Brinker International Inc (EAT) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Brinker International second-quarter 2009 earnings release conference call. At this time, all participants have been placed on a listen-only mode and we will open the floor for your questions and comments following the presentation.

It is now my pleasure to turn the floor over to your host, Marie Perry. Ma'am, the floor is yours.

Thank you, Jenna. Good morning, everyone, and welcome to Brinker International's second-quarter fiscal 2009 earnings call, which is also being broadcast live on the Internet. Today with us from management are Doug Brooks, Chairman and Chief Executive Officer; Chuck Sonsteby, Chief Financial Officer; and Guy Constant, Senior Vice President of Finance.

Before turning the call over, let me quickly remind you of our Safe Harbor regarding forward-looking statements. 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 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.

On the call, we may refer to certain non-GAAP financial measures that management uses in its review of the business and believes will provide insight into the Company's ongoing operations. Reconciliations are provided in the tables in the earnings release and on Brinker's website under the financial section of the investor tab for your review.

This morning, Doug will start us off with Company highlights. Chuck will follow with the financial recap of the quarter's operating results. Following the comments, we will open up the call for your questions. Now I will turn it over to Doug.

Thank you, Marie. Good morning and thanks for joining us on the call this morning. The second quarter of our fiscal year 2009 has been marked by many of the same challenges Brinker faced in the first three months of the fiscal year. Externally the volatile financial market, rising unemployment, and the housing crisis continue to put significant pressure on consumer spending in the US and overseas.

The holiday season brought little relief for retail and restaurant companies including Brinker as consumers remain cautious about discretionary spending. As a result, our traffic trends indicate the guest choice to limit restaurant dining occasions or scale back on check totals during their visits. While there are multiple efforts to re-energize the economy and encourage consumer spending, we realized that lasting change will only happen over time.

At Brinker, we are not waiting for external actions to strengthen our Company. Instead we have taken considerable steps to remain competitive and position our brands for accelerated profitability once the economy eventually does improve.

Although the ongoing economic downturn is not ideal for our industry, we remain confident in the relevance of casual dining and the long-term viability of Brinker brands. The consumer still desires dining options that offer high-quality food in a comfortable setting delivered with outstanding hospitality. We will continue to meet that need by investing in strategies that strengthen our brands and as the economy stabilizes I fully expect to return in the growth of guest business.

In the meantime, we are bolstered by a strong cash flow, commitment to fiscal responsibility, and our ongoing dedication to hospitality and guest satisfaction. An ongoing area of focus for Brinker and its brands is food and beverage excellence. Our goal is to continue to satisfy and delight guests with delicious menu items that align with our brands' unique positionings. And because we understand our guest's desire to manage expenses during these challenging economic times, all three brands are focused on delivering great food at the best possible value.

Our brands are also improving core menu execution by increasing training and recertification of managers and our heart of house team members and by tightening product specs for our supplier partners. Additionally, periodic reviews of recipes, ingredients, and processes for signature menu items help our restaurant teams ensure consistent execution and quality across the system.

Chili's capitalized on some of its most popular menu items in the second quarter by introducing kicked up new flavors of guest favorites. The kicking crisper's promotion with a starting price of $7.99 introduced new menu items such as Buffalo chicken crisper bites, crispy chicken crisper tacos, and new crisper flavors such as honey barbecue, sweet chili glaze, and habanero chipotle. The promotion was supported by media throughout the quarter.

Guests also enjoyed the new chocolate chip molten cake and the new red velvet and key lime pie sweet shots. Support for the brands right and right on time to-go messaging continued during the quarter, promoting the brand's process improvements in the execution of to-go orders. Looking ahead to the third quarter of fiscal 2009, Chili's has introduced an expanded triple dipper dinner menu for $9.99 with three new options and endless combinations for guests.

Also launching this month are four new additions to the guiltless grill menu featuring dishes that appeal to our guests' interest in a lifestyle of health and wellness. Early guest reaction to both of these expanded menu categories has been very positive.

To support the successful launch of new menu items, Chili's continues to hold quarterly all team member training sessions. In these meetings, hourly team members learn the details of upcoming promotions, review execution of core menu items, and reinforce hospitality principles.

On The Border proudly serves the world's favorite Mexican food and is focused on delivering cravable new dishes and incredible value. In late October, the brand began featuring the On The Border classic five which includes five Mexican favorites at a value price of $8.99. The promotion was supported by media in key markets.

The brand also promoted its fajita revolution, a commitment to offering the perfect fajita grilled to order for each guest. This promotion features create your favorite fajita where guests are invited to choose their favorite protein, veggies, and sauce to create a fully customized version of the brand's best-selling menu item with more than 125 possible combinations. This menu enhancement is supported by training to ensure each customized order is delivered flawlessly to the guest. The brand's grilled enchiladas also continue to be popular and became part of the core menu during the quarter.

Now this month, the On The Border team introduced a new border lunch menu starting at $6.49, which addresses our guest's priorities for value, speed, and health and wellness. With a combination of new offerings and guest favorites, the menu focuses on menu items that can be compared and delivered to the table quickly. The brand will also feature its popular endless enchilada promotion in the third quarter also value priced at $8.99.

Maggiano's Little Italy opened its 44th restaurant during the second quarter in the Rim Shopping Center in San Antonio. In keeping with its commitment to delivering food and beverage excellence, the brand introduced three new Little Italy favorites including lobster fettuccine, chicken francese, and beef braciole. New items were promoted with online advertising in radio in selected markets.

