Brinker International Inc (EAT) 2010 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the fourth-quarter 2010 earnings release conference call. At this time all participants have been placed on a listen-only mode and we will open up the floor for your questions and comments after the presentation.

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

Thank you, Holly. Good morning, everyone, and welcome to the Brinker International fourth-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 Constance], Senior Vice President of Finance.

Before turning over the call let me quickly remind you of our Safe Harbor regarding forward-looking statements. During our management comments and in our responses to your questions certain items may be discussed which are not based entirely on historical facts. Any such items should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

All such statements should be 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 earnings release and the Company's filings with the SEC.

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

On the call today we will provide insight into the results for the quarter, progress on our initiatives, and management's guidance for fiscal 2011. As a reminder, we provide annual guidance on key line items in the income statement and will only provide updates if there is a material change versus our original guidance. Consistent with prior practice we will be silent on interperiod sales or other key operating results yet to be reported as the data may not accurately reflect the financial results of the quarter referenced.

Now I will turn the call over to Doug.

Thank you, Marie. Good morning. Well these last several months have proven to be erratic. When we last spoke to you we reported slightly stronger sales in March, which appeared to correspond with the modest increase in general consumer spending, only to see another contraction in the fourth quarter.

Unemployment and under-employment continue to remain high in what many have dubbed a jobless recovery and the sharp decline in the June Consumer Confidence Index after three straight months of gains only emphasizes the uncertainty consumers feel about the current economy and prospective job market. We will continue to monitor those key indicators and their impact to our business using those as filters to help ensure we have the right priorities around the right strategies.

The casual dining industry and Brinker have not been immune to these factors. The uncertainty has led to volatility in the industry which makes it difficult to predict results. Announcements of same-store sales figures in the space have been scattered across the spectrum, some with solid traction on the top line while others finding positive sales growth elusive or stalled. This is not unlike our own company.

Maggiano's enjoyed its second consecutive quarter of comparable sales increases, while Chili's still felt some pressure on the top line. Regardless of the economic environment, we must pursue the strategies that are best for the Company in the long term and not be short sighted. Easy fixes are rarely the best fix. The solutions which require more effort are often the ones that stand the test of time and the strategies discussed at the March investor conference reflect the latter and work on those priorities is well underway.

Wyman will update you on the progress Chili's has made on their plan to win in just a few minutes, but I want to share a few thoughts. First, I believe the strategies [that we test] at Chili's are the right ones. Not only do they improve the restaurant economics today but they begin to reduce our labor pool which could be important as the healthcare provisions take shape and we deal with the demands of having a large hourly workforce.

However, the priorities are not just about four-wall savings. They are about our commitment to high quality food and improving the guest experience, and we believe this can be accomplished by selective use of technology and simplification of processes which are complemented by our guest-friendly service platform.

Second, when we laid out our long-term strategy many of these ideas were just entering test. As with all things, you can plan but undoubtedly something unexpected will arise and adaptability is critical. At the investor conference we discussed many strategic initiatives from transforming our kitchen processes and technology in the back of the house to implementing a team service approach. These initiatives represented ideas believed to be impactful to the business.

In aggregate, we said we would deliver 400 basis points of net operating margin improvement. I can tell you today as we about making our way through more extensive testing of the initiatives we remain committed and confident about delivering the margin improvement and reiterating our goal to double EPS by fiscal year 2015.

Now in March Steve Provost provided you with a look at Maggiano's path to growth and we have made considerable progress. The top line has been showing positive comparable sales in recent quarters and restaurant margins for the year improved an impressive 130 basis points over fiscal 2009.

You may have noticed that Maggiano's introduced a new menu earlier this month. While recipes were left virtually untouched, the complexity was reduced to stages such as offering entrees in only one size. The menu also plays up value by emphasizing affordable abundance in the new classic pasta section. When guests order one of the distinctive pastas to enjoy in the restaurant they choose a second to take with them to be enjoyed at a later meal compliments of our chef.

Maggiano's is a strong brand in what remains a differentiated and growing segment of the restaurant industry. During the recession we strengthened the business and return model and now Maggiano's is poised to take that progress to the next level with direct marketing and labor and food cost improvements. We are optimistic on Maggiano's ability to achieve the necessary improvements to return to growth in the coming years.

Our global development team has been hard at work as well. In fiscal 2010 we opened 22 Chili's and one Maggiano's restaurant and now have representation in 31 countries or territories. The system had a solid year with annual comparable restaurant sales down less than 1% aided by a positive 3% for the fourth quarter.

Additionally, we are excited to announce a new development agreement in Brazil with [Montana Partners]. They are a seasoned operator with businesses already established in the restaurant industry, operating close to 90 restaurants and churrascarias. They understand the culture of Brazil, are familiar with running a restaurant, and have the necessary capital to begin building out that territory.

We believe Brazil possesses the critical success factors as outlined at our investor conference, thus representing a large growth opportunity for us. As a result, we have entered into a joint venture partnership and believe we can replicate the success of opening restaurants similar to our joint venture with CMR in Mexico. Additionally, this marks the third BRIC country where we have signed development agreements which will be integral in delivering our 425 Chili's outside of the US by the end of 2014.

Our accomplishments, however, are not limited to the brands and their progress. While weathering the storm over the past 24 months we have strengthened our balance sheet while preserving our financial flexibility. Our stable cash flow enabled us to fund investments in our brands, pay down debt, increase our dividend, and buy back shares during the year. Our financial strength and clear plan to return value to shareholders in the years to come contributed to a successful refinancing of our debt into a five-year facility at an investment grade rating. No small feat in today's environment.

Fiscal year 2010 will once again prove to be difficult. However, we did not let shortfalls in the top line define us. Instead we made decisions to improve margins, something more directly in our control. Initiatives meant to transform the business have a tall order. They are designed to not only improve business returns, but improve the guest experience.

Margin expansion will be achieved through disciplined investment and priorities which show reliable operating margin improvements. The initiatives and progress today are not only the right financial decision, but the right decision for our guests and shareholders. Our strategies will balance margin improvement through investments with top-line initiatives which are grounded in innovation and value to collectively deliver earnings growth with strong business fundamentals.

The talented team at Brinker we are working tirelessly to deliver on our promise and I am confident this team can make it happen. Now let me turn the call over to Wyman Roberts.

Thanks, Doug. Good morning, everyone. As Doug mentioned, the economic recovery is not as robust as it was when we last spoke with unemployment up and consumer confidence still at fairly low levels. Going into the fourth quarter we expect headwinds on the top line for Chili's.

We chose to take a less aggressive approach to promotional advertising, working off the strength of the base menu, emphasizing our improved food with a price point mention. While pulling back on discounting impacted the top-line trends, the pressure on margins eased. Cost of sales from second quarter through third quarter and continuing to the fourth quarter improved dramatically beyond commodity favorability.

