Brinker International Inc (EAT) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Brinker International first quarter results 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, Lynn Schweinfurth. Ma’am, the floor is yours.

Good morning, and welcome to the October 26th, 2004, Brinker International, first- quarter fiscal 2005 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 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 factors more completely described in this morning’s press release, and the Company’s filings with the SEC.

With me today are Doug Brooks, President and Chief Executive Officer; Todd Diener, Executive Vice President and Chief Operating Officer; Chuck Sonsteby, Executive Vice President and Chief Financial Officer; Starlette Johnson, Executive Vice President and Chief Strategic Officer. This morning Doug will provide you a strategic update on the business;, next, Chuck will present the first quarter financial results, and the second quarter and full year forecast. We will then open up the call for questions.

With that, let me turn the call over to Doug.

Thank you Lynn. Good morning everyone, and thank you for joining us on the call today. As we reported earlier this morning in our press release, first quarter of FY 2005 net income was $36.4m, or 40 cents per diluted share, excluding certain gains and charges that were detailed in the press release, meeting the higher end of our guidance range. Shortly, Chuck will take you through the financial results for the quarter in more detail. But before I turn the call over to Chuck, I wanted to give you an update on where the business is today, on our progress to date against key initiatives, and on decisions the senior leadership team has made to grow long-term shareholder value going forward.

In the last few months there has been some softness in consumer spending that impacted both restaurants and retailers. While we believe this spending behavior did have an impact on our business results, we also believe that initiatives we are currently focused on will allow us to be more effective in driving growth in the future, not only in strong markets, but in softer markets as well. I continue to believe casual dining will grow at a healthy rate in the coming years, and that our brands are well positioned to take advantage of that growth that Technomic estimates at 7% per year.

As I said last quarter, we have built our brands on innovation, quality, and customer service, and we remain committed to these operating principles as foundations of growth. And we will spend much of the FY executing initiatives based on consumer insights that will drive consistent traffic growth in the future. I am committed to growing shareholder value for the long term, and the Brinker leadership team will continue to make decisions based on this principle.

As a result of our focus on returns, we announced this morning we are divesting the Big Bowl concept from our brand portfolio. We recently signed a letter of intent to sell the concept back to Lettuce Entertain You in the next 120 days. We still have great respect for the Big Bowl team, the segment, and the concept. In addition, we took an impairment charge for Rockfish this quarter, and Chuck will discuss the accounting implication. However, to be clear, this does not change the existing partnership agreement with Rockfish.

Next I’d like to give you an update on our two largest brands, Chili’s and Macaroni Grill. Starting with Chili’s, as I mentioned last quarter, we have implemented a new product development process that has been very successful at On The Border, and we have made good progress. Currently we have three new product platforms that are in, or shortly to be rolled out in, test markets. In addition, there are two other product platforms that will be ready to market tests in the coming months., aAnd we continue to test new product ideas with focus groups for future testing to build a robust pipeline of new products.

And, as we previously communicated, we expect to have a steady stream of new products starting in the spring of 2005 at Chili’s. We also continue to focus on advertising quality and effectiveness, so we can communicate and reach our consumers with compelling new product news, both inside and outside of our restaurants. As part of our new product development process, we will only roll out national television ads that have been tested in test markets with proven results.

I would also like to announce Krista Gibson has been promoted to the role of Vice President of Concept Strategy for the Chili’s brand, assuming responsibility for the marketing, the culinary, and the beverage functions. Krista has been an integral part of the On The Border leadership team for seven years, and has been instrumental in creating and implementing the strategies that have led to success at On The Border.

Chili’s continues to experience improved internal guest survey scores, and has seen improvement in the most recent external NPD/ CREST data as well. I attribute these positive results to the new service standards that were put in place in the first quarter. However, while we are encouraged by this customer feedback, we continue to expect this effort will build traffic growth over time, and not in the shorter term.

On a separate note, I am happy to announce Chili’s recently raised $2.5m for St. Jude's Children’s Research Hospital during National Childhood Cancer Awareness Month. This was the first national charitable effort that Chili’s brand has pursued;, and it is one of many charitable programs Brinker has supported to give back to the community, - an important part of the Company’s culture, and our partnership with our customers.

Now turning to Macaroni Grill, we have recently undergone a highly detailed customer research effort that has produced a more clearly defined and executable marketing strategy. To clarify, we are not dramatically changing the brand or its positioning., bBut we are intending to evolve the Macaroni Grill experience by leveraging the strength of the brand’s current identity, emphasizing chef-driven food and continuous innovation, while making the dining experience more appealing to those consumers that are not currently visiting our restaurants. We are in the process of testing initiatives that touch on elements of food, service, and atmosphere,; consistent with the consumer insights we have gained through our research. We will finalize our proposed game plan by the end of this calendar year.

Next, in early calendar 2005, we will conduct market tests in three markets with our consolidated solution, including marketing. We will be able to provide you an update on where we are at the end of the third quarter.

Additionally, on the service side, since our Viaggio service initiative rollout at Macaroni Grill, we continue to see our guest satisfaction scores improve, both in our own internal guest satisfaction scores, as well as in the NPD/ CREST data. We expect Viaggio's service will help to differentiate the Mac Grill experience, and be a longer-term driver of traffic and sales growth in the restaurants.

Finally, we are continuing to focus on our marketing efforts in the immediate term. We are looking at advertising effectiveness, and using multiple advertising mediums we can test as part of our consolidated test early in calendar 2005.

With that, let me introduce Chuck, who will go over the financial results of the first quarter, and our expectations for the second quarter and the full FY. Chuck?

Well, thanks Doug, and good morning. And thanks for joining us on today’s call. As you read in this morning’s press release, our first quarter results were impacted by impairment charges taken as a result of our decision to sell Big Bowl, and recently declining operating performance at Rockfish. As Doug indicated, we’re not walking away from the Rockfish partnership, but took the appropriate impairment charge given their recent trends.

Exclusive of gains and charges, diluted EPS for the first quarter fiscal 2005 would have been 40 cents per share, versus 45 cents in the same period for the prior year. Our performance in the quarter wasn’t what we had originally anticipated., bBut our team delivered against our revised expectations, despite numerous external challenges in September. Taking a closer look at the reported brands, Chili’s posted a 0.3% comp sales decrease in the first quarter, composed of a 2.4% price increase, a 0.3% increase in mix, and a 3% decrease in traffic. And remember, hurricanes had a negative impact on traffic of approximately 0.9%, almost a point, for the quarter.

Another major contributor to the softer sales was the sharply reduced advertising at Chili’s in September. The team is committed to a new process of introducing new food items, and testing media in concert with those items, prior to their national rollout. Our planned September product did not perform to our satisfaction, so it was cancelled, and as a result, national advertising was dramatically reduced.

Given the lack of media support, Chili’s performance was stronger than it may appear on the surface. Wilson Craft and the Chili’s team are focused on developing a pipeline of new products to provide multiple plug-and-play options for new products. This will give us multiple choices of tested products for future campaigns. With the promotion of Krista Gibson, and her focus on that activity, the team is poised to dramatically increase new product development. The Chili’s team opened 21 restaurants, 14 company-owned, and seven franchised restaurants, in the quarter.

