Brinker International Inc (EAT) 2007 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to Brinker International's third 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 most Laura Conn, Director of Investor Relations. Ma'am, the floor is yours.

Good morning, everyone, and welcome to the April 24th Brinker International third 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 statements are subject to risks and uncertainties which could cause actual results to differ from those anticipated. Such risk factors are more completely described in the Company's press release today as well as our SEC filings. Upcoming calendar dates include the filing of the third quarter 10-Q on or before May 7th and April sales scheduled on May 9th after the market closes.

With me today are Doug Brooks, Chairman and Chief Executive Officer; Chuck Sonsteby, Chief Financial Officer Guy Constant, VP of Strategic Planning and Analysis and Investor Relations. Doug will begin this morning with an update on our ongoing strategic initiatives, Chuck will follow with the financial overview for the quarter and then we will open up the call for your questions.

Good morning, and thanks Laura. I want to begin by making it clear that the Brinker management team is in no way satisfied with the Company's third quarter results which did not build on the positive operating performance we achieved during the first half of our fiscal year. We are moving with increased urgency to deliver bottom line results that meet our stated goals for profitable growth. In the short-term we will aggressively utilize our financial strength with action such as the accelerated share repurchase announced earlier today while also building out the strategic initiatives which will deliver long-term results.

Despite the current challenges we remain committed to our Company's strategic direction and firmly believe that our initiatives will improve the growth rate and the quality of earnings for Brinker. The third quarter of fiscal 2007 represented a tougher operating environment for Brinker. As we all know the consumer has an ever expanding array of options when they choose to dine out. During the quarter we saw the frequency of dining business decrease due in part to severe winter weather and increased demands on the consumer's wallet.

In addition, our decision to buy less media during the period had a negative impact on results versus the same quarter last fiscal year. Sales decreased as the brands did not permit the sales leverage we realized in the first half of the fiscal year to continue into this quarter. Our management teams are highly focused on the central challenge of increasing traffic at all four brands. It should be noted that Chili's experienced incremental traffic improvement throughout the months of March outpacing the industry during the last three weeks of the month.

Although the current operating environment is not ideal we remain committed to the strategies that we have laid out to build our business for the long-term, developing new profitable restaurants, growing our base business through sound operations and marketing initiatives and effectively leveraging our infrastructure. Demonstrating the commitment to grow Brinker brands both domestically and internationally we built 55 new system restaurants during the quarter. A combination of company-owned and franchise locations. We added company locations in key domestic markets, such as Houston, Atlanta and Southern California, among others where we want to deepen our presence and build our brands out to scale. The majority of these locations are new Chili's restaurants which continues to represent the primary growth driver for our business.

In addition we continue to pursue our goal of balancing systemwide ownership from 80% company-owned and 20% franchise locations, to a milestone of 70/30 by the end of calendar year 2007. We are achieving this mix through an active franchising program and with accelerated development commitments from experienced operators worldwide. During the quarter we completed two franchise transactions, representing the future development of three Macaroni Grill restaurants as well as the sale of one company-owned On the Border in South Texas. Just after the close of the quarter on March 29th we completed a third transaction selling an existing On the Border restaurant in Idaho. Beyond the Border transactions also featured development commitments for five additional restaurants in South Texas and five in the northwestern markets of Idaho, Montana and Utah. Proceeds generated from these transactions totaled approximately $6 million.

As you can see we are experiencing success with our franchising efforts for Macaroni Grill and On the Border, which provide the opportunity to grow more quickly in regions where the brands have limited presence. Transactions for these brands tend to be smaller in size than the deals we have announced at Chili's but are still meaningful components of our commitment to growing franchise development across the enterprise.

In addition to our domestic development efforts we are gaining momentum internationally in markets such as the Middle East, Latin America and Mexico. Our global development team added 7 new restaurants during the quarter and is on pace to add an additional 9 restaurants by fiscal year end, bringing our total number of international restaurants to 155 in 23 countries. Our first Romano's Macaroni Grill opened in the Middle East at Dubai Festival City, the second of three Brinker brands to be developed at that location. We also opened the first counter service Chili's in Bahrain, demonstrating the flexibility of our flagship brand to adapt to a number of unique formats.

The current fiscal year is on pace to be the highest level of international growth in our Company's 32 year history. During the quarter all four Brinker brands introduced changes to core menus. Our overriding strategy here is to build on the strength of the brands by introducing new variations on additions our customers crave and come back for. Chili's added several new items to the core menu in February during period eight, the brand leveraged insight from consumer research which tells us customers love the heightened flavor of fire grilled food. The March fire grilled favorites promotion which included some price point advertising highlighted three new menu items.

Maggiano's Little Italy unveiled a new core menu in mid-February featuring Little Italy favorites, signature dishes created by our own chefs and inspired by Italian American neighborhoods throughout the United States. New menu innovation is an exclusive at Chili's and Maggiano's, Romano's Macaroni Grill and On the Border also introduced new items to their core menus during the quarter. In all we added over 20 items to Brinker restaurants during the quarter as a result of our strategy to bolster our core menus.

In addition to the brands core menu enhancements, Brinker continues to successfully grow and refine our industry-leading gift card program. Our ability to leverage our portfolio with innovative gift cards is a unique driver for us in this area. We continue to monitor the program and its effect on consumer behaviors including the incremental benefit gained from offering incentives. To that end we intend to further evaluate the effectiveness of gift card incentives during the spring holiday marketing window.

