Brinker International Inc (EAT) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Brinker International second quarter earnings release 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, Laura Conn, Director of Investor Relations. Ma'am, the floor is yours.

Thank you. Good morning and welcome to the Brinker International second quarter fiscal 2007 earnings conference call. During our opening remarks and in response 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 cost actual results to differ from those anticipated. Such risks and uncertainties include factors more completely described in this morning's press release and in the Company's SEC filings.

Upcoming calendar dates include the filing of our second quarter 10-Q on or before February 5 and January sales scheduled on February 7 after the market closes. With me today are Doug Brooks, Chairman and Chief Executive Officer; Chuck Sonsteby, Chief Financial Officer; and Guy Constant, VP of Strategic Planning, Analysis and Investor Relations.

Doug will begin our call today with an update on our strategic initiatives followed by Chuck, who will cover our quarterly results. Then we'll open up the call for questions.

Good morning everyone, and thank you, Laura. This morning we are pleased to announce second quarter results, which not only build on the strength of our first quarter but continue the trend of effectively managing the overall business to increase our bottom-line results. We remain focused on the strategies of developing new profitable restaurants, growing our base business through sound operations and marketing initiatives, and effectively leveraging our infrastructure. Our solid start during these first six months of the year is further evidence that our strategies are taking hold and moving the business forward.

As we have mentioned to you in previous calls, we remain committed to growing Brinker brands domestically and internationally in a number of ways -- by building new corporate locations and increasing franchise ownership with carefully selected operators.

During the quarter, 50 new system restaurants were opened; 33 of those Company-owned and 17 operated by Brinker franchisees, further extending our dominance in key markets. While we allocate the majority of our development capital to new Chili's restaurants, we also look for opportunities to economically grow our other brands in key markets.

In the second quarter, On The Border opened its first new restaurant in the lucrative Houston market and Maggiano's added its third location in Atlanta. In addition we signed development agreements with four franchisees to open new restaurants in key areas in the United States as well as in Peru, South Korea and Canada.

On January 4, we signed our largest franchise deal to date -- an asset purchase agreement with Pepper Dining, an affiliate of the private equity firm Olympus Partners. As part of the agreement, Pepper Dining will acquire 89 Company-owned Chili's restaurants and become a new Brinker franchisee. Pepper Dining also committed to build 20 to 44 additional locations in the eastern United States.

Although the deal is subject to due diligence, we expect the transaction to be completed by the end of the fiscal year. This landmark agreement is evidence of our stated intention to meaningfully increase franchise ownership. Upon closing of the deal of Pepper Dining, Brinker franchisees will operate 27% of our restaurant locations, closing in on our initial milestone of 30% by the end of calendar year 2007.

In addition to our domestic development efforts, we are gaining momentum internationally in strength markets such as the Middle East, Latin America, and Mexico. Our Global Development team added 12 new Chili's restaurants during the quarter, bringing our total number of international restaurants to 139 in 23 countries.

In November, we welcomed our new President of Global Business Development, Greg Walther. Greg comes to Brinker with an impressive 30-year background in finance and international business, most recently with Outback Steakhouse International. We are thrilled to have Greg on our team and look forward to his leadership as we continue to expand our presence around the globe.

By increasing our presence in strategic locations within and outside the United States, Brinker is on track and committed to meeting the development goals that we set for this current fiscal year.

Our second quarter performance demonstrates Brinker's ability to operate effectively despite a soft top line sales environment. Our focus on careful planning, improved systems and processes, and effective leverage of price and G&A spending while continuing to provide a consistent guest experience at each brand led to solid results for the Company. An operational highlight for the quarter is our successful gift card program, where we continue to perform as an industry leader with innovative card designs and expanded points of distribution.

In the second quarter, we experienced another record-breaking holiday season in terms of gift card sales. During period six alone, sales topped $101 million, a 30% increase over our last fiscal year. Although the majority of gift cards are sold to customers visiting our restaurants, a growing number are purchased through third party retailers or online corporate sales.

Our strategy to expand these points of distribution resulted in $36 million in sales during the holidays for an impressive 62% increase over last fiscal year. These strong results should encourage traffic through our restaurants for the remainder of the third quarter.

As we look across the casual dining industry, we are aware that providing a meaningful dining experience means more than just meeting customers in our restaurants. Brand extensions such as to-go and catering are growing in popularity as busy consumers look for quality meal solutions. As we mentioned even in our last call, Romano's Macaroni Grill added catering services in five key markets and initial results have been very promising, and On The Border holiday celebrations resulted in record catering sales for the month of December.

Our innovation and experience as early adopters of both to-go and catering convince us we can take these services to the next level. We will continue to listen to our customers through disciplined consumer research and actively pursue opportunities for our brands.

Continuous culinary innovation is another strategy we employ to enhance the overall customer experience. Limited Time Offers, or LTO's, have provided a solid vehicle for introducing new flavors and dishes in our restaurants and evaluating their success with customers. As we move forward, we will build off of that experience and devote more of our energy to enhancing the core menus at all four brands. Now this strategy can take a number of forms -- adding items that were popular as Limited Time Offers; providing new twists on old favorites or introducing innovative new tastes that reflect the essence of the brand.

The new rib flavors we added to the Chili's core menu during the second quarter are great examples of this strategy, as are the new soup and sandwich lunch items now available at Macaroni Grill. During the third quarter and continuing throughout this fiscal year, new items will be added to the core menus at all four Brinker brands, giving our customers more reasons to stop in and see what's new.

In addition to menu innovation, we are working with our restaurant teams to enhance our culture of hospitality and service. Earlier this fiscal year, we began implementation of a new hourly employee selection process. Through a combination of manager training and improved technology we are able to more effectively identify candidates who embody Brinker values of customer-focused service and teamwork.

