Brinker International Inc (EAT) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Brinker International second-quarter earnings release conference call. At this time all 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, Marie Perry, Vice President of Investor Relations and Treasurer. Ma'am, the floor is yours.

Thank you, Kate. Good morning, everyone, and welcome to January 23rd Brinker International's second-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 fact. 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 risks 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 second-quarter SEC Form 10-Q on or before February 4th and the Company's third-quarter comparable sales and earnings results currently scheduled to be reported on April 22nd. With me today are Doug Brooks, Chairman and Chief Executive Officer; Chuck Sonsteby, Chief Financial Officer; and Guy Constant, VP of Operations Analysis. Doug will begin this morning with a strategic overview, Chuck will follow with a financial overview for the quarter and we will open up the call for your questions.

Thanks, Marie. Good morning, everyone; thank you for joining us. I'd like to begin my remarks this morning by stating that Brinker International's year-to-date results are not satisfactory for our shareholders or our management team. This is obviously a very challenging time for Brinker and for the entire casual dining industry.

You are all aware of the various factors contributing to this environment, including a continually expanding array of food options in the marketplace. Add to this an uncertainty about the economy, a decline in consumer confidence and increased commodity cost and we are operating in one of the toughest environments in our company history.

During times such as these we believe it's valuable to examine our business from a variety of perspectives and look for improvement opportunities. Brinker has faced tough operating environments at different times throughout its almost 33-year history, and every time we have successfully responded to the challenges.

In the past and now we realize Brinker must aggressively evaluate and foresee strategies designed to engage and delight our guests, differentiate our brands from the multitude of competitors across the dining industry and reduce costs associated with opening and managing our restaurants. And while the changing economy does create a more difficult operating environment, we are fully committed to aggressively pursuing all avenues to enhance shareholder return from both an operational and a financial perspective.

Over the past 18 months we have been implementing changes of which we are confident will have a positive impact on our business in the future. We are committed to accelerating these changes where applicable to positively influence results in the short-term while making long-term changes that will enable sustained success for many years to come. These changes include the ongoing evolution of our portfolio growth strategy. We have successfully shifted our domestic focus from new restaurant development to increased franchising of corporate restaurants, working with experienced operators who can grow and develop our brands in markets where our presence is not as well established.

As a result we have balanced our system wide ownership from 80% company-owned and 20% franchise locations beyond our stated 70/30 milestone for calendar year 2007. We used a majority of the transaction proceeds to fund an aggressive share repurchase program as part of our ongoing commitment to return value to our shareholders.

In contrast to our high-level development of company-owned restaurants in fiscal 2007, we are significantly reducing our domestic development in the near term. Instead we will shift a greater proportion of new restaurant development to our expanding franchise network in the United States and overseas. Going forward our focus will be on increasing profitable sales within existing Company restaurants and restricting development to a limited number of restaurants in selected high potential markets.

Our portfolio evaluation also includes actions that underscore our commitment to operating profitable restaurants and growing brands. In this regard we have been diligent in divesting our enterprise of underperforming restaurant locations and we continue to make progress in regards to the sale of Romano's Macaroni Grill. Chuck will provide you more detail on this process in his upcoming remarks.

As we evolve our development strategy in the U.S. we continue to strengthen our presence in growing markets overseas. An expanding middle class and faster growing economies have made international expansion an ongoing strategic focus for Brinker. Our brands are well-received by potential franchisees and highly popular with guests seeking higher quality food and American hospitality. Leading this area of strategy is one of the most experienced global development teams in the business.

During the second quarter Brinker announced a new joint venture with our partner CMR in Mexico which will effectively double our presence in the country from 53 restaurants to more than 100 over the next few years. We also entered our 24th country outside the United States with our first restaurant opening in Honduras, and opened our first international On the Border location in Seoul, South Korea.

In addition, Brinker and its franchise partners opened new restaurants in Japan and the Middle East bringing our total number of international restaurants to 172 locations in 24 countries and one U.S. territory outside the United States. Over the next several years international expansion will be the focus of our growth strategy with a goal of 300 international restaurants by 2010.

We have developed new marketing partnerships that are helping us refine and refresh our guest communication and to showcase the unique qualities of each Brinker brand. As we all know, the consumer has an unprecedented variety of dining options. In this environment it's more important than ever that we differentiate our brands from the competition. By making continual investments in advertising and by refreshing our marketing approach at all four brands we are confident Brinker can stand apart in the industry and be the restaurants of choice when guests dine out.

Our new Pepper in Some Fun campaign builds on the spiced up flavorful and fun reputation of our flagship brand. The new campaign emphasizes the iconic nature of the brand's signature red pepper while differentiating Chili's from others in the grill and bar segment. The Chili's guest appreciates the energetic, irreverent personality of the brand and craves the spicy zesty foods that they can't get at other restaurants.

New core menu items such as the highly successful Honey Chipotle Chicken Crispers and the new rib flavors underscore our guests' preference for Chili's unique taste profile. We will continue to innovate and enhance our core menu with dishes that satisfy and delight our loyal guests.

In addition, the current re-image program at Chili's has demonstrated progress in driving incremental traffic as guests return to the brand in fully remodeled and updated restaurants. This new more contemporary take on our well-known brand is bringing guests back to Chili's and proving successful in enhancing the overall dining atmosphere. The program targets older solid performing restaurants in need of a face lift and is resulting in positive guest feedback and a boost in traffic.

