Brinker International Inc (EAT) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Brinker International third quarter 2009 earnings release. At this time all participants have been placed on a listen-only mode. The floor will be open 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, Mandy. Good morning, everyone, and welcome to Brinker International's third quarter fiscal '09 earnings call, which is also being broadcast live over 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 Corporate Finance.

Before turning over the call, let me quickly remind you of the 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 -- which could cause actual results to differ from those anticipated. Such risks and uncertainties can 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 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 share Company highlights, along with specific brand updates. Chuck will follow with a financial recap of the quarter's operating results. Following these comments, we will open up the call for your questions.

Now I will turn the call over to Doug.

Thank you, Marie. Good morning, and thank you for joining us on the call this morning.

Brinker International's focus on strengthening our business model continued in the third quarter of fiscal year 2009. With our solid cash flow, our commitment to fiscal responsibility and our ongoing dedication to hospitality and guest satisfaction, Brinker is well positioned to protect its leadership position in the industry, and emerge even stronger from the current recession. Although we continue to be challenged by a difficult operating environment, we have taken considerable steps to remain competitive and position our brands for accelerated profitability once the economy improves.

All across Brinker, we're taking action to make the business as efficient as possible. Our team has improved margins through effective labor management, decreasing pre-opening expenses and holding the line on G&A spending. In addition to benefiting from lower cost of sales, we've reduced waste in our kitchens, we've revamped key processes and updated menus to reflect our guest's current focus on value, all of which contributed to our cost improvements. We're encouraged with the traction gained by these efforts and are optimistic we will sustain the benefits of margin improvement over the next six to nine months.

Now, despite the current economic downturn that has negatively impacted our industry along with many others, we remain confident in the relevance of casual dining and the long-term viability of our Brinker brands. As evidenced by our record Valentine's Day results at Chili's Grill & Bar, the consumer still desires dining options that offer high quality food in a comfortable setting, delivered with outstanding hospitality. We'll continue to meet our guests' needs by investing in the strategies which strengthen our brands.

In March, we announced a new organizational structure designed to streamline decision making and maximize our leadership talent, while achieving better operational efficiencies across the portfolio. Todd Diener has been named President of Chili's Grill & Bar and On The Border Mexican Grill & Cantina. Todd's 25-plus years of experience in operations and his incredible leadership skills made him ideally suited to lead both brands. Wyman Roberts has been named Chief Marketing Officer for Brinker, in addition to continuing his role as President of Maggiano's Little Italy. Based on Wyman's experience leading marketing, branding and culinary functions, it was a perfect opportunity to apply his experience across all three Brinker International brands.

I want to emphasize these changes are not meant to merge or change the unique identities of our brands. On the contrary, the intent is to continue strengthening our brands by leveraging shared services, adopting best practices and further enhancing the guest experience across our portfolio. across our portfolio. This new structure sets Brinker apart from the casual dining industry, and unites our brands with a clear vision for the future.

An ongoing area of focus for Brinker's brands is food and beverage excellence. Our goal is to satisfy and delight our guests with a variety of delicious food and drinks that align with each brand's unique positioning. Due to our desire to manage expenses during these challenging times, all three brands have been focused on innovative menu offerings that deliver great taste, but at the best possible value. Rather than putting our food for sale, or on sale, our approach includes constructing our menu around value through the introduction of new product offerings, as well as perfect portions of guest favorites at lower price points.

In addition to Chili's Bottomless Express Lunch, which continues to be a guest favorite, the brand recently launched its new 10 under $7 menu, which features perfect portions of some of the brand's most popular items for less than $7. We are kicking off the 10 under $7 promotion with a creative new advertising campaign that highlights Chili's positioning as the place for innovative and flavorful food. The campaign includes national TV, online and other media targeting value-oriented consumers.

During the third quarter, Chili's continued to promote its Triple Dipper Dinner for $9.99, with three new options and endless combinations for our guests. The brand also introduced its newly expanded Guiltless Grill menu with four new healthy options; carne asada steak, cedar plank tilapia, honey-mustard glazed salmon, and the new buffalo chicken sandwich. All the new offerings have been a big hit with guests, and the carne asada steak has now become the best-selling item on the Guiltless menu. Earlier this month the brand also announced a relationship with Curves Fitness Centers, designed to further promote our Guiltless Grill menu.

Now On the Border's new Border Lunch, which was introduced in January and starts at just $6.99, addresses our guests' priorities for value, speed, and health and wellness. Our On the Border guests have responded very favorably to the option to order the new lunch portion of two tacos for a lower price, and still have the opportunity to order the full plate of three tacos whenever they wish. And for those who just can't get enough of a good thing, the brand also offered its popular Endless Enchiladas promotion for $8.99 during the quarter.

This month On the Border also launched a major initiative to make the brand more relevant to our guests. We call the initiative Fresh Look, and it's a holistic brand refresh that touches all aspects of the brand's operation, including initiatives to include the cost structure through tighter management and controls on cost of sales, as well as those things most visible to the guests; the menu, the service and the restaurant atmosphere. A new signature menu features innovative and fresh new items, while highlighting the fajitas, tacos and enchiladas our guests crave.

We have a new value layer called Everyday Favorites. It features a Create Your Own Combo starting at $6.99. Guests can choose two or three items from our array of favorite Mexican classics, paired with rice and beans, to create their own customized meal. With 15 total options, the choices result in countless combinations for the guests, and are always served with the brand's Bottomless Chips and Salsa, all for one low price.