All of our brands are in the process of implementing the new process. In fact, Romano's Macaroni Grill completed implementation already and we are encouraged by early results. This new approach will be instrumental in helping us deliver a consistent customer experience, reducing our employee turnover, and better manage our hourly staffing needs. We intend to implement the process throughout our entire Brinker system by the end of June.

As we look for ways to expand our business, effectively managing the bottom line and enhance the guest experience, we also remain committed to the key tenet of returning capital to shareholders. We will continue an ongoing share repurchase program, funded in part by transactions such as the pending sale of Chili's restaurants to Pepper Dining. Additionally, in November our Board of Directors authorized a 35% increase in the quarterly dividend and split the stock on a 3-for-2 basis.

Throughout the past year, Brinker and others in the industry have experienced soft top line results and traffic continues to be a challenge. But we are encouraged by the sequential increase that we experienced throughout the second quarter. More importantly, we're committed to initiatives that build our business for the long-term. Our strategic plans for development continue as menu innovation and targeted initiatives to improve processes as well as service and the overall customer experience are designed to enable Brinker to perform favorably in a variety of economic environments.

I will now turn the call over to Chuck to provide more specific information about our results during the quarter.

Thanks, Doug, and good morning, everyone. Brinker reported second quarter 2007 earnings per share of $0.40 before special items, representing a 29% growth rate on a comparable basis. And just as important, operating earnings grew 20% as a result of restaurant capacity increases, continued improvement in cost of sales, and the continued integration of tools to assist our Operations team, who are doing a great job of managing the business.

On the top line, same-store sales built momentum month by month, and ended down 1.6% for December. Revenues for the quarter were approximately $1,070,000,000, a 6% greater total than the same quarter in fiscal 2006 as new restaurant development continues to be the major revenue growth driver of our business.

We have 90 net additional Company-owned restaurants this year versus last, resulting in increased capacity of 7.8% based on average sales weeks. This growth was somewhat offset by declining same-store sales and the impact of our strategic initiative to sell Company-owned restaurants to franchisees. Excluding these transactions, revenues increased 8.7%.

Franchise revenues for the quarter totaled approximately $10 million, about a 25% increase over the prior year driven by an additional 76 franchised restaurants versus last year and solid growth in international same-store sales. Our international business continues to deliver growth. Accelerated restaurant openings and comp sales gains have produced year-over-year international franchise revenue increases of 27%.

Cost of sales improvements continue to drive results, providing a comparable 50 basis point benefit for the quarter and representing 28% of revenues. This quarter, leverage from price produced the majority of sales benefit as well as favorable mix shift versus the steak promotion in November 2005. Also, similar to last quarter, beef, chicken, cheese and pork costs improved. However, the Chili's Baby Back Road Trip promotion during the quarter somewhat offset the favorability.

Our rollout of technology to assist the process of measuring actual versus theoretical costs or, as we call it internally, A versus T, continues to benefit this line item as well. This program has been so successful, Chili's is increasing the frequency of analysis from a monthly to a weekly review.

Restaurant expense increased 50 basis points versus the prior year. In total, no real issues aside from the deleverage of sales stands out. So just a few highlights are -- preopening costs were up 20 basis points as a result of the adoption of SSP 13-1 or, as it's called, holiday rent. This item will get better as we lap the initial adoption in the third quarter of last year.

We continued to invest in the guest experience and as a result, incremental repair and maintenance at the restaurant level is up over last year. Labor was also up slightly, about 10 basis points, as a result of modest wage pressure and higher labor hours. As we move through the year, state minimum wage increases will move labor costs higher by about 50 basis points. Utilities continue to be beneficial on a year-over-year basis, about 30 basis points, and should continue in the third quarter.

General and administrative expenses were about 4.4% of revenue, which improved 80 basis points for three reasons -- first, about 35 basis points of the improvement resulted from our shift of our stock option award date from the second quarter last year to the first quarter of this year; second, about 30 basis points relates to the expenses of the Chili's 30th Anniversary Conference held in the second quarter last year and not held this year; third, and one that represents a more permanent shift, benefits related to the rebalancing of our portfolio via sales of brands and restaurants.

Brinker's effective income tax rate from continuing operations for the quarter was 31.3% compared to 34% last year. The year-over-year decrease in the rate was primarily due to the exercise of incentive stock options, which are deductible and reduce the Company's rate when exercised, and ongoing benefits from effective state income tax planning.

Now I would like to share some details about brand performance during the quarter. As I mentioned, Chili's marketing platform during the quarter was the Baby Back Road Trip featuring five different rib flavors on our full rack of ribs. Menu inserts also featured hot spinach and artichoke dip; skillet apple tart; strawberry mango split margaritas; and blackberry lemonade. Complementing the Baby Back Rib promotion was the rib bonus value message, which offered a complete meal of a salad, half rack of ribs, fries, and a choice of dessert for only $9.99.

Chili's was also on air with a gift card message in December, contributing to the record-breaking holiday season Doug mentioned earlier. Results for the period have us cautiously optimistic. During the promotion traffic improved approximately 3% versus the previous 8 week trend, and versus the industry, Chili's beat the [now] track average in five out of six weeks. In fact, December's results produced the best traffic through our restaurants in 11 periods.

Our strategic plan of building scale in important markets continues. Brinker's Company-owned development strategy is designed to penetrate high growth markets and allocate capital to investments with the highest returns on a risk-adjusted basis. The intent is not to simply build broadly across multiple markets, but build where we can achieve improvements and returns due to better scale, following that disciplined approach to continue growing the Chili's brand at a rational pace while taking things more slowly with our other brands.

