar and grill segment?

We don't really feel that there is any saturation. In fact, you look over the past few years in Chili's, we have done nothing but increase our amount of expansion and don't have any plans on slowing that down whatsoever.

One other note, in a recent presentation with our NPD group, currently 60 percent of the casual dining customer experiences are from non chain restaurants. So it is not a marketshare game. It is still about each restaurant taking care their customers.

Also you touched a little bit there on Macaroni Grill with the marketing and the proper mix that you're looking at. What more specifically do you think gets this brand up and moving? Can it be an OTB like turnaround for you guys?

First of all, I don't think that Macaroni Grill is in a turnaround mode. We have over 200 locations; an AAB of 3.3 million. Are there some things that need to be fine-tuned? Absolutely. But we're still very bullish and very proud of the brand and still have plans to build more locations, and all the while trying to fine-tune and drill into a much more effective marketing message, and continuous product innovation.

Okay. Thank you.

Glenn Guard, Legg Mason.

Essentially just a quick follow-up on the Macaroni Grill; you just talked about it. If it is not low carb as the issue, and if the customer scores seem to be on the mark, and yet we still have 6 months of flat to negative traffic at the brand, is there something wrong with perhaps the research process?

I know we talked about this last quarter as well. Are you doing anything different in terms of marketing research that you could kind of say, we're going to try this method this time to see if maybe this will turn the brand -- not turn the brand around, but maybe turn traffic around?

We're still looking at it. We're still looking at different aspects of marketing. I would say again, everything is under evaluation. But we have not seen gains; we're not happy with the performance in terms of traffic. Everything is on the table. So, we're looking at marketing. We're looking at marketing mix. We're looking at effectiveness. All those things are under consideration.

You are still in basically a research mode with this? You haven't -- still basically in a research mode? I guess that would be the takeaway.

We do not have any definitive announcements to make today as to what we expect.

Okay. A quick follow-up on the smaller prototype for Chili's. Is that a different real estate strategy from perhaps the older Chili's? Not maybe A locations, but B and C locations? Just a reminder.

The Proto 12 has actually been around for the last -- I don't know, 2.5, 3 years. We have about 41 company-owned Prototype 12s, and they're performing very, very well. We can utilize that prototype for small market development, a fill-in strategy. So again we are still very bullish about that prototype while at the same time we still think there is an incredible amount of expansion potential for our full-size Prototype 10.

Okay. Thanks a lot.

Paul Westra, SG Cowen.

Quick follow-up for Chuck. That 3-cent gain in the first fiscal quarter guidance; where is that in the line item guidance? I assume that is the 3 cents that is in the full-year guidance as well.

The second question is really on pricing. A specific question is what does the pricing assume within the fiscal full-year '05 guidance? Is it that 2.4 percent we just saw in the fourth quarter, or is it less?

I have a specific question on pricing but I would rather like to hear some general comments, that basically will you take prices if then (ph) what is now trough returns and trough (ph) margins at your brands in the environment where we have food costs outpacing labor costs, which is a lot easier to take prices than the other way around?

The 3 cents that is in the first quarter is the 3 cents that is in the fiscal-year guidance.

Where is that within the line item guidance you gave us?

I think right now, we're just exclude it from any of the guidance as an unusual item. We've got to book it in restaurant expense; but the restaurant expense guidance that we gave you did not book that gain in there. I'm trying to make it comparable on a year-over-year basis; and we understand that that refranchising gain is a noncomparable type of item, so it would not have been included in the comparison on restaurant expense we gave you. Does that explain it, Paul?

Yes. I just didn't see in there in the guidance and I assumed that was the base, but just wanted to clarify it.

The second thing you were asking about was pricing. We would rather not talk about pricing strategy as we go forward. I will give you an overall background. We agree that commodity pricing is probably the fastest --or excuse me, the easiest thing that you can pass around to your customer. Because they see all substitute goods also going up in price.

So, if the price of steak goes up, it affects the small independent restaurant on the corner; it affects the price of steak in the supermarkets, as well as stake at a particular brand. So if you take a 50-cent price increase on steak, consumers sort of understand that steak prices are up.

I think that is a lot easier situation to take pricing than if you have issues with healthcare insurance or workers comp, where when you take that same 50-cent price increase it could be a Brinker issue or it could be something other people are not experiencing in terms of cost pressures. The supermarket may not have that cost pressure. So that us what puts you out of step with the market.

