Brinker International Inc (EAT) 2011 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Brinker International fourth-quarter 2011 earnings conference call. (Operator Instructions). It is now my pleasure to turn the floor over to your host, Mister Tony Laday. Sir, the floor is yours.

Thank you, Kate. Good morning, everyone, and welcome to Brinker International's fourth-quarter fiscal 2011 earnings call which is also being broadcast live over the Internet.

Before turning the call over, let me quickly remind you of our Safe Harbor regarding forward-looking statements. During our management comments, and in our responses to your questions, certain items may be discussed which are 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 anticipated. Such risks and uncertainties include factors more completely described in this morning's press release and the Company's filings in 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 section of the Investor tab.

Consistent with prior practice we will be silent on intra-period sales or other key operating results yet to be reported as the data may not accurately reflect the final results of the quarter referenced.

On the call today, you will hear from Doug Brooks, Chairman and Chief Executive Officer; Guy Constant, Chief Financial Officer; and Wyman Roberts, President of Chili's Grill and bar. Following their remarks, we will take your questions.

Now I will turn the floor over to Doug.

Thank you, Tony. Good morning, everyone. I'm going to briefly share with you our Company results for the fourth quarter and for the entire fiscal year. I'll give you a glimpse into our plans for fiscal 2012 and then I'll turn it over to Wyman and Guy for deeper dives into Chili's, our number results, before we answer your questions.

As you saw in our press release this morning, we reported an adjusted fourth-quarter earnings per share of $0.48. That is a 9% increase for the quarter, resulting in a 32% increase for the entire year. Brinker ended quarter four with a 2.6% gain in both comp sales and traffic, marking our fifth consecutive period of positive growth. These results prove we are delivering on our promises.

In the third quarter, our focus on strengthening our business model produced significant margin improvement and we began to start seeing that same sales growth.

In quarter four as we continued to work on margins our sales building initiatives gained more traction and continue to generate positive growth in both sales and traffic. And now into fiscal 2012, the work we're doing to revitalize our brands, we are building our momentum with sales and traffic while we maintain the operational efficiencies we've gained from the work we started last fiscal year.

Now let me give you some highlights around Chile's results. During our last call we indicated we'd see topline improvement during the back half of the year and we delivered on that promise. We delivered positive comp sales in February and March and we continue to build on this momentum into the fourth quarter, ending the quarter up 2.1% in both comp sales and traffic, and achieving sequential improvement throughout the quarter. These results mark Chili's fifth consecutive period of positive comp sales and traffic.

The bottom line? Chili's plan to win is working, and in a few minutes Wyman will give you a closer look at where the team gained traction during the quarter and he will share the highlights of what's coming in F12 as they continue to build on the brand's momentum by driving guest satisfaction.

Let's talk about Maggiano's. I hope some of you saw Maggiano's featured last night on ABC's hit comedy show Modern Family, one of the little boys -- Manny, a 12-year-old -- insisted on Maggiano's being the only place he wanted to spend his birthday party so, thank you, Manny. And by the way, that show is really, really funny.

But, impressive would be the way I would describe Maggiano's fourth quarter, not funny as President Steve Provo and the team continued to produce outstanding results. 5.7% sales growth, sixth consecutive quarter of positive comp sales, 5.8% increase in guest counts, our seventh consecutive quarter of traffic growth. And, a 250 basis point increase in operating margins as the team continued to drive great margin improvements.

As Maggiano's begins to lap strong sustained sales growth, we fully expect sales momentum to continue based on three key areas. First, value. Our Classic Pasta offers everyday value unmatched by the competition. Guests buy one entree and go home with a second full entree, compliments of our chef. And the brand is coming new news to Classic Pasta beginning this month, in fact, a new menu that we started this previous Monday.

Second, direct marketing. We are using what we believe is the largest pro-restaurant database in the industry to target [loyalists] and new prospects in every trade area with direct mail and e-mail and we'll continue that traction into fiscal 2012.

And third, banquets and delivery, the latter of which grew by 25% in fiscal 2011. Considering Maggiano's positive trends in sales and traffic along with ongoing margin improvements, we anticipate new restaurant growth in Maggiano's as early as our fiscal year 2013.

The global side of our business also made valuable contributions to Brinker's results as well. President Carin Stutz and the global team achieved comp sales increases of 7.7% for the quarter and 3.5% for the entire year. We opened 23 net restaurants this year, bringing our total to 235 Chili's and one Maggiano's in 30 countries and two territories outside the US.

As you know, international growth comes with its fair share of challenges. Turmoil in the Middle East, coupled with violence in Mexico reduced the number of restaurants that we planned to open this past year. Looking ahead, we are committed to our long-term goal of 425 restaurants; however, we expect it may take an additional year to reach that goal.

Carin and her team continue to work tirelessly to introduce Chili's to the world and deliver value to our shareholders. By the way, despite all the turmoil we did continue to drive positive comp sales across the Middle East. We also expanded our presence in the BRIC markets, opening our first Chili's in Russia and an additional restaurant in India, meaning we now have a total of four in India. We look forward to opening our first Chili's in Brazil this quarter marking the 31st country to host a Brinker restaurant outside the US.

Here in the United States, the entire restaurant industry and I think everyone in general continues to face challenging macroeconomic conditions that certainly are impacting consumer confidence. This prolific media coverage around our political environment, the unemployment rate remaining high and elevated gas prices that hit in the pocketbook of every restaurant guest. So our three primary value strategies have become increasingly important in appealing to our guests.

