Brinker International Inc (EAT) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Brinker International fourth-quarter earnings release. At this time all participants have been placed on a listen-only mode and we will open the floor for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Lynn Schweinfurth. Ma'am, the floor is yours.

Good morning and welcome to the August 10th Brinker International fourth-quarter fiscal 2006 earnings conference call. I want you thank everyone for their patience this morning; there was a brief problem with our Web link and therefore we had to get started a little late this morning.

During our opening remarks and in our responses to your questions certain items may be discussed which are not based entirely on historical facts. Any such items should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ from those anticipated. Such risks and uncertainties include factors more completely described in this morning's press release in the Company's filings with the SEC.

Upcoming calendar dates currently planned include -- September 7th we will release period two or August sales after the market close; on or before September 11th we will file our SEC Form 10-K; and on October 24th we will release first-quarter fiscal 2007 results before market opening. With me today are Doug Brooks, Chairman of the Board and Chief Executive Officer, and Chuck Sonsteby, Chief Financial Officer. Following prepared comments by Doug and Chuck we will open up the call for questions. With that let me turn you over to Doug.

Thank you, Lynn. Good morning and thank you for joining us on the call today. I am happy to report earnings per share from continuing operations grew 18% in fiscal 2006 to $2.49 on a comparable basis as provided in our press release this morning. Our fiscal year operating performance was driven by solid revenue growth of 11% and improvement in restaurant level profitability. And even in this softening consumer environment, our general managers delivered the bottom line the right way -- being thoughtful entrepreneurs with a maniacal focus on the consumer.

I will let Chuck take you through the fourth-quarter results in more detail, but before I do let me acknowledge that our traffic trends in the fourth quarter were disappointing. While our results are not unique to the casual dining segment, we will not be satisfied until we can perform better even in the environment we find ourselves today. Now we are not sitting back waiting for the external environment to change; instead we have identified opportunities to drive results by delivering on each and every guest experience to build continued loyalty for our brands across our portfolio and with our shareholders.

Continuous innovation has long been a key tenet of growing our base business and this will not change. The size and scale of our company affords us the benefit of ongoing consumer research to effectively evolve and differentiate the brands and stay relevant, meeting guests' changing needs, expectations and taste.

While I do not want to give away too much of our fiscal playbook for competitive reasons, we are focused on initiatives supporting an improved overall guest experience across day parts and occasions. Some of these initiatives will touch on innovative product and service evolution, compelling messaging, value and convenience and staff selection and training. These are not areas of focus to benefit the short-term and some will take time to put in place; however, we believe these programs will support the long-term strength of each of our brands and our overall portfolio.

We have not changed our outlook on the growth prospect of casual dining. Despite the challenges we are currently facing, our strategic plan is on track and achievable. That being said, we continue to monitor our restaurant returns very closely and are committed to taking and continuing a disciplined approach to growth. The good news is consumers are not gaining more time in their day and that does bode well for the future of our business.

I'd like to spend a little time reflecting on the past year because we really made great strides in progressing the achievement of our strategic vision of becoming the dominant global casual dining restaurant portfolio company. And we expect to meet this goal by focusing on three key growth platforms -- one, building profitable restaurants worldwide and increasing our franchise mix; two, growing our existing business through successful brand building and operating initiatives; and three, leveraging guest, infrastructure and casual dining expertise across the entire portfolio.

We achieved a number of milestones for the Company this year supporting these areas of focus including building 159 new restaurants systemwide, a record number and a primary driver of our revenue growth. We continue to progress with our international development strategy including securing 20 new development commitments from franchisees to build 105 additional new restaurants outside the United States over the next several years. We remain convinced global expansion will be a material growth vehicle for our company in the future.

Gift card sales increased by 30% over the prior year and totaled about $200 million. Gift cards continue to be a means to introduce loyal brand customers to the rest of the Brinker International portfolio. Food and beverage innovation across our portfolio of brands -- during the year each brand not only introduced some great new culinary offerings, but created a pipeline of products for the future leveraging our experience and processes to build the top line.

And also we executed against our portfolio asset strategy including the divestiture of Corner Bakery. We also sold 20 restaurants domestically to highly capable operators who have committed to build 56 new restaurants over the next several years. These deals generated more than $100 million in cash proceeds used to primarily buy back our shares. And we returned capital to our shareholders by initiating a meaningful quarterly dividend first paid in December and we've been maintaining an active share repurchase program.

Turning to brand specific accomplishments -- Chili's rolled out several new products this past fiscal year and continues to build on its experience with culinary development and deployment, putting Chili's in a great position to evolve core product offerings going forward. On the marketing front the brand recently launched the new Spicealicious advertising campaign. This campaign is music based and consumer testing indicates it is effective in breaking through and communicating with our target customer. Chili's will continue to leverage this new platform going forward.

The Chili's team also improved operating results through better food cost, labor productivity and management expense while also improving overall guest satisfaction scores. New restaurants are opening well above the required rate of return threshold. Chili's set a casual dining record this year of building 100 company restaurants in our fiscal 2006, topping last year's record of over 80 company restaurant openings.

Finally, Chili's is keenly focused on the success of our franchising efforts and has been instrumental in facilitating the growth, orientation and operations quality of both new and existing franchisees. Macaroni Grill and On The Border are also actively involved in this successful franchise program that is currently underway.

