Brinker International Inc (EAT) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Brinker International first quarter fiscal 2008 earnings release conference call. At this time all lines have been placed on a listen only mode, and we will open the floor for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Lynn Schweinfurth, Vice President of Investor Relations. Ma'am, the floor is yours.

Thank you. Good morning, and welcome to the October 23rd Brinker International first quarter fiscal 2008 earnings conference call. During our management comments and in our responses to your questions certain items may be discussed which are not based entirely on historical facts. Any such items should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such statements are subject to risk and uncertainties which could cause actual results to differ from those anticipated. Such risk and uncertainties include factors more completely described in this morning's press release and the Company's filings with the SEC.

Upcoming calendar dates include the filing of the Company's first quarter SEC form 10-Q on or before November 5th and the Company's second quarter comparable sales and earnings results currently scheduled to be reported on January 23rd before the market opens. As noted in our press release this morning, Macaroni Grill has been presented for the first time as a discontinued operation in our first quarter financial statement. A deal is expected to close late in the current fiscal year. Consequently, we have defined our annual fiscal year 2008 guidance to target EPS growth from continuing operations. Posted on our website under the financials tab is a summary by quarter of fiscal 2007 continuing operations before special items for your information. As a point of reference, the comparable fiscal year 2007 EPS number from continuing operations excluding special items was $1.49.

With me today are Doug Brooks, Chairman and Chief Executive Officer; Chuck Sonsteby, Chief Financial Officer and Guy Constant, Vice President of Operations Analysis. Doug will start us off this morning with some opening comments. Chuck will follow with key financial highlights. We will then open up the call for questions.

Thanks, Lynn. Good morning, everyone. Thank you for joining us on this morning's call. Progress continued in several areas of our operations during the first quarter reflected by growth in earnings per share from continuing operations of 17%. As you know, Brinker is in the process of evolving its growth strategy. In past years, the company successfully generated growth primarily through new company restaurant development. Gong forward we will be more focused on building profitable sales to generate ongoing earnings growth while shifting a greater proportion of new restaurant development to our expanding franchise network. This is priority number one.

As we continue to reinvest in our business to meet the long-term strategic and financial goals laid out at our investor conference last month, we see several leading indicators and aspects of our business that make us optimistic about the future. First our portfolio strategy is improving financial returns and optimizing development opportunities throughout the United States and overseas, which is apparent with the flowthrough we are seeing on our topline growth. Additionally, system restaurant growth was an impressive 12% this past quarter.

Chili's continues to be a high return growth vehicle for the company and our franchise partners. We continue to serve more guests per restaurant than the competition, generating an enviable return on investment. This financial performance allows the company and our franchisees to enter new and existing markets throughout the world. Chili's unique positioning in the grill and bar segment is being accentuated by ongoing culinary and hospitality enhancements as can be seen in our quarterly sales results. The current reimage program at Chili's is driving incremental traffic now in the mid single digits.

We continue to invest in making hospitality a competitive advantage across the portfolio through our staff selection, our operational excellence, culinary development, technology improvements and new restaurant designs. Lower turnover of our restaurant team members and management is benefiting the guest experience and lowering training costs. Restaurant management turnover improved 3 percentage points to 25%, and team member turnover improved 37 percentage points to 100% in the first quarter. A focused set of elements that drive guest loyalty at each of the brands has been identified and are being used to deliver an elevated guest experience.

And last, but certainly not least, incremental layers of revenue are being built through new ways to assess our brands like delivery service at Maggiano's, a concerted program to build to-go sales across our portfolio of brands, and a potential for retail sales of licensed products in the foreseeable future. While each of these parts of the business are important in their own right, the whole of their combination gives us confidence in the direction of the overall business and our ability to meet the expectations underlying our strategies.

Now turning to some particulars regarding the first quarter, our culinary marketing teams focused on meeting the guest value orientation with new flavorful offerings that build on our core menu and brand positioning. These efforts drove improved sequential sales trends of 2% from our preceding quarter. Chili's was on-air during July and August with its Fired-Up Favorites promotion. The promotion featured favorite menu items with spicy new flavors, such as the very popular new honey chipotle chicken crispers. Building on the spiced up, flavorful and fun reputation of the brand, Chili's launched an advertising campaign earlier this month. The new campaign is our first with our new agency, Hill Holliday, and emphasizes the iconic nature of the brand's signature red pepper.

As part of his campaign the brand is currently advertising its baby back rib bonus, a three course meal that includes a dinner salad, a half rack of ribs with home-style fries and a choice of desert for $10.99, a great value. At On The Border, the new sizzling fajita flavors promotion launched earlier this month, featuring the brand's signature fajitas served with an extra side of premium sauce. This promotion follows the launch of a new menu in July, which introduced guests to spicy buffalo chicken tacos and chicken chipotle fajitas. The order incidence of the New Border Smart Menu items also continues to grow.