First, the $20 dinner for two at Chili's. Second, Chili's new lunch combos and third, Maggiano's Classic Pasta that I just mentioned. Our ability to execute these offerings and provide everyday value to our guests have certainly helped Brinker navigate through this uncertain economic environment. And looking forward, we anticipate achieving earnings growth that outpaces the rest of the Bar and Grill segment.

Given our progress in F11 and the plans we have in place for F12 I am confident we will achieve our long-term goal of doubling Brinker's earnings-per-share in five years.

Our strategies are succeeding, even during a challenging year. We've improved returns in our business model and we have reinvested in initiatives that are driving sales and traffic. We have the right teams and the right strategies in place to continue and build on our momentum and deliver long-term value to our shareholders.

So, speaking of the right team, by the way, I'm about to turn the call over to Wyman Roberts who coincidentally today is celebrating his six-year anniversary with the Company. He tried to call in sick this morning and I told him I'd give him an anniversary day off when he reaches 10 years, not six.

So, Wyman, nice to have you here and why don't you update everybody on the Chili's business? Happy anniversary.

Thanks, Doug. Appreciate it.

You know you're right. There are a lot of exciting things going on at Chili's. Earlier this year, I laid out a five-point strategy to drive sustainable sales growth as part of our plan to win. Today I'll share our results to date, walk you through highlights of each of the five points in our strategy and tell you where we are headed in fiscal 2012 on our journey to make Chili's like no place else.

As you heard from Doug, our plan to win is working. We drove positive comp sales in February and March as well as every period during the fourth quarter with every period getting sequentially stronger. Comp traffic was positive for the quarter and outpaced the industry every period during the quarter. The fact that sequential sales improvements were driven by increases in traffic and not check underscores the power of the initiatives we've implemented.

We are growing share by delivering a better guest experience. We're offering more compelling products, and we have operations teams focused on consistent execution and raising the bar on hospitality, and all of this is happening while we improve the margins.

So, let me walk you through the five points in our plan to win and highlight where we've gained tractions and I'll give you a glimpse into F12. First, we're focused on key dayparts. At lunch we launched Chili's Combos in the third quarter featuring great new sandwiches matched with soup or salad and served with hot fresh fries. This has been a big win for our guests.

We've seen strong preference and great value scores. Lunch traffic which was negative before we launched the combos has shown sustained positive trends since the rollout. We're maintaining our margins a these new lunch combos were created with food costs in line with our overall menu so, during F12 we will continue to build awareness of our strong lunch offering while we make some changes, both additions and deletions, to keep it a fresh and compelling reason to visit Chili's.

At dinner we are focusing on key platforms like Triple Dipper and $20 Dinner for Two to remind guests what they love at Chili's. We're coming keeping the complexity low but we are adding manageable new news to reinforce Chili's unique Southwest position to pique the interest of those looking to try something different.

Next, we are creating a stronger base menu. We are systematically going through our menu with the expectation that every quarter, we will make several changes that will improve the overall performance. Changes take the form of new product specifications, alternative cooking procedures and additions of new tested items as well as deletions of items that are aren't meeting our guest expectations. Through F11 we have employed this approach. And the balance between guest needs and operations capacity is tight.

As a result, we have seen significant increases in our Food Tastes Great score. When we couple this with our strong platforms like lunch combos and $20 Dinner for Two, the menu is working much harder for us as we -- as indicated by value scores that are at the highest levels we've seen at Chili's in years.

The third part of our strategy is staying relevant and fresh. There are really two parts to this equation, how we connect with our guests and then what we deliver when they get to Chili's. We're connecting with our guests on a more personal level through our e-mail database and other social media programs.

Over the past 12 months we've grown our e-mail database for fold for fold which enables us to give our guests the news they want, when they want it and when we do that, we see the impact in our restaurants. And social media programs like Twitter and Facebook are showing promising potential as well. Our Facebook following is growing rapidly and is significantly larger than most of our key competitors.

So, as important as it is to connect with our guests in more fresh and relevant ways, they also need to see a fresher and more relevant Chili's when they visit. And that's where our re-image program comes in.

Last quarter we completed our lab market in Oklahoma City and we learned a lot from our guests. They are using this input to refine our design which we've now expanded into additional markets across the country. Those markets include multiple different prototypes.

It's still early but we're excited about the results we're seeing to date and our expectation is to have approximately 250 re-image restaurants by the end of F 2012. So, so far I've covered how we're improving key data parts, building a stronger base menu, keeping Chili's fresh and relevant.

The fourth point in our strategy is our commitment to achieve operational excellence. During F 2011, our goals were to elevate our level of service, increase consistency and improve our bottom line through both team service, which continues to pay dividends today, and Phase I of our kitchen retrofit which has been rolled out nationwide. The results from both of these initiatives demonstrate that we have achieved those goals.

And during F 2012, as we sustain those improvements, we will continue to elevate the guest experience even more by delivering our food faster and more consistently as we roll out Phase II of the kitchen retrofit and we will further improve our bottom line with the implementation of our new point-of-sale system.

But the cornerstone to achieving operational excellence is the quality of our restaurant leaders and at Chili's we have the best. Under the direction of Kelli Valade, our ops leaders are embracing change and challenging themselves and their teams to raise the bar. I have the utmost confidence in this team and that's why I'm confident we'll accomplish our aggressive plan to win.

And finally, and perhaps most importantly is the fifth point in our strategy, our commitment to sustainable business model improvement. We carefully evaluate every strategy by its impact to our business model. If initiatives won't maintain or improve our overall profitability we don't do it, and it's that simple. Our commitment to a 400 basis point improvement while delivering on the brand building initiatives we just reviewed is without compromise.