Turning to Romano's Macaroni Grill, the team focused its initiatives in fiscal 2006 around consistent execution in the restaurants. Specifically the team rolled out an optimized menu and also the kitchen display system to all company restaurants, and both of these initiatives helped to improve food cost and service quality. The team also improved labor efficiency through improved processes, increased focus and better tools. The restaurant managers and above store level managers are spending more time working with the restaurant teams and interacting with our guests.

Mac Grill's culinary team was hard at work creating, testing and rolling out new products and building the pipeline for the current year. Macaroni Grill's refined positioning, Our Passion Ignites the Senses, was communicated through a new advertising and media execution plan. And finally, based on testing catering this past year in a limited number of restaurants and markets, Macaroni Grill will expand this service to six new markets during fiscal 2007.

One of the advantages to this catering initiative, in addition to the financial proposition, is the opportunity to introduce the Romano's Macaroni Grill brand to catering guests. Macaroni Grill also continues to expand outside of the United States. Agreements with three franchisees will bring 14 new Macaroni Grill restaurants to multiple countries by 2009.

Now similar to the rest of the portfolio, On The Border made progress against new product development and restaurant level profitability during the year, increasing its ability to control food costs and labor more effectively. In the fourth quarter On The Border set a Cinco de Mayo system sales record, an increase in sales of 28% over an already record-setting day last year, and 86 restaurants set individual records on that day as well. On The Border also signed its first international franchising deal which will lead to 23 new On The Border restaurants in seven countries over the next five years. The brand recently launched its new advertising campaign, See What Sizzles, within a renewed media execution plan.

And last but certainly not least, President Wyman Roberts took the helm at Maggiano's Little Italy this past year and has already made considerable progress. The team is working towards enabling this unique brand to increase new restaurant development in coming years to contribute to incremental company returns. Maggiano's continues to make strides in creating compelling new product features to drive the top line and instituting operating programs that drive profitability with high-quality service and execution.

The Maggiano's team continues to focus on opportunities to build a banquet business through an improved software platform, some national sales initiatives and improvements in phone access so our guests can make banquet inquiries after regular business hours. Maggiano's in fact beat several banquet sales records this past year, particularly during the very busy second-quarter holiday season.

So to conclude, we are excited about our absolute fiscal year 2006 results, growing earnings per share above our 15% target growth rate. We have made excellent progress against our three key priorities that will contribute to ongoing shareholder value creation, restaurant development, brand building and operations initiatives and portfolio and asset strategies. However, we are currently operating in a soft consumer environment that we do believe is temporary and we need to focus our teams on delivering against each and every experience to drive our guests' loyalty and frequency ultimately driving long-term financial performance.

We continue to believe our long-term vision of becoming the dominant global casual dining restaurant portfolio company is on track and achievable. Brinker remains well positioned to capture various occasions within its current portfolio of great brands that target a broad spectrum of dining occasions and guest demographics and we have the infrastructure and the management team in place to evolve in our brands effectively over time. Now let me turn the call over to Chuck.

Thanks, Doug and good morning, everyone. Today we reported very good results with fourth-quarter EPS of $0.70 including incremental equity-based compensation expense of $0.05, but excluding franchising gains and certain tax benefit of an additional $0.15. This result was $0.02 above the high end of our guidance despite a soft sales environment driven by better-than-expected commodity costs and increased share repurchases.

Quarterly EPS grew 9% on a comparable basis over last year, as we detailed in our press release. The quarterly growth rate was negatively impacted by higher G&A expenses in the current year, but those were related to performance-based compensation that was not paid last year. All in all it was a very good quarter.

On a comparable basis full-year EPS grew 18%, exceeding our long-term business model as a result of 11% revenue growth, improved operating earnings and a 7% reduction in the share base as we deliver on our pledge to return capital to shareholders. Cost challenges have been successfully controlled by the operations teams, producing steadily improving flowthrough performance. And in addition, we see continuing improvement in overall store level profitability and improving guest satisfaction scores.

All of our brands continue to focus on opportunities to expand margins. Menu optimization, actual versus theoretical measurements of cost to goods sold used to eliminate waste, and enhanced reporting tools are all designed to provide greater operational visibility and are some of the initiatives we are using to improve bottom-line performance.

As Doug mentioned, the Company built a record number of new restaurants during the year driven by our continued strategy to accelerate growth at Chili's. Continued opportunities for new locations exist as a result of suburban sprawl, deeper market penetration and following the growth of leading retailers into new markets. Our disciplined site selection process has delivered proven results based on the profitability of our new restaurants.

Our model uses current restaurant level returns and is continually updated along with expected construction costs that justify all new restaurant investments. Our strong financial performance combined with our existing portfolio of brands provides us the opportunity to build our brands even in this economic climate and gain market share.

We made solid progress against our goal of increasing franchise ownership from 20% to a targeted 30% through an active franchising program and accelerated development commitments from both domestic and international franchisees. During the year 20 company-owned restaurants were sold to franchisees -- 14 Chili's in the markets of South Carolina, Wyoming, Washington, Idaho and Florida; two On The Border's also in Florida; and four Macaroni Grill's in California. In addition, development agreements were entered into in these same markets as well as Montana to build 56 additional restaurants over the next few years. Now these deals are significant because they accelerate domestic growth and also provide entry into the great state of Montana, the only state without a Brinker restaurant.

Looking into fiscal year 2007 we anticipate continued success in our franchising programs. Our brands are in demand and they've created a high level of interest from both new and existing franchisees. In fact, last week we announced the expansion of our franchise agreement with ERJ Dining. ERJ has acquired 15 Chili's and intends to develop an additional 31 new locations in Wisconsin and Missouri. I'm very excited to grow our relationship and our brands with strong operating partners like ERJ.