We also focused on increasing our investment in team members at the hourly and restaurant management levels to elevate the overall guest experience by reducing turnover within our restaurants. Our new process for hiring hourly employees continues to produce the desired favorable results as demonstrated through higher retention of employees. This program will be in place systemwide by the end of June. In addition, we are investing considerable energy to the recruitment and career development of our high potential managers who can effectively lead and foster an atmosphere of hospitality within our restaurants.

Despite all the challenges we are confident in the future of casual dining and the strategies we are deploying to remain an industry leader. Brinker has faced tough operating environments numerous times through its 32-year history and every time we have successfully responded to the challenges. In all cases we achieved new levels of growth through a focused understanding of our guests, then evolving to meet their needs and expectations. Once again, we are in the process of better understanding in engaging our guests with the goal of increasing loyalty and driving our business forward.

At the same time we are scrutinizing all aspects of the business from a shareholder perspective. We are optimizing the use of capital by managing a number of new restaurants, closing underperforming locations, selling company restaurants to strong franchisees and aggressively buying back our stock. But our activism doesn't stop there. Just as important as running the business as efficiently as possible by managing our operating expenses including G&A, which allows us to deliver the best possible value to our guests. Our team has done a good job keeping costs under control as we navigate through this challenging environment.

For these reasons, as we have stated in previous calls, we are pulling back on the number of planned restaurant openings for fiscal year 2008. We will still build more company restaurants than any other casual diner but factors such as declining sales, escalating construction real estate costs make it necessary for us to cut back on our original estimates. We also continue to look for ways to return cash to shareholders. Our dividend policy is one step, and the second step is the use of a share repurchase program. The ASR program announced today will also help us efficiently and effectively return capital to shareholders.

Thank you. And now Chuck will provide a bit more detail on the results from our third quarter.

Thanks, Doug, and good morning everyone. As Doug just touched on we continue to operate in a challenging topline environment and while March showed some signs of sales and traffic improvements at Chili's our other brands have not yet demonstrated similar signs of improving trends. Our intent is to build customer traffic with long-term initiatives which will take time for consumers to increase their frequency. In past quarters cost control and successful operational programs have allowed us to weather the topline impact of some challenging macroeconomic circumstances, and provide Brinker with the financial flexibility to continue to reinvest in the business despite a difficult earnings quarter.

This reinvestment continues but we did not deliver the same earnings gains as prior quarters. Sustainable topline growth is paramount to deliver the required long-term results for our shareholders and remains an important focus for Brinker. Let me update you on some of the progress on some of those initiatives we discussed on previous calls. First, as it relates to the work on our core menu, a natural evolution of our recent marketing emphasis was to move items from successful LTOs to a more permanent home on the core menu. We are encouraged by the impact these offerings are having with the guests and look for gains in transactions as customers are reintroduced to them over the coming weeks and months.

Items such as at the Triple Dipper, Vodka Rustica and Carne Asada steak tacos have shown high guest preference since their menu additions. A number of new menu creations were introduced, as well. At Chili's two new tilapia dishes, along with the Chicken Club Tacos and the Mesquite Chicken salad have sold strongly in their first six weeks on the menu. These products, while new to our customers stayed true to the essence of the flavorful profile for which Chili's is uniquely known.

At Maggiano's the introduction of our Little Italy Favorites is going very well and On the Border we've seen strong sales of our new Southwest Chicken Tacos. The recent introductions reinforce our capability of developing new culinary offerings that resonate with our guests. In addition, we continue to work on innovative new product platforms that will deliver sustainable topline growth. Building a successful core menu is truly a long-term play designed to drive preference and increase frequency by our guests. And to supplement those items our recent promotions included some new dishes intended to drive topline growth. Two new taco flavors hit on On the Border, the Carne Asada tacos and Buffalo Chicken tacos have been selling well, and the return of the Create Your Own Pasta promotion at Macaroni Grill has once again been a very popular choice for customers.

As we look forward to the fourth quarter we will be closely watching the impact of our core menu work and preparing for the biggest sales day of the year for On the Border, Cinco de Mayo. Last year's OTV sales for the day were more than $3 million, that is one big day and one big celebration. Last quarter we discussed a more conservative approach to capital expenditures in fiscal year 2007, as well as a 20 to 30% reduction in spending on new restaurant development for fiscal year 2008. Currently for fiscal year 2007 we are anticipating capital expenditures to be in the range $425 million, down almost $35 million from our initial estimate.

In addition, a more modest growth plan for company restaurants in '08 will require approximately 250 to $275 million of total capital; $50 million lower than last reported. For the year we will be opening 80 to 90 new company-owned restaurants, the vast majority of which will be Chili's versus 145 company-owned restaurants this year. Total capital expenditures for fiscal year '08 will be in the range of 300 to $325 million. These expenditures are a result of our disciplined capital allocation process and offer the best opportunity to build scale in our core markets and drive shareholder value. Chili's has been actively engaged in reimage research for the older prototype restaurants. So far we've tested three reimage sites todate and the test will now expand to additional sites very soon. Once we identify the aspects of the reimage that resonate best with customers and project to deliver the required returns, a full implementation of the reimage program will be on tap.

These investments will be incremental to the 2008 capital plan, which should provide the appropriate positive financial impact on sales and guest experience. The growth of Chili's continues with an average investment cost of around $2.8 million and average annual volumes of $3.2 million, Chili's restaurants are one of the best investment options in the entire casual dining industry. With an average PPA for Chili's in March of $12.43 we believe Chili's offers an attractive value proposition for its customers and with a newer look in our remodeled restaurants will give the guest another reason to visit Chili's.