Additionally, restaurant expense and specifically labor improved as we moved into subsequent marketing platforms. The improvement in the labor line was also driven by a decrease in the level of change to the menu. The transformation of the menu has settled and team members have built muscle memory around the new items. At our last call we talked about how our test restaurants went through a period of unrest or a change curve characterized by an increase in cost of sales, comped meal expense, and labor coupled with a decline in guest satisfaction before returning to pre-change levels.

The brand had a similar experience with these metrics, returning to historic levels and higher as we moved through the quarter. And as we have talked about, the changes to the menu were extensive and very visible to the guests. The improvement in our burger meat and new cooking processes for ribs were wins for Chili's. Additionally, a number of the salads have resonated well with customers.

We moved quickly in this process and as always we listened and reacted to customer feedback by further evolving the menu to deliver on our promise of fresh, flavorful food served perfectly every time. All-in-all our culinary and marketing strategies have progressed, resulting in sequentially improving operating margin and a better guest experience.

As we said earlier, consumer sentiment still remains tough and people are still looking for a deal. We have been monitoring the casual dining and bar & grill environment and contemplating how best to respond. So you will soon see in the restaurants and may have seen an early introduction to our e-mail club the $20 dinner for two offer. This promotion will feature your choice of an appetizer and two entrees for $20. It will include signature entree selections such as our chicken fajitas, crispers, and ribs.

We have taken the learnings from the past year and incorporated them into making this offer compelling to the guest and a win for Chili's margins. The absence of dessert and improved distribution of entree selections over multiple stations in the kitchen will alleviate the pressures felt on labor. As such, the breakeven traffic needed for this offer will be sharply improved.

While this promotion is not yet in restaurants nationwide, it has been tested in a few markets and, as I mentioned, we introduced it to our e-mail database guests recently. In tests the promotion has performed very well and operating margins have come in as expected.

While our very near-term marketing platform is one more heavily focused on value, it does deliver innovation to the guest by including items like our fresh fire grilled corn guacamole and our new sweet and smoky chicken crispers. We expect future platforms to further balance innovation and value messages to entice the guests to choose Chili's for their dining occasions. Our base menu strategy and food-related pipeline will be grounded in innovation, incorporating Chili's bold flavors into both lunch and dinner offerings which are compelling and deliver an attractive value proposition.

In March we shared our comprehensive plan to win with you and since then we have been hard at work on these initiatives. As Doug said, we believe the collective initiatives remain on target to deliver a net 400 basis point operating margin improvement. I want to briefly touch on each of these initiatives to provide some color around early results and expected timing.

Several front-of-house initiatives are in the early stages as we speak. The first one, which I am really excited about, is team service. We made this change while I was at Maggiano's and it has proven positive for our three key stakeholders -- our guests, our team members, and Brinker.

This service approach challenges our servers to team together to be more efficient and to deliver better service which lowers our cost and puts more money in their pockets. You know your initiatives are having an impact when guests start talking about you differently. We now get many guests sharing their experiences with us the way this guest from Abbeville, Louisiana, did this week.

They wrote -- I want to give special thanks to Josh and Kenny for their friendly, professional, and fast service. We are getting a lot of comments like that now. The team service strategy and our new labor scheduling tool are now in place, producing meaningful labor improvements and better guest experiences.

Certainly the migration of our cooking platforms and improved kitchen processes is one of the more ambitious initiatives. Today in our three test restaurants we are achieving our objectives while delivering a better guest experience and more consistent food. This strategy not only improves today's business model, but as Doug said it places us in a better position to navigate potential future impacts to labor driven by healthcare or other related issues. The new equipment also opens up new avenues for future menu innovation.

Another priority in the manufacturing component of the business is our new restaurant systems. We remain on track to have the Chili's system implemented by the end of the second quarter. Once in place we believe this system will unlock value through improved inventory control and A-versus-T reporting further enhancing the margins in the back half of the fiscal year.

Chili's is a powerful brand with great awareness levels and a lot of strong attributes, but some of our facilities need to be refreshed. The goal of our planned reimage is not just to clean up the building but to use the remodel to jumpstart the brand's revitalization. Our guests will know that Chili's didn't just paint the restaurant but is changing their expectations for the quality of the experience.

We are targeting a $300,000 fully-loaded cost with lighter versions for those restaurants recently remodeled or built. The first reimaged restaurant will be in place by mid-September with multiple markets completed by the end of fiscal 2011. From there we will read results and determine next steps.

So I will be the first to say that we haven't yet turned the corner at Chili's. We are facing a very competitive market and a still very tentative customer, but we are laying the foundation. We have a vision, a motivated leadership team, a set of the initiatives that are going to move this brand forward and strengthen our business model.

Our goal is to achieve margin expansion primarily through investment and improved top-line performance driven by a better guest experience and more consistent food, resulting in significant impact to our business model making Chili's a stronger, leaner, more flexible brand. As Doug mentioned, this will allow us to switch gears from a margin expansion strategy to a growth strategy with Chili's plan to win fueling top-line growth and improving margins resulting in the right recipe for potential company-owned restaurant growth.

Now I would like to turn the call over to Chuck.

Thanks, Wyman, and good morning. You heard Doug and Wyman talk about the macroeconomic impact on the consumer and the challenges we face in driving top-line sales. Well, given these circumstances, we have chosen to tackle the business model and innovate and really transform how we think about our business.

Our sales performance did not prove to be a big success in fiscal 2010; however, we had many accomplishments which will serve as our foundation to fuel our underlying business growth. Brinker continued to deliver on its hallmark of strong cash flow, generating $237 million in free cash flow from continuing operations.

Beyond paying down $190 million in debt, we are able to refinance our credit facility consisting of a $200 million term loan and a $200 million revolver with a five-year tenure at investment-grade rates. The maturity of this new facility which extends beyond our outstanding bonds and the terms of these deals demonstrate the positive view lenders have about Brinker.

We increased our ongoing dividend payout ratio to 40% putting Brinker in the top quartile of best-in-class retailers. And in an unstable investment environment we successfully completed a refranchise transaction and the sale of On the Border, both at a gain.

We repurchased 1 million shares in the fourth quarter, our initial internally targeted amount, while we finalized the completion of the debt refinancing and the On the Border transaction. With those milestones achieved we look forward to returning to a more rapid share repurchase strategy. We are proud of these accomplishments and are optimistic about our ability to build off this momentum with investment into the four walls of our business resulting in an enhanced guest experience to drive top-line and improve restaurant level margins.

So let's turn to the results for a deeper dive into the quarter and my commentary will be based on continuing operations unless otherwise noted. Additionally, comparisons will be made on a GAAP basis of 14 weeks in the current quarter versus 13 weeks in the same quarter last year unless otherwise noted. Got that?