Macaroni Grill reported a decrease in same-store sales of 2.4%, driven by a 2.1% increase in price, little change in mix, and a 4.6% decline in traffic. Hurricanes had a negative impact on traffic of approximately 0.8% for the quarter. As Doug indicated, John Miller and his team are working on developing a game plan for Mac Grill by the end of the calendar year that will be tested in four markets in calendar year 2005. We will provide you with a status update by the end of the third quarter on the progress of Mac.

Maggiano’s continues to perform well in a difficult environment. Same-store sales at Maggiano’s increased 0.4% in the first quarter, resulting from a price increase of 2.4%, a 0.1% increase in mix, and a 2.1% decrease in traffic. And for Maggiano’s, hurricanes impacted traffic negatively by about 0.7% for the quarter. Maggiano’s will open five new restaurants in FY 2005. This quarter, the Maggiano’s team opened restaurants in Scottsdale and Cincinnati, and since quarter end, we’ve also opened in Troy, Michigan, and Las Vegas. We’re really excited about our Las Vegas restaurant, located across the street from Steve Wynn’s hotel and casino project, which opens in April. And sales in these new locations continue to build, and underscores our belief that Maggiano’s can one day be a $1 billion dollar brand.

Mark Tormey and his team continue to focus on building both dine-in and banquet business. In fact, for the first time, every restaurant will be open this year for Thanksgiving, hopefully creating a new family tradition. In addition, the team will roll out its new and improved Website in January, which will offer, among other things, a virtual tour of banquet rooms at each restaurant, in addition to a photo gallery of various setups and themes. This Website will provide a faster start to banquet business in new restaurants, and provide a more customer-friendly way to increase bookings in existing ones.

OTB continued its impressive momentum, and posted same-store sales gains of 7.7%, driven by a 1.6% price increase, an increase of 0.4% in mix, and a 5.7% increase in traffic. And hurricanes had the least impact on OTB, about 0.3% for the quarter. This marks the sixth consecutive strong quarter of sales and traffic gains for OTB. And those sales gains have translated into increased profitability, opening the gateway for new restaurant investment. The team has earned the right to increase the number of openings from three last year to eight to ten this year. Dave Orenstein and the OTB team continue to focus on improving the menu format, and adding new and limited-time offerings, as well as enhancements to service and atmosphere.

Now let’s dive a little deeper on first- quarter results. First- quarter revenues increased 4.5% to $910.5m, and comp sales growth was 0.3%. Comp sales were driven by a 2.2% increase in price, a 0.3% increase in mix, and a 2.3% decrease in traffic. And for Brinker overall, the hurricanes reduced traffic by 0.7% in the quarter. As you may recall, last year’s restaurant base included Cozymel, which was sold mid-year, 30 stores that were closed late in the FY, and nine stores sold as part of our refranchising strategy. These events resulted in lower year-over-year revenue growth than our long-term target.

Cost of sales as a percentage of revenues was 27.8%, versus 27.5% a year ago, and in line with our forecast. The increase in cost of sales was driven by expected pressures from higher commodities. We experienced unfavorable commodity prices for dairy, ribs, burger meat, and chicken. We extended the original term of our chicken contract from February 2005, out to 2007.

Restaurant expenses as a percentage of revenues, were 55.9%, versus 55.8% a year ago, including a 40 BP benefit from the refranchising gain. On a comparable basis, restaurant expenses were 50 BPs higher year-over-year, primarily due to higher labor costs. During the quarter, we changed our forecast to reflect increased labor costs, primarily attributed to increasing staffing levels, and lower leverage from soft sales. We also saw increases in payroll taxes, and slight increases in worker’s comp and general liability expense, which were offset by lower advertising, R&M, and field compensation expenses.

D&A as a percentage of revenues was 5%, and in line with our guidance. It was higher on a dollar basis compared to the prior year, due to more restaurants in the base. G&A was 4.1%, versus 3.8% a year ago, an increase of 30 basis points year-over-year. As we disclosed in the press release, we have executed a letter of intent to sell Big Bowl to Lettuce Entertain You Enterprises. We anticipate the transaction will be finalized by the third quarter, and anticipate some ongoing expenses as we wrap up the sale. These negotiations required us to restate the value of Big Bowl, and record an after-tax loss of $10.1m.

In addition, the recent performance of Rockfish has caused us to reassess the carrying value of this investment. As a result, we are recording an after-tax charge of $14.1m in the quarter. The resulting operating income was 1.9%, versus 8% a year ago. Excluding impairment charges and gains, operating income would have been 6.8%. Interest expense was $7.1m, about $4m higher than a year ago, primarily due to the bond issuance we did this past May. Other net was a $442,000 expense, versus a $250,000 credit a year ago.

For the quarter, the impairment charges for Rockfish and Big Bowl made our tax provision an overall $5.6m tax benefit. Excluding these benefits, our tax rate would have been 32.2%, as forecasted. The Company continues to be active in the share repurchase program, acquiring approximately 4.7 million shares during the first quarter. Approximately 3.5 million shares were acquired under forward purchase contracts, and were settled on October 21st, 2004. At the end of the quarter, approximately $132.4m was available under the Company’s share repurchase authorization, net of the forward purchase contract.

As of October 10th, the convertible debt can now be called at the Company’s option. On October 10th, the conversion price was $34.77, and it continues to accrete at 2.7% per year. As I have stated in the past, it’s the Company’s intent to eventually remove this debt from its BS at a point when the share price is closer to the conversion price. It is our intention to offset dilution attributable to the transaction over time. Our financial position continues to be strong. We generated cash from operating activities estimated at $54m in the first quarter. Net income as a percentage of revenues was 1.6%, versus 5.2% a year ago. Excluding impairment charges and gains, net income as a percentage of revenues was 4%.

Now, for our Q2 outlook. Our estimate for top-line revenue growth is approximately 5% to 7%, and comp sales should be flat to up 1%. Cost of sales will increase about 50 to 60 BPs, primarily driven by year-over-year increases in commodity costs for ribs, burger meat, dairy, produce, and poultry. Restaurant expenses will be approximately 40 to 50 BPs lower. This year-over-year favorability is primarily due to the previously mentioned reductions in our advertising accrual. As a side note, this estimate excludes any potential refranchising gains.

Depreciation and amortization sequentially will be slightly higher, at approximately $47m, and 5% of revenues. G&A expenses should be slightly lower than last year as a percent of sales, due to lower performance-based expenses. We anticipate charges associated with store closures of approximately $2.5m to $3m, that we will continue to isolate on our income statement.

Interest expense in dollar terms should be higher than last year, due to a higher debt balance, and increased interest rates. And, as a result of the Emerging Issues Task Force 04-8, we will have to record an interest expense associated with our convertible debt, but it will be adjusted as a benefit in shares outstanding. Other net should be approximately $0.5m cost. The tax rate is expected to be slightly lower at 32.2%. Our new share base will increase to approximately 96 to 97 million shares. The estimate includes the increased share from the impact of EITF 04-8, and the reduction of shares recently delivered under the forward purchase contract.