Our previously announced transaction with Pepper Dining to buy 89 Chili's restaurants on the East Coast remains on track to close by fiscal year end, and we look forward to a smooth transition. However, we are not resting on recent success. We're still actively marketing our franchising program for all Brinker brands and see a heightened interest from potential franchisees. I expect to make additional announcements for subsequent deals in the coming weeks and months. Doug talked about our 70/30 target for the calendar year, but based on the expected pace of these transactions and on current discussions I anticipate the mix moving to 65% company, 35% franchise by the end of next fiscal year. Our analysis of the performance of company-owned restaurants to determine whether current results would dictate further expansion of our franchising program and goals continues as part of our focus on achieving the best long-term shareholder return from our assets.

Now turning to the quarterly line item results, revenues for the quarter were approximately $1.123 billion. New restaurant development continues to be the major driver of revenue growth. On a net basis we added 101 additional company-owned restaurants since the third quarter last year, resulting in increased capacity of 7.9% based on average sales weeks. The revenue growth was muted by the impact of our sales of company restaurants to franchisees and same-store sales performance. On a year-over-year basis revenue was up about 3% over the same quarter last year. However, excluding the sale of company restaurants to franchisees, revenues increased about 5%.

Franchise revenues for the quarter total approximately $10 million, driven by an additional 75 franchise restaurants and solid growth in international same-store sales. We continue to experience great performance in our international markets and receptivity to all our brands. Greg Walther has had a tremendous influence in his role as President of global business, and in a few months has taken his team to a new level.

Cost of sales increased slightly from 28.1% of sales to 28.3%. Cost pressures continue for salmon and produce. Originally we had anticipated a lower cost of sales on a year-over-year basis, but the rising cost of corn feed started to impact this quarter and will put pressure on protein costs for everyone in fiscal year 2008. Our teams are doing an excellent job managing the actual versus theoretical food costs; we are simply seeing cost inflation in commodities. A few adjustments should be made to restaurant expense for a clean year-over-year comparison. In the current year there was a gain from the sale of an On the Border restaurant of approximately $1.7 million; excluding the benefits from the transaction we increased restaurant expense to 56.2% of sales. Last year we had a net gain of approximately $7 million on the sale of six Chili's restaurants and two On The Border restaurants producing an adjustment restaurant expense of 54.5%.

So on a similar basis restaurant expense increased 170 basis points versus the prior year. Significant deleverage of sales on fixed costs was the primary driver. In addition, minimum wage increases constituted about a 50 basis point headwind and will remain so for the balance of the calendar year. Due to the number of states which have a wage higher than the federal wage any potential impact from federal legislation is anticipated to be only about 10 basis points. Our focus on keeping our restaurants in good order to avoid detracting from the guest experience had a cost impact. Incremental repair and maintenance is up as a percent of sales over last year. In addition, preopening expense from higher openings and rent expense were up about 20 basis points each. And on the bright side, utility costs continue to be beneficial on a year-over-year basis.

General and administrative expense for the quarter was 3.9% of revenue compared to 4.9% last year. The majority of this year's improvement relates to lower achievement of performance-based compensation during the current year. But independent of the performance bonuses through our permanent rebalancing efforts within the home office, and other support functions, we have effectively absorbed the capacity gains from the additional 55 restaurants and will deliver on our promise of flat G&A on a dollar basis in fiscal year 2007.

Brinker's effective income tax rate from continuing operations for the quarter was 29.4% compared to 30.9% last year. The year-over-year decrease in the rate was primarily due to incentive stock options which are deductible and reduce the Company's rate when exercised. Year-to-date fiscal 2007 the Company generated approximately $390 million in cash flow from operations and capital expenditures of about $301 million. We've instituted a number of ways to return the excess cash to shareholders; on our ongoing share repurchase program we bought 3.2 million shares during the quarter, bringing the fiscal year total to 7.7 million shares and $222 million.

And, in addition, we have announced today the execution of an agreement to purchase all the remaining Board authorization, $297 million of common stock through an accelerated share repurchase transaction or an ASR. Due to the nature and timing of the ASR the affect on the fourth quarter EPS will be minimal. The full benefit will be recognized next quarter. Repurchasing our stock has been an ongoing strategy in our commitment to maximize our shareholders investment. Since the beginning of fiscal year 2001 we have repurchased approximately 61.5 million shares and permanently reduced shares outstanding by nearly 20%. In a difficult topline environment we are committed to using all of the available tools to drive shareholder value. And we remain confident in the future growth prospects at Brinker and believe purchasing the stock at current market prices continues to be an excellent use of capital and an important component to helping Brinker to achieve its goal of 15% annual EPS growth.

We will continue to manage our bottom line through building sustainable topline sales, increasing franchise revenues, growing other revenue streams and maintaining an efficient overhead structure. Strong cash flow generation and disciplined capital stewardship will allow us not only to generate incremental returns to invest back into the business, but also to return capital to shareholders in the form of quarterly dividends and aggressive share repurchase resulting in long-term shareholder value and targeted EPS growth of 15% per year. Now I would like to open it up for questions. Kate, do you have the first one?

(OPERATOR INSTRUCTIONS) Matthew DiFrisco.