Now let me share with you a little bit more detail about F 2012. We've spent a lot of time fixing our business model and strengthening our core and we are prepared to continue this heavy lifting into next year as we build upon our foundation for future earnings growth with Phase II of our kitchens, our system enhancements and the reimage program.

We'll continue to drive sales and traffic by bringing new news to our guests, centered on meeting their needs to connect with family and friends. Specifically we are placing special emphasis on our bars this year, which we are confident will further strengthen our business model, given the favorable margins associated with alcohol sales. We'll continue to build on the happy hour daypart strategy by continuing to offer specially priced beverages and menu items and we'll augment that with a bar service program that improves our bar guest experience.

We are also excited about implementing new technology to help us grow our To Go business.

And then another key focus for us during F 2012 is menu innovation. Our culinary team is committed to leveraging new technologies to enhance our menu with new favorable offerings, ensuring that every ingredient and every menu item delivers signature flavors in the quality of our quality our guests demand and then partnering with marketing and operations to attract casual diners with new news and reminding them why Chili's really is like no place else.

And of course we will promote all of this news by leveraging the power of our national advertising presence, as well as our e-mail database and other social media assets that allow us to build relationships with our guests and give them the news they want when they want it.

So as I take stock in our fourth-quarter performance, I am encouraged by the results our Chili's team has delivered. We've stabilized the brand. We know we still have work to do, but we've turned our trends around. We've achieved five consecutive periods of positive comp sales and traffic growth that have outpaced the industry. Our guest feedback scores and business model metrics improved significantly over last year and our guests are telling us that we're doing the right things and, in just a minute, Guy will tell you more about how our P&L has fared.

The Chili's brand continues to get strong and gain momentum and we are committed to our plan to win. Now, let me turn it over to Guy to give you some detailed financial perspectives. Guy?

Thanks, Wyman. You just heard Doug and Wyman talk about the great work of our operators in delivering strong results throughout the quarter. Now let's take a deeper dive into those results.

My commentary will be based upon continuing operations and I'll make comparisons on the basis of 13 weeks in the current quarter versus 14 weeks in the same quarter last year. Continuing the year-over-year improvement we have seen in the past three quarters, EPS before special items for the fourth quarter was $0.48 versus $0.44 in the prior year, highlighted again by our balanced approach to strengthening our business model.

As mentioned in previous calls, the extra operating week in fiscal 2010 contributed approximately $0.09 to the prior year's EPS due to leverage gained on fixed cost with the additional week of sales.

Brinker Q4 revenues were $717 million. Total Company-owned comparable restaurant sales increased 2.6% on 2.6% traffic and equally offsetting positive price and negative mix of 1.1%. Considering the calendar shift caused by the extra operating week in the prior year, comp sales were up 3.1%. Given the 53rd week in fiscal 2010 Company-owned restaurant capacity was down 7.5%.

Franchise royalties and fees increased 4.8%. This is due primarily to 23 net international franchise openings and six net domestic openings since the end of fiscal 2010 as well as an increase in international franchise comp sales of 7.7%. Cost of sales decreased by 80 basis points from prior year to 26.9%.

In order of magnitude, the improvement was driven by favorable impact from menu pricing and other items of 60 basis points. A more profitable mix of items within the Triple Dipper and lunch offerings, coupled with menu improvements, drove an additional 50 basis points. This was offset by unfavorable commodities of 30 basis points stemming from higher beef fajitas, salmon, and ribs partially mitigated by lower produce costs.

Restaurant labor improved 10 basis points to 31.8%. As you recall, last quarter we introduced the first phase of our kitchen retrofit program which focuses on optimizing the prep process. This initiative coupled with the continued execution of team service drove hourly labor savings over prior year of close to 150 basis points.

This tailwind was partially offset by two factors. First, as has been the case throughout the year our restaurant managers earned higher bonus payouts on the improved earnings and in Q4 these payouts were affected by the delever associated with the extra operating week in fiscal 2010.

Second, vacation expense was higher due to a change in estimate, lapping over a change in estimate that was a benefit a year ago. Restaurant expense was 23% versus 22.2% in the prior year, primarily due to deleverage on fixed costs from the extra week in fiscal 2010. Due to our positive comparable restaurant comparable restaurant sales, our restaurant managers' successful execution of key initiatives and our continued focus on cost management, restaurant operating margin was flat at 18.3% even though there was an additional operating week in fiscal 2010. If you adjust for the impact of the extra operating week, Q4 fiscal 2011 operating margin would've increased approximately 130 basis points consistent with what we saw in Q3.

Depreciation expense decreased $1.3 million to $31.6 million due to fully depreciated assets, restaurant closures, and impairments partially offset by normal asset replacements. General and administrative expenses decreased about $1 million over the same quarter last year to $36 million. This decrease was primarily driven by reduced payroll associated with lower headcount and one less operating week than fiscal 2010, partially offset by a reduction in transition services income and an increase in performance-based compensation. Interest expense is $1.4 million lower than prior year, primarily due to the expensing of deferred financing costs of $1.7 million in fiscal 2010 when Brinker entered into a new five-year credit facility. The tax rate before special charges was 28.9% versus 24.3% last year, an increase of 460 basis points driven by higher earnings for the year and the positive impact of resolved tax positions a year ago.

CapEx for the year was $70 million with year-to-date cash flow from operations at $260 million. During the quarter, we completed an additional $62.9 million of share repurchase, buying 2.5 million shares. This brought our fiscal 2011 total share purchase to $420 million or 20.6 million shares, and we ended the year with approximately $82 million of available cash on our balance sheet.