Based on these assumptions, our estimate for second quarter EPS is 45 to 47 cents, excluding any charges and potential refranchising gains. As presented in our press release, our full- year forecast is $2.06 to $2.19, excluding gains and charges. This assumes a weighted average share base under the new accounting pronouncement for the year, of approximately 96 to 97 million shares.

Now this is an exciting time for our management team. We’re laying the foundation, which we will use to produce superior long-term results. Our team remains highly motivated with a focus on meeting our customers’ needs by providing a great experience. This vision, combined with a disciplined approach to returns, will ultimately increase shareholder value.

And now I’d like to turn the call over to Pete [ph] to facilitate the question and answer period.

Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press the numbers one, followed by four, on your touchtone phone at this time. Pressing one four a second time will remove you from the queue should your question be answered. Lastly, we do ask while posing your question that you please pick up your handset if listening on speakerphone for optimum sound quality. Please hold while we poll for questions.

Thank you. Your first question is coming from Matthew DiFrisco at Harris Nesbitt.

Hi. Chuck, a question regarding Mac Grill. You mentioned the term chef-driven food, it seems like. A couple of months ago, or even about a year ago, I think, the direction was more Southern Italian, and I think you targeted becoming a little bit more casual dining-looking, rather than a higher occasion. How does this chef-driven food direction now change--or how do you incorporate some of the remodels, and some of the lessons we were talking about a year ago with this new direction of chef-driven?

Matt, this is Todd. As Doug, or I believe Chuck, maybe said in the opening comments, it’s not a real big change from what we think has really been the basis of Macaroni Grill’s success over the past 16 years. We’ve always had chefs in our restaurants. We’ve always had chef-prepared food. Our products are made a la minute, to order. So, while we did for a period of time -- and try to broaden the menu, and try to broaden the brand’s appeal via advertising, and even the menu to a great degree, we still want to stay committed to high quality products that have an appeal to specific customers, but still at the same time have enough variety on the menu to bring everyday customers into the restaurants, whether it be at lunch, or to come in during the week. We’re making all of our decisions based on customer research, and getting direct feedback from the people that come into our restaurants, and even from people that don’t use Macaroni Grill on a regular basis.

Okay. Thank you. And just a follow-up there also regarding pricing, and how it might impact the going-forward comp. Looks like November of last year, you took an incremental 1% price increase across most of the brands. Should we presume that with your new comp assumptions that you’re not looking to take as aggressive a price increase, and the aid from pricing will probably moderate as we get in towards the end of this quarter?

We don’t want to talk about potential price increases. Sorry Matt. Next question?

Thank you. Your next question is coming from Mark Kalinowski at Smith Barney.

Hi. A couple questions. First on the diluted share count outlook. If you’re projecting, targeting, 96 to 97 million diluted shares for fiscal Q2, 96 to 97 million for fiscal ’05 as a whole, does that correctly imply -- am I understanding it correctly, that for the back half of fiscal ’05 you’re expecting diluted share count to be -- and this is just a rough number -- about 99.3 million on average? And then I have a follow-up after that.

Well, actually, on the restatement under the EITF, we have to go back and restate every quarter, with the shares from the convert would have to be included in that calculation. So, our first quarter share outstanding would go up by about 7.8 million shares. So, when you’re calculating the annual impact, you’d have to go across all four quarters.

So, just to make sure I understand, fiscal Q1 could be restated in terms of the share count, and for the back half of fiscal ’05, we would expect roughly 96 to 97 million diluted shares outstanding?

That’s correct, Mark.

Okay. The second thing I wanted to ask about is you have said that the tax rate, excluding all one-time items, in the fiscal first quarter was 32.2%?

Yeah.

Other than excluding the pre-tax restructuring charge of about $48m, what else needs to be taken out of the model to get everything to reconcile?

I’m sorry. Could you repeat the question?

Oh sure. I mean, assuming my math is correct, the income statement, including one-time items, includes a restructuring charge in and other impairments of $48.256m. If I take that out of the income statement, tax affected --?

When we did the write-down on Big Bowl in Q2, excuse me, in Q3 of last year, we did not get a tax benefit for that impairment on goodwill. So, we took a $27m charge with no tax benefit. This quarter, as we look at a sale to Lettuce Entertain You, we’re actually able to recognize that for tax purposes. So, the $27m book write-down in third quarter was not a tax event until this quarter.

Okay.

So, it gives us a higher recognition for tax purposes.

Okay. I’m not sure that gets me to where I’m going.

Okay. Why don’t we work offline, Mark?

Okay. That’s fair enough.

I’m sorry that I couldn’t --

That’s okay.

-- quickly.

Okay, and Mark, one other --

Yes.

-- fine clarifying point is there was a refranchising transaction booked in the first quarter, and that did impact restaurant expense by about 30 BPs.

Okay. Thank you very much.

Thank you. Your next question is coming from John Glass at CIBC World Markets.

Thanks. Just given what you said about September ads at Chili’s being pulled, and then maybe lower ad accrual expected in the second quarter, what are your plans for advertising the Chili’s brand in the next quarter?

Well, we’ve never talked about what we have going forward. Right now we’re advertising a product called Mix-and-Match, which is really a great item. Guests can choose among a number of proteins. It sells for $12.99 in some markets, $13.99 in others. And I don’t know, Todd, if you want to talk a little bit more about that product?

Yeah, it does -- John, it does have a choice of two proteins from five. A grilled salmon, which we’ve been pleasantly surprised at the acceptance of the consumer to buy grilled fish at Chili’s; our famous baby back ribs; Monterey chicken; a grilled steak; or a grilled shrimp. Again, a combination of two of those five proteins, along with loaded mashed potatoes and steamed vegetables.

I guess I was wondering, does your -- in your comments about lower ad accrual in the second quarter, what did that apply to?

Well, I think John, for us -- the item that we had in September didn’t test as well as we had hoped it would. And so the Chili’s team had the discipline, having put this new process in place, that we were going to identify new products, we were going to test those new products, and we were going to put media against those new products. And if we had a winner, we’d roll it out to the system, and if we didn’t, we’d pull it.

And, again, congratulations to the Chili’s team to have the discipline to do that. We pulled back advertising, did not roll that new product out, and basically didn’t have much advertising in September. Sales went down a little bit, but not that drastically. We came back on in October with a product that had tested well. The Mix-and-Match had done well in other markets. We followed that discipline in introduction and advertising against it, and feel pretty confident that it’ll keep sales going.

Okay. And then just one final follow-up. Can you talk about when you do exit the Big Bowl business, what the likely impact on sales and earnings are,? aAnd is that already embedded in your forecast?

It is embedded in our earnings forecast. We have not reforecasted sales and revenues. One note there, John, those restaurants will stay in the system for approximately four months as we wrap up taking care of the liquor licenses, and a number of things, so we’ll still get the financial performance from Big Bowl hitting our P&L for a while.

Got it. Thank you.