In 2003, Chili's opened 68 restaurants; 70 in 2004, 80 in 2005, and 100 in 2006. Each class of new restaurants continues to perform well above our required hurdle rates. However, the combined effects of softness in top line and higher real estate prices will have the anticipated effect. We expect to build fewer Company-owned restaurants next fiscal year.

Our fiscal year 2008 new restaurant plan is shaping up due to the approximately 18-month lag time between approvals and openings. Currently, for fiscal year 2008, we are estimating capital expenditures on new Company restaurants to be in the range of $300 million to $325 million, which represents a 20% reduction from this year's spend on new restaurants. There will be some immediate cash flow benefits as capital expenditures for fiscal year 2007 will be slightly lower than plan as a result of slowing openings next year.

The final capital numbers for fiscal year 2008 won't be locked down for a few months as our brands and corporate personnel evaluate discretionary capital, remodels, and infrastructure needs. Year to date fiscal 2007, the Company generated approximately $293 million in cash flow from operations, and capital expenditures were about $195 million.

Our continued focus on disciplined investments and financial rigor delivered a 100 basis point improvement in our consolidated return on invested capital measure to 17.8% compared to fiscal year end June of 2006. There's a complete description and detail of the calculation on our website.

Our intent to return capital to shareholders was evidenced by the repurchase of 2.8 million shares during the quarter. This brings the fiscal year total to 4.5 million through the end of the second quarter of fiscal year 2007, and there's still opportunity for us to continue the process as approximately $450 million remains under our Board authorizations.

As part of our strategic review, we have shared our intention to carry higher leverage at the Company and there's still a bit of room before we hit the target. On an adjusted basis, including operating leases capitalized at eight times, we're at about 61% debt to total cap versus a targeted capital structure of 65% to 70%.

Doug mentioned the increase of our dividend and the proceeds from the sale of Company restaurants being used for share repurchase. These are just two examples of us returning cash to shareholders today. In addition, our team continues to review all possible measures to build long-term shareholder value.

We remain confident in the long-term prospects of the industry, and our brand's and team's ability to perform effectively in an extremely competitive marketplace. Our business model is strong despite current top line pressures. The average annual volume at Chili's continues to demonstrate it's one of the strongest brands in casual dining for customers and investors. Our business model allows us to grow top line by investing in new restaurants and provide our shareholder with above market returns.

Other areas of growth are beginning to emerge as the international business continues to build momentum and provides long-term growth opportunities for top and bottom line.

Our management team has demonstrated ongoing capital discipline by rebalancing the portfolio through the sale of Company-owned restaurant, slowing the growth of underperforming brands, and concept divestitures. Our transition from a company focused primarily on building new restaurants to provide top line growth, to one who focuses on increases and earnings via sales growth and margin improvements, continues.

The past few quarters have shown significant progress in restaurant margins and G&A efficiencies, and I have incredible confidence in the teams who are working to drive same-store sales. You can count on us delivering even better earnings growth when we see the effects of all their hard work.

At Brinker we remain strongly dedicated to building a long-term shareholder value through growing our business effectively, managing the middle of the P&L, and using our cash to enhance shareholder value. And with that, I'd like to turn the call over to Kate to facilitate the question and answer period.

(OPERATOR INSTRUCTIONS). David Palmer, UBS.

Congrats on the quarter. Wanted to ask -- I just want to get your sense about a few of the things that could help us get a sense of the momentum in sales. You discussed some of these, so forgive me if I just missed -- if I'm making you repeat what you said. Media advertising days and just your overall sense of promotion versus what you believe is excluding the promotion in terms of effect to December sales and where the momentum is going forward. In addition, holiday timing and the gift card lift -- could you help us sort through those things with the idea that we can look to January and the spring and get a sense of where you see the momentum in sales?

We saw momentum through the whole quarter, I mean really we saw numbers get better from October to November. We did see some benefit from a holiday shift although maybe not as great as some other groups. That was about 20 basis points in terms of a holiday shift. Gift cards -- not only were people enticed to come into the restaurants because of some of the marketing that we ran during the period, but also the value message of the rib bones we think was very important. It was an opportunity for people to come in and get a full meal at $9.99 and we think that was a very good message at the right time.

So, as far as looking out into the third and fourth quarters, we think some of the gift card bounce-backs will give us some benefits in January and also in February. There is a little bit of change in timing on bounce-backs at Chili's. But we're looking forward to the third and fourth quarters with some confidence.

You advertised the gift cards this year versus last year when you did not. Was there also a difference in the weight of the media?

Well, we didn't run any media last year in December, so that was additional. We didn't run it as heavy as we would run a normal campaign.

Is there a sense of what the relative lift to January 2007 versus 2006 from gift cards?

Historically, David -- this is Doug -- historically, we've seen about 70% of the gift cards redeemed in about 90 days and that's old news so there's a lot of gift card activity in the marketplace among a lot of retailers, so that's an old number. But we're seeing those redemptions throughout the month. We've also had some weather already in January. Of course it's that time of the year, but there's been a lot of snow and ice over the last week. Don't know if there's any other really valid information to say at this point in time.

I guess I'm just wondering if you had a lot more gift card sales this year than last year such that it might be more of a lift to your growth rate this year versus last year. That's what I was getting at.

And I think you're right, David. We did have a 30.5% increase in gift card sales on a year-over-year basis. And that's great. Those are people who have a gift card in their pocket and can come to Chili's and we expect to see those folks come again. Historically, they've come in primarily in January and February, and so we're hoping that they'll have the foresight to go ahead and use those gift cards and come in.

Jeff Bernstein, Lehman Brothers.