During the holidays, the brand also featured seasonal specials including the very popular chicken tortellacci. In addition to delivering food and beverage excellence, the brand continues to emphasize outstanding hospitality by investing in ongoing leadership training for managers and coaching all team members to make every guest feel special.

As we shift our focus to increase franchise development both domestically and internationally, our growth will be driven by a combination of franchising and equity investments or joint venture investments.

During the second quarter, Brinker and its franchise partners around the world opened 27 new restaurants. We opened two company-owned restaurants; 12 were domestic franchised and 13 were international franchise locations. All totaled, these new restaurants bring our system presence to 1704 restaurants in 25 countries worldwide.

Our global development team remains focused on discipline and aggressive international expansion of Brinker brands in key markets around the world. In the third quarter, we will enter three new countries and one new territory with the first Chili's restaurants in El Salvador, Turkey, India, and Guam.

With the completion of the sale of Macaroni Grill, our global development team has revised our stated goal for international expansion to 260 restaurants outside of the US by the end of calendar year 2010.

In December, Brinker closed the sale of a majority interest in Romano's Macaroni Grill to Mac Acquisition LLC, a subsidiary of Golden Gate Capital. Cash attributable to the transaction has been or will be used to pay down outstanding bank debt. While we will no longer be involved in the day-to-day operation of the brand, we will continue to support the Macaroni Grill team as a minority partner and through the provision of ongoing transition services for at least one year.

In addition, I will serve on the brand's Board of Directors, lending my support to their new president, Brad Blum. Brad brings an excellent track record of leading some of the country's best-known restaurant brands and we look forward to partnering with him. Our guests will be able to redeem Brinker gift cards at Macaroni Grill as they always have. And Chili's, On The Border, and Maggiano's will continue accepting Macaroni Grill gift cards as well.

Although the sale of the brand has been a long process of hard work and negotiation for all those involved in the sale, we are proud to have met our goal of closing the sale by the end of the calendar year. It is a great brand and we wish them continued success.

As we look forward to the remainder of fiscal year 2009, Brinker and the entire restaurant industry remains challenged by a highly competitive environment and an uncertain economy. Despite the challenges, we are more focused and motivated than ever to produce positive results for our shareholders. We will continue to optimize the use of capital by being disciplined about new restaurant development in order to preserve capital, lessen manager churn, and hold the line on hourly team member turnover, which in turn has created a more consistent guest experience within our restaurants.

Our active refranchise in existing domestic restaurant locations has enabled us to produce a stable revenue stream and reduce volatility in our P&L. By emphasizing international expansion with a primarily franchised model in high-growth areas with lower competition, we are creating a stable revenue stream with fast potential for the future.

Our discipline in closing underperforming locations has enabled us to focus on restaurants that produce the strongest return for our investment. Likewise, we have made the decision to divest Corner Bakery and Macaroni Grill in order to focus on our core brands. By renewing our focus on core menu items and their extensions, [dippers] at Chili's, fajitas at On The Border, Little Italy favorites at Maggiano's, we continue to differentiate our brands from the competition and retain loyal guests. Despite tough economic times, guests can trust Brinker brands to deliver outstanding hospitality.

Chili's continues to outperform the industry, beating the casual dining comp sales growth as measured by KNAPP-TRACK for the sixth consecutive quarter. And On The Border has now beaten the KNAPP-TRACK casual dining composite for the fifth consecutive month. These accomplishments speak to the ability of our brands to connect with our guests and deliver the food and hospitality they prefer. In addition, Chili's continued investment in a national advertising provides a competitive advantage in the space where only a handful of restaurant brands can compete.

Just as important as these initiatives are our efforts to run the business efficiently by managing operating expenses including G&A. Our decision to place a moratorium on our share repurchase program, pay down debt, reduce our capital expenditures, and increase cash flow are all evidence of our commitment to proactive balance sheet management. Although we are challenged by a variety of external factors, our experienced leadership team has seen tough times before and has successfully managed through those challenges to emerge stronger and more competitive than before.

Our top priority as an organization remains increasing profitable traffic over time. Through concentrated actions aligned with our strategies, we are confident Brinker is well positioned to deliver profitable growth over the long term.

Thank you. With that, I will turn the call over to Chuck to share financial details of the quarter.

Thanks, Doug, and good morning. Well today's unprecedented economic times are contributing to continued pressure on the consumer and as a consequence, our margins have also been impacted in large part driven by deleverage on lower sales. But we have adapted throughout the past year. Our management team will not fall victim to the current environment, but rather we look upon these times as an opportunity to create change to the business model and to drive sales and profits.

The team's attention is fully tuned to reinforcing our current positions of strength and bolstering our long-term success. In fact, we expect not only to survive but emerge from this economic recession as a stronger leader in casual dining. Our team reacted to the declining market some time ago, paring back new restaurant development and balancing our G&A costs to help weather an economic storm.

The second quarter saw the lack of available and affordable credit, declining stock in home prices, and rising unemployment, which has led to an all-time low in the consumer confidence index and has impacted many of your businesses as well as ours. These factors contributed to comparable restaurant sales of negative 4.5% in the second quarter excluding Macaroni Grill results.

In turning to the second quarter, please note unless otherwise stated, the Macaroni Grill results are included in Brinker results up through the date of the sale, which occurred in the last week of the quarter. At closing, Golden Gate Capital and its affiliates will own 80.1% of the new entity while Brinker affiliates hold a 19.9% ownership interest. So going forward, an entry will be made each quarter to record 19.9% of the Macaroni Grill entities results in restaurant expense as well as rental income on 12 properties retained by Brinker as part of the transaction will be recorded in other net. And prior quarters will reflect Macaroni Grill in continuing operations.

