Brinker International Inc (EAT) 2010 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Brinker International third-quarter 2010 earnings release. At this time, all lines have been placed on the 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, VP Investor Relations and Treasurer. Ma'am, the floor is yours.

Thank you, Kate. Good morning, everyone, and welcome to Brinker International's third-quarter fiscal 2010 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; Wyman Roberts, President of Chili's Grill & Bar; and Guy Constant, Senior Vice President of Corporate Finance.

First let me provide some clarity around this morning's release of the third-quarter results. As you saw in the press release this morning, Brinker generated EPS of $0.42 for the quarter before the impact of special items and including the results of On the Border, which was in line with our prerelease estimates of $0.41 to $0.44. This equates to $0.37 on a continuing ops basis which excludes the results of On The Border.

While we enjoyed hosting many of you at our analyst and investor conference and hope you walked away with a greater appreciation of the Brinker story and our plan of action for the future, we have a clear vision in place to drive our long-term strategic initiatives. We would like to recap the key financial takeaways and provide some clarification to answer a few of the follow-up questions we received.

First, the long-term goal is to double our fiscal 2010 consolidated EPS before special items by 2015. Our long-term business model of 10% to 12% EPS growth is for fiscal years '13 through '15. So in order to double EPS, growth in the next two years must inherently be greater than the 10% to 12% skewing to fiscal 2012 allowing time for the implementation of our initiative.

For the next two years, we also assume minor levels of sales growth of approximately 1% to 2% same restaurant sales.

Next, let's discuss topline for the current fiscal year. Our same restaurant sales guidance of down 1% to 2% includes a 53rd week. Our original guidance issued on our August call was on the same basis and we attempted to clarify the metrics in a consistent manner. We estimate the 53rd week helped comps by approximately 2%.

Additionally, we shared some exciting news with everyone around the transformation of the kitchen as well as ways to do things on the retail side of the house. The 500 basis point improvement shared including 300 basis points attributable to the kitchen retrofit, kitchen display system enhancements, and a new point-of-sale system, and 200 basis points stemming from other items at Chili's. Collectively these items have 100 basis points depreciation impact for a net 400 basis point impact to operating margins.

Much of the depreciation is associated with initiatives on the manufacturing side of the business but are not wholly attributable to the kitchen strategies. Items such as LED lighting and the reimage program are also included in the 100 basis point impact.

Lastly, there's a few points to clarify on the use of cash. Investment in CapEx will only continue as proof of returns warrant While we are confident in our ability to deliver margin improvements, clearly we will not continue to invest capital if there are not warranted returns associated with the deployment of that capital.

Second, with our free cash flow, we will invest back into the business, reduce debt, and pay dividends, and to the extent cash remains, reinstate our share repurchase program. Third, while we have been carrying higher than recent historical levels of cash, we intend to put the cash back to work and will likely carry levels to meet our working capital needs of approximately $50 million barring any significant event in the future that might suggest a need for higher liquidity levels.

Lastly, the On The Border proceeds will be put to use. We anticipate proceeds from the sale to be used for share repurchase to quickly rebuild the EPS base. Additionally I would like to clarify the treatment of G&A costs included in discontinued operations. This represents only costs directly linked to the On The Border brand. Centralized services such as accounting have not been allocated to the discontinued ops line.

We will receive approximately $3 million to $6 million of fees for providing support services to the acquirer, Golden Gate. Giving consideration to both the share repurchase and the fees collected to offset centralized G&A services, we estimate the OTB sale to be slightly dilutive EPS by approximately $0.03 to $0.05.

At the conference, we provided guidance for the full year on a continuing operations basis before special items of $1.20 to $1.24, implying a range of $0.45 to $0.49 for the fourth quarter.

In addition to the 53rd week positively impacting the results, I would like to remind you of several generally lower than normal expenses that occurred in the fourth quarter of fiscal 2009 including insurance expense, property tax, utilities, and vacation expense. These amounts in aggregate favorably impacted margins by approximately 110 basis points.

Now 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 that 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 to the Company's ongoing operations. Reconciliations are provided in the tables in the press release and on Brinker's website under the financial session of the investor tab.

Also in this section, you will find the restated fiscal 2009 and 2010 income statement excluding On The Border and special items.

Now I will turn the call over to Wyman.

Thanks, Marie. Good morning, everyone. I really enjoyed the opportunity to speak to many of you about a month ago, sharing our long-term vision for Chili's. At the conference, we laid out Chili's plan to win. We talked about the vision established and empowering the entire organization to own the goals. We also emphasized the need to deliver on great tasting quality food consistently served in an improved pace and a more relevant atmosphere. And the business model must be strengthened to drive this brand forward.

Now this isn't an easy process and we said this is a long-term vision for Chili's. And turning a ship as large as Chili's is not a task that you want to do quickly, as you might end up somewhere other than you wanted to be, but we must balance the need to react to factors quickly with building business fundamentals that will yield greater rewards in the long term. And we must change the business the hard way, the right way.

During the quarter, we completed the last rollout of the initial wave of the menu transformation and it represented the most significant change of all the waves. Not measured in terms of most new recipes or items, but in terms of impact to guests and operations in aggregate. The first two phases were heavily focused on rolling a few new menu items and changing kitchen process.

This quarter we rolled out new items, further improved processes in the kitchen, removed several items, changed recipes on a number of things, and altered the menu to a completely new look with fewer pages.

And there's been an investment in rolling out these changes. In the third quarter, the investment included retraining servers, giving cooks more time to build muscle memory on new recipes, familiarizing guests with the new menu, and helping them find their new favorites if one of their old items had been removed.

Cost of sales, labor, and comp meal expense were all impacted by these investments, which are now tapering off as we entered in the fourth quarter. And we saw a similar impact in our 16 test restaurants, which have continued to sequentially improve on metrics such as sales, cost of sales, and guest satisfaction scores since the introduction of the new menu.

But the thing about change is it's a necessary part of growing and we believe we are evolving the areas which will have significant positive impact on our future. In our plan to win, we said better food was an absolute must and we've made good progress on this goal.