Thank you. Your next question is coming from Janice Meyer at Credit Suisse First Boston.

Hi Janice.

Hi. Thank you. The question’s on Rockfish and Big Bowl. Now understanding that now two concepts aren't exactly alike, with Bonefish doing pretty well for Outback with PF Chang’s doing well, why do you think--hindsight’s 20/20 -- why do you think you struggled with Big Bowl, that you seem to be struggling a little with Rockfish? And what are your thoughts going forward on new concepts, acquiring versus internally generated? Have you changed your idea of what you’re looking for, or how you will treat them as part of the Brinker portfolio, based on this experience?

Janice, hi, it’s Starlette. I guess kind of a couple of different things here. First of all, in terms of both the segments, for Asian, as well as seafood, we still believe both are very strong, viable segments. I think for us it’s been about focus on the core business, and the core brands. And the ability to generate really the long-term benefits for Big Bowl, I think are going to be very well suited for Lettuce Entertain You, and what their strengths are.

I think Rockfish is going through kind of the typical growing pains of a small organization, and our accounting treatment of this quarter reflects their current performance. Long-term I think there is still a viable position and segment out there for Rockfish in the neighborhood seafood category that is different from Bonefish, and where Bonefish competes at this point in time.

I think, as you’ve heard Chuck and the rest of the team here talk today, our approach is about being a lot more disciplined across the portfolio, whether that’s with the emerging brands, or our existing core brands. And that’s what we’re trying to employ better as we go forward. So, in terms of acquisitions, or internally generated concepts in the future, what I can assure you, obviously we’re going to be a lot more disciplined and focused on how we do that as we move forward.

What does it mean, being a lot more disciplined? Where maybe were you were not disciplined on Rockfish and Big Bowl?

Well, I think you’ve heard me talk about this before, in terms of just our growth expectations. Sometimes our growth gets ahead of what our actual returns are in that early stage of development and learning. And I think for us it’s going to be a little more patience and understanding performance as we move kind of out of different regions, and what that appropriate pace for growth is, given the infrastructure,. Aand having the right infrastructure and systems in place for growth. That’s probably been, I think, our biggest learning recently, with both of these being able to have the right pace of growth combined with the infrastructure to go forward.

Okay. And have you looked at -- I mean, I guess that sounds a little odd, just because you’ve been there before with Grady’s, with Spaghetti’s, so the fact that you grew them too fast for the infrastructure is a little surprising. Have you gone back to Corner Bakery, and will we see you maybe reinvesting now in Rockfish to make sure you have the infrastructure?

Well, I guess those are kind of two different questions. In terms of Corner Bakery, I think you’ve seen us slow Corner Bakery down --

Right.

-- as we slowed On The Border down. All of them kind of get refocused, get the positioning solid, get the business model where it is more predictable, and again, more disciplined, before we go back to grow. I think the Rockfish team is working very hard at reversing their current business trends in their performance, and we remain committed as a limited partner to them to support them through our partnership agreement right now.

Okay. Thanks.

Thank you. Your next question is coming from Andrew Barish at Banc of America.

Hi Andy.

Hi. A question on kind of the -- I guess the portfolio effect of kind of the closures and the refranchising. Can you give us a sense of how much, and how long that continues? And then would you be willing to quantify -- I think I remember there were some one-time sort of retraining and labor costs in the September quarter on both Chili’s and Mac Grill for the new service initiatives. So, would you quantify those?

Lynn, do you want to quantify the --

Sure.

-- labor costs?

Yeah. I mean, in terms of labor costs in particular, I think we’re expecting about 20 to 30 BPs impact on a kind of go-forward basis. And obviously that will mitigate as sales improve.

And then, Andy, when you were talking about the impact of the portfolio, could you repeat the question for us please?

Yes. Just the changes that you’ve made, does that 40 BP improvement from the refranchising continue, or does it in fact maybe even get better now with the elimination of Big Bowl and some other stuff that may not be running through the numbers?

Well, I think as we do make the sale for Big Bowl, our margins will get better. Those restaurants weren’t highly profitable, and they did have expenses that were more above the system. So, margins will get a little bit better through that process.

And Andy, just to clarify the 30 BPs positive impact to restaurant expense in the first quarter was related to the gain recognized on that restaurant expense line item.

For SEC purposes we have to book the gains on refranchising as a credit to restaurant expense. And so when we close the transaction, and record a gain as we did this quarter, our restaurant expense goes down on a one-time charge just due to us recording that gain.

Okay. So, that gain is up in that restaurant, or netted from restaurant expense?

Yeah. It’s a different way to do it, but we’re required to do it that way.

Okay. Thank you.

Thank you. Your next question is coming from Glenn Guard at Legg Mason.

Hi. This is an accounting question Chuck, a follow-up on Rockfish. So, you fully wrote off the investment for Rockfish, is that what I understand?

That’s correct. We fully impaired it.

Fully impaired it, okay. So, there’s no remaining carrying value on the balance sheet at this point?

No. That is correct.

Okay. And so how are the results going to -- for Rockfish, where are they going to be posted going forward? How does that work?

We will not be picking up their performance on a go-forward basis.

Okay, okay. And but still you’re not divesting it?

No, we’re not divesting it. We will still provide some accounting back office support. We’ll provide strategic assistance to them to help them get back on their feet. But we just didn’t feel it was right to have a continued investment on our balance sheet.

Okay, okay. And, actually, a quick follow-up on Mac Grill pricing. Most of my questions have been answered, but just a real quick follow-up. Pricing has been consistently higher, and traffic has pretty much been consistently weak for some time now. And you say you’re not going to talk about forward pricing, but maybe if I could get some color on what you’ve learned in terms of the price traffic relationship previously, and what your thinking is now, if that’s changed at all? Just a little bit more color on that.

Well, right now, Macaroni Grill is carrying about a 1.6% price, which historically is out of alignment with where we’ve been in the past, and honestly have not seen any real correlation between pricing and negative traffic, and/or positive traffic.

Okay, fair enough. Thank you very much.

Thank you. Your next question is coming from Jason Whitmer at FTN Mid Research.

Morning. Doug, you mentioned some consumer weakness clearly over the last few months. I’d be interested in your thoughts on some extracurricular events in the channel, such as competitive noise, and various competitors looking similar, and maybe deviation from that -- how your consumer base, or market research, has developed, what you’ve learned from that? Any surprises, or any changes to the market you’d address?

Well, Jason, over the quarter there was a lot of noise and things going on besides the hurricanes. You had the gas prices. The [inaudible] map group, you may have seen map that research, they tracked all the casual dining industry, and actually August was the worst month in seven and a half years in terms of competitive sales versus previous years. Some of that was based on income tax returns from a year ago, and a lot of other issues. So, there was a lot of clutter.

I think for us, and we’ve alluded to this in previous quarters, our consumer marketing group, and really the marketing folks in each one of the brands, we’re going to get closer to the customer. We’re going to learn what the customer is looking for,, as Todd mentioned regarding Mac Grill, and use that as really the acid test for any new processes we put in place. So, if it’s the a television ad, we’re going to make sure that customers have a chance to see that ad and respond to it. If it’s new products, we’re going to test it, and these are products that customers are going to suggest to us initially.