To date we have re-imaged 62 Chili's restaurants and early numbers show mid single-digit growth in guest counts. During fiscal 2008 we will spend up to $75 million to re-image approximately 135 to 140 Chili's restaurants that are 10 years or older.

At all four brands we are capitalizing on the popularity of signature menu items our guests crave and come back for. Our Chili's team will launch three new smoke house bacon Big Mouth Burgers as well as the new Big Mouth Bites appetizer and this launch will be supported by new television, radio and online ads and all that will begin next week.

Our culinary marketing teams at all four brands have developed menu options that allow guests to enjoy a high-quality restaurant meal also at a great value. Chili's new bottomless soup, salad and chips; Macaroni Grill's Trio Perfecto, a complete three course meal for one low price; and On the Border's new Endless Enchiladas are all great examples of how we're responding to our guests' needs for great tasting meals within a budget.

As many of you heard at our recent analyst conference, we're actively testing new technologies that could lead to innovative new kitchens and brand prototypes. At our On the Border brand we have tested a new kitchen layout and new handheld ordering technology that gets food to guests more quickly.

These improvements enable us to not only quicken the pace of the dining experience, but could also potentially provide savings in back of house staffing. We are excited about what we are learning in our tests with On the Border and look forward to exploring how we might apply that knowledge to our other brands and internationally where our footprint is smaller.

We are also optimistic about the incremental years of revenue being built through new points of access to our brands. The new online reservation system at Maggiano's provides a convenient way for guests to reserve a table and make special requests and the same brand's delivery service has given guests a new way to enjoy the essence of the brand within their own homes and workplaces.

Process and technology improvements at all four brands have enabled us to build on the success of our strong to-go program by ensuring guests receive outstanding service as well as convenient, efficient delivery of hot, fresh food. In addition, our Chili's brand has been testing these process improvements and marketing support for its to-go program and we are encouraged by the initial results. We're considering implementing these enhancements across the Chili's system and applying what we've learned to our other brands.

Our attention to improving the hourly hiring process has enabled us to identify potential team members with a natural affinity to connect and engage with guests. As a result we have not only seen encouraging improvements in guest satisfaction scores, but also improvements in team member turnover and engagement. At all four brands we have revitalized our commitment to hospitality, focusing our team members on operational excellence.

Enhanced leadership development programs are also equipping our managers with the skills they need to effectively coach and manage their teams in the restaurant and preparing emerging leaders to take on even more responsibility as our business grows. Guest comments and secret shopper scores indicate we're gaining traction in the areas of guest satisfaction and loyalty and we expect these positive results to continue in the future.

At the same time we're scrutinizing all aspects of the business from a shareholder perspective. We're optimizing the use of capital by continuing to be disciplined about new restaurant and 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 are our efforts to run the business efficiently by managing operating expenses including G&A which in turn should allow us to deliver the best possible value to our guests. Our team has done an excellent job of keeping costs under control as we navigate through this challenging environment.

However, our top priority remains increasing profitable traffic over time. We see progress in traction with the changes we have made and realize we must leverage what we've learned with those initiatives to ramp up results for the more immediate future. At the same time we're actively looking for opportunities to make additional forward thinking long-term changes that would enable Brinker to achieve sustainable growth in a variety of economic environments.

We believe those opportunities reside within the four walls of our existing restaurants and that is where we'll devote our time and resources over the coming months. We will build on the strong foundational areas of our brands by focusing on our core operations. To accomplish this we have identified five strategic priorities to differentiate Brinker brands.

Number one and first, we will achieve a culture of hospitality that establishes emotional connections with our guests and engages our team members. Second, we will advance our culinary innovation to offer our guests a new level of food and beverage excellence. Third, we will ensure our restaurants represent the vibrant and relevant personalities of our brands and offer a warm and welcoming atmosphere for our guests. Fourth, we'll be at the forefront of improving the casual dining experience in terms of pace and convenience. And fifth, we will continue to aggressively pursue our strategy for international growth.

Once again, I want to stress that our management team is in no way satisfied with current results. We are moving with urgency to refocus our organization on actions that will deliver positive bottom-line results in any operating environment. In the coming weeks our team will outline specific tactics under those five strategic priorities. We look forward to sharing our detailed plans with you during our April quarterly earnings call.

Thank you. And now Chuck will provide a bit more detail on the financial results of the quarter.

Thanks, Doug, and good morning. As Doug said earlier, our second-quarter results were not satisfactory. Earnings per share from continuing operations, excluding special items, declined 8%. These results reinforce our emphasis on improving business fundamentals and growing traffic over time. And an unwavering focus on the guest must pervade our entire organization.

Consistent revenue growth from existing restaurants is a critical component of building a business model that can be successful in all macroeconomic environments. Building such a business model remains an important part of the everyday focus of Brinker. The basis in delivering this model will be grounded in our five areas of key focus -- hospitality, food and beverage excellence, atmosphere, pace and convenience of the dining experience, and international expansion.

As part of building our ongoing business model we continue to deliver against some key milestones from our ongoing strategic initiatives. First, we successfully completed the sale of 76 Chili's to an existing franchise partner, ERJ Dining. This transaction pushes us past the Company franchise mix goal of 70/30 we had set for the end of calendar year 2007 and keeps us on track for the expected accomplishment of our next milestone -- 65/35 by the end of this fiscal year.