At both Chili's and On the Border, major menu launches and brand initiatives are supported again by our quarterly all team member meetings and training sessions. In these meetings, hourly team members learn the details of upcoming promotions, review execution of core menu items, and are recognized for delivering great hospitality to our guests.

Now in February, Maggiano's Little Italy featured date night throughout the month, with special menu offerings celebrating the Valentine's season. The brand's lobster tail entree was popular with guests, as was a new Italian sausage flat bread appetizers and a new mini dessert sampler. The Maggiano's team is also focused on delivering value-oriented options for their guests, including a smaller portion of its signature Mom's Lasagna at a lower price point and new price tiers for its popular Family Style Dining, all of which will debut on the menu on April 28. Throughout the month of April, the brand is also featuring three great wines by the glass for just $5. During the quarter, Maggiano's also opened its newest location in south New Jersey at Cherry Hill Mall, bringing the brand's presence to 45 total locations now worldwide.

As we emphasize growth within the four walls of our existing restaurants, we continue to shift a greater portion of new restaurant development to our existing franchise network in both domestic and our international markets. During the third quarter, Brinker and its franchise partners around the world opened 13 new restaurants. Two of those restaurants opened during the quarter were company=owned, three were domestic franchise restaurants and eight were international franchise locations. All totaled, these new restaurants bring our system presence to 1,679 restaurants in 28 countries and two territories worldwide. Our global business development team remains focused on discipline and aggressive international expansion of Brinker brands in key markets around the world.

During the third quarter, we entered a new country and a new territory, Turkey and Guam respectively. This quarter the global team will celebrate two important milestones, our 100th restaurant in Latin America and our 200th international restaurant, which will also represent Brinker's entry into India, bringing our international presence to 29 countries and territories outside the US. With these openings and the continued popularity of our brands overseas, Brinker is well on its way to opening a record 50 international restaurants during fiscal 2009 and very confident in our goal now to reach 500 international restaurants by 2014.

At Brinker our attention to delivering hospitality remains consistent across the portfolio, and in the third quarter we implemented new processes that enable our international franchise partners to leverage our successful programs in their own restaurants. By adopting our unique hospitality training programs and our guest experience measurement tools, our partners can now help us ensure guests enjoy an outstanding dining experience at Brinker brands around the globe.

As we look forward to the last quarter of the fiscal year, Brinker and the entire restaurant industry remains challenged by a highly competitive environment in an uncertain economy. Despite the many challenges, we're committed and more focused than ever on delivering positive results for our shareholders. Our top priority as an organization remains growing guest traffic over time. Although the current economic environment continues to challenge us, we're confident the new introductions at Chili's and On the Border will help us reverse the negative sales trend.

Thank you. Let me turn the call over to Chuck, so he can share the details on our third quarter results.

Thanks, Doug and good morning.

In the third quarter we delivered on our promise to not only survive the current challenges we face, but also position ourselves to strongly emerge from the recession and thrive into the future. As guests continue to be pressured and look for ways to cut back on discretionary spending, including limiting the number of visits to restaurants, Brinker has been keenly focused on reversing the resulting impact on sales by making adjustments to the way we manage our business. Our strategic focus has transformed us from building new company-owned restaurants to concentrating on the optimal operation of our existing restaurants, and grow through international and domestic franchising.

The result has been a significant improvement in our operating margins. A great deal of these margin improvements are sustainable; more importantly, they're consistent with our focus on providing a great restaurant experience for our guests. The brand's food and overall guest experience measurement scores have been consistently improving, and the third quarter scores were higher than both the prior year and prior quarter. As we effectively managed the business and deliver solid cash flows in the current economic environment, we're poised to generate even greater returns as top line sales improve. A healthier economy will certainly assist us in the sales turnaround; however, we're committed to help drive our own recovery to improve sales and earnings.

As Doug mentioned, in the fourth quarter we were launching several compelling value menu offerings across our brands which we believe will resonate with our guests. Promotions featuring the 10 items under $7, which are perfectly portioned, cravable values at Chili's; a new Family Style program at Maggiano's; and On the Border's Fresh Look, featuring Create Your Own Combo for only $6.99. All of which give guests a value proposition, which they're looking for in today's environment, at an attractive price point. More than ever, our guests are looking for value, and we know fresh twists on those items are the best vehicle to provide value.

In addition to these new value offerings, we're seeing continued success of the Bottomless Express Lunch at Chili's, and are featuring some new menu offerings which give the guests the choice of some lower-priced lunch items. Both Chili's and On the Border are offering the choice of perfect portions on some core favorites, consistent with Brinker's approach to value. The introduction of new items are new takes on guest favorites at reasonable prices with appropriate margins, rather than temporarily discounting or giving something away for free.

Margin focus is another key component to exiting this economic environment in a position of strength. Sustainable margin improvements are derived from the disciplined focus of our operators, slowed restaurant development and the closure of underperforming locations. Our focus on effectively managing cost of sales, increasing labor productivity and reducing fixed costs, all had a positive impact on margins in the third quarter and will be sustainable. In addition to the immediate benefit of lower pre-opening expenses, we're also starting to see the longer-term margin benefits from our shift in focus from building new company-owned restaurants to the operations of our existing restaurants. Reduced development, along with lower turnover trends, translates to less disruption of management teams at the restaurants. Besides the explicit benefit of having lower management training and relocation costs, and other turnover related expenses, a more tenured team also operates a restaurant more efficiently.