Internationally our global business development team signed 20 new development agreements over the fiscal year and in the fourth quarter entered into a development agreement with Arabian Food Supplies, AFS, to open 23 On The Border restaurants in five years in the UAE, Oman, Saudi Arabia, Egypt, Kuwait, Qatar and Bahrain, working toward our vision to become the globally dominant casual dining restaurant portfolio company.

For 2007 approximately 40 sites are scheduled to open during the fiscal year. Revenues from the international business are growing fast from $10 million in 2006 to approximately $15 million in 2007. Overall while we're concerned and focused on declining traffic trends, the Company delivered proven financial performance and accomplished a great deal. Store level profitability improved, we opened 159 new restaurants with solid returns, margins improved as a result of focus by our operations team and our franchising program domestically. We refined the portfolio with the sale of Corner Bakery; we established the foundation for future growth internationally and we successfully managed G&A costs. As a result for the year ROIC increased approximately 40 basis points from the prior year to 16.8% and the methodology for this calculation is available on our website.

Turning specifically to our fourth quarter financial results, Chili's posted a negative 1.6% comp sales in the fourth quarter and this decrease was composed of a 3.5% price increase, a 1.8% increase in mix and a 6.9% decrease in traffic. And traffic declines occurred during both the dinner and launch day parts in the quarter and regionally the northeast market experienced more significant declines versus the system. The increase in mix for the fourth quarter was driven by the sales of featured menu items including our Mexican fiesta promotion which guests were offered choices such as the new kicked up Carne Asada which ran for five weeks during the quarter.

During July, as Doug mentioned, we introduced our new ad campaign at Chili's which featured the Build Your Own Bigmouth Burger that ran through August 9th. The offering carried a somewhat lower price than the Babyback Road Trip feature in the prior year, yet mix was only down slightly as a result of higher priced items being featured in store and advertised in freestanding inserts in the Sunday newspapers during the month. These additional menu options demonstrate the wide range of great products and a range of price points to accommodate guests with different price sensitivities, something that is us especially important in the current economy.

Chili's continues to provide one of the lowest per person averages in the casual dining arena according to NPD CREST. When you combine that fact with the one of having one of the highest average annual volumes in the grill and bar segment means Chili's serves a very high number of guests every day.

Romano's Macaroni Grill for the quarter reported a decrease in same-store sales of 4.5% driven by a 1.6% increase in pricing, flat mix and a 6.1% decline in traffic primarily at dinner. Mac Grill continues to roll out new product features and menu items showing the increased robustness in its product pipeline. This past quarter Mac promoted its Penne from Heaven, the oven roasted chicken with penne pasta at $11.29 versus the $11.99 Trio Milano three core offering in the Boursin Filet during May and June in the prior year.

Currently Mac Grill is featuring the new seafood linguini priced at $13.99 and this feature will continue at Mac Grill until September 3rd. The kitchen display system or KDS that was implemented throughout the Mac Grill system has demonstrated a reduction in waste, fewer back of the house mistakes and improved guest satisfaction scores which leads to a great guest experience at Macaroni Grill. In fact, Customer Reports recently recognized Mac Grill as number two in the casual dining category for offering a good price and a very good meal. We sold four Macaroni Grill's in the California market in mid-June to a franchisee with development commitments for another 11 new restaurants.

For the quarter On The Border same-store sales decreased 2.5% driven by a 3% price increase, a 2.8% increase in mix, and an 8.3% decrease in traffic primarily in weekend dinner. On The Border advertised the new High Five Fiesta priced at $10.99 which included a sour cream enchilada, beef taco, cheese enchilada, chicken flauta and beef empanada. This feature and other higher priced entrées and higher alcohol sales during the quarter helped to drive mix. In July On The Border began featuring the Primo Quesadilla, a choice of three premium recipes including chipotle stake, lobster [pablano] or smoking chicken starting at $8.99 and this feature will run until August 26th.

Maggiano's comparable store sales were 1.1% for the fourth quarter driven by a price increase of 2.7%, a two-tenths of a percent decrease in mix, and a 1.4% decrease in traffic. This quarter represents the 19th consecutive quarter of positive comparable store sales at Maggiano's and the team is gearing up to open four new restaurants in the fiscal year 2007, the first of which is later this month in Bridgewater, New Jersey. Our first Maggiano's -- which is our first Maggiano's in New Jersey -- followed by openings during the year in Atlanta, Orlando and Hackensack, New Jersey. The team is building its banquet business and improving the dine-in menu through new menu offerings later this year.

Next, let's review the fourth quarter in more detail. In the fourth quarter of 2006 revenues increased 8% to $1,074,000,000; capacity increased 7.3% as a result of 109 more company-owned restaurants than last year. Comparable sales decreased 2% driven by a 3.1% increase in price and a 1.4% increase in mix and a 6.5% decrease in traffic. Cost of sales as a percent of revenues improved 110 basis points to 27.1% for the current quarter as compared to 28.2% a year ago driven by favorable commodity prices, particularly in ribs, steak and dairy. Also favorable menu price changes were somewhat offset by product mix shifts related to the Mexican fiesta promotion at Chili's which carried a higher cost of sales.