In addition we have repurchased close to 0.5 million for proxy shares for approximately $10 million through the first six weeks of fiscal 2012 leaving an outstanding authorization of $435 million.

Earlier this week, we executed a new credit facility to increase our total capacity to $500 million to take advantage of favorable pricing, relative to our current facility. This also increased our financial flexibility as the five-year term further extends its maturity beyond our 5.75% notes. The new facility will mature in August 2016 and consist of a $250 million revolving credit facility and a $250 million term loan.

With fiscal 2011 behind us, let's turn now to fiscal 2012. We expect earnings per diluted share from continuing operations of $1.80 to $1.95 with fairly consistent growth throughout the year. As we dig a little deeper into our revenues and expenses, here's our perspective on the major categories and our view on the business in fiscal 2012.

We expect both revenues and our Company-owned comp sales to increase between 2% and 3% and we project Chili's taking about 1% price. The revenue increase assumes flat Company-owned restaurant capacity and an anticipated franchise revenue increase in the low single digits resulting from the expansion of the restaurant base.

Currently, 61% of commodities are contracted through the end of calendar 2011 and 10% are contracted through the end of fiscal 2012. Now, while this 10% is lower than our typical contracted rate at this time of year, we are purposely writing the market a little more and contracting less since we believe we are currently operating at prices that are closer to peaks than they were a year ago.

Based on these insights we anticipate about 100 basis points impact to cost of sales due to inflation in our commodity basket for fiscal 2012. But some of this headwind will be mitigated by operating efficiencies within the four walls from the rollout of new kitchen equipment, improved day versus T gain from implementing our new restaurant systems, a mix of menu offerings that are more profitable and menu price increases.

In all, we expect cost of sales to represent between 27% and 27.5% of revenue for the year. Restaurant labor should see further improvements from continued optimization of kitchen prep procedures, efficiency gains from the rollout of new kitchen equipment and some benefit from a change in policy at Chili's that will lessen our steady-state vacation expense.

We expect restaurant expense to improve from sales leverage as well as savings in utilities, repair and maintenance and credit card fees. Depreciation expense is expected to increase to $130 million to $135 million due to the Chili's re-image, the introduction of new kitchen equipment and our new point-of-sale back-office systems.

We expect fiscal 2012 CapEx of $155 million to $165 million including $50 million for ordinary maintenance. We anticipate our actual level of G&A spend in fiscal 2012 will be in the range of $135 million to $140 million, slightly above fiscal 2011 largely due to the fact that we have not completely offset the loss of transition services income from Macaroni Grill and On The Border.

In total we expect approximately 50 basis points of operating margin improvement in fiscal 2012, including the unfavorable impact of rising commodity prices. Interest expense will be flat due largely to a lower interest rate and lower commitment fees on our new credit facility, offset by a one-time write-off of approximately $3 million of deferred financing costs on our previous credit facility. This write-off will occur in the first quarter of fiscal 2012.

Excluding the impact of special items our income tax rate should be around 29%, consistent with what you saw in the fourth quarter of fiscal 2011. Naturally this rate will rise or fall with higher or lower earnings.

And finally, free cash flow defined as cash from operations, less CapEx is projected to be $125 million to $135 million. We continue to maintain a balanced approach to our use of cash through reinvestment in the business, debt amortization, best in class dividends and in an appropriate cash reserve with the remainder dedicated to share repurchase. The net effect results in a weighted average share count for fiscal 2012 between $80 million and $83 million, which plays a big part in our projected EPS growth.

So, to wrap things up, we finished fiscal 2011 with a strong fourth quarter and we enter fiscal 2012 focused on building upon that momentum. During fiscal 2012, we will expand Chili's reimage program to a total of about 250 restaurants. We'll expand the second phase of our kitchen retrofit to more than 500 Chili's restaurants, and the new point-of-sale and back-office enhancements to almost the entire Chili's system. We'll also layer in new sales initiatives, we'll turn on restaurant unit growth at Maggiano's and we'll continue our international expansion. All of these initiatives will help generate EPS in the range of $1.80 to $1.95.

So while we'll spend a great deal of capital on our key initiatives in fiscal 2012, not only will we see the resulting margin improvements during fiscal 2012 but that margin improvement will also naturally carry over into fiscal 2013. As a result, we now project fiscal 2013 EPS growth to be well above the steady-state range of 10% to 12% we communicated at our investor conference last March. Given this confidence, we reiterate our plan to achieve the Company goal of doubling EPS to a range of $2.75 to $2.80 by the end of fiscal 2015.

Overall we feel good about the progress we've made so far. With that, I would like to now turn the call over to Kate to open the line for questions.

(Operator Instructions). John Glass.

It's Morgan Stanley. I guess you just in the context of what you laid out in the pushes and pulls on margins from commodity pressures and some of the bonuses, etc., can you just rebuke where we are on this path to the 400 net basis points of margin expansion? Are we in fact, when you X out some of those one-time items and the extra week about halfway there? So and maybe can you talk about what the gross benefit before the food cost do you expect to get in 2012?

Well, so the net impact of depreciation gene is going to be pretty flat. We think cost of sales we ended the year slightly below 27% and we project out 27% to 27.5% for next year. But yet, overall on the operating line we expect a 50 basis point improvement so I guess you call it -- what 70 to 100 basis points better on restaurant labor and restaurant expense would be the math.

Okay and then just -- I mean I'm just trying to sort of get us to up-to-date where we are because when you announced this plan it was 400, 500 basis points at the restaurant level. 400 basis points and this was going to be achieved by 2013.