Even excluding preopening costs, margins on new restaurants run an average of 500 basis points lower margins than restaurants which have been opened at least 18 months. And this isn't surprising, as it takes time to get a new restaurant running at optimal cost of sales, labor and restaurant supply levels. So by having fewer new restaurants in our system this year, margins have benefited by about 30 basis points in the third quarter. We also did not offer a bounce back with our gift card sales at Chili's and On the Border this year, giving rise to approximately 30 basis points in improved margins against the prior year. Additionally, the closing of 55 restaurants since the beginning of the third quarter last year accounted for approximately 25 basis points of margin improvement in the third quarter of this year.

The last big component to help position Brinker to thrive is our prudent management of capital. The decline in company-owned restaurant development, along with the slowing of the Chili's reimage program, has allowed us to reduce our total capital expenditures and thus reduce interest expense. Excluding Macaroni Grill, we'll spend approximately $110 million to $115 million in capital this fiscal year, which is down from $260 million in fiscal 2008. This additional free cash flow will allow us to pay down debt further, improving the health of our balance sheet. The emergence from the current economic conditions will mean an increased demand for casual dining, but we may not see demand return to pre-recession levels for some time.

Today's challenges are also resulting in a reduction in restaurant supply, as major chains have slowed their growth and have started to close underperforming restaurants, and many independents have ceased operations. Giving Chili's unique position in the marketplace, and the reinforcement of that position with our newest menu initiatives, we expect increased market share and higher overall sales exiting the recession which, coupled with higher margins and lower capital expenditures, will have us delivering even stronger returns in the future. In the more immediate timeframe, we have sales-building initiatives in place addressing the value proposition, and our work on margins has produced improved returns in the most current quarter.

And let's now turn to the specifics of this quarter's results. All comparable year-over-year numbers in today's discussion of results will exclude Macaroni Grill from prior-year numbers, in order to give an apples-to-apples comparison. And this is slightly different from what was presented in the press release, where prior-year numbers still reflected the results of Macaroni Grill as required by GAAP. Our majority interest in Macaroni Grill was sold in the second quarter, and a reconciliation of our consolidated income statement is provided on our website.

In the third quarter, total revenue decreased by 5.5%compared to the prior year, mostly driven by a 5.6% decline in comparable restaurant sales. And capacity, as mentioned by the number of operating restaurant weeks, decreased by 1% due to the closing of underperforming restaurants over the past year. Franchise revenues were virtually flat compared to prior year, as increased royalties resulting from additional franchise restaurants were offset by higher development fees received in fiscal 2008 from the signing of a deal to develop Maggiano's internationally.

While negative 5.6% comparable restaurant sales were disappointing, there were some contributing factors that aided this decline. First, the aggressive discounting efforts of some of our competitors likely contributed to a portion of the sales and traffic loss in the quarter, as Brinker decided not to bolster our top line at the expense of our bottom line. Also, we're lapping our successful burger promotion in the third quarter of fiscal 2008, and there was a net holiday trading day impact of 80 basis points, in which the second quarter benefited at the expense of the third quarter due to the timing of the Christmas holiday. In addition, softer gift card sales in the Christmas holiday season this year resulted in an estimated 70 basis points sales decline to the third quarter, as redemptions were down compared to the prior year.

To provide some additional perspective, when adjusted for holidays, Brinker's two-year sales trend improved sequentially to minus 3.4% in the March quarter, up sharply from minus 7.6% in the December quarter. And when you look specifically at two-year sales trends versus [nav track], Chili's consistently outperformed its peer groups in each of the three months in the March quarter. However, despite this additional perspective, our fiscal 2009 third quarter sales performance was not where we want it to be; furthering our resolve to focus on improving those comparable sales trends by providing greater hospitality, introducing cravable offerings to our guests, and giving guests great value.

In the third quarter, we experienced 100 basis points of cost of sales improvements to 27.9% versus prior year. Menu pricing offset all but 20 basis points of a slower increase in commodity costs. The real benefit came from decreased commodity usage from reduced waste and menu item changes. Chili's and On the Border have both expanded their use of pre-portioning for some proteins, in addition to setting and achieving tighter actual versus theoretical food cost goals. We also made changes to some menu items, which will have a lasting positive impact on cost of sales.

The culinary teams have examined every item we use on the menu; and as a result, we've made some changes where the guests told us in tests the new product did not compromise quality. We've changed things like slicing our onion strings in-house, switching the procurement of our bacon, and offering a new tequila in our house Margaritas, which allowed us to lower the price and increase the margin at the same time. We have also changed the amount of some sauces and garnishes we deliver to the table, but are always willing and able to provide the additional -- the guests additional amounts upon request. Seemingly small changes like these add up to a large savings in cost of sales, without compromising the guest experience.

Restaurant expenses decreased 150 basis points to 54.6% in the third quarter. Improved turnover, which is now below 100% from a peak of 140%, has produced tangible benefits in productivity. As expected, labor savings from productivity and lower wage inflation was the largest driver, accounting for 60 basis points of the decline. In addition to a more tenured team, our general managers have adapted their scheduling to current traffic numbers, and have been able to improve labor efficiency in both the front and back of the house.