While the current credit market challenges are making transactions a little more difficult to complete, we still see significant interest from perspective franchisees and are currently working on a number of potential transactions which may be announced in the coming months. While these potential transactions would not be of the size of our recent Pepper Dining and ERJ deals, they will still be an important part of the Company's transition to an increased percentage of franchisee owned restaurants.

International markets continue to provide growth opportunities for Brinker. Capitalized on one of the more significant opportunities, we announced the joint venture partnership with our Mexican franchisee, CMR, to jointly build 50 new restaurants over the next four years. This partnership furthers Brinker's focus on taking advantage of higher growth, higher return international markets as a source for growing shareholder value in the future and delivers on the initiative to grow our international presence as outlined at our analyst conference this past September.

Solid returns internationally are attracting franchisee capital as they've continued to invest in our brands and have expanded our global footprint by opening 16 new international franchise restaurants in the second quarter.

The continued focus on capital has created a change in our expected development rate. Our projections for new restaurant development for Brinker in fiscal year '08 are approximately 75 restaurants and fiscal year '09 climbs to a range of 40 to 45 restaurants. And these numbers are both down significantly from our original estimates with fiscal year '09 in particular down from our original estimate of 70 to 80 restaurants.

The resulting CapEx projections are approximately $330 million to $340 million for fiscal 2008 and of that $170 million to $180 million is for new restaurants and a range of $215 million to $235 million for fiscal year '09 with $125 million to $135 million being for new restaurants. The current 2009 projection is approximately $65 million to $85 million lower than the amounts presented at our investor conference in September.

Due to the lead-time in construction a significant portion of our fiscal year 2009 new restaurant growth is under lease commitment. However, we could still see further decline in fiscal '09 development as we move forward, and a further slowing of new restaurant growth in fiscal 2010. We anticipate company-owned development will continue at these lower levels until there is a sustained recovery in consumer demand for casual dining restaurants.

Also, as we have done traditionally, we continue to rationalize our fleet of restaurants to ensure the assets are working in the most productive manner for Brinker. We will continue to assess restaurant closures and decline lease renewals where appropriate as well as consider further relocations within markets to optimize our fleet of restaurants.

Overall you can expect our capital spending to focus more deeply on our existing restaurants and slow significantly for new restaurants. Simply stated, we believe it's best to focus on enhancing our existing operations to improve performance and drive the business rather than domestic company-owned growth.

Bricker also continued its commitment to an aggressive share repurchase program in the second quarter. As we had previously committed, we used the majority of the proceeds from ERJ Dining's transaction to repurchase 4.1 million shares in the second quarter for approximately $100 million. This increases the amount of share repurchase to approximately $800 million since the start of fiscal 2007.

These actions, combined with a 22% increase in our quarterly dividend as announced on November 1st, demonstrate Brinker's commitment to return capital to shareholders; a cornerstone of our focus on delivering long-term value to our shareholders.

The successful execution of our financial strategies over the last year, achievement of our franchise mix goals, disposition of underperforming assets, modification of our capital allocation plans, aggressive share repurchases and the growth of Brinker's dividend program has preserved Brinker's stable financial base. With that in place the organization is focused on driving the necessary operational changes, the business model, to keep the brands relevant to the consumer and delivering compelling financial returns during all economic conditions.

So now let's turn to the results of the quarter. And to clarify, we continue to report Macaroni Grill in discontinued operations. Therefore our comments on the income statement line items pertain to the continuing operations and exclude Macaroni Grill unless specifically noted.

Revenues decreased 3.5% to $868 million in the second quarter versus the same quarter the prior year. The decline is attributable to a reduction in capacity of approximately 3% and a decline in comparable restaurant sales of 2.1%. The capacity reduction is due to the sale of 173 restaurants and franchise partners over the last 12 months, partially offset by new restaurant development. The comp sales decrease of 2.1% was driven by negative traffic, essentially flat mix, and 2.8% price.

Franchise royalty revenues increased by 57%, largely driven by our strategy to diversify portfolio risk by increasing the mix of franchise operated restaurants. We also recognized $6.3 million in franchise and development fee revenue during the quarter, just as we recognized $4.1 million in the fourth quarter of fiscal 2007 related to the Pepper Dining transaction.

Now remember, these fees occur primarily upon completion of the sale of company-owned restaurants and would be replicated only by additional transactions in the future. Additionally, franchisees continue to demonstrate commitment to the brands by opening 27 restaurants during the quarter which exceeds company-owned development of 18 restaurants.

We believe system wide growth driven by a balance of franchise and company-owned restaurants is the right decision, and the same balance exists between domestic and international franchise growth. In the quarter international franchise development out-paced domestic franchise growth. In the future our international business will become a significant and growing part of our overall profits.

The second quarter also featured another successful gift card season for Brinker. Overall gift card sales increased approximately 13% driven primarily by significant gift card sales by third party retailers as well as our corporate gift card business. Now let's discuss the operating cost of the business.

Cost of sales increased 20 basis points from 28% to 28.2% in the second quarter of fiscal 2008 due to the continued challenge of rising commodity costs. Most notable increases were in the meat, seafood, dairy and cheese categories. Commodity pressures were mitigated by price and we achieved margin leverage due to the increase in franchise revenues.

