Brinker International Inc (EAT) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Brinker's Second Quart Fiscal 2005 Earnings Conference Call. At this time, all participants have been placed on a listen only mode, and we will open the floor for 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.

Thank you very much Michele. Good morning and welcome to the January 25th, 2005 Brinker International second 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 risk 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 Chairman and Chief Executive Officer, Todd Diener, Executive Vice President and Chief Operating Officer, Chuck Sonsteby, Executive Vice President and Chief Financial Officer. This morning, Doug will provide a strategic update on the business. Next, Chuck will present the second quarter financial results and the third quarter and full year forecast. We will then open up the call for questions.

But before I turn the call over to Doug I just want to remind everyone that last year we had an extra week in the fourth quarter. You will want to take that into consideration as you update your quarterly models for the fiscal year and for the fourth quarter in particular. 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, second quarter fiscal year 2005 net income was $44.2 million or 47 cents per diluted share, excluding certain charges that were detailed in our press release. And while I am pleased that we grew our second quarter EPS by 12%, we are greatly focused on driving consistent long-term financial performance. Chuck is in the on-deck circle and will take you through our financial results for the quarter in more detail. However, before I turn the call over to him, I want to give you an update on the state of the business.

Brinker is well positioned in the fast-growing casual dining segment of the restaurant industry, commanding a powerful portfolio of brands. I truly believe Brinker will be the premier restaurant portfolio company for the foreseeable future. Now how will we retain this status over the long-term, by making the customer our number one priority and invoking consumer data research, process and discipline and our returns focus to drive consistent predictable results.

Additionally, the benefit of being a portfolio company is something that we can leverage our infrastructure to better support the Brinker family of brands. Areas of expertise, including consumer research, marketing research and supply chain management are a few examples of corporate centers that are currently aiding each of our brands.

Now, let me update you on each of our concepts starting with our largest brand Chili's. This coming March will mark the 30th anniversary of our Chili's brand. And as many of you know, Chili's represents about 60% of our revenues and 75% of our profits. Chili's has one of the highest average annual volumes per restaurant in the national Grill & Bar category of just over $3 million. It is also the highest returning restaurant concept in the Brinker portfolio.

A top priority at Chili's is building the product pipeline and providing compelling product news to drive traffic into our restaurants. And the Chili's scene is making very good progress.. Firstly, I've finalized our marketing calendar for the balance of the fiscal year, and we will be promoting products that have come out of our new product development ideation and testing process. And as we have mentioned in the past, the culinary pipeline is built with a disciplined process from the concept appeal to sanitary testing, to in-store execution, to market testing where the product is paired with proposed advertising. In addition, we are targeting to have our product pipeline lined up for fiscal year 2006 by August and for fiscal year 2007 by December. Of course, timing could be extended depending on how products test or if we have to tweak and retest a product along the way.

On the development front, we are continuing to build new Chili's restaurants as quickly as we can. And as I previously mentioned, Chili's generates the highest returns in our brand portfolio. In fact, we are estimating we will develop up to 110 new system restaurants this fiscal year, up to 80 new company and 25 to 30 new franchise restaurants. It is our intent to increase the number of the new Chili's developed in the coming years. In fact for fiscal year 2006, we are targeting building up to 130 new system restaurants, driven by up to 100 new company stores and 25 to 30 new franchise stores.

We also continue to pursue franchise development through our re-franchising strategy. On January 20th, we announced the Company reached a franchise and development agreement with ERJ Dining. ERJ has agreed to acquire four Chili's restaurants in Louisville and Lexington and to develop 18 Chili's in Kentucky over the next seven years. ERJ Dining is a new venture that includes Junior Bridgeman, a former NBA basketball star, who is also one of the country's largest Wendy's franchisees with over 150 Wendy stores. I'm extremely excited to have a franchisee of Junior's caliber now in the Chili's system.

Over the past year and including ERJ, Chili's has re-franchised a total of 17 restaurants to franchisees that have agreed to develop 50 new restaurants by 2011.

Now, turning to Macaroni Grill. We recently announced Jean Birch was the President of Romano's Macaroni Grill.. As many of you know, Jean joined Brinker in 2003 as President of Corner Bakery and has been working in the restaurant industry for over 14 years. I have a tremendous amount of confidence in Jean's ability to be an inspirational leader who can move the needle.. The Corner Bakery management team is currently reporting directly to Todd Diener until a new president is named. This team has an average of 15 years experience in the restaurant industry and is not skipping a beat.

Now Jean could not have joined Romano's Macaroni Grill at a more opportune time. The team recently concluded an extensive consumer research effort to identify and more clearly define an executable marketing strategy for the brand. And it is the marketing strategy the team has decided to initially test in three markets at the beginning of February as the strategic marketing overlay will drive all elements of the brand experience, going forward.

The test primarily focuses on the in-restaurant experience paired with menu and food innovation that comes together with a consistent marketing message. We are also testing different media execution plans in each of the markets at the same time. We'll certainly update you on the preliminary read of the test and give you a better understanding of our next steps on our next earnings conference call in April. Additionally, we are in the process of refining design elements inside and outside of our restaurants, but this will necessarily be a longer-term project over the next 12 to 14 months.