We’re going to get closer and closer to the customer, and make sure that we have seen actual results in test restaurants before moving forward. Again, discipline in all areas, whether it be acquiring new brands, or trying new things in individual restaurant concepts we already own.

So, if I get your takeaway message from that, but even the last six months, it seems like you’ve been off schedule with all of the above -- with marketing, with food, even with your expansion, which looked a little light this quarter. Do you feel like you’re getting back on schedule, or are you still a little ways from that?

Well, as my opening comments said, most of the processes that we’re putting in place, there is a time -- there’s a tail on those processes. And it’s going to be ’05, calendar ’05, before we really have a disciplined plan at Macaroni Grill. And it will be spring of ’05 before we think we’ll have a pipeline of products at Chili’s that have been tested that we’re confident we can move forward. So, I guess you’d call us in a transition time right now.

We’re implementing these systems and the processes, we’re very excited about,. aAnd again I’ll reiterate, these are processes and systems that On The Border has used for the last couple of years., aAnd Krista Gibson, who engineered all those processes is now in charge of strategy at our largest brand, Chili’s. So, we think there’s a lot of -- we’re excited, as Chuck said, about things in place. They just don’t happen overnight.

Thank you.

Thank you. Your next question is coming from Joe Buckley at Bear Stearns.

Hi, Joe.

Hi. Thank you. I have a couple more questions on the consumer research side. I’m curious, as you did this research, if you detected any change in the role of QSR versus the bar and grill sector? And also, I need perceptions of Chili’s that were surprising to you?

Douglas H. BrooksCharles M. Sonsteby: Well, I think, Joe, when we’ve looked at our research., Wwe really haven’t seen drastic changes on QSR versus casual. We have seen some improved scores with QSR, but there’s nothing really that sticks out in my mind that I can remember offhand. And then when we looked at Chili’s and saw where they were, I think the really encouraging thing for us is the metrics and the scores over the past, really about six months, have been continually improving at Chili’s.

So, while we haven’t seen it necessarily show up in same-store sales as of yet, at least through the end of September, we feel very comfortable that the investments we’re making in better service, and what we’re doing at Chili’s is moving the mark. Again, these are external surveys, not ones just done internally, and they really compare brand against brand. So, some of the CREST data that we get, some of the NPD data, we feel is very valid, and it does show our scores to be moving up.

Hey Joe, this is Todd. Just kind of add on to Chuck’s comments there. The internal GSS scores that we have, the NPD/ CREST information, JD Powers, they’re a good barometer for us to understand how our customers, and how people that don’t use the brands, look at our concepts. Whether it’s Chili’s, Mac Grill, or On The Border, or whichever brand you want to talk about. I guess there weren’t any surprises about Chili’s, other than what we have found that people still see Chili’s as a very strong brand out there that has a great variety of menu choices.

You know, our a real differentiation for Chili’s against most of our major competitors is the flavor profile of our food. So, honestly, it reinforced more of what we think we already knew, and gave us a good path to follow in terms of continued development for the food pipeline.

Question on the changed advertising approach at Chili’s. It seems like if you’re testing things before you run them -- and sounded like the September pull was kind of an 11th hour decision -- are you on that short of a lead time right now, in terms of perhaps not even knowing if you will be advertising in the coming months in the fourth quarter?

Well, there’s no question that we’ve been behind the curve on that for the past six months or so, and we recognize that. We haven’t been shy about talking about it. But we are going to not only test product in the restaurant, we’re going to test product in media markets to make sure that before we put the amount of money that we have to put behind a national rollout on television, that it’s going to be something that’s going to drive business into our restaurants. And if doesn’t, as Chuck said earlier, we’re not going to do it.

Okay. And then just a couple of numbers questions. What will the first quarter EPS number be restated, for the accounting change?

We’ll lose a couple cents for the EITF.

Okay. And how dilutive were Big Bowl and Rockfish, say last year, in fiscal ’04?

Combined they probably lost between 3 -- about $3m.

Okay. Thank you.

Thank you. Your next question is coming from Larry Miller at Prudential Equity Group.

Yeah, hi. Thanks. I had two questions. First, how do you guys feel about the long-term capacity growth rate, given that you’re disposing of Big Bowl, and that you’re sort of eliminating Rockfish? Does that change your thoughts on what you might be able to do, the 10% to 12% rate that you’ve targeted over the long term? And I had a follow-up.

Well, in the near term, it actually helps a little bit, because that’s a base that we weren’t growing off of, in terms of for company operations with Big Bowl. Those restaurants, we had planned on maybe building one, so it was under that 10% to 12% growth rate. Again, and we outlined this last year, most of our core brands, really the big four brands, will take care of that 10% to 12% growth. It’s going to be Chili’s, Mac, Maggiano’s, On The Border. And again, still have great hopes for Corner Bakery, that they can get their financial model tweaked to where they can also get into a phase of rapid growth.

Okay, great. I just wanted to follow up on the convert scenarios. It sounds like in your prepared remarks that you were talking about getting closer to the stock price, so maybe you wanted to call it per stock. And can you kind of walk through what might be the share count impact? In fact, iIt sounds like there won’t be a share count impact now that you have the EITF --if converted method in place, and that you will get a benefit from lower interest expense going forward. Is that correct to understand?

It is correct, with one modification. Under the EITF, we actually do get credit for the reduced interest expense. Now, if you look at our interest expense line on the P&L, it will still include the accrued interest related to the convert. However, when we make an adjustment to shares for the outstanding shares related to the convert, we’re allowed to net the interest expense against that calculation.

And what is the annual add-back?

The annual add-back, net of those two items, we had 7.8 million in shares, and then 2.7% is the annual interest rate on that. I couldn’t tell you the effective weighted shares, the effective -- the share, once it’s net against the interest. But if you’ll call us, we can give you that.

Okay. Thank you.

Thank you. Your next question is coming from Jeff Omohundro at Wachovia Securities.

Thanks. My question’s on Maggiano’s, and in particular, your comments regarding Thanksgiving and creating a new occasion. I’m just wondering how that compares year-over-year, how much of the system was open last year, for example, and what impact it might have on Maggiano’s--?

Hey Jeff, this is Todd. Maggiano’s last year, I believe we had between four to seven restaurants open last year. And those same restaurants have been open for a couple of years in a row, and have had great success with it. And we’re very excited about having the entire system open this year. We have in-restaurant signage telling people about it. Our entire menu will be available along with traditional Thanksgiving fare, such as turkey, pumpkin pie. And when you stop in with you and your family, be sure to have a pumpkin martini to top it all off with.

I’ll try. Also, I think last quarter there was some good strength in banquet and to-go, while dine-in was maybe a little bit softer. How did Q1 perform on those metrics?

Banquet sales held up pretty strong. Dine-in had been a little bit weak. We’re very encouraged looking out into Q2, and we’re very excited about, you know, the holiday season bookings right now look pretty solid.

Okay. Thank you.