From a marketing perspective, as we stepped away from three-course promotion and into fresh pairings, it was meant to accomplish a couple of things. First, we needed to balance guest expectations and not ingrain the three-course promotion as a standard of everyday value at Chili's. Our NPD data shows at Chili's, our promotional activities are attracting more light users to come in and give us a try versus conditioning our medium and heavy users to rely on deals and we didn't want this pendulum to shift and to be the driver for our medium and heavy users frequency.

However with the promotion attracting light users, it was tougher to move their frequency up in short period of time. It takes time to build loyalty and translate that into increased frequencies. So as the deal went away, the (inaudible) or trial lessened quicker than we could convert the light users -- all the light users of the promotion to more frequent guests, so as expected we saw little traffic slides.

Second, we moved to fresh pairings to take a step down on our level of discounting. As we presented at the investor conference, our participation in deals was among the lowest of our key competitors and even at our peak about one-third of our guests were using the deal. With the most recent data from NPD, our deal rate continues to be lower than key competitors and only about 10% of our guests are using the fresh pairings promotion.

However, the trade-off on stepping down from our level of discounting is traffic but the benefit is margins and while our topline softened and yes our sales comparisons have declined slightly, our margins strengthened from the second and third quarter including 130 basis point improvement in cost of sales alone.

It's been an interesting quarter for Chili's. Clearly the results are not ones we are satisfied with or anything we want to declare as a victory, but they are not unexpected. We put the brand and the guests through a tremendous amount of change. At the conference, we indicated that our guest satisfaction results had softened as we were moving through this change curve but today I can tell you we see the trend improving and the indication of things settling and moving in the right direction.

Additionally, NPD data and our customer research shows improvement on several areas of customer satisfaction, most notably on our value for the money scores, affordable to eat there often and feel like a valued customer.

In our test restaurants, which have been living with the changes for a few months longer, we see guest and financial metrics that line up with our expectations for better performance after conquering the rollout learnings.

Third-quarter results are behind us providing valuable lessons. These lessons translated into learnings which serve to improve our decisions in the future. Chili's plan to win is aggressive and not without risk but it is grounded on proven strategies that in pieces have been used by other companies and industries successfully. Our challenge is to stay focused on the long-term vision and change the business the right way.

And now I will turn the call over to Chuck.

Thanks, Wyman. Good morning. It was great to see those of you who were able to attend our recent investor conference and thanks for joining us today. And to ensure we clarify this point, I want to reiterate what Marie just mentioned regarding the third quarter.

As you saw in the press release this morning, Brinker generated EPS of $0.42 for the quarter before the impact of special items and including the results of On The Border, which was in line with our pre-release estimates of $0.41 to $0.44. And this equates to $0.37 on a continuing operations basis, which excludes the results of On The Border.

In the quarter, weather-adjusted sales improved sequentially throughout the quarter by about 180 basis points.

So let's turn to the quarter. All comparable year-over-year numbers in today's discussion of the results will exclude On The Border, which is now included in the discontinued operations line of the income statement. My commentary will be based on continuing operations numbers unless otherwise noted.

During the second quarter,(Sic-see press release) revenues decreased by 7.8% from $774 million to $713 million, driven by a 4.2% decline in same restaurant sales as well as 40 fewer restaurants. This represents a 5.3% decrease in capacity measured in sales weeks than this quarter last year.

Traffic, while negative, is better than our overall comp sales number as a result of negative mix which was generated by promotional activities.

Franchise royalties and fees were $16.5 million, up about 4% from the same quarter a year ago, primarily due to the increase in the number of franchised restaurants.

Cost of sales increased 30 basis points to 28.5% from the same quarter in the prior year and represents a 90 basis point sequential improvement. The third quarter benefited from favorable commodities in price of approximately 70 basis points but was more than offset by margin loss from mix shifts attributable to the promotions and changes to the menu at Chili's.

We expect commodity costs to remain favorable for the remainder of the calendar year and expect to see cost of sales benefits as a result.

Restaurant expense as a percentage revenues increased to 54.7% from 54.1% in the prior year. As you heard Wyman say and we discussed in the second-quarter call, the menu changes at Chili's require investment.

This quarter the investment we made was in labor. Training for the new menu and the efficiency to build the muscle memory for execution of that new menu. As familiarity in the menu has increased, we are beginning to see productivity returning to more historical levels as we head into the fourth quarter.

Headwinds in labor were partially mitigated by a decrease in property taxes, utilities, and advertising expense, which was driven by the rebalancing of our advertising mix. National media has similar total ratings point levels as in the prior year with a decrease in cost derived from changes in local and web-based spend, and we've benefited from lower ad rates and a reduction in nonmedia expenses.

Depreciation expense has decreased by $2.6 million from the third quarter last year due to having 40 fewer restaurants and more fully depreciated assets and moderately offset by depreciation on new investments in the existing restaurants.

General and administrative expenses have decreased by $3.2 million year-over-year to $32.1 million and decreased by 10 basis points as a result of -- as a percent of revenues to 4.5%. And the dollar decline is due to lower salary costs attributable to headcount and lower legal expenses.

The savings would of been greater if generally accepted accounting principles, GAAP, allowed allocated costs of centralized services that support On The Border to be included in the results of discontinued operations.

As you can see on the website, there are some general and administrative expenses shown for the discontinued operations, but those expenses relate to directly attributable support costs that are discreetly identifiable to the OTB brand. Not included are things such as centralized accounting services and other back-office costs. And as we complete the On The Border transaction and begin administering support services to the brand, Brinker will collect fees resulting in an offset to these indirect costs which were lower G&A.

The scope of the services along with the strategic priorities will be the filters used in considering the appropriate infrastructure needed to support our overall goal of doubling EPS by fiscal year 2015.

Other gains and charges for the quarter are $4.3 million and generally relate to lease termination charges stemming from the closure of underperforming restaurants.

Interest expense for the quarter was $6.5 million or $1 million lower than the same quarter in prior year due to reduced levels of average borrowings and lower interest rates. Other net was virtually flat with prior year at $1 million of income.