Macaroni Grill featured the overstuffed ravioli platform during most of the recent quarter. At the end of September, Mac initiated its promotion of brick oven creations, including layers and layers of lasagna, their signature lasagna offering. Throughout the month of October, Maggiano's is featuring its fall harvest celebration including dishes like butternut squash ravioli and asiago crusted shrimp. Top one of those incredible offerings off with a new spumoni desert.

The marketing programs across all the brands built off the signature successful menu offerings reinforce the established position of each of the brands by staying true to who they are and demonstrate their ability to provide value to the guest for their hard-earned dollar. Demonstrating our commitment to grow Brinker brands both domestically and internationally, we built 27 new system restaurants during the quarter. Twenty-two of those new locations were Chili's restaurants, 13 company-owned and 9 operated by our domestic and international franchisees. Company locations were primarily added in domestic, metropolitan markets where we want to deepen our presence, improve convenience for our guests and generate efficiencies of scale.

Franchise locations were added in accordance with development agreements with experienced domestic operators, such as Shoot The Moon, which opened our very first restaurant in the state of Montana on September 27. In addition, longtime franchisee, HMSHost, opened our first On The Border airport location in Atlanta Hartsfield Airport, demonstrating incremental opportunities to enter new markets. HMSHost also signed an expanded agreement to develop 26 new restaurants over five years under the Chili's, On The Border and Macaroni Grill names at airports and toll roads throughout the United States.

Internationally, Brinker's strengthened its presence in successful Latin America markets adding two locations in Mexico during the quarter and one in Lima, Peru. These latest openings bring our total number of international restaurants to 156 in 23 countries and one territory outside the United States. The company continues its commitment to support worthy causes, encourage community involvement, value diversity and inclusion and engage our guests and team members to work together for the common goal of helping those in need. In September Chili's conducted another record-breaking campaign to benefit St. Jude Children's Research Hospital. And in October On The Border kicked off its first Fiesta For The Cure promotion to benefit Susan G. Komen for the Cure.

Across the country On The Border team members and guests have rallied together to raise funds for Komen's ongoing research and education to fight breast cancer. Community involvement has been a cornerstone of our culture at Brinker for almost 33 years and is a responsibility we take very seriously throughout our organization. I cannot emphasize enough how engaged our team members and guests are in these efforts. Certainly driving loyalty and affinity to our brands and our company, but even more importantly, to the communities they serve.

The overall economic environment continues to present challenges to the casual dining industry. Recent moves by the Federal Reserve and other entities to provide support to the economy and to mitigate future problems related to the housing industry should prove helpful over time. In the meantime, Brinker remains focused on our long-term strategies while realizing the immediate benefits of successful restructuring efforts. We are encouraged by the momentum we are achieving with initiatives that address our guest need for value, pacing, convenience and a variety of menu options. We have also reignited our focus on hospitality with a goal of providing outstanding guest experience that differentiates our brands from the competition.

We are optimistic about the future of casual dining and the strategies we are deploying to remain an industry leader. throughout our history Brinker has successfully responded to tough operating environment and providing shareholders with a quality level of return. We are in the process of better understanding our guests, as well as engaging and developing team members with the goal of increasing guest loyalty and driving the 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 continuing to be disciplined about new restaurant development, closing underperforming locations, selling Company restaurants to strong franchisees, and remain committed to returning capital directly to shareholders in the form of increasing dividends or buying back stock.

Just as important as running the business efficiently, by managing operating expenses, including G&A which in turn 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. However, to be clear, our number one priority is increasing profitable traffic over time. Management and our team members are aligned with this priority and hard at work to make it happen. And now Chuck will provide a bit more detail on the financial results of the quarter.

Thanks, Doug, and good morning. The first quarter results were very solid, 17% EPS growth from continuing operations, excluding special items, is a good quarter. We accomplished those results from 10% growth in operating income and the benefits of our aggressive share buybacks. Revenue growth was modest, as expected, due to new restaurant capacity being partially offset by the refranchising of restaurants and quarterly comparable sales that were even with last year. This change is reflected in our franchise revenues, which increased 33% to $14.1 million. And while the soft demand by consumers continues to grab headlines, we drove improved trends at Chili's in July and August by offering new, craveable products on target with the Chili's brand promise.

Higher operating income flowthrough was achieved by increased high return franchise revenues, better average restaurant margins due to the sale of lower margin Company restaurants and lower corporate overhead expenses. As you heard Doug say, strengthening business fundamentals and growing traffic over time remains a top priority for the company. And sales and traffic performance in the first two-thirds of the quarter demonstrate our culinary pipelines, helping us drive improved trends.