So anyway, revenues were virtually flat increasing by $1 million to $743 million. Comparable restaurant sales on a 13-week basis decreased approximately 3.4% with Chili's down 4.1% for the quarter while Maggiano's was up 1.3%. The Brinker result was driven by a 5.5% traffic decline offset by a 1.2% increase in price and a 0.9% increase in mix.

Capacity decreases from closures and the sale of company-owned restaurant were more than offset by the extra operating week in the quarter.

Royalty and franchise revenues totaled $16.7 million, representing a 3.7% increase from the $16.1 million reported in the same quarter last year. And the increase in royalty income is primarily due to a net increase of 31 franchised restaurant openings and the sale of 21 company-owned restaurants since the end of fiscal 2009.

Cost of sales increased 30 basis points year-over-year from 27.4% to 27.7% in the fourth quarter of 2010. Increased menu prices and decreased commodity costs, particularly in proteins, were more than offset by mix changes due to menu investments and promotional activity. Commodities were approximately 40 basis points favorable and we would expect to see similar favorability for the first half of fiscal 2011.

Restaurant expenses decreased 10 basis points to 54% and were nearly flat on a dollar basis at $401 million. You might remember last year our restaurant expenses included approximately 110 basis points of one-time benefits attributable to items such as favorable experience in claims on insurance and lower amounts of vacation, property tax, and utility expenses due to structural changes in the business. Well, these same items became a lap of 125 basis points when presented on a continuing operations basis, or in other words without On the Border.

While media weights remained constant, we had a 60 basis point benefit due to lower media costs in the quarter. As a Wyman discussed, labor improved from first to fourth quarter with momentum gained during the fourth quarter on a sequential basis. And those labor trends reflect sustainable improvements as we lap the three-course promotion and will be further enhanced by savings generated from team service and the new scheduling tool.

Depreciation expense decreased $3.4 million to $32.9 million due to fully depreciated assets, restaurant closures, and impairments and were offset partially by some normal asset replacements. General and administrative expenses were relatively flat on a dollar basis, but represented about a 10 basis point increase in the current quarter as compared to last year.

Other gains and charges of $4.6 million, primarily derived from long-lived asset impairment charges, were partially offset by a $1.3 million gain on the sale of land.

Interest expense is $2.4 million higher than prior year due to fully expensing deferred financing costs of $1.7 million when we entered into a new line of credit and from lapping a $1.3 million gain in prior year related to the repurchase of a portion of the outstanding notes at a discount. The write-off from the financing costs hurt quarterly EPS by about $0.01.

The decline in other net is primarily attributable to lapping $5.5 million of life insurance proceeds last year. The quarterly effective income tax rate increased to 23.7% as compared to 13.8% last year due to the decrease in other gains and charges in the insurance proceeds last year. Excluding the impact from those special items, the tax rate was relatively flat at 24.3% compared to 24% last year.

Cash flows from operations were $297 million and CapEx related to maintenance and other items was $61 million. CapEx for the year was lower than expected due to the timing of spend. Our cash balance of approximately $345 million was unusually high due to receiving the proceeds from the On the Border sale on the last day of the fiscal year.

As mentioned earlier, we delayed significant share repurchase until the completion of our debt financing which occurred in mid-June and the closing of the On the Border. With these two key milestones in place we can resume share repurchase at a more rapid pace and with today marking the end of our quiet period we expect to be in the market soon actively repurchasing shares.

Fiscal 2010 is behind us so let's turn to 2011. From our press release we expect earnings per diluted share from continuing operations to increase between 10% and 20%, including a lap of the 53rd week, and our results in Q4 have put us a bit behind on our goal of doubling EPS. We do need better top-line results than we originally forecasted to hit that goal, but were not prepared to walk away from the target today.

So here is our perspective on major categories and a view of the business in fiscal 2011. On the top line we expect our comparable restaurant sales to be flat to down 2%, while revenue will be down 2% to 4%. And specifically we believe that the first half of the year faces steeper headwinds with a lap of the three-course promotions and a tentative consumer environment.

Our expectations are top-line sales will gain traction in the second half of the year as initiatives such as team service and the culinary pipeline will enhance the guest experience to create compelling offerings and great value, the revenue declines attributable to the impact of the 53rd week, and capacity declines from restaurant closures and sales of company-owned restaurants during fiscal 2010.

Excluding the impact of the 53rd week, revenue will be flat to down 2% and we anticipate franchise revenue to increase in the mid-single digits resulting from the expansion of the restaurant base. Overall, we expect cost of sales to be at levels significantly less than 2010 and lower than our recent historical norms aided by marketing strategies that are less costly to this line as well as an improved A-versus-T gain from our restaurant systems implementation.

Commodities should be relatively flat. Currently we have 64% of commodities on a contracted basis through the end of the calendar year. And based on these insights, we believe cost of sales should benefit from improved commodities in the first half of the year. As we look to our calendar year 2011 we expect to see modest increases in commodity costs, primarily on beef, with some of this headwind mitigated by nominal menu price increases.

Restaurant expense will face headwinds, such as the loss of leverage in Q4 related to the 53rd week, and an increased investment in the restaurants in both management and repairs and maintenance. Given the initiatives implemented in the restaurant, we have invested in management via merit and expectation of higher bonuses to ensure all restaurants have sufficient manager bandwidth to lead the restaurants through this change resulting in improved guest experience.

Additionally, we expect higher repairs and maintenance expense resulting from initiatives to improve guest scores. So as we looked at 2010 we slightly delayed some maintenance expense until the kitchen transformation and the reimage scope was more advanced to ensure the money was not spent on items which would be replaced through these programs in the very near term. These headwinds will be partially offset by improved labor driven by team service, the new scheduling system, and less operationally complex marketing platforms.

Depreciation expense is expected to increase slightly due to a new POS system with the impact more pronounced in the second half of the year. We are revising our 2011 CapEx guidance down to $115 million to $120 million due to the timing of initiatives and further scrutiny on costs. And this number includes $55 million of ordinary maintenance CapEx spend.

Our business structure has changed with growth in franchise and a reduction in the number of brands. We anticipate our actual level of G&A spend in 2011 will be close to the 4.8% we experienced in fiscal 2010. Interest expense will be a slightly based on higher all-in rates on the new term loan. And last, our free cash flow, which is defined as cash from operations less CapEx, is projected to be $115 million to $125 million.

In order to truly compare free cash flow on a year-over-year basis you have to normalize fiscal year 2010 for a few items. First, fiscal year 2010 had primarily maintenance CapEx of $61 million versus our current guidance of $115 million to $120 million. Second, in fiscal 2009 and 2010 we received the benefits from the sale of Macaroni Grill and deferred tax items which decreased cash taxes paid. In fiscal year 2011 we did not expect the same cash tax benefit.