Turning now to Maggiano's, the team continues to drive improved business performance. In fact, the Maggiano's restaurant at Tysons Corner mall outside of Washington, DC recently recorded a new one week sales record of $475,000. Congratulations to the Tysons Corner Maggiano's team for those outstanding results. We also recently hired an experienced national sales representative that will market Maggiano's' banquet facilities directly to businesses. Additionally, Maggiano's will be testing virtual tours of its banquet space by the end of this month with a plan to launch this website enhancement in mid-February. And finally, Maggiano's team is working on some promising promotions in conjunction with food and service initiatives to drive dinning traffic.

I would be remiss not to acknowledge the continued great performance we are seeing in On the Border. Dave Orenstein and his team are doing all the right things, continually looking for opportunities to improve food, service and atmosphere through disciplined consumer research and market testing. On The Border is now in its 21st consecutive month of both same store sales and traffic growth.

In summary, I'm very excited about the foundation we are laying as a Company. The concepts are current leveraging our corporate, consumer and marketing research centers to drive consistent brand performance. We continue to focus on growing profitable Company restaurants and high-return franchise stores. And finally, the management team continues to steer the Company in the appropriate strategic direction to achieve the ultimate goal of building long-term shareholder value.

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

Well, thanks Doug and good morning everyone.. This has been a particularly busy time for our team. We demonstrated very good sales and earnings performance and accomplished quite a few non-operational things as well.

As Doug noted, the second quart diluted earnings per share, excluding charges were 47 cents versus 42 cents last year on a restated basis and under EITF 04-8. This exceeded Wall Street's expectation and the high end of our range by 2 cents and 1 cent respectively, primarily as a result of December sales. And it also marks the return to double digit EPS growth. Good sales and traffic momentum were driven by December promotions and perhaps, customer recognition of the initiatives by our team. While it may be too early to state it definitively, we feel we are again setting the standard for service and execution.

One important point, comp sales were impacted by the year-over-year fiscal period comparison as a result of our 53-week fiscal year last year. The favorability and results, due to the fiscal year comparison was more pronounced in December, given the more significant seasonal trends during this month. The December fiscal period started seven days later versus last year. However, this favorable impact was partially offset by the net negative impact of holiday shifts. More simply stated, the run rate of cost in December, excluding calendar shifts and fiscal comparison would have been about 2 to 3%.

In December, the company resolved its ongoing dispute with the IRS. The settlement required a payment for employer based FICA taxes, which was included in restaurant expense this quarter. And the Company will receive a corresponding income tax credit. While we disagree with the methods of enforcement and the calculation used by the IRS, a protracted appeals process would have been more costly than the net $400,000 impact to earnings. I'm glad this issue is behind us, and I believe the resolution agreed to was the right financial outcome for our shareholders. Starting this quarter the company adopted the new accounting pronouncement EITF 04-8, the effect of contingently convertible debt on diluted earnings per share. The negative impact to second quarter diluted EPS for the second quarter in fiscal years 2005 and 2004 is 1 and 2 cents respectively.

The accounting change will have no impact on earnings after the third quarter due to the January 24th redemption of the convertible debt. We feel the call was appropriate given our optimism about the long-term business in addition to the strength of our current cash flow and balance sheet. The transaction will ultimately reduce our diluted share account by about 7.5 million shares.. However, we will only see a partial impact on the third quarter.

In December, the Company corrected its computation of straight-line rent expense and a related deferred rent liability after consultation with our auditor KPMG. Our previous method of accounting was consistent with industry practices and the restatement is similar to the recent announcements by several other restaurant companies. The negative impact to diluted earnings per share for the second quarter is one cent for fiscal years 2005 and 2004. To facilitate year-over-year comparisons, our restated financial statements are included in our press release and published on our website.

Taking a closer look at the reported brand, Chili's posted a 3.2% comp sales increase in the second quarter composed of a 3% price increase, a 1.5% increase in mix and 1.3% decrease in traffic. These quarterly sales results are particularly impressive, given Chili's was on television only five weeks this year versus nine weeks last year. Chili's promoted our multi-branded gift cards and Table Tent's featured cage and rib eye (ph) and holiday in Margaritas during December. The Chili's name continued it commitment to capacity growth by opening 27 restaurants, 23 were company owned and four franchise restaurants in the quarter.

For the quarter Macaroni Grill reported a decrease in same-store sale of 2.2% driven by a 1.9% increase in price, little change in mix and a 4.2% decline in traffic.. Macro promoted its Trio Rustico, a three-course feature during the month but did not advertise on television or radio. Maggiano's had the strongest sales quarter since first quarter of 2001 with same store sales of 5.8% for the second quarter resulting from a price increase of 2.2%, a 1.4 increase in mix and a 2.2% increase in traffic. Maggiano's new store openings continue to perform well and there's still one more opening planned for the fiscal year.

Maggiano's continues to hit targets and is a great growth vehicle for our portfolio. As Doug said, OTB continues its remarkable run of 21 months of positive same store sales and traffic gain. For the quarter, same-store sales increased 6.4% driven by a 1.4% increase in pricing, a decrease of 1% in mix and a 6% increase in traffic. Before I talk about second quarter results, the following second quarter fiscal 2004 numbers incorporate the restated straight line in rent calculation and exclude gains from re-franchising and real estate sales and restructure charges to assist in comparability. In this year's second quarter, revenues increased 7.3% to $950,800,000 and comp sales growth was 2.6% above our forecast for the quarter. Comparable sales were driven by a 2.6% increase in price, a 1% increase in mix and a 1% decrease in traffic.