Now let's get into some of the details for the quarter and what drove our results. First, as Lynn mentioned, we are now reporting the net financial impact of Macaroni Grill as a discontinued operation, therefore the following comments on income statement line items pertain to the continuous operations and exclude Macaroni Grill unless specifically mentioned. Again, our first quarter EPS growth from continuing operations was 17%, excluding the net impact of special items of $322,000 consisting of charges related to restaurant impairments, and loss on the sale of land associated with prior restaurant closings. EPS including continuing and discontinued operations, was $0.39 and it grew 8% excluding those special items. Special items from discontinued operations included the net income of $5.1 million after-tax, consisting primarily of impairment charges and stock-based compensation expense resulting from the expected sale of Macaroni Grill.

Revenues increased 3% to $895 million in the first quarter versus prior year. The increase is primarily attributed to the net increase of 123 company-owned restaurants and partially offset by the decrease of 97 restaurants sold to franchisees, subsequent to the first quarter of fiscal 2007. All of this resulted in capacity growth of 2.6%. On a consolidated basis and excluding Macaroni Grill, Brinker comp sales were even with the prior year, driven by almost 2% in price, increased mix but offset by softer traffic.

As I stated earlier, franchise revenues grew 33% due to a net increase of 143 franchise restaurants in the system. Chili's increased comp sales by 0.7% in the first quarter. Our Fired-Up Favorites promotion ran in July and August and drew improved sequential sales and traffic trends. However, there was a timing difference of when we were on-air this year versus last, positively impacting August but negatively impacting September results. While we expected a softer comparison in September due to the unfavorable advertising comparison, September comp results were lower than we anticipated. Quarterly sales at Chili's included the impact of price increases of 2% and strong mix shift driven by sales of new appetizers and desserts. The other factor continuing to negatively impact traffic trends at Chili's is cannibalization from new Chili's restaurants. We previously quantified self-cannibalization impact to the system results over 1% in fiscal 2007, and that estimate is still valid. Even though comp sales are negatively impacted, overall shareholder value continues to grow because cannibalization is included in our return projections for new restaurants.

As we slow restaurant development during fiscal year 2008 and beyond, this will become less of a drag on comp sales. Chili's continues to offer great everyday value with attractive price points for high-quality fare delivered with hospitality in a comfortable setting. We are accentuating the value in our latest advertising at Chili's with the baby back bonus meal Doug described. This abundant three course meal is offered at a very compelling price of $10.99 and offers new product extensions to a signature platform, ribs. The new flavors include honey chipotle, blazin' habanero and brown sugar chili rub which support Chili's unique positioning and flavor profile.

Additionally, we have added a great new seasonal dessert that will be offered through the holidays, the all fruit cobbler. Last week, Chili's rolled out its latest menu with an adjusted layout, carrying bigger category pictures, new grilled rib flavors and a lunch menu on the back. The lunch menu focuses on already popular lunch selections, including soup, salad, sandwiches and burgers. These items are ones which can be prepared more quickly to help increase the pace of the experience. Additionally we took about 50 basis points of price with this new menu rollout which still keeps us well below current industry averages and the increases in food away from home. Romano's Macaroni Grill reported a decrease in same restaurant sales of 4.8%, driven by a decrease in traffic and partially offset by pricing and mix. On The Border same restaurant sales decreased 5.3%, driven by decreased traffic and mix and partially offset by pricing. We ended the quarter carrying 1.6% in price. The On The Border team continues to focus on improving execution through its new Mucho Gusto hospitality program. It was developed to build an emotional connection to the guest, correctly pacing the desired experience and ensuring order accuracy each and every time.

We continue to be enthusiastic about our new restaurant design and see opportunities to leverage our learnings to improve speed of service, as well as improvements in kitchen design efficiencies for the system. Maggiano's comparable store sales were up 0.5% for the first quarter, driven by increases in traffic and price and partially offset by a decrease in mix. The team continues to focus on operational excellence and menu variety for each occasion, whether it is in the dining room, the banquet room or delivery service. And we are pleased traffic trends continue to improve. And more people are enjoying the unique experience Maggiano's offers. The delivery service rollout to the system has been successful, adding a new revenue layer to brand performance. And the fall harvest celebration is giving guests a reason to come to Maggiano's and experience freshly prepared seasonal dishes.

Brinker's cost of sales came in better than we had expected, holding even with the prior year at 27.4% of revenues despite higher prices in most commodities. Unfavorable commodity prices, particularly in beef, cheese and cooking oil and unfavorable product mix shifts were offset by favorable menu price increases and increased franchise revenues. Our operations team has continued to focus on the improved actual versus theoretical forecasting tools and the purchasing team has done an outstanding job managing our input costs.

Restaurant expense increased 80 basis points to 56.1% in the first quarter of fiscal 2008 compared to the prior year, driven by higher wage rates, primarily due to increased state minimum wages. We anticipate these higher wage costs to continue in the second quarter until we lap the state mandated minimum wage increases passed last January. Higher restaurant supply expenses were partially offset by decreased preopening costs as we opened 16 fewer restaurants during the quarter versus the prior year and lower stock-based compensation expense.