To allow for similar year-over-year comparison, a reconciliation of the consolidated income statement is provided on the website to adjust prior quarters for both the Macaroni Grill results and special items.

Looking at the top line, revenue decreased by 7.8% over prior year or 4.5% excluding Macaroni Grill. The decline was due in part to a decrease of 5.4% comp sales along with a 3.3% decline in capacity due to the closing of underperforming restaurants in fiscal 2008 and the majority of those were Macaroni Grills. And also the sale of restaurants to franchise partners in fiscal 2008 and the sale of the brand Macaroni Grill in the last week of quarter two this year. So excluding the Macaroni Grill items, the capacity decline was only 0.3%.

The comparable sales decrease was driven by lower traffic as consumers felt the pinch of this economy and was somewhat offset by 2.9 price and the benefit of about 100 basis points from Christmas shifting into our third quarter this year. As Doug said, this comp performance was well above the industry average throughout the quarter even after the adjustments for holidays.

In addition, total systemwide sales were up 1.7% excluding Macaroni Grill. Franchise royalty revenues increased 9.7%, up to $15.8 million for the second quarter of 2009. This improvement was driven by both the growth in the number of domestic and international franchisee locations compared to a year ago and comparable restaurant sales gains at our international franchise locations of approximately 5.6%. This was partially offset by comparable restaurant sales decline in domestic franchise locations.

Initial development and franchise fees totaled $1.3 million this year, down $5.2 million and that was mainly attributable to the proceeds from the sale of 76 company-owned restaurants to our franchise partner ERJ last fiscal year.

Brinker maintains an open relationship with its franchisees and as a historical practice, we've monitored the financial health of our franchise system. In the second quarter, one of our On The Border franchisees filed for bankruptcy resulting in the closure of four restaurants in Southern California. So with that in mind, we wanted to update you on the strength of the Brinker's franchise system.

Overall, our franchisee base is strong and features an excellent group of restaurant operators. In fact, Chili's comparable sales in the second quarter were 220 basis points better than the franchise territories as compared to our company-owned locations as those restaurants are located outside of the regions that are heavily impacted by some pressures.

Our franchise partners are great operators who are well-capitalized and work closely with us as we implement our key brands initiatives. And a large part of our franchise system is also based outside of the United States, where they have continued to see strong comparable restaurant sales growth and continuing demand for new restaurants.

The second quarter is our largest quarter for gift card sales, with almost half of our total annual gift card sales. Brinker did not escape the phenomenon, which impacted many retailers and did experience a reduction in gift card sales compared to last year. Third-party and corporate business-to-business gift card sales continue to be solid and have increased year-over-year with third-party sales setting weekly records for our cards in December.

However, this was offset by declines in our in restaurant gift card sales in part as a result of our elimination of our bounce back program which we determined last year to not have driven the incremental gift card sales required to offset the costs of the bounce back. The result was a year-over-year decline in second-quarter total gift card sales of approximately 14%.

As for quarterly sales comparisons, there are some important calendar shifts to be considered. First, as I previously mentioned, Christmas day shifted from our second quarter into our third quarter which benefited second quarter but will negatively impact third quarter. Also, Easter will shift from our third quarter into our fourth quarter in fiscal 2009, which benefits the third quarter and has detriment to the fourth quarter. So we are estimating the net result of the Christmas and Easter shifts to have a 50 basis point unfavorable impact to the third quarter.

Cost of sales was 10 basis points favorable to last year. Menu pricing and improvements in actual versus theoretical food costs offset commodity prices which were higher year-over-year primarily due to chicken, oils, and produce prices. Our teams have responded to the challenge with a new round of tools and focus to eliminate waste and maintain guest satisfaction.

We also see some encouraging signs of abatement commodity pressures, which are down from their peaks and may further materialize in calendar 2009. Commodity pricing is certainly moving in the right direction, but it still remains to be seen whether supply concerns offset these favorable trends.

Restaurant expenses increased from 56.8% in the second quarter of fiscal 2008 to 58% in the second quarter of fiscal 2009. The 120 basis point increase is the cumulative result of many factors with the impact of Macaroni Grill, and sales deleverage being the biggest single drivers. Without Macaroni Grill, restaurant expenses would have been 57.5%, 70 basis points higher than last year.

The biggest changes were 40 basis points of higher utility expenses and 20 basis points increases in restaurant and to-go supply costs, unfavorable labor costs and advertising expenses. These were somewhat offset by 50 basis points of favorable preopening expense.

Depreciation and amortization increased by $1.6 million to $40.6 million for the quarter. And new restaurant openings and reimages in the past year are driving the modest dollar increase.

General and administrative expenses continue to be in line with our stated goal to hold G&A flat to prior year as a percent of revenues even with the divestiture of Macaroni Grill and the closures of restaurants. For the quarter, G&A expenses were $39.1 million or 4.1% and that is $2.3 million less than the prior year with the decline being mainly due to lower payroll resulting from continuous actions we've taken over the past year to control G&A spending.

Other gains and charges for the quarter were $85.1 million. In the second quarter, we completed an evaluation of our restaurant base, making the decision to close 35 underperforming restaurants. The evaluation included both financial performance as well as lease renewal considerations across all brands. And as a result, we expect to see a 30 basis point improvement in operating margins as a result of these closures. The majority of these closures will occur in the third quarter and our second-quarter results reflect a $44.2 million asset impairment charge. During the second quarter, a $43.3 million loss was recorded for the Macaroni Grill sale.