As I mentioned earlier, we will be buying back shares with our excess cash reserves, free cash flow, and proceeds from On the Border resulting in an average weighted share count of between 90 million and 94 million.

In terms of quarterly calendar shifts, Christmas will trade into the second quarter having a negative impact on that one which will be regained in the third quarter. In addition to holiday shifts, the quarterly comparisons are impacted by misalignment on a calendar basis created by the 53rd week. So in total, the second and fourth quarter will be negatively impacted by 50 basis points and the third quarter will benefit by 100 basis points from these shifts. Additionally, we will be lapping our initial three-course promotion in the first quarter.

Also, I wanted to announce a couple of changes in our reporting that will begin during fiscal 2011. To provide greater transparency of information we will introduce a few new metrics into our disclosed information.

Starting in the first quarter we will release franchise comparable sales for both domestic and international restaurants and on the income statement we will break out direct restaurant labor, which is defined as all compensation costs of the general manager position and below. And within our press release we will provide sales by brand and directional commentary on each brand's restaurant operating margins. We believe these changes will facilitate better insight into the performance of our company.

And, again, I want to reiterate these will begin in the first quarter of fiscal 2011 reporting and I will answer any clarifying questions about the release at that time. So now I want to return the call to Holly to open the floor for questions. Thanks.

(Operator Instructions) Joe Buckley.

I am with Bank of America Merrill Lynch. Good morning. Could I just ask Wyman, I guess, to walk through the timing on the different initiatives at Chili's? For example, the front of the house, the team servers, and the labor scheduling. When will that be implemented? When will the new restaurant systems be in place? The cooking processes; just kind of walk us through it. You mentioned four initiatives; I guess remodels is the fourth one.

Sure, Joe. So let's start with team service. We have rolled team service out; it's in the restaurants today. We are getting ourselves to our fully-expected levels of performance with that program by the end of the quarter. So we anticipate that team service will be at our expected level of performance really by the end of this first quarter.

The hot schedules labor scheduling tool has been rolled out now to all restaurants as of the end of July. Again managers are gaining proficiency with that new labor scheduling tool and we think should be fully proficient and all of our team members comfortable with that tool really probably by the end of this month. But for sure by the end of the quarter. So those two first-quarter initiatives are -- those two initiatives are targeted for first-quarter impact.

The second quarter will focus on the menu systems. And so the radiant system with Aloha and MenuLink, we will really focus on rolling that out in the second quarter. Our expectation, while we are currently in test right now in lab environment, we will roll into test restaurants here in the first quarter. Then our expectation is we will have that system in restaurants by the end of the second quarter and start to see, as I mentioned, improvement in our cost of sales through better A-versus-T. It's a much stronger A-versus-T system than we have today in the second half of the year.

With regard to the other initiatives, the reimage is -- we break ground next week. We should have our first reimaged restaurant finished by mid-September and then we will start to roll into test restaurants or other markets throughout the second and third quarter. We will evaluate those results and really by the end of the year start to plan our rollout strategy for the reimage. So that impact to this year's finances won't be as great.

With regard to our kitchen of the future, we are going to continue to test aggressively over the next couple of quarters and anticipate starting to roll that out on a pretty aggressive schedule in the back half. And while we are still having to understand exactly what that looks like, we do anticipate that we will start to get some benefit of kitchen of the future late this year, but the majority of the benefit for kitchen of the future will impact us next year.

Does that help, Joe?

It does. The Radiant Systems, is that the new POS system or is that --?

Yes, Radiant is Aloha and MenuLink.

Okay. Then just one follow-up for Doug. How were the food ratings on the revised menu items? I know when you change anything initially a lot of people crave the old style, even if the new is improved and better. Have you seen those food ratings begin to improve?

Joe, let me throw that back to Wyman. He actually has not just some internal data but also some external data about our menu and guest perception.

Sure. So, yes, Joe, absolutely. Anytime you make a change to a brand that has as much history and loyalty as Chili's you are going to kind of rock somebody's world, even if it's an improvement. People are loyal to Chili's and they have grown accustomed to things so even as we make improvements some people just don't want to see the change.

So we do experience that and we experienced it probably to a greater degree than we would have liked in the menu change, in the menu revolution process. Moving quickly had -- and with the magnitude of the changes we made, we rocked a few more people's worlds that we probably would have liked. So we quickly adjusted and I think if you were monitoring the menu you will have seen that we have gone back in and made changes to several items that we thought the feedback really required us to do.

And then on things that we really felt it was more about just getting customers and guests comfortable with the change we have held our ground. We have seen those responses from our guests move from again that dip they initially took back to a positive and now a higher level. We also track very closely how many meals we are having to comp by item, so we know if guests are having a hard time and we are having to comp food, where we are seeing that. And we address that very quickly.

So, yes, we did see some of that. We have addressed it and we think we have now got ourselves back on track.

Externally, what we saw with the changes in the menu is that our scores as measured from an external standpoint on a brand perspective on freshness, quality of food are significantly higher than they were before menu revolution. So we are starting to get credit in the consumer's mind and relative to the competitive set that Chili's does do some things with higher-quality products and fresher products than they thought we had before. And we think that is important for our long-term, strategic positioning for the brand.

Does that help?

That helps. Thank you.

John Ivankoe.

Thanks, from JPMorgan. I just wanted to get your best reach, whatever extent that you can, on the traffic underperformance of Chili's relative to the peers. What is it about what Chili's did? We can look at it really short term, in the fourth quarter 2010, that you think led to that underperformance. Whether it was advertising or it was the new menu or geographies, price point, what have you, I just want to see what you recognize as the issue, if any, and what specifically you think is going to change that relative underperformance into fiscal 2011.

Sure, John. This is Wyman. Let me take a shot at that, a couple of things. First, as I mentioned, we dialed back promotional efforts. When you look at some syndicated data relative to the category, the deal rate that the consumers see Chili's use relative to some of our key competitors in the category, it saw a dramatic change from the first half to the second half especially in the fourth quarter. And relative to the competition the gap widened.

So while we were out there with messages, the level of the deal and the consumer's perception of deal dropped dramatically and we think that put us at a competitive disadvantage. Now the upside to that was better margins and so we were trying to find that balance there. We probably, we sacrificed a little more on the top line to drive better margins in the back half.

We also, though, have a fundamental challenge, right, with the strength of our brand. We are working on that through all of these initiatives and through continued work on strengthening the value proposition every day at lunch and dinner for Chili's. And that is work that is underway now and going to be rolled out this year to strengthen the everyday value proposition for the brand in both dayparts. So that I think is what drove some of that shift.

We know that over on the year basis our relative market share is not nearly as dramatic, but we have seen fluctuations that we don't like and we don't like having to use promotions as aggressively to deal with the competitive pressures. So our vision is to strengthen the base brand and be less reliable on promotion.