In addition, the sales Company restaurants to franchise partners and the ensuing royalty stream contributed a benefit to restaurant expense as a percentage of revenues. Depreciation and amortization was $38.5 million, a $1.7 million improvement from last year due to the required suspension of depreciation expense for restaurants held for sale to franchise partners. Closed restaurants and fully depreciated assets. The benefits were partially offset by new restaurants and remodel investments. G&A was 4.6% versus 5.6% a year ago, an improvement of 100 basis points year-over-year. The $7.2 million decrease was due to reduced stock-based compensation expense from forfeitures and the expiration of prior plans and reduced performance-based compensation expense in the current year.

Interest expense was $12.9 million versus $6.2 million a year ago due to the use of a $400 million, one-year unsecured committed credit facility to fund our accelerated share repurchase of $297 million of common stock and for general corporate purposes. The effective income tax rate for continuing operations decreased to 30.8% excluding restructuring charges versus 32.5% last year. The lower tax rate for continuing operations was primarily due to an increase in the federal tax credits. Seventy basis points of which came from work opportunity tax credit and a decrease related to the impact of incentive stock options.

Cash flow from continuing operations decreased $14.7 million to $77.9 million this quarter over last, primarily due to the timing and amount of income taxes. Capital expenditures for continuing operations were $15.5 million less than the prior year due to 16 fewer restaurants being built during the quarter than last year. We ended the quarter 3.2 times adjusted debt to EBITDAR and continue to target a debt level to fall below three times by the end of the fiscal year.

Due to the change in reporting for Romano's Macaroni Grill as a discontinued operation, our fiscal 2008 guidance will be EPS growth from continuing operations. Our expectation for EPS growth from continuing operations is unchanged and is still in the low to mid double digits for fiscal year 2008 over our fiscal year 2007 earnings from continuing operations of $1.49. And again, Lynn told you where you can find that number.

The expansion of Chili's reimage program continues with 31 restaurants complete. This new look helps contemporize the Chili's experience in restaurants which are more than ten years old. Results continue to be exciting with sales increases in the mid single digits. Excluding routinely scheduled capital improvements, returns are in the midteens based on an average traffic lift that I said right now is in the mid single digits. Our focus on returns continues with the latest projections for new Company restaurants in fiscal 2008 going from a range of 80 to 93 restaurants to 75 to 85 restaurants, including Macaroni Grill. This will result in lower capital expenditure expectations from a previous range of $385 million to $405 million, down to $360 to $380 million.

Estimates have been reduced based on the reduction and projected new Company restaurants for this year and our expectation of lower development in 2009, as well. Additionally, projections for franchise restaurant development increased from a previous estimate of 68 to 82 restaurants in fiscal year 2008 to 78 to 92 restaurants driven by increased franchise projections for new Chili's and On The Border franchise restaurants.

We continue to make progress on the sale of Macaroni Grill, also the debt markets seem to be settling down a bit. And while we have not seen a direct impact of the tightening credit markets negatively impacting our sales processes, this gives us increased comfort that we will successfully conclude the Macaroni Grill transaction and continue to make progress with our ongoing refranchising program.

And to that point, our previously announced transaction with ERJ Dining to buy 76 Chili's restaurants in the Midwest remains on track and should be completed in the second quarter. Given the continuation of our franchising program with all Brinker brands and more aggressive franchising goals for the OTB brand, we'll continue to evaluate refranchising transactions in the foreseeable future, though they will probably be smaller deals. And while our next milestone target is to have a franchise mix of at least 35% by the end of fiscal 2008, we will continue to assess our portfolio strategy and goals on an ongoing basis.

And so to wrap up, our system continues to grow at a healthy pace. In fact, system restaurants increased 12% this quarter over last year. Increased franchise presence in our system intentionally improves Company returns, flowthrough and focus while allowing the system to grow our brands quickly in the global marketplace. This portfolio strategy will produce a different kind of revenue growth from past years and as a result, growing profitable, ongoing comparable sales is the number one priority for Brinker and its franchisees. Growth will be achieved through exceptional brand management, franchise support, culinary and operations innovation and most importantly, extraordinary hospitality at a great value.

We are investing in the long-term health of our brands and our stakeholders with a number of initiatives, tests and research in play that will help us achieve consistent long-term shareholder value over time. And with that, I would like to turn the call over to the operator to facilitate the question-and-answer period.

(OPERATOR INSTRUCTIONS) Jeffery Bernstein.

Lehman Brothers. Good morning. Just a question of the importance of traffic and at what cost. I know you mentioned that improving traffic is pretty much your number one priority and the current (inaudible) is challenging environment, (inaudible) the trend by some of your peers as well as yourselves most recently is to really promote more significant value offerings. I guess an example would be the current rib bundling promotion. I'm wondering if you can provide your thought process in terms of your willingness to offer such promotions and at what point the benefit from greater traffic might diminish -- just kind of thinking back to people look at the burger wars and fast food where everyone got into significant discounting. I'm wondering to what degree you are willing to do something like that and at what point the benefit from such might diminish. Thanks.