Thank you. Your next question is coming from David Palmer at UBS O’Connor.

Hi. It sounds like you guys are taking a hard look at your business. I’m wondering what you think about the scale and scope of your business now? Aas it stands,. eExcluding Rockfish, you still have five sizable chains; you have the challenge of opening over 100 company-owned full-service restaurants a year. I’m curious to know, do you think that this business is still pretty cumbersome from a management perspective?

Well, David, I guess this management team is going to continue to take a hard look at our portfolio. We’re going to look at market conditions, and we’re going to look at our results. And over the last year or so, we haven’t had the most outstanding results in our core brands. And we’re taking a hard look at our decision-making process, as most of this call has been about, systems and processes we’re putting in place here at our office to help support our brands out in the field. We still feel strongly we’re a portfolio restaurant company, but we’re looking at it short- and long-term. We don’t want to miss a niche opportunity, but we also want to make sure that our results now are increased shareholder returns.

So, running a restaurant business, some smart guy once said, “The restaurant business is simple. Simple is hard.” And whether you have one brand, or seven or eight brands, you have to make sure you know your customers. And you have to make sure that you can put in menu items, and build a concept that meet that customer need. So, this is just us taking a hard look at our current results, and trying to balance our short- and long-term success.

And the portfolio will still be challenging to operate, but we think we have a lot of -- again, these systems and processes in place are going to help us make better decisions so that Chili’s and Macaroni Grill can be successful, as well as the smaller brands in the portfolio, like Corner Bakery.

Thanks, guys.

Next question?

Thank you. Your next question is coming from Dean Haskell [ph] at JMP Securities.

Good morning, gentlemen, and everyone else. Question is on the consumer. Where do you see them going? What do you see happening perhaps internally on mix? Are they leaning towards less expensive items? Are they leaning towards fish, away from beef, et cetera, et cetera? And it seems that the only casual dining bar and grill chain that seems to be growing aggressively is Red Robin. Are they having an impact on your numbers?

This is Todd. Starting at the back end, I don’t really see Red Robin having any kind of material effect on the business. And as Doug said earlier, based on Technomic information, the industry is growing at about 7%, so I don’t think it’s a case of they do well, and or we don’t, or vice versa. There seems to still be plenty of room for growth going forward.

In terms of the consumer, you know, I haven’t seen a whole lot of shift there, in terms of people maybe trading down because of gas prices. Mix shift hasn’t moved that much. Again, we’re encouraged in the very short-term with the Mix-and-Match, and entrée sales at Chili’s, but all of the other brands’ mixes have not moved much at all over the past couple of periods.

Dean, in regards to specific items, of course when the Atkins diet was hot, the protein intake went up, but I think what we see is consumers want choices, and at all brands. Maggiano’s having great sandwiches at lunch is as important as Chili’s now being able to offer protein choices for dinner. And customers make those decisions, sometimes based on whether they think that product is relevant or appropriate for that brand. Macaroni Grill it may be more of an Italian dish, or but there may be all the shrimp, chicken, beef, veal proteins are just plated, marinated, and prepared differently.

As customers eat out more and more, I mean, the Maggiano’s on Thanksgiving, that’s an outgrowth of consumers not wanting to cook at home, and even on a family occasion implementing kind of their own personal strategy. They don’t want to cook and do dishes anymore. Chuck has just reminded me that Maggiano’s on Thanksgiving, we even promise that we’ll supply the drunk brother-in-law if you want. So, sorry -- back to your question. We don’t see any particular protein being different. The most important thing is the appropriateness for the concept, and giving the customer lots of choices.

Hey Dean, you know, this is Todd again. The only other couple things I might add to that are to-go sales from a consumer standpoint still look to be right on target for what they’re looking for in terms of convenience. They’re still obviously looking for quality, they’re looking for value, and we’re pretty darn confident that our brands are able to deliver on all of those fronts.

Okay. One follow-up question. There’s an old QSR maxim that goes the customer thinks about the product first, and then the brand. I think Whopper, therefore, Burger King. Do you see that perhaps becoming true in the bar and grill segment, and without a product that really draws customers in, in terms of a branded product, could that be an issue?

Dean, I think historically we’ve had great success with what we call famous and favorites. And at Chili’s, that’s a great line of burgers, it’s our famous barbeque ribs. We do see customers wanting to see an influx of new items as well. New item news is important. It’s a balance. The brand may be certain products, but new items also get their attention.

One recent thing that also is a byproduct I think of this choice is customization. We’ve done Create Your Own Pasta at Macaroni Grill, and we see more and more customers wanting to customize their orders. And maybe that plays back to the old, “Have it your way,” Burger King analogy, since you opened up the Burger King analogy there. But they want new choices, they want to customize the products, but they still do connect a brand with old favorites.

Okay, thanks.

Thank you. Your next question is coming from Howard Penney at Friedman, Billings, and Ramsey.

Hey, Howard.

Thanks very much. Hi, good morning. Doug, it seems like your tenure as CEO has been spent unon doing some of your predecessor’s' actions, although I know you were a part of the management team that made these transactions as well. We’ve heard now twice in six months, or nine months, that you’re trying to be more disciplined on the business, which begs the question, where are you not being disciplined today? I’d like to think maybe you’re 100% disciplined today, but chances are you’re probably not. So, where are you not being disciplined? Where are the holes in your portfolio?

And are we going to be going back to the Asian segment again? You got rid of Big Bowl, are you looking to buy something else,? oOr is this a permanent discipline to where we’ve got our four core brands, and we’re just going to focus on those? And maybe if you could answer the question in the context of the presentation two years ago, or three years ago, when you sort of laid out your core brands and emerging brands, and where is the cCompany today from that standpoint?

Hi Howard. Lot’s of questions there. I guess -- and Janice may have mentioned this earlier, this management team, which, yes, is made up of some people that have been part of the Company for many years, but many of them in new responsibilities, really want to make the best decisions today for our shareholders today. And what happened at Grady’s, what happened historically at Brinker is history. But we’ve to got to make the right decisions today in this marketplace, with the competitive segment being different. And I guess I don’t want to spend a whole lot of time at our table here worrying about what something was at Brinker ten years ago. We want to do what’s right for our shareholders today.

In terms of discipline, I think it’s resonating in all parts of the organization. It is going to resonate in how we make decisions about acquiring new brands. It’s going to resonate in decisions like we’ve announced today when we sell a brand. And it’s going to resonate in decisions to support brands. And product pipeline, which we’ve talked a lot about today, I guess if we want to look in the mirror and be critical of ourselves, that probably is an area where we haven’t, over the last couple years, been as disciplined. And that’s why you’re hearing us over and over talk about this new process. Tthat maybe the September decision at Chili’s; we might be embarrassed that we didn’t have a pipeline in place;, but we’re not going to hide behind the fact that we didn’t., aAnd our goal is next year, we will have that pipeline in place, and have more discipline there.

So, the management here at Brinker, that’s all we’re talking about, is how do we make great decisions so that we’re going to be stronger? There’s a lot of other things -- refranchising is an area; there may be some markets throughout the country where we haven’t had as much success. We find a local outstanding operator that knows that market, that lives in that market. We’ve already seen that in a couple of places where we can grow more restaurants and have better success.