Let's further review restaurant expense to discuss it on a more comparable basis. Excluding the $23.3 million charge associated with the correction of accruals for vacation and utility expense, the prior year number as a percent of revenues was 53.4%. For the current year, excluding the $8.5 million franchising gain and the $2 million of expense related to equity-based compensation, restaurant expense represents 54.5% of sales. The year-over-year increase was driven by higher advertising expense at Chili's and Mac Grill. Utility costs are up due to slightly higher preopening cost from opening more restaurants and a deleverage on fixed costs.

These headwinds were somewhat offset by a margin benefit from the Company restaurants sold to franchisees in the second and third quarters. The operations team increased focus on labor productivity and balancing staffing levels and kept labor costs in line. In general labor efficiencies year-over-year will be partially offset by an increase in wage rates which have ticked up slightly to 2 to 3% higher in future quarters.

Depreciation and amortization was $47.5 million, a 1.4 million increase from last year due to the increased amortization of company-owned restaurants. G&A was 4.7% versus 4.1% a year ago, an increase of 60 basis points year-over-year -- excluding the impact of $4 million of equity base compensation in the current year and $1.1 million in the prior year related to the vacation and utilities correction. This comparable increase was primarily due to performance-based compensation in the current year compared to no payout in the prior year.

Interest expense was $5.7 million versus about $5.2 million a year ago primarily due to higher debt balances and higher rates. The effective income tax rate for continuing operations was 24.4% as compared to 17% last year. The lower tax rate in the fourth quarter of fiscal 2005 was primarily due to the income tax benefit of $6.6 million related to the correction of deferred tax liabilities. And fiscal year 2006 was impacted favorably by a tax benefit of $8.1 million associated with the completion of IRS audits and a decrease in the effective tax rate for state income taxes.

For the full fiscal year 2006 the Company generated approximately $470 million of cash flow from operations, 11% growth from the prior year. Capital expenditures for this year were approximately $355 million. Asset sales totaled $121 million and 7.8 million shares were repurchased for about $306 million. Approximately $119 million was available under the Company's share repurchase authorization at year-end. We ended the year with an adjusted debt to capital ratio including leases of 61% at the high end of our targeted capital structure.

Now turning to the 2007 outlook, the industry's topline performance has been a little slow. The key drivers for expected performance for us during the year will be revenue growth of 10 to 12% primarily from capacity gains from 220 new system restaurants opening during the year and flat to 2% comparable store sales growth. Operating income improvement of 20 to 30 basis points, improving commodity trends, growth in the number of franchise restaurants within the system as well as flat general and administrative expenses will drive the improvement.

We are anticipating flat G&A as a result of earning above 100% target bonuses and some onetime expenses in 2006 like the Chili's 30th anniversary conference which took place during the second quarter last year. In addition, the reduction in the number of brands in the portfolio has led to improved home office efficiencies. These changes will allow us to invest in infrastructure to support our growth platforms in 2007 but remain relatively flat in G&A dollars.

While good progress was made in 2006, we're striving for continuous improvement in the areas of productivity and turnover with the ultimate goal of improving the guest's experience in our restaurants each and every time. And our policy is to no longer provide quarterly guidance; however, there are some differences in the timing of expenses in '07 versus '06. During the first six months of fiscal 2007 the adoption of SFSP 13-1 requiring the Company to expense rental costs associated with ground or operating leases incurred during a construction period will negatively affect results.

This accounting change was adopted in Q3 2006 and impacted the year by about $0.02 per share. In addition, about $0.04 per share of expense related to equity-based compensation will shift to Q1 this year from Q2 last year. This is driven by the date the option grants were awarded moving from October last year to August this year. As I just mentioned, the Chili's conference this year was about $3 million and will not take place this year.

Capital expenditures for fiscal year 2007 are anticipated to be approximately $460 million. Capital expenditures have increased on a year-over-year basis as a result of incremental restaurants and higher construction costs. In addition, looking at average investment costs for the brands in both 2006 and 2007 we are building in markets that are considered high-cost areas and have historically produced higher sales volumes.

Consistent with the capital allocation priorities for the Company which are based on financial returns, the majority of restaurant development in 2007 will be domestic Chili's and it will represent about 86% of our growth. Restaurant level returns Chili's continue to exceed our expectations and are well above our internal return hurdle rates. As I mentioned, we've been focusing on controlling costs and improving flowthrough on sales. These efforts are serving to produce improved profitability even with increasing investment costs.

Excluding franchising Company restaurants or other asset sales we anticipate cash flow from operations should be between $500 million and $525 million for the year. The Company remains committed to actively managing the balance sheet based on our capital structure objectives and to distribute capital to shareholders through the payment of dividends and ongoing share repurchases.

Our industry offers one of the few ways people can put more time back in their lives. While we're clearly in the middle of a short-term pullback, demographic and lifestyle trends support the thesis casual dining chains are best positioned to enjoy superior growth compared to other segments in the restaurant industry. Brinker's premium set of brands that compete in multiple categories are poised to take advantage of the long-term growth. This in combination with actively managing our asset base and adhering to financial discipline will drive shareholder value over the long-term. And with that I'd like to turn the call over to Janice to facilitate the question-and-answer period.

(OPERATOR INSTRUCTIONS).

Any questions? Janice, are we having problems?

No, we're just getting the order for questions, sir. Joe Buckley.

I'm with Bear Stearns. First, just a broad fundamental question. Doug, just curious if you're seeing any additional nuances in the business as a read on consumer behavior? I think you mentioned both lunch and dinner being soft at Chili's. Are you seeing check management within the menu? Any change in the to go business? Just any details that might give a read on if the consumer is shifting further in terms of behavior?

