Brinker International Inc (EAT) 2012 Q2 法說會逐字稿

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

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

Thank you, Everett. Good morning everyone and welcome to Brinker International's second 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 insight into the Company's ongoing operations. Reconciliations are provided in the tables in the press release and on Brinker's website under the financial section of the investor tab. Consistent with prior practice, we'll be silent on inter-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. Good morning, everyone. I'm going to briefly share with you our Company results for the second quarter; how our strategies continue to yield wins for our guests, team members and shareholders; and then turn it over as usual to Wyman and Guy for a deeper dive into Chili's and the results at Brinker before we answer your questions.

As you saw in our press release this morning, we reported an adjusted second-quarter earnings per share of $0.47, a 24% increase year-over-year. Brinker comparable sales during the quarter increased 1.7% on a 1% gain in traffic. That is our fourth consecutive quarter of positive growth.

These results demonstrate how we're delivering on our promise to strengthen our overall business model with a balanced approach that drives topline sales, improves operational efficiencies and increases shareholder value.

Our topline 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 platform is again, first, Chili's $20 dinner for two; second, our lunch combo platform at Chili's; three, Maggiano's Classic Pasta; and fourth, our latest offering at Maggiano's, Marco's Meal for Two continues to be important and appealing to our guests. And we continue to bring new news to these offerings, keeping them relevant and fresh.

At the same time, as you know, we're focused on improving our operating margins by 400 basis points. The initiatives we implemented last year gave us an impressive start towards achieving that goal, and we continue to (technical difficulty) initiatives along with new initiatives in pursuit of our goal.

These initiatives are delivering results because we are taking a disciplined approach that ensures everything we do improves our margin and positively impacts our guests, our team members and our shareholders. So we're not just cutting costs. We are changing the way we operate our restaurants to become more efficient, which is resulting in sustainable margin improvements, increased consistency and better guest service.

Let me give you some highlights around Chili's results. We ended the quarter up 1.4% positive comp sales and 1.1% positive traffic. That is our third consecutive quarter of positive growth. And we continue to see operating margin expansion year-over-year, despite commodity headwinds.

In a few minutes, Wyman will give you a closer look at how the team gained traction during the quarter and he'll update you on the progress of our fiscal 2012 initiatives.

Now at Maggiano's, President Steve Provost and his team produced solid results this quarter by growing everyday dining along with their traditional special occasion business. As you know, the second quarter is an exceptionally strong period, an important period for Maggiano's, with December being the peak month for a special occasion and private dining.

We continued to see that trend this year as banquet sales grew 9.1% in December, contributing to the following results for the quarter -- 2.8% positive sales growth. That is our eighth consecutive quarter of positive comp sales, and a 0.6% increase in guest counts represented the ninth consecutive quarter of positive traffic.

Although Maggiano's is lapping strong sales growth from last year, we've continued to drive sales momentum across every part of the business -- the dining room, the banquets, our to-go and delivery, and it's thanks to two key strategies. First, the value that we've built into the menu, which has transitioned Maggiano's beyond just a special occasion restaurant; and second, our direct marketing program which gives us the ability to use direct mail and e-mail to target loyal guests and new prospects in every trade area.

And our global business turned in another strong quarter as well, growing comp sales by 4.8% across the globe. As many of you know, the president of our global organization resigned last month. After careful deliberation, we determined the global business would be best supported by capitalizing on strong leadership talent and maximizing shared resources we already have -- already in place in our global Chili's and Brinker leadership teams.

Therefore, the global team will be co-led by Wyman Roberts and Guy Constant. As Wyman and Guy both report to me, I look forward to maintaining an active role in helping their teams reach our aggressive, global development milestones.

So, Brinker delivered another quarter of positive earnings growth because we provided everyday value to our guests and we continue to execute on our plan to improve our margins. We have sound strategies in place with an excellent team implementing them, and we believe our growth will continue to outpace the casual dining segment.

With our commitment to shareholder value, our financial strength, the power of our brands, and most of all the quality, character and commitment of our people, I am very confident we will achieve our long-term goal of delivering 400 basis points of margin improvement and doubling our earnings per share by 2015.

Now let me turn the call over to Wyman to share the exciting work taking place at Chili's.

Thanks, Doug, and good morning everyone. As you heard from Doug, we have just ended another really solid quarter at Chili's. Our comp sales were up around 1.5% every period during the quarter as we continued to take share and outperform KNAPP for the third consecutive quarter.

The primary driver of the sales improvement was an increase in traffic, which is a key component for sustainable sales growth. We achieved positive guest counts every period, beating KNAPP by more than 2% in comp traffic for the quarter. And that speaks to the strength of the Chili's brand and the strategies that deliver value for our guests.

And even though during the entire second quarter we were up against the introduction of 2 for $20 from last September and we took two additional media hiatus weeks, we still grew dinner traffic and sales while we continued strong improvements at lunch. And that is indicative of a business that's focused on the fundamentals, not one that is being driven by the ups and downs of limited time promotions.

As I have shared with you before, our strategy is built around a few key pillars -- strengthening our base menu, staying fresh and relevant, and focusing on key dayparts. And we're continuing to work that strategy. For example, one week ago we rolled out a new menu that includes a revamped steak offering.

Why steak? Well, steak makes up a major menu category in bar and grill, and we've historically under-penetrated that category. So we upgraded our steaks with products we're extremely proud of, and we have structured the offerings in a way that allows us to be very price competitive.

We have upgraded our 10 ounce top sirloin and our 12 ounce ribeye, and we now have a 6 ounce top sirloin on the menu at around $10, depending on your location. We're leveraging our 2 for $20 platform to introduce this new steak offering, and while -- and early results are very encouraging. Guest preference and feedback have both been positive.

This new steak platform is just one example of how we're strengthening our base menu, becoming more fresh and relevant, and driving our dinner business, which is the key to continuing to grow traffic during the second half of the year. And we're following the same strategy at lunch, strengthening the base menu by enhancing our lunch combos with new, fresh and relevant offerings.

So let's talk about how we're going to lap the introduction of lunch combos from Q3 last year. There are a couple of things worth noting here. First, like 2 for $20, lunch combos aren't a limited time offer. They are part of our base menu. They are achieving basically the same level of preference today as when we introduced them last year.

And second, lunch traffic trends have also been consistent over the last year. We haven't seen the kinds of spikes and drops we did in the past when we were using limited time offers.

So, the concern isn't about how to lap the huge introductory spikes. Instead, we're focused on how to build on the platform and make it even better. We're currently on-air with several new lunch combo items, a great new sandwich and a new soup, and we're receiving positive reviews from our guests.

We are confident that with the changes we've made and the new news we're bringing to the lunch combos, we'll continue to see the steady growth in our lunch business just like we have at dinner.

We're also working on our bar business and how we can fundamentally strengthen that segment. During the second quarter we introduced a new program that improves our quality of service, our beverage execution and the products we offer in our bar during regular business as well as happy hour. We're making sure we offer the best quality margaritas and the best draft beer, and that we're innovating and staying fresh by leveraging the same strong culinary team that's doing such a great job strengthening our base menu.

With these changes, we've seen our alcohol mix increase almost 0.5% year to date. And during the back half of the year we'll continue our efforts with product innovation, and we'll refocus our training on bartenders and cocktail servers.

So we've talked about lunch, dinner and our bar business. Those are the three key dayparts we're building. We're also still working diligently on all the margin initiatives that you already know about.

Our reimage program continues to move forward. The rollout of our point-of-sale and back of house system continues to move forward and get solid results. And we now have a significant number of our restaurants with the full Kitchen of the Future package, and we're continuing to move that forward as well. In just a moment Guy will give you more detail on these initiatives.

So, as you can see, there's a lot going on at Chili's. And as we move through all of these initiatives, there are a couple of things we're keeping top of mind. First, as we work to improve operating margins, we're making sure that we don't do anything that would compromise the guest experience.

We take our guest opinions very seriously and we solicit and track their input daily. And I'm thrilled to say again this quarter, our metrics have never been stronger. I was able to say that last quarter and they got even stronger this quarter.

And it's across the board. In food, service, and value, our guests feel like they're getting a better experience at Chili's today.

The second thing that's top of mind for us is making sure we don't overload our operators with too much at one time. We've been diligent to understand how to pace and sequence these initiatives in a way that ensures one initiative sticks before we move to the next.

We've now been working on most of these initiatives for over a year, and our operators are performing exceptionally well in terms of their execution. That's why we're confident. And we're moving forward with all of these initiatives with a sense of urgency, because our guests appreciate the changes we're making. They are assuring us we haven't compromised their experience, and our operators are excited about where we're going.

And, when we step outside the restaurant and we look at how Chili's sits relative to the competition, we're starting to see positive movement there as well. While it's a slower process to change the perceptions of a brand with a legacy like Chili's, we're definitely moving in the right direction in terms of differentiating Chili's, which we know is key in our