In addition, operations continues to hold the benefits realized from our previously implemented actual versus theoretical tool. The brands and purchasing teams continue to work together to optimize quality products and price value as we innovate the menu for new flavorful favorites.

Restaurant expenses increased 130 basis points to 56.1% in the second quarter of fiscal 2008 compared to the prior year driven by increases in wage rates and salaries, supply costs and repairs and maintenance and accelerated by deleverage from lower comp sales.

The increase in minimum wage rates is primarily due to fiscal 2007 changes in state minimum wage which we begin to lap in January. State minimum wage increases were less prevalent this year, but still took place in some states. Increases in the federal minimum wage rate in calendar year 2008 should have minimal impact, similar to the 10 basis point increase we saw a year ago.

Additionally, repairs and maintenance expense per restaurant increased as compared to the second quarter of fiscal 2007 and our plan is to continue to reinvest in the business to keep the restaurants fresh and inviting to guests.

Restaurant expenses continue to benefit from lower preopening costs as we opened 14 fewer restaurants during the quarter as compared to a year ago. Depreciation and amortization was $39.1 million for the quarter, a $1.7 million improvement from the prior year. The favorable change is a result of the required suspension of depreciation expense for restaurants held for sale, the lower restaurant counts from the sales of assets to franchisees, ERJ and PDI, and closed restaurants. These depreciation reductions were slightly offset by higher depreciation from investments in new restaurants and the ongoing re-image program at Chili's that Doug discussed earlier.

G&A was $39.6 million or 4.6% of revenues in the second quarter of fiscal 2008; $5.4 million lower than the prior quarter and that's about $1.5 million lower than the first quarter of fiscal 2008. The decline was primarily due to reduced performance-based compensation expense in the current year and, to a lesser extent, decreased stock-based compensation costs.

Interest expense increased from $6.6 million in the second quarter of fiscal 2007 to $12.5 million in the same quarter of fiscal 2008. The increase in interest expense results from the $400 million term loan used to fund our accelerated share repurchase of common stock and for general corporate purposes in fiscal 2007. We should continue to see similar quarterly increases until we lap the initial drawdown of the debt during the fourth quarter of fiscal 2007.

The effective income tax rate for income from continuing operations before special items remains a benefit to the business and decreased 3.8 percentage points to 29% for the second quarter of fiscal 2008. The decrease in the tax rate was primarily due to an increase in federal work opportunity credits, the leverage of FICA tax credits and a decrease in incentive stock option exercises.

Cash flow from continuing operations for the first six months of fiscal 2008 was $214 million, a $42 million decrease over the prior quarter primarily due to lower adjusted earnings and the timing of operation of receipts from items like third party gift cards and payment. This decrease was partially offset by a $36 million savings in CapEx generated from opening 40% fewer restaurants in the current year.

We continue to make progress against our previously announced intent to divest our Macaroni Grill brand. Negotiations and discussions are ongoing with multiple parties and we're still seeing continued interest. The current tightening of the credit market has resulted in a process which has taken a little longer than we had planned. While we remain hopeful we can complete the transaction by the close of the fiscal year, it's still more likely to occur in early fiscal year 2009.

This is undoubtedly a tough time for both Brinker and the casual dining industry. We believe that financial discipline demonstrated to date gives us the flexibility to make the necessary long-term changes to evolve the business. While rebalancing the portfolio and the macroeconomic conditions have created a downward pressure in our short-term results, we do believe we're laying a financial foundation to make the necessary investments in operations and to pursue strategies that are inviting and compelling to our guests and differentiated from our competitors.

The five strategic priorities defined on the call today is the filter used to make decisions and drive the business in a focused manner. Our ultimate goal is to drive shareholder returns through a coordinated effort of financial strategies and operational excellence with a unique twist on the dining experience, and these priorities are the pillars to success. So with that I'd like to turn the call over to Kate to facilitate the question-and-answer period.

(OPERATOR INSTRUCTIONS). Matthew DiFrisco, Thomas Weisel Partners.

I have a question, but I also just have a bookkeeping thing here. Chuck, did you say that the Mac Grill sale is now closer to the beginning of fiscal year 2009 or calendar year 2009 closing?

That would be fiscal year. Our fiscal year begins in July.

And then also, can you give us some visibility around the pipeline of franchise growth? The 75 stores, company-owned, predominantly Chili's I'd assume for 2008 and then 40 to 45 also Chili's in 2009 predominantly? If you could give us just what you're looking at by brand for the company owned and then somewhat of a pipeline or the pace that we should see opening of the franchise development pipeline in '08 and '09?

The first question I believe was you're asking for the breakdown between company-owned restaurants between Chili's, Mac Grill -- is that what you want (multiple speakers)?

Chili's -- well, I presume you're not including Mac Grill in that?

Right. The 40 to 45 would be -- we're looking anywhere from 35 to 40 Chili's, two to three On the Borders, and then the balance would be Maggiano's.

Okay. And then the franchise -- domestic -- Chili's?

In our --

Oh, I see it in the release, sorry. No need -- I got it.

Steven Kron, Goldman Sachs.