Do you want to take that, Doug?

Sure, Jeff. I think as we've seen over the years it is kind of about balance when we talk to consumers now. Casual dining still represents a social occasion, and so the capabilities that casual dining has always had has been about that experience, the service, the atmosphere, the music. But there is a tightening on the pocketbooks right now, so some of those experiences have a lot to do with how much they can spend. So a lot of it is balancing great value offerings and still a casual dining environment; and if you look at promotions or many rollouts over a 12 month basis it probably will include some value ideas and obviously expansion of lines like the chipotle crispers that we rolled out earlier this summer. And we've also learned that value, of course, is not always just what you pay for the food. It is the total experience, and what you get is what you pay for not just discounting. So it is not just the price point. It is the total experience that goes with the product that you are buying.

And Jeff, when you talk about our $10.99 rib bundle, that was something that was specifically engineered to have both a good return for us and offer a compelling value to customers. And so I think it is important that we maybe look at what are things on our menu that can be tweaked in a slightly different way such that we are not discounting the everyday price that we have on the menu, not putting food on sale, which I think is a very dangerous path to go down. But maybe looking at something that we don't normally carry and putting a slight twist on it so they can deliver good value to the guests. And I think you'll see us try to do those kinds of things more and more often.

The rib bundling and I guess some of your other value promotions in terms of profitability that's still seen as enough of a profitability that you are willing to offer it to drive the traffic?

Yes, the $10.99 rib bundle offers a compelling value both for the guest and a great return for us.

Okay, and just one follow-up on the menu pricing. I think you recently noted a boost to pricing would be likely and necessary to help protect margins, looks like you're currently running 2%, I think you said you were boosting it maybe by half a point earlier this month. I am just wondering is 2.5 something we should assume going forward? Is that enough to offset the, as you mentioned the ongoing commodity and labor cost pressure, just kind of trying to figure out that balance between pricing and traffic and whether or not if 2.5 is what you guys see as necessary.

That is where we stand right now, Jeff, and again, we will continue to look at it as we go through the rest of the fiscal year and see where we are in terms of input prices and also where the consumer is. So right now all I can tell you is we are at 2.5%, and we will continue to take a look as we go through the fiscal year.

Do you have commodities locked in for the rest of this year that you can get great greater clarity or where does that stand?

Yes, we certainly have the majority of our commodity costs embedded in contracts. Some of those contracts do include some escalators related to feed, as well as our distribution contract also includes some fuel surcharges. However, we have those costs embedded in our current forecast.

Great. Thank you.

John Glass.

CIBC. I wanted to clarify your guidance. So $1.49, is a new base year and should grow at low to mid, single, double-digit, so say $1.65 to $1.70. Are you making any assumptions on buybacks in those numbers? It seems like you're penalizing yourself for removing Macaroni Grill, but you're not getting any benefit to the potential buyback. And I guess to that end, is your, do you still that the sale of Macaroni Grill would be accretive when you factor in buybacks?

John, it will be accretive after the impact of reduction of the share count. So it will be an accretive transaction once we get to a full quarter of getting the buyback. You are right, we are putting out a number that excludes the Macaroni Grill simply because the timing of when we do the deal, John, and also the proceeds and the share price make three variables in that assumption. And I think that makes a lot of if's to go into the calculation. So we think when we do that, that will help us get some upsides for the balance of the year.

Should I read from your comments, are you negotiating with a bidder? I mean do you have a deal that you are just [not] finalizing or you just negotiating with a bunch and you believe there is enough sufficient interest you can get it done to somebody?

Yes, I think the second is closer than the first.

Okay. Thank you.

David Palmer.

Just one quick question, and it is about On The Border. You talked about the hospitality program, and you have talked about the new restaurant design and that some exciting changes that you've made with regard to kitchen systems. I guess with, I guess we could be patient and wait for some of these things to go -- be something that could help the overall chain. However, the same-store sales trends seem more and more troubling, and I am wondering if there is any sort of near-term help there for sales. Obviously we are seeing some other brands being sold, and this would be one that that would be a potential option. I am just wondering how you are thinking about the near-term and whether this is strategically something that it is off the table that this might be sold On The Border. Thanks.

It is off the table that it will be sold. I think we're looking at a number of things that offer some excitement for us right now, David. The [thing to] option gives us something that appeals to franchise partners and again, we have been discussion with people and find that there is an active market of folks that are very interested in On The Border. It does carry scale in that it is the largest sit-down casual dining Mexican restaurant, and that is also a pretty compelling platform to work from. So with those two things going for it, I think as we look at it, it still continues to look to be able to deliver returns well in excess of what we need to stay in the portfolio. And so we are very excited about it.