You know, Wyman, I know many of the initiatives in 2011 are geared both for margin savings as well as customer and employee satisfaction as you pointed out. With hindsight being 20/20 did you see some of the cost cuts that Brinker did across the organization in 2008, 2009 perhaps leading to some of that traffic underperformance in the second half of 2010?

Absolutely, no. I don't think so. I think it's not so much cost cutting that I think we are wrestling with right now. It's just the competitive landscape and the changing consumer perceptions and us dialing this brand in tighter to what that requires.

I think it's not so much that we haven't -- that we have done something that has made us less competitive in the past. I think it's that we need to do something in the future that is going to put us in a position. So it's not so much about what has happened in the past as much as what we have to do moving forward.

Okay, thank you.

Jeffrey Bernstein.

It's Barclays Capital. Just a couple of questions; one perhaps for Chuck. As we look to fiscal 2011 I think you guys mentioned the economy is not as robust; I think that is fairly clear. But it looks like you are still -- it's still allowing for above your long-term EPS growth. Like you said at your analyst day, want to achieve 10% to 12% long-term. We think we are going to achieve more than that in fiscal 2011 and you actually are promising now 10% to 20%.

So it seems like you are meeting your earnings promise, but yet the comp, just due to the broader macros, now you are saying flat to down 2%. Previously I think you had inferred fiscal 2011 could be up 1% to 2%. So with that significant comp swing to the negative side, what do you think are the primary offsets that are still allowing you to make that promise for such meaningful earnings growth? There are two, three key things that are the delta to drive that earnings despite the shortfall?

Well, share repurchase obviously is a tool that we are using to help our earnings in that respect. Some of the softness in our original expectations around where the share price was and where it is today, that is helping to make up some of that gap, Jeff.

Okay. Specific to that share repurchase, I think you said you have $345 million in cash. I know based on your guidance for 90 million to 94 million of shares outstanding, it would seem like that is conservative that perhaps you are not using all of your excess. I know you target to maintain like $50 million in cash on the balance sheet, but that would allow you $300 million of existing cash plus you are talking about the free cash north of $100 million.

So I am just wondering is there any other usage for that cash or why wouldn't we see a share base reduction further than the 90 million to 94 million that you are forecasting.

Well, I think, Jeff, the one thing that you need to think about is that is an average over the whole year. So it doesn't just mean we are only going to buy back 8 million to 12 million shares, we could buy back more than. Just simply the shares that you buy later in the year, those derived from cash flow in other words, would have less of an impact on that average calculation.

Does that make sense?

Yes, that part I think I understood. But I am just -- it seemed like -- I know you said as soon as we get the money back from the On the Border deal that money would go in week one or month one. I think going into this year people understood the significant share repurchase component.

But it seems like still to achieve a 10% to 20% earnings growth with the comp score you are looking at right now -- I didn't know if there is any low-hanging fruit that you are getting earlier than expected as a component of that 400 basis points of margin perhaps or anything else unusual besides the share repurchase.

We are getting some benefits from team services, as Wyman outlined before. Commodities and cost of sales are probably going to be a little bit better than what we had looked at, particularly as we have changed our promotional activities.

In terms of the share repurchase, we were blacked out from buying really from the time we closed the On the Border transaction until now with regard to your comment about why we weren't more aggressive in buying shares. But obviously that particular blackout has been lifted, so we will be in the market soon.

Okay. And then just lastly, you mentioned the new two for $20 promotion I think you said the traffic needed to breakeven is a lot less than your prior similar promotions. Just wondering whether there is any more color from your test market in terms of what is needed for that breakeven, just whether or not you see the broader category as similarly, perhaps whether you see the category easing on, or being more aggressive with the promotional activity.

Jeff, it's Guy. I think the only color we can give you from the test restaurants is it's matching up consistently with what we thought and what we have forecasted for a potential breakeven. So the test is confirming what we believe so we are confident in what Chuck had said earlier in his commentary.

Okay, thank you.

John Glass.

It's Morgan Stanley. First, maybe a follow-up on the two for $20 promotion. Why would you expect -- I understand that you have talked about this being better for margins, but why wouldn't you expect traffic to be negative versus a year ago when you were offering a better promotion? Is there some -- is that your expectation that traffic will be negative, maybe less negative than it would have been otherwise and you will make that up in margin? Or do you actually think has the possibility of driving positive transactions even against a better promotion a year ago?

John, this is Chuck. The offer of two for $20 is less than the three for $20 that we did last year, so we are anticipating traffic on a year-over-year basis to be negative.

Okay. And then on a profit -- do you think on a profit dollar per transaction you will make it up though because the margin is better?

We will make it back up on margins and then also just some of the initiatives that we have outlined in the scripts and in some of the other follow-up questions.

Okay. And then if you could -- in the release you talked about 70 to 100 basis points, I think it's of operating margin leverage, you just said an increase of operating income 70 to 100 basis points. I presume that means an operating margin expansion of 70 to 100 basis points, if you could just clarify that.

And can you talk about what you talked about on the restaurant expense line is that being sort of a negative for you 2011? A lot of the things you are doing are designed to reduce store-level labor over time but it sounds like you are going to get some -- is the increase in compensation, for example, is that a one-year phenomenon or is that a change in the way you are looking at the labor, the components of that line I guess going forward? And shouldn't that line get labor leverage, I presume, going forward beyond next year?

A couple of things there, John. Yes, first of all, we are talking about 70 basis points of margin improvement. Thanks for allowing us to clarify that.

Secondly, I think what you will see next year -- the biggest benefit, honestly, comes from cost of sales in terms of margin improvement. Getting off some of the promotional activity as we talked about three for $20, we are not giving away a dessert so that in and of itself is better for margins. And that is on the food costs line so we will have a big gain in food costs.

Restaurant expense we do expect to be slightly up a little bit. As I said, we reinstituted merit increases this year for our management teams. We think that is a big motivating factor for them, especially given the transformations we will be making in terms of going to team service, implementing a new POS system, asking people to adopt kitchen of the future. There is a lot of change coming through the systems. All planned for, all well thought out, but we will be asking our managers to do more so we do anticipate that merit makes a lot of sense.

Last year, because of our sales and financial performance, our managers did not earn full bonus but we anticipate in this plan that they will return to full bonus levels. And so because of that we are seeing a slightly bigger increase on the restaurant labor side, but we still will improve margins on an overall basis by, as we said in the press release, 70 basis points.

And then just going forward, 2012 and beyond, that revenue expense line should be a significant source, though, of your 400 basis points or 500 basis points of restaurant margin expansion, correct? I mean, it should --

Absolutely. Absolutely, John.

Okay, thank you.

Destin Tompkins.