Thomas Weisel Partners. Chuck, I think I missed it, I don't know if you mentioned the dollars for the remodel. Did you -- I heard you say $2.8 million investment cost, $3.2 million for sales. Is that the new prototype going forward, and what is the investment cost you assume in the remodel? (multiple speakers)

Matt, that is for the new unit investment cost. On the remodel we tried one -- we actually did two restaurants that we experimented with in Atlanta, and then we actually spent quite a bit of dollars trying to find out what are the right elements to keep and to use in driving sales on a continuous basis. But the restaurant that we just did had significantly less cost than that, and right now we are estimated somewhere in the neighborhood of 3 to $400,000 per restaurant. But we're going to test about 5 more before we consider whether to roll it out or not.

What is the major difference or the thing you're adding to the box?

Basically it is a new look, it is just not as -- it is a little bit more contemporary. It is more in line with the spirit and feeling of Chili's today.

Okay, and then a second question can you just help us understand how the balance sheet changes here as we get toward the accelerated share repurchase program, which is in 1Q; however it looks like you're going to receive the proceeds for the sale of the franchisee in 4Q? Are you planning on taking out the using that $300 million credit facility or is that just sort of a cushion in case to not prevent the accelerated share repurchase happening if there is a delay in paying?

We're actually going to borrow down on the bridge loan immediately the fund share repurchase program, and we expect to receive the proceeds from the sale of the franchise restaurants at the end of the quarter. So we are actually just using the bridge facilities to do a portion of that a little bit earlier than we might normally do it.

Okay, and the big scheme of things what is your comfort zone given the current trends you're seeing on the margins and the operating deleverage? Where do you feel is the comfort zone for the right mix debt to cap on the balance sheet today?

We stated before we would be at 65 to 70%. The closing of this transaction puts us a little closer to 74% once we get the proceeds in from our franchise sale, we will dip back into the around 70% level.

Thank you.

John Glass.

It's CIBC. If I could first clarify on the ASR, Chuck, on the timing of that would you expect to get the benefits of the share count reduction in the fourth quarter even though it doesn't settle to the first quarter? And also how do we look at this? Is this just a basically an offset for the lost income from Pepper Dining, or should it build beyond that and accrete to earnings beyond that?

In the current quarter the interest expense that we will pay from having the additional debt is really going to almost offset the amount of shares simply because the method of how an ASR works. We are only allowed to reduce a portion of the total proceeds immediately, and then we can reduce another portion as we get through the hedge period. So because of the mechanical -- the way the mechanics of the transaction work, there is really not going to be much benefit for the fourth quarter. But once we get into next quarter we will have a reduction in shares that will help us somewhere in the neighborhood of 2%.

And do you expect that will be awash with the sale of the Pepper units or to the Pepper --

We haven't talked about what the net impact of that transaction is going to be; we will as we get into reporting the fourth quarter.

And just a question on you're slowing of unit growth in '08 versus '07, you're cutting your unit growth by almost half. Does that happen immediately, or does that ramp down over the year? In other words are there certain units already in the pipelines so the run rate may be higher in the first half, lower in the second? And maybe are you making structural cost reductions as part of that? In other words would there be reduction, structural reductions in G&A reducing the number of people you have in the development team, or do you view this as a temporary reduction and therefore you may not see some of that G&A impact?

I'm not sure we will have much G&A impact as we go through because we have really been slowing down for a while. It is going to be more toward the back end of next year. So as we look at how many sites in our '09 plan, that is when we will make determinations on G&A and what our spend level will be through the end of '08. Does that make sense, John?

It does. In terms of the unit openings, do they tail off similarly, or do they slow down when you hit first quarter?

They're going to slow down as we get into the end of fiscal year '08.

Thank you.

David Palmer.

UBS. Question for you, Doug. You mentioned the tough environment in the industry a few times, and I guess I am wondering do you see that environment improving meaningfully, or do you see some brand initiatives coming from Brinker specifically, perhaps showing more effective gains in terms of same-store sales in the next few quarters? I guess I will just lead off with that question. Thanks.

Sure, David. Sometimes you can't control the outside factors. So we certainly hope that those consumer macroeconomic trends improve, but the second part of your question we are working very diligently in each brand to try to figure out how to build topline sales. As Chuck talked about in his comments we've got to have improvement in topline to get flow through because it is the combination of the poor topline with those rising costs that are impacting our ability to get the profit flows we normally get. But if you look at the marketplace, you do see -- you look at the success with Quick Service and some of the capabilities that Quick Service is normally known for which is more about value and speed. And so certainly casual dining not just at Brinker but across the whole casual dining we are going to have to get better at our speed, our convenience, some of that may come from technology, some of it is going to come from equipment redesign.

Short service also getting better at choice so menu innovation across casual dining is going to be important. So we are getting actually better guest experience information than we have ever gotten in terms of each brand and what are the specific needs of our customer. But overall casual dining including the four brands at Brinker we're going to have to deliver better on what the guest needs today, and a lot of those are -- some of the traits historically been Quick Service but we're also going to get a lot better at the capabilities that are important to casual dining. More of the experiential pieces, that is the advantage casual dining has always had, sort of the social relevance.

So we are working very hard on building guest loyalty, trying to find out -- I mentioned in my comments the training programs, how to create more of an emotional connection with guests, not just the functional connection of dining out but how to make the experience special because that is the difference and the advantage casual dining has always had over Quick Service. So each one of our brands is working very, very hard and if the outside marketplace doesn't change in the short-term, our brands will get better at satisfying our guest needs in that time.