Just a question on the comprehensive analysis you spoke about in the press release that you did in this quarter related to stores not meeting return thresholds. Just wondering if you could give some color or details on the analysis -- perhaps the return and the other operating thresholds used and the number of actual units not meeting those thresholds by concept, and I guess, most importantly, what steps are going to be taking going forward to address these under-performing units? Thanks.

Well, Jeff, we go through an analysis really all the time, we do an ongoing analysis of our asset base. And we make a determination based on a lot of factors -- what the operational performance of the restaurants had been; also what the outlook is from our Operations team, and then we try to do a net present value on what we would anticipate receiving from closing the restaurants versus keeping them open. Generally, if it's better for shareholders for us to close the restaurants we'll go ahead and do that.

Is that what's potentially anticipated from this particular analysis? If you could just divvy up by concept, how many units we're talking about for each.

Well, again, the benefits for shareholders are when we close those restaurants they'll improve generally restaurant operating margins and also produce more cash; immediate cash by going ahead and closing the restaurants. We've not given a breakdown by brand and don't care to at this time.

Joe Buckley, Bear, Stearns.

Just a question again on sales. Other than gift cards, are there any Company initiatives you'd have us focus on in terms of potential drivers of sales going forward? And last call, Doug, I know you mentioned getting Rich [Millman] involved on a consulting basis again. Maybe in the context of the answer if you could talk about what role he's playing, that might be helpful.

Doug, you want to take that one?

Sure, thanks, Joe. Well, a couple of comments. First of all, Joe, as we mentioned in our prepared commentary, we are working real hard on our core menu choices. In fact, in almost all of our brands this week and over the next two or three weeks, Chili's has a brand-new menu with a number of core menu items added; they've got a couple of new tilapia dishes, some new chili dishes, some new tacos, and are adding some former Limited Time Offers -- the Rib Flavors, the Sizzling Spice, the Triple Dipper, to their core menu.

On The Border next week also is rolling out a new menu with a number of new menu items -- smothered steak fajitas, some Southwest chicken tacos; an item prepared fresh at the table, queso live, a lot of interaction between the server and the guest; Maggiano's in early February has a new core menu going out with a new design as well as some great new entree items called Little Italy Favorites that have a very exciting presentation at the table. They've got some more entree salads for lunch business, so there is a lot of focus.

Macaroni Grill, we mentioned recently, rolled out a number of great items that should help lunch business and the value propositions, some new sandwiches and some new soups. So a lot of core menu focus and a lot of innovation at Chili's. We're still working with Rich [Millman] group. Those products which include a lot of salads and sandwiches are still in the testing process as we roll them out across markets outside of just Chicago to make sure there's some stickage to the consumers.

On sort of more just the overall experience side, I was actually reading an email yesterday from Paul Wester, from his recent conference in New York and I thought there was some interesting commentary. Just across maybe the industry, Paul called it customer-centric. I would say that we're working really hard as well on both the employee side and the customer side. Employees, we mentioned we have some new processes for hiring but included with that are tools for training and coaching and motivating, and honestly working to try to create a more emotional connection with our employees so that then they translate that down to a more emotional connection with our guests.

In an industry that has gotten as competitive as casual dining, it's more than just about the menu items. It's really -- the competitive advantage in casual dining more than ever is how our employees make our customers feel. That really is the social relevance. That's how we think through social relevance we'll build loyalty, frequency, and be able to compete against QSR and fast casual because the experience in casual dining is as important as the food itself.

So, we think we have a lot of great new menu items that customers will see, but we're probably working harder than ever behind the scenes with our employees to make the guest experience that much richer and better than it's been in the past.

Can I ask just a follow-up on two things? Any different thoughts on marketing? You seem to be doing different things at different points in time. Maybe if you could talk just a little bit about that. And then also just the role of pricing? I know you've run off some price in the last few months and not replaced it, so to speak. What are your thoughts as we head into some higher labor costs in 2007?

Well, on marketing, Joe, certainly as I just mentioned, we're probably going to focus more on core menu items and the relevance of those items to the brand and what the consumer is looking for in that brand specifically, and less limited time offers, just that understanding of what you have on the menu and driving customer loyalty.

On price, as we look back through calendar 2006 and we look at the macroeconomic pressures felt by the customer, probably put a premium on the cost of eating out and this whole idea of value more than we've seen in a number of years. So we are going to be cautious knowing how important value is to our guest, but also understand the wage pressures that Chuck alluded to caused by minimum wage and the increased cost of opening new restaurants. So we have a lot of different evaluation points on both the consumer side and the economic side and have those price-availables as levers, if need be.

Jeff Farmer, CIBC.

Just quickly on the Pepper re-franchising announcement -- any details on the proceeds that you guys received?

We will not close that transaction until our fourth quarter, and we'll announce the proceeds at that time.

Then just a little bit different tack on that question -- the AUV for that group of restaurants, above or below your current Company-owned system average?

It's right about at the system average.

And similar for margins as well?

In general they're a little bit lower than system average. (multiple speakers) -- just the cost of doing business in those territories may be a little bit different.

And then just looking at the balance sheet, it still doesn't look like you've tapped that $400 million credit facility, is that a fair statement?

We did have that bridge facility available and we've actually canceled that bridge, but we have it available any time should we need it.

And then with that statement, what does that mean to your interest expense guidance for the year? I think the last time you commented you were about $30 million; is that number still in play considering where you are through the first two quarters?

Yes.

Andrew Barish, Banc of America.

Just a couple of follow-ups on some of the clarifications. Are you guys -- Chili's right now I think is dark on the advertising front. Can you just talk about what went into that decision? And on the pricing front, did you or are you taking additional price on the menu at Chili's that's rolling out right now?