Yes, it's Morgan Keegan. Thank you. My first question was on the CapEx, guys. I think you mentioned that it was somewhat reduced from what you had talked about previously. And I thought I also mentioned in Q4 there were some timing differences and maybe fiscal 2010 came in a little lower than expected. So as I reconcile those two pieces where do you see CapEx, where is the reduction most pronounced within CapEx?

Well, I think from our original estimate some of it is the fact that POS got moved from, in our minds, 2010 to 2011 so that was about a $15 million switch. And then just as we looked at reimage and kitchen of the future we were maybe a little bit high in terms of some totals that we used in that regard. As we have gotten better at scoping them those costs came down on an overall basis for the year.

Okay. And I think previously there was some remodels or reimages in there, around $18 million. Is that still in there?

That is still in there. Kitchen of the future will be about $30 million, reimages will be somewhere around $18 million as well. Maintenance; POS is about $15 million and then I talked about just ongoing maintenance makes up the bulk of that.

Okay. And then one clarification, when you were talking about the share repurchases this year and you mentioned the combination of the cash on hand and the free cash flow, I think if you look at what you could use it would be north of $400 million potentially during the year. Is it still the plan to use the majority or all of that for share repurchases?

We have sat down with our Board. Our Board obviously has given us authorization to repurchase shares and we will use that authorization as we go through the year.

Okay, great. Thank you.

Brad Ludington.

KeyBanc Capital Markets. I wanted to start off back on the two for $20 promotion. You said that is not out systemwide yet. Is there a target date for when that will be out systemwide and will there be ad support with it?

Yes, so it is actually out. We sent the offer through our e-mail database which is nationwide and we have obviously guests in every restaurant in the database, but it's just not merchandised in the restaurant. So every restaurant is having some experience with it this week through our database. It will go live on national advertising on Monday.

Okay. So is kind of just a -- the e-mail promo is like a soft rollout to get everybody ramped up on it?

Yes, it was a great way to introduce it to our most loyal guests, those that are in our database, and then also to give the restaurants across the country a little bit of look into what the two for $20 looks like versus the three for $20 and get them set for that promotion.

Okay. And then the labor scheduling tool you have talked about is their any kind of estimate -- do you know if you look longer term what kind of savings that could provide margin-wise, how much that would save on the labor line? I know that maybe offset with higher bonuses and some of the other issues this year, but looking fiscal 2012 and beyond.

No, it's not -- we are not counting on it for a huge labor cost savings. What we are doing is it does have -- we think it's a much better system; it's much more user-friendly for our servers. They can get a lot of their schedule information texted to them. It just works -- they can trade schedules themselves by just posting it and texting. It takes a lot of that onus off of the management team which is great. So there is a lot of those kind of benefits that are hard to quantify but truly a positive thing for the restaurant.

The other thing it has done for us is as we switch out our systems and move to this Radian Aloha MenuLink system in the second quarter, one of the biggest jobs managers have is scheduling and as we move this system we will not have to burden them with learning a new labor scheduling system. So the second-quarter system changes will become easier for our managers now that we already have the new labor scheduling tool in place. They won't have to learn that piece as we roll out the new system, so that was another benefit to doing hot schedules early.

Okay. And then just finally, thank you very much for saying you are going to break out labor in fiscal 2011 and beyond. When you do that will you restate any previous years so we can have some kind of comparison or will it just be the first quarter 2011 and beyond?

No, we will give you a comparison year-over-year.

Okay, good. Thank you very much.

[Karen Lamark].

Federated Investors. I want to go back to the remodels and make sure I understand. The upcoming plans you have is that the test or have you tested this already?

We are currently working on construction for the test right now.

Okay, so can you share any expectations around the lift to sales or margin benefit, anything like that?

Sure, we would expect to see lifts of sale somewhere in the mid-single digits in order to give us a good return on that reimage.

Okay. And then as far as the markets that you plan to remodel in fiscal 2011, how are you prioritizing or identifying them? Are they the best markets or the worst? Any color would be helpful.

Trying to do them in DMAs where we can put marketing against the reimage. So I would say a smaller number of restaurants so we can get an accurate read on what happens once we complete the remodel and then put marketing behind that to let people know that something new and different at Chili's, see what kind of lift we get.

Okay. And then separately can you share anything about your commodity commitments in the first half and then in the second half?

Yes, we are contracted right now for about 64% through the calendar year and then we are also looking at contracts that would comprise about another 5% of that total that we should finalize here in the next couple weeks. As I said, we expect to see some benefits in commodity pricing for the first part of the fiscal year, or in other words through the end of calendar year 2010.

And then as we look to the back half we do see commodities up slightly primarily related to beef. Beef costs are a little bit higher than they were on a year-over-year basis. I know dairy is high year-over-year but the new contract we have for dairy actually for us may be helpful, just in the fact that we had a contract that hasn't seen that kind of increase in price.

How much are you contracted for that second half or fiscal, calendar 2011?

Marie, do you have that number?

I think it's 27% out to the end of our fiscal year. So obviously it falls off so as Chuck said 64% to December, but then if you want to just put that to the end of our fiscal year it's only around 27%.

Okay. And then one last question. Maggiano's, can you give us some idea about what is driving the positive comps, if it's corporate spending or it is it a higher income consumer coming back to sort of gauge the durability of the improvement? Thanks.

Sure, Karen. Yes, at Maggiano's we are seeing return of corporate spending. We see the weekday lunches, which are many times driven by business folks on expense accounts, we have seen that go up. The banquet business is about 50% corporate spend. We have also seen the banquet business gone up and we are actually growing some catering business as well which is fueled by a lot of companies and small businesses.

So real positive trends. I think we said at last quarter that upper income consumer and the business consumer don't seem to be as impacted as maybe the average guest (inaudible) so Maggiano's is seeing some positive trends.

We also are very excited about this new menu and some of the value propositions with the classic pasta section. And just some other tweaks and changes to sizing of items, offering side salads for everyone, just lots of ability for the guest -- for the server to give guests more choices but still great chef-driven pasta dishes.

Thank you.

[Tom Forte].

Great, thanks very much. So two quick questions. One, can you comment at all on bar alcohol trends for both brands, for Chili's and Maggiano's? And then second, can you talk at all about labor trends, turnover for both brands?

In bar trends we have seen Chili's beer business -- that is probably the one piece of the alcohol trend that has been trending upward and part of that is price driven. As consumers are looking to manage check we have some beer specials and they tend to be a little bit lower price. Maggiano's is pretty flat in spirits and the wine side. But generally flat; the only thing really trending up has been beer sales at Chili's.

I missed the second part, Tom.

Sure. Can you talk about labor turnover trends for both brands?

Turnover has continued to come down I think as a reflection of a tough economy. It has been easy to retain teammates.