Doug, do you want to take that one?

There's not one single thing that stands out. All of us as consumers feel what's going on. I've got my electricity bill at my house last night; I filled up my car yesterday. I guess I'd describe it as more -- it's more of a lifestyle adjustments to habits that people have engrained. And so there is some check management going on. Obviously there may be less occasions, but there still is that special occasion activity that's going on. We still talk to customers on the weekends at On The Border, large groups that come in on Friday afternoon. We're still getting the banquet business at Maggiano's. They're just having to be selective sometimes about what they do.

And I know I saw something you wrote recently about this -- demand versus supply. We certainly agree, there's plenty of supply as the customers are going through this short term crunch on their personal disposable income. But as we've said before, we think casual dining and eating out is firmly ingrained in sort of the habits of consumers. They're not getting more time in their lives, they're just having to manage the little bit less money that they have until this goes away.

Okay. And then just a couple of bookkeeping questions. Chuck, maybe I'll direct them at you. The 15% EPS growth, what base are you guiding off of for that increase? And is it pre option, post option?

It would be post option.

Okay. And you mentioned the option shift in the first quarter -- I guess $0.04 more in the first quarter than the year ago, was that the message?

It will be relatively the same amount on a year-over-year basis, but last year the options were granted in October. So it is a second-quarter event. We felt that it was more appropriate to have option grants done earlier in the year more associated with the beginning of the fiscal year and closer to last year. And so we're changing starting this year to having August be our new grant date. So that becomes a Q1 event. So what was a $0.04 expense last year in Q2 now becomes a $0.04 expense in Q1 in fiscal year '07.

Okay. On a full-year basis are you still -- I know last year there was some talk that your option expense number might come down a little bit fiscal '07 versus fiscal '06. Are you still thinking that?

It will come down on a total basis, yes.

Can you ballpark it for us?

Some of the things depend on the stock price and there's a lot of different variability to it, Joe. We'll try to highlight it as we get into -- at the end of the first quarter.

Okay. That takes care of me for now. Thank you.

Andrew Barish.

Bank of America Securities. Just two things. Just back on the base of the earnings growth, is it that 245 number that you guys are looking at for fiscal '06 and then growing that 15%?

Yes.

Okay. And then secondly, (multiple speakers)

I'm sorry, it's actually off of 222 because 245 includes sales related to sales of Company restaurants. So we had gains in there on our refranchising activities or our refranchising activities where we sold company-owned restaurants. That's the difference between the 222 and the 245.

Okay. But obviously you expect to continue to see those refranchising gains running through the numbers as evidenced by the ERJ deal you had already done in the first quarter?

Yes, we do expect that to continue. But I think the baseline business and what we're trying to show, this comparable business, really comes off that 222. But you're right, Andy, we do expect to do more franchising deals as we go through '07.

Okay. And then secondly, I guess I'm trying to gauge how much as you look at unit level or store level margins, how much is kind of portfolio management versus kind of running the business tighter? And I don't need numbers around that, I'm just trying to get a sense of is the portfolio management side now having Corner Bakery gone and obviously some of the other concepts having been gone for more than a year or so now, does that continue to benefit you here through fiscal '07 or is in more just kind of keeping a tight rein on the operations and hopefully stabilizing the sales numbers here?

Andy, I think there's really -- the changing in our portfolio has had some impact on operating numbers. As we have done franchising of company-owned stores that's helped us some. We've been helped on the G&A line at home office by having fewer brands to support, that's been a benefit. And we would continue to see even more benefit as we go through fiscal year '07.

We're being helped a lot right now by very good focus by our operations team, the folks at Chili's, Mac, OTB, Maggiano's are doing a great job of trying to bring costs down but not affecting the guest experience. And commodity prices are really a big benefit for us right now. What's been a headwind over the last two years, and I'm talking about commodity prices there, they've really become more of a tailwind for us and it's really been a big help for us.

Thank you.

John Glass.

CIBC. I wanted to ask a question I guess about the hurdle rates on new Chili's. Last year about this time you talked about the class of Chili's an '03, '04, '05 about 10 to 20% above their hurdle rates. What would the class of '06 look like on that basis?

Well, the class of '06 really hasn't had enough time to be operating, John, that's what we try to put them into bigger buckets. But right now we're looking at somewhere around 160 basis points over our target or about a little over 10%.

And the hurdle rate is the same this year as it has been in the past years?

Yes, we haven't changed that at all.

Got you. Okay. And then as it relates to the food cost decrease, I understand you're talking about benefits to commodities, but you've seen it fairly abruptly this quarter versus a fairly consistent food cost ratio in the past seven or eight quarters and pricing hasn't changed that much. Did contracts roll over or did you get some rebates or something in the fourth? Was there something extraordinary about the fourth quarter that drove those lower or was that just spot market pricing that improved?

No, we've been reworking contracts throughout the quarter. And Lynn, I don't know if you want to talk any more about it, but I think we feel like it's fairly predictable as we go forward.

I would agree with that response. There wasn't anything greatly unusual with the fourth quarter. I think certainly in an environment with improving commodity cost we try to get out in front of contracts and renegotiate contracts and we've been very effective. That's evident in the latest quarterly results.

And would that visibility then run through most of '07, the lower food cost run rate would be good for '07?

Correct.

Thank you.

David Palmer.

UBS. Doug and Chuck, kind of a long winded build upon what Joe was talking about with kind of the big picture -- I think it was Toll Brothers yesterday had an interesting comment about how this current downturn doesn't seem to be precipitated by higher interest rates, a weak economy, job losses or other macroeconomic factors. They said it seems to be the result of a decline in confidence combined with an oversupply of inventory.