Our performance against our scheduling tool has continued to improve during the quarter, and we have been actively managing outliers that exceed the recommended level for scheduled hours at their sales levels. Lower and new restaurant openings provided a reduced preopening expense of 60 basis points. It also allowed us to increase the number of restaurants per Area Director, which lowered supervision costs. Better maintenance contracts, due to our dedicated effort to make sure we have the right levels of service at the best prices; decreased management training and relocation costs due to lower turnover and less manager movement to new restaurants; and lower R&M expense, due in part to less of a need for R&M at recently reimaged restaurants, have all contributed to favorable restaurant expense. There was also a modest credit in restaurant expense to record our minority share of Macaroni Grill profits. These gains in margins have been somewhat offset by lower comparable restaurant sales, which deleverages fixed costs such as rent, property taxes and management salaries.

Depreciation and amortization was $39.9 million for the third quarter, which was flat on a dollar basis year-over-year, but was unfavorable 20 basis points due to sales deleverage. General and administrative expenses continue to be in line with our stated goal to hold G&A flat to prior year. For the quarter G&A expense was $36.7 million or 4.3%, which is $3 million and 10 basis points favorable from prior year, with a decline mainly driven from lower payroll expenses. These gains are a direct result from decisions we've made to control G&A expenditures. This quarter also includes a $1.75 million credit for the G&A resources we've kept in our organization to provide transitional services to Macaroni Grill.

Other gains and charges for the quarter were $17.9 million, with the bulk of that expense being related to restaurants we closed during the quarter, and also for severance costs related to a reduction in force. Prior-year other gains and charges of $133.2 million was mainly from writing down the value of Macaroni Grill, and from restaurant closures and long-lived asset impairments. Interest expense decreased by $3.3 million from prior year for the third quarter to $7.5 million this year. The decrease is attributable to lower borrowing balances, along with lower overall interest rates. Excluding the impact of special charges, the third quarter tax rate was 300 basis points higher at 31.1% compared to 28.1% last year, with the change in the tax rate resulting from an increase in profit before taxes, and that's a good thing, and reduced leverage from FICA tip -- tip credits.

Cash flow from continuing operations was $184.5 million for the first nine months of the fiscal year, and given the significant changes to the organization, including the sale of Macaroni Grill, restaurant closures and the decline in new restaurant development, it's difficult to compare GAAP cash flow from operations on a year-over-year basis. Income adjusted for noncash items increased slightly on a year-over-year basis, but overall cash flow from operations decreased, primarily driven by a decrease in working capital. Excluding the swings in working capital, we generated approximately $290 million of EBITDA, and with this excess cash we continued to aggressively deleverage the balance sheet by paying down approximately $60 million in debt during the quarter.

We also completed the refinancing of our revolving credit facility at the end of February, and our ability to close this transaction in the midst of a difficult financial environment is further testament to the reputation of our brands, our healthy balance sheet, considerable cash flow and strong banking relationships. Since the end of the quarter we have fully paid down the revolver balance to zero, and our decision to place a moratorium on share repurchases, pay down debt, reduce our capital expenditures while protecting the dividend, and increasing cash flow, are all evidence of our commitment to proactively manage our balance sheet; and we've continually improved our leverage metrics throughout the year.

Brinker's third quarter results reflect the benefits of reduced company-owned restaurant growth, and our team's focus on margins, which delivered increased earnings per share even in the face of declining traffic. And while we continue to generate strong cash flows due to improvements to our business model through improved margin efficiencies and capital spending reductions, these changes will allow Brinker to even further solidify its balance sheet, but more importantly our brands' strengths going forward.

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

Thank you.

(Operator Instructions)

Our first question is with David Palmer. Please announce your affiliation and then pose your question.

Hi. UBS. Thanks for the detailed call. Hey, Chuck.

I was just curious, any signs with regard to this everyday low pricing menu that you've launched and, you know, plans that you have to make this -- is this a temporary rollout that you would consider making a long-term permanent menu, wait and see on that? And then, also, just -- because I know a lot of people are wondering and watching about this thing, Applebee's had its 2 for $20, now we're getting the 10 for under $7, and the thoughts that you may have about making these sort of everyday low pricing menus work for you in casual dining? Some competitors of Chili's have said that this will end up cheapening your brand and others that do these everyday low pricing menus, but we've seen them work for those that advertise them heavily in the fast food world, so any thoughts about that would be helpful. Thanks.

Well, Doug, why don't you take the first part. I'll take the second part.

Thanks, David. That was a lot of questions, but kind of a good holistic sort of look at what's going on right now. I guess first I'd say the Chili's and On the Border menus have been in for just about a week, and Maggiano's new Family Style hasn't begun yet. So in terms of forecasting what's going to happen, not real keen on that.

I would say this, we are first of all very encouraged by the margin improvements and their sustainability. We're also really optimistic about all the new value programs, the menu changes and the impact they're going to have on traffic. But we're guarded about the consumer and the economy. So, you know, there's sort of that quick viewpoint.

As far as cheapening the concept or cheapening the way people view casual dining, I think you asked, I mean we're very excited still about the quality of the product. It's really more about how much the offering is, and honestly we've had lots of guests over the last four years speak to the amount of food we serve. Casual dining for decades has been married to these large, large portions. So I think last quarter we talked about this sort of tipping point that's going on, where the consumer has less disposable income, and certainly many consumers, particularly baby boomers, aren't looking for that much food.