So commodity pricing in general is easier to pass on to consumers and a little bit more readily accepted. We have not seen rejection against the price increase that we took last November.

Okay. So, appreciate that. As far as specific, you are not going to give us pricing in the '05 guidance?

No. People can (multiple speakers) last year. We remember that.

Fair enough. Thanks a lot.

Matt DiFrisco.

My question is I guess on the return on investment which you guys have talked about as somewhat being the prohibitor to growing the younger brands, the Corner Bakeries, the Big Bowls, even to a certain extent it looks like Rockfish is only opening one next year. What makes you confident that the poor return on investment can be rapidly improved at Chili's? And more so then, why isn't that a signal maybe that the brand is at a maturation stage, especially for the Prototype 10, because of your requirement for such a higher AUV than say your competitor Applebee's, which operates at a small unit volume to get its return?

Why don't we take the -- I guess as a long-term investor, why don't you take the hit this year in '05 to develop some of these brands maybe, and look at a longer-term strategy to try and get out there with some of these stores if we're eventually going to develop them, rather than prolong their beginning stage dilution for fiscal years '06, '07, or '08 -- whenever they do start to ramp up, if they will be?

Matt, as a long-term comment, I will say that it's very difficult to build a large chain and then go back in and try to improve the economics. It is very difficult to put change through that many restaurants and that many people. We have that we tried that before. Believe me. We have gone through build it fast and then fixing the economics later. Those have been brands that we have had to dispose of, because we found cultures have habits embedded in them, training passes on bad habits. It just does not work.

So for us we found a much more rational approach to growth to be get the unit economics fixed at an early stage. And, yes, there may be sometimes where you look at a brand and say it does not have the kinds of returns that Chili's has. Chili's has fantastic returns, probably some of the best in the industry; and they continue to post those kinds of returns even over (inaudible) the last year.

But you've got to be able to compare them -- (inaudible) with emerging brands -- you have got to be able to compare their returns against something that still does build shareholder value and still gives us an excess of, in over our cost of capital plus an appropriate risk premium. So when we get to that stage and get to that return for each brand, then we decide to go ahead and make capital investments and expand the brand.

Right; but aren't those brands a little bit hamstrung in that they're never going to get to that ROI unless they get some greater density or brand recognition in those markets that Chili's enjoys? Sort of at an unfair comparison to compare Chili's at its brand equity that it has earned over the years versus what these brands are limited at their early stages.

I would agree with you. It is very difficult to have another Chili's and have the return that Chili's has. We don't ask the smaller brands to hit that yardstick. We do ask them to be above our cost of capital with an associated risk premium, to be able to continue to grow. So we do not necessarily say you must beat Chili's. We simply say, you've got to add to shareholder value and provide for a risk of building in a brand.

Also Chuck, can you just specify -- I think the market research data, was that just regarding Chili's when you said maybe some service initiatives you have seen some good response on rolling out? Or is that also including Mac Grill, Maggiano's, or On The Border?

Doug mentioned that in his opening comments. He was referring primarily to Chili's; and then we have also seen some positive guest satisfaction scores at Macaroni Grill from their rollout too. Those are the 2 brands right now that have service initiatives working.

So your cost that you just outlaid in that increased G&A, that was put behind the brands, both Mac Grill and Chili's?

Yes.

Okay. Thank you.

Joe Buckley.

One additional question. Have you done anything in terms of locking in steak? I know you have been sort of doing rolling short-term contracts. Has there been any change on that front?

Not really, Joe, we're still looking at the market more in a shorter-term buy than we are buying for the longer-term. We have yet to do a year contract for steak.

One just additional one. The July price factor was a little bit higher than June. Is that just a function of year-over-year changes? Or was there any additional price increase taken in July?

We did take some price increase on ribs in July.

Okay. Thank you.

Howard Penney, Friedman, Billings, Ramsey.

I have a big picture question as well, and also a nitpicky question. The difference between the last time Chili's went through this problem was the market and the fact that your competition is stronger. We're now hearing terms like new product news from you, which is not a term that I think we've heard in the past; and it is really a term that you hear with QSR players, which is a far more mature business than what casual dining is.

So, relative to your competition, who are using all you can eat promotions and giving away appetizers and desserts with entrees and being far more promotional if you will, when you talk about your new product news, is it really product oriented? Or is it going to be a promotional oriented campaign in response to what your competition has done over the last couple years?