Okay, and any sort of guidance about the refranchising pace that could be achieved roughly speaking?

Well, we've already said that we would be out 35% by the end of the fiscal year. Obviously we are going to exceed that target, and we continue to talk to potential partners about a number of deals. But you won't see anything as big as the deals we did both in New England and also in the Midwest. Those where huge deals on a relative basis. We would look to do things that were a little bit smaller in size, but we are very encouraged by the response we've been getting from potential partners and feel like we can continue to actively refranchise the restaurants that are in the marketplace now.

Okay. Thanks. I'll leave it there. Thank you.

Steven Kron.

Goldman Sachs. A couple of questions if I could just go back to guidance real quick and the guidance that you guys laid out in the fourth quarter and then reiterated at the analyst day, as far as the algorithm to get that growth. The revenue growth at plus 1, same-store sales at 2 to 2.5, margins positive, G&A around 200; you are eliminating a lower margin or seemingly lower margin business and a business that I suspect had revenue perhaps decline during the quarter. So are you holding to those specific line items still and essentially in essence the existing business that you are retaining, the expectations have been slightly reduced here. How should we think about those pieces?

I think when you go through that metric of looking at things, Steven, you probably come to a wider range than what we demonstrated. You know, we said the low double-digits to mid on EPS growth. You probably come in somewhere on the higher end of that. So I wouldn't say necessarily we have lowered our numbers because we're going to have additional costs related to going through the transaction. We've had some costs that have hit continuing operations related to existing Macaroni Grill restaurants that [won't] be in the deal. So suffice to say I think we're still pretty much on track with our business model such that if we hit those metrics we will still continue the same kinds of earnings growth that we had set back in the investor conference.

Okay, so you're sticking with those types of targets. Secondly, if I think just about kind of more of a bigger picture question and just curious as to how you guys assess the cyclical pressures that certainly your industry is seeing to the secular pressures potentially, particularly some of the things that have driven casual dining and bar and grill in the past. Dual income households, women in the workforce, seems to have kind of stabilized a bit more recently in the last couple of years. So how do you assess the pressures that you are seeing and determine whether or not for Chili's in particular and maybe a more significant brand repositioning might be necessary or might not?

I think as I mentioned in some of my prepared comments and we talked about in Jersey, we are trying to figure out ways to build the business outside of the traditional casual dining experience. We're working on all of the things inside the box, but the delivery and catering business is growing. We are trying some retail products in the grocery stores. We are working hard on some better systems on our to-go business, so there is a lot of other ways that consumers can use casual dining they have historically, as well as what goes on inside the box. So we are not looking at this short-term, as we never do, and a company that has been around 33 years has seen times like this where there were short-term pressures based on supply and demand and sometimes pressures on the consumers' pocketbook. So right now it does feel like there is a lot of things going on we can't control but the things we can control are the guest experience in the restaurant and figuring out ways to use our brand differently maybe than consumers have in the past.

Okay, Doug. That's helpful. One last one if I might. Chuck, you made a comment that September sales were lower than you guys had anticipated. And is there any color that you could provide whether that was macro driven from your assessment or competitive reasons, anything you could share. Thanks.

I think everybody on the retail side saw September be somewhat strange, too. I think we reported that macro trend.

Thank you.

Jeff Omohundro.

Wachovia. Just another question on the baby back bonus promo. Just curious a little bit about some of the details around the price increase against that promo year-over-year. It looks pretty significant; still an attractive value. Just also wondering about the product enhancements. I did notice the new flavors look pretty interesting, but in this environment maybe you can talk a little bit about the thinking behind the price increase on that.

We tested the product. We ran it last year at $9.99. We did tests on the product earlier this year at $10.99. We didn't see any change in the amount of sales. So we felt pretty comfortable that it was an outstanding value. It is a salad, a half a rack of ribs, your choice of a side and a full desert. So when you look at that even at $10.99 that is pretty compelling. I know some of our competition has been on-air operating a very similar type of item for $12.99. So again on a comparative basis both to people in the industry and then from the results we got when we tested it at $10.99, it is pretty good (multiple speakers).

Is that the major part of the 50 basis point overall price increase at Chili's?

No. That would be in mix. Price increase would just be on an item we had on the menu last year that we have on the menu this year. That baby back bonus would be -- it would show up in either mix or traffic.

Great. Thanks.

Joe Buckley.

Bear Stearns. A couple questions. First on the, the comments about the on-air off-air influences on sales, does it change your thoughts at all in terms of maybe in this environment that you need to be on-air more consistently at Chili's?

We are excited to get some lift in July and August and so I think we will continue to look at how we can get effectiveness from our marketing spending, Joe. We have got a new agency, Hill Holliday, who is really working around the brand differentiation for Chili's. The pepper is something that is an icon that really does represent something different, something bold, something spicy and it is something that our competition really doesn't have. And so if we can get out there with a message that can move people in and move profitability, we definitely will continue to market more and advertise more.