And I wonder if that has any parallels to casual dining. Because we've seen such a sharp downturn since March, do you think -- is your thinking inside the Company that perhaps this is a consumer mood issue to some degree that is disproportionately hurting casual dining which has slowed it maybe 4 or 5 points and that slowdown dwarfs what we're seen in other parts of restaurants, even other retail. So a comment on that.

And then away from this near-term noise, if you will, is there a sneaking suspicion or worry that casual dining might be reaching critical mass here where there really is an imbalance longer-term in terms of supply and demand at the unit level? Thanks.

Doug, I'll let you start that one.

Okay. We have talked to a lot of our consumers recently trying to sort of get to the root of their behaviors and they do speak to some of the specific things that we already alluded to this morning. They do speak to the gas prices for their car and the utilities and credit card debt and the publicity, whether it impacts them or not, about home mortgage rates and people going to arms and so they do speak to all those things.

And they do speak to consumer confidence a little bit, the President ratings, the kind of news we get this morning when we turn on the TV set. But they do connect at specifically two events and how much discretionary spending that they don't have because those other pressures and certainly time. The time thing we see long-term as an advantage for casual dining because time plays into the ability to shop and cook and cleanup and on the things that American consumers just don't have time to do anymore.

But we see personal disposable income as still being the primary reason for less visits, managing the check. And we still see lots of supply. As we follow retailers around the country we see new pockets of homeowners and new neighborhoods and lots of areas where there are no restaurants to pick from and in fact the new restaurants that we open in many of those sort of greenfield areas are opening up very, very strong with lots of consumer demand.

Thank you very much.

David, just to maybe expand on that a little bit. I think again we did see a pretty graphic decline starting about in March around the time that gas prices and interest rates and everything sort of affected the consumer. And there may be a shift away from that consumer. Right now they may not have the money to go to casual dining, but I think the good news is those people didn't reject the brand, they just don't have the money to spend right now. And so as you reach some kind of equilibrium in gas prices, I think as people adjust their spending, I think they'll try to make more -- they'll try to get out and still go to casual dining.

So is it a permanent shift away? I don't think so. When you talk about there being increased supply, certainly the downturn in sales are going to affect growth as we go forward. I know as we look at our '08 opening pipeline, we're not going to open as many restaurants as maybe we thought we might six months ago. So it's affecting us. And it certainly will affect people with weaker financial models than ourselves. All of our brands do more than $3 million per restaurant and sales are higher, that's incredibly high for this segment.

So I don't want to say we are immune from it. I think we've got a strong enough business proposition in each of our brands to be able to continue to offer very good services to our guests and be able to continue to expand the number of new restaurants that we build. So if it is supply and demand it will start to equalize in the industry and I think if it was supply demand it is pretty hard to see use it all of the sudden happening, all in one month.

Thank you very much.

Will Hamilton.

Sanders Morris Harris. First I was wondering with the your expectations for margin improvement for this year, is much of that depended on a substantial improvement or somewhat of a marginal improvement in the comps? In other words if sales trends stayed the same as they are for the full year theoretically could you still get that 20 to 30 basis points?

Will, it is Lynn. Just to respond to that question, we are very conservative in terms of our expectations for comp sales in the current fiscal year as it relates to our forecast. I think we do expect to see some benefit related to the stores we have refranchised in the past as well as certainly the continued commodity favorable trends we have been experiencing. Those two items will certainly help to improve operating performance. Then of course flat G&A would be another item to certainly point to.

Okay. I was also wondering, you marketed or did a little bit more in terms of gift card marketing earlier in the quarter, could you talk about how sales were for that, whether there was any material impact in the quarter?

We did see some very successful implementation of our gift card program. We ran it for the first time in the spring related to really Mother's Day, graduation day and teacher appreciation and saw a good affect both in the sales of gift cards on a year-over-year basis and then also the redemption of both the gift cards and also we did some bounce backs related to that.

Okay. Lastly I was just wondering can you guide at all in terms of where you think share account for '07 should be or what we should model for that?

Right now we are looking at relatively flat to slightly down share count but I have to say that will continue to be driven by the amount of available cash that we have and us looking at where we want to maintain our leverage. We do want to use our share repurchase ability to help us drive that 15% EPS growth goal and we will try to balance everything, both the operational performance and the ability to raise debt, and really balance out what kind of share repurchase we will do.

Thank you very much.

John Ivankoe.

JPMorgan. I am just looking at the COGS number that you did in the fourth quarter and it is the lowest number on a percentage basis that I can find for some number of years and so in this current environment and I am going to ask this one question about pricing and I have a second question slightly related, do you think 27% is the right price value in this current environment? Is it perhaps something that you might consider to reinvest on the plate since commodities are coming back to where you would have wanted them several years ago? Typically you have used pricing to offset higher costs. Can you give us some idea of the pricing laps coming up for fiscal '07 and what you might do with pricing in '07? The broad question is just price value as you currently see specifically at the Chili's brand and the declining commodity environment.

Obviously we're always trying to improve the price value to the guest. And in this environment where the consumer's disposable income may be challenged we're going to be cautious about price raising of course. And we're going to come off -- in the next quarter or two we'll come off some of our current price. But as far as also some of the consumers, we've seen QSR improve food quality; it also is a great opportunity for us to look across the entire menu -- we have a number of initiatives going on right now as a matter-of-fact with how much food is on the plate.

