Brinker International Inc (EAT) 2012 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Brinker International first-quarter 2012 earnings conference call. At this time all lines have been placed on a listen-only mode and we will open the floor for your questions and comments following the presentation.

It is now my pleasure to turn the floor over to your host, Mr. Tony Laday. Sir, the floor is yours.

Thank you, Kate. Good morning, everyone, and welcome to Brinker International's first-quarter fiscal 2012 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 not based entirely on historical facts. Any such items should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

All such statements are subject to risk and uncertainties which could cause actual results to differ from those anticipated. Such risk and uncertainties include factors more completely described in this morning's press release and the Company's filings with the SEC.

On the call we may refer to certain non-GAAP financial measures that management uses in its review of the business and believes will provide you with insight in 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 our 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 & Bar. Following their remarks, we will take your questions.

Now I will turn the call over to Doug.

Thank you, Tony, and good morning, everyone. I am going to briefly share with you our company results for the first quarter, how we continue to deliver on our promise to strengthen the business model and drive shareholder value, and then turn it over to Wyman and Guy for a deeper dive into Chili's and our total business results before we answer any questions you may have.

As you saw in our press release this morning, we reported an adjusted first-quarter earnings per share of $0.30 and that is a 43% year-over-year increase. Brinker entered the first quarter with a 1.9% gain in both comp sales and traffic, and that is our third consecutive quarter of positive growth.

During the quarter we continued to face challenging macroeconomic conditions -- unemployment rate remained high and the policy debates that occurred in Austin around the budget deficit, along with the downgrade of the US credit rating, caused the consumer to form a more pessimistic view about the future of the economy. But we, along with the industry, felt the impact in our business from those economic headwinds.

But despite all that economic challenge, achieving strong earnings growth this quarter demonstrates our strategies to improve the overall business model are continuing to work. Our top-line strategy of providing everyday value is attracting guests to our restaurants and allowing us to continue to outperform the industry in traffic growth.

So our primary value strategies continue to be, number one, Chili's $20 Dinner for Two; secondly, their lunch combos; third, Maggiano's classic pasta; and fourth, we have a new offering for Maggiano's, Marco's Meal for Two. These are all increasingly important and appealing to our guests.

At the same time, we are continuing to work on the middle of the P&L by focusing on improving operational efficiencies. The initiatives that we put in place continue to deliver results by not only improving our margins, but also elevating our level of service and increasing our consistency. Our ability to provide everyday value to our guests, coupled with our continuous margin improvements, are resulting in positive earnings growth.

Let me give you some quick highlights around Chili's results. We ended the quarter up 1.7% in comp sales and 1.9% in traffic, which marks our eighth consecutive period of positive growth, and we continue to see operating margin expansion year over year despite those commodity headwinds. In a few minutes, Wyman will give you a closer look at how the team gained traction during the quarter and he will update you on the progress of our fiscal 2012 initiatives.

At Maggiano's, Steve Provost and his team continued to produce positive results as well. They had a 3.5% sales growth, marking our seventh consecutive quarter of positive comp sales and Maggiano's had a 2.1% increase in guest counts, marking two years now of positive traffic growth. And they had a 90 basis point increase in operating margins.

So although Maggiano's is lapping strong sales growth, sales momentum has continued driven by three key areas. First, the value we have built into our menu with the classic pasta offering, which continues to be a distinguishing factor unmatched by our competition, and our new offering, Marco's Meal for Two. With this offering you and a guest get a choice of an appetizer, flatbread, or two side salads for your first course, then two classic pastas for the main course, a dessert to share, plus two classic pastas to take home -- all for $39.95. Great value offerings.

Second at Maggiano's, our direct marketing program that gives us the ability to target loyalists and new prospects in every trade area with direct mail and e-mail is working fine. And, third, delivery and to-go continue to contribute to Maggiano's top-line growth.

Now on the global side of our business, we made some -- they made some valuable contributions to our Brinker results as well. Comp sales across all of our global restaurants increased 7.5% for the quarter. We actually opened five net restaurants, bringing our total to 240 Chili's and one Maggiano's in 31 countries and two territories outside of the United States.

One of our openings was our joint venture in Brazil marking another entrance into one of our strategic growth markets. The opening has been successful and we are pleased with these initial results. So Carin Stutz, the President of our Global Team, and her team continue to work tirelessly to introduce Chili's to the world and deliver value to our shareholders.

So despite these crazy macroeconomic conditions, we believe our strategies are succeeding and our growth will continue to outpace the bar and grill segment. We have invested in initiatives that are driving sales and traffic, while at the same time focusing on increasing operational efficiencies to improve our margins, but equally important, our level of service to our guests.

Now given the results we have achieved in F '11 and the progress we have made in F '12, I continue to be confident we will achieve our long-term goal of delivering 400 basis points of margin improvement and doubling our earnings per share by 2015. We have got great teams and the right strategies in place to continue to build on our momentum and generate strong returns for our shareholders.

Let me now turn it over to Wyman and share the exciting work taking place at Chili's.

Thanks, Doug. Good morning, everyone. So let me update you on where we are at at Chili's. Strategically we are prioritizing value-enhancing initiatives that drive traffic and we are challenging ourselves to do things differently, rather than working harder on the same things and hoping for better results.

If you look at our results over the last three quarters, we have been growing traffic significantly higher than the category as measured by Knapp, we are taking share, we are translating that into sales, and we are hitting our earnings targets. So we want to continue that momentum, and the key to doing that is following our five strategic pillars that shape our focus and drive our initiatives.

So let's take the first pillar, building a stronger base menu. A key focus for us here is creating value platforms that drive traffic. When we look at some of the things we have done recently, with Two for $20 and the lunch menu, those are significantly different and powerful propositions that many of our guests are now enjoying, which is helping us change the perception of the brand from a food quality and a value perspective.