Is a major constraint on or restraint in your switch to even more slowing in your unit growth and a more and a shifting of capital towards more aggressive reimaging, is it basically just timing? In other words that you have a pipeline, it would be -- there are financial reasons why you wouldn't want to break lease agreements and what not in terms of your new unit development. And also with regard to the reimaging you are not just -- you really are not there yet in terms of your testing with a refined program let alone having that integrated with an overall brand strategy. Is it kind of just a big timing issue here with those two, with potential changes on those two fronts?

Yes, David, it really is. We've talked before about the at least eighteen month timing it takes to negotiate, find a casual dining lease, negotiate, build and open. So as we make decisions to slow down growth in '08, there are leases -- we have signed leases. We have contractual agreements with landlords. So those, some of those you can't get out of, some of them are early enough on that we have been able to figure out ways to back off of those. And as Chuck mentioned on the remodel program, we want to give those restaurants enough time to get some consumer trial. We not only are looking at the sales, but also we're talking to customers that come into those three remodeled restaurants. We are putting in some of the characteristics that are in the new prototypes but we are just trying to contemporize a building that may be fifteen to twenty years old and make it relevant to the casual dining customer today. There's a lot of timing on both those questions.

I wanted to add one other point, too. The restaurants that we have approved that are in the pipeline, those are good restaurants. We're still seeing good performance from our new restaurants. We have not seen a real change in trend in that respect. So we are still confident that the restaurants that we are building are still going to deliver great returns to shareholders. So this isn't a matter of gee we're just stuck with a pipeline of restaurants that we wish we could get out of; far from that. Our new restaurants continue to do well. This is just us cutting back to really a number that we think we can execute against those parameters that we have for capital approval.

All right. Thanks very much.

Steven Kron.

Goldman Sachs. A couple questions on the cost side, if I might. Over the last number of quarters we have seen, despite some softer same-store sales numbers, we have seen very good cost controls and driving bottom-line results. And it seems as though despite some color in the second-quarter conference call, that you felt as though there was still more to come from a cost save strategy. It seems as though this quarter, things reversed a bit despite lower G&A. And I guess the question is how do you look at kind of the cost basket on a go-forward basis, and how should we be thinking about the opportunity to manage that cost profile? That is the first question.

Steven, I think for us commodities moved a little bit more drastically than we anticipated when we were making the commentary about thinking we could hang in there for a little while. That plus just deleverage from sales being significantly different than what we had anticipated through the quarter. We thought we were going against some softer numbers that we would see a little bit more of a bump as we got in through the March timeframe, and we did not experience that. So that was really something that took away from and gave us some deleverage.

Minimum wage was a little bit more of an impact than we had originally guessed -- about 10 basis points. But as we go forward, we still expect commodities to be relatively difficult as we get into the fourth quarter and throughout next fiscal year, too. So we see it as a tough cost environment as we go forward.

Chuck, on the last call, you guys talked about not feeling as though the beef and chicken or the protein complex would be problematic, given long-term contracts and where prices were at that time. And I don't think from a spot standpoint they have moved materially from there. It seems as though this quarter was salmon and produce. Can you give us a sense what salmon and produce are as a percentage of your cost of sales, just so we can get a little bit of a flavor as to how impactful this could have been?

And then secondly, on cost of sales line, I know you are lapping the initial initiative on the actual versus theoretical matrix. And I think more recently you went to monthly monitoring instead of quarterly. Is that still benefiting that line? Can you just give us a little context around that?

I don't have the amount of salmon right away, so we can maybe follow up on that later. But in terms of actual versus theoretical, we are seeing improvements as we go through. Some is just the fact that we are running into deleverage against fixed costs that are really having the biggest impact. Doug, did you have anything you wanted to add?

Steven, I was just going to add this is more of a commentary moving forward -- on the previous question that David Palmer asked, we're focused on building top-line sales. And honestly, the management of the restaurants have done a great job of controlling the actual versus theoretical, the scheduling. A lot of this is just deleverage from sales. So what we want to be cautious about is you can't cut your costs to top-line sales growth. So the brands are working at making sure that we have plenty of labor out on the restaurant floors, and the only way we're going to build top-line business is make sure the guest experiences is as high quality as it can be.

So honestly, the operating teams did a good job of managing the costs. And the only way we will build better flow through is by building the top line by making sure that the restaurants are staffed and the guest experience is as high quality as possible. So until the top line reverses itself, we're going to be cautious about cutting anymore costs. We want to build the top line.

Okay, understood. And Doug, just following up on that last question, year-over-year in this third quarter you had lower media weights. I guess as we move forward, how do you see that playing out?

Well, part of the decision this year on media was, as always January and February there is risk with weather. You always want to be cautious. We also were anticipating the gift card success and sort of the post-holiday season we've had in past years. And it didn't play out as well as we'd like, although we certainly saved some cost on media. But over the rest of the year, percentage of media will be pretty similar to what it has been in past years, although we do have more restaurants so will spend slightly more. But through the fourth quarter, about maybe 5% to 10% increase in media costs.

Great. Thanks a lot.

Bryan Elliott.

Raymond James. A couple questions. First following up on the cost of goods remind us of the timing of your key protein contracts. Are they fiscal or calendar year, typically?

They actually vary depending on the protein, Brian. The poultry contracts are three to five years. And they will go through calendar year. A lot of the beef contracts are fiscal year as well as calendar year.