So when you marry I want to spend less with don't want as much, it gives us the chance to serve the same great food, just in portions that are more reasonable and more reasonably priced for this sort of point in time. I think the easiest examples are the items that used to have three tacos. On the Border has these great new Mahi Mahi tacos that are fantastic. But a lunch portion of two versus three is much more appropriate, and the price point is much more in line with what consumers have and want to spend today. We don't see it as cheapening, we see it more it's the perfect portion, it's right-sizing the price and right-sizing the amount of food, while continuing to improve the quality of food.

And are you at all concerned that you will have enough advertising weight to really drive the incremental traffic to make this sort of a -- this sort of check trade down risk pay off?

We started, David, with good marketing weight, and I guess we'll continue to evaluate that as it moves forward.

Yeah, we started out heavy on the advertising right now, David. And to backtrack a little bit and just to add on to what Doug said, and I thought he answered it well, you know, I think what we're really trying to do is offer guests the opportunity to customize their experience. So we're not changing the quality of the items that are 10 under $7. It gives guests an opportunity to pick two tacos or three tacos. I think on something like that, that doesn't cheapen the brand.

I think you run a greater risk when you take something that's got a regular menu price, and now offer it on sale. We're really working for everyday low value, everyday value at Chili's, so that you can come in, get a great meal and pay what you want to pay, and we think that's a much better way to position a brand than to put things on sale or give things away. And so, anyway, that's the underlying brand promise that we're making.

Thank you.

David, I know you were asking about traffic trends and, you know, again, we have seen some improvement in traffic trends since we started doing it. It's very, very early. I certainly don't want to run around the track declaring victory. We think we've got a long way to go, but we have seen numbers come back a little bit since we started putting this in.

Thanks, Chuck and Doug.

Sure.

Thank you. Our next question is with John Glass. Please announce your affiliation and then pose your question.

Thanks. It's Morgan Stanley.

On the labor cuts at the restaurant level over the last three quarters, your restaurant expenses have gone down 400 basis points, and I presume the lion's share of that is the labor component. Can you just give maybe a couple much concrete examples at the store level of where you've achieved that? And more importantly, you know, how do you know when is too much when you interfere with service? I know you talked about service sort of getting better, but often in a declining traffic environment you're asking fewer people or people that keep coming back, and they're more satisfied than the ones who left? Is there any way to control for the dissatisfied customers who may not have come back, and maybe you're not getting at that constituency?

Hey, John, it's Guy. I would say, if you want to use a couple of examples of where I think we've managed labor costs, the first would be on what we would call internally as outliers. So if you look at restaurants that are running higher labor compared to restaurants of similar volumes, particularly around certain day parts, we can go and look at the restaurants that are more efficient versus the ones that aren't as efficient, and bring those outliers up. So it's not like we're taking a restaurant that's operating optimally and trying to squeeze a little bit more out of it. What we're trying to do is get those who aren't operating efficiently and bring them up to more of the brand standard. So that would be one example.

Obviously that's a little vaguer, so maybe let me give you a little more specific example. If you look just around traffic by day part, what we've been pretty effective at doing is making sure that we match when we bring labor on or when we take labor off as the traffic flows through the day part in the restaurant. So we make sure we're not overstaffed earlier in the period, you know, the lunch period or earlier in the dinner period than we need to be, and we also make sure we're correctly staffed when we're busy in the restaurant. So managing around those day parts more effectively and, again, benchmarking the restaurants that do that very well versus the ones that aren't are areas where we've been able to get some of that labor productivity, really without impacting the guest experience.

Hey, John, the other big thing around that is, you know, we've also benefited on restaurant expense because lower preopening, 60 basis points, we've also gotten more efficient restaurants that are operating. By getting rid of restaurants that were underperforming and thus had a higher restaurant expense, by closing those locations, we improved our restaurant expense margins, also. And then the last thing has been the wage rate inflation that we're seeing now is less than 2% and, you know, we got pricing in at over 3%. So we're getting leverage from that, too, John.

So I think it would be kind of mixing things up to assume that all of the margin improvement has been from the way we've changed the guest experience. I think some of it is we're taking out, as Guy said, the outliers, we're eliminating underperforming restaurants, we've got lower preopening, we've got more efficiencies from having no growth in our system, and I think that's an important point that people ought to look at when they look at our restaurant expense improvement.

And this year was supposed to be a year across the industry where we were supposed to get some lower commodities that we're going to benefit food costs. Do you think that will occur, just given the level of mix shift that you guys are undergoing, others are undergoing, or do you think actually that the lower commodities are going to get offset by this change in mix that you're talking about?

WeIl, I think we certainly see a commodity environment that looks much more benign than when we were sitting here last year kind of looking out, commodities looked like they were going up and out of sight. So it certainly looks to be a much better environment, and we feel like this is the perfect time to bring something in like this because we won't see or haven't seen any indication that we'll have a lot of commodity pressure over the next nine months. So this gives us a chance to introduce this, I think, at a really good time comparatively to where our guests are sitting, but also financially.

Got you. But at the same token, we shouldn't assume down food costs as a percentage of sales, maybe more flat in this environment given what you're saying?