The tax rate of 19.7% was lower than the third quarter of fiscal 2009 due to the resolution of certain tax positions, which resulted in a positive impact of approximately $3 million in tax expense in the current quarter.

Cash flows remain strong with cash from operations increasing to $223 million and CapEx totaling $32 million. We reiterated our CapEx guidance of $85 million at the conference inclusive of amounts needed to fund initiatives which take place during this fiscal year.

As Marie stated in her opening remarks, CapEx associated with the strategy shared at the investors conference will be contingent on achieving an appropriate level of returns. Historically we have been vigilant in our review of capital spending and will continue that practice.

At the end of Q3, we had approximately $182 million of cash on the balance sheet, of which $50 million is earmarked for term loan repayment and will reduce the balance to $200 million. With the upcoming maturity we expect to refinance the remaining $200 million of the term loan balance at current market rates before the end of the fiscal year.

You can see our balance sheet is healthy and cash flows are strong. In fact, we anticipate our fiscal year 2010 cash flow yield will be in the low double digits and the steps we've taken to shore up our financial fundamentals provide us the flexibility to invest in a variety of strategic priorities.

And Marie clarified several items communicated initially at the investor conference and hopefully remarks made here today will provide even further transparency of our intended vision and results.

I would remind you we will provide fiscal year 2011 guidance at our fourth-quarter call. However, as Marie pointed out, in order to double our $1.40 to $1.44 EPS by fiscal year 2015 and with only 10% to 12% growth coming in years 2013 through 2015, our EPS growth must be greater in the collective fiscal years 2011 and 2012 time periods.

As many of the value driving initiatives will not be fully implemented until well into fiscal year 2011, the excess growth in this time period will skew towards fiscal year 2012.

And with that, I would now like to turn the call over to Doug.

Thanks, Chuck. Good morning. We're hopeful the information from the investor conference provided all of you with a roadmap to where we plan to take the Company in the next five years and the opportunity to create value for all of our stakeholders. The vision certainly has challenges and potential risks and more work needs to be completed vetting the returns associated with each initiative, but I, with the full support of the entire leadership team, am absolutely committed to achieving these goals.

As we work to complete the On the Border transaction, the remaining business is viewed as Chili's, Maggiano's, and global business development or GBD. Each business is in a slightly different place on the brand maturation curve and has different core equities, opportunities, and challenges.

Starting with GBD, we shared with you the solid growth potential that exists outside of the United States. Currently Brinker is the second largest US-based casual dining company abroad and we will extend our portfolio to have 425 Chili's restaurants internationally by 2014, cementing us as the dominant player.

During the third quarter, we made some progress towards our goal opening up four Chili's International and one On The Border, bringing us to the total of 218 restaurants abroad. The openings were a nice mix of those in proven market such as Mexico and the Middle East, but also in newer areas with more untapped potential like Asia.

We will fuel our growth through equity investments and franchise partnerships, taking advantage of demographic and eating trends will only accelerate in the rest of world over the next decade.

Same restaurant sales for the quarter at our international restaurants increased nearly 1% and were further encouraged by the economic stability of many of the countries that we do business in today.

Maggiano's had a great quarter, gaining real traction, increasing profits, and making strides toward stability (technical difficulty) returns. The press release today showed Maggiano's healthy comp sales for the quarter, which was highlighted by a 5.2% increase in March. Adjusting for weather impacts, traffic was consistently strong with a 3.8% increase in January, a 3.7% increase in February, and an impressive 5.4% increase for March.

This quarter over the same quarter last year, Maggiano's improved margins by 200 basis points. So you can begin to see how the aggressive plan of potentially adding a third more restaurants by 2015 is getting closer day by day.

Now you heard us speak about a transformation of the kitchen. From the point of sale system to maximizing the kitchen display system capabilities to an actual new kitchen design. Well, you might think it sounds fine on paper, you might want to wait and see what really happens. Let me share with you why we are so excited.

We actually have one of these kitchens up and running today in our Mexican joint venture partnership. To be honest, it's not the exact equipment we are testing domestically, it actually has less of the equipment and process improvements than the anticipated United States retrofit. But the results coming out of that kitchen are impressive and really ignited our drive to get this going here domestically.

The excitement has to be tempered with doing what is right for our team members in the kitchen, testing in Company-owned domestic restaurants, and learning best practices before rolling it out broadly. The equipment is not revolutionary. It's proven equipment used by others today and that comes with an added benefit of some of our cooks already having familiarity.

What is different is how we are incorporating new to Chili's equipment, process flow, changes, and enhanced capabilities of KDS to collectively provide fresher food to the guest and faster with improved costs.

I can tell you today we have (technical difficulty) one of these kitchens up and running in a domestic Company-owned restaurant and plan to have five more in place by summer. Yes, there is a learning curve. We will need to educate managers and hourly team members on how to work in this new environment and how to staff in this redesigned kitchen. But the team is ready to take on the challenge.

Wyman spoke about the current environment at Chili's. In addition to the work being done in the manufacturing side of our restaurants, Wyman and his team continue to move the revitalization efforts at Chili's forward. The team is also testing initiatives around comp meal expense and team service with a goal to read results and implement margin driving initiatives that also satisfy guest needs.

Currently we are rolling out LED lighting and other necessary refresh maintenance items investing into our core asset. As always, the initiatives contemplated in both the manufacturing and retail side of the business will be evaluated on the basis of financial returns and guest acceptance.

As we talked about at the investor conference, one of Brinker's hallmarks is our consistently strong free cash flow. With our short-term debt repayment goals nearly accomplished and a confirmation of our investment grade rating and stable outlook from Standard & Poor's obtained, we can provide additional value to shareholders through our 40% best in class -- best in retail class dividend payout ratio and share repurchase while preserving flexibility in our future capital structure.

So these kind of long-term initiatives take focused leadership and financial resources. We have put the structure in place to apply these elements so we can move faster now than our competitors. The vision is clear and is defined with teams navigating various parallel workflows. It will not be easy but with goals aligned, passion driving efforts, and the innate competitive drive of our team members, we will make this a reality.

Now I would like to turn the call back over to Kate for all of your questions.