A great example of how we are doing things differently at Chili's is our lunch menu. In the 36-year history of the brand we have always had one all-day menu and there were a lot of beliefs within the organization that it was going to be very difficult for our guests to accept a menu that was only available at lunch. But we have pushed ourselves, we put it out there. We created a very compelling lunch menu and we have had absolutely no issues with our guests.

It opens up the opportunity for us to be much more competitive at lunch and our value scores are significantly higher than they have been in years.

Moving forward, our goal is to keep our platforms fresh rather than resorting to a limited-time promotional strategy every six to eight weeks. So we are continuing to innovate around both Two for $20 and lunch. Today we are on air with new taco and quesadilla offerings for our Two for $20 menu and we are working to bring out new news on our lunch combo platform in the very near future.

So that is where we are at with building a stronger base menu. We are really pleased about the work that has been done there and the results we have got to date.

Our second pillar is this idea of targeted dayparts. We just talked about lunch and dinner, so let me update you on our happy hour strategy.

After a successful test phase, we are now rolling out a full-blown happy hour program that includes new food and beverage offerings, like our fresh platinum margaritas and sangrias, with both operational training and marketing support behind it. We love the fact that focusing on happy hour also supports our need to keep Chili's fresh and relevant, which is our third pillar.

One of the key initiatives here is our re-image where a lot of the energy and the investment is focused in the bar area. So we feel great about how the re-image and our happy hour strategy work together to drive stronger business in our bars going forward.

But as you know, our re-image project extends beyond the bar. It's about creating a much more compelling environment throughout the dining room as well. It elevates our look and makes us more competitive in the marketplace. And as we elevate our look, we are also challenging ourselves to elevate the level of service we offer our guests, which brings us to our fourth pillar, improving operational excellence.

So team service was the first big initiative and that is helping us deliver a much better guest experience. The guests appreciate the more attentive service and our guest satisfaction scores, similar to our value scores, are at levels we haven't experienced in years. And because we are delivering better service, our team members are making more money. Being a server at Chili's is about a $20 an hour job now, so we are able to get more engaged, higher quality team members who are capable of doing more.

So now we are focusing on improving our servers' sales skills so they can do more to drive that check. We are teaching them to give our guests opportunities to buy things on the menu that may not have been top of mind. We have had pockets of success with selling when we have done it on a more promotional basis, so we know from experience that when we get the skill set into our DNA every day we will significant improve the guest experience, we will drive sales, and we will increase the profitability of this brand.

As you know, we are in the middle of some very big initiatives. We have got kitchen of the future, the re-image, happy hour, and team service. Now we are starting to see the impact and get some momentum on a larger scale so you will see those initiatives hit significant number of restaurants in the next six months.

So for our teams we are focusing on two key things -- making sure we are implementing the initiatives at a manageable pace for them, and then once we have rolled them out, that they stick. That is one of the things we have struggled with in the past, the stickiness. In the short term we could ask our operators to do most anything and they will deliver that specific result, but when we move to another area of focus we would often lose the impact we got with the first initiative.

And so we want to make sure that we create stickiness so that all of our traffic-driving initiatives make it into the DNA of the operation and everyone has got it before we move on to the next one. We are methodically laying out our rollout strategy, making sure the various initiatives hit the restaurant in ways that allow them to absorb them, implement them, and then take on the next one. We have created a staggered approach that is very well-planned and thought out that allows us to implement multiple big initiatives over a short period of time without stacking too much on any one restaurant at once.

Then, finally, and last thing, and really it overlays everything, is that with all of our initiatives and everything we do we are doing it with an eye towards improving our business model, which is our last pillar. We are making sure that all of the different initiatives are going to be positive for the guest and the value proposition, and at the same time deliver a more profitable business model, one that is 400 basis points stronger and helps double our earnings per share by 2015.

One of the ways we are fulfilling our commitment to improving our business model is by putting a more efficient marketing strategy in place to mitigate the significant cost increases seen this year in TV advertising. So for example, September is historically the lowest volume period in our restaurants. It's also the most expensive quarter in network advertising, so we made the decision this year to take a three-week hiatus and augment our marketing strategy with more efficient social media and local marketing elements.

While sales weren't as strong, as you would expect with less TV advertising, we met our targets in both sales and profits. So we won't be that aggressive with hiatus weeks at any point in time during the rest of this fiscal year, but we will be diligent in making sure that we maintain and grow our margins.

It continues to be a very competitive environment. We track it very carefully to ensure we deliver a competitive value proposition, that we are driving the business as much as possible through traffic-oriented strategies. We think we have got a lot of opportunity as we move forward at Chili's.

We are excited about the back half of this year and what it's going to bring for us and our shareholders. Now I would like to turn the call over to Guy to walk you through our first-quarter financial results.

Thanks, Wyman. As Doug mentioned, our first-quarter earnings per share before special items was $0.30 versus $0.21 in the prior year, including a write-off of financing fees that was about $2 million less than originally expected. These results demonstrate again our ability to drive sales and traffic through everyday guest value while also continuing to work the middle of the P&L.

Brinker Q1 revenues were $668.4 million, up from $654.9 million a year ago. Total company-owned comp restaurant sales increased 1.9% on 1.9% traffic. Negative mix of 1.4% was equally offset by price increase of 1.4%. Capacity was slightly negative with less than 1% impact and the impact of weather was immaterial for the quarter.

Franchise royalties and fees increased 5.2%. This is due primarily to 25 net international franchise openings in the last 12 months, as well as an increase in international franchise comp sales of 7.5%.

Cost of sales increased by 60 basis points from prior year to 27.2%. The increase was driven primarily by unfavorable commodities of 80 basis points stemming from higher oil, beef, and produce, partially mitigated by lower poultry costs. This was offset by 20 basis points of favorable impact from menu pricing and other items.

Currently 79% of commodities are contracted through the end of calendar 2011 and 51% are contracted through the end of fiscal 2012. Restaurant labor improved 90 basis points to 32.3% driven primarily by hourly labor savings. Management expense was essentially flat.

As you recall, last year we introduced team service in the first quarter and our new kitchen prep procedures in the third quarter. So while we are now lapping the benefits of team service, we continue to benefit from the first phase of our kitchen retrofit as these changes to our prep procedures drove 60 basis points of labor savings over the prior year, continuing to accelerate above our previous phase one projected benefit of 50 basis points.

The balance of savings came from other items including lower steady-state vacation expense associated with a change in policy at Chili's.

We also started ramping up the second phase of our kitchen retrofit program which involves the rollout of new line equipment. While the impact from this equipment will be more significant in fiscal 2013, we do expect some increasing benefit throughout this fiscal year as the number of restaurants with the new equipment grows to more than 500 by the end of fiscal 2012.

We expect to complete the rollout of new line equipment to kitchens in all of our company-owned restaurants by the end of the second quarter of fiscal 2013. We have completed these new kitchen installations in 66 company-owned restaurants and four franchise restaurants and the labor productivity savings are tracking in line with our expectations. In addition we are seeing improved ticket times, more consistent food quality, and, of course, the future opportunity for culinary innovation.

Given the success of phase one and the initial success of phase two we are confident the changes we are making to our kitchen will play the key role we expect that they would in delivering the overall 400 basis point margin improvement.

Restaurant expense was 40 basis points lower than the prior year, primarily due to leverage on fixed costs related to higher revenue. Depreciation expense decreased $1.4 million to $31.2 million due to fully depreciated assets and restaurant closures, partially offset by normal asset replacement.

General and administrative expenses increased $2.8 million over the same quarter last year to $32.8 million. The increase was primarily driven by a reduction in transition services income, the impact of which should step down in the third and fourth quarter of this fiscal year as those arrangements concluded during the back half of last year. Interest expense was slightly lower than prior year due largely to the lower interest rate and lower commitment fees on our new credit facility offset by a one-time write-off of approximately $0.5 million of deferred financing costs on our previous credit facility.

The tax rate before special charges was 30.2% versus 27.9% in the prior year, an increase of 230 basis points, driven by higher earnings.

Capital expenditures were $27.7 million with year-to-date cash flow from operations of $30.9 million. In addition to the new line equipment associated with our kitchen retrofit, capital expenditures also include those related to our Chili's re-image and new point-of-sale back office restaurant systems.

We have completed the rollout of 65 re-images in our four test markets and we continue to move forward with additional markets during the second quarter. Our new point-of-sale back office systems are in 86 restaurants today with an additional 56 installations expected before the end of the second quarter and full rollout projected to be complete by early fiscal 2013.

We repurchased 3.2 million shares for $75 million in the first quarter leaving an outstanding authorization of $370 million. We ended the quarter with approximately $64 million of available cash on our balance sheet.

The financial health of the Company remains strong. We have once again seen positive comp sales at Chili's, Maggiano's, and in our global business. The results we have achieved in labor productivity and cost control efforts are in line with our expectations and allow us to continue the rollout of our key initiatives.

Our bottom-line results continue to demonstrate our balanced approach to investing in our people and assets, managing debt, maintaining appropriate liquidity, and returning cash to our shareholders. This includes the recent 14% increase in our quarterly dividend from $0.14 to $0.16 per share.

The year is off to a solid start. Still, there is much work to be done, but with each passing day we make progress towards both our short-term and our long-term earnings goals.

With that I will turn the call over to Kate to open the line for questions.

(Operator Instructions) David Palmer.

UBS. Just a quick question; I think the market and I think a lot of investors wonder about this quarter in light of the entire year. Basically people are wondering about whether the traffic and the margin gains that you are getting today, if you can sustain those as perhaps the margin comparisons and the sales comparisons get tougher as the year goes on.

I oftentimes look at things in terms of the trend but I think the comparisons sometimes scare people with regard to Brinker and its story. Is there anything that you can say that give you comfort about how you view the year playing out versus those concerns about tougher comparisons?

Yes, David, it's Wyman. It's true that as we look at wrapping on some things and maybe some tougher comparisons I think people are more focused on the back half. But really in the first quarter here we wrapped on the introduction of Two for $20, so that was in mid-August so now we have wrapped that. And as you can see, we were still running positive traffic and sales.

And so we have gotten past one of the big wraps and when we look at the fundamentals -- so outside of the specifics of, hey, we have got a lunch introduction and a dinner introduction that we have got to get over, we look at the fundamentals of the business and what our guests are telling us. The key, we think, for momentum is how is our value proposition playing out and so we really are focusing on that.

The scores that we are getting from our guests right now with regard to the value proposition at Chili's are outstanding. They are the highest they have been and they are continuing to strengthen, even as we don't necessarily provide a deeper discount. It's just, I think, with the consistency of the offer, the higher execution levels at the restaurant, we are seeing better value scores which bode well, I think, for the ability to maintain traffic growth.

Okay, thank you.

Jeffery Bernstein.

Barclays Capital. Good morning. Two questions for you.

First, I guess, Guy, in your prepared remarks you talked about the ever popular food inflation. I think you said you are now 79% through calendar 2011, if I heard that right, and 50-or-so-percent taking you into the end of fiscal 2012. I am just wondering if you could package that for us in terms of what you think the overall basket of inflation will be. Obviously, you have to make some assumptions on the other 50% for fiscal 2012.

And then in terms of the pricing that you think you will need to offset that, I know in the past you talked about 100 basis points of pressure on fiscal 2012 based on your prior knowledge, just wondering what your pricing thoughts are. And then I had a follow-up question on labor.

Okay, I will let Wyman handle the pricing question in a second but on the -- you are right, Jeff, we thought at the start of the year we would run about 100 basis points of inflation in our commodity basket. And you heard in my comments that it actually was 80 in the first quarter.

Actually as we look out to our commodity basket now I would say that has actually mitigated or abated a little bit. So where we thought maybe that 100 basis points was 4% to 5% inflation, maybe that is now 3.5% to 4.5%. We actually think it's going to be a little bit better than we originally thought.

Some of that was the result of the contracting strategy we employed. We didn't contract a lot early in the year and as you have seen things soften a little bit over the last three months we have taken advantage on the commodities where we think there is an opportunity and decided to lock those in. There still are other commodities that we think do still have a little bit of an opportunity to run down a little bit more, and those are the ones we are not contracted on. But the ones where we think that things could get worse we are contracted.

Overall, I would say we don't think things are going to get a lot better than they are today, but not necessarily a lot worse either. But we are not -- nothing that we have got in our plans is banking on a huge good guy in commodities in the back half of the year.

On the pricing side, Wyman, do you want to tackle that?

Yes. Well, I think we are going to put it in the context, right, so we are still committed to that 400 basis points and we are well on our way. So we are going to maintain and actually improve our margins. And so our objective, though, is to do that with -- right now we are thinking 1% to 2% price, which is probably a little lower than a lot of other folks that are out there taking.

Strategically we want to continue to have a real strong value proposition. We want to continue the momentum on strengthening our value proposition, so we are looking to stay in that 1% to 2% range and continue to grow margins. So we are counting on the initiatives that we have laid out for you with regard to the kitchen of the future and other things that we are doing to help us mitigate maybe some of the other pressures that we are feeling.

Jeff -- you had a follow-up on labor, Jeff?

Yes, just I appreciate all the color you gave on the labor and we know that you are lapping some big initiatives there. I think you said the retrofit still gave you 60 basis points of benefit in the first quarter.

Just wondering as we look at the labor line as a percentage of cost of sales for the remainder -- the next three quarters I should say, would you expect that you could still see significant favorability on that line? Or that retrofit helped in the first quarter but over time you would expect the labor initiatives to be mitigated and, therefore, less year-over-year benefit as we move through this year?

Well, a lot of moving parts in there. The kitchen retrofits, we are well on our way now to rolling that out and we are certainly seeing labor productivity benefits from those. As we continue to put more and more kitchens in restaurants we will get that labor benefit.

We have now lapped completely team service, so that is fully in the bank and we are still building off that. And then we -- because we didn't roll out the prep procedures until the third quarter last year, we still have a little bit of opportunity here in the front half of the year and in the third quarter to benefit from that. Not even taking into account the fact that we are getting better savings from that initiative than we even originally thought we were, so we will continue to benefit from that going forward.

But all that being said, we were seeing this all last year. Where it was masked a little bit is you know we talked about how our manager compensation was higher because we had asked them to do such heavy lifting and that we were going to build that into the plan this year. And that is in the plan this year now.

And that is why you are seeing management expense fairly flat. But you are seeing the huge labor good guys, because now we are able to expose that a little bit more now because you are not seeing it offset by increases in management compensation.

Great, thank you very much.

Bryan Elliott.

Raymond James. I would like to drill down on the sales some. I may have missed this but I assume that the mix -- negative mix shift is a function of the success at lunch?

It's a combination, yes. So lunch is driving that and then the mix got -- we had less mix impact as we rolled over the Two for $20 introduction last year. So part of the mix issue in early July and August was Two for $20 this year and not last year. You can see when you look at the September mix not nearly as significant as we have now got that wrapped under our belts.

All right. So as we look forward, given that lapping now, would you expect it to -- remind me when the $6.99 combo lunches came out.

January.

January, right, okay. So we will see it again this quarter. You would expect it to look more like September than the whole quarter though?

Yes, in that ballpark. Yes, more one to -- 50 to 100 basis points. Not the bigger numbers we saw in July and August.

There is still, obviously, a lot of investor concern and uncertainty about the competitive environment at the bar and grill space. In particular, we are all seeing more discounting and more aggressive actions from some other players in that space.

Just looking at the monthly trends and listening to you it doesn't sound like you are necessarily seeing any impact on the behavior of your customers from some of those offers from competitors anymore. Is that a fair read?

You know, we haven't seen anything specific. I will say that there hasn't been an action taken by a competitor that has really changed anything dramatically in our trends. We obviously are always evaluating and watching what is going on in the competitive marketplace.

So I would say it's more about where the consumers' head is at in general. And obviously, we are hoping for some improvement in the job market, because at the end of the day that is going to be the key for the category I think to start to see some more robust gains.

But I guess what I am thinking is that it sounds like your research is telling you that your value proposition and value perception now within the bar and grill consumer is strong enough to withstand other people giving away food?

Yes, I think we have got -- well, we know what we have put into our base business now is much more competitive than it was a year ago. And so just from the standpoint if somebody wants to take a shot from a promotional or a discounting perspective, we are going to be better positioned to deal with that. Doesn't mean if somebody wants to give away the farm that it won't have an impact on us, but we think we can -- we know we are in a much better place today with consumers in the value proposition that we are offering today at Chili's day in and day out.

Great. Thanks much.

Destin Tompkins.

Morgan Keegan. Thank you. Guys, I just wanted to ask a few -- see if I can get a few more details on the remodel program.

Guy, I think you gave some numbers there, but I wasn't exactly sure what period those applied to. So if you could just kind of walk us through maybe how many you have remodeled in the first quarter and kind of what it looks like as you go through the year. And any details along the lines of what kind of experiences you are seeing from those remodels would be helpful.

All right. So, Destin, we are in 65 restaurants now with the remodel, so that basically encompasses the original lab market we had, which was Oklahoma City as well as a couple of units in Dallas that we originally did to kind of prove out the design and to get the initial customer feedback. Now we have completed the test in our four test markets, which really encompass markets both on the East Coast and the West Coast.

The remodels themselves are all complete as of about a month ago -- two weeks to a month ago. The actual construction is done. Obviously, some of those were done much earlier in the quarter and we are getting a good chance to read the reaction to guests from the ones that were done earlier.

And we are getting a chance to implement all of the strategies around those remodels, like retraining the employees, trying to capture some of the excitement around the investment in the building, doing some marketing to guests to get them to come in and introduce them to the changes. What we are really watching now is where that settles following the introduction of those guests and the retraining of the team members.

Where is this going to land once people have had a chance to experience it? Does it increase their frequency? Do we start to bring new guests back into the brand?

I will say, though, what can give you the most confidence that we are pleased with the progress we are making on that is we are continuing to roll it out to additional markets. And we still think that 200 to 250 range is where we will be by the end of the year in terms of number of remodels completed.

Okay, great. That is helpful.

And then, Wyman, you talked about the marketing and I may have missed some of it; the change in the marketing plan for September, I believe it was. Can you maybe go through those details again? And then what -- do you expect to continue to use more social media in the rest of the year or should we expect that you will maybe use some of those TV savings and use that in a period where maybe it's more cost effective?

No, so in September we did see the opportunity with -- just given the level of increase that the networks were looking at this year to reduce our weight levels and rely more on the significant database and social marketing programs that we have now to carry the business. And so we took a couple extra hiatus weeks during that month. Again cost a little bit of the top line, but from an overall financial perspective it was the right thing to do.

We don't see ourselves, because, again, the factors that drove that were the cost of the media in that quarter as well as it's just a slower time in our restaurants, so we don't see that opportunity as much going forward. But we will be leveraging social and direct marketing more. We have been investing in it, we have grown the capability, and it's working very well for us. So we will continue to use that to help deliver an efficient marketing program going forward.

Great, thanks.

Chris O'Cull.

SunTrust. Morning. Wyman, my question relates to traffic. I am a little surprised that traffic has not improved at a greater pace, especially given the comments you provided around the survey information you have collected. What do you think needs to change at Chili's to drive better traffic? Is the advertising message an issue?

I don't -- listen, we are always looking to be -- to have our advertising work as hard for us as possible. I think there is -- the fundamental issue that we are talking about in terms of stealing traffic and growing traffic in an industry that is actually down traffic.

So, again, when you look at the absolutes they may not be as impressive as you would like, but the category is down. So relative to what everyone else is experiencing, we are stealing some fairly significant share in traffic. And so we are happy with where we are at.

Would we like it to be better? Obviously. We would always like to steal more share, but the key to that is the value proposition. I think that -- staying focused on are we delivering a better value for our guests every day. When I say value I know a lot of times in the category that people just rush to price or discount.

We are talking about the whole equation, so the service, the atmosphere, the quality of the food. Some of the bigger drivers when we look at the details are quality of food and the experience and the service that we are giving. That is driving our value proposition as much as pricing is, and so that is what we are focused on; just a better guest experience is the key.

Then making sure these platforms that we are putting in place are getting stronger and stronger and that people can then count on Chili's day in and day out to be their place. So that is the strategy we are using to drive traffic. It's working for us fairly well right now. We are happy with eight straight periods of stealing share and growing traffic, and we are just going to continue to leverage that going forward.

Guy, what were the year-over-year advertising savings during the quarter, and do you expect to redistribute those monies to the second quarter?

Well, I mean the budget overall for the year, Chris, is pretty flat so clearly that will allow us to make some investments in other parts of the year as well. It wasn't material for the quarter, but the opportunity of what we saved in September will allow us to make some reinvestments at other points in the year.

And then one last question. What was the magnitude of the -- or what is the magnitude of the labor benefits from the phase two roll out? What do you expect to receive this fiscal year from that rollout?

We haven't specifically talked about that detail, Chris, but it's meaningful. It's of a team service size that we think we can accomplish with really all of what we get from the kitchen rollout. Not just labor productivity, but we get utility savings from the new equipment. And that is not even counting faster ticket times and food quality and culinary innovation which would all benefit top line. I am more just talking about the margin improvement opportunity.

Okay, great. Thanks, guys.

John Ivankoe.

Actually, this is a follow-up on that last one. If we could talk about when things like the new point-of-sale system and the kitchen equipment actually becomes fully effective at the store level once it's rolled out, and as we just think about the overall plan, how much an investment would be at the store level of costs or training or inefficiencies, what have you, until you can get the systems up to where you want.

And, Guy, if you could just clarify that last point that you made in terms of benefit to margins. I mean, was that kitchen equipment and the point-of-sale system that you meant to discuss?

Yes. So I mean, what our practice has been, John -- I will get to both parts of your question, but I will start with the last one first. What our practice has been is to wait until it's rolled out before we let you know exactly what the benefit was.

We talked about team service, we got 100 basis points from that, we are now lapping that. Kitchen of the future phase one, which was the prep component, we thought would be 50 basis points. It was actually 60 in this quarter. We have actually had weeks where it has been 70 or better, so we do continue to see some accelerating benefit from that.

We think that phase two of the rollout of the line equipment, all-in, could be of the magnitude of team service, although we are -- I hate to be coy on that, but we really like to see how it all plays out because it's only in about 60 restaurants to date. So we still think that, like kitchen of the future phase one, once we get it in we will get a real good sense of whether there is even more opportunity there than we think there will be. But we are very happy with what we are seeing so far on that.

Then the rollout of the new point-of-sale systems is probably more in the order of magnitude of the prep procedures not as big as team service or the line equipment. So that would be kind of the benefit of all of those.

In terms of the timing, we will be rolled out with Aloha MenuLink by July of calendar 2012, so the first period of fiscal 2013. Frankly, it's going to take a couple of months or more for restaurants to get that system before they really get good at exercising and flexing their muscle on using that data and seeing improvements in cost of sales. So it's not -- it's probably the most difficult of the transitions of any of the initiatives that we have rolled out for the restaurant managers to run with and adopt and see the benefit of.

The kitchen equipment, I mean our expectation is by three or four weeks after we have rolled out the kitchen equipment that we should be scheduling based on the new paradigm. Now does that mean you always get all the labor savings right away? Maybe not. But we believe that by the time you are into the end of the first month or the start of the second month after receiving the equipment you should be scheduling to see the labor productivity savings that we are seeing in the restaurants that have it already today.

So the MenuLink taking a couple of months, the kitchen equipment taking a couple of weeks, three or four weeks, I mean do you see a dip in margins before it can stabilize and improve? Or are you able to accomplish it kind of with the hours that you are currently using in the store?

No, the way we have rolled these out and it's fairly traditional to how we have typically rolled these out, and it's why early on you might go, wow, 500 this year and you only have about 60 kitchens done right now. Shouldn't you be further along?

What we are really doing is we are seeding them in markets as we go along. And so what we are doing is, for example, you put four in Oklahoma City. Then everyone in the Tulsa, Oklahoma City surrounding area can all go there to train which really allows you to manage the cost much more effectively, kind of mushrooming it out so to speak.

So it takes longer to put four or five in each of the markets when you start, but once you get them in those markets then you can really start to gain traction on the rollout and move much quicker. And that is what we can do 500 by the end of the year versus 40.

The training costs, they are not material. We don't think it's a material impact to the P&L. The more material impact is making sure that once they have it they get traction as quickly as possible.

Great, thank you.

Joe Buckley.

Thank you. It's Bank of America Merrill Lynch. Good morning. Just a couple questions on the kitchen of the future, so is phase one simply the prep worker change that was effective last January?

Yes.

Okay. Phase two is the actual installation of the equipment then presumably.

As you have done this first 60-some-odd company restaurants, what are you learning? Any takeaways that you didn't get from the 15-unit test market in terms of how it's implemented or what kind of impacts it has on the operations of the store, of the restaurant?

Some of it was how we phrase the goals that we are trying to get the managers to achieve. So everybody on this call talks about it in terms of basis points, Joe, because that is how we understand it. Now restaurant managers look at it in terms of hours.

So when we were setting some of the initial goals and having basis points as a goal that was not as easy for them to translate into what that really meant in terms of what I needed to get. What we have now done is we have started to roll it out and as we learned in the rollout of these markets was to frame it in terms of the number of hours you need to get out of your schedule in the heart of house. And that has allowed us to get a lot more traction more quickly than perhaps when we first rolled it out. So that was one of the things we learned.

We have actually taken our scheduling tool now and made it specific to this new line. So we have provided them a much better tool. Once they have the line, and as Guy said, they get a couple of weeks to get familiar with it. And then the tool actually tells them here is how many cooks you need on this new line, and they are very quickly kind of getting to that level.

Okay, but from an operational standpoint, are there any kind of new learnings as you begin the rollout?

I think servers need to get used to the fact that the food hits the window a lot faster than it used to, so that has been an interesting impact on front of house, where this was primarily a heart of house issue. I think that what we learned very quickly is that the servers weren't expecting the food to come out as quickly as possible.

So that has been a little bit -- they have had to learn to get to the window a little bit quicker to see the food come out. Of course, it is much hotter than it was before. It is more consistent. We melt cheese very effectively now in this new kitchen. We had a lot of comped items before where we struggled melting cheese, and this does a much better job of that. But I would say operationally, that is the one big learning is that it had an impact on front of house where you might not have initially thought so.

Okay. Just a question on sales. The outlier in the quarter seemed to be the month of August, and I'm just curious if there is any media mismatches there or --? I'm also curious why you think lapping 2 for $20 when you comped down so much last year is like a challenge? I don't get that.

Joe, one thing I would mention, and this was talking to peers in the industry, the only question in August, all of the conversation has been DC about the debt ceiling and the US credit downgrade. I think that was when we saw the Michigan consumer confidence score the lowest since 1981, so there is no question the country got shook up by what was going on. But our traffic was still 1.6% higher than KNAPP-TRACK in August.

So the whole market kind of dipped then. And then, as Wyman said, in September we had maybe a more holistic view of the business managing costs and using slightly different marketing programs. But August I think people got a little nervous but we still outperformed the industry by 1.6%.

Joe, with regard to the promotional lap, what was exactly that?

You referred to lapping the Two for $20 successfully. The Two for $20 last year -- I mean for the quarter you comped down 5%, for August you comped down 8%. Why do you view that as a challenge or a successful lap so important to the outlook for the year?

Again, the Two for $20 it's one of the key drivers for our sales and dinner business, and so as we introduced it last year we saw a nice movement. Now what you have got to do as you are looking at three-year now, two years ago I guess when we were wrapping Three for $20 and that was an extremely powerful promotion that -- in terms of traffic drivers. It didn't do a whole lot for our margins and we were giving too much away.

And so as we wrapped that we didn't see the same level of traffic, but obviously with last year's results we were very happy with the overall performance from a financial perspective and from a shareholder perspective. So now that this is our base platform, Two for $20; now that we have gotten past the introduction of that, which was very successful -- again from an earnings perspective, if you just look at the profitability of the brand over the last now three years, the trajectory is going the right way. And now we can afford this platform.

We have now introduced it and we are keeping it fresh. And it's continuing to gain momentum with our consumers, both from a preference standpoint and from a value perspective. So it's really about the relative impact, not just to the top line but also the bottom line.

Okay, thank you.

Michael Kelter.

Sure, Goldman Sachs. Question on kind of the longer-term outlook and guidance and how you are going to get there.

As I have understood it in previous calls or meetings you have had, you have always talked about getting up to 3%, 4% comps in 2013, 2014, and 2015 to enable you to get to your 400 basis points of net margin expansion. And I guess I am curious as to why you have the confidence that your comps are going to accelerate to that level. Is it that you think the broader industry is going to rebound with the economy? Do you think your market share gains are going to accelerate?

And why do you have such confidence in one of those two things happening that you have incorporated it in your guidance?

So, Michael, we think of it more as 3% to 4% revenue growth, but actually as we have looked at our longer-term models we actually don't even think we need that now going forward. That we think 2% to 3% revenue growth is enough to allow us to hit our overall goals.

In part of that is because our -- we see these margin improvements are getting even more traction than we might have thought initially. We do have new unit growth in our long-term plan. We talked last call about how we turned on Maggiano's growth. We believe we are very close to doing the same thing with Chili's.

In fact, we would probably be doing that with Chili's right now but for the fact that we have a lot of these initiatives. Really in the next six months it's critical for us to get these seeded and locked down and margins working, which we believe will happen. So we don't want to necessarily introduce the distraction of new unit growth at this time, but we don't believe that we are that far away from doing that.

And if the space continues to sort of bang away at 1%, 2% sales growth, all we got to do is hit the space add 1% to 2% unit growth on top of that, get a little bit of benefit from the re-image, and the math really it's not that difficult to get to 2% to 3% revenue growth, which is what we think we need now long term in order to double our EPS.

And on the traffic, while it was positive, the two-year trend actually did decelerate from the last couple of quarters. Just kind of back-of-the-envelope math, if the current traffic levels hold I think traffic might flip back negative again by the back half of this year, your fiscal year. Is that math wrong or is there some reason why perhaps that won't necessarily play out?

Well, I think we have got a lot of questions from you guys on the call that in the back half of the year, when you start seeing your positive traffic, can you lap that. And that is where things, like Wyman talked about, having good proposition for the guest, having faster ticket times from a new kitchen, continuing to innovate well with food and deliver good food quality, all become important things for us to continue to do. There is really nothing in the initiatives rolling out that would cause us to be any less confident than we before that we continue to deliver positive traffic.

Thank you very much.

Brad Ludington.

With KeyBanc. I just got a couple of quick questions. Guy, starting off with -- on the -- you talked about lower steady-state vacation expense helping the labor line due to some change in policy. Can you explain that a little bit more?

Yes, we had a policy at Chili's that was not as inclusive as we would like it to be, so what we actually did was we were able to come up with a policy that actually became more inclusive to more of our team members, our hourly team members, while at the same time making it a little easier for our operators to manage. As you might imagine, there are just certain times of the year where it's very difficult to operate a restaurant; there is a lot of people out on vacation and so it was very difficult for our operators to manage.

So we made those two changes but we also added a vacation policy for that less inclusive group of people that was richer than the competitive set. So at the same time we broadened the inclusiveness of the policy, we also made it more competitive with the rest of the space and that is where we think we can get the long-term savings.

Okay. Then when you talked about the trends last quarter you guys mentioned that the West was getting stronger. Are you still seeing improvement in the West or has that changed over the last quarter?

Yes, the West is getting stronger. It's really northern versus southern, and Southern California is performing better. Northern California is still one of our bigger challenges. The Northeast continues to be -- the far Northeast -- continues to be a bigger challenge for us. So we are seeing pockets of softer results, if you will, in the Northern California area and the Northeast.

And does that extend, Wyman, to the Pacific Northwest? I think Knapp has said that that has been one of the strained regions most months for him as well?

Yes, we don't have a lot of presence there and so it's not a big impact for us, but I would anticipate, just based on the industry and looking at the Knapp numbers it is kind of moving that way. Based on our franchisees in the Northeast -- and you will notice they have been running a little bit softer than us -- that is part of the issue there is the geography. So we are working very diligently to understand exactly what we need to do to get better results in the Northeast and in Northern California.

All right. Thank you.

Jeff Omohundro.

Thanks, it's Wells Fargo Securities. Just a question on Chili's and menu evolution. In particular on the $20 dinner for two, just wondering how far you can take that. It seems like you have been introducing more or broader flavor profiles -- I am thinking of the Margarita Chicken Tacos, for example -- and just wondering if, how you are thinking about efforts such as that and consumer acceptance of what I would describe as a much bolder flavor profile on the dinner for two? Thanks.

Well, first of all, thanks for eating some of our food, appreciate that. We think the -- we are all about differentiating ourselves more in the category, and we have a lot of confidence as well as a lot of consumer support for taking a bolder flavor profile approach. We think we have plenty of variety on our menu for guests that are not necessarily looking for that, but with a name like Chili's there is an expectation.

And there is a lot of consumer trend data that says people are looking for some bolder flavor profiles. And so we are going to continue to lean into that as our point of differentiation, as the thing that not only works because of who we are but works because of what consumers are looking for today. You don't have to look too far in the category to find some names that really resonate with bolder flavors.

We have that in our DNA and we are going to continue to push.

I guess what I am wondering, in terms of your guest satisfaction scores, is it leaning toward price or the product evolution driving the improvements there?

Yes, it's really both. We haven't -- we continue to see improved scores without us doing much -- not only have we made significant changes to our pricing strategy, we are continuing to price and we are continuing to see improved scores. And that is directly related to the quality of the food, scores going up.

And the quality of those -- and the food that we are putting out on the menu now is bolder. I mean if you look at what is out there today, those new taco and quesadilla offerings, the one you mentioned, they are bolder flavor profiles and we are getting better response with those food items.

Great, thanks.

John Glass.

It's Morgan Stanley. My first question has to do with the cadence of margin improvement through the rest of the year; I am thinking about the operating margin improvement.

I think, Guy, originally you said 50 basis points was a good number for this year. In light of better contracting on food commodities and in light of your performance in the first quarter is that still the right way to think about it? And is it -- maybe you could just go back and refresh us on how lumpy it is expected to be throughout the next three quarters?

No, our feeling was, not just in terms of margin improvement but EPS growth, that we would be fairly consistent throughout the year. So there is nothing in the numbers that would necessarily make it lumpy.

Yes, we finished lapping the prep procedures in the back half of the year, but then that is when the new kitchen rollout starts to pick up some of that slack as well. So again, we don't really comment on changing the numbers unless they are materially different, but obviously we are pleased with the margin performance in the first quarter.

Okay. And then how much did the pulling of the ads in September hurt comp do you think?

I don't want to give you a number, because it's very difficult to separate everything that is going on in the environment, but it had an impact. You look at the trend in September, and obviously when we give you the second quarter it will be a lot easier to make an estimate. But it took us off our trend a little bit. I wouldn't -- not huge, not huge, but it had an impact.

John, I think the way I would want you to look at it is just sort of business judgment. If you were sitting in this room as you looked at what advertising costs were about to be and you know traditionally September is one of your lowest months of the year, we just felt like it was good business judgment to take advantage of these new marketing platforms that Wyman's team has created and avoid the urge to overspend a ridiculous amount on TV advertising when consumers aren't going to be in the restaurants as often. And so we are willing to balance top and bottom line to do the right thing for the shareholders.

But hard to put a number of what the top line could have or would have or should have been.

Absolutely. My goal is more just to assess what the current state of the business was rather than to question whether it was the right decision, but thanks.

Peter Saleh.

Telsey Advisory Group. Just a quick question on the happy hour; it sounds like you guys are going to get a little bit more aggressive with that. So maybe you could give us an update on where you stand today with happy hour, where you think you can go, and then should we be expecting some TV advertising to support that as well?

Well, we are very excited about the happy hour and really growing the bar business. It's really an overall strategic focus for us and it links the operations, the marketing, and the atmosphere and the re-image together.

So when we talk about the re-image, we will start there. A lot of the energy and the emphasis on that is in the bar area. We upgraded our video presence. We really transformed the bar into a much more competitive bar.

What we are doing now is getting ahead of that with the product offering, so we have made menu changes already both on the food and on the beverage side. And we are working on the operational pieces now, which those are always the tougher pieces. The human element of the restaurant business is always the most difficult. So we are very much focused right now on getting the bartenders where we need them to be and the servers in the bar where we need them to be with regard to quality of the bar operation.

We think we have got a lot of upside there. We are working -- we are probably right at the introduction of that program right now and we are very pleased with some of the initial results we are seeing.

Great, thanks.

Michel Speiser.

Buckingham Research. First on the first-quarter comps, can you break it down and let us know lunch, dinner, happy hour, were all of these dayparts positive? And maybe which one was the best, if you can rank them?

So on the comps at Chili's we saw growth on really all dayparts and all weekparts. So there was a very nice, consistent growth in lunch and dinner across the early and weekend, so it was a very nice, balanced approach. Lunch continues to be a little stronger and early week a little stronger because of the lunch impact, but we did see balanced traffic and sales movement.

And so obviously the weekend was a little softer. As we wrapped Two for $20 introduction last year, we got a little bit softer on the weekend where that has a bigger impact. But still positive.

Great. How did happy hour do in the quarter?

Well, happy hour it's more about going forward for our happy hour strategy so it was in test. So we will have more specifics for you on the happy hour program next quarter.

Great, thanks. If I can just ask a separate question, can you give us a sense, with franchisees about 35% of your store base, just the general health of your franchisees and the likelihood, or the timetable, that they will adopt some of the equipment upgrades or re-imaginings that you have talked about?

Well, we just got off the road. We did our manager meetings around the country the last three weeks and incorporated into that -- all our franchise partners joined us. So we are all on the same page. I would say I feel great about the franchise community and the relationships and the continuity between company and franchise thinking.

We are using our franchisees and partnering with our franchisees in all of these initiatives as partners. They are in the tests. They have -- franchisees are testing the kitchen of the future one and two, they are up to speed on the re-image. So we are now just working out the calendar to see how quickly they can get -- they can implement these initiatives.

I don't have a specific date for you there, but everybody is on the same page. They know what we are shooting for in terms of timelines. And especially with the kitchen of the future where there will be menu innovation that springs from that new kitchen, it's important that we are all kind of aligned at some point down the road when we have said, hey, this is when we will then be able to start changing menus and marketing new innovations. So we are all in sync.

Okay, thanks.

Gentlemen, that is all the time we have for today. Do you have any closing statements?

Yes, thanks, Kate. We appreciate everybody's interest and questions today. I guess I would just say there were a lot of questions about our confidence moving forward, and I think we are confident both in the top and bottom line.

On the top line, our approach to driving sales and traffic by, as Wyman mentioned, driving delivering everyday value and some menu innovations coming down the road. On the margin side, we believe the initiatives that we discussed quite a bit this morning -- the kitchen of the future phase two, the point-of-sale, and even the re-image -- they are going to help us drive margin improvement. But equally important, they invest in value and in the guest experience so we are confident about all those.

As Guy said, the commodity market maybe looks just a little bit more favorable than it did before so value is going to continue to be important for us and we are going to be very cautious about pricing. Not because we don't think the guest would accept it, but because we want to continue to build on that value score that goes up and up.

We didn't talk about Maggiano's much this morning but, again, they are on a great run. They are getting great value scores. They have added some new items. To Wyman's point, this Marco's Meal that is $39.95 for two, the value scores that guests are giving us for that are even higher than on the classic pasta where you get two meals for $12.95. So it is about the overall experience and about the quality of the food that you get.

And I would just close -- we didn't really talk about guest feedback. I know sometimes on these calls you hear about what the guests are telling us, but at both Maggiano's and Chili's over the past couple of quarters we are seeing the highest scores since we have tracked these guest metrics across the total guest experience -- the service, the food, the overall experience. Those scores continue to go up, so it builds confidence for us and all of the initiatives that we have in place.

If we can just get a little help from the economy in Washington, DC, it will just get better. So we appreciate everybody's support; look forward to talking to you again in January. Hope everybody has happy holidays and great business. Thank you so much.

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