I still think we'll see some improvement in food costs in the near term, in the next six months, over where we were last year. Inflation on commodities is not as high as some of the price we got through the end of the year, so I think we're still looking at a favorable food cost environment in the shorter term; and, honestly, longer term, I have hope, too.

Okay. Thank you.

Thank you. Our next question is with Jeffrey Bernstein. Please announce your affiliation and then pose your question.

Thank you. Barclays Capital. Thanks.

A couple of questions regarding traffic. One just a follow on to your previous commentary regarding the changing labor model for time of day. Wondering if you can just talk about -- if you can compare perhaps weekday versus weekend, and lunch versus dinner traffic? There's been lots of talk that weekend traffic perhaps is coming back, but weekday traffic -- or the disparity between weekday and weekend has become a lot more meaningful. Which leads me to my broader question of maybe the change in structural design casual dining. I mean you've seen traffic down 3% to 4% the past three years, looks like this year it's going to be down 5% or so, so we've really taken a large chunk out of the category through sales, and you mentioned in your prepared remarks about returning to pre-recession levels, just wondering about your thoughts on regaining that traffic, or whether you think this is probably the new norm, and food at home is fighting back, and the opportunity to get at that back that lost share in this changing environment is less likely? Thanks.

Well, Jeff, each one of our three brands is a little different. For instance, at Maggiano's, just because of the business environment, the banquet business we're doing, particularly in the business community, it's down. And we're probably going to have to see this recession or the change in -- the economic climate change before some of that business -- banquet business comes back. Probably weekday nights is still the biggest challenge across our portfolio, as you see consumers still wanting to go out on weekends, but they're probably managing a little tighter to the vest during the middle of the week, and we're hoping of course with the value messages, we'll get on the short list of places they might consider if they're still eating out when they're just trying to spend less.

And in terms of the broader category with the traffic declines over the past three or four years, is it reasonable to get back to prior levels or do you think the category's changed, with food at home kind of taking more share and casual dining being less of a driver?

Well, Jeff, I think there's been a number of reasons why traffic's been down. I think part of the underlying issue has been, you know, casual dining has gotten expensive, and one of the things that we're trying to offer is the right amount of food for the right price to folks. And we think that this option of perfect portions works more in what I call a non-celebratory kind of environment, where maybe during the week you may be much more willing to take your family out for the 10 under $7 for either lunch or dinner, and those have been the weaker parts of our day part, and I'd say that's not a Brinker phenomenon, that has been a part of all casual dining.

So I think some of the things we're working around on pace and convenience also are -- give the ability for really the guest to customize their experience both in their food choices and the amount of time they want to spend in a restaurant, and I don't think casual dining has offered that kind of flexibility to a guest experience. So that's really part of our strategy to try and help recapture the share and the traffic that we lost.

And I think lastly in your prepared remarks you mentioned something about a meaningful, or I should say an acceleration, in independent store closures on top of the slowdown of chains growth. I was just wondering if you could give an update versus the past few quarters now that the year end is complete, and are you seeing any more meaningful independent closures? Is there any means to quantify that, or any markets where you're seeing more meaningful closures that you're getting more of the lift?

We'll we bring that stat up just because the latest NPD numbers say that. We've heard some commentary from distributors also, talking about how they've lost independent customers. So I can't point to a definitive source, but we see it both anecdotally and also from those -- you know, those reports.

Great. Thank you.

Thank you. Our next question is with Jeff Omohundro. Please announce your affiliation and then pose your question.

I'm with Wachovia.

Thanks for the update on your international unit openings. I was wondering how the global macroeconomic slowdown has impacted your international development plans, and as international becomes a larger portion of future growth, I was wondering if you could benchmark for us the returns in that business versus the US? Thanks.

Jeff, it's Guy. On your first question, you know, international growth in terms of comp sales, we've definitely seen some slowing, but the comp sales are still positive internationally. So when you compare that to what we're seeing in the domestic system, we're still seeing that lift. So that combined with the fact of just lower penetration of casual dining in many of those markets where we're competing globally gives us, we think, lots of upside for development, particularly in the markets that we're focusing on or markets where we have a large presence, the latter being the Middle East and Latin America, and of course as Chuck and Doug both mentioned in their comments some newer, larger markets where we think there's lots of upside potential for development.

In terms of returns, Jeff, as I think you know, the vast majority of our international system is the franchise model. You know, we do have a handful of company-owned locations, and we do have the joint venture that we entered into about a year ago with our Mexico franchise partner. So the returns look a lot more like the franchise model returns you might see than they would with our domestic system which is, you know, about 60% company-owned.

Thank you.

Thank you. Our next question is with Thomas Forte. Please announce your affiliation and then pose your question.

Thank you very much. Tom Forte from Telsey Advisory Group.

I had two real estate questions. The first one was, when we think about your decision not to add company-owned models for fiscal 2010, is that something we should expect to be related to the current cycle, or in 2011 do you also not to intend -- or not intend to add company-owned units?

And then the second question was I wanted to know if you could comment on your ability to renegotiate leases with your landlords, both on locations that are coming up for renewal within the next one or two years and other locations that aren't coming up for renewal?