(Operator Instructions) John Glass.

Thank you, Morgan Stanley. You cited many rollout cuts this quarter in training and both for the servers and for the chefs. What do you think the -- is there any way to quantify what the costs, similar costs might be as you roll out the new kitchen initiatives? Do you have any way of framing it and what timeframe you might expect to see some of the training and implementation [costs] for those initiatives?

John, this is Chuck. Just to paraphrase the question, you were trying to ask what would the costs be of rolling out the new equipment?

Yes, menu costs for this quarter so I wonder at what time and how much you think those costs will be?

To the extent that we will be rolling it out over time and not just in one lump sum as we did with the new menu, this is a one-time event that went into every Chili's. We will be staging in the investment in the new kitchen over time, so I would not expect it to hit any one quarter in an inordinate amount. And then we will have a pretty good idea as we get through this testing period Doug was talking about. We will five restaurants open up this summer and we will get a pretty good idea of how much that will be and certainly hope that it will be offset by the savings that we are currently seeing both in Mexico and also what we project from our domestic operations.

Great. And then just one follow-up, Chuck. You mentioned $0.03 to $0.05 dilution around the On The Border sale. I think you are referring to -- but could you clarify -- that was just the G&A pickup that you would have and that's an amount that you might be able to offset with revenue? Was that what you were referring to?

No, John, what we were trying to do there is we had $0.20 of GAAP earnings that are shown on -- as the discontinued operations earnings from On The Border. That's going to be offset some by G&A expenses that are not recorded in that line. And then also the use of the proceeds we would anticipate buying back shares with the cash once we receive the cash and then the ultimate effect would be after we shrink the shares to be still $0.03 to $0.05 dilutive.

Okay, that's helpful. Thank you.

David Palmer.

Thanks, I wanted to ask you about that comment. I think, Wyman, you were talking about the (technical difficulty) gap between Chili's and competitors on the percent that sold on promotion and how that remains fairly wide. I think that this is open to all of you.

How do you see that playing out here in the competitive environment and how Chili's will navigate that? Obviously we have a tough time thinking about how to model you through this summer as not only Chili's with its promotions that started around July, you are going to lap those. Competitors started even earlier last year. They are lapping those. Any tips on how to model you guys and the sort of competitive environment in terms of promotions would be helpful.

Wyman, do you want to take that?

I can't necessarily tell you how to model us but I can just talk to you about our strategy. We continue to track obviously what's going on in the marketplace and the competitive response. The level of discounting and consumers that are eating on a deal in casual dining is continuing to be very strong. It's up 17% in the January/February numbers based on NPD and that's pretty much where the growth is coming from, so there's still a lot of competitive activity out there from a promotional standpoint.

We have stated our objective is to try and strengthen the base through those fundamental initiatives that we have shared with you but we also have to be cognizant of what the competitive environment is doing and where the consumer is headed. And so we will just continue to monitor that and depending on the responses we are seeing from our guests, put the appropriate marketing strategy and promotions out there.

Again, our long-term plan is to be less reliant on promotion but we have to be competitive within the quarter. So I can't give you anything specific on a modeling number but that's our strategy and we continue to watch the external marketplace as well as what's going on within our business.

I guess more specifically, the industry I think was up 30%. You may be up 17% earlier this year. But during the summer last year, I think the industry kicked up to percent increases and promotions of up 30-some%. So you are going to have easy comparisons against -- the promotional environment year over year will likely not go up like that again off of heavy promotions last year.

On the other hand, the comparisons for the industry on overall sales are going to be easy or easier and it's just I guess that in sum is the difficulty is to try to figure out how the summer will play out for casual dining. It's tough.

I would agree. We are optimistic. We think we've got a good plan in place but it's going to be tough. Again, what we also are really looking at as we go into our next -- through this quarter and into next year is the whole margin story that we've talked about.

So we've got a -- you're right, we do have once we started [3C] last year, we did see some nice traffic improvement. The margin play there was opportunistic for us, so we're balancing all of that into our plans as we go forward in terms of what we're going to do to be competitive through the remainder of the spring and into the summer.

Thanks. Thanks for your thoughts.

Jeffrey Bernstein.

Thank you, Barclays Capital. A couple of financial questions. Just one, a clarification on your commentary regarding the doubling of EPS. First I think you said over five years double the $1.40 to $1.44 and that in fiscal '13 and '14 and '15, you that it was going to be within that 10% to 12% range.

So in fiscal '11 and '12, I know you said combined it was going to be above that range in each of those years but skewed towards fiscal '12. Was that kind of the color that we should expect without specific guidance that you are going to be above 10% to 12% in both fiscal '11 and '12 but skewing to '12?

That's what we are looking at, Jeff, yes.

Okay, and that is even reflective of I guess the nickel or so benefit that you're seeing in the fiscal fourth quarter of fiscal '10 from a 53rd week?

Yes.

Okay, and then in terms of the cash flow proceeds from On The Border, I know you guys have said kind of on a net basis you would think you would bring in like $165 million after kind of fees and whatnot. And you thought that was going to be expected by the end of --

(multiple speakers) Fees and taxes too, so we will have a gain on it. That is net of fees and taxes. So go ahead, sorry.

Sure, but that $165 million I think you guys mentioned the goal was immediate share repurchase. I'm just wondering what the process is behind that and when you think you could openly do something like that? How long should we expect before you can deploy that type of capital in such a short period of time?

Jeff, we will take a look at it over the next couple of months and talk with our Board and get a strategy for getting that out in the marketplace and buying back the shares. But we probably won't make any announcement to the market on how we'll get that done until we have gotten it done.

But (inaudible) to be just open market share purchase, not a specific?

We will look at any and all options honestly, Jeff. Sorry, I don't mean to be moving around a lot on you there, but we will get it deployed into buying back the stock and how we do it is still up in the air.

Okay, then just lastly I know you guys -- we've talked about the analyst day the portfolio shrinking. I know it seems like while you guys like the idea of a portfolio perhaps in the near term, the focus on Chili's would counter that with I guess more recently it seems like companies are looking to generate shareholder value and sell themselves and whatnot. In the near term, should we just think of you guys as Chili's and Maggiano's, putting aside the external factors that you guys are really focused on these two brands in the near term?