Second-quarter results created a tax rate benefit of 51.1% versus a tax expense of 30.2% a year ago, driven to a large extent by the items recorded in other gains and charges. Adjusting for the changes in both years, the tax rate would have been 22% versus 28.4% last year due primarily to the increased benefit of FICA tax credits.

Cash flow from continuing operations for the first six months was $94.8 million, a $146.3 million decrease over the prior year quarter primarily due to a decline in operating profitability, a reduction in gift card sales, and the timing of income tax payments as well as operational payments and receipts as well as the sale of Macaroni Grill.

Generating strong cash flows has been a long hallmark of Brinker. In the second quarter, we took further steps to strengthen our cash flows in order to provide the flexibility necessary to address current challenges and drive the business forward, securing our competitive strength.

Besides paring our asset base of underperforming restaurants as previously mentioned, we also made the decision early in the quarter to further reduce our fiscal 2009 capital expenditures. This was done to provide flexibility for slower sales or potentially another delay in the Macaroni Grill transaction. At that time, we slowed the pace of Chile's reimages and discretionary projects initially scheduled throughout the fiscal year.

Spending on these items have been delayed until the end of the fourth quarter and as a result, we are now projecting to spend $110 million in the fiscal year excluding Macaroni Grill, which is down $147 million from last year and $30 million from our previous guidance. Also in the second quarter, we received the cash proceeds from the divestiture of Macaroni Grill at a purchase price of $88 million and approximately $44 million related to a tax cash benefit from the sale which will be realized in the back half of the year.

The balance sheet is the primary focus. We have committed to reducing our leverage allowing us to retain the investment grade rating from Standard & Poor's and ultimately regain our investment grade rating from Moody's. This commitment is supported by our use of free cash flow and cash proceeds from Macaroni Grill to pay down debt. In fact, we paid down the uncommitted lines of credit of $60 million in the second quarter, leaving the remainder of the Macaroni Grill cash proceeds to fund our short-term working capital needs.

We are committed to our long-term strategies and initiatives centering around our five areas of focus. Previously we provided and has since updated our financial covenants calculation on our website and we are in full compliance with all of our covenants. In fact, we anticipate our ratios to improve going forward with our commitment to pay down debt with available free cash flow while still investing in the business.

And as previously mentioned, we are in the midst of refinancing our revolving credit facility that expires in October of 2009 and expects to have the transaction closed in a matter of weeks. Spread over LIBOR on the revolver will increase for the refinancing due in part to market conditions. But our expectation is to have little utilization on that line, so the increased spread will still provide lower year-over-year interest expense.

Our focus on maintaining a strong balance sheet and liquidity coupled with our work on the initiatives Doug outlined as well, we are also seeing the continued balancing of industry supply and those all give me a great deal of confidence that Brinker is in excellent condition to remain an industry leader.

And now I would like to turn the call over to Jenna to facilitate the question-and-answer period.

(Operator Instructions) John Glass, Morgan Stanley.

Thanks very much, a couple of questions. First, Chuck, if you just look at the restaurant margin sequentially, your revenues were lower. Your comps were lower and yet you got over 100 basis points improvement in margin. So I hear what you are saying about changing the business over the past year, but what happened specifically in this quarter versus, let's say, last quarter which got you the improvement in the restaurant expenses?

Again, we did a good job with actual versus theoretical on our food costs, so we got some benefits on the food cost line versus last quarter. We also worked on labor and labor efficiencies. We did a better job there too. And then you also saw the increase in franchised restaurants on a year-over-year basis helped us get better margins and that's a year-over-year benefit. We have controlled G&A spending, so it's really been good cost control.

Okay, so if you think about the 15% restaurant margin that you guys ran this quarter roughly, do you think that's -- even given the negative mid single-digit comps that you've been running, that's a sustainable level for the next couple of quarters? I guess that's what I'm getting at.

Well, John, I think we've adapted to being down this much in comp store sales. If it continues for several quarters, obviously we can't maintain that. But I think in the short term, we have made the necessary adjustments throughout the system to try and hold margins where they are.

Okay. A question on the cash flows. I think just backing into it, you generated about $40 million from cash from operations this quarter. Can you talk about what the impact year-over-year was on gift cards? Was that a negative to the cash flow? I know it's been generally a source of cash during this first quarter. And I guess you said during the commentary does not include the tax benefit. Last quarter you talked about generating roughly $380 million in cash I guess including that tax benefit in 2009, fiscal 2009. Is there an update to that number given this quarter?

Sorry, are you asking if there is an update to the (multiple speakers)?

Yes, you said $380 million. You thought you could generate $380 million in cash flow last quarter for the full year. What do you think it is now? Did you expect the decline in cash flow from operations this quarter in factoring in that number or is it going to be a lower number now?

No, I think we are relatively close to that same number. We are down a little bit in terms of operating income maybe from where we had guessed but we've also made some adjustments to cap spending sort of to offset those and still end up with the same net number.

Thank you.

John, you asked specifically about gift cards. We are down about $20 million on gift cards, but again, that's only a cash flow difference from second quarter to third quarter. We usually see those redeemed fairly quickly so we think we have cycled through most of that impact already.

Thank you.

Joe Buckley, Bank of America-Merrill Lynch.

Thank you, a question on the margins as well. I think you had told us previously maybe last call or two calls ago that you had about 30% or 32% of your food contracts kind of running off in the December quarter. Given this better-than-expected food cost experience, were you able to renew at lower prices? Is this food cost experience sustainable going forward?

Maybe in conjunction with that, if you talk a little bit about your menu pricing. You give us good detail in the release but what happens going forward if some of that runs off?