Well, in terms of new restaurants out to 2011, there's generally an 18-month cycle from the time we say we'd like to build a restaurant and start looking for a site until we actually get one open, and I can tell you that we aren't looking for sites currently. So, you know, we probably will not open any restaurants for the next 18 months that are company owned. We still will have franchise development, so that will help us continue to build top line sales, at least for the system.

In addition to that, on renewals, I can't say we're having tremendous success with places where you might have a ground lease, but we certainly are able to go back on leases that might be within a year or two of renewal and work with landlords there to get better rent -- better rent prices than we've been going through currently.

Great. Thank you very much.

Thank you. Our next question is with Destin Tompkins. Please announce your affiliation and then pose your question.

Morgan Keegan, thank you.

My question is on the same store sales trends through the quarter. Can you comment maybe on the sequential trends you saw, and was there any impact from the Easter shift in March that may have negatively impacted March and positively impacted April at all?

Well, actually, for us, Easter is a negative, so that actually helped March and hurt April. Sequentially, as we went through the period, we did see -- if you look on a two-year basis, we saw numbers relatively flat. On a one-year basis, they went down. We were better in January and February than we were in March.

Okay. And then quickly on your new promotion, the new menu, I just was curious if you had done any testing and if you can share maybe some of the test results you saw from that, and if you see any opportunity for increased appetizers, beverages, dessert sales to go along with the lower price points?

You want to talk about -- well, first of all, on tests, we probably don't want to talk too much about tests, because we didn't have media on when we were testing those items. So that should be something that's an unknown based on that. You want to talk about some of the other items?

Sure. Obviously if your core entree price is lower, the potential or the hope is that a guest might order something else, an appetizer, a dessert, a beverage, which over the last year is what we saw consumers starting to trade down to. So part of the strategy on the Chili's menu is we also added some new lower-cost appetizer items and dessert items. For instance, there's a great new item on the Chili's menu, it's an onion string and jalapeno stack for around $3. There's also now a half order version of Texas cheese fries for under $4. Our classic margarita is now offered at $3.99, and we've had the sweet shot desserts, the bottomless tostada chips.

So we're certainly trying to also -- besides offering our entrees at a right price and portion, also -- trying to also management other parts of the guest experience, and if they decide to trade up, keep the check average close to where it was previously, as we've seen actually happen a lot in other restaurants.

Okay, great, thank you.

One other comment. You were talking about sequentially what happened with sales. I wanted to talk about where our [NAP gap] was on a two-year basis. We were up about 20 basis points in January, we were 8 points better than [NAP] in February and 160 basis points better in March. So, again, we still beat NAP in every period during the quarter. So, you know, that's kind of -- so we are producing well against the industry.

Thank you. Our next question is with John Ivankoe. Please announce your affiliation and then pose your question.

Hi, I'm with JPMorgan.

Chuck, maybe a question for you regarding the balance sheet. You know, obviously, you know, you say you're continuing or protecting, I guess, the dividend, and you have a moratorium on stock buyback and you're just paying down debt. I mean at what point, you know, do you get to a debt level, and what is that nominal debt level, where you say our coverage, our debt to free cash flow, our debt to EBITDA is good, and then you can begin to think about reinvesting in your business in some other way, which could include stock buyback? And related to that question, are you paying down debt now because, I mean, you're fearful of refinancing the term loan, which I think isn't due until October 2010, or is it just you want to be as conservative as you can possibly be in this environment?

Well, I think the first thing we're trying to accomplish on a very short-term goal is -- this is on balance sheet management. We're trying to get our debt on the term loan below our revolver balance, and what that does is that makes sure that we don't have a refinancing risk related to that and we feel very comfortable we can get that done. We can do that while we're still investing in the business, John. I don't want anyone to think that we are sitting around not investing in our restaurants, not trying to push our business forward at the expense of paying down the balance sheet. We think we can do both, and we think we are going to take away any possibility of having a refinancing risk in 2010 when that term loan comes up.

Okay.

Over the much longer term, I think we want to remain investment grade at BBB minus, and getting the term loan down certainly will help us in that, help us accomplish that, and that's really what we're trying to get accomplished over a much longer period of time.

Okay. That's helpful. Thank you.

Thank you. Our next question is with Steve Anderson. Please announce your affiliation and then pose your question.

MKM Partners.

As you start to model out for future quarters, do you -- would it be safe to assume a return to the 29% tax rate for future quarters?

We would think that would be more the run rate.

Okay. All right. Thank you.

Thank you. Our next question is with Bryan Elliott. Please announce your affiliation and then pose your question.

Raymond James.

Good morning. A couple of questions. With some of the significant changes in what you're bringing in the back of the house or the restaurant from a supply food standpoint, you talked about going to more pre-cut proteins, et cetera, has that sort of pushed the reset button on a number of contracts? Maybe bring us up-to-date on where you are as far as your commodity contracts are, the important ones?

Bryan, I don't want to confuse, you said pre-cut proteins. In some cases we're just doing pre-portioning.

Pre-portion, I meant, yes, sorry.

We're pre-portioning some of those things in the restaurant ourselves. It doesn't mean we're necessarily bringing them in pre-portioned. Some items we are, but some we're just pre-portioning into baggies in the morning, and saying this is the right spec, we measure it out and make sure that it's the right amount of protein or the right amount of fries or whatever.

Oh, okay, I misinterpreted that. Okay, thank you.

And if you're out of line on your actual versus theoretical food costs, that becomes a [requirement].