Jeff, again, the global business, although it's primarily Chili's, we do see it as almost a third completely different business. So -- but right now as I said at the analyst conference, our goal is to get better probably before we get a lot bigger and all these strategies that we are putting in place to reinvest in the business, improve our food, make our buildings more contemporary and relevant, and improve the guest experience, right now those are going to be focused on Chili's, Maggiano's, and our global customers.

Great, thank you.

Jeffrey Omohundro.

Wells Fargo Securities. Just wonder if you could elaborate a bit on your throughput initiatives at the analyst day (technical difficulty) was outlined. Just wondering if you could help put this in perspective how you achieved that, where you stand on that? Thank you.

Jeff, this is Doug. Let me take it maybe even more holistically because this really goes back to us evaluating the brand and the business last year and we decided it was time to rethink the whole business model. So we looked at the entire Chili's box from front to back and I guess you'd call this a stool with multiple legs, but our goals, they are pretty all-inclusive.

We wanted to lower our costs, improve our margins. We wanted a better pace and (inaudible) for the guests. We wanted our food more consistently prepared. We are trying to upgrade the menu, better service for our guests and make sure the physical plant again was updated. So the different components that lead to that which get to your question, one this kitchen display system, which by the way, there is no incremental costs. We already have that in place. It's just utilizing more of the systems functionality.

We think we can use it and in this domestic restaurant that we keep talking about, we have already seen reduced ticket times. We also think with some of the new equipment working together we can improve the food quality and consistency and reduce waste.

So kitchen display system is part of that and there is no financial investment in that piece of equipment. It's just utilizing a piece of the equipment we didn't use before.

The second big component of course is the point of sale or back office, so we are transitioning from this very old proprietary system to a new third-party system. And this is going to give our managers a lot better tools and more real-time information to manage inventory, control usage and commodity costs. So we see certainly some improvements in managing food costs and managing products, and that's the $15 million investment we talked about at the off-site meeting.

Then the kitchen retrofit, which really works primarily with this new back-office system, it's proven equipment -- but this will improve flow and processes, and our goal there is a five-minute faster ticket time and we're seeing some improvements in the ticket times in this test restaurant that is already functioning.

But it's also to operate with potentially less team members to lower costs while improving consistency and equal or higher qualities. So we mentioned the restaurant we already have in Mexico and we mentioned the restaurant we already have in place here and having five more by the summertime. We are seeing that become a reality.

And I mentioned also maybe the fourth leg on this stool, a service strategy in the front of the house. It's just utilizing team members differently. It is a new service model and our goal here again is to lower front of house labor cost but improve service to the guests and again in some test restaurants, we are seeing that become a reality.

The fifth leg is the reimage. We already had looking at designs. We're going to have a reimaged restaurant here in the next 60 to 90 days and you will remember back in 2007, 2008 we had a reimage strategy at Chili's. It was put on the back burner because of liquidity and just trying to save CapEx and now this would be I guess some of that reimage program with some newer ideas.

We also as part of that, an important part of it, also this facility and energy and one of our goals is to reduce our energy usage, the LED lighting is a big part of it, but also this new kitchen equipment will lower utilities. We are working on some energy monitoring system tests and testing some new HVAC systems and water heaters.

The last leg is online ordering, which has now been rolled out in all Chili's and Maggiano's, so much more convenience for the guests. We think we can compete maybe with fast casual and fast food because we can get to the orders quicker and we've also seen an increase in the check of the to-go sales.

So all of those initiatives we think point to faster ticket times, lower costs, but most importantly improved guest experience and that's at the heart of the 500 basis point improvement including some topline growth.

Roughly where is ticket time now?

It varies depending on lunch and dinner and honestly we don't really get into that. Internally what's important is we put five minutes as a goal. A lot of that is lunchtime competing with fast casuals. It's just guests have less time and if we take five minutes off, we think it will make us much more competitive particularly at lunch.

Thank you.

Joe Buckley.

Bank of America Merrill Lynch. Could you talk about the timing of the rollout? You talk about having five restaurants you have sort of at the start of fiscal (technical difficulty). By the end of fiscal 2011, how much of the Chili's system do you think will be on these new systems for the kitchen?

Well, pieces of it, the point of sale and back office we believe that could be completed by the end of this year or early next year, so that's moving. The KDS, Joe, some of those adjustments are happening in the next 60, 90 days. The kitchen retrofit would be the [floor] one. This would take two to three years which is why part of the 500 basis point improvement, a lot of that we're pushing into 2012.

So we will have time to build as many as possible in 2011 and pick up the pace in 2012. To give you an exact number today would probably be hard to do.

So assuming you get to the 400 basis points net of depreciation margin improvement, the first full year we will see that is actually 2013, is it not?

Probably so, and I didn't mention some of the service strategy in the front of the house. We see those things happening in the first half of this next fiscal year. But yes, your question, it would probably be more 2013.

Yes, we would expect to see margin improvements through 2011 and 2012, Joe, but they would not be necessarily based on us putting in new kitchen equipment but rather based on some of the technology changes that Doug referred to and other service things that we are putting in place currently.

Okay, just a question on share repurchase, and I realize you don't want to be too explicit about what your doing, but did you do any in the quarter you are reporting today? Can we activate the program here in the fourth quarter do you think or do you want to wait until the OTB deal closes? You know, not all the share repurchase obviously is OTB-related, it sounds like.

That's correct. Not all the share repurchase is just based on the proceeds from On The Border. We will have excess cash that we will deploy into share repurchase. We did not do any share repurchase in the third quarter. We didn't receive authorization from our Board to do that until very late in the quarter. And we will look to do some amount of share repurchase in the fourth quarter.

Okay, thank you.

John Ivankoe.

Thanks, from JPMorgan. I just wanted to clarify some comments that commodities will be down for calendar '10. And I guess as markets are kind of evolving the way they are, and you have intelligence on those markets, what you might think for commodities in calendar '11 -- is the first question.