Joe, hi, this is Marie. In terms of the commodity question, to your point in the second quarter we did have over 30% of our contracts come due. And we did see actually it was slightly higher than prior year but it was actually favorable from what we were projecting. So as commodity prices continue to hopefully decline, we do expect to realize some of those savings.

Now just to kind of give you one stat, for the third quarter, we are only expecting about 3% of our commodities come due and that's in seafood primarily. So we are not going to be able to capture it completely there but in the fourth quarter, we will have approximately 17% of our contracts come due.

If you remember, Joe, last year in the second quarter was when commodity prices really spiked up. So we are starting to lap these higher numbers from last year, so we think there is the opportunity for continued favorability on cost of sales on a year-over-year basis as we look out in the third and fourth quarter.

Okay, then just a question on sales trends. Can you talk a little bit about how sales trended during the quarter? There has been a lot of talk of December being very weak. And then maybe also just talk about regional differences particularly interested if Texas continued to be good for you.

Texas has continued to be very good for us and that has been a strong market. It's one of our home markets so we perform very well here. If you look at the quarter, December was weak, Joe, we saw the same kind of thing and for us, we had the holiday flip as we got into January. And so the first week or so because of the flip and we think also because we eliminated the bounce back on gift cards, contributed to us having a pretty weak first couple weeks.

But things seem to have firmed up and are starting to look little better here the last two weeks for sure. So I know that that's a short trend and things have changed pretty dramatically in the economic environment, so I am not here predicting things are going to get better but I think we've seen some stabilization, seen things kind of looking like they are getting to some sort of normalcy.

Okay, and last one. Christmas you said was 100 basis points. Is that for the quarter or for the month of December?

That's for the whole quarter.

The whole quarter, thank you.

Jeffrey Bernstein, Barclays Capital.

Great, thank you, a couple of questions. First, just high level on the fiscal '09 guidance with half the year now complete, I know it wasn't necessarily referenced in the release. I recall last time those earnings down 15% to down 25% with comps down 2% to 4%. It seems like this quarter the comps were a little worse but the earnings a little bit better. I am just wondering if you can give some updated thoughts on fiscal '09 guidance in terms of earnings comps, expectations? And then I have a couple of follow-ups.

We really have told folks we don't want to get into the guidance game. I think we have done a very good job of balancing our costs. Thanks for reminding folks of that. I think that we are pretty confident in where our cash flows are. We have been making changes to the business as we have seen softer sales maybe somewhat better than we would have originally anticipated. So let's just leave it at that.

But versus your own internal expectations, I know you didn't give quarterly guidance. I'm assuming this quarter was better than you had perhaps internally expected in terms of cost control perspective?

I would say yes. We did a really nice job, better than what we had first thought we would. We made some real changes as we started to get into this quarter, really started watching costs, really got focused on the fact that this could be a protracted economic downturn and really tried to react to the environment. (multiple speakers) just being a short-term blip.

Okay, so net-net, this quarter was a little bit better, so that guidance you had previously offered if it was anything it would be quite slightly better than what you had previously offered, not worse. Is that fair to say?

I don't want to get into guidance.

Okay, then just a follow-up kind of broader -- I think last quarter, Doug, you talked a little bit about industry consolidation. We've seen recent unit data numbers that don't necessarily show a significant slowdown in openings or actually net closures. I'm just wondering if you could talk about what you are seeing whether anecdotally or more factually in terms of the chains and independents and the outlook for growth?

I think, Jeff, NPD came out with some information recently about actually being less restaurants at the end of 2008 than at the end of 2007. They spoke more to independents, family restaurants causing that phenomenon. So anecdotally it looks like there will be some more contraction. I know some other competitors have mentioned closing some restaurants. We of course announced today we will close some restaurants. I think everyone is going to be smart about looking at the things we can do so that our -- all the inertia that Chuck mentioned is to the restaurants are going to provide the biggest gain to our stakeholders.

So anecdotally I think there will be more contraction throughout the year as people try to deal with this projected long economy.

And just lastly, you mentioned I think restaurant closures 35 units in the quarter. I think you just said kind of underperformers in terms of profits. But is that now review totally complete or is that something that you would expect additional closures in the next couple of quarters? I was just wondering where you can get some color by concept or what the comp list was, the neighboring stores, just kind of the impact from that.

Jeff, again these are spread out all across the country. Many of these restaurants have not closed yet. Many of them are leases that are expiring and so even in a great economy, we always go through leases and make decisions in individual markets about whether individual one-off restaurants, how they are contributing to the total brand awareness in that market.

So there's a real diversity of restaurants across some from each one of the brands and don't see closing more again very quickly but we will continue to evaluate it and we see about a 30 basis points improvement by these closures.

Great. Thanks very much.

John Ivankoe, JPMorgan. Brad Ludington, KeyBanc Capital Markets.

Good morning. I just want to get some clarification on the closures. I missed a little bit of that. Did you guys do 35 closures in maybe third and fourth quarter and did you say what brands that would consist of?

Well, it's 35 restaurants, some of which will close in the third quarter, some of which will close on the lease expirations which could be spread out over a longer period of time. We did not give a brand by brand breakdown and really would prefer not to.

Okay. And then -- so then the 30 basis point improvement on operating margin is more of a long-term further out fiscal '10 and beyond, maybe.

It is, but most of the restaurants will close this quarter.

Okay and then on your closures, the nine Chili's and two On The Borders this quarter, were those all closures or were any of them sales to franchisees?

Some of those were sales to franchisees. I think -- I believe we sold six restaurants -- or excuse me -- nine restaurants, sorry.