It is really focused on product, and new product news is not anything new and different at our Company nor a lot of other casual dining companies out there as well. We really think that a customer out there has become so much more sophisticated over the years that they are coming for high quality and a great experience. They're not necessarily looking for the best deal that happens to come in their mailbox or in the Sunday supplement. So, we're very confident in the direction we're going in terms of trying to get out there with more product news on a regular basis.

The other question is the comps for the quarter. Chuck, you said 0 to 2 percent, and I thought you said the low end of the range. Or did you not say you expect to be at the low end of the range for that? Given where you are in July, the implications are for maybe flat to down comps. Is that level what you're thinking? Or is that just too low?

We face much tougher comps. Chili's went against comps from around a half a point in July; and they are going to go against 3.5 in August. You take the sum of what we did in July, plus what we are lapping in July, that would mean that we do around 3 points on a 2-year basis, and we are going against the 3.5.

The numbers get tougher, and we have got to have something that moves sales. Current rib promotion right now has not been driving people in. We would have expected Chili's to be somewhere in that 4 percent range in July. We do not hit that. So we're maybe 130 basis points low from what we expected. So, yes, we think we could be in the low end of that flat to 2.

Thank you.

Dennis Forst.

I wanted to see if you would give us a little color on capital expenditures, the number for '04 and maybe some guidance in '05, and where the 115 to 130 store openings are going to come? Which brands?

Our CapEx for '04 was about 307 million. As we look into '05, I would say we would be in a very similar range, maybe up $10 million from there at around 317. There is a chart in the back of our press release that gives you a brand by brand breakdown.

I didn't look at the last column. You're absolutely right.

That gives you a little bit of a brand by brand. In terms of where they're going to be on a geographic basis, for Chili's they will just be continuing to build in new markets. Really in fact I think you can say that for almost every brand we have.

Okay. Great. Thanks.

One last question?

Janice Meyer.

It's a follow-up on Macaroni Grill. You mentioned, Todd, earlier that you don't think Macaroni Grill is in turnaround mode. Yet if you look at the last few years, I think in '02, 3 out of the 4 quarters had negative traffic. In '03, 3 out of the 4 quarters. And I think '04, if I am not mistaken, all 4 quarters have had negative traffic.

You have tried a lot of things. You're tried low-priced items, high-priced items, remodeling, advertising. I guess what would make you think it needs a turnaround or something a little more significant than what you are doing? And Chuck, if I look at your '05 guidance, can you sort of maybe -- versus Chili's, how much cost do you have in your numbers for doing things at Macaroni Grill to turn trends, versus Chili's to turn trends?

Janice, as far as the definition of turnaround, I guess turnaround can mean a lot of different things to a lot of different people. But while Macaroni Grill is not performing at a sales and customer traffic level that we would like it to, we don't think it is broken. Otherwise it would not be doing the kind of volumes that it is doing, that the acceptance that we get from consumer scores, to the ability to continue to build restaurants.

Does it need some tweaking? There is no question that we have to do some things at Macaroni Grill, which is why we have made some changes in the leadership team this past year, with a new head of marketing, a new head of culinary. I am very confident in the direction. I can assure you that the team is very confident in their direction as well. They understand the metric. They understand the measurement. They understand the accountability that goes along with that too.

So maybe it is semantics in terms of what everybody thinks turnaround either does or doesn't mean. But I'm very confident in Macaroni Grill. It is a great brand, and we think we have a great future with it.

I'm sorry Janice. Did you -- ? This is Chuck.

On the cost side?

In what (indiscernible) on the cost side?

For example, you talked about some labor and training, certainly at Chili's ; and I guess it is at Mac Grill. But is there money -- are you putting in your guidance money to really enhance the product development pipeline? Maybe making some mix shift, doing more on the service side, whatever it may be. Or is there not a lot in the budget versus what you are doing at Chili's for improvements at Macaroni Grill?

I think we're still taking a look at Mac Grill to figure out what we need to do (multiple speakers) same-store sales. So, yes, we don't have a lot in there (multiple speakers) a lot built into the forecast outside of the labor initiatives we already talked about.

That was sort of my question. It sounds like you're still in a lot of the trying to understand the issues as opposed to fix the issues stage.

That's correct.

And the fix the issues stage is usually the costly one, I am assuming; or potentially the costly one.

We will let you know if we find out that is the case.

Right, if that is necessary.

Right.

Okay. Thanks.

Thank you, Janice, and thank you, everyone, for joining us today. Our next sales release will be on September 9 for the second period ending September 1. If you have any questions, please feel free to contact Chuck or myself. Thanks very much.

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.