And we don't ever start necessarily with a food cost goal. We start with a score from a consumer on how they see the value of the product that's bought. In fact, if you looked historically at our consumer scores on price value, Maggiano's with the highest per person average has also had traditionally the highest price value score. So obviously the consumer's perception of value has more to do with just price. 27% probably historically is probably a pretty average number, but we are looking right now at healthy options on our plates, we're looking at food quality products as well as new products across the portfolio. And the culinary team has got a great pipeline put together that the market will see over the next year.

And John, also cost of sales is getting better and improved operations focused on the rest of the P&L is really going to give us some opportunities to revise and take a look at pricing, as Doug said. So we may not have the same kind of situation we may have had in the past.

Okay, I hear you. Just if I may focus on July for a second. I know you've done the big Build Your Own Bigmouth Burger once if not twice in the past and it's been successful at driving traffic. And your traffic declines at Chili's were down over 6. I know a lot of people are asking what's been changing in this environment. And obviously, given the fact that you did advertise a successful product and your traffic is down 6 something has.

So my point is would you change anything tactically in the near-term acknowledging that that environment has changed to bring back traffic? I mean, what should we really expect to see different in terms of promotions or price points, lunch versus dinner going forward that will what has previously been a successful promotion be successful again?

John, I would I guess say that first of all we think that was the right product to promote. Certainly it's been a historical product where Chili's began, the hamburger. And what we don't want to do is gat caught up in a short-term strategy that impacts the long-term customer loyalty that we have. So we're always at Chili's looking for 14 meal periods, we're looking for great lunch options and dinner options. And probably as we've said before, the last couple of years we were marketing a number of dinner items and we hadn't probably reminded the customer of the many great lunch items that we had on the Chili's menu.

And so throughout this year we're going to look at a nice variety probably of lunch and dinner items, different price points, but we're not going to change a strategy on price points. We're going to make sure that the consumer sees the entire promise that we make in the casual dining restaurant, what has brought them there over the last few years -- it's the service, it's the environment, it's the decor, it's the entire package which is different than in a QSR. The price point is different but also what you receive is quite different.

There's lots of innovation going on in our company. Over the last couple years as Becky Johnson has joined us we have numerous very talented people, not just on the culinary side, but on the consumer side that are helping us evolve and create new product lines. So we're not going to probably change anything short-term. I guess it would go under the category of there's only so many things you can control. And we're going to do the best job we can and when someone comes into our restaurant they get great value, they get great service. And when the consumer has a little bit more money in their pocket we think they'll come back to us more times.

Okay, thanks.

Matt DiFrisco.

Thomas Weisel Partners. I have two questions actually. I wanted to know how are the new stores opening these days volume wise versus what you've seen in the past given that your brand is a little bit more mature and known better and the advertising has made it more of a national presence now. Are you seeing higher volumes quicker? Are you seeing the same type of honeymoon period in the past? Are you opening up at sustainable type volumes? Can you comment on that?

Matt, this is Chuck. We're actually opening up right now it looks like at about 5% on average weekly sales versus the prior year. So we're seeing very good openings and in fact the Chili's team has done a great job in trying to get to operating efficiency more quickly. We've done some different things with training, some different things with hiring and how to staff a new restaurant which has allowed us to get to profitability much more quickly.

We did a test in the Tampa area of a restaurant there and actually got to a profit level internally in a couple months that normally we wouldn't get to for six or eight. So the Chili's team -- Mike [DeSuris] has been leading a deal along with George Hailey, really trying to get improved profitability on new restaurants and we think it could be huge for us.

Okay. I guess with that comment on improved profitability then on a turnover ratio type basis you're also looking then for the increases that you're seeing on the construction costs are less than the 5% rate?

No, we're seeing construction costs that have gone up more than 5%.

So overall are you seeing though the average weekly sales larger than the overall investment cost increase?

We're talking about apples and oranges. I see what you're trying to get to, but construction costs today relate to restaurants that will open up in 2007 and 2008. And the restaurants that opened up in 2006 would be more likely associated with the construction costs that we saw back in '05 and '06, and those are relatively in line. At that time we were seeing about 7% construction costs and we had about a 5% increase in average weekly sales so they're pretty close.

As we look at costs going forward we are changing some of our mix and going into some bigger metropolitan market. Part of the construction cost increases that we see now, because we are building in Dallas, we are building in L.A. -- in places that might have higher cost but will also bring with it higher volumes.

I understand. My second question is regarding advertising. Although you have a forecast for flat dollars in G&A, can you give us what you would expect or a good proxy for advertising growth? I would think with the greater store growth and the greater presence and greater franchise contribution coming in and all in your budget for advertising would be still up though in '07?

We expect it to be up pretty much related to store growth.

Okay, great. Thank you.

Jeffrey Bernstein.

Lehman Brothers. Thank you. Actually I had a question on Chili's and then one on Mac Grill. First on Chili's, with your recent value push with I guess more of the focus on the lunch day part, I'm just wondering if you can give us some of the take aways from the couple of promotions you had done, the lunch starting at $5.99, the ten choices for under $7. It doesn't seem like either of those are price discounting because I guess they were already on the menu but perhaps repackaged. I'm just wondering if you've seen any promising signs and more broadly what your thoughts are surrounding price point ads and the ongoing volatile market. And then I had a follow-up on Mac Grill. Thanks.