We are not taking additional price. In terms of the evaluation on the marketing, we have for the last couple of years tried to say if we really don't have news that we think is effective to the consumer, we weren't going to market. So we felt like the rebound from January associated with gift cards and bounce-backs would give us a push through January. We also want to have media lined up to support the new menu rollout that Doug is talking about. So it became more important to back that than it would be to do something in January.

Jeff Omohundro, Wachovia Securities.

Just wondered maybe if you could talk a little bit about some of the challenges that you are facing with Macaroni Grill, how you might be addressing them, give a little update on that, particularly in light of what looks like it was a pretty challenging quarter in terms of traffic.

Well, Jeff, we continue to work on a lot of things that I talked about in the last previous calls. We really feel like we've stabilized and reinforced the operating platform. A lot of work in the kitchen design and on scheduling, the A&T process as well as the food cost process. With this new selection process, as I mentioned, Macaroni Grill was the first brand to roll that out. We've already seen reduced turnover among our hourly staff. With the new technology in the kitchen we've reduced our guest ticket times and actually our internal customer service satisfaction scores have gone up over the last couple of quarters.

So we feel like we're really ready to add a lot of these signature and motivating menu items to add more variety throughout the calendar year, and we do have some new items that will be forthcoming throughout calendar 2007.

And on the new items -- the Macaroni Grill and across your brands, when you're adding new items to these core menus, are any items coming off or are you expanding the menus?

We always evaluate the entire menu and one of the challenges, of course, is managing the right number of items so that the ticket times and the customer satisfaction is high. But, yes, we check into the items that are selling the least that also have the least loyalty scores from guests come off the menu and that's an evolution process that's been going on since the beginning of time here. So at Chili's, for instance, there are some items that have come off the menu as these new items have been added.

Jason Whitmer, Cleveland Research.

Doug, I wanted to maybe refresh some of your thinking on your portfolio strategy. Obviously, in the last few years you've pared it back from some of these brands, but can you shape us a new picture maybe on Chili's versus these other brands, some of which have struggled now for a little while and maybe even shift it from domestic to international and where you want to take this portfolio -- maybe even add to the portfolio going forward.

Calendar 2006 has been a tough macroeconomic year, so maybe not the easiest year to evaluate performance. But our portfolio strategy continues to be that our brands are going to earn the right to grow. We'd like brands that represent different types of casual dining experiences, different food items, so that you have a variety of choices, but they do have to earn the right to grow.

I think as Chuck laid out in the short-term, we're going to build more Chili's and spend more time with the rest of the portfolio domestically improving returns and trying to get those top line sales in order. Internationally we see some very exciting times ahead. In fact, we're going to open about 35 international restaurants this year. There's some markets where our top line sales growth has been remarkable, and honestly the economics are very good. So Greg Walther brings a wealth of experience, the last 11 years with Outback International. They're involved in many countries we haven't gone to. He not only has a great financial discipline regarding how to set up those deals but also a lot of people around the world that could be potential partners that we are already in dialogue with.

So, in fact we're going to double the international growth in fiscal 2008 over 2007. So there are a lot of deals that have already been agreed to by our partners. But generally the portfolio strategy hasn't changed. We want to have multiple choices for the same consumer and certainly have long-term growth for the shareholders.

Can you remind us what the sales and profit mix and contribution might be from that international piece and maybe overall franchisees?

I'm sorry, could I hear the question again?

Sure. Within the international side maybe in a broader picture from the franchise business what the sales and profit contribution mix might be.

Well, we have an internal target to achieve profitability and contribution to overall Brinker growth by 2011 of 20%, and that's a very aggressive goal but the team is really charged with trying to achieve that goal and very optimistic they can do it.

And last question, have you guys done anything meaningfully different structurally to lower corporate G&A cost, maybe regional cost, even some restaurant level expense? I know you've done a lot of work here the last couple years, I wanted to see if you could provide any color on that?

Doug, you want to take that?

If you look at sort of cost control while not compromising customer experience, we have had, as was mentioned, the portfolio restructure. We have reorganized the way the Chili's Operations team is supervised throughout the whole country. We have had a lot of great enterprise approach to brand support here at the home office, which is why our G&A numbers are so good. A lot of shared services. We're getting leverage from more of the support services behind the scenes than we ever have across the brands.

Over the past year we have gotten leverage from price. We've gotten a good leverage from commodities. Utilities are a little bit lower now than were forecasted. The refranchising work has helped. We've already mentioned this morning the labor scheduling and the actual versus theoretical food cost technology. We've had good results from our non-comp stores; some of our newer restaurants are performing well. I think overall all those things though, we can't effect guest experience. In fact, in some of the labor lines our wage hours are actually higher than they have been. We are focusing on how to take better care of the guest and have employees view us as the employer of choice.

Matt DiFrisco, Thomas Weisel Partners.

Chuck, can you give us some guidance in reference to going ahead as far your share count? I think it -- it looked like it sequentially went up despite some pretty hefty buying during the quarter. Just trying to get a better handle around the treasury method with your stock appreciating. And when you timed the share repurchase, what you ended the quarter with so we can model better going forward.

Well, it went up slightly due to quite a few stock option exercises that happened in the second quarter. That's an anomaly for us. We have told people we were going to shrink the share base and we will. So as we go forward, we're trying to take the share base down, both on a sequential basis in the third and fourth quarters. We haven't told people an external target but we are committed to getting that done.

Can you tell us what the diluted share base is right now at the end of the quarter? What we enter Q3 with?

Versus the average?

Yes.

I don't have that number. We can follow-up with that later.

And then also, can you just talk about -- I guess, how should we view the 30% goal for the franchises -- franchise mix. Is this a 18 month, let's get it done with and review it and see how much more we can go? Or is this pretty much where you guys feel the Company works best at 30% franchise mix, 70% company? Or can we go more towards a 50/50 franchise/company-owned model someday do you think in the near-term?