So I guess my question is, where are we in that spectrum? Are we halfway collectively there? It sounds like it's getting pushed a little bit into 2013 from 2012 just based on your commentary about earnings growth in 2013 versus 2012 which I think was the original inflection year.

Yes, I would say getting pretty close to halfway, John, I think is a fair way to describe it. Obviously there's a lot of investment in all of the initiatives in fiscal 2012 and as re-images roll on, as kitchens are retrofitted, as restaurants received the new Aloha [menu link] systems, they'll start to see those margin improvements. They are built into their plans. As soon as they get a remake re-image, as soon as they get a new kitchen, as soon as they get a new point-of-sale back-office system the expectations arise in terms of what needs to be delivered.

But, clearly since it's going to take a lot of fiscal 2012 particularly to get the kitchens and the point-of-sale back-office systems in place you will see the lapping effect of that happened in 2013 as well. So you are right. Things are probably a little bit later than they were before. So, that's why we think fiscal 2013 growth is going to be above that steady-state we talked about last year at the investor conference.

Okay. Then just one other just in a different direction. The market seems to believe that restaurants are -- at least the restaurant consumer's in for much tougher times. Today's results notwithstanding.

Is there any evidence in your business in the last few weeks -- I'm not asking for July comps, but is there any evidence qualitatively in your business that you are starting to see some change in behavior that's concerning to you? Or is this more what's happening outside of your industry and much more sort of a function of financial markets and you don't see any change in consumer behavior?

John, it's Doug. I can't say we've seen anything in the last couple of weeks other than conversations with friends and neighbors about their retirement plans and their 401(k)s and trying to understand who Standard & Poor's is and everybody tries to purse size how it impacts them but we haven't seen things at the restaurant and as I mentioned, the value offerings that we put in place at the restaurant certainly play during this time.

But, at the end of the day when we look out at macroeconomics it's always been about jobs and continues to be about jobs. And, if job information and growth starts to get better we'll be more optimistic and if jobs stay where they are it's going to be challenging. But we are going to work our plan as we laid it out this morning, steal share, grow our profit even in this economic environment and, the results we see continue to support that. But we haven't seen consumers shopping differently in the last couple of weeks, no.

Jeffrey Bernstein.

It's Barclays Capital. Two questions for you. First, just specific kind of follow on as it relates to comps at the core Chili's. A 2.1% comp this past quarter, it seems like as you mentioned 100% traffic and then offsetting positive price with negative perhaps mix. Just wondering whether you can walk us through obviously you have a lot of new initiatives hitting the menu simultaneously after not doing much for a while. So can you give some sort of clarity or granularity in terms of lunch versus Two for $20 versus happy hour. Kind of an estimate as to directionally what they are mixing or how much they contribute to the total or what's been the strongest or weakest? Any kind of color you can give on the mix of those and perhaps how those impact the margins and then I had a follow up.

Yes Jeff, this is Wyman. So, the good news with Chili's, especially in the fourth quarter, is we've had pretty balanced growth. It's not all coming from one initiative. So, lunch is working strong for us, both weekday and our weekend lunch was also significantly better than we've seen in the past. And then, dinner a little more early week than late week. But again, we're seeing a lot of results there based on the Two for $20 and then our offering that we are communicating via our e-mail database.

So without giving you the specifics I'll just say it's balanced across both lunch and dinner. And then our bar business and the initiatives we are doing there are less of an impact but solid.

Okay. I know in the past you guys had said it is going to be like 50 to 100 basis points from the bar. I don't know if it was still kind of tracking in a similar range?

Yes, probably. We are still in that range probably on the low end of the 100. Then regionally, we're starting to see better movement across the country with the West getting a little stronger than we had been seeing in the past. So that's also helping as these initiatives have started to resonate in some markets that were probably reacting more negatively to some of the economic pressure we'd seen out there.

Got you. And then, Guy, I guess just on the balance sheet and cash usage I appreciate the color you gave already. There is an ongoing I guess repo versus dividend debate. I know you've gave the share count kind of 82 million to 83 million for fiscal 2012. I'm just wondering first and foremost the contribution of fiscal 2012 EPS from the share repo you did in 2011 kind of what percentage growth that's contributing to the 18% to 27% growth forecast you gave for fiscal 2012? And then separately how do you think about that repo and dividend going forward in terms of balancing that for fiscal 2012?

So Jeff, the share purchase probably contributed a little less than half of the benefit of the fiscal 2011 EPS if you kind of do the math on that. In fiscal 2012, it's going to comprise actually a little bit larger component of the EPS growth, in part just because of the commodity headwinds we're getting. I mean the other underlying other fundamentals and margin improvements we've done in the business continue to be strong. Obviously sales are -- we project them to be in the 2% to 3% range so those will be strong.

But the commodity headwinds are certainly something we are having to wrestle with. So, share repurchase picks up a little bit more of the slack. But that, as you look forward to fiscal 2013 for example that will swing back again and once we get reimages in place, kitchens in place, point-of-sale back-office systems in place, then margins start to pick up a little bit more of the slack and share repurchase doesn't perhaps carry as much weight.

In terms of how we think about going forward, the four tenets are the same. You know, you what the CapEx investment is in the business; we've talked about that. We know we're going to have to do debt amortization on our term loan which used to be $20 million a year on a $200 million term loan. Now it's $25 million a year on a $250 million term loan. We want to maintain appropriate amount of cash on our balance sheet. That's been typically been in the $50 million range. We expect that to be the same and we are going to hold to the 40% dividend payout ratio so, those are all the same and the remaining dollars are used for share repurchase.