Okay but as of right now no sort of plan to be on-air more consistently? You will still be sort of driven by timing and product?

As of right now, that is where we are at.

Okay, and then question on Macaroni Grill just looking at the information on the website, and then looking at the data reported with Macaroni Grill included as part of Brinker, it looks like the EBITDA contribution from Macaroni Grill might have been about $78 million last year. That is a lot higher that I would have guessed on my own or a lot higher even than some of your pie chart data from the analysts day might have suggested. I guess I am curious; going again to that number I am just taking your operating income number off the website, adding back D&A and then doing the same for the originally reported numbers is about a $78 million difference.

Yes, I think it is hard to do that because, Joe, when you do that you don't have any stand-alone cost for G&A. And so that would be slightly reducing that $78 million that you stated. And then there is also -- there would have to be some implied rent related to the owned properties that they have. So when we would be shopping that deal, there would be a haircut for those two items.

And Joe, I think the other consideration as well as, unfortunately we've seen declining traffic. So you will want to incorporate that into your financial projection.

Okay, and one more question on the Macaroni Grill in terms of potential accretion. So as someone else pointed out, you sort of get the '08 guidance doesn't reflect any of that. Will the '09 numbers be changed materially from -- I guess what I am asking is whether or not '09 estimates would change much one way or the other if Macaroni Grill is included in the business or not included in the business assuming proceeds are used to buy back stock.

It would be helpful to us. We'd have reductions in G&A. We would also have the reduction in share count for a full year. And the other thing is it is tough to get any impact on '08 because of just the timing.

Yes. I understand.

So as we look out into '09 there should be a benefit from that.

Okay, thank you.

Paul Westra.

Cowen & Company. I think there is still a lot of confusion on this; I have a follow-up question I guess on the Mac and your guidance for earnings and accretion or dilution. When you say you hope it to be accretive you're talking about getting basically that $0.28 of earnings back that Mac earned in 2007 -- fiscal 2007 back into your continued operation earnings. Is that what you mean by saying you hope it is earnings neutral or accretive?

Maybe I can say it this way, Paul. Now that we are guiding to continuing operations in the low to mid double digit, with the sale of Mac Grill we expect the impact to be on continuing operations related to share count to be flat to accretive for that number.

I may have to go through it with you a little bit again but just to walk through, when you break out that earnings in your quarterly as you allocated G&A I guess without support services, so you only allocated $9 million in G&A and I think that relates to the question prior. So you only allocate $9 million in G&A, which means your continued operation's G&A in your restated number jumps significantly. The question is could you -- will G&A increase as a percent of the sale dramatically to the sale? Or do you think you can maintain roughly the same G&A saving or G&A levels that you had as a combined entity?

In the macro P&L there is G&A, but there is also as Chuck mentioned earlier, there is stand-alone costs at Brinker. So that number $9 million that you talk about, we talked about more than Mac specific G&A. There also are stand-alone costs at Brinker in addition to that. The G&A savings would be larger than that $9 million.

Considerably, you would think right, yes. So, right, you are allocating from an accounting standpoint and you're coming up with $0.28, but clearly that is moving all the stand-alone Mac G&A into the continued operations G&A number. So it looks obviously at $0.28 numbers inflated because it doesn't include that stand-alone G&A. Now you think you can save a significant portion of that stand-alone G&A, in other words if your total G&A was 4.4% of sales of revenues and fiscal '07 as a combined entity as a continued operation in '09, is that the type of G&A level you would like to get back to?

Absolutely.

Okay, that answers a significant question. I think, and I think people were really confused on that so I'm sure you might still have some follow-ups later. But then the last question just for clarification, as well, just double-checking you had the assets for sale, went from $93 million last quarter to $407 million. I assume that entire delta is just Macaroni Grill. You had $93 million which is the E. R. J. transaction in your last balance sheet, and now it moved to $407 million. Is that good to assume that delta of $314 million is entire Macaroni Grill?

Yes.

Yes.

Okay. Thank you very much. That is all the questions.

Matthew DiFrisco.

Thomas Weisel Partners. Actually just a follow-up there. That 407 versus the $93 million, so the 407 still includes assets for sale going to E.R.J., or is the 407 completely just Macaroni Grill?

It includes E. R. J.

Okay. And then just to not, just bring it out even more I guess, looking back at the last quarter's guidance you specifically said 10% growth and then getting to low to mid single digit, double digit growth. So I think what we are all trying to figure out is 10% growth would have been $1.94 off of your base of $1.76. And now you are on the upper end saying $1.70. So we are all just trying to figure out when you -- if it was as of the first day of the fiscal year '08 -- when you say earnings neutral or accretive. We are all presuming then you're going to do if it was as of the beginning of fiscal '08, a share repurchase to the magnitude that would offset the $0.22 or so going out the window with Macaroni Grill. Is that correct?