I always say it's a milestone, not a stop sign. I think we continue the evaluation, talking to our brands, finding out what the best way for them to run their business is and what percentage works best for them. But this transaction when closed will get us to about 73%/27% franchise. It gets us pretty close to that 70/30 target. But I'll say that we still have other markets that we are evaluating to see if they would be better as franchise operations versus company. So we'll stay diligent on the process. And as always, returns will be the determination of what we do and we're trying to build shareholder value and that will be the ultimate way we cast the vote.

I guess, the last point, just on pricing. I might have missed this, but are you expecting then in lieu of the -- well, ahead with the labor increase that we have coming, the third year maybe of around 3% pricing taken at Chili's? And do you think the consumer can handle that without a step back in the momentum that you have seen in the traffic?

Well, I think it is important to note a couple of things. First of all, when we take a price increase, we take it on a restaurant by restaurant basis. We've got restaurants that have not had price increases for 18 months in Chili's. So it's not a blanket price increase that goes everywhere. So we do it on a strategic basis. We evaluate the markets, evaluate the menu items, and see what makes sense. And as Doug said earlier, we will continue that evaluation. We'll look at the states that have had minimum wage increases and see if it makes sense to take price. But we are cautious at what the overall environment is out there for consumers and we'll address it very carefully.

I know you want me to say what's the number going to be, and I think it's just not that simple. I think we're going through the process of evaluation, looking at all the inputs and we will make the right decision for long-term. Doug, you got anything else you want to say?

Yesterday, right now it's sitting around 1%. So, where it goes, as Chuck said, we will evaluate what happens to our top line sales, what happens to the cost state-by-state. The minimum wage hasn't actually passed and we haven't actually seen what the final determination will be cost-wise. So, we want to be cautious. Value is extremely important to the guest when picking casual dining restaurants right now and we have to keep that in mind and weigh it against the business costs.

But I was thinking since you're so close to the new menu coming out that maybe you had a tangible number out there that you're thinking.

The new menu at Chili's is out and we took no price on this menu.

As a follow-up, I know somebody asked the total shares outstanding in the quarter. Laura, you've got that number. Do you want to --

Sure. It's about 123,196,000.

So that's down 3 million from where our average was for the quarter, so we did buy back stock. They'll be more accurately reflected as we get into the third quarter.

John Ivankoe, JPMorgan.

Actually, straight on to that, was that -- Laura, was that the basic count or is that the fully diluted count, that 123 number?

Fully diluted.

So the number is going to be something like that presumably for the third quarter. Let me move on to CapEx and I think my question is fairly short. Can you review with us in fiscal 2007, Chuck, I know you said that it might be a little bit less than what we previously thought -- growth CapEx and non-growth CapEx, firstly. I know you've already given us the growth CapEx for fiscal 2008, but if you could maybe talk about how you are considering remodels as potentially increasingly important 2008, 2009?

Most of our dollars have gone to new growth. CapEx, in fact, that's represented about 70 to -- a little bit more than 70% of our total spend. We are evaluating remodels very seriously at Chili's. So we are trying to take a look at some of the test restaurants that we have remodeled, see if we are getting a list that we would anticipate getting from the remodels, to see if it makes sense to go forward with that type program as we get into next year.

Two things on that -- do you have the total CapEx number for fiscal 2007?

I'm sorry, John.

The total CapEx number for fiscal 2007, Chuck?

(indiscernible) to be $460 million.

But did you say or did you not say that it's actually coming in a little bit relative to those expectations?

It is coming in and it will come down probably from 460 would be my best guess.

And are remodels and tests anywhere and how significant is that test?

We do have a couple of restaurants that are in test.

Yes, John, with Chili's obviously being 32 years old, we have a variety of prototypical buildings all over the country from different decades. And we are testing some of those older ones that were built in the '80s and '90s with some of the elements that are in the current new prototype, as well as some other elements that we think might make the brand relevant; making sure it still feels new and fresh even though the building might have sat there for 20 or 30 years.

And to Chuck's point, after we're doing it, we're evaluating what kind of lift in sales, what kind of commentary the customers and the employees have about the dining experience, and back to that social relevance of casual kind dining, what kind of feel do you get. That's an ongoing challenge. But we do have them out in the marketplace and we're evaluating those results, and that could have some bearing on 2008 CapEx dollars.

Would you view remodels as offensive or defensive?

Well, there's refurbishing and there's remodels. And so refurbishing is probably more the defensive part of just keeping it clean and fresh; repainting, which you have to do on an ongoing basis, and a remodel may be more of the offense that makes sure that your building is relevant and still feels good in the marketplace versus some new brand that just came across the street that shows up with a fresh building and fresh coats of paint.

Just to add on, maybe pile on to Doug's comments a little bit, I think, John, we want to make sure that Chili's does stay relevant. And so we're taking on two -- we've got two current versions of remodels. We did one in Atlanta, did a couple in Atlanta, we're doing some down in Houston, just to take a look and see what effects they might have.

And we're doing it more than just changing the physical appearance. We're also going through, making sure that all the employees are trained well, we're making sure we're staffed with the right folks when we make those investments. So we're really trying to take it as much of an offensive move as we possibly can, yet understanding that remodels, we have to be defensive. It's really a holistic approach to a change in a restaurant, an existing restaurant, and making it something exciting and new and relevant for 2007.

Bryan Elliott, Raymond James.

A couple of follow-ups first and then my question. A follow-up on John's CapEx. So if I heard you right you said 70%-ish of CapEx historically has been growth capital. You gave us a growth capital dollar number for 2008. So we could just put those two pieces together and make some judgment about non-growth capital up or down and come up with an 2008 CapEx number independent. Is that essentially the message you were trying to deliver?