Good morning. A couple questions I guess, Doug, just starting with a big picture question. The five priorities that you laid out, particularly the first couple, cultural and hospitality advanced, the culinary innovation stuff -- I guess can you just dimensionalize that a bit for us? How things are different? And I guess more poignantly, is there any new consumer research that you've done which has given you feedback as to how people are now perceiving the Chili's brand and what you might be doing differently? And then I have a follow-up?

Sure, Steve. Well, part of it is during times like today's environment it gives an organization like ours sort of a unique opportunity to sit back and look at the world differently. Anybody that works for our company knows that people tend to get more motivated when times are tough sometimes than when times are going well. So we're refocusing on the four walls of our restaurant.

And there's no really new research. Obviously we have a lot of consumer research, but we're just applying what we know. The consumer certainly is looking for convenience and value and there are some short-term macroeconomic trends as well as just social trends. But we're taking our casual dining brands, capitalizing on what they're known for, expanding the menu like at Chili's with spicy flavorful products.

And if you look at those five, for instance on pace and convenience, trying to look very forward thinking about technology. Some of that's technology in the kitchen, some of that's technology on the floor -- how to create a great casual dining experience but also make sure we're taking advantage of all the tools we can to meet those guests' changing needs. But we're really, Steven, just focusing on how to take brands that are pretty darn good and make them better and make them able to succeed in this marketplace moving forward.

Okay, that's helpful. And then Chuck, there was some language in the release talking about your lack of concern in reaching any debt covenants or anything like that. I guess you felt the need to put that in there. Can you just update us as to where you are from a debt to -- adjusted debt to EBITDAR and where you might be at a point of reach if that were to occur? How far away would we be?

We're quite a ways away and the reason we put that in is we've gotten a lot of questions because apparently one of our competitors had faced that prospect. And so we've seen an increase in the number of questions of late. And with credit markets being so sloppy right now we thought it would just be a good thing to put that in to allay anyone's fears. We certainly weren't trying to create any issues by saying that. And we still have quite a bit of room to go from that 3.3 that we're at today.

Okay. And just lastly on the G&A side. You mentioned the reduction was more attributed to incentive based compensation and stuff. Was there any benefit realized from the refranchising of the number of stores?

Yes, there was. Whenever we sell those restaurants, generally above store supervision also goes with those and that helps to reduce our G&A.

Will you quantify how much that helped?

We have not given that out. I'd hate to just make a guess; we can follow up later.

Okay, thanks.

David Palmer, UBS.

Good morning, everybody. Chuck and Guy, just two questions about important earnings drivers, at least in my model, and that is the restaurant expense line. And secondly, that gap between your average unit volume growth versus your same-store sales growth. And I guess regarding the AUVs, do you see those decreasing less or growing more than same-store sales in the next few quarters due to the slowing unit growth and refranchising? That's my first question.

The second question is regarding the restaurant expense line, that is obviously a big line item. I wonder what your flexibility is to decrease this cost per restaurant operating week. As you potentially adjust to negative same-store sales, obviously there's a lot of moving parts in that line item. Thanks.

David, on the first part in general, the refranchising that we have done have been of restaurants that had lower average weekly sales than the system. So that in combination with really the focus now on driving same-store sales within the four walls of the restaurants we already own, that should improve the average weekly sales as we go forward.

If we could pick up on the new restaurants and non-comp restaurants, get those to perform better, that too would help us drive revenue growth higher than just our same-store sales growth. Does that make sense?

It does. I guess the only thing that could help a little bit more is to talk in terms of numbers. This last quarter we had, I guess really on the eve of perhaps a little bit more of the slowing in unit growth and of course the refranchising benefit from the last slug, your AUVs were decreasing roughly in line with same-store sales. I guess I am just wondering if that might widen again in the next few quarters even one or two points, in that sort of dimension?

Again, if we can continue to do some refranchising transactions, David, as we start to have -- as we start to drive same-store sales in new and non-comp restaurants, that gap will go up because those aren't included in our comp store sales computations, yet they do go into average unit volumes.

And regarding the restaurant expense line?

Davis, this is Guy. I think one of the things to think about on that restaurant expense line is obviously that is the line that gets impacted the most by deleverage of sales. And probably a good reminder now to remember -- this is now two years ago -- this is the quarter when we started to see the decline in same-store sales. So, obviously, that puts additional pressure on deleverage as we look forward in the third quarter and the fourth quarter.

Obviously, our ability to manage that line stems to a large extent from our ability to manage labor costs with the labor modeling that we do in the restaurant, which our restaurants have made good progress on keeping labor costs under control in a declining sales environment.

I guess there were two things that were leading that question for me. It's that you have certain costs that coincide with the new store growth, and that is slowing that would probably be sort of a regional overhead component in there as well, and the fact that you might be adjusting within this fiscal year to a lower AUV environment, perhaps there might be something that you could do that you couldn't do this last quarter that you could do going forward. Is that a fair thought or are you basically thinking that this sort of deleverage that we saw this last quarter is similar to what we should be expecting in the next few quarters if we see the same sort of same-store sales?

Yes, that's what I would say, David, is we would expect to see a similar kind of deleverage if we see the same sort of same-store sales performance.

And then one of the things that we won't have going forward, David, is -- we got a nice benefit from the transaction that we did with both Pepper Dining and ERJ in our franchise revenues. We recognized significant income from the initial franchise fees on both those transactions. We don't forecast anything that high as we look out over the next six months or so. So as we look at deleverage and along the lines of deleverage it could get worse if same-store sales don't improve.