Over the last year, as part of the dedication to increasing returns, we have been transforming our asset base. Last year's restaurant base included 63 restaurants, which are no longer in the system. We no longer operate 16 closure (ph) mills, which were sold in Q2 of last fiscal year, 33 restaurants closed as part of the restructure in late fiscal year '04 and early '05. Five Big Bowls closed in Q3 and 9 Chili's, which were sold as part of our enfranchising strategy early this fiscal year. These strategically driven events contributed to lower year-over-year capacity growth that are long-term target but will improve the returns over time.

Cost to sales as a percent of revenues was 28.4% versus 27.7% a year ago and in line with our forecast. The year over year increase is primarily due to the increase of this year's mix and match grill promotion at Chili's and pressure from higher commodities. We experienced year-over-year unfavorable commodity prices for dairy, ribs, burger meat, chicken and produce, particularly tomatoes and squash.

Restaurant expenses as a percentage of revenue were 56.3% including the assessment for FICA taxes. Excluding this assessment restaurant expenses would have been 54.5% or 120 basis points lower versus 55.7% a year ago, slightly better than forecast. The year-over-year decrease is attributed to lower advertising expenses and efficiencies in management labor. The increased investment in labor at Chili's and Mac Grill were offset by leverage on higher sale. In addition, wage rate increases continue to be modest in the 1 to 2% range.

D&A as a percent of revenues was 4.9% and in line with previous guidance. Depreciation was higher on a dollar basis compared to the prior year due to more restaurants in the base. G&A was 4.5% versus 4.1% a year ago an increase of 40 basis points year-over-year. This increase was primarily due to an increase in consumer marketing research, severance costs and miscellaneous and some miscellaneous project costs. These increases were slightly offset by lower performance based expenses.

As Doug mentioned, the shift to becoming a more consumer-focused company has resulted in additional investment in consumer research and marketing. However, we anticipate these costs to be offset by leverage from higher sales moving forward and do not anticipate G&A to trend above historic norms. The resulting operating income was 5.5% versus 7.6% a year ago. Excluding impairment charges, operating income for this fiscal year would have been 5.9%.

Interest expense was $7.1 million; about $4 million higher than a year ago primarily due to the issuance of the 10-year bond in May of 2004, and other net was flat year-over-year.

For the quarter, we recorded an income tax credit related to the FICA tax resolution with the Internal Revenue Service, which lowered our effective tax rate to 6.5%. Excluding this benefit, our tax rate would have been 32.3% as forecasted. Net income as a percentage of revenue was 4.4% versus 4.9% a year ago. Excluding impairment charges, net income, as a percent of revenue, for this fiscal quarter was 4.7%.

As we previously disclosed during our last earnings call, the company purchased under forward contracts 3.5 million shares, which reduced the share base early in the second quarter. We did not repurchase any other shares during the quarter pending the call of the convert. As a result, there remains approximately $132 million available under the Company's share repurchase authorization. We generated cash from operating activities estimated at $141 million in the second quarter, aided by strong gift card sales in December that generated approximately $44 million of cash, and that's net of redemption.

Now, for our Q3 outlook. We recently completed the redemption of the convertible debentures. Holders were given the option to let conversion into stock or take cash at increased value of $35.04. As a result of the share price, on the date of conversion, the majority of holders elected to take cash. Holders representing 96% of the outstanding bonds were paid approximately $263 million in cash. The company funded the cash redemption with cash on hand of approximately 105 million, and the remaining balance with lines of credit. Debenture holders with an accretive value of $10.8 million elected to convert into approximately 308,000 shares of common stock of Brinker International, and received cash in lieu of fractional shares. The effect of this transaction has been included in our third quarter and full-year estimates.

Our estimate for topline revenue growth in the third quarter is approximately 6 to 8%, and comp sales should be 1 to 3%. Revenue growth continues to be impacted by some of the asset redeployment transactions noted previously. Cost to sales will increase about 20 to 30 basis points, 27.6 versus 27.4%, primarily driven by year-over-year increases in commodity cost for ribs, burger meat and poultry. Restaurant expenses will be about the same as last year. This estimate excludes the refranchising gain associated with the ERJ Dining transaction that Doug previously mentioned. The pretax gain will be about $2 million and recorded in restaurant expenses, and EPS will be positively impacted by approximately 1%.

Depreciation and amortization sequentially will be slightly higher at approximately 47 million on a dollar basis and 4.7% of revenue. G&A should be slightly lower than last year as percentage of revenue due to lower performance based expenses. Interest expense in dollar terms should be approximately 6.2 million for the quarter. The higher expense is due to higher debt balance related to the bond issuance last May. It is our intent to use our strong cash flow to reduce debt levels throughout the quarter.

Other net should approximate to $1 million expense as a result of reduced interest income due to lower cash balances, and to confirm we are still on schedule to have the Big Bowl divestiture completed during the quarter. The tax rate should approximate 32.3%. Our average weighted outstanding shares for computing fully diluted EPS will be approximately 91 million shares. The estimate includes the reduction of shares associated with the call of convertible debentures. Based on these assumptions our estimate for the third quarter earnings per share is 63 to 65 cents versus 51 cents in the prior year, excluding any refranchising gains or restructure charges. We anticipate our full-year forecast to be $2.12 to $2.18, excluding gains and charges, and comparable store sales are still estimated 1 to 3% gain for the full year.