A lot of things going on at Corner Bakery. We redid the whole customer service style, and we’re looking at the economic model there. So, discipline is going to resonate throughout the organization, and there are still things we’re working on to get better at. But this management team is going to make the best decisions today for our shareholders, and also try to make those decisions that will help us long-term still be able to grow multiple brands.

So, if I could just follow-up? Not that you’re going to rule out anything, but do you -- we still want to make an acquisition, or develop something in one of those segments that you were -- that you've just exited?

Well, Rockfish we didn’t exit. Rockfish, we still think there’s a great play in that seafood market. So, we are still partners, and we’re limited partners. We want to help them take advantage of the opportunity we think that is in that field. But we also want to make sure that short-term, we increase shareholder value. But what happens next year, the following year, it’s hard to predict today. Our crystal ball may be a little foggier than it was at one time,. bBut we are a portfolio restaurant company, and we’re going to try to be timely with opportunities as we see them moving forward.

Thank you.

Next question?

Thank you. Your next question is coming from Paul Westra at SG Cowen.

Great. Thank you. Just three questions here. Could I have your outlook on your commodity costs?, just Precisely, basically you’d mentioned the a chicken contract. Is that a favorable -- unfavorable from your prior? And are things getting better or worse out there as you look out for your second half ’05 outlook embedded in your guidance? And second question on Macaroni Grill, you mentioned the three or four market tests. How many stores is that,? aAnd what’s the CAPEX cost, if any? And lastly, if you can just hit on the to-go sales, just at Chili’s?

Okay. I think you mentioned a number of questions there. Let me start with the first one, in terms of it’s for commodities, and our commodity outlook. We are projecting inflation in commodities in the going-forward quarters in FY 2005. In particular, we do see beef and pork up. Chicken has been up. Dairy has been trending downward, but for quarters two and three, we will see an unfavorable comparison, but then there will be a benefit in that particular commodity in quarter four. We have locked in our shrimp commodity for the remaining part of the FY.

And then in terms of the chicken contract in particular, we have extended a portion of the previous chicken contract, representing about 55% of our purchases, and we’re in the process of renegotiating another portion. So, again, I think commodities generally will be unfavorable through the year. We do see some benefit, as I mentioned, in dairy. And there will be also an unfavorable impact in Q2 related to some produce costs we’re experiencing as a result of the hurricanes.

But about your chicken contract, is that price per pound up or down from the February -- your one that’s rolling off from February--?

In terms of comparisons for quarters one and two, it’s up,; and then for quarters three and four, we’ve been able to actually benefit a bit versus our prior forecast.

Okay. Thanks.

Paul, on to-go for Cchili’s, and really all the brands, in this past quarter, Chili’s was at 9.6% of sales. That’s up 40 BPs from a year ago. Mac’s at 6.5%, just basically flat from a year ago. OTB, 4.6%, up 20 BPs. And the then Maggiano’s at 7.2%, flat from a year ago. We will be doing, by the way, take-away at Maggiano’s on Thanksgiving Day, opening up at 9:00 as well,. sSo along with the pumpkin martini, go by and get some to-go food. As far as the Macaroni Grill test, I’m not sure the exact number of restaurants involved in those four markets for the test in Q3. But it will not involve CAPEX.

Great. Thank you.

More of a product marketing.

Thank you. Your next question is coming from John Ivankoe at JPMorgan Securities.

Hi. Thanks. Several questions, if I may? Could you now talk about what you did on the labor side in Chili’s in the first quarter, in terms of whether there was were any incremental costs that happened there? And maybe specifically, what you did to drive improvements? And then I have several follow-ups as well.

You bet, John. This is Todd. The Chili’s operations commitment in the restaurant center around full-time staffing of host/hostesses; taking a look at the number of stations; number of tables; and the food service station; making sure our bartenders are bartending, and not trying to wait tables at the same time; manager presencet; training; and the list goes on,. bBut that gives you a pretty good flavor of what we’ve been working on.

And does that come with additional costs?

It did involve some increased labor costs, absolutely.

Okay. Following-up on that, I think in Chuck’s prepared remarks, he mentioned something about lower repair and maintenance, and lower field support. Could you also give some more color, again in the first quarter, whether some of that was one-time, or we’re going to see those costs go higher in the near future?

I think repair and maintenance go back to more or less forecasted where it was forecasted. That was just sort of a bit of an anomaly. We had the 53rd week, so maybe it gave some managers a chance to fix things a little bit earlier, and maybe our forecast was a little bit overstated in that regard. And then in terms of field supervision, it’s really about manager bonuses, John.

Okay.

With sales being lower, and profitability being lower this quarter --

It’s not headcount?

No, it’s not. Well, we are down a little bit on headcount versus a year ago. If you remember a year ago, we had an issue -- we had a few too many managers in the system. We benefit from the favorable comparison year-over-year, because we have gotten that back in line. Chili’s seems to have done a great job with that. But the other part of it too is just manager bonuses are down a little bit, given financial performance.

And this is just a bookkeeping question, if I may? The refranchising gain, I mean, should we look at that this as on a pre-tax basis, or after tax basis, as a percentage of revenue?

Really on a pre-tax basis.

Okay. All right. Thanks.

Thank you. Your next question is coming from Dennis Forst at Key McDonald.

Yeah.

Hi Dennis.

Hi, how are you? I had one question about the Mix-and-Match grill. We’ve noticed other companies using that type of a promotion, and I’m curious whether this has a positive impact on your comps, given that it’s a very high ticket, and might it have a negative impact on food costs, given that there is so much protein on the plate?

Well, Dennis, you know, we don’t want to talk about October results in advance. But we felt like it tested well, and so it tested well enough that we wanted to roll it out. The issue you face is once you have higher food costs, as a percent of the menu item, it might -- it does have higher food costs, but it does deliver leverage through the rest of the P&L. It delivers leverage against labor costs, fixed expenses, because it is a $12.99 and a $13.99 --

So, there’s more raw dollars of gross margin.

It’s got a higher [inaudible] penny (ph) profit return.

Yeah. Okay. Thanks.

Thank you. Your next question is a follow-up question from Matthew DiFrisco.

Hi. Just looking at the G&A growth relative to your sales growth, the prior two years, you did a good job of leveraging that, and it’s been lagging sales. And it looks like the last 12 months it’s nearly grown 20%, while sales have grown roughly around 10%. Can you just talk about some of the investment that has been done there, and should we interpret that as prior years perhaps under-investing? Or are we looking at something that now we’re going to start to leverage? I know you said it looks like it’s going to get leveraged in 2Q. Is that a trend that’s going to continue throughout the remainder of the fiscal 2005?