Okay, thank you very much.

Jeffery Bernstein, Lehman Brothers.

A couple of questions. Just first on guidance I guess for the remainder of this year and next. You gave some good color on the unit side, I'm just wondering if you could talk perhaps about what the implied comp assumption is. I guess it was talked about somewhat in the previous question, but your thoughts in terms of comp trends over the next couple quarters and perhaps an update to your EPS guidance.

I know you originally had guidance out there for the current fiscal '08 and with the shortfall this quarter I was just wondering what your thoughts are for the back half of this year and perhaps with your new unit plans perhaps what your thoughts are initially for fiscal '09? Then I have a follow-up. Thanks.

We had stated that we would not provide ongoing guidance, so we've really stayed away from that. We would still expect same-store sales to be in the slightly negative range as we look forward in the next couple quarters. I think there are a lot of things up in the air with the consumer. Certainly we're hopeful that Fed funds cut will put some more cash back in people's pockets. I know there's a stimulus plan that's currently being talked about. We would hope that that too would be positive for not only us but for our industry.

And then we're starting to see capacity come down throughout the whole industry. I know as we have reduced our capacity I know some of our competitors, both in the grill and bar and also in the casual dining space, have also been dropping their plans for new unit growth, too. All those should have a bigger impact as we get to the back half of the year.

And then just a follow up question on your refranchising initiative. I'm just wondering about your thought process, at least with a couple of big ones we saw of late. It sounds like many of those were perhaps underperforming Chili's units. Just wondering if there's a level at which you'd prefer to remain owners, perhaps working, like you said, to improve restaurant level fundamentals before considering a sale.

I know you mentioned the current environment for selling these units. Some potential perhaps smaller buyers were having more difficulty raising capital. I'm just wondering if you can give any detail on the refranchising effort going forward and perhaps is there a target beyond what you've projected for the 35% six months from now?

Jeff, this is Guy Constant. Certainly we've talked about the 65/35 as being only a guide for the end of the fiscal year. And as we've discussed before, to a large extent we do the math and look at the projections for restaurants in the future and determine whether it makes more sense to retain it as a company-owned restaurant or to sell it to franchisees. So that same exercise continues.

Now obviously pressure on margins and lower sales would lead you to perhaps more franchising than we might do if obviously those were working in the other direction. So we'll continue to run that exercise and determine if there are additional markets where it makes sense to franchise.

To your question on the ability in the credit market and the ability of franchisees to secure credit, we certainly found when we worked with existing franchisees that have a track record with lenders that they've still been able to get transactions done. But there's no question that this market is putting a little more pressure on folks that might be newer to the industry to get those deals done.

Thank you.

Joe Buckley, Bear Stearns.

I have a couple of questions. First, sort of a bookkeeping one -- you identify the non-royalty franchise revenues, the $6.3 million and I realize that's a number inflated by the ERJ deal. In our model we have the year ago quarter at about $1.2 million and I was curious if that's right and if you could also share of the non-royalty franchise revenues in the first quarter. And maybe then you could share thoughts on what an ongoing run rate might be, albeit way less than the 6.3?

I can say, Joe, that approximately 4 of the 6.3 in this past quarter was related to the ERJ transaction, the balance was related to transactions primarily in the international marketplace. So we would still expect to see transactions like that take place internationally. But as Chuck said, obviously not the same kind of size domestically if we were to do additional transactions.

Okay. And then a question on the cost. Could you share with us what kind of wage rate inflation you experienced in that restaurant operating expense line?

We've seen about 3%.

Okay. And then on the food cost side, you're obviously running up year-over-year given what's going on in the commodity markets, does it stay that way through the back half or does it start to level off beginning in the fourth quarter?

It stays that way in the back half, Joe.

Okay. And then --

I mean, we don't see it escalating from here. It pretty much stays at this same rate as we go through the balance of the calendar year, Joe.

Okay. And then just two more quick ones if I can. For Chili's, the bottomless soup, salad, chips that you mentioned, Doug; what kind of pricing is around that and is that something that you would consider promoting or advertising in some way?

Joe, it's in the $6.00 to $7.00 range depending on different parts of the country and the different prices in those different marketplaces. We're actually doing a number of tests right now in some different markets to determine if it's something that we would do a full-scale marketing role on. But it does go on all menus next week across the system. It has been in some markets and has been very popular in those markets without advertising support, just having a lunch menu that highlights products that not only have great value, but also that item, Joe, can be prepared much quicker.

Those small salads, the bowl of soup and the chips are items that we can get out of the kitchen very, very quickly. So we've done some restaurants in the Midwest and some on the West Coast and found guests like them a lot. So Todd has made a quick move and added them to all menus as of next week.

How does it look from a food cost perspective? Is it above-average, below average food cost?

I don't think we have enough traction yet. It's slightly higher depending on how many bowls of soups and how many salads people have. But the idea right now is of course to get guest loyalty to build lunch business and to build value and building value sometimes means the food costs are going to be slightly higher.

Okay. And then last question. Any differential between lunch/dinner or weekday/weekend sales in the overall sales mix?

Well, I think, Joe, we've been slower at weekdays, dinner has been tough and weekday lunch have both been soft.

Okay. Is dinner softer than lunch?