Yes, Tom, just looking at the hourly team member level throughout this past fiscal year we saw about a 10% decrease or better -- less turnover, excuse me, on both of our brands. Management is still very, very flat.

So part of that is the economy, part of it we think is excitement about some of the ongoing strategies and improvements in the business we have moving forward.

Great. Thank you very much.

Jeff Omohundro.

Thanks, Wells Fargo. With the pullback in the level of promo activity behind Chili's in Q4 and then the return for the introduction of the two for $20 in Q1, I wondered if you could step back and help us with your thoughts around the overall level of promo/discounting activity 2011 versus 2010, price check and mix? Thanks.

Sure, Jeff, I think the -- so if you are trying to look at this upcoming year versus last year, and I will say -- it would be more balanced in this year than it was last year. So we were really aggressive in the first half with three course really driving a lot of that and moderated it quite a bit in the back.

What we know now is we will -- with two, as we have talked about already, two for $20 is what going to be less aggressive, obviously, than three and so we will see and feel some of that in the first half. The back half it's really going to be -- our expectation is that we will have promotion but it won't be as aggressive. But again we have got to just see where the marketplace and what the consumer and the competitive set are kind of requiring from us. We are going to be fairly flexible there.

But I would say I don't anticipate it going any more aggressive in the back half than in the first half. We would like to be able to, again as we did this year, pull back but we are going to have to be pretty confident that when we do that it's with either a better, stronger base offer, so to some changes we are making to the concept on the base menu will offset some of that, need for promotional activity, or that we are seeing either competitive or economic indicators that will allow us to do that.

And so it's hard to give you a straight answer in terms of it's going to be exactly the same all the way through the year.

And as a bit of a follow-up to Karen's question on Maggiano's, looking at the performance of Maggiano's how are you thinking about a development there and what would you need to see for a re-acceleration?

Jeff, this is Doug. Let me just add one thing to what you and Wyman were talking about too. It's so hard to predict what is going to happen. I know you asked about our promotional activity, but even looking across the competitive landscape a couple of folks doing buy one get one frees right now.

So again the economic news of this week speaks to the consumer being more nervous and trying to manage how they spend, and if our competitors are aggressively buy ones and get ones we are going to have to manage what we are doing long and short term. And so we are going to have to play it out throughout the year.

On your Maggiano's question though, what I can tell you is we don't have any signed leases today. So if you look at the average time it takes from when you sign a lease to open a restaurant 18 to 24 months, we have nothing signed. We are looking at the marketplace. We are seeing favorable rents and good deals on real estate versus a few years ago.

We are bullish on the brand and its current trajectory, but we are still working on the business model at Maggiano's. If we find affordable sites and we continue to actually do some of the same kitchen work that we are doing in Chili's, some of those same equipment, some of those same manufacturing processes are applicable at Maggiano's, we do see starting to build them again. But nothing specific to report today.

Thanks.

Jonathan Waite.

Precipio Research. A question on just the July period. As you recall last year I think you guys started out down double digits and kind of guided down below expectations due to the profitability. I think the emphasis was on --the July month was kind of an extraordinary month as far as its profit generation.

Can you comment on July this year? Are we back to kind of a more normalized profit level for the month?

We are not going to make any comments, Jonathan, about July or any period, intraperiod. We talked a little bit about what our guidance policy would be and we have stuck to that. We will continue to stick to that.

Was July last year more of an anomaly?

Last year in July we reported same-restaurant sales because we had a significant discrepancy in where earnings were versus where the Street was. So we felt like at that time it was a material event and needed to be disclosed.

Okay. And then on the two for $20, what has been the customer reaction so far? I mean are you getting a pushback because you are dialing back the discount here? You are providing one appetizer and two entrees and no dessert. Any pushback from that change?

No, we are not. Surprisingly, we are not getting that and we believe the reason for that is that we have added some compelling entrees to this selection. So this isn't just, oh, we took away the dessert.

We restructured the entree component to this. We have added things like chicken fajitas, which are doing very well, and I think really showing our guest that there is a strong value and a compelling offer here.

So between that and just the nature of the promotion it has been a long time from a consumer standpoint, six months, since they last saw this offer or more or an offer like this has got them not so much worried about what they got last time but just kind of focused on what they are getting today. And they are responding very well.

Okay, thank you.

Chris O'Cull.

Yes, I am with SunTrust Bank. Good morning, guys. Just a couple of follow-ups. Chuck, in terms of the operating margin guidance that you gave for fiscal 2011, how sensitive is that to changes in comps?

Well, for us one point of comp is somewhere -- if you want to look at it on an EPS basis, all things equal, it's probably $0.07 to $0.08. Now that doesn't assume that we pull any levers to make that up, but obviously when you start flowing that back on margins it has an impact.

Okay. Help me just understand the flat to down 2 comp guidance. It sounds like clearly an acceleration from what you are seeing in the trend. In this economy we have seen kind of a continued downward trend with the consumer so why give that kind of guidance at this point?

First of all, we have to give you some guidance so we have got to give you -- and our best expectation, as we look at the current business environment -- what we have done last year, what we did last year, and how we performed and what we have got on our agenda -- we feel like, yes, while it may be a little more aggressive to where we are seeing in the first half we think the back half is going to be stronger.

And that is not counting on a huge economic recovery in the back half, but just more of what we think we are going to be able to do from a brand perspective especially at Chili's. And so that is where we come up with that forecast.

Wyman, do you expect to have the same amount of GRPs in fiscal 2011 that you had this year?

Yes, our media plan is in place and the upfront is pretty much finished. So we have bought a large portion of our advertising in the upfront this year and so we are planning to be at or above prior-year levels with regard to media.

Okay. And then you mentioned A-versus-T with this new MenuLink system. How large is the actual versus theoretical gap under the new system?

Well, under the new system -- we don't have it in place yet but we have an A-versus-T number now that we think there is opportunity. The biggest challenge is just the timeliness with which our current system gives our operators data. It's just not timely enough and this new system will give it to them in a much -- in almost a real-time state. And that is -- as a restaurateur that is what you need. You need information that is timely and then you can take action to deal with what you are seeing.

And so we think we there is -- we know there is opportunity there that is why we are investing in it, both from a capital standpoint and from the standpoint of our operator's time and energy in rolling it out. We also just -- as Chuck mentioned, we are asking our managers to do a lot and so we believe that we owe them the best tools in the industry so that they can really spend their time with their team members and their guests. This tool will simplify their lives and keep them out of the office and allow them to answer questions with regard to product without having to do as much legwork or manually trying to figure it out.

So those are the investments we are making, not just to get a better A-versus-T and a lower cost of sales, but to get our operators and our managers in the front of the house and working with their team members and guests more.

Okay. And just one last question regarding the remodels. Why wouldn't you complete the kitchen of the future before you start a remodel campaign? I guess I am thinking why wouldn't you want to improve the service execution to the best you can before you start advertising to people that you have got a better experience waiting at Chili's.