Brad, this is Guy. We did have a small franchise transaction that we completed in the second quarter for nine Chili's restaurants.

Okay. And then is there any way that you can quantify the impact of lower energy costs on restaurant expenses and lower diesel on COGS this quarter? Or was there?

There really wasn't. For us, well utility expenses were up 40 basis points year-over-year but we are starting to see some improvement in that. We are starting to see as we look forward some of those lower energy costs are starting to flow through on utilities and utilities look to be better as we go forward. I don't know if they will be better year-over-year. They just won't be 40 basis points worse.

Okay and then last thing, CapEx down $30 million so $105 million to $115 million.

Yes.

Okay, thanks a lot. Congratulations on the cost controls.

Chris O'Cull, SunTrust.

Thanks. Just a follow-up question on the restaurant expense lines. What is the opportunity for better labor cost management? Can you quantify the variants you are seeing between what you think you should run and what you are actually running right now for labor in the restaurants?

In what sense, Chris?

I mean theoretical versus actual.

Well, we did see better efficiency. We measure that in a number of ways. We measure both in dollars and also on per 100 guests. We are doing a good job just by staying focused. I think the teams have adjusted to sales being down and we've got people watching and looking at the models and sort of anticipating what the environment might bring us. And so we have done a much better job of just bringing that line. In terms of the gap between actual and theoretical, I don't have that at my fingertips but we can certainly talk about that later (inaudible).

Okay and then when you look at the gross margin or the cost of sales line, a similar question. I mean you seem to be running better theoretical food costs. Is that just more attention to detail, better tools in the field, or what is allowing you to get some of those improvements?

Both those things. Again, times are tough and I think everybody's ears are wide open right now in our restaurants and while I wouldn't say that we haven't looked at that area, I think we have just increased the focus on it. People are ready and willing to serve to spec and watch waste and everything else they can in this environment. I think the same thing we are seeing going with our consumers also go with our restaurant employees and teammates. Everybody understands that every penny is precious.

So there's been no changes to the recipes or anything?

No, we've looked at some side items and things that people might order upon request and looked at those. But we have not changed or degraded the recipes of the basic food items.

Okay, then also, Doug, it appears the Company is kind of recycling some of the promotional platforms that they ran last year. Do you guys expect Chili's to come out with some new platform ideas during the back half of '09?

Well, we are always looking for innovation. We have some items in test now that are actually doing quite well. And we are probably going to balance value messaging with new product innovation. In some cases, those will be combined. And if you look at the triple dipper dinner -- which say that three times -- that's been a very popular item. We have added the bites, three different bites which were one of the greatest innovative items over the last year of the small burgers.

Now we have chicken versions of those. So when you add that to the triple dipper dinner, you give the opportunity for the burger which is one of the based Chili's historical cult items in kind of a new format. So the reformulation of the guiltless grill which happened in this current menu, we have four great new products that speak to not just value but also to healthy eating and all the publicity about restaurants owning part of the obesity problem.

So trying to be balanced, but there is innovation within value and there's innovation on its own. I think you will see both of those in the coming quarters.

But most of the back half of '09 will be product extensions of some of these existing platforms? It won't be new platforms?

I think certainly we are going to always continue to highlight items that the brand is famous for. Guests tend to think about Chili's and they think about burgers and fajitas. And historically as you bring out totally new items that aren't based on historical preferences with brands and consumers, it's more difficult to get guests to give you credit for those items. So we are going to probably -- we are going to innovate but we are certainly going to provide new products that guests are comfortable of dining in those brands, whether it be Maggiano's or On The Border or Chili's.

Okay, okay. And one last question just related to interest expense. It was higher in the second quarter compared to the first and I may have missed that if you provided any comments on that, Chuck. Given the debt balance was down, what was the explanation for that?

Well, we did do some borrowing to make sure we had liquidity through the quarter. One of the things that we did was -- it is typically a quarter in which we use cash and the first part, the latter part of September -- excuse me -- the first part of October rather when the financial markets started looking pretty dicey, we went and took down some additional debt just to provide us and make sure we had liquidity.

We paid that down as we got through the quarter and with the proceeds from Macaroni Grill. But again, that was late in the quarter and that's why interest expense for the quarter was higher year-over-year. But as we get to the third quarter, we expect to have interest expense to be lower both third and fourth quarter.

Okay, great. Thanks, guys.

Jeff Omohundro, Wachovia.

Thanks, just one question. I was wondering if you can give a few more details on the changes in the gift card program and what was the reason for the shift in that program? And maybe you can talk about new initiatives around gift cards.

Jeff, its Guy. Last year when we ran our gift card program actually for the past two years, we offered a bounce back within the restaurant that basically said purchase a $25 gift card, received a $5 bounce back that you could use on your next visit. And as with any marketing initiative that we take on with the company, we evaluate whether it makes sense and it is providing the return that it should. And last year at this time, we made the assessment that we did not believe that that was providing us the return that we needed, so we made the choice that during this holiday season we would not go forward with that promotion.

And then at the same time, we are just seeing a shift in mix as we get our gift cards into more third-party retail locations. We are seeing just more gift cards being purchased in third-party distribution channels than we are within our own restaurants. So that just further confirmed to us that staying with a bounce back program didn't make sense going forward.

And there was a $20 million I guess impact related to that. Was that as expected confirming your analysis?

Well, I think it is consistent with what you just saw in -- what you have seen in retail in general during the holiday period, that there has just been an overall decline in gift card sales to begin with. But yes, we continued to see the trend we started to see last year which were less sales within the restaurant and more of third-party locations. But overall, a decline has been part of what's going on in macroeconomic circumstances.

