Brinker International Inc (EAT) 2006 Q1 法說會逐字稿

Welcome to the Brinker International first-quarter fiscal 2006 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, Vice President of Investor Relations. Ma'am, the floor is yours.

Good morning and welcome to the October 25th Brinker International first-quarter fiscal 2006 earnings conference call. During our opening remarks and in our responses to your questions certain items may be discussed which are not based entirely on historical fact. Any such item 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 in the Company's filings with the SEC.

The next key calendar date is our October sales release scheduled to be published November 9th after the market closes. Additionally, I'd like to confirm we have updated our Investor Relations website in the financial pages for fiscal years 2005 and 2006 to provide breakouts of continuing operations, discontinued operations and special items for comparability. Within the special items category we have provided detail related to equity based compensation expense.

With me today are Doug Brooks, Chairman and Chief Executive Officer, and Chuck Sonsteby, Chief Financial Officer. Doug and Chuck will kick things off this morning with some opening comments and then we will open up the call for questions. With that let me turn you over to Doug.

Good morning, everyone, and thank you for joining us on the call today. Given the momentum of our business performance Brinker International recently announced its first-ever quarterly dividend to be issued during the second quarter. And I'm happy to report that our first-quarter earnings performance did not disappoint.

As you saw earlier this morning, earnings per share grew 35% in the first quarter on a comparable basis over last year to $0.50, $0.02 above the high end of our guidance. Our strong first-quarter performance was the result of continued progress against our three key strategies -- first, developing new profitable restaurants; second, growing our base business through effective marketing and operations initiatives; and third, effectively leveraging our infrastructure.

We developed 44 system restaurants meeting our quarterly development goal. Additionally, as we shared in our recent investor and analyst conference, we are making good progress against our three-phase international development strategy including increased franchise development commitments with franchisees already successful and well capitalized.

To put this in perspective, the greatest number of Brinker restaurants developed internationally in one year was last year with a total of nine new international locations. Over the past several months Bill Simon (ph) and his team have increased franchise commitments to build over 90 incremental new restaurants over the next three to five years. And the team continues to work diligently on phases two and three as well. We will certainly keep you informed on our progress.

Marketing and operational initiatives continue to drive our business performance. Our new product promotion strategy at our largest brand, Chili's, combined with continued improvement on the overall customer experience within our restaurants generated the strong quarterly top-line results we reported today. We recently announced our selection of Rapp Collins Worldwide as the advertising agency of record for Macaroni Grill, On The Border and Maggiano's.

Rapp Collins has expertise in targeted media and shares our focus on marketing return on investment. With this new relationship we will shift from a mass marketing approach to a targeted direct marketing and brand building. We are confident this new focus will enable us to take our marketing to a more customized and personal level that will enhance our relationships with targeted customers and improve our return on marketing dollars. GSD&M will continue as our agency partner for the Chili's brand, supporting new initiatives and helping to continue to generate positive top-line results.

Turning to our portfolio. Earlier this month Brinker announced that it had reached a definitive asset purchase agreement for the sale of Corner Bakery Cafe. We expect the transaction to close by the end of this calendar year. Although we made the decision to sell Corner Bakery, we do remain committed to a portfolio of successful casual dining restaurant concepts.

Allow me to switch gears. I want to take a few minutes to respond to a couple of key questions investors have asked about the state of the casual dining restaurant industry and why I think Brinker is strongly positioned for success in this increasingly competitive industry over the long term. First, with the impact of recent hurricanes and the high cost of gas and other commodities consumer discretionary income is decreasing. And how will this affect our business?

Based on our research and past experience, casual dining is less discretionary for a material portion of the guest universe. And as I have said on many occasions, we are selling convenience at a greater value in these times where people are busier than ever before. In addition, our target customers, while not completely insulated from the factors experienced by the rest of the nation, are less sensitive to economic changes given their demographic makeup.

Specifically, Chili's has been successful in generating solid sales results in recent months driven by growth in both traffic and mix. Our latest promotion, the triple dipper, not only generated high traffic but also generated positive mix. So not only did more guests come into our restaurant this September versus last year, they also spent more on average.

The second question, how saturated is the industry and with the increased U.S. development also many casual dining companies why are we comfortable with our domestic development strategy? When using our development model that takes into account competition and demographics coupled with other market planning assessments we have identified a large number of new restaurant opportunities. Additionally we share our strategy with our franchise partners to allow the entire system to develop more quickly. Not surprisingly we want to get to those trade areas early to establish a dominant position.

To put this in perspective, we are only covering less than half of our core demographic households with the existing Chili's restaurant universe in our metropolitan markets. Our development capability is proven, we have set development records every year for the past four years at Chili's and we are on target to do so again this year. And as you can see from our latest financial results, the Chili's system is solidly outperforming the industry and its competition.

During September, which was national childhood cancer awareness month, Chili's conducted a month long fund-raising campaign for St. Jude's Children's Research Hospital. This is the second year our Chili's team lent its national support for this extraordinary cause and I'm proud that we can assist in the amazing work St. Jude's is doing to provide important research and patient care to benefit children all over the country. Our goal was to raise $3 million and, despite the hurricanes and other challenges last month, our team and our customers rallied behind this cause to meet this goal.

Brinker also had the pleasure of joining many of our peers in the restaurant industry to raise money for the American Red Cross hurricane relief fund by participating in Dine for America on October 5th. All profits generated from our five concepts for the day will be donated to the fund. We believe this program was the perfect way for the restaurant industry to contribute to the massive hurricane relief efforts. It was especially meaningful for us at Brinker as many of our employees in Louisiana, Mississippi and Texas were displaced by the storms.

I continue to be very bullish on Brinker and its long-term prospects. We have a seasoned accountable management team, a world-class portfolio of brands and a very focused strategy to grow shareholder value. Let me now turn the call over to Chuck.

Today our thoughts and concerns are with all Brinker employees and South Florida residents who have been impacted by hurricane Wilma. We're currently assessing our restaurants to determine the amount of damage. To ensure the safety of our employees, we closed ten restaurants on Sunday and 41 were closed yesterday. Our best estimate is that 34 will remain closed today due to lack of electricity or a safe water source. While we do not anticipate any material change at this time, if we subsequently determine there is a significant impact to our quarterly estimates we'll make an appropriate disclosure at that time.

Well, today we reported first-quarter 2006 earnings per share before special items of $0.50, an excellent quarter. Earnings per share grew 35% on a comparable basis as a result of strong sales growth driven by the continued success of our new product pipeline at Chili's and effective cost controls by our operations team. We met with many of you at our investor conference in September and outlined our strategic vision and how we plan to deliver long-term shareholder value.

Our goal is to grow earnings per share 15% a year by, one, growing revenues 12 to 14% through capacity growth of 8 to 10% and comparable sales of 1 to 3%; two, improving margins; and three, returning capital to shareholders by way of dividends and share repurchases. And this quarter certainly represented an effective demonstration we can deliver on that model.

Turning to actual year-over-year results, as indicated in our press release, we are now required to account for Corner Bakery as a discontinued operation. Also, changes in our long-term equity-based compensation plans, year-over-year awards and related expenses are no longer easily comparable. Therefore we are separately showing equity-based compensation expense as a special item as well as certain gains and charges.

The detail of each of these items is included in our press release to provide both clarity and year-over-year comparability. Further detail is available on our website including a breakdown of equity-based compensation components and a separation of fiscal 2005 quarterly results into continuing and discontinued operations.

As we discuss the results of the first quarter and subsequent periods we will focus primarily on continuing operations. Therefore, first-quarter earnings per share from continuing operations -- and really that's the results from everything but Corner Bakery -- and before special items is $0.48 adjusting for the $0.02 impact of Corner Bakery profitability that now falls in discontinued operations. Now remember however, when we provided guidance for the first quarter those $0.02 were considered ongoing operations at that time.

Revenues for the first quarter of fiscal 2006 increased to 976 million, 12% greater than the same quarter in fiscal 2005. The increase was primarily attributable to new restaurants driving capacity growth of 7.1% and strong comparable same-store sales growth of 3.7%. Now reported capacity was slightly lower than our long-term target of 8 to 10% primarily as a result of Big Bowl being included in the revenue base last year. Excluding the impact of Big Bowl capacity growth was 8.4% within our target range.

Cost of sales increased 30 basis points from 27.9% to 28.2%. And the increase was due to higher costs related to product mix and commodities and it was primarily offset by increased menu prices but came within our anticipated range. Last November we entered into a new contract for chicken which was slightly higher than our previous contract and we will lap the increase in future periods.

Restaurant expenses decreased from 55.9% in Q1 of 2005 to 55.7% in 2006. Our operations team has done a good job controlling costs related to new product rollouts at Chili's and at each line on the P&L at all of the brands. But we didn't get quite as much leverage as we would like due to higher utility expenses. The good news in restaurant expense is that growth in wage rates continues to be modest at 1 to 2%.

General and administrative expense was 4.4% of revenue, a slight increase from the prior year and better than our expectations due to an appropriate focus on spending. The effective income tax rate from continuing operations for the quarter was 32.1% compared to 32.2% last year.

As I mentioned previously, Corner Bakery is classified as a discontinued operation. The transaction is progressing on schedule and we expect the sale to close in December. Three components make up the discontinued operations line item on the P&L for the first quarter. First, the net profitability of Corner Bakery operations of $1.7 million. Second, the required suspension of depreciation which was $1 million after-tax. And third, the net loss on the sale of 9.4 million.

The after-tax loss on the sale is $1 million greater than the pre-tax loss of 8.4 million due to a lower tax basis than book basis and, in fact, it created a gain for tax purposes. The sales price was limited due to a number of Corner Bakery locations that are attached to Maggiano's and will be either modified or closed as a result of the sale.

During the first quarter of fiscal 2006 the Company acquired approximately 3.6 million shares of its common stock for approximately $140 million. In addition, we still had $136 million remaining under our Board authorizations at the end of the quarter.

Turning to brand specific performance, Chili's posted a 6.1% comp sales increase in the first quarter, the highest comp we've seen at Chili's for 16 quarters. This increase was composed of a 3.3% price increase, a 2.4% increase in mix and positive traffic of 0.4%. The success of new product promotions, the Baby Back Roadshow and the Triple Dripper, drove the increase in same-store sales.

Different levers are used to generate sales growth, a balance of mix and traffic driving promotions and appropriate pricing. The Baby Back Roadshow replicated its test results and was successful in driving mix while the Tripper Dipper also produced expected returns as a successful traffic driver.

Additionally, our menu breadth and value proposition continue to resonate with our guests. To leverage our reputation for flavor and quality in-store marketing efforts have been successful in presenting the guest opportunity to trade up to premium products which offer great value. As a result, we continue to see year-over-year increases in mix. Chili's has a unique positioning; while there may be consumers who are trading down at other chains or within the industry, Chili's provides a great guest experience for someone to trade into from a higher check average dining option. It's a great brand.

Romano's Macaroni Grill -- for the quarter Mac Grill reported a decrease in same-store sales of 1.6% driven by a 2.3% increase in pricing, a 0.4% increase in mix and a 4.2% decline in traffic. Jean Birch, the Mac Grill President, outlined the work her team is engaged in during the investor conference. They've been analyzing data to support the market testing of their positioning and the appropriate media support. These tasks will be complete in November and the results will be rolled out during the second half of the fiscal year. Additionally the Mac Grill team is focused on building their product pipeline, testing an optimized menu and pursuing operating initiatives with the intent of expanding margins and improving throughput.

Maggiano's comparable store sales were 2.7% for the first quarter driven by a price increase of 1.5%, a 1.2% increase in mix and flat traffic. This quarter represents the 16th consecutive quarter of positive comparable store sales at Maggiano's. And Maggiano's has opened restaurants in St. Louis, Nashville and Beachwood, Ohio this fiscal year and will open Bellevue, Washington by the end of November. And similar to last year, all Maggiano's restaurants will be open on Thanksgiving and guests will be offered a special holiday menu.

On The Border -- for the quarter same-store sales decreased 0.7%, made up of a 1.7% increase in price, a negative 6/10 of a percent mix and a decline in traffic of 1.8%. As you know, On The Border has had very consistent positive sales and traffic performance over the past two years. And on a two-year basis the brand continues to outperform the industry. Importantly, new restaurants continue to exceed hurdle rates and the On The Border system sales average while carrying a lower investment cost.

And as Doug already outlined, we continue to make great progress in furthering our three-phase international development strategy. During the quarter our partners opened five new international restaurants and sales performance continues to be strong with year-over-year revenues up almost 30%. Bill Simon and his team are on track to deliver almost two new restaurants per month overseas.

Well, the lease issues never end. The newest pronouncement, FSP 13-1, was recently issued on October 6th and ales with the issue of construction period rent. Starting in the third quarter the Company is required to prospectively expense rental costs associated with ground or building operating leases during construction periods. The Company previously capitalized these costs as a leasehold improvement. This change will not impact cash flow but will negatively impact restaurant expense by about $3 to $4 million on a pre-tax basis in the current fiscal year or about $0.01 to $0.03 per share and we have updated our guidance to take this accounting change into effect.

Now turning to the second-quarter outlook, we are continuing to expect revenue growth of approximately 12% and same-store sales to be in the 3to 4% range. Remember that we are lapping the highly successful Chili's mix and match grill promotion in October of last year and are off air at Chili's for month of October this year. Comparable same-store sales will be softer in October because of this comparison. For the quarter we will actually have one more week of advertising than last year so we expect a stronger second half.

Cost of sales will decrease of about 40 basis points, 28.2% versus 28.6%, primarily driven by favorable commodity costs. Specifically, produce costs will be down year-over-year and slightly offset by increases in pork and chicken costs. Hurricanes in Florida created a spike in produce costs last year and if they're not replicated this year should provide an opportunity for a favorable comparison.

Restaurant expenses excluding special items will increase of about 70 basis points at 54.6% versus 53.9% and that 53.9% excludes the impact of the $17 million IRS settlement last year on a comparable basis, primarily driven by higher advertising spending and higher utility expenses, and offset by improved labor efficiencies and sales leverage. Advertising expenses will be up year-over-year for both the quarter and the full year compared to last year when we modified advertising spending at Chili's and Mac Grill.

Utilities will present an ongoing challenge as year-over-year costs will be up an estimated 50 basis points. However, there are some things going in our direction. Leverage from top-line sales and the continued focus on improving labor and other costs by our operations team should keep margins in line. Depreciation and amortization will be slightly higher at $48 million and 4.8% of revenues as a result of new restaurant development. And general and administrative expenses will be relatively flat at about 4.6%.

Incremental equity based compensation for the quarter is expected to be about $11 million pretax and $8 million after-tax or about $0.09 per share. This expense has been isolated in my outlook in order to provide year-over-year comparability. Note that approximately 75% of the compensation expense will fall in G&A with the balance included in restaurant expense.

Interest expense in dollar terms should approximate 6.7 million for the quarter, slightly lower than last year as strong cash flows have funded both capital expenditures and share repurchases. The tax rate from continuing operations should approximate 32.2% excluding equity-based compensation expense. And including this expense the tax rate should be about 34%.

Our average weighted outstanding shares for computing fully diluted earnings per share should be approximately 89 to 90 million. Our initial estimate for second-quarter earnings per share is $0.56 to $0.58 excluding special items versus $0.47 in the prior year, approximately a 20% year-over-year growth in earnings per share. Incremental equity-based compensation expense is estimated to impact second-quarter results by approximately $0.09.

The range for the full-year forecast from continuing operations is estimated to be $2.34 to $2.43 excluding special items and is based on comparable sales growth of 3 to 4% and a share count of about 89 to 90 million. We carried our $0.02 performance over expectations from the first quarter through the full year, but we widened the range a bit to account for the uncertainty of utility costs in the back half of the year. However, our team is intent in managing the business to overcome these cost increases.

Incremental equity-based compensation expense is estimated to impact fiscal year 2006 results by $0.27 to $0.29. Additionally, we remain committed to returning capital to shareholders through share repurchases and the payment of a quarterly dividend, the first of which will be paid in December.

One of the key growth drivers for the Company is restaurant development. However, we have made capital discipline a principal in our organization. In this environment of increasing construction costs we are continuing to examine each site against our model to ensure it receives proper returns. Our development team is still on track to meet our capacity goals and the design and construction teams continue to partner with developers and vendors on ways to reduce investment costs.

Our focus on consumer testing is intended on getting enhanced visibility into our business and providing confidence in our ability to produce financial results. New products in other areas that touch the customer such as new menu designs, media messaging and mix and restaurant prototypes pass through rigorous consumer and financial testing before approval.

We continue our commitment of delivering 15% earnings per share growth each year through our shareholders by achieving the long-term business model targets laid out during our recent investor and analyst conference. And one thing most people miss in our industry is that it has a built-in need stay. People get hungry and the opportunity to provide time in our customers' lives seems to eventually trump all other distractions.

I share Doug's optimism about both Brinker and the industry's current and future business prospects. So with that, I'd like to turn the call over to Kate to facilitate the question-and-answer period.

(OPERATOR INSTRUCTIONS). John Glass, CIBC.

First, Chuck, I just wanted to clarify the earnings guidance, 240 to 248 which is the number you're citing excluding the discontinued operations. How much of that -- how much of Corner Bakery is in that number? Are you assuming a sale midway through the year? Could you compare that number to the old 240 to 246 which I assume did include Corner Bakery for the full year?

Yes, the old amount did include Corner Bakery. There's approximately two to three -- there's about $0.02 to $0.03 of Corner Bakery earnings that are included in that number.

Okay, what would Corner Bakery have earned on a full-year basis for '06?

Right now, John, maybe I can clarify. Our original guidance was 242 to 246 including profitability associated with Corner Bakery. And we estimated that profitability to be $0.03, but that also assumes that we closed the transaction by the end of December. So our revised guidance has changed in that we are now focusing on continuing operations and we've also adjusted the number to account for the FSP 13-1 impact.

So essentially we've actually carried $0.02 from our first-quarter results over to the full-year result, but then made an adjustment to take out discontinued operations and made an adjustment to take out FSP 13-1.

Okay. Just to clarify, Corner Bakery contributed $0.02 to the first quarter, roughly $0.08 to the full year, correct? So you've essentially excluded $0.05 of Corner Bakery, $0.02 that you've included now instead of the $0.08 for the full year?

Discontinued operations related to Corner Bakery profitability is $0.03 through the end of December.

Mac Grill, just maybe an update. I know you talked about a brand relaunch in the second half. Are you likely to take a page from Chili's in that repositioning and maybe work more limited time offers into the equation at Mac Grill since it's worked so well at Chili's?

As I mentioned, we just signed up with our new advertising agency, Rapp Collins. So all the meetings and discussions that are going on right now with Rapp Collins and the Mac Grill leadership team are, first of all, understanding all the market testing and positioning and then deciding what the appropriate media execution might be.

We'll certainly keep in mind with concerns about discretionary consumer spending, that a value message might be important, but we haven't made that decision yet. We do have the product pipeline starting to kick in, in fact may have some new product news this fall. So don't know, but we'll be working that with Rapp Collins in the next 90 to 120 days.

Thank you.

Jake Bartlett (ph), Thomas Weisel Partners.

Actually it's Matt DiFrisco. Regarding your guidance for the recurring number of I guess even pre the FSP 13-1, so your 237, 245 full-year number -- the back-half guidance seems to be I guess either in line or slightly a little muted from before given the upside to the first half. Is that in restaurant expenses? Is that being conservative or, can you just remind us, is there something in G&A that maybe you benefited from last year that maybe there's normalization coming in the back half? Just trying to figure out what in the model gets a little deleveraged in the back half of the year.

There's two things in the back half of the year that will be higher this year than last year. First and foremost would be G&A expense. If you look back last year in the second half, we actually stopped accruing for profit-sharing as we were not hitting our financial target. And we are on target to hit our financial goals this year. So we will be accruing profit-sharing in Q3 and Q4. So G&A expense will be higher due to that accrual.

The second thing is advertising expense. Last year we reduced advertising expense because we were trying to look at the most effective way to advertise at both Chili's and Macaroni Grill. And as we get to the back half of the year advertising expense as a percentage of revenues will be up.

Okay. So it's all pretty much the G&A line that's going to see -- what's a good basis '04 relative?

We're looking really at pretty much the run rate we've been going through here in Q1 extending out through the year.

Okay. And then also just a question if you can clarify the improvement that you made on depreciation. Is that just simply cleaning out Corner Bakery out of the operations and having better leverage off of Chili's, or is that a little bit of a byproduct of maybe some slower growth from '05 and when new stores come in we're going to get a little bit more normalized as far as what we had last year relative?

It's really mostly attributable to a leverage on same-store sales growth.

Okay, great. Thank you.

Joe Buckley, Bear Stearns.

A couple of questions on Chili's. Obviously the September numbers were very, very strong. Do you get a sense of the brand positioning -- that there's been a shift in brand positioning? You mentioned Chili's is a potential trade down option in the scheme of things. Do you think the changes you've implemented at Chili's over the past year have adjusted the brand positioning at all?

We don't think so. The beauty of Chili's really for 30 years now has been that it's appropriate for lots of different occasions and experiences and the PPA, which as we've mentioned recently, is still very nicely positioned even against our bar and grill competitors, works for tough economic times as well as special occasions, whatever the needs might be. So the positioning really has remained rock solid. We've got new news and customers are looking for new food news and we think they're combining a great brand they trust with something new to try on the menu.

Okay. And then a couple of shorter-term questions on Chili's. You mentioned the October comp against the mix and match promotion, should we be tracking pretty closely when Chili's in on-air, off-air? Might we see a more hill and valley monthly approach even if it's a more consistent quarterly performance from Chili's?

I think that's possible. As you look back just even over the last year, Joe, where we've had comparable advertising schedules and noncomparable advertising schedules at Chili's we have seen more of that peak and valley effect. So I would say as we look at this quarter we would anticipate seeing that kind of result.

Okay. And for the full quarter Chili's is on the air one more weak than last year, so you'll pick up November/December presumably you're on-air more than a year ago?

Yes, we will be.

And then lastly, the pricing at Chili's, just looking at the data, it looks like you're rolling over a 1% price increase in October. Will the price factor come down by about 100 basis points starting in October?

Yes, you're correct that we will be rolling off about a percentage point of pricing and that is in P4 (ph) and we don't really want to talk about how we're going to be pricing going forward.

Okay. That's all I have, thank you.

Jonathan Waite, KeyBanc Capital.

A quick question. I was wondering if we have some more clarity on the Corner Bakery, how you're going to separate that from Maggiano's -- from a physical plant standpoint where you share space? And then the second question was regarding, Doug, your comments on as you expand out the Chili's chain, as you look at competitive sets, demographic sets and whatnot, I wonder if I could drill down a little bit and ask -- I wonder if you guys think about Applebee's and Ruby Tuesday as they make their public statements about how big they think they can be if you take those numbers into account such as Applebee's unit potential 3,000 units and whatnot?

On the Maggiano's and Corner Bakery, that's still a discussion going on between the buyer and our existing brand about how to handle some of those mixed location so all those haven't been figured out yet.

It's really going to get down to site-by-site specifics. Some Maggiano's you actually enter through the Corner Bakery, some are a little bit more detached, for instance Northpark here in Dallas is a good example of one that they're a little bit separated. So it's really going to get into a site-by-site issue. We've made plans to make sure that the guests of both Corner Bakery and Maggiano's are not impacted while we go through the transaction.

Okay.

And then Jonathan, just as far as growth goes, I mean we look at all those factors -- Chili's many times go into new trade areas so those are new opportunities. We have some alliances with big box retailers and they're still very bullish on new shopping centers and of course we'll partner up in those. But site availability has not been a deterrent for Chili's.

That existing universes I mention in my prepared comments it looks like there's still lots of growth to go and we know that some of the competitors are talking some of the same story, that's why we're building faster. We'd like to get some of those new markets and get dominance early. And the independents still represent more than half of this grill and bar segment. So there are still some chains growing at the expense of the independents.

But as you look out and as Applebee’s throws up a 3,000 number, you guys have just pushed up your number -- does Applebee’s unit potential, Ruby Tuesday's unit potential, all those guys, do those numbers come into play when you contemplate your total build out?

Certainly, Jonathan, we look at what everybody else is doing and we take that into our decision-making but we also are very bullish about Chili's, Chili's alignment with the consumer and our current results.

Great, thanks.

And we also have disciplined capital. We again continue to evaluate every site to make sure it hits our model. So if there is performance issues or there are costs that increase, that would change that development schedule.

Paul Westra, S.G. Cowen.

It is actually Colin Guheen for Paul. But I just wanted to check in on the calendar '06 commodity cost outlook, especially chicken. I think you said that you're supposed to contract in November. Any details on that?

Yes. Actually what we indicated is we did enter into a new contract in November of last year; and as a result of that, on a year-over-year comparison we will see a little bit of an increase in terms of poultry purchases for Brinker. But overall beef, produce and dairy are improving on a year-over-year basis. Poultry, pork and seafood are offsetting that increase to a certain extent.

The contract we signed last November is a long-term contract and will extend through this entire fiscal year.

Great, thank you very much.

Jeffrey Bernstein, Lehman Brothers.

Just a question on share repurchase. Obviously you talked about capital discipline. I guess for the full year you're saying 89 to 90 share base. It looks like that is roughly in line with guidance for the first quarter. I know there is still a lot of money left under authorization. I am just wondering if you have expectations for repurchase for the rest of the year; and if you do, I guess, do you expect it to be offset by options?

There is option expense, but there is also the price of the stock that go into the calculation of the weighted average shares. So it has a number of moving pieces in there, Jeffery. So as we look at share repurchases, we will continue to evaluate whether the purchase is accretive to earnings, where it is on the trading range, and a number of other factors. But again we are very bullish about our stock. We have been very active in buying back stock in the first quarter and have not seen anything that would change our mind.

Great. Just one other follow-up question on On The Border. Obviously the company has been posting extremely strong sales over the past few years, especially since the brand repositioning. I know at the conference we spoke about 300 stores openly (sic) versus the 140 or so now. Just wondering near-term outlook in terms of unit growth. What would keep you perhaps from being a little bit more aggressive on that ramp up?

Well, as far as On The Borders' growth we are going to build about 9 to 12 this year, but we have lowered the cost of our new buildings. So the good news is we have had two great years growing both traffic as well as top-line sales; and the cost of our new prototype is also less expensive. In the short term we did not get as much traction over this past quarter on the Fajita Favorites we ran, over last year's Fajita Favorites. We also had a very warm summer and patio sales were impacted.

But we are bullish and optimistic about On The Border. If the trends of the last couple years keep up, we probably will build more On The Borders moving forward.

John Ivankoe, JPMorgan.

Chuck, a couple of questions if I may. This first one may be for Lynn actually. If I look at your table 2 -- excuse me for being so specific -- in your press release, you had a $0.09 Corner Bakery charge in discontinued ops. Does that $0.09 charge have anything to do with the discontinued ops you're adding back in table 4, the $0.03, or are they completely unrelated?

Actually let me clarify, John. The Corner Bakery charge is considered a special item in that table 2 box, and so special items does not include the profitability associated with Corner Bakery.

So when we look at your guidance, the breakdown of forecast components, that number is in special items. Okay, now that I look at it I do see it. That's fine. Thanks for that. Secondly, regarding your share count and following up on Jeff's question. You bought 3.6 million shares in the first quarter. Why wouldn't we see a pretty hefty decline in share count just even going from 1Q to 2Q?

Again, there is a lot of things that go into that. Some would be the price of the stock does affect what the weighted average share count is and if the stock goes up the weighted average share count also goes up. So as we take and try to estimate what we think the weighted average share count is going forward, that goes into the calculation, John.

Okay.

We're trying to be a little conservative in our guidance related to share count.

Okay. What is the structure of the Corner Bakery deal? Are you receiving cash for that?

We are.

And that's something -- and that's cash that you will actually receive in the second quarter?

Yes, if we close on the last day it will be received either on the last day of the second quarter or the first day of the third quarter.

And I don't know if it's fair to ask the question -- I mean, that's money that could presumably be used to reduce your share count to off-set the dilution in the second half of the year?

Yes, I would say we wouldn't specifically earmark any cash for certain purposes, it would just go into the available cash flow for us.

Okay. Let me ask you in terms of your equity-based compensation of 31 to 33 million, how much of that is options and how much of that is restricted stock?

We had a change in the breakdown between the amount of options that we're granting and the amount of restricted stock that we're granting. Lynn, do you want to cover that in a little bit more detail?

In terms of the full-year estimate of 24 to 26 after-tax expense dollars for incremental equity-based compensation, 18 to 19 million relate to stock options while 6 to 7 relate to restricted and performance share units.

Okay. And you're going to continue to lump those together just for comparability or should we expect restricted stock to flow through the P&L at some point?

Well, there is a component of restricted shares that did flow through the P&L last year. And so we've taken that same plan or expense item and that is not included in our $24 to $26 million incremental impact.

Okay.

We're trying to break it out, John, because other restaurant companies haven't yet had to -- not all restaurant companies have had to start expensing options. And in fact, not -- other public companies have been required to. So this helps people try to compare across the industry by having us put it in and once we get to next year everything will be comparable, everybody in the industry will be doing it, so we'll include it in continuing operations as we go into '07.

The restricted stock or both restricted stock and options?

We do have parts of restricted stock that are currently included in both '05 and '06. It's the mix change that we made when we changed the amount of options that were granted. We have some other components of compensation that took the place of options and so we're lumping all that together.

Very good, thanks.

John, just to clarify as well. We've got a table on the website that breaks out the numbers I was just referring to.

Okay, great. Thanks, Lynn.

We understand it's a very confusing time for everybody.

Andrew Barish, Banc of America Securities.

Just one more on that stock-based comp -- I assume this year is going to be kind of the high watermark just given the service and age requirement expensing you have to do as well this year?

That's correct. It will go down as we get into future years.

And then one quick ops or promotional question. Just looking at the promotional match up, Steak Festival coming up for the rest of the quarter versus mix and match, is that a gross margin neutral type of promotion versus what happened with mix and match last year or is it maybe a little bit lower gross margin given the state focus?

I'm not really sure, but I can tell you within the restaurants (inaudible).

The mix and match -- there was a lot of dependence on which items they picked of the couple on the plate. Some had obviously higher margins than others where the state gives more of a consistent flow through. But the fact that it's on the calendar tells you and tells us that we're excited about Steak Festival and think it will perform well against last year.

Was there a little shakedown? I think mix and match represented the first of really your new limited time only, providing a lot more variety. Was there a little bit of extra weight in shakedown associated with mix and match going on last year?

Yes, there was. One of the first times we had to put that in and, we have to admit, we went through some operational pains getting used to the limited time offers, but really congratulations go out to our operations team. Every rollout has gotten better each and every time, so Mike (indiscernible) and his group have done a great job of really controlling costs.

Thanks.

Mark Wiltamuth, Morgan Stanley.

I wanted to ask about the Phase I international development. That wave of 90 new stores -- are most of those franchisee or licensee properties so you won't be incurring I guess a drag on earnings as those newer stores are ramping?

They are, Mark, and that's one of the great things about what Bill and his team are doing. They're actually getting the revenue stream coming in first before we would even consider really making investments in other countries. So the 90 restaurants that we're talking about are with very qualified franchise partners who've seen great success with their Brinker restaurants overseas.

So they've been upping their development requirements and really willingly so they're providing an additional revenue stream for us before we would have any kinds of costs related to international development.

And where are most of those geographically?

They're really spread out all over. We're very excited about some regions in the Middle East, we're also very excited about our new partners in Mexico, the Alsaya (ph) Group which is just a very, very large franchise group. They operate almost 600 restaurants of different brand so they're very qualified, know the area very well. Those have been very exciting territories for us.

Okay, thank you.

Steven Kron, Goldman Sachs.

Just two quick questions. The first is on traffic trends and clearly at Chili's you had some nice multi-year sequential improvements in traffic. But if I look at your other brands I think on a multiyear basis you saw traffic declines accelerate. I was just wondering what's different about those brands and maybe the value proposition that they are providing at this point and how you're thinking about that. And then I have a quick follow-up.

We are very excited about the short-term traffic at Chili's and -- not getting to deep -- probably in the brand-by-brand stuff. But we do have some marketing mismatches from a year ago. At Macaroni Grill in this past quarter a year ago there was actually television on. And as we've already said a couple times today, we're in a little bit of a wait mode on Mac Grill. We're not, from a marketing perspective, pushing any products as we'll get into a more serious strategy at the second half of the year with our partnership with Rapp Collins.

At On The Border the patio sales, it was one of the warmest summers on history in the Midwest and northeast where summertime patio sales are not just a big part of that consumer summer activity but also a big part of the On The Border experience. Kept traffic down again, that's after two years of positive sales and traffic at On The Border. So we're going to look at On The Border's last quarters.

A little bit of a blip. In fact, if you put the normal patio sales in their top line sales would have actually been positive for the quarter. So both at On The Border and Mac Grill, we're excited about Rapp Collins, our new agency, helping us get more personalized and more driven to the customers and getting those traffic numbers similar to what Chili's are.

And then the follow-up is back on Chili's on the promotional calendar and as we think about clearly off the air in October, but as we head into November and into the beginning of December, the Steak Festival promotion is priced at a higher price point. And I know value is more than just price, but can you just help kind of frame how you think about value when consumers heading into November and December might start getting their first taste of what it might be to keep their homes this winter and kind of how you're thinking about the promotional calendar going forward?

Well, Steven, again, we always want to look at a full year and I think the last couple of promotions speak to some are traffic, some may be mix. And historically in November and December it's more of a celebratory time period and products like steak, more upscale items have worked very, very well in that time frame. And even when we do a commercial like the Steak Festival, which everyone seems to know a lot about this morning, many times the photographs now on the Chili's menu are value items. So we'll many times position and partner a different type of an item, more of a value item on the menu if we're actually on television advertising something that might be more center of the plate protein type dish.

So, again, we think it's a blend and we're not going to walk away from value. In fact, already looking at the calendar at the second half of the fiscal year we have some different type promotions that will be going on at Chili's after the holidays.

Thank you.

Peter Oakes, Piper Jaffray.

I was actually hoping we could just talk a little bit more about the September performance, the dichotomy there between Chili's and Mac Grill and On The Border and Doug just told us somewhat there or reminded us as to what's going on marketing wise. Is Chili's seeing any great variance from a geographic standpoint that's showing up? I don't want to micro manage this, but I'm curious if the Katrina exodus where Chili's has a very big footprint in Texas, is that possibly impacting that reported number at least for September?

It's hard to tell where customers came from, Peter. Again, we saw strong performance at Chili's. Lynn, do you want to talk a little bit more about regional breakdown in September?

Sure, I'd be happy to. And certainly, just for clarification too, in the footnote of the press release we did provide the overall impact of the hurricane for September sales. But turning to the regions, again Chili's does very well in the West and the Southeast and we continue to see that performance during the quarter including September and we saw sequential improvement in terms of quarterly performance in the first quarter versus the fourth quarter in all regions of the country.

I was just asking about Texas in September for Chili's given that is something like 170 units I think in the state. The other question I wanted to ask you was --.

Peter, when you're talking about where we have really more in Dallas, Dallas was up about 20 basis points in September versus really the rest of the country. We some more increase than that in L.A. and Chicago.

That helps. Good.

It's fine that just everybody moved out of New Orleans and into Houston and Dallas. Although it seemed that way at times living here. It was not the massive contributor to the sales for the period.

That helps. That's good. Thanks, Chuck. As far as the triple dipper, using that as an example, are you seeing as you gain more experience in the LTO approach, are you seeing the incidence of the LTOs making a gradual climb or is it pretty much a steady performance?

Peter, do you mean throughout the period that we're advertising it?

No, actually, Doug, I mean over time as the consumer becomes a little more familiar with your approach where there's going to be an on-off with the LTOs, is it really just a function as to how appealing that individual -- I'm just looking, for example, at the triple dipper versus where you were four or five months ago. Are you finding when you try to factor out the variances of the product, does the consumer seem to be responding a little bit better to that kind of message that you're sending?

One of the dichotomies of analyzing it, Peter, and I think this goes back to the consumer that dines out more is looking for new news and Chili's is a perfect combination of this brand they trust, but they've had ribs and fajitas and some of those products for many, many years. And the advertising reminds them about something new at the restaurant but many of the customers come in and order something other than triple dipper. We've only been playing this game for about a year.

So the test market information is playing out very strongly as we roll across the country and we have seen great success with triple dipper. But there are anecdotal stories I've heard as well from folks that see an add like the triple dipper and then as soon as they did in the photographs of the baby back ribs reminds about then all favorite and I order that instead.

So it helps on veto vote, it helps on keeping a fresh new potential items to order. But the traffic is up, the sales are up, some of those are triple dipper, some of them are old favorites like burgers and ribs and fajitas that have been on the menu forever.

Okay. That's helpful. And the first-quarter '05 restated revenues, that is the change that deltas exclusively in Corner Bakery's revenues?

Yes.

Thanks a lot.

There are no further questions in the queue. Do you have any closing, G. would like to finish with?

I just wanted to thank everyone for their interest in Brinker International and I look forward to speaking to many of you later today.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect or phone lines at this time and have a wonderful day. Thank you for your participation.1