That is a good idea and we are working both initiatives parallel path and there is nothing that precludes us from putting a kitchen of the future into a remodeled market as we -- before we remodel it. So we are solving both issues and resolving the issues around both independently, but when it becomes a rollout initiative there is absolutely some good logic to your thinking.

We have actually had some of those same thoughts and we will probably incorporate that as much as possible as we roll forward. So we do kitchen and remodel where possible for exactly the reasons you stated.

Okay, great. Thanks, guys.

[Steve Anderson].

(inaudible) Partners. Just taking a look at the bump up in your interest expense, are you prepared to give a range for your interest expense this year or is that something that is going to be dependent on where you think interest rates will be? Thanks.

For us we will have slightly higher borrowings. We have the $200 million borrowed at a slightly higher rate than we had last year.

All right, thank you.

Steve West.

Stifel Nicolaus. This is Matt (inaudible) on for Steve. I just had a quick question on the two for $20. Through the tests have you seen any difference in attachment rates of your drinks or are maybe people adding on a dessert now that they want that maybe they got last year? I guess just any kind of different trends there that might help average check as we go forward.

Sure, yes. The PPA, the average check is higher, as you would expect, without giving the dessert. We are also seeing solid pick up on our add-on checks with regard to beverage, so that is a benefit.

Okay. And then another question on the reimages. How much of what is going to go into test is a carryover from the previous test that you used and I guess how much of it is just brand-new kind of scrap that whole plan and move forward with something different?

This reimage is really -- we started from scratch. We wanted to go back and really understand what is it that we want the brand to kind of stand for today going forward. So there isn't much -- well, there is no carryover from prior programs. This is a new initiative and so there isn't any carryover there.

Okay, thank you.

Sara Senatore.

Sanford Bernstein. Just a quick follow-up on the commodities but also wanted to see if we could circle back a little bit on franchising. I will start with the latter, which is obviously you are still opening in international markets with licensees, but when -- a lot of times what we are hearing from other companies is in an effort to sort of mitigate their exposure, their risk there is continued franchising going on.

I know you guys stopped doing that and you were going to revisit. Can you just update where you stand, why you haven't pursued it further, and if that is going to change? And then I will have a follow-up on the commodities.

Sure. On the refranchising effort I think for us we just did complete a transaction so we have not stopped looking at markets. That is a continual evaluation, but I will say we are incredibly bullish about the initiatives we have outlined today. And we think those can demonstrate and produce much better margins and much better earnings power from those company-owned restaurants.

So in the nearer term shareholders are better served by the improved margin. And then once we have completed the rollout of kitchen of the future or anything else, again, that will be part of the ongoing process of evaluating which markets should be company-owned and which markets should be franchised.

Got it. So maybe you get a better price for them once you have improved the operating margins as dramatically as you are intending?

That is correct.

Okay. And then the quick follow-up was on commodities and really vis-a-vis price and the environment. You take a little price or maybe -- have you sort of quantified the trade-off between traffic and price? I am just thinking about in this demand environment we have been, I don't know if you want to call it fortunate, but commodities have been lower as demand has been weak so people have been able to keep prices low or discount.

Have you thought about what happens if commodity prices go up a lot as some of the initial signals are suggesting but the labor market doesn't improve that much? So are you setting up for -- is it possible to take price? Is there some sort of calculation you would do where x points of price makes traffic down by a certain amount? Or how do you think about it if commodities and demand kind of go in opposite directions?

Well, a couple things. First of all, we have been trying -- we tried very hard to be judicious in our price increases. We have looked at somewhere between 1% and 2%. We do know the amount of elasticity we have on pricing. I would rather not disclose that to everyone on a call today.

Right.

We are very cautious in that respect.

When you look at commodity prices, I would say generally when you see an increase in commodity environment that is generally due to a better economy and so that does give you better demand for your products and should see an increase in top-line sales to help you offset commodity increases. What you are talking about is just a bifurcation where we are starting to see commodity prices increase and no demand increase.

Having said that, if that was the environment that we are using for assumptions that would be tough on margins. So the one good thing about the Chili's brand is that it's a varied menu so we don't just have dairy costs as a huge component, we don't just have one protein that is a huge component.

We have got a wide variety of inputs that affect our commodity costs, but we have also got the ability to market against the things that have the best returns for us. So if beef prices spike up, if Wyman chooses he can market chicken items. So we do have some flexibility in our menu offerings and of course the business model improvements we are talking about help us save on lines other than just commodity costs.

Got it. Thank you.

Howard Penny.

Hedgeye Risk Management. Thanks very much. Two questions, it would appear that part of your comp issue in the most recent quarter may be somewhat self inflicted in the sense that some of the changes had caused guests to not come back. And I was wondering if you could pull that out in terms of percentages as to what you think that is. And then I have another question.

Hi, Howard, this is Wyman. I don't know if we can quantify exactly what change to the menu did to kind of move traffic down before we have been able to bring it back and stabilize and start to grow that and fix that issue.

We do know there was some, obviously with -- as I had mentioned before, anytime you make the change you are going to have some of that reaction. So we know that is just -- so again when we talk about first half versus second half of the year we know the first half has got some very aggressive promotions with some solid margin give up last year that we will have the opportunity to improve margins more in the first half. Maybe still see some softness relative to the top line because we are not going to be as deeply discounting in our promotional offer.

But in the back half we know we have that opportunity as well as just the opportunity to do additional, more impactful promotional messaging and base menu fixes. And we are counting on our team service to be kicked in and better guest experiences. Our operators are focused on delivering more consistent experiences every day and measuring and monitoring our key metrics along that. So we see a lot of things that will help us in the back half relative to prior year.

And that is just one of them. I couldn't quantify it for you in terms of number of points or anything, but it is another element that we get to lap over this year that will make the second half more positive for us.

Good, thanks. Chuck, if I just take the midpoint of your range of the reduction in your share count to 10 million and use the current price of $15 you get $150 million. Can you just -- which relative to an earlier comment that you could potentially spend $400 million on share repurchase and I know you artfully dodged that number. But can you help me think about how much share repurchase could make up for a shortfall in sales given the fact you really don't -- I know the stock is not going to stay at $15 but --

Right. There is a lot of assumptions, Howard. Almost too many to articulate in a single answer, but I would say that you could probably make up a couple cents, $0.02 or $0.03. But it's all based on where the share price trades and how does the share price trade against a change in comps. So there is two huge assumptions there but I think we could make up a couple cents.

Thank you.

All right, thanks.

All right. Well, thank you all for joining us today. This concludes our call.

We look forward to following up with many of you later this afternoon. If not, we will talk to you for our first-quarter earnings call on October 26. Thank you.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.