Right now lunch has still been a little softer than dinner.

Okay.

It's mostly been -- weekday lunch has been the slowest.

Joe, I can tell you thought, the brands are working hard at trying to initiate activities like the Chili's bottomless soup, salad and chips. Maggiano's actually is showing some increases in their weekday lunch; they've added some entree salads, they've done some things with the service model to try to understand the guest needs. So we're working hard to sort of balance, particularly at lunch, the time constraints of our guests.

Okay, thank you.

John Glass, Morgan Stanley.

Part of the issue in casual dining, Chuck, I think as you alluded to, is overbuilding, and that would include both franchise development as well as company development. Has there been any thought on your part to asking franchisees to slow their development or cease their development in favor of focusing their energies on reacquiring company units?

Well, I think when we talk to our franchisees they also go through the same kind of economic analysis that we do. And we keep an open dialogue with them. I think we know that they've got the discipline to look at their own capital and can make determinations whether they think it's right to open up restaurants. I don't think it would be up to us to go tell them not to build.

But I do think that improving the restaurants that we have and coming up with both operational and other enhancements to the restaurants that can help drive four wall sales, those will be things that we can pass on to our franchisees just as we'd ask our franchisees to pass on good ideas back to us. So that just helps to strengthen the overall system, John.

Okay. And it's safe to assume then that franchisees have not come back to you and asked for relief on their store opening schedules yet?

Not yet. But again, I think most of them have not been growing as aggressively as we have on the company side.

Okay. And then I thought you said or I thought I heard you say on the restaurant expense line one of the issues has been increased repair and maintenance expense. And if that's the case, is that part of remodeling, is that separate from remodeling, and can you quantify how much that repair and maintenance expense was?

Well, that's been separate from the re-image issue; that's just been ongoing repair and maintenance. We're just making sure right now, John, in a tough environment many independents and people who might be feeling the pinch even in public companies, they start to squeeze on that repair and maintenance.

So you get a ripped booth, you get a table that's in disrepair -- we're trying to make sure that our restaurants don't look like that at all, that they still look clean and fresh and everything is really looking nice. On a year-over-year basis, I think we're up about $160 a restaurant a period at Chili's, so that would be the amount of what we're spending over last year.

Got you. Okay, and then finally, just any glimmer of hope in January so far in terms of sales trends?

We don't talk about sales during the interim months.

Thought I'd try. Thanks.

I appreciate it, everybody else does too.

John Ivankoe, JPMorgan.

Two questions if I may. The first, on the Chili's re-images, it looks like in fiscal '08 -- your run rate is something like $500,000 a box, is that right? I mean $75 million on $135 units?

Yes, John, in that respect, about $350 million really goes, $350 million to $400 million really goes for what we call re-image. The balance of it is part of our ongoing repair and maintenance or ongoing upgrade that we do to a restaurant on an ongoing schedule. So that balance, that $100 million to $150 million is just part of what we'd be doing at the restaurant anyway and we do at the same time we'd be doing this re-image.

Okay, to that specific restaurant I suppose, the restaurants that are over 10 years old.

That's right. We would have a maintenance schedule where we'd go in and make changes in the neighborhood of $100 million to $150 million and that's what we normally plan on. That's part of that $80 million ongoing CapEx. But since we're already going to be in the restaurant with crews we do the whole thing.

And how many restaurants will be re-imaged in 2009? I guess you've been kind enough to give us the guidance that 90 million to 100 million will be non new units. How much of that will be for the sales driving re-image restaurants?

About 40, that's where we stand now. But we're doing some tests on our Proto 10's to see if we can get a sales lift, we can see if we can do it on an economical basis and we'll judge that as we go forward. But right now we just have 40 in there as an estimate.

Could you remind me, when were the Proto 10's built? I mean, is it less than 10 years ago?

Yes, some of those are as old as about nine years ago.

Okay. And secondly on G&A spend, is there -- and I'm just -- obviously all of us are going to have to think about fiscal '09. Is there a possibility that G&A dollars can be down '09 versus '08? How are you as a company thinking about your future G&A spend given what sounds like it's going to be a number of years of some very low corporate development and focus on the four walls?

John, we are going to bring down G&A. We committed to that when we said we were going to sell Mac Grill. And we've always been diligent keeping our G&A spend in line. Having said that, this year we are -- it's going to be a very low bonus year for corporate. So if we exclude that we will be down in G&A dollars year-over-year.

All right, perfect. Thank you.

Mitch Speiser, Telsey Advisory Group.

First question on wages, Chuck, I think you said up 3% this quarter. Can you give us a sense given that there are still statement on wages going up, I guess not as many year-over-year, where do think wage rates are going to be for the balance of the fiscal year?

Mitch, we expect it to be half or maybe close to half of what the increase has been since the last state minimum wage increase.

We're talking about 1.5% then kind of going through the numbers?

Yes, up to that.

Okay. And on food costs that you mentioned, you don't expect food cost to be up any further now and through the remainder of the year. Does that mean that food costs year-over-year should decelerate? Just trying to get a sense of what they were last year at this time?

We should start to see us maintaining a higher level on a year-over-year basis. I think, Mitch, we're kind of at the high water point so we'd start to flatten out, but we wouldn't lap that for another two or three quarters.

So food costs year-over-year will be up at the same rate that we saw in this quarter?