As Doug outlined for you, the brands remain focused on meeting our guest needs by providing a great experience. The success of the quarter provided proof of their commitment and acknowledgment by the guests that we are making strides. We're focused on growing our profitable brands organically, and utilizing a company and franchise development model to meet an expanding consumer demand for casual-dining. This is a very exciting time. We understand the challenges and we are determined to win. We've made great progress in executing programs that were put in place to grow consistent returns over the long-term, and we're starting to see some tangible results. And now, I would like to turn the call over to Michelle 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 number "one" followed by "four" on your touch-tone 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 that before posing your question that you please pick up your handset listening on speakerphone for optimum phone quality. Please hold while we poll for questions. Your first question is coming from John Glass. Please announce your affiliation, and then pose your question.

Thank you. It's CIBC. I wondered if you would update us on your thoughts for capacity growth for Brinker. It sounds like your upticking development at Chili's. I'm wondering if that's shifting more of the emphasis there versus the other brands or that's actually an increase in overall growth. Thanks.

We are shifting development of Chili's. We are increasing it. We will open up between 125 and 130 restaurants as Doug said. Part of that is shift in looking at increasing returns to shareholders by putting higher growth on the brands that are giving us the best returns. So, we are increase being.

Would you though consider the overall Brinker still at 10% capacity gross store or is it lower than that perhaps?

When we get through our asset deployment and we start getting to a more normalized basis we'll be running right around that 9 to 10% range.

OK. Then, in the third quarter, are you going back to a more normalized advertising schedule at Chili's?

We'd rather not talk about what we're expecting to, John. All our competitors are listening, so we'd rather not give any insight into what we're looking at Q3.

OK. And then, finally, there was that benefit from the later fiscal year start. Is there a detriment in the coming quarter or how does that work?

Yes, John it's Lynn. You are going to see a little bit of benefit associated with Christmas Day falling out of January. However, there will be a negative seasonal impact associated with this 53rd week situation that we're coming off of last fiscal year. So, overall those two items combined are expected to negatively impact January sales on a fiscal basis a little bit versus on a comparable calendar basis.

When you say a little bit, is it more than a percentage point?

Its probably going to be less than a percentage point.

OK. Thank you.

Your next question is coming from Joe Buckley.. Please announce your affiliation and then pose your question.

I'm with Bear Stearns.. And thank you.. The question on December sales, you mentioned that you did not do any television advertising.. I think you said no television and radio advertising for Macaroni Grill, yet the month of December, even excluding the holiday benefits or the weekly counter ship benefits, you were quite good.. Just curious as to your thoughts on what drove that? Did you do any marketing outside of the broadcast media?

Hi, Joe.. This is Todd.. How are you doing? If you look back in December, we did a different mix of advertising.. I think you probably saw or maybe have seen some other write-ups about direct mail, we did with Macaroni Grill, as well as, FSIs and there was nice result from that.. I think the consumer was also very favorable in our direction in terms of dining out and that really happened across all brands from Chili's to Corner Bakery and all those in between.. So the consumer was certainly heading in that direction, that time of the year, and I think some of our marketing pieces that went out did a great job of driving some results, along with the gift card promotion.

What did you do in terms of freestanding inserts? Was it significant during the month?

I'm not sure, as what you mean by significant.. More so than what we have done in the past.. I can put it that way.

OK.. And just a question on Chili's, I know, you don't want to comment on the third quarter advertising plans.. Was the game plan starting in March or April to be on the air consistently every month?

Joe, again I'd rather not comment too much about that other than just to reiterate what Doug mentioned, that we do have two products that we're excited about and plan on promoting, in the one way, shape or another in the back half of the year.

OK.. And I just want on the product platform, did you say, you hope to have fiscal '06 done by August and fiscal '07 by September?

Correct.

'07 by December, Joe.

December.. OK.. Good that's too impressive.. Does Corner Bakery, what are the plans on the management side there? Are you actively recruiting for a new President there at Corner Bakery?

Yes.. We have to -- we absolutely are going to be recruiting a new concept's President but I feel very confident right now the team has got all of the testing going on in the lab stores and all the progress that they have made and continues on.. Jim and the rest of leadership team there are doing a super job keeping the things going.

OK.. Thank you.

Your next question is from Dennis Forst.. Please announce your affiliation and then pose your question..

Yes, KeyBanc.. Good morning.. I wanted to get an idea of capital expenditures for the rest of year and maybe expansion plans for the other divisions for this year and next the way you shared the Chili's numbers?

Well, CapEx for this year will be between 335 and $350 million.. We gave the outlook for expansion for the existing brands in the press release, this morning.. Our projected openings for clinical Chili's are 113 to 123.. For -- excuse me Chili's will be --

77 to 80 of that.

Yes.

Yes, but what about next year?

We haven't really given our growth rates for those units, it will be -- we don't know really, what they will be yet.

OK. Thanks.

Your next question is coming from John Ivankoe.. Please announce your affiliation and then pose your question.

Hi.. Thanks for JP Morgan.. Could you talk about your attitude towards pricing at the various brands for calendar 2005? Remind us of some of the significant lapse that we're facing that we're going to place in '04 and what kind of room do you think, you have in the current environment? Thanks..

Todd do you want to take that?

Hi, John.. How are you doing? Pricing will continue to be something that we look at our on an ongoing basis.. And the numbers that we have right now will probably be maybe at Chili's a little high from an historical perspective but we are always taking looking at the comparative set out there and also taking into account all the external factors that we're always going to facing whether commodity pressure, minimum wage in different states around the country that are taking some minimum wage initiatives and putting them in place.. So, I would say right now, it's steady as she goes and we're going to continue on with the same pricing strategy that we've had, which is probably in the realm of the overall 2% range.. With Chili's a little better ahead of that, right now, obviously.