Okay, so given that and the contracts have been under spot, then several quarters at least of sequential pressure of some decent noticeable magnitude. The sequential change we saw in this quarter, would that be a decent starting point to think about the next several quarters on a sequential cost of goods line?

There is increased pressure through fiscal '08. Those long-term contracts will help mitigate that but we will have growing pressure and cost of sales.

Thank you. An accounting question. The discontinued operations number on the balance sheet, is the Pepper transaction in that number, or were all those numbers fully consolidated until the consummation of the sale at the end of this quarter?

They are still reported on our balance sheet.

So they are consolidated in PP&E, etc., not broken out as discontinued ops?

I'm not sure. On the summary balance sheet they would be included in that as assets held for sale.

Okay, how about on the P&L, were they reported single line item, or were they consolidated in the P&L?

They are consolidated in the P&L.

Okay.

With the exception of there is not depreciation and expense being taken.

Okay, so we saw all the cash sales and cash expenses but because the assets are discontinued just the depreciation line was impacted, then?

Right.

Okay.

On an accrual basis, not on a cash basis, but the items related to the balance sheet -- excuse me -- related to PP&E there is no depreciation.

Okay. And you gave us the basic shares outstanding at the end of the quarter, can you help us with what the common share equivalents are so we can get a starting point for fully diluted?

I think that is the point of us giving you basic at the end of the quarter so you can make some assumptions around fully diluted.

What was common share equivalents in Q1?

Brian, I'll have to get you that number. I can get it from our Q.

Okay, thank you.

Jeff Bernstein.

Lehman Brothers. Just looking more recently following up on traffic trends specifically at Chili's in terms of the promotions, I know you said March was actually slightly better than some of your peers. Just looking at the week a year ago, it did look like March overall wasn't obviously a considerable improvement. Just wondering if you could talk about main takeaways on the value oriented, fire grilled specialties which lap the most higher price point item last year. And the second I'm just curious if the current value message is actually delivering the results you anticipate. Is that what we should expect going forward or are you still seeing traffic below expectations despite the greater value focus? And I had a follow-up.

There is not a single solution to something as complicated as what is going on in the marketplace. We're going to continue to have value messages but we are also going to have, we are going to introduce new items that might work at dinner or lunch. We are seeing better trends at Chili's and part of that I think is new menu items. In fact if you look at many of the new menu items we added in March it makes up about 10% of Chili's sales, so we are getting trial of those new items by consumers across lunch and dinner periods. But as long as the macroeconomic environment is like it is now, any improvement in traffic is a positive for us, and we're going to stick to those same initiatives that we talk about.

What actually just looking in coming months and quarters I am just wondering versus your initial guidance for this year what you are assuming or what you're embedding in terms of comps going forward.

I think we still look at a relatively difficult comparison on comps on a year-over-year basis, looking somewhere around flat to slightly down.

Okay, and then just lastly just a follow-up on your commentary with regard to slowing down growth at Chili's. I know you have talked about take advantage of opportunities with peers slowing down as you thought there was tremendous growth opportunity for Chili's. I just wonder if you can characterize your frame of mind in terms of unit growth, is the projected slowdown due to the concern of saturation or do you really believe it really is more near-term in response to consumer slowdown, and if we're likely to reaccelerate? Thanks.

I think we will find out as we go through. Right now we think that is the right number of restaurants for us to build today. If the environment changes and we see more consumer response and sales improve, margins get better then we will be, then we will look at growing again. But right now I would say our six-month outlook is for sales to remain very tough and for pricing and commodity prices to be difficult. So I don't see us accelerating anytime in the near future.

Okay because I was just trying to balance between I know you guys said the pipeline is 18 months, if you do see the category as strong long-term obviously slowing down now, not kicking in for another year, then all of a sudden things do get better. It just seem like you are kind of caught in a tough situation; I'm just wondering why you wouldn't necessarily stick with the higher unit growth if you really believe that the long-term outlook was pretty strong for Chili's.

We still believe in the category. We believe very much in the brand but we also have a capital model that uses today's rolling 12-months returns and what our expected construction costs will be to determine the return for the restaurant. And I think simply a function of that. Is there a lag time? Maybe we are building a little faster into a sales slowdown and don't accelerate as quickly into a great environment. Yes, that is the way it works. But we think staying true to that model may put us off six months or so, but it is still a very good model for us. And again we have very much confidence in the long-term model of casual dining.

Thanks very much.

Joe Buckley.

Bear Stearns. Just had a few questions touching on a number of caveats that have been mentioned already in the Q&A. First on the ASR, so the timing of that, the actual purchase of shares is probably somewhat discretionary for the broker-dealer. But will that be happening in the June quarter do you anticipate?

Yes, it will.

And then a question on the CapEx. Are you seeing the new unit construction costs level off, or are you still experiencing inflation in those costs?

What's happening, Joe, in the market is residential construction is going on but there is still a lot of growth in retail and commercial. So it has started to drop down into the mid to high single digits. But there still is lots of construction growth. And so the overall cost is still accelerating at a lower-level than it was a year ago.

Okay. And then on the CapEx you mentioned there is about a $50 million gap between the new unit construction CapEx and the total CapEx number; should we consider that the maintenance level of CapEx for Brinker or are there other things in that $50 million?

That is the maintenance level, Joe.

Okay, and then question on the gift cards. Doug I'm not quite sure what you said. You mentioned the incentives and I wasn't quite sure if you were including incentives in the spring gift card effort this year or if you're going to experiment without the incentives.