And then secondly, as you have begun to have more time to think about health insurance mandates, what have you, how you think that may affect the Brinker business as that legislation currently stands?

Marie, do you want to talk about commodities and kind of our outlook?

Absolutely. John, as you recall really in December we went through a lot of negotiations in terms of our commodity contracts, and so really toward the end of our fiscal 2010, which as you know ends in June, we have absolute clarity in terms of what those contracts are in seeing a year-over-year improvement in the commodity costs. Really even going out to December, we expect our commodity costs to still be favorable on a year-over-year basis and that is really in all items with the exception of produce.

Our proteins across the board, we are seeing favorability year-over-year and our contracts really up to December, they are around 50% to 60% contracted. So I think we've got fairly relative clarity in terms of what we have contracted and what we're expecting at least toward the end of the calendar year. So that will be end of our fiscal 2011.

And current -- obviously I don't know the prices at which you contracted in December '10 but kind of you current price -- excuse me, in December '09 -- current prices and the outlook for prices, do you have a sense of how commodity -- are you concerned for example about commodities in calendar '11? Are you expecting a pullback? Do you think there could be further increases? And what would that mean?

Right now, John, we're looking at it being pretty flat on a year-over-year basis as we go 2010 to 2011. It's a fairly dynamic market. We will continue to take a look at it. Right now we are looking quite a bit into the crystal ball as far as maybe almost 20 months or 17 months if we're looking at the end of calendar year '11, so that's quite a ways out there.

Okay, and health costs -- health insurance?

John, on the health and care insurance as usual, the devil is in the details and I know we've had our government relations team, many of our human resource -- people works team spending more time in Washington, DC than in Dallas recently, and there's still more questions than answers.

What has been released so far is most of the programs and requirements won't take effect until 2014. The very few provisions that take effect immediately don't have any material impact on our business. We don't exclude pre-existing conditions and we offer coverage to students to 25. So a couple of things that have been released don't impact us at all.

So we're going to keep -- we've got a little matrix with plans A, plans B, plans C, and plans Ds. As soon as we find out exactly what they might be, we will have time to make strategic plan adjustments to minimize the impact as much as possible.

Thank you.

Brad Ludington.

Thank you, KeyBanc Capital Markets. I just had -- first just a brief housecleaning. You said a cash balance but I missed that number. What is the cash balance right now?

$182 million.

Okay, thank you very much. And then I wanted to ask on the service (technical difficulty) strategy if you could expand on that little bit. Is that going to be more of a team waiting system or taking away or adding busboys or any kind of changes like that?

You know, it is focused more on team, team service, whether or not -- what the support systems are that work around it. We're still working through all of that, but it definitely is one that is focused on team service and it's also a system that I had some experience with when I was at Maggiano's. We had some pretty good success bringing to Maggiano's that did a couple things. Obviously it provided actually a higher level of service for the guests and put more money in our team members' pockets and our servers' pockets, and that's what's really great about a strategy that works on both those fronts.

Okay, then finally with the rollout of the kitchen retrofit, it's going to take two to three years. Should we expect measurable accelerated depreciation expenses along with that rollout?

Well it will just -- as we roll out the equipment, Brad, we will get some depreciation. But that will be written off four or five years, so the margin improvement will be greater than that. So it should always be earnings accretive throughout the whole period of time.

Okay, thank you.

Tom Forte.

Tom Forte, Telsey Advisory Group. I had two questions. Wyman, when you think about balancing the near-term and long-term goals of Chili's from a promotional standpoint, what's the lead time for some of these marketing? For example, the fresh pairings, is that something that you could put together in a couple weeks? Or when you think about the media element, is it something that requires a couple months?

Then second, I think you've talked before last quarter about improving sales trends of Maggiano's as it relates to the business consumer, the lunch sales on Monday through Thursday. What are you seeing there this past quarter? How are banquet sales doing at Maggiano's?

Well, I'll take the Chili's promotional question and I will let Doug answer the Maggiano's question, because I am focused on Chili's. So, Tom, with regard to lead times, the good thing about Chili's is we have a national marketing strategy and a plan that has media in place. So we're not having to scramble to go out and buy media. We buy in the upfront marketplace and so we get real benefit there with regard to a cost structure, and we have a media plan.

So it's really more about messaging and getting all of the product and the operations teams aligned around a change in promotions. And that's not a small fact, a small feat. That does take coordination. It does take some time, but we are -- for the size of a company that we are and with the franchisees' support that we have, we're able to move fairly quickly. I wouldn't say one or two weeks, but if we decided that it's in our best interests to shift a promotion, it can be done probably as quick as three or four weeks.

And everything -- and that's fairly smooth and without having to get into the marketplace and pay some kind of premium for media that you are buying in a scattered marketplace under duress. So that allows us to do it without putting more pressure on our business model. So that's kind of how we look at it.

We obviously have calendars that go out for long periods of time, but we always have some contingency thinking in our back pocket as to what we're going to do to address competitors in the marketplace.

Tom, on the Maggiano's question -- this is Doug -- and I think what you described is exactly what's happening. The core Maggiano's consumer, the baby boomer, maybe the little bit higher income guest, as well as the business customer, do seem to be the groups coming out of this economic recessionary time the fastest or the quickest. And some of them, on the banquet business we hear companies talk about the fact that they didn't do meetings and banquets in 2009, and so they are coming back, restoring that same kind of behavior.

But we have seen improvement in Monday through Friday lunch in much of that expense account business, and we have seen the banquet business come back. So we've been very pleased with things going on at Maggiano's.

Thank you.

[Chrisman Boggin].

Thank you, my question has been answered.

Steve West.

Yes, Stifel Nicolaus. This is Matt Van Vliet on for Steve. I just had a question on promotions. As you switch to the fresh pairings from the three cores, I you probably don't want to get into a lot of detail but we saw that food costs were down yet your gross margin also declined. If I guess just hypothetically, do these new fresh pairings have enough of a margin impact that maybe in this quarter or going forward, either way you want to look at it, would that have swung to a benefit there or is there not that big of a difference in the margin impact from the promotion -- I guess given the same level of sales assumption?