Yes. So therefore there hasn't been a big change in the mix of what's coming in the back door then?

Well, you know, we continue to always go through and say, okay, where can we get a better contract, where can we make a change, you know. We changed tequilas on our house Margarita, you know Doug talked about add-ons, it was able to give us a $3.99 house Margarita, and give us better house margins. So -- consumers also liked the test of the tequila better. So doing something like that is an opportunity for us to get better margins, and be able to offer a lower price to the guests.

Okay. Big picture question. Maybe I'm, I think, still trying to balance this and understand it in my head as well. The, you know, general move to materially lower prices for the entrees, obviously hoping to get reversal in some of the declining proportion of folks who are buying appetizers, desserts, et cetera, helps offset that. But fundamentally, have we not -- are we not significantly lowering the sort of gross margin dollars per plate and, therefore, do we not have to commensurately reduce, you know, just the sort of, you know, man hours per plate or man minutes per plate, or some of the other costs, you know, to produce a plate of food seem, you know, relatively unchanged simply because the portion size are smaller, et cetera? Help me understand that a little better, if you can.

Well, Bryan, I'd say that, first of all, if you look at the Chili's menu or the On the Border menu, there are still lots of the same choices -- great choices we've always had, larger portions, full-priced steaks, ribs, fajitas and the attempt to do some of these 10 under $7s and certainly On the Border to offer some more fresh items, some more salads, it really just is offering, as Chuck said earlier, the consumer lots more choices. The Triple Dipper gives you the chance to marry different products together.

So it isn't just about lower check, it's about more choice and particularly in this current economic time, you know, consumers have less disposable income and they're eating out less, or when they do eat out, they -- some consumers are picking by price point. So we're just trying to make sure there's enough choices across the entire menu, but we haven't -- you know, a large portion of the menu is still exactly the same.

Yes, I think that's the important point to remember, Bryan. It's not as if we've changed 90% of preference or 90% of our items to be a much lower price. You know, we'll be very happy if we get mix in the 10% to 15%, 20% range on this kind of item. And I think when you look at restaurant level margins, you've got to also understand our organization has modified the way we operate to accommodate having less new restaurants in the system. So we've got lower overall supervision costs, less manager churn; there's a lot of costs around growth that have been eliminated and allow us to do this kind much new offering to the customer to, again, give them a custom experience.

Bryan, I would just add we didn't talk a whole lot about this new recent reorganization, but part of -- one of the things we did, to Chuck's point, when we married Chili's and On the Border, the supervision is now done geographically. So even though we added 160 restaurants, you take the On the Border restaurants to Chili's, we've expanded the span of -- to all those Directors, because you have more logical geography and traveling, and we haven't increased the number of Directors. So we have 160 more restaurants being supervised by the exact same number of operations folks. So there's other costs throughout the enterprise that have been reduced and lowered at the same time we've made menu reformulations and new menu offerings. So it isn't just about food in the door, it's about the way we're managing the entire company.

Yes, which gives you flexibility to take some lower margin at the stores?

Absolutely. If you're going to start charging less for some products, obviously your whole economic model has to change, and that's really what represents more of what has gone on in the last six months than just a few new menu items at a lower cost.

Yes, puts you in position to go forward with this. All right, appreciate it. Thank you.

Thanks, Bryan.

Thank you. Our last question today is with Greg Ruedy. Please announce your affiliation.

Thanks, Stephens, Inc.

I jumped off quickly, so I apologize if the questions have been asked, but can you update us on the target for company to franchise-owned and your refranchising initiatives in the past?

You want to take that one?

As you know, Greg, we haven't really talked about a target of where we might end up. We've talked a lot on the calls in the past about us looking really at whether it makes sense long term to be company owned in terms of the returns we delivered to the shareholders or whether it makes sense, you know, to franchise the market. So we don't really have a target.

In terms of the refranchising efforts, you know, obviously a lot is still going on in the global market, we're still able to sign additional deals, and we expect to be able to announce additional deals here as we go forward. Domestically, while it is more difficult to do in the credit environment, and it's presented some challenges, I wouldn't say that we won't be able to get any deals done, but as we've talked about before we won't see deals of the size that we did with [Pepperdine and ERJ]. Those types of deals aren't out there right now.

Okay. I'm just wondering, given the focus on ops at the existing stores, that maybe you pull back from looking to sell company-owned stores?

Well, again, to the extent that we can make the business model work better in the company-owned locations as we talked about the math would tell you that on balance it would make more sense to keep those as company-owned restaurants if we can improve the returns, than it would if we weren't able to improve the returns.

Okay. Switching gears to the 10 under $7 menu, what sort of impact could that have to a server's cash take home, and is there any variance to the throughput?

Well, again, it depends on the total check spent by the guest, and honestly right now our servers are excited by it, because it's generating more traffic, which means there's a better chance for tips. That old theory of whatever percent of zero is still zero, so reimages, new menu items, honestly keep our team members and servers excited. So there's a real upbeat, positive attitude about the whole thing. Again, after a little over a week, having great concrete data about that, a little too early to tell.

Great, thanks.

Well, we wanted to thank you for joining us on the call today. This concludes our earnings call and our Q&A session. We look forward to talking to everyone to share our fourth quarter fiscal '09 results, and we'll also provide 2010 guidance at that time as well in early August. So thank you so much.

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.