When we are talking -- hold on. I'm trying to follow your math. The hard part is we are not going to have much share repurchase done in this fiscal year because we won't get the proceeds toward the end of the year. So I think when we are talking about being neutral, Matt, we are really talking about when we get to fiscal year '09.

Okay, and can you just remind us, you said basis points in pricing you just took an incremental 50 basis points of price, so you are running now currently 2.5?

That would be at Chili's, yes.

And you are going to manage that around 2.5, would that be correct for the rest of '08 just as sort of a proxy?

We will just continue to take a look as we go through the year and figure out what pricing is necessary based on input costs and the competitive situation.

And the last question you mentioned a couple times a reference to some of the Mac Grills that are still in continuing operations. Are you going to hold onto some Mac Grills; you're not selling all of the Mac Grills?

No, there's a few restaurants that were being closed between Q2 -- Q1 and Q2 that will be closed, and those had to be carried in continuing operations because they won't be held for sale. And then we do have one restaurant in the UK that is a company Mac Grill that will be reimaged.

Okay, but the brand will leave you; it is just that these are ones that aren't going to be sold that are better closed?

Yes, they are better closed than sold to a partner that EBITDA, and then was sufficiently (inaudible) in order to do that.

Then you mentioned September being a little sort of an overall macro trend that everyone else experienced as well. Is this a trend that -- the underlying fundamentals that drove that, or are you seeing that continue into October?

I wouldn't necessarily make that logically.

Okay, thank you.

John Ivankoe.

JPMorgan. The majority of the questions have been asked or where I would ask the same thing regarding guidance as everyone else has regarding '08 -- or, excuse me, '09. So I'll just ask you one simple one. What is your CapEx going to be in fiscal '09? I mean, that was a number that caught a lot of us by surprise on the high end, and it sounds like that might be coming down a little bit. Do you have a firm number for us to update from the analyst conference?

Well, I think the analyst conference number was about $300 million, and it will be down from there in '09. I don't have a specific number to call out for you right now.

Okay, and presumably and hopefully the next time we speak, we can go through growth versus maintenance and remodel CapEx. But should we expect it down at least in the magnitude relative to what '08 was down relative to previous expectations, or perhaps even more than that?

What number are you talking about, John?

The '09 CapEx number of $300 million,

Yes.

So I think the '08 -- I'm just going back -- it looks like the '08 number is down about $25 million. So should the '09 number be down $25 million or more or less than that number relative to where you're thinking right now?

It is going to be maybe about $50 million lower than what we had previously presented.

So $285, something (multiple speakers)

Yes, right now, and again you know that number changes with various initiatives as you proceed through the year in our development pipeline.

Okay. All right, thank you.

David Palmer.

I am just going to go a different direction here. Maybe you would want to give another couple thoughts on your marketing direction on Chili's. Obviously we have the new advertising out. You're emphasizing the icon, the pepper icon, but perhaps there is something more, something a little deeper about the insights around the type of consumers that you are trying to get to visit more frequently. Lapsed users, certain day parts, something about this initiative that might give us a sense of the detail behind the initiatives and the marketing. Thanks.

David, I think with the association with Hill Holliday -- in fact we even had a press release a couple weeks ago regarding this idea of the icon and the pepper, and the pepper representing in the past it has been sort of a noun, I guess it has been this spicy vegetable and we are looking at it representing the whole experience. The types of food we serve, the attitude of the team members and even the guests that we talk to call themselves everyday adventurers. When they are looking for something just a little bit different to break out of the rut, to break out of the everyday experience. So the blocking and tackling of casual dining is the same it has always been, but we do talk to guests that tell us that Chili's is just a little bit different. The food is just a little bit more flavorful, and the experience inside is a little bit more fun and so we are going to build on new products that live up to the legacy of the pepper. As well as just try to improve the experience for the casual dining guests.

And really tie together the marketing both in the restaurant and the advertising. It is more about, as Doug said, the experience that when you walk into the restaurant you see something that really is depicted on TV. And it really does match up to the same kind of sense of adventure and sense of fun that you would see in a commercial, you would also experience when you walk into the restaurant. And maybe sometimes those things can be disconnected and the idea is really start connecting it through a lot of the things that Doug mentioned.

And Chuck, just a follow-up on the proceeds. You believe that the proceeds on the Macaroni Grill, I mean obviously you have to close on this and decide on a bidder. But do you really believe this will happen in the final quarter, that the cash proceeds will be realized in the final fiscal quarter? Is that around the timeframe that we should be expecting?

That is our current estimate, yes.

Okay, thank you.

Ladies and gentlemen, there are no further questions in the queue. Do you have any closing comments you would like to finish with?

Thank you. I just want to thank everyone for their continued interest in Brinker International, and I'll look forward to speaking to many of you later this morning.

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.