Yes, we would anticipate that.

Okay, great. Thanks. And lastly, just on --

I want to come back to that wage inflation. I think we're talking maybe two different things. We were talking originally like individual wage inflation has been about 3% per person. Right now we're anticipating it to stay fairly close to that as we look through the balance of the year. With the economic times changing I'm not sure if that has a bias to be able to go down at all. We think there might be an opportunity if things get a little tighter in the employment markets or get a little looser in the employment markets maybe we wouldn't see as big a jump. Does that make sense?

So that maybe we're still thinking more like 3% year-over-year for the remainder of the year?

Yes.

Okay. And lastly, just on the industry supply scene, are you seeing any net closures as you develop in your areas? We are seeing the bigger chains slow unit growth, but are we seeing just from an industry wide perspective more closures than openings just yet and do you think that's just eventually going to happen at some point?

Well, we're not seeing more closures right now. You certainly can drive down a street and see independents that have closed, but I don't think we've seen any wholesale closures in the industry. I know Don Pablo's just went into bankruptcy again, so I'm not certain how many restaurants that may take out of the system, but we haven't seen a wholesale disruption in what's out there already.

Okay, thank you.

Jeff Omohundro, Wachovia.

Just a question maybe if you could talk a little bit more about your thinking about pricing and value at Chili's and perhaps how that's going to integrate with the new advertising efforts with the agency in this environment? Thanks.

I don't know, Jeff, if there will be any major change in pricing other than particularly looking at lunch. I think a big part of the advertising platform is taking advantage of this iconic pepper you'll see on the new menu next week. Peppering in is all over the place, in fact there are eight or 10 comments about how pepper, now representing a verb, represents sort of the experience to the guest, the experience of the food, the flavor and we're going to continue to take advantage of that because we do think Chili's brand is different and represents different things from an experiential as well as a food flavor from the rest of the industry. And Hill Holiday as a partner is helping us take advantage of how we separate ourselves from that sea of sameness that's out there.

Thanks.

Howard Penny, Friedman, Billings, Ramsey.

Thanks. My question has been asked and answered.

Matt DiFrisco, Thomas Weisel Partners.

Can you just tell us what you're currently standing at as far as takeout sales, percentage of sales? And you also made a reference too in your prepared comments about it sounded like that was a little bit of low hanging fruit or some of your initiatives are to try and improve convenience. Have you set an internal goal of what you think the brand, your price point and the positioning of the brand, how high that could go?

Matt, at Chili's right now it's close to 10% of total sales, but it's about 13% of actual guess transactions because there's a slightly lower check average. And as we look at that, part of it is some technology things, technology in our register system that can help predict the length of time of the experience. We're just trying to get better, almost from a manufacturing perspective, on the process of delivering the food and making sure that what's in the bag is correct.

We do see -- although we've talked about supply and demand, we do see to-go sales going up across the industry, so we want to make sure that our brands have the best systems and processes in place to meet those needs. And we've had some great success in some markets with Chili's and have some new ideas, but they're really more process related using technology in making sure the system works because when you get home you want what you order in that bag.

So if you could give us sort of the bell curve on the stand-alone stores. So aside from the Chili's Too's in airports, if you look at a traditional Chili's what's the best success story as a percentage of sales?

Well, depending on where they are in the market, Matt, there could be sales that -- restaurants that have up to 20% to-go sales, but that's driven a lot by what's around that restaurant. We have restaurants with very different to-go mixes, some at dinner, some at lunch, some more weekends. The rest of the portfolio though, the other brands are more in that 6 to 8% range. So we do think there's upside opportunity in advertising it, in improving the processes, but sometimes that percentage of to-go sales is more about the geography of the restaurant than the consumer itself.

Is there something behind the $350 million to $400 million of the re-imaging that you're putting towards, if you can give us some tangible things of when we walk in the store what you would notice different that might drive greater convenience and greater takeout sales?

We have upgraded the to-go area in those re-images. Part of it's some visuals on the wall of products; part of it, again, is just the layout of the process. I mentioned that before, sort of the system of making sure that the food that's in the kitchen gets prepared in a proper time and everything is in those bags. But visually there's just a sleeker, sort of a newer area that promotes convenience and all the other process changes should make the to-go experience better.

And then just lastly, where do we stand as far as -- I understand you're saying that it's a lesser percentage of dollars, greater percentage of transactions -- as far as packaging, optimizing, the execution of it? Is it now if it were to see a 1% comp does it have an even amount of profitability flow through as a 1% comp with a sit-down customer?

It does not have the same flow through because you don't have the alcohol component, unless you're in Louisiana, so there is a lower profit on those. But one of the things that we're trying to do, for instance I mentioned some of the visuals -- there's pictures of beverages, there's a large picture of a chocolate shake and a wonderful soft drink. So part of that, just as we've seen on the menu many times when we change the photograph on a menu that's what drives sales.

The same thing happens with the visuals on the wall behind the server that's ringing up your order. So we are trying to add more beverage sales, more dessert sales which historically on to-go the guest gets the entree but they don't get salads, beverages and desserts. All those add-ons is what we're trying to do so we can minimize the difference in that check average.

Great, thank you.

There are no further questions in queue.

We just want to thank everyone for your continued interest in Brinker International and we look forward to speaking to many of you later today. 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.