Yes, Matt, the biggest issue there really is about the introduction of the menu revolution. That is what I think you are wrestling with in terms of sorting through that. The promotion didn't have -- it doesn't have a significant breakeven or hurdle or impact to cost of sales. So the difference between the cost of sales number that you would -- we see going forward is really just the increased costs that we've experienced this quarter in rolling out the new menu.

Okay, then I guess just one question on the Chili's remodels. You stated that you are back I guess sort of in the evaluation process of having a couple of them in place. What kind of timeframe are you expecting to make the decision in terms of really accelerating that program if you think you've found sort of the prototype that works best or just sort of thoughts around that would be helpful. Thanks.

We will get one in test this summer and then we will have to read the results of that test before we can more fully make an estimate on what our rollout would look like. So again, the timeline is to get one rolled out this summer, read the test, and then make a determination on where we go from there.

Okay, and then in the test is that -- would you be looking at it on like a three or six month basis or full-year impact or are you not comfortable saying that yet?

We'd look at it on a much shorter term. We can get consumer feedback and we can see what sales lifts we get and be able to project what that looks like. We've had some experience with reimages, so we are pretty able to dial that out, dial out the noise and figure out where it should be in a pretty quick period of time. Wyman, anything you want to add to that?

No, again, I think our bias right now is to move as quickly as possible but prudently, so we will get one up, we will get some results. And then again, with the kitchen of the future and with the reimage program, these things will be phased in in a number of restaurants at a time but not the whole system, so we will be able to move quickly and prudently. And as we get a bigger sample, we will obviously feel more and more comfortable, but that's our strategy moving forward is to get a quick learn, take that learning, and then expand it as quickly as makes sense but prudently and then go from there.

Okay, thank you.

Chris O'Cull.

Yes, thanks, SunTrust Bank. My first question relates to the G&A depreciation and interest expense guidance that you guys provided at the analysts day. If you consider the year-to-date results excluding On The Border, it seems like the implied fourth-quarter target for each of those line items suggests costs are increasing on a sequential dollar basis. Even when you consider the extra week, is this just conservatism, Chuck, or is there something else that we are missing?

I'm sorry. I guess I missed the question, Chris, because --

If you look at the analyst day presentation you had $140 million for G&A, $140 million for depreciation and $28 million for interest expense on a continuing ops basis. And when you look the year-to-date results on a continuing ops basis excluding On The Border, it seems like the fourth -- the implied fourth-quarter target would suggest costs increasing on a sequential dollar basis from the third even when you consider the extra week. Is this just conservatism?

No I think some of the noise might just be in trying to carve out the discontinued operations from the full run rate.

Chris, this is Guy. Let me jump in. On interest expense, as you know, we had always modeled in some expectation around what we might do with our credit facilities in the back half of the year and that's still in flux. So whether you want to argue conservatism on that or not what we tried to do is guide to our best thinking at the time a month ago, but credit markets continue to improve and the timing on when we might deal with that facility continues to move around, although it matures in October so we have to do something with it fairly quickly.

The other two lines whether you want to call it a little bit of conservatism or not, that might be fair. But we don't -- some of it will have to do with what happens with our incentive compensation accrual around profit sharing too and then a lot of that depends on what happens with results as we move forward. So we're making the best estimates based on what we know today but depending on what happens going forward, that could move up or down as well.

Okay, that's fair. And one last question. Is the Aloha system investment included -- was that included in the $40 million of restaurant technology or is that just ongoing Chili's maintenance? I'm referring to slide I think 120 on the analyst day presentation. I wasn't sure where the Aloha POS investment was going.

Chris, I don't have that presentation right in front of the right now, but it is included in our CapEx expectations that we laid out for fiscal '11 since our expectation, as Doug said, is that most of us spend in the rollout of that system would come in the back half of this calendar year. And maybe a little bit into the first half of next calendar year.

Okay, so the plan is to roll out that Aloha system to all the Chili's stores over that period of time.

Yes, yes.

Okay, great. Thanks, guys.

Sara Senatore.

Sara Senatore, Sanford Bernstein. Just a couple of questions that you've touched on, but I wanted to get some clarification on these topics. The first is on just can you give me a sense of kind of what -- how the go/no go decisions at sort of each node of the decision tree will play out? So you will have a retrofit in place in mid-2011 and then you will have a big jump in margins in fiscal '12. So clearly not ratable, but I guess do these things happen very quickly in your mind, like once everything is in place it's very easy to do or do have to make a lot of upfront investments first and then there's sort of higher -- there's a risk that things don't play out as you expect?

That's in terms of the investments and then the other piece is do you find that staff adjust very quickly? Is that fair relative to what you've seen? It only takes a couple of months and then you are at maximum sort of operational ability, or is there a chance that you do some of these kind of initiatives as retrofit that kind of thing and it takes multiple quarters for the people working with that to really ramp?

Well, it depends on which initiative you are talking about, Sara. Things like POS and use of our kitchen display system or KDS, those are things that people already have some familiarity with. Certainly the Aloha system is in place in a number of restaurants, so our team members, while there will be some training in regard to that, will have some familiarity with that type of system.

When you talk about the kitchen or the kitchen retrofit, that's really where the big capital dollars come in place. But I will tell you that right now we are looking at somewhere around $100,000 per restaurant. We will be able to make relatively small investments in total and be able to read the effects that we get back in terms of labor savings and margin improvement pretty darn quickly. That's not the kind of rollout that would take several quarters to get through efficiencies. We would hope we'd get there in a relatively shorter period of time in 30 to 45 days, at least enough to be able to evaluate it and get a look at guest satisfaction to make sure that we are seeing both the guest acceptance and also the margins that we want to see before we would start to make any kind of heavy investments. So --

Okay, great. That's very helpful. The other question I have is just about advertising spend. I guess you benefited from rebalancing but like everything else it seems media rates seem to be going up and I would guess again based on the fact that my expectation is that demand may be softer for a while longer. Do you have any expectation that you will have to spend more on advertising going forward?