We're going to do some experimenting, some with and some without. The gift card alone is definitely incremental but we do have consumers that use the bounce back or the incentive piece in different ways. Some use that as a gift. Some end up using it on the same guest experience when the hope for us was that it would be an incremental distinct and different visit. So certainly across the marketplace gift cards has become sort of point of entry during holiday seasons. But we are just trying to understand how the initial gift card and the incentive works; without the incentive you have less gift card purchases as well as how the incentive card is used. So we are getting great sales in both. We're just trying to understand the cause and effect of having the incentive piece tied to the gift card sale.

So you are going to do some experimenting across different markets?

Yes, in the spring during the Father's Day, Mother's Day all this exciting graduation time we are going to do some markets with incentives and some without and gauge the impact of that.

Okay. And then just one last one. You mentioned the G&A and the flat full-year number, year to date you are down about 10 or $11 million. Will that number -- looks to me like it is going to be down significantly on a full-year basis, not flat.

It will, Joe, and really we're saying we got a lower year-over-year number because of reduced performance incentive payments. Our profit-sharing and accrual on a year-over-year basis is down. Really what I was trying to point out, too, is we are down even if you exclude that benefit. So just the cost of running the business is lower on a year-over-year basis, excluding those incentive payments that are lower this year than last.

Very good. Thank you.

Michael Smith.

Oppenheimer. A couple of questions. I see the price increases that you've taken in the various concepts, but in line with that have you done any work on how elastic your demand is, and what the relationship is between price increases and sales?

We have. We have done that analysis. We got some markets where we haven't taken price. We've got markets where we are taking different amounts of price in order to make that determination. But I would hate to disclose that to all of our competitors who are listening too.

You went over there is no way to predict the options exercise to figure out what will happen to G&A as we go forward, is there?

No.

In terms of 2008 the preopening expenses will probably be down in the neighborhood of 12 to $15 million. Is that a fairly accurate guess?

I am trying to do a little quick math in my head. It should be -- I am having folks help me, too. It will be down -- sorry -- I'll have to get back with you. It should be down 15 to 20 million.

And I guess my last question is since you are slowing down the rate of new unit construction, is there part of your infrastructure that you could cut back on?

We'll have to take a look at that over a longer-term. So we have been staffing to what I would say has been anticipated slower rate of growth for a while. So we will make those calls as we go through the year.

Thank you.

Jeff Omohundro.

Wachovia. Just a question on OTV and the sales slowdown there relative to some of your other concepts; how much do you think the rapid growth of fast casual in that category has impacted sales results at On The Border versus say internal issues like price value? And how does that impact the attractiveness of the concept in the broader portfolio?

I think really I would answer the question across the whole portfolio and not just at On the Border as we look at where some of our traffic trends are down, lunch and weekday experiences are where the opportunity is across our portfolio. And it is where the fast casual or the quick service restaurants because of price, because of the time pressures that consumers are feeling could be impacting casual dining sales. So it is not just at On the Border. We believe that across the whole portfolio and across casual dining we've got to get better at competing with those different sort of restaurant formats that are a little bit faster.

Thanks.

John Ivankoe.

JPMorgan. Now that we have a couple of years of negative comps, not just negative traffic at Chili's, not just with you obviously but some of your competition, how much do you think unit growth has hurt overall traffic trends in the category in the past couple of years?

I don't really have an answer to that, John.

Is it -- on a specific market basis let me ask it somewhat differently -- in the markets that have been growing the fastest because clearly people aren't growing in certain markets and are in others. Are those the markets that have suffered from negative comps?

It's hard to tell, John. Where we are seeing the toughest comp performance has been also the markets that have been impacted by things like changing home values. For instance California, Texas and Florida have just great markets for us over the last four or five years. Those markets have changed dramatically. But there has been a change in that consumer attitude. Those are the folks that had high escalation in their home values, went out and maybe took on additional variable mortgages, had maybe gotten into more house than they could possibly afford by having some kind of teaser mortgage or anything else. And those are the markets that we are seeing the biggest impact. So it is hard to figure out is that a function of more restaurants in that market, or is that a function of people just being stretched too thin? And I think it's very tough to bifurcate between those kinds of items.

And actually those markets that you named have been fairly major growth markets for Brinker, have they not?

Sure they have. And that is where the people have been. Like I say it is hard to tell, is it because of restaurants or is it because people are feeling pinched and maybe don't go out to eat as often. The way you track it would be to find out the number of occasions in those markets, and I don't have that either.

Slightly a different question, if I may. Last night you announced that you are conducting a new advertising agency search for Chili's. Can you talk about the significance of that and what was it about the old advertising agency's campaign that wasn't achieving what you would like. Not necessarily from a sales perspective, but from an overall brand perception perspective.

We have been partnered with that agency for 20 years. So they have been a huge part of and important part of helping growth at Chili's brand. We had a great relationship. But having said that, it was just time for a change, and we're looking forward to building a similar successful long-term relationship with another agency that has the same sort of creative capabilities as well as brand building help and that search has started. So it wasn't any one thing; it was just time for a change to try to compete better in this changing environment.