Very good, thanks.

Joe Fisher, Goldman Sachs.

Thanks, calling for Steven here. I was curious, Chuck, in the commentary, I thought you said that labor was unfavorable in the quarter and then when you answered John Glass's first question, I thought you said it was better. Did I misunderstand you?

Yes, well no, I think what he was talking about was improvements from first quarter to second quarter. It was unfavorable year-over-year, but we did get margin improvement sequentially because labor was not as bad as it was in the first quarter.

Okay, fair enough. I was also wondering when you guys roll off price going forward here?

We just took a new menu but I know we did take -- we only took a little bit of price coming out to the Chili's right now. Do you have that number there?

Just while you are looking at that, I'm wondering -- I think in the last conference call you guys mentioned that you are maybe up a little bit on advertising spend as a percent of sales. Kind of curious if you guys are seeing kind of better bang for the buck, if you are actually getting more -- a better buy in this environment than maybe you were last year and you are also spending more.

We are spending more. We had a couple more weeks this quarter than we did last year. We did -- we primarily bought most of our media in the upfront market, so while we are seeing some benefits maybe on some spot buys, the majority of our media was purchased at the beginning of the year.

Okay, then lastly for -- I'm sorry?

Joe, to answer your question, we don't have a lot of price rolling off in the third quarter, but quite a significant price roll off that would occur in the fourth quarter if we chose not to increase prices to offset it.

Okay, thank you. Then just lastly, Chuck, I believe you made the comment in this environment something about an opportunity to change the business model. I was just wondering if you could elaborate on that a bit?

Well, I think we are sitting down trying to figure out obviously value is key to the consumer and trying to evaluate our model really from the time a guest enters the door until they leave. What can we do to increase terms? What can we do to decrease labor? We know that is the cost that goes up every year. What can we do really in terms of exciting new food products and value? Where is the gap between QSR and casual dining?

It's expanded over the years in terms of check averages. So we think we've got to figure out our cost model and lay that against what consumers want and really makes some changes to the way we've always done business and so (multiple speakers)

What are consumers out there telling you? Are they saying they want to be able to get in and out faster or are they -- they just want the price points to be more reasonable? Is there anything meaningful that you can say to that? I noticed that mix shift was a bit more negative in this quarter than last.

Well, faster and cheaper is always the American way, it seems, so that is consistent with what we find folks saying. And as Doug talks about the five areas of focus, those are based around pace and convenience, trying to get things in and out and better quality food and beverage, which means that better value and value is not just price, value is a number thing. So Doug, I don't know if you want to talk about what consumers are looking at in terms of value but --.

Sure, Chuck, there is a quote that was made by somebody recently that we've kind of grabbed onto. A crisis is a terrible thing to waste, and so as we talk to people from hourly team members in the restaurants to executives here at our restaurant support center, this is an opportunity as Chuck just said to re-examine things we've done forever because the economy is different. The market is different. The consumers are asking for faster and cheaper. But still in a casual dining environment, value does mean more than just price.

And so we actually have an equation we created and all of our five areas of focus connect to this and even the questions we ask our guests in our guest experienced measurement, it is about the quality of the product. It is about the relevance of the facility, which is why we are doing reimages. It is about the service or hospitality and we are even trying to push now this emotional connection teaching our team members how to find out more about the guest at the table and make an emotional connections.

So those are the numerators. The denominators are price and time. So we are evaluating the way we talk about the experience for the guest but balancing that with how to do it maybe cheaper, how to do it faster, how to read the guests, how to use clues to help us interested what their needs are because as Chuck said, right now the consumer is looking for faster and cheaper. Our to-go, right and right on time, we do think has responded to a strong consumer need, a higher-quality food they can take with them, but making it accurate and making it faster.

But inside the restaurant, we are really focused on, as Chuck said, the business model but manifested in a guest casual dining experience. So wonderful atmosphere, high-quality food, incredible hospitality, but at higher value and if they want to get out that faster, how we can pull that off for them. So it's a shift, but a crisis is a terrible thing to waste is the mantra that we've grabbed onto during this economy.

Sure, so have you seen the to-go business grow faster than the rest of the traditional sit down?

We haven't seen it grow faster. Again, we were fighting maybe the parts of the industry that do have faster and cheaper experiences. QSR is really built more by definition to be faster and cheaper. So in this economy, we are doing this in advertising right now, about to-go, trying to remind guests that you can get a great meal at a great value and get it fast. But we haven't seen it grow as much but we do think the initiatives we are doing are keeping it flat and keeping interest in that.

Sure, thanks a lot, guys.

John Ivankoe, JPMorgan.

Sorry I lost you when I was picking up the handset in this hotel. So just a couple of follow-ups for me and I do apologize if they were asked, but I was off for just a couple of minutes. First, just a quick one. On the reduction in CapEx fiscal '09 to $110 million, that's down $30 million from your previous guidance. What is that $30 million? I know previously you've discussed or at least I remember you discussing that 2010 would be lower than 2009. Should we still consider that as we begin to look out into next year's plan?

John, we did slide some dollars out from as you said 2009 into 2010. It was primarily Chili's reimages. And then as we look at next year's spend, right now it looks like it might go up a little bit because of that shift on a year-over-year basis. But again, we will reevaluate that CapEx commitment as we get through the year and see how sales are and what the environment looks like.

Okay, fair enough. Normally when you see negative menu mix -- well firstly, you normally don't see negative menu mix as big as it is for you now and obviously that's just what's happening in the economy. But normally at least when you think about negative menu mix, you would think about that hurting your gross margins as people maybe get less appetizers or less drinks. And I know in your press release you actually discussed that menu mix was positive or a benefit to COGS.