Somewhat. And again, we're still trying to figure out --

Sure. I understand that you don't have the whole budget for 2008 down yet.

That's right.

But the big swing in the new is essentially 70% of that 455-ish would be a good base new number to compare to the 300-something you gave us earlier, correct?

Right. And it will be 70% to 80% -- somewhere in that neighborhood.

Also, the menu item discussion -- net-net, are the new menus by the brands that are coming out have more items? Same number? Or less?

On the menus they're replacing.

Net-net, Brian, it's probably about the same. Maggiano's menu has some very different layouts. It has wine products in a different location we think will be great for upselling and matching the appropriate wine with different products. On The Border's menu has a number of new fresh components to it that build on the fact that almost everything is made from scratch at On The Border. I mean there's other --

Aspects to it.

Aspects to it, certainly. But net-net, when we add new items, we normally take off a similar number of items to assure that we're going to be able to execute to the customer.

And what is the Maggiano's wine mix these days?

It's about 20% of sales. Total liquor is about 20% of sales. Wine is a big piece of that but they also do a nice job with martinis and other classic cocktails as well.

So clearly there's some room for the wine piece to go up, yes? Okay. Last question would be -- you've done a lot of work on efficiencies and certainly benefited from portfolio reductions, et cetera, but clearly there's been a lot going on to lower the underlying cost structure of the business. And give us a sense for how much further we can see the benefit from that and at what point, looking forward, do same-store sales again become the driver of margins? And we've sort of done all we can on the underlying cost structure.

Well, we'll start to lap a lot of those effects as we get through the third and fourth quarters. Our operators really took control last year. Just about this time it really started to put in some major moves on cost of sales. We talked about the A versus T system. Also some labor planning and labor scheduling tools that they put in place and enhancements around that. It really helped us in third and fourth quarter and have really driven so far year-to-date earnings growth that are very good. But we will start to lap those and we all know that until we start to get consistent top line growth, it's going to be tough to continue to deliver this robust earnings growth that we've seen. So when you ask me when, I'd say, well, now. We really need sales to start turning around if we want to continue to put up 20-ish percent growth. We still think there's opportunity even if we have softness in sales, and continue to drive the things that we can control that don't affect the restaurants. We've got a number of initiatives in the back half of the year that we think can control costs. And we've got a number of initiatives trying to control G&A costs and we'll be able to use our balance sheet to help us [buy back] stock to continue to deliver that 15% plus growth.

So, it's a bit of a balanced message; we can't continue to not have top line. We know that. But we also have things that will start to continue to implement to drive earnings growth as we get in through the balance of this year and the start of next year.

Mark Wiltamuth, Morgan Stanley.

Wanted to dig in a little bit on food costs. You have been seeing some healthy food cost savings over the last few quarters. If you could just give us your thoughts as we move forward and also just reflect on the higher corn prices and is that changing any of the dynamics out there with the chicken complex?

Hi Mark, it's Laura. As you said, we did see benefit in food cost for Q2. We expect to continue to see a benefit in Q3, specifically in the areas of beef, poultry, pork, cheese, with seafood and produce being slightly unfavorable. The produce we'll continue to see pressure to as relates to the storms in California earlier this month.

Specifically as it relates to the corn prices, most of our beef contracts are longer-term in nature and so we probably won't see pressure through this calendar year, but as we get through the back half of fiscal 2008, there will probably be pressure related to that.

And then on the chicken side?

Chicken are multi-year contracts. That won't --

How much longer do you have to go on that?

Two to three years -- that are multiple contracts, but --

When do you start lapping some of the most healthy gains? Obviously, some of the food cost savings were from your A versus T work; when do you start lapping -- that's a third and fourth quarter event, and when do you really start rolling off these cost savings?

More fourth quarter than third, Mark. We expect to continue to see some benefit in the third quarter and then first quarter next year we'll begin to lap some things.

Mike Smith, Oppenheimer.

A couple of questions. You did an awfully good job on G&A this year and actually declined 9% year-over-year. Did you mention that the reason for that was that you did not have a franchisee's conference this year?

Actually, it was a corporate -- it was a conference for all of Chili's, both Company-owned and franchise. It was 30-year anniversary last year, a very special year and so we marked that with a big conference. This year, there's not as much magic around 31, so we did not have the conference this year.

I'm sure you've done some work, considering the changes in the minimum wage laws, on what you would have to raise prices to keep the change in the federal as well as the various states to be margin-neutral. What sort of a price increase would that take?

We think the impact of the state increases that have already been mandated is about 50 basis points, and that's been the effect. Federal is not going to be as much. We operate in a lot of states where the state-mandated minimum wage is already higher than what the first leg of the federal is going to be. So, we're still not sure what that legislation is going to look like when passed. We certainly hope that they maintain the cash wage and the tip credit. So, if indeed they've [done it] , it would be about another 10 basis points or so, if it passes as it was currently written.

And the third question -- in the past, with things like your bowls concept at Corner Bakery. When results did not start to improve within a certain period of time they became, I guess, casualties of being in your portfolio. Is there any chance that in the next 12 to 18 months if Mac Grill continues to perform as it has been for the last eight to 10 months, would be paired?

Mike, we evaluate our brands as we've proven historically. We said earlier they have to prove the right to grow. They also have to perform to stay. So there's a lot of encouraging things we think going on at Mac Grill. We have incredible confidence in the team and our guests are actually giving us higher scores, but our sales are not where they need to be. I wouldn't predict or forecast an event as you're asking about on this call anyway, but we will always check our portfolio to make sure that cumulatively all our brands are returning to our shareholders.

Howard Penney, Prudential Equity Group.