John, I was going to add to the commentary you had with Chuck, too. One of challenges as you look at new store growth also is the consumer talking about convenience and how important convenience is. So a lot of our new store locations are in new markets. As I said earlier, the retail construction is still happening. There is still lots of new retail shopping centers being built in new areas. So as gas prices go up and the consumer talks about convenience our ability to get more depth in the markets already successful in does bring us closer to the customer. So trying to balance, not cannibalizing existing stores but also being closer to the guest where also Quick Service is. So we are there when they want to dine. It is a balance of both those things.

Okay, thanks.

Howard Penney.

Prudential Equity Group. Two questions, Chuck. First the slowing topline growth didn't equate to a reduction in your 15% EPS target. Does that imply there is more financial engineering, or you are going to use your balance sheet to help hit that earnings growth target? And sort of in that same vein last summer you were going to spend up to $450 million buying back stock plus you have had some announced asset sales and it sounds like there are further asset sales coming. Why is $300 million the right number today, and could it be not literally tomorrow but could there be another 3, or $400 million additional to what you are doing?

And Doug, there is less social relevance to eating at casual dining today at lunch than there is at dinner. And it almost -- you almost cringe when you hear you talk about competing against Quick Service because the really only real way you can compete against Quick Service is on price and I know that would be detrimental to your margins. So you really sort of have to go after another customer base. You've lost some customers or some customers aren't coming to you because you are more expensive today relative to the competition. So the right answer I don't know what the right answer is and I don't know if you have the right answer today. But some of your competitors in bar and grill are moving more upscale to attract customers that can afford to eat at sort of a bar and grill or your restaurant. Is price the issue that you are really dealing with here or do you really have to go out and look for new customers to bring in to replace the lunch and to go business that you lost? Thanks.

Where do you want to start (multiple speakers) Chuck.

I will give you a chance to take a breath. Howard on the ASR and just share repurchase in general, the magic number around $300 million that was all we had authorized by the Board. We will be completing that authorization; we will sit down at our next meeting which comes next month where we talk about our annual plan. We talk about our capital spending, cash availability and make determination on what the next step is. I do believe that as we go forward those proceeds that we do get in from franchise transactions will go toward share repurchase, and that is part of us delivering 15% on a long-term basis. The financial engineering is just one of the levers that we have to try and deliver that 15% along with same-store sales and margins, development, to help G&A costs, they all go up to, they all add up to things that we can do as a management team to help manage that growth rate. Any more questions on the share repurchase stuff?

No.

Howard you bring up some great points on this whole customer relevance, and certainly my commentary was not meant to presume that we're going to go after the Quick Service customer that is looking to spend $3 or $4. But to go is a part of our business that does compete many times with the drive-through Quick Service customer, and we are doing a whole lot of things testing how to deliver the to go experience at a higher quality as well as faster, and then I think time is part of a lunch decision. It's not just price. Many times it is time and so there is some work that we are doing on kitchen equipment, kitchen design, how to execute the items out of the kitchen faster as well as the experience.

We have 45 Chili's in airports now where customers get in and out in 20 to 30 minutes and part of it is the expectation and the airport that the guest is in a hurry. So we are also trying to apply some of those learnings and experiences in the airport to the streetside casual dining location to allow the guest that does only have 30 minutes ability to eat in a casual dining restaurant and 30 minutes where the goal at one time might have been 45 minutes to an hour or so. The time components we do think there are initiatives that can help on that. And probably more importantly is to find out what the customers' needs are. We want to get better at the social relevance part of the experience because there are some fast casual brands that are starting to finish out their buildings at a higher cost than before, trying to create what casual dining has always owned. So we are spending a lot of time just trying to get better at what we've always done and if that translates into what you call going up to a higher spending customer, then we have a steak at Chili's and customers were fine with that. I think part of it is just making sure we're providing a dining out experience that a casual dining customer that is experienced and knows value as well as great service, is pleased with.

Thanks, Chuck. One last question, there was a bigger company than you that announced a massive reduction in its capital spending plan to focus sort of on higher returns. Do you calculate a return on incremental capital calculation? And if so, what is it?

We do, but I don't have that with me right now.

Okay. Thanks.

Morgan Stanley. On the reimaging tests do you feel like you're asset base does need a complete overhaul, or do you feel like if things remain soft you may shift more of your CapEx towards reimaging and away from new unit growth?

Some of those restaurants are 15, 20 years old so they have gotten general refurbishing and repainting, but we have done older restaurants five and ten years ago and approach it the same way. Chili's is thirty-two years old, so I think every 10 to 15 years ago a building probably does need just sort of a -- the components of the building itself to make it feel more contemporary and more relevant to whatever the rest of the competition is providing. And if you looked at the prototype we call it the prototype 14, the new restaurant we build today there are some different components to it than the one that was built 15, 20 years ago. So part of it is just integrating what we think are the latest and greatest elements into a building that was built a decade or two ago.

And I guess your guest satisfaction rates are still running high but your traffic trends are kind of worse than the peers. Can you really point to anything that would account for that disconnect?

Mark, I think our traffic trends at Chili's have actually been better than our peers over the more recent time. So we are not seeing that to be true.

Okay. And I guess on the, as we're looking at your new debt profile here are you going to use the full $400 million facility and are you getting an idea of what your blended cost of debt is going to be on all your debt outstanding?

I know on our incremental debt that the rate will be somewhere around 6%. That will go into place relatively quickly so we will only have about two-thirds of the interest impact in the quarter. So if you want to follow up later we can talk about modeling.

Okay. Thank you.

Thank you very much for joining us today. We look forward to our earnings release -- or excuse me.

Sales release on May 7th. Thank you.

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.