And that comment about the EPS growth in fiscal 2013 being well above kind of that 2010 to 2012 long-term, is that primarily driven by further success from the margin initiatives or what kind of comp assumption I think you guys were initially talking longer-term of getting back to 3 to 4. But is it more margin driven that gives you that confidence to talk about well above 2010 to 2012?

It's more the impact Jeff of just all the initiatives getting put in place. So when you put 500+ kitchens in place in fiscal 2012 then you just get the lapping effect of those 513 plus the remainder that you'll do early in the year in 2013, the labor productivity that we get from that in addition to better ticket time in addition to better food quality, which we are seeing out of those new kitchens and the innovation possibilities all support other parts of the P&L. But primarily the fiscal 2013 commentary is around when you put all of the point-of-sale back-office systems and kitchens in place in fiscal 2012. You get some benefit but you get additional benefit in 2013.

Joe Buckley.

Bank of America Merrill Lynch. A couple of questions. Just on, Guy, going back to food costs, I guess you said you are 61% covered through calendar year end and then in the second half, is that what the 10% refers to? You are just 10% covered for the second half need?

Yes, that would be the way to look at it, Joe.

Okay so what kind of assumptions are you making on commodities in the second half behind the food forecast -- the food cost forecast?

Obviously to get to our 100 basis point number, we had to make some assumptions. It's probably still in that 4% -- low 4% inflation range -- 4% to 5% inflation range that we talked about. We haven't really seen that change.

So if we continue to look at what would it cost us if we were contracting at that timing, given our best estimates of what would happen. We know what's falling off when obviously. So, we can track out. And, we'll obviously make the call as to whether we think it's the right time to lock in or we want to continue to [ride].

Now on balance, given what's happened with the market, you know, you would hope that at least dampens the inflationary pressures and, if we're lucky maybe we get a little deflation from that. But, obviously, we're looking at that. We're looking at what we have contracted and then as you may have seen in some recent announcement of the whole new supply-chain organization, that we have a great belief in what they'll be able to deliver to the Company. We felt that that was an area that we wanted to invest some resources and have, and we think that will pay off in some big dividends, not just necessarily on the cost side but just sourcing distribution and all the other things we need to support delivering great food to our guests.

Okay. I know you said the earnings growth would be fairly even throughout the year. Do you expect the same store sales growth to be fairly even? I mean, obviously, comparison is a lot easier the first half than the second.

Yes. So on the EPS side, you are right, Joe, we would -- the range that we gave we would expect that to be fairly consistent. I think it's probably fair to say you're right that the laps get a little bit tougher in the back half of the year. So, our assumptions maybe reflect that to some extent. But I wouldn't overread too much into that. It's not dramatically different but, as you look at the numbers, we would expect the back half of the year would be a little tougher than the first half.

Okay and then just update us on the kitchen retrofits. I know you mentioned doing 500 for the year. Where are you now? And talk about the mechanics of it. What happens to the restaurant? Can you do it overnight? Do you have to close down? Is there significant training involved? Just sort of what are the operational mechanics of the program as you start to roll it out.

Yes, we can do it overnight, Joe, so we do. We don't have to close the restaurant to do it. There is significant training involved. It's sort of the way we phrase it the store here would be like if you had to go prepare a big meal in someone else's kitchen and didn't know where anything was, it might be difficult to do so we have to spend some time training.

Some of the way we'll do that training is when we get restaurants into an area then that will become the focal point for training for that area. So that's very helpful in getting it rolled out quickly.

It probably takes -- we've been making the assessment that laborsaving don't come right away. So you do need some time for the kitchen to adapt to the new equipment, because we want to maintain the food quality standard. We don't want to take the labor out right away while they are still learning the new kitchen. So, that's worked very well and then the initial restaurants we have today which probably 15 done at the end of the fourth quarter and we are now in full rollout mode. We are in two markets rolling out new kitchens every Sunday night, Monday night. We're putting new kitchens in restaurants now on the way to the 500.

But we have seen food scores -- we're very happy with the food scores. In fact, they've previously the bar was we wanted the food to be as good as it was before and it was in the lab market in Dallas. But what we're seeing now at our -- the new restaurants we did and I think we've talked about those are in Tampa, we are seeing better food quality now than we had in the previous food, and it was really good and we're seeing significant improvements in ticket time which we are very happy about. We see the potential for labor productivity. We have some of it and as those kitchens are in the restaurants longer, we get more and more of the labor productivity and then we haven't yet tapped into the innovation opportunity but, certainly, our culinary folks are anxiously awaiting the opportunity to utilize that equipment once it gets some scale to provide the new menu items as well. Does that help?

That helps. Thank you.

Chris O'Cull.

SunTrust Robinson Humphrey. The operators in the field have seen quite a few changes the past 12 months. Do you think the kitchen changes, the point-of-sale changes, the remodeling that are all occurring it seems like over the next 12 to 24 months, could that lead to operators just being overwhelmed by these changes?

It's a great question, Chris. And, I think the potential would be there. The nice thing about the investments in those specific projects is they don't come to any one restaurant at any one point in time. So we are very -- we're being very careful about how we roll these out and staging them so that no one restaurant, no one area director has to deal with all three at once. And, ideally, they are coming in a stage gating process where you knock one off, get comfortable and then the next one rolls in.

So, sometimes there's a little bit of an overlap but for the most part we are able to, especially with the kitchen and the POS system, because those impact the restaurants the most actually from an operations standpoint we keep those separated and we'll roll one in first and then follow with the other when they've gotten their feet under them. So, absolutely a priority for us to make sure that we don't overwhelm the leaders in the restaurants.

They are excited about all of these things so, the reality is they are asking for it. We are actually having to kind of calm some of them down and say, let's bring it to you anyway that's easily managed.

And are you still remodeling the stores after these service changes have been made? Are you --? I guess my point is, a lot of the kitchen initiatives are designed to improve speed of service, quality of food -- are you doing that before you advertise it with the remodel program?

Not necessarily. Again, because of the way that it will all work out. We'll have a few that will get reimaged before they have a kitchen but the timelines on the kitchens and the POS are more accelerated than re-images. So at some point, we will have everyone with the new kitchen and the new POS and we won't have everything be reimaged so that, at that point, we'll be reimaging restaurants that have all of those other systems in place. But right now we may have a market that gets a reimage that doesn't have all the restaurants with the other two pieces.

Because we don't want to slow down. We want to hit the aggressive goals that we've got out there. We need the impact of the reimaging and the impact of the POS systems, and the new kitchen.

Okay, fair enough. Then one last question. Doug, Maggiano's has been doing obviously very well the past seven or eight quarters. Why aren't we seeing more openings or at least openings in fiscal 2012?

Thanks, Chris, for teeing that one up for me. In my prepared comments I mentioned we now have I guess taken the leash off and we have real estate people that are out in the market. We do feel good enough about the brand, its results, the business model -- all the things that Steve and the team have done. And so some time pretty soon, we'll probably announce some new real estate locations that have been signed. Nothing I can say today but, just there's usually about an 18-month timeframe.

So, we are in the market looking at real estate today. Sometime in F 2013 we are hopeful we will be opening Maggiano's restaurants again.

Brad Ludington.

KeyBanc. I had a question, a clarification. I think you mentioned development guidance for fiscal 2012 running through it and I think I heard a 1% increase in the franchise base. Is that accurate?

Well, we talked about having openings both international and domestic although a smaller number domestically than we'll have internationally. But we do think the low single-digit franchise revenue growth, which is a combination of course both of comp sales growth and development of units, primarily international, some domestic.

Okay. And on timing of those, would those be more backend-weighted, do you think?

Not necessarily. I think they are fairly evenly spread out throughout the year.

Then when you talked about a lunch traffic being positive still, I think on the last call you said it was up mid single digits. Is it maintaining that level or, has it moderated a little bit since the initial rollout of the lunch combos you did?

Yes, Brad, it's maintaining that level.

Destin Tompkins.

Morgan Keegan. I guess just a couple of follow-up questions. One, on the reimages, did you say how many reimages you're planning for 2012? And if you didn't, would you?

Sure. Yes, we are planning to have 250 restaurants completed by the end of 2012.

Okay. And it seemed like CapEx came down slightly from a number you had talked about in the past. I just wasn't sure if that was just kind of truing that number up or, if you were planning fewer than you had originally planned for, for this year, or was there -- what was maybe the change in CapEx?

We had talked maybe about 175 I think a call ago. So we've now brought that number down 155 to 165. That's not reflective of any delay of any of the projects. It's just further fine-tuning and truing up the number.

Okay and then, Guy, one more on follow-up on labor expense. I didn't -- if you wouldn't mind repeating kind of your what you -- where you expected labor to be in 2012 and I guess thinking through some of the dynamics, you are lapping team service and that was obviously a big benefit in 2011. And, you got the kitchen retrofit rolling out. And, it sounds like the benefit is a little bit delayed there.

So, if you could repeat that and kind of I don't know I'm trying to get a sense of how difficult it is going to be to lap the team service and, if there are some other opportunities in labor that maybe I'm not thinking about.

So, we think operating margin improvements are going to be up 50 basis points, approximately 50 basis points next year. If you look at our cost of sales number, the range we give you said it's going to go up 10 to 60 basis points in cost of sales, D&A and G&A are going to be fairly flat so in order to get up 50 to offset the 10 to 60 basis points of cost of sales that's all going to come from restaurant labor and leverage on restaurant expense.

And is a lot of that driven by sales leverage?

There is some sales leverage on the restaurant expense line. The savings on the restaurant labor line will come from the prep process that we introduced in the kitchen. We didn't really get that rolled out until early in the third quarter so we'll still benefit from that lap in the early part of the year.

And, we've talked about team service being 100 basis points and I said the combination of team service and kitchen prep in Q4 was 150. We actually continue to see the prep process gaining more and more savings. In recent weeks, it's been more than that 50 basis points. So, I think that's encouraging.

And then, as we do 500 kitchens as they get in place and they get traction we'll start to see labor benefit from that but obviously a little bit more back weighted as we roll the kitchens out through the year.

Howard Penney.

Hedgeye Risk Management. I'm curious as to why you're spending $3 million to increase your debt capacity if you don't need the money.

You mean the write-off that we are doing in the first quarter?

No. I thought you said you were -- you increased your capacity -- took your debt -- maybe I -- did I not read that right?

No, what I said, Howard, was (Multiple Speakers) --.

You took your total capacity to -- from $400 million, $500 million (Multiple Speakers).

Yes and (Multiple Speakers).

So, why are you doing that if you don't need the money is I guess my question?

Because the rates are lower. So, the net effect for this year will be that the interest rate is flat. But that's because we have that write down but then of course over the five-year term of the transaction the next four years we'll have lower interest expense; and rates where they are today, it was a little too appetizing to not take advantage of those lower rates.

We give ourselves a bigger revolver which is nice to have the cushion if we want to accelerate these initiatives, because they are working better than we thought. And then obviously, as we said excess cash is going to be used for share purchase. So we want to make sure we have cash available to help us with that aspect so that we are doing sales margins and share purchase.

Well, maybe another potential use of cash could be and I could ask a question about Chili's that was asked about Maggiano's in terms of potential growth. You have a new look, better margins, better sales. Is it a time to think about getting real estate people to think about growth again there?

Howard, there's no question we are starting to think about it. As we saw with Maggiano's now in six and seven quarters in a row of positive topline growth and earnings growth; Chili's, we are into five periods. Everything we see moving forward we have that same optimism.

We're also in the process for our sales center franchisees of building a new restaurant that the front of the restaurant will look a lot like the re-imaged old one. The back of the restaurant will contain the new kitchen equipment plans. So we are -- although it certainly is a crowded bar and grill space there are spots in markets around the country where there could be site locations and we will be looking at real estate in the next couple of years for Chili's again.

I think I said, Howard, in March last year we want to get better before we get bigger. We think we're getting better and so that means soon we're going to start getting bigger.

Just one last question. Of the 10% you don't have hedged from commodities, can you tell me what that is and where you see the bubble? (Multiple Speakers).

Actually we only have 10% hedged on commodities. So the other 90% -- we are riding the market because you know we think of these rates -- all things being equal, we know the rates are higher than they were last year so, why contract if you believe we are close to the peak. We will obviously continue to watch that and see what the right time to do it but I think we believe right now that locking in long-term on these kinds of rates, the risk profile on that seems high to me so you rather ride it a little bit and hedge our bets that way.

Jeff Omohundro.

Wells Fargo Securities. Just a question on the 250 Chili's reimaging. I wonder if you could give an update on the expected sales lift average investment cost and return profile.

Sorry, I didn't quite hear your question. Could you repeat it?

On the Chili's reimage and the 250 expected in 2012, just any update on thoughts around average sales lift, average investment and returns?

Jeff, no change. So we're still --. We are still targeting at $225,000 to $250,000 investment, and a 3% to 4% increase in sales off of that investment.

And then if I could with a follow-up, on Maggiano's and the impressive operating margin expansion in the quarter, in the press release there's a mention of the improvement in labor at Maggiano's. I'm just wondering, was that linked primarily to the comp lift or were there some additional labor initiatives underway at Maggiano's?

I think it's all parts of the business. It's 25% growth in delivery. Our banquet business actually is positive again. It's just increase in the dining room business, you look at across all parts of Maggiano's, there is just some flowthrough that's happening because of the topline growth.

John Ivankoe.

Really quickly, with JPMorgan. 1% pricing at Chili's -- was that level because you don't need to or you don't think you can in this current environment? And just kind of juxtapose that to the guest satisfaction scores but also relative to competition. And secondly, is that something that might be an opportunity to the extent that commodities don't cooperate that you might be thinking about.

Hey John, Wyman. Yes so 1% is lower than you are hearing from a lot of the competitors out there and we want to keep our pricing and our value ratings as strong as we can. So we are using our pricing conservatively. We are seeing some pretty impressive value scores now within the brand. We think they are important to the long-term growth of the brand.

But as you say, there may be an opportunity there if things change in the marketplace, we'll continue to monitor it and see how it works. But, we think as 1% as a goal that's a good target to have, and we know we're going to be probably pricing less than some of the competitors but we like the way we're taking traffic right now and we'll grow the business that way as a priority.

Mitch Speiser.

Buckingham Research. On the fiscal 2012 guidance, it's about a $0.15 spread from the bottom to the top. And incremental comp I think is worth maybe about $0.08 a share, net additional leeway -- is that just a commodity cost outlook? Are there any things else we should consider in terms of the widespread in your fiscal 2012 guidance?

Range of commodity cost outlook, you're right. It's leveraged depending on from the bottom to the top of the sales range on restaurant expense, and given that it's still fairly meaningful share purchases we've learned in the last couple of weeks it's kind of hard to predict the share price. So, the number of shares we could buy will obviously be dependent on that as well.

We have time for one final question today. Steve Anderson.

From Miller Tabak. Just wanted to ask, given most of your focus on your use of cash it seems to be still on share repurchases. Have you or do you contemplate any changes to your current dividend policy which remains at $0.14 per share on a quarterly basis given that some of your peers -- one in particular has hiked their dividend by about 40%. What's your thoughts on that?

Yes, what we've in these bases, people have brought their dividend payout ratio similar to what ours already is which is about a 40% dividend payout ratio. So no change to that percentage dividend payout ratio from what we had previously communicated.

That was our final question for today.

Thanks, Kate. This is Doug. I'll just wrap it up here. I hope that everyone -- appreciate everyone's interest first of all in being on the call this morning and our business.

Hopefully we were able to address a little bit about the macroeconomic concerns but how at least our business has been steady-state. Gave you plenty of updates on some of the key initiatives and some exciting news about potential new restaurant growth coming down the path.

Also I just mention, because of everyone's interest in the Chili's plan to win, we would like to schedule a day with you at a Chili's restaurant soon so you can see and experience many of the cool new things we're doing. So, we've kind of marked our calendar for Tuesday, November 15 starting first thing in the morning.

We don't have an exact restaurant location established yet -- kind of to Chris's question, we are trying to find a place that has as many of the pieces in one restaurant as possible so you'll be able to understand as much about the look and kitchen process as is possible. But, we'll get an exact location out to you soon probably somewhere on the East Coast. But if you would at least tentatively mark your calendars for the morning of November 15, I would love to let everybody see and experience a little bit more about these things we've been talking about.

I hope everyone can feel the confidence in our teams, our strategies and the results despite the economic headwinds. I know we'll talk to some of you later today and everyone in October.

Appreciate your interest. Good day.

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.