Well, Sara, we've got most of our media purchase in the upfront, so that takes us all the way through the summer, so the bulk of our media costs for the next five months, we know what they are. And looking forward, it's always as we get ready to go into the next upfront negotiations, it's always a little bit of a game of cat and mouse.

So we're not anticipating it to be onerous and we are not anticipating that next year's marketing plan is going to require significantly larger amounts than what we have been used to spending or where we are currently running at.

Okay, thank you.

Howard Penney.

Hedgeye Risk Management. I was wondering if you could -- I'm sure a five-minute ticket time is a huge improvement and I was wondering if you might be able to convert that for a knucklehead restaurant analysts into maybe a comp number or table turns or something that might be relevant.

Howard, this is Doug. This is just a knucklehead operations guy on this end, so hard to just transform it into that. I will tell you that in some of the restaurants where we have done some of the team service initiatives, we have seen shorter wait times during the heavy wait periods, Friday and Saturday night. So when you put all of these together, a faster ticket time, different service model out in the front, our goal certainly is to be able to during high-capacity periods to not just provide the guests a faster experience but potentially shorten the wait for other guests to drive more throughput through the restaurants. No question that's part of the strategy.

Do you know if it's like a table turn or a half a table turn or is there any way to measure it?

It depends, Howard, on the individual restaurant and on a weekend night how early the wait might start. There's so many factors. Better, up is up is our attitude right now. It is kind of hard to throw a number out to you.

Bryan Elliott.

Raymond James. A couple of clarifications. First, just thinking about the EPS commentary, I wanted first to make sure I understood the right base. Are we talking about the $1.20 to $1.24? And then double by fiscal '15 off of that number?

No, Howard -- I'm sorry -- Bryan. My apologies. But just to clarify, the double EPS is on the $1.40 to $1.44.

Okay, and we're talking about the last three of those years being in the long-term 10% to 12% and then faster 12% then 11, although both will be above the long-term 10% to 12% growth rate?

That's exactly correct.

And so we are making all these investments. What is the underlying comp assumption that you are using there, the three to four long-term or more in the early years?

We stated 1% to 2% comp store sales really when you look at '11 and '12.

Okay, so we've got slightly positive comp and we're making a lot of investments. I guess I am unclear I guess how we are going to get the margin expansion implied by those next couple of year targets. I would think it would be more back-end weighted given the magnitude of the transformation we're talking about and the investment costs.

But commodity assumptions, you said fairly static. Labor savings, etc. coming in pretty quick from the service changes and the KDS and some of these initial moves. That's going to be more than enough to offset the heavier investments that will start to kick in a little further down the road?

Well, that will be the margin gains, not enough to offset the heavy investment that you're talking about, Bryan. But actually those initiatives relate to POS, relate to KDS, but the service models will give us the margin improvements in fiscal year '11. And then in fiscal year '12, will start to be the margin improvements from the investments in kitchen equipment.

Equipment. Okay, got you. Second question, just given that comps came in at sort of the worst end of the guidance range from a few weeks ago imply that the quarter didn't end up on an accelerating note. You mentioned it did at Maggiano's. There's certainly a ton of widespread belief out here that we are seeing a pretty good acceleration in industry sales. Is that misplaced or did Chili's kind of take a step back relative to the industry here in the last part of the quarter?

Bryan, we haven't seen the NAP numbers from March but we can tell you that we saw acceleration from February to March and even on a weather-adjusted basis.

All right. Thanks, George. See you.

Nicole Miller.

Piper Jaffray, thanks. I missed the Maggiano's numbers you gave by month, if you could just run past those again. And then as you -- I understand exited with strength in March, has that carried forward into the current period?

Nicole, the traffic numbers from Maggiano's were 3.8 in January, 3.7 in February, 5.4% in March. So that was the traffic numbers we talked about month by month from Maggiano's. And first, as you know, Nicole, we talk about what has happened since then as is our practice.

And I know it's clearly as you stated at the analyst day more than around a year. So it is an important part of the business. I was wanting to get some perspective broader on what this means for the corporate spending recovery sort of schematically that everyone is talking about. So just be curious to know is there anything that would derail that, those patterns or it seems to be earlier in the Q&A session you talked about, that is something you see as playing out for the rest of the year. Just qualitatively.

Nicole, again we see a lot of strength in the Maggiano's business. Last year we actually did some value. We did an item called today and tomorrow that also one of Steve's goals as he mentioned in the analyst conference is to try to grow the consumer experiences. So these numbers are based on a guest that doesn't come that often, more about birthdays and anniversaries. So we're able to expand the uses of that brand on top of the banquet business, on top of the core equities that Steve mentioned, the banquet business, the ability to serve large parties, the bountiful food portions.

We see a very positive growth and when we look at the number of Maggiano's versus its core competitors, there's still room for more new Maggiano's down the road. So short-term, we see nothing to change that trajectory but we will play that out quarter by quarter as we talk to you.

Nicole, I know you are trying to figure out is business spending really coming back and -- this is Chuck -- I would say without really disclosing or talking about really April or April trends or anything like that, we do see, as Doug said, business spending is starting to come back. We do see banquet bookings as we go out looking better than they have. Same way with some social bookings.

So your thesis around the business spending recovering I would say we saw that in our quarter and feel pretty comfortable that that's continuing to happen.

I really appreciate that. Thank you. And as a last question, obviously your focus -- the last two transactions have been divestitures broadly. In the industry we see a lot of M&A and some participants public or private actually making acquisitions. So I was just wondering big picture if you would consider acquisitions and under what context?

As I said earlier, Nicole, our primary focus right now is getting better, but our phone rings a lot. We pay attention to what happens down the street and we would always want to be opportunistic. But Chili's business is right now the single most important part of our focus and anything else that might happen down the road will play it as it lays. But right now Chili's, Maggiano's, and our global business are our three major priorities.

Thank you.

We just want to thank everyone for joining us today. This concludes our third-quarter earnings call. We look forward to following up with some of you this afternoon and to everyone again on August 12 to discuss our fourth-quarter results and our 2011 outlook. Thank you.

Thank you, ladies and children. 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.