So could you put some context around that negative menu mix? A, in terms of how we should think about the second quarter and maybe more importantly, how you think it might affect margins as we move throughout the year?

John, we were selling more burgers. The burger bites have been a great item that we've had. That really helped our menu mix and there's also not a lot of waste with that product too. So it helps both our efficiency and also it is a lower product just in terms of cost of sales.

And it may be it's just something as simple as people trading from steaks to burger bites for example?

Yes.

Okay and in terms of appetizer and drink sales, are you seeing -- is that a more pronounced trend year-over-year or is that stable?

What's happening in some cases, John, is as guests find a value entree, some guests are actually adding on the check with appetizers or beverages. So as we look at value over the coming quarters, these are some of the things that our operators and chefs were looking at. It's also to have more value in the appetizer category. Maggiano's has some flatbreads now in their advertiser line that can be shared by a group of people at a cost lower than some of the other appetizers. So it may be a way to add value but still not be quite so negative on menu mix.

But in a time when our goal is to get more guests in the restaurants and to offer value, that mix category may be a little bit more challenging to stay positive year-over-year when before you were selling fajitas or items that might have been at double digits $10, $11, $12, now you are trying to get someone like an On The Border to get excited about a lunch value menu at $6.49. So bring in more guests, but the mix they be negative year-over-year.

Okay, and in terms of the overall -- what I'm fearful of is that having a double effect on your business, right, both average ticket and reported margin. But in terms of as you think about the actual gross margin going forward, do you think it will contract on the negative mix as you think about your business? Is that a real risk or do you think you have the menu management in place at the gross margin as a percent could hold on negative mix?

I think we can hold on negative mix for the short term. I think the issue becomes how long do you have negative guest counts? At some point in time, you're going to use that, John. But we think we've got pretty good visibility in this quarter and next quarter and feel pretty good about where we are. Doug talked about the triple dipper dinner. It comes on TV on Monday and I know the Chili's team is incredibly excited about that product and what we've seen on soft role. I hope everybody gets out and get a chance to try it. And we also --

We enjoyed it yesterday, by the way.

Good, good.

It is a great product on -- and like that for example wouldn't necessarily -- if someone is trading up from a big mouth burger to that, that could theoretically have positive mix?

That could have positive mix and that's -- that would be a nice thing. We think that $9.99 for those kinds of options that's one of the things Doug talked a little bit about. People are looking for convenience and choice and time.

It also, John, it's sharing food. It expands sort of the experiential part of a brand like Chili's because you take a number of appetizers and turn it into a meal at a higher price point than what an entree might have been and the guests can share those products.

So we just have to be a lot more creative about how we send value messages but continue to have innovation with food items and our goal certainly is not to have negative mix long-term because as I was saying before you got on the call to the previous caller, Joe, this whole casual dining experience still is about -- there still is a social relevance to it and part of that is having an alcoholic beverage and having an experiential meal more so than just a quick burger and a fast satisfaction of hunger.

It is -- there is a real social part to our casual dining. We're not walking away or backing away from that one bit.

Okay, all right, thank you very much.

Lynne Collier, KeyBank.

A quick question. I wanted to expand a little bit on the original Texas question. I realize that Texas is a very strong market for you, but are you seeing any sort of sequential deceleration or some weakness in terms of the sales trends in this particular market?

Well, one of the unique facts, Lynne, has been since the hurricane, Houston has been a fantastic market for us. And I don't know if that's tradesmen or whatever's happened or we've even theorized that maybe some of the independents took their insurance proceeds and said you know what? Let's go open something else or let's go take our cash and do something else. But Houston has been an incredibly strong market and Dallas has still hung in there fairly well.

So I don't know if I can give you any more color than that, Lynne, or if I could answer your question any better.

No, that's great. I'm just hearing from a couple of companies that I follow that Texas may be showing a little bit of weakness here in the last 30 to 60 days. So I was just checking. Thank you.

Okay. Thanks, Lynne.

[Chris Bogen], [MTB Investments].

Thank you. Congratulations on good execution in a difficult environment. I was wondering if you could give us a little bit more fine print on the Chili's reimaging, i.e., the number of stores, how much you plan to spend on each store, and the return on investment you have experienced thus far and kind of what you expect going forward?

Chris, we've done about 95 Chili's reimages to date. In the first go round that we did of the Chili's reimages, most of which were in fiscal 2008, the average spend on the reimaged components was about $260,000 and we had a return of in the sort of mid-single digits on sales. Since that time, though, we went back. We revisited the program. We looked at the elements and what was resonating with consumers and the more recent reimages we have been doing at a cost of about $100,000 less or around $160,000. And it seemed pretty much the same sales lift.

So if you do that math, what was once probably a mid 20% return on the reimage is probably now north of 30% if you do the math on those numbers.

Okay, great. And just kind of a financial question then, given those high returns, not to be too cynical but why would you reduce the number of reimages that you get? It seems to make financial sense to continue on that path.

It does and I think what we are trying to do is maintain flexibility. When we made those decisions at the first part of the second quarter, we are not sure how long this economic downturn would last and so for us we are not backing away. We're still bullish about the prospect, still want to do it, but we also want to maintain our liquidity and make sure that we have the financial resources to continue to operate the business.

Right, okay. Thanks, great.

Thank you, there are no more questions in queue.

We just want to thank everyone for joining us today. This concludes our earnings call and Q&A session. We look forward to talking to everyone again for our third-quarter conference call in a couple months. 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.