Chuck, I was hoping you could put a little historical perspective around the 17% return on incremental capital number -- what was the peak? What was the trough? I assume you have some sort of target out there that you're looking to deliver over the next couple of years. I assume the big push has come from the low hanging fruit that you've been able to take care of over the last couple of years, so if you could put a little historical perspective around that, that would be great.

I think it was somewhere around 15% if we look back a couple of years. So we've really made a lot of progress. And you're right, Howard, it has come from taking some of the low-hanging fruit. But I think our continued focus on opening up restaurants that will hurdle, our focus on re-franchising -- all those things that can continue to drive it upward.

We had a shareholder conference in September a year ago. We talked very much about trying to increase that measure and said we tried to get it up by 150 basis points. Well, we're almost there. But I think again, that's not reason to stop, that's not reason to change, at this point, capital allocation. So we'll continue to look for ways to increase that number. And welcome back.

Thank you. Is this the peak? Are you at peak levels now?

I wouldn't think we are. Personally I don't think we are, I think we still have opportunities.

Howard, welcome back and nice to hear from you. Certainly if we get to top line performing as we'd like, that would help. I would like to, just for all the people that work for Brinker that are listening to the call, thank you for calling it low-hanging fruit -- but a lot of people worked really hard on some of that low-hanging fruit. So, it may look like optically it's low-hanging fruit there; a lot of energy and work has been put in place by folks all across our enterprise.

Steven Kron, Goldman Sachs.

A couple of questions. First, just a clarifying question. On that G&A, I believe your guidance was for the year flat G&A. First, is that still the case? And then more specifically, I thought some of that G&A, as a percentage of revenue is coming down, was based on a lower incentive comp for expectation for 2007. If that is the case, was that more structural from a compensation structure standpoint or is that just performance-related? And given the first half of this year and the reported strength in numbers, can you give us an update as to where that might trend?

Well, Steven, we still think that G&A will be relatively flat this year because of a lot of things that we talked about. When you talk about compensation, our Board has changed some of the ways that options are granted. That will give us a reduced option-based comped expenses this year versus last year. But also last year was a very good year for us in terms of performance. We exceeded targets and incentive-based comp was very good last year. This year it's a little tougher, it's always tough to lap very good performance. So, we don't have built in our plan that we would beat the number like we did last year, but we're certainly optimistic that if we can deliver in the back half of the year like we have in the front half of the year, our G&A might go up. But again, it will be because we've delivered on our earnings target.

Secondly, Doug, just a more theoretical big picture question, and it's on the category, the bar and grill category. Over the past, I guess, over two years now, two and a half years, we've seen some negative traffic trends within the category as a whole. Over that time period we saw quite a bit coming out of the companies -- everything from more disciplined menu development, value focus, new menu items, advertising changes, a lot of different things -- gas prices going up, coming back down. So I guess if we take a step back, we're still looking at two and a half years worth of negative traffic. Is there something a little bit more structural that's going on here? And what ultimately gets this category back on good footing? Because it seems to be more than just consumer spending weakness during this past nine to 12 months?

Without the numbers right in front of me, Steven, I don't think we've had negative traffic that long at Chili's. But last year was a challenging time; challenging time for everybody. And there are some macroeconomic data that would help support that, besides just a competitive marketplace. But, hey, we pay attention to what the competitors do but we're more concerned about how we're performing.

We tend to look at it as the beauty of bar and grill is that you have the most number of choices for a guest or a group of guests in terms of dining out. But the pressure is on us to make sure that the experience that we provide for our customers is equal to or better than the competitors. There are a lot of things here we're working on, whether it's structural out in the marketplace -- I think it's like a lot of competitive industries that the best companies that perform the best in the consumers mind are the most successful then. Our ultimate goal is to provide a great place for employees to work and a great place for customers to dine, and if the economy cooperates a little bit with disposable spending, that will help maybe clear up -- take the clouds away and make it a little bit better for our performance.

Chili's is a very strong brand. Their top line sales volume is one of the highest in that niche. Sure, we want positive comps. We don't want to do short-term things that will risk long-term results. We're very excited about some of the selection process tools we talked about. We think it's going to help us hire a better employee, connect better with our customers.

And then just lastly, you may have mentioned this before, I apologize, but the international expansion efforts, is that accretive to overall Company returns as you see it?

Yes, it is accretive.

Joe Buckley, Bear, Stearns.

Just had a follow-up. Doug, just in terms of how you manage the employee anticipation and expectations as you do re-franchise markets, have you seen any increase in your turnover numbers at the manager or assistant manager level as you've kind of shifted the portfolio to more franchising?

No, Joe. I think one of the exciting things is that historically the areas that have been franchised have not grown as much corporately. So what happens when we find a successful local businessperson that puts our brand on their back is that they build more restaurants. So, the reverse happens; there's actually more opportunity for the folks that work for us -- they're still part of the Chili's team, as evidenced -- as Chuck said, a year ago when we had a 30-year conference, every franchised partner was invited as well as corporate. They're a part of our team. So it actually provides more opportunities for them.

Recently one of our franchise groups, a number of general managers became area directors. And one of the long-term area directors became a director of operations. And also in many cases, occasionally someone that's been successful in our corporate system will join our franchise partner and be one of the leaders. So it also guarantees continuity and philosophy and strategy and a relationship here.

Our stock options are such that they continue vesting. So a person has still felt that they're part of the Chili's system. And in fact, in some ways they're a bigger fish in a smaller pond but they're still part of this enterprise that's successful and has an incredible legacy. So it's kind of win-win and win, as we see it, and the shareholders win as well.

Ladies and gentlemen, there are no further questions in the queue.

Okay, well, thanks very much for joining us. We will talk to you later. Bye.

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.