Well, it gets better [inaudible] in Q2 just because the lower profit sharing bonus this year for corporate employees. Again, what we’re facing a year that looks pretty difficult in terms of what we originally set out, and originally set for our plan. Over the last couple of years, G&A has been better, but we have done some culling of poor- performing restaurants that really had sales dollars, but weren’t giving us much profitability dollars. And in that regard, that artificially makes it look as if G&A expenses were going up. I would say they are actually going up a little bit, but they are going up faster than revenues, because we’ve gotten rid of Cozymel, and gotten rid of some of the under-performing restaurants, which have reduced our sales base.

We have been investing in new people. We’ve made some great hires. There are still areas that we think we had a weakness, or an opportunity. We’ve hired some Senior VP marketing people. Becky Johnson comes to mind. We hired a Senior VP in HR, Valerie Davison [ph]. Those people bring great things to the table, and there’s many others that go unmentioned. But again, they’re all folks that are very important in helping us lay a foundation that we can use to build for the future.

And then a question on Maggiano’s. You talked about Thanksgiving being open. Is there an offset with Christmas and New Year’s falling on a weekend? How does that affect the Maggiano’s brand net for the quarter?

Net for the quarter, it’s going to be a little bit negative for them, because bigger than that is the issue that the number of days between Thanksgiving and Christmas shrank, and that’s always big holiday banquet days. But the team has come about with a different way to book those meetings, hoping to recapture that lost day. So we’ll see how it works.

Thank you very much.

Thank you. Your next question is coming from Karen Lamark at Merrill Lynch.

Hi Karen.

Good morning. A couple of questions. I think you indicated the chicken contracts extend through 2007, and I’m just wondering, are there any provisions for adjusting down for any cost declines in the commodity? How do they price annually?

No, it’s a fixed understanding.

Okay. And then secondly, any thoughts to adjust in your 10% to 12% square footage growth plans for Chili’s as you focus on restaurant operations and returns? Thanks.

Well, Chili’s performance is still stellar. I mean, if you look at ROI capital for that brand, versus the rest of the industry, it’s well over 30%. So, we feel extremely comfortable about the number of restaurants we’re opening at Chili’s. It’s got the highest AAVs in the system, or in their segment, excuse me. And although they may have had some months of soft sales, we believe that, again, the long-term implications for Chili’s are very, very good.,

Great. Thank you.

Thank you. Your next question is a follow-up question from Janice Meyer.

Thanks. It’s been so long since I pressed that button, I almost forgot my question.

[Inaudible] then you get two bites at the apple.

Want to be clear on Macaroni Grill. The chef-driven was the original positioning. And then it looked like you tried to make it more accessible, broadening the menu, and changing some of the décor. And now you’re going back towards more emphasis on the chef-driven. And sort of in my mind that’s more of a narrower positioning, so maybe you can talk about how -- what changes in Mac Grill, as that changes, would you expect the average check to go up?

And particularly on unit size, Olive Garden is a very broad positioning. They have 500 stores. You’re going to what I think is a more narrow positioning, and you already have 200 stores. Are you rethinking the ultimate size of Macaroni Grill for your portfolio?

Well, Janice, I don’t know if we’ve really defined that at this stage of this the ball game. But they’ve been successful for a number of years, obviously. And we want to find out from the research and the testing that we’re doing, really ultimately what the brand can be in terms of size. As far as the chef-prepared foods, having chef-prepared foods doesn’t necessarily mean we’re going to have nothing but very expensive food items.

We just want to be sure that the customer knows, and gives us credit for, when they come in and get twice-baked lasagna, or create your own pasta, or if they get a veal chop, it’s the best damn food that they can get in any Italian restaurant that they want to go to. It’s all kind of centered around fresh, made-to-order, and display cooking, so that people understand that their food is being prepared a la menu minute after they order it.

So, I’m a little confused. So, the chef-driven positioning focuses on fresh, but you don’t really see a menu shift going on?

I don’t think we know the answer to that yet, Janice. We’re still in the midst of a lot of research, and getting in the queue in terms of getting a lot of the stuff tested.

Well, intuitively then, if you’re moving towards a more chef-driven concept, which you’ve been there before, because that’s how Macaroni Grill started, what’s sort of your instinct telling you about where you think the concept is headed with respect to those questions?

Well, we’re honestly obviously trying to get away from instinct and intuition, and base our decisions on facts, and you know --

Touché.

-- we’ve gotten in trouble trying to do that. And so I’m not going to try to get cornered on trying to make a decision and pass it on to you right now.

Okay. Thanks.

Thank you. Your next question is a follow-up question from Joe Buckley.

Actually I had two questions. One, you mentioned a couple of management changes. New additions from the outside, and I guess, Krista Gibson is shifting over to Chili’s. Wondering if there’s any other management changes through the system? There’s been some talk in the press and in the industry of some other changes at fairly senior levels within the brands. Could you address those?

Joe, this is Todd. We are in the midst of a search to replace the Cchief Operating Officer position at Macaroni Grill, which is vacant right now. And we’re seeing some very nice resumes come across the wire. We’re also in the midst of filling positions at Chili’s, both in culinary and marketing. Krista Gibson’s position is going to be overseeing both of those disciplines, in a concept strategy position., sSo we will be filling both of those positions in the weeks ahead as well.

And I think one point to kind of offer up to Todd’s point is Becky Johnson, who’s been the SVP of Marketing at Brinker, has been helping the Chili’s team through this process. So, there really won’t be a disruption, or wait, for the people to get on the team at Chili’s in the culinary or the marketing world. Things are still happening there, vis a vis people who will be able to take that and run it as an ongoing process.

Okay. And then another commodity question, where do you stand on beef? Have you ever locked something in contract-wise,? aAnd with will the reopening of Japan, shift that market back up significantly in your view?

In terms of beef -- well, let me answer your Japan order question first. Actually, the opening of the borders will not impact us until calendar year 2007. Right now we’re contracted through the cuts of beef that we need through 2006, that that border opening would impact. And then in terms of other beef contracts we have, they tend to be shorter term in nature, generally about six months, for those products that we do contract.

Okay. So, you’re covered through ’06 on your key ones?

On the skirt steaks.

Okay. Okay. Thank you.

Thank you. Your next question is a follow-up question from David Palmer.

Hey, guys. Your customer satisfaction scores have always been pretty strong at Mac Grill, and you’ve pointed to a lack of advertising scale as a key inhibitor for sales in the past. Is there anything in your recent research that’s told you that maybe something else in your marketing approach was missing the mark, and that advertising scale need may not be the barrier you thought it was?

I think that’s something right now we’re honestly trying to find out. With the advent and onslaught of TiVo, I think advertising in general is going to take a lot of new slant in the months and the years ahead. With Macaroni Grill, we’re not really sure right now what is going to be the best medium to advertise the brand. I’m sure it’ll be some mix between TV, radio, print, direct mail, or FSIs, if you will, so we don’t know the answer to that, and I don’t think that’s going to be clear for maybe a couple more quarters.

Okay. Thank you very much.

Great. Thank you.

Thank you. There appear to be no further questions in the queue. Do you have any closing comments you’d like to finish with?

Yeah. I will close the call. I just want to thank everyone for calling in today, and remind the group that we will be releasing October sales on November 10th. And please feel free to give me a call if you have any additional questions or comments.

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.

END