And have -- are you seeing any difference of the price value relationship of Chili's relative to any of competition that you could share?

Not at all.. Actually, feeling very good about our value scores.

OK.. Thank you.

Your next question is coming from Andrew Barish.. Please announce your affiliation and then pose your question.

With Banc of America Securities..

Hi, Andy.

Yes, hi.. Chuck, you talked about a couple of expense items and restaurant expense advertising management labor.. Can you give us a sense just with the portfolio changes and the kind of the mix change, what kind of benefit that's having on our margins, not having some of these non-core, breakeven or money losing concepts in the mix right now?

I haven't really broken it out, Andy on a category-by-category basis.. I just know that those restaurants were definitely a drag on our returns and we've been taking them out of the portfolio that has helped us.. What has made it particularly difficult as I sort of outlined there, we've had so many different transactions to go in and see what the effects of each one would have, it would just take a little bit of time.. But if you would like, we can follow-up with you on that later.

Right.. Thank you.

Your next question is coming from Hil Davis.. Please announce your affiliation and then pose your question.

Who?

Hello, Hil.

Hi, all.

We are having a hard time hearing you.

OK.

I'm sorry, Hil we still can't hear you.

Is this better?

That's much better.

Hello, Hil.

Hi, Hil.

The technology confuses me.. Yes, I was curious, you had mentioned, you've taken up kind of your marketing expense side in terms of the infrastructure there and just wondering, when you look at kind of the results, you've done, when you've done some consumer testing and trying to drive the brand awareness.. Is there anything that kind of jumps at you in terms of a tough mountain ahead of you or something that might be some low hanging fruit? And also with Mac Grill the same thing I mean, is there in terms of positioning and execution, is it more of one than the other? And Chili's how you can continue to kind of drop some of the success that we're seeing today?

Todd, do you want to take that?

Well, Hil, first of all, some of those expenses are, as we described in our previous comments being a consumer driven company, we just want to find out more and more about the consumers by brands.. So some of your questions are obviously proprietary answers but I would say that some of the tests we're doing with Mac Grill, we're finding out more about how they see us, as a concept.. And we're able to implement strategies inside the restaurant whether it be food or service that match up with what the consumers' expectations are with the brand. And if you go back on the board a couple of years ago that was the kind of key to that door talking to the consumer about what was important at casual-dining Mexican experience to make sure the brand lived up to the expectations. So, we are spending a lot more time getting information general research on the consumer in casual-dining as well as specific information on our consumer for our brands.

Great. Thank you very much.

Thanks, Hil.

The next question is coming from Jason Whitmer, please announce your affiliation, and pose your question.

I'm in Midwest Research. Good morning. Todd you said something to the effect that consumers were visiting more frequently or had some better spending patterns. Can you provide little more color on some of the underline sales trends based upon some of the traffic you have seen, and the overall average check?

Well, I think if you look at the results from our Q2, and really, primarily at period six, which was very strong, check average was up for the most part across the brands. Again, I think, the consumer from what we saw seemed pretty flush throughout the holidays, and you look at the sales at Maggiano's experienced over the holidays, which were some of the best they have ever experienced, and really the results across the board. We came out of December obviously feeling very good about our business, where the brands are all positioned, and where the consumer was as well.

In shipping just briefly to Macaroni Grill, and a lot of that the changes with people and product, do you have any really sense on further expansion plans there or would you want to pull back first to tweak some of the elements within that box? Any thoughts there yet?

Yes. We had already slowed -- planned to slow our expansion down for Macaroni Grill, and trying to be much more disciplined, and how we deploy capital to that brand until we are very confident that what we have in place, whether it be culinary, marketing, what have you, is ready to go.

Great. Thanks.

The next question is coming from Mark Kalinowski. Please announce your affiliation, and pose your question.

Hi. Two things I want to ask about. First, some of my clients are go concerned that the varied menu space within casual-dining is perhaps getting more crowded, concerned about ramp up of advertising at Appleby's and Ruby Tuesday and how that might affect Chili's. Just what your general thoughts about the outlook for the sector as a whole, and Chili's placed within it. And then second question just wanted to revisit the long-term EPS growth rate that Brinker is targeting. What you are comfortable with, and what components of unit growth would be vacant to that number. Thank you.

Hi Mark. This is Todd. As far as the varied menu segment in casual-dining, I think, we are still as excited about it, as we ever have been as the competitive landscape, getting tough, absolutely, but I think, the good news from that is everybody is raising the bar including ourselves. You know you look at our guest scores from external, whether it be NPD/CREST or Gallup or even own our internal scores shows that our brands are performing quite well, and looking at Chili's we are very excited about the direction that we have right now. Right now, if you look at the landscape, it's the independents that are being crowded out by the move by the big chains. Chili, it still seems to be a great deal of room for growth.

OK.

I'm sorry. What was the second half of your question?

Just revisiting Brinker's target for the long-term EPS growth rate.

Well Mark, we're still looking to build on the same model we've been trying to accomplish for years. Trying to get capacity growth somewhere in that 10% range, trying to comps that 1 to 3% over a long period of time. Get a little bit of leverage on our margins or at least keep them flat. You know we want to repurchase shares to help give growth, and give return back to our shareholders. And still looking at that 15% EPS growth as a target.

OK. Thank you very much.

The next question is coming from David Palmer. Please announce your affiliation then pose your question.

Hi. UBS. Guys, I know you don't want to share every detail with the competitors, but perhaps you could take a moment, and give us maybe some insight from your consumer research. Like types of stuff that I love to hear about is what you are discovering about your core customer base, what type of menu innovation and marketing messaging can better express the brand personality to that base, media strategies, leverage by type of dollars that you can spend at the big two brands that any sort of insights would be great.

Well. Yes I'll take it David. How are you doing?

Great.

Again you asked a lot of questions. Let me first say that specifically one thing we have been excited about both our internal guest satisfaction scores as well as the NPD/CREST scores and association that we subscribe to many of our competitors do. We have seen our consumer scores go up; in fact on our internal GSS scores all brands are up the last four quarters. In fact Chili's had the most significant improvement just on customer dine in experience, which covers food and service. In terms of generally what we are hearing about just casual-dining customers the idea of customization is certainly something more important than ever wanting to be come in and create things the way they want it. Also there's certainly innovation is probably as big a news, as ever people want to hear about new products, which is why we're consult on our new products pipeline, and internally as we've talked about we are trying to look at different mediums and different ways to advertise. Not just television, as historically we might have looked at we trying to go what are better ways to reach our customers and do it in a more cost effective manner.

Just a separate question on card balance, maybe heading into the fiscal third quarter, unredeemed card balance much higher than last year?

We typically redeem about 70% of our gift cards over 60 to 90 days.

And -- was the gift card sales, and therefore the unredeemed balance much higher this year?

Our gift card sales in total at the Brinker level were 25% greater than last year.

Is there any way to measure the magnitude that that could mean in terms of sales, I mean in terms of unredeemed dollars?

I'm going to leave that up to you, David.

OK.

Your next question is coming from Matthew Difrisco. Please announce your affiliation, and pose your question.

Harris Nesbitt. Chuck, a couple of quarters ago you talked or last quarter you talked about different medians of advertising potentially being something also to test for the Mac Grill. Can you talk about some medians of advertising that you might feel you are underutilizing right now with regard to the Mac Grill brand?

We can't do. But I'll let Todd or let Doug handle that one. Doug, do you want to take it?

Sure. We are looking at everything. So, I can give you a laundry list of things we might be trying, we could be testing or we will test in the future. Certainly in store different ways to show the menu, photographs. Different in store promotions on the table, magazine, print, billboard, direct mail, online, radio. We are looking at all different mediums and by brand it may be different or by promotion it might be different. The good news is and period six is probably an example of this, we didn't have TV on, we did have pieces of some of those I just mentioned, and you see what the results were. So, moving forward, we are going to be open to finding consumers in different places and different ways.

And then, I guess, also looking at the way the press release was structured or the tables are structured you have Maggiano's now ahead of on the board. Does that presume, should we presume that is a larger revenue base right now for the company?

Did we do (ph) it by size at this time?

Typically you do it by size of revenue.

Maggiano's is still a little bit below on the border.

OK.

I believe on the press release it was rank by comp growth.

Yes. No, but Chili's would have been at the bottom, but OK, I will figure it out. And then also on the cogs outlook. How much of your cogs going forward, it's a pretty heavy sequential improvement quarter-to-quarter on a relative basis your cogs. How much of that is assisted by your better outlook for commodity cost improving or is it also the different promotional schedule that's going to be more favorable mix skewed?

Well, looking at the commodities in particular, I mean, most of the difference here year-over-year will be driven by commodity cost increases is that we are expecting for the quarter. Looking out over the next several quarters we do expect that trends to begin improving. And by the end of the calendar year to be about flat year-over-year from a commodity cost perspective.

OK.. So, sequentially though the biggest, I mean, you have a much more favorable cogs outlook in 3Q than you posted in 2Q. Is that due to a change in the promotional mix do you think?

Well, it is Seasonality.

Seasonality. OK. And then last question just a clarification you say in the press release 6 to 7% or 6 to 8% revenue growth for 3Q. Is that also consistent with the comp there or saying instead of revenue are you meaning expansion?

It is 6 to 8% of revenue growth.

Inclusive of a comp of 1 to 3.

That's correct.

I got you. OK. Thank you.

Your next question is from Paul Westra. Please announce your affiliation then pose your question.

Hi. Good morning. Paul Westra with SG Cowan. I was wondering if you could give little more detail as Brinker the implied sort of fourth quarter guidance. Just want if you can let us know what your outlook is on some of the line items just give us a little more color. Looks like you are implying a little bit more of a year-over-year margin decline. I know you have the extra week last year, but is there any significant change in advertising expenses and the other restaurant expense or the classical outlook there?

Paul, it's really relatively the same as we look out in the fourth quarter. The biggest change, in fact, the last year we had that extra week and try as we could we couldn't get an extra week this year. It's going to hurt us a little bit when you look at margins as stated that way. I think, we did outline in our press release the benefit that we saw from that week. And certainly some folks have taken their models and maybe not excluded the earnings related it this 53rd week. So, as we look out and into the fourth quarter for us we see pretty consist sent same store sales growth. We really don't see any big changes in commodity or restaurant expense that might be looming for us as we get into the fourth quarter. Feeling pretty good about where the model is right now.

And as far as looking at all the line items so nothing, G&A shouldn't expect continued leverage there as well?

We should get some leverage out of G&A on a seasonality basis because sales are so high for us in the fourth quarter. As a percent of sales that will come down, but it will be still up on a dollar basis sequentially.

OK. Great. Thank you.

The next question is from Peter Oaks. Please announce your affiliation then pose your question.

Hi. Piper Jaffray.

Hi Peter.

Hi. I was hoping to go back to the gift card sales when you mentioned that they were up 25%. That is a net number as opposed to gross?

That is year over year gross number.

That's a gross number. How about on a net basis?

I guess, Peter, net of what? I'm sorry.

Well, there was little more discounting this year on the gift card sales, weren't there?

No, Peter, they have -- that's always been pretty much the same over the past few years, whether it be getting the $5 bounce back from Chili's for every $25, Mac's had the same discount program in place for a couple of years. So, year-over-year should be pretty much the same, as we have had over the past few years.

OK. And with the quarter ending on the 29th versus last year on the 24th, is it -- I assume it's pretty safe to assume that the redemption in that last week defiantly help the December sales?

I probably don't know what the redemption is where.

Yes. That was seen right there.

OK.

Peter as you said members of my family were in there redeeming those gift cards.

Glad to hear that. On the FSI was that, in December was that more of product awareness effort and was it both of the core brands.

There is both product awareness and gift card.

OK. And so was that both brands?

Yes. I believe we had Chili's, I think, it all three, Chili's, Mac and OTB there FSI included product and gift card.

OK. Good. And actually in the press release you talked about consumer research to guide your operations. And I think you touched a little bit on that, but how would you characterize this as changing specifically in operations versus the prior approach as far as consumer research guiding that process?

Peter, I think, we've talked about this probably on previous calls. Historically and this probably in the Brinker phenomenon all the casual dining there was little more gut involved in decision making on new menu. Those days are gone. It's not about what we think the customer wants. We are talking to the guests first. Every initiative that we would consider starts with a group of consumers before it goes into the test. So, we are spending more dollars early on, but we think as Chuck said it will drive sales and cover those costs.

OK. So, Doug, when you are talking about menu and product innovation that's what you mean by your operations?

Menu product innovation as well as could be design elements in the building, it could be marketing, different marketing initiatives that may or may not work. We're going to test everything. You know, we've talked already about different marketing initiatives. We have not walked away from television either, but we won't air a television ad if we don't get the results that we need to in the test markets first.

OK. All right. Thank you.

All right.

Thank you Peter.

Your next question from Howard Penney. Please announce your affiliation then pose your question.

Friedman, Billings & Ramsey.. The last time you accelerated Chili's expansion you incurred some incremental labor costs.

Can you speak up? We are having a hard time hearing you. Sorry.

Can you hear me now?

Yes. Little better.

I was just curious about the increase in Chili's store growth and corresponding increase in labor costs that you would naturally expect given the new managers and whatnot and you experienced the last time you ramped up the rate of growth some incremental pressure. How are you planning for that differently this time around? And I have another question.

Well, we are more prepared for the timing of the openings Howard. You know, this has been something that we have been working on increasing from 75 to 80 right now to the 100. We have got some different processes in place to monitor new restaurant managers that are in the system. We look at it a little differently than we have before. And the Chili's team has been focused on keeping that under control. So, we are pretty confident that that's not going to get out of control as it did a couple of years ago.

So, are you already incurring costs for new managers today in anticipation of it?

Absolutely, we -- actually, we've got a number of managers in training around the country. We have -- as Chuck mentioned we have been planning this for pretty good while and we think we are in good shape. Our management turnover trends have been very favorable for us and we are excited about moving into the New Year with the increased number of openings.

And can you just comment on Corner Bakery? There's not too much attention to that and you are not growing it too much. Where does that stand with your current thoughts?

Howard, basically we have a number of initiatives Jean and her team worked on over the past year and we have selected restaurants that we are taking a hard look at all the initiatives at one location to get a better feel the account that economic model that we've been trying to make sure was appropriate before we ramp things backup and it's still kind of in that wait and see and watch and evaluate mode.

How much more you -- much longer will you wait and see and watch before you decide?

Well, don't have that answer right now and again we have competitors listening in so I don't want to get too forward thinking but we are still optimistic and excited about our results, the team has put in place. We feel much better about it than year or two ago because part of it goes back to living up to consumers expectations, figuring out ways to move the line quicker, lower labor cost to back to the house, drive coffee sales. A number of different programs that brand is working on.

Yes. Specifically, they have four test restaurants in different cities that represent really different facets of the Corner Bakery business and those lab stores are intent on us closing the gap and getting to the kind of margin we need to be able to expand the restaurants. Those tests have been in place since period five, so we have only had a couple of months to look at them. But we are very optimistic that the steps that gene has put in place in the operating group is executing and we will deliver the target that they are anticipated.. And so we're in the regional, Howard, and we want to get through a little bit of seasonality when you get through field a couple more months that more -- that reflect more accurately how they are doing. Certainly, snowstorms that's the test restaurant off and the rains in California. So, we need a little bit period of time to be able to read it.

OK. Just one last question. You are moving to more of a franchise mode on Chili's. That concept, Corner Bakery at least there's another company out there that seems to have made a lot of money franchising a similar vehicle. Is that part of the process here or you are going to look to maybe franchise Corner Bakery?

Howard, we get lots of phone calls on franchising Corner Bakery and if everything Chuck just mentioned plays out like we hope well, absolutely franchising would be part of the growth of that concept.

OK. Thanks very much.

Thank you, Howard.

The next question is coming from Larry Miller. Please answer your affiliation then pose your question.

Yes. Prudential. Just a couple of follow-ups. I was wondering if, I know you don't want to disclose for competitive reasons the details of the media plan, but I was wondering if you could talk about at Chili's in particular what kind of TRP if dollar increase we might see, and what kind of media inflation you are experiencing?

Larry, again we don't want to really give out the inside information in terms of TRP levels or anything media inflation, I believe this year we are all looking at around an 8% to 10% inflationary number.

OK. Is it fair to say that you're going have more impressions this year?

Not necessarily.

OK.

Larry, I think what's really important as we look at the marketing spend and do said it before. We're going to go into test market, I'm going to test the media in comparison with new food products, and if indeed we get the results that show that it is an effective spend, we will put money behind marketing. And if our test restaurants don't show a movement, based on that advertising we won't advertise.

OK.

And the Chili's team has been very diligent about staying true to that model. They did it in November and also in part of December. They also did it back in September. So, again, when you see us on television we will have had good test results in the markets and the management team feels comfortable we'll get some kind of return for the advertising that we are spending. We are not dedicated and sitting here and just saying, we are going to spend money on advertising to obtain TRP levels. We are interested in driving topline sales and ultimately profitability every time we go on air.

OK. That makes a lot of sense. I was just kind a get -- it seems like you have built out your pipeline pretty well so we may see an increase in spending, I thought?

Again, if we ...

But I understand what you are saying.

Right. But it also may be Larry a different mix of advertising as well as along with television, the potential of radio, FSI, direct mail. All the things that Doug mentioned earlier.

OK. Great. Just Dough one more question. One of the things you guys were doing was increasing the service levels or increasing the staffing levels at Chili's. Is that where you want it to be now or do you still need to make a bit of investment I know labor into that?

We feel very comfortable with the labor percentage drive now and the GSS scores that we have internally and external feedback we are getting that we have talked about today a couple of times also supports the fact that we have made the right investment into the brand and we are getting results from it.

OK. Thank you, Doug.

The next question is coming from Joe Buckley. Please announce your affiliation and pose your question.

Hi, I'm from Bear Stearns. Just one follow-up, you mentioned the consumer research of Macaroni Grill and I guess, through the years it has sort of been at least from our side of the street it looks like you kind of move the brand down a little then moved it up a little. I'm curious if driving consumer research told you something different about the brand that might move you to position it one way or the other?

Joe not really, I think what we are trying to learn more than anything else from the research we are doing is how to get to our customer, how to market to our customer, as well as, what their wants and desires are from a food perspective, a service perspective. So, it is really all of the above. I wish there was one silver bullet that would give us the ultimate answer but we need to look at all of the things that go into the customer experience and we are getting some great insight from all of that, too. Basically, we just want to break through the clutter out there so that people understand what Macaroni Grill is all about and also have a very, very strong continuity of message that we tell the customer about Macaroni Grill experience.

OK. One last one when the accelerated expansion of Chili's, what type of markets do you expect to go to in is there any change in your expansion mix by size of market or geographically or anything that you can share with us?

Yes, Joe, still about the same as in the past, about 10% of the growth will be with the prototype the small town prototype. But we still see a huge opportunity in the mega markets out there for some very strong penetration of the big metropolitans where we are already very successful and that certainly have a number of built in efficiencies there as well.

OK. Thank you.

Your last question is coming from Matthew DiFrisco. Sir, please go ahead.

Hi, question regarding your expansion of Chili's the percentage of those or can you give us a feel of how many those are going to be Chili's two's, smaller markets or airport stores or slim down menu versus the fall out choice?

Yes. Of the 100 company owned that we have planned looking out in the FY'06, again, as I mentioned about 10% of those are probably be the proto 12, small town markets, the Chili's two's are still franchise primarily with the airport locations and of the 25 to 30 franchise I'm not honestly sure what number of those fall into that overall number.

OK. And then also, I mean, you have spoken a lot about the consumer research seems to be focused on the Mac Grill side. Are you spending incremental dollars as far as trying to day ahead of your Chili's consumer before we have a slowdown in the Chili's sales? For one thing I think one of the things that the bar and grill space might be concerned with going forward, McDonald's talking a lot about democratic their menu, pulling down from quick casual. I don't think that with exclude bar and grill pulling down that consumer into the QSR side. Are you doing research on that to try and see how maybe you could take up your customer away from that and even get incremental consumers at a higher end price point?

Yes. We are applying all of that consumer research across all brands and quite honestly focusing on taking the brand appeal up a little pit. If you look at Chili's over the past couple of months the mix and match grill that we have promoted back in November was a huge seller for us at the 13.99 price point of the salmon -- grilled salmon. He would have ever thought people would come to in Chili's to eat grilled salmon but it has also become quite a big seller for us. So, I think the entre middle of the plate protein items have been a big winner for us.

That is something we could expect to you continue?

Absolutely.

OK. Thank you.

Ma'am there appear to be no further questions in queue. Do you have any closing comments you like to finish with?

Well, thank you so much, Michelle and thank you everyone for joining us today. We will be releasing January sales on February 9th after the market closes. Please feel free to give me a call if you have any additional comments or questions after today's call. Thanks again.

Thank you, ladies and gentlemen. This thus concludes the conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.