Jeff, this is Doug. We didn't get fantastic results from those. Honestly they weren't, as you said, new products. And we do think that innovation, new news is a part of getting the consumer excited. We can always repackage things, we can always do multiple combos like we've done on dinner items, but we're working hard at balancing our existing core menu that customer love with new news for them. And the Bigmouth Burger, the excitement for the customer there obviously is not just the price point and the lunch mix, but also the ability to pick and choose what products they want to create their own special Bigmouth Burger. But we didn't get great results from some of those five for two things that you were talking about and we're focused on new news, new innovation, new products moving forward.

Okay, thank you. And then just on Mac Grill. Obviously there have been some broad concept changes which have been pretty significant with the shift in the brand positioning, the operational and menu changes, KDS and some of the other things you spoke about. I'm just wondering if you could talk about your early read on the most recent changes, your view of the brand in light of the continued disappointing results. I'm just wondering if you perhaps have a timeline for a brand turnaround or at what point you would consider other alternatives for the brand? Thanks.

You bet, Jeff. Again, a lot has happened at Mac Grill in the last year. There's been a lot of simplification and work on consistency and some of the food cost numbers that you see across the Brinker portfolio, some of those are certainly part of Mac Grill. We've tried to simplify operations so that quality and consistency does go up. The menu optimization that happened, we have less products -- that has helped with the cost of sales in the back of the house because we've said less waste and a more productive kitchen staff.

There's a new menu design, there have been some great new items -- the brick oven pizzas, some new great salads that have come out recently -- a seared scallop salad, a parmesan crusted chicken salad, the KDS rollout has helped with ticket times as well as our guest satisfaction scores. The marketing plan is very different, it's much more targeted trade area focused with our new partner Rapp Collins. And the management team honestly is very focused and we're excited about Mac Grill's future because we have kind of come back to our roots, it's sort of back to the future to focus on the culinary food items and the guest. And we're very excited right now.

Obviously in these tough consumer times it makes it much more difficult to read changes when the discretionary spending the consumer has is not as great as it normally has been. So we're trying to balance our excitement about all the things that Jean and her team are doing understanding the current consumer environment.

I guess with all that said, and I definitely understand those changes, I'm just wondering is there a timeline where you say 12 months from now those seemed to be great changes but the brand just isn't turning around like we thought and the rest of the consumer market is better off. I'm just wondering if at what point you do consider other alternatives to brands should these things that have been implemented not work? Thanks.

We've evaluated our portfolio over the years and we always go through that with all of our brands. But again, we're excited about what's going on at Mac Grill. When you look at their results versus maybe some of the other Italian competitors who have gotten very soft very quickly, Mac Grill has hung right in there. So we think that's a reflection of some of the changes that have been going on. And again, we're excited about the future.

Mark Wiltamuth.

Hi, it's Mark Wiltamuth, Morgan Stanley. I just want to explore a little more on your comment there that you thought the comp assumption you have is kind of conservative with that 0 to 2% range. It sounds like you're going to be a little less aggressive on price this year and wouldn't that imply that if the traffic stays negative that the comp could shift from the negative 2 that we're at now? And if that type of thing plays out, what are your reactionary moves you can make on the cost line to help protect yourself?

Maybe I can respond initially to your question and then certainly the team over here will chime in. certainly we are lapping a back half of fiscal 2006 that had some light results. So I think from a comparison standpoint there might be a benefit there as you look at in particular the metric of comp sales. Pricing, while we were more aggressive in pricing this past year really to make up for maybe some pricing increases we didn't take in prior years, we are looking at being more judicious in pricing during the current year. But that means that we might still carry a bit of price through the year.

And I think, Mark, a couple other things to think about. Number one, as Lynn said, we start lapping easier numbers when we get into February next year. So if it's been the fact that consumers have been pinched and temporarily one of the things that they've given up maybe are a visit to a casual dining restaurant. We think that they may respond or come back over time and if nothing else we'll simply lap the time in which people lost the ability to come to casual dining restaurants.

So I don't think it's that we've lost relevance or we've lost a desire by consumers to come see us, they just may be pinched in terms of dollars. And you hope that that frees up over time as maybe gas prices come more in line or we just start to lap year-over-year that same performance.

Also some of the things besides comps that can help on our revenue growth have been the performance of new restaurants. Again, that's been continually something that we can point to internally that's really helped us on the revenue growth line. New restaurants have done very well. And what we call non comps or restaurants that have been open for 18 months, those have done very well too along with our franchising.

Okay, then on the cost control side, if you to have an environment that stays ugly for a while what can you do to kind of react?

Our team has done a very good job of watching scheduling and other things, so I think we've been reacting well to a variable sales model that is sales have come down and we try to control costs.

I guess, Mark, I would just balance your question with the last thing we want to do is cut costs and take away from the guest. And in fact, if you look at some of our labor costs internally, some of our front of the house labor numbers have actually gone up because we're trying to make sure the guests get a great experience. Fortunately we've done a great job in the back of the house on managing some of the food cost items.

But we're always about controlling costs but more important to controlling the cost is making sure every customer in this tough consumer discretionary income time has a great experience when they come in because loyalty is not just about what you get now, it's about how much money you have to spend and when the next time you might visit us. So as always, we're balanced in the short and long-term. And if the top line isn't there we're going to make sure the guest is getting what we promise to them first and control costs as much as we can at the same time.

Okay, thank you.

Do you have any closing comments you'd like to finish with?

Not really, Janice. Just a quick thank you to everyone participating on the call today and I'll look forward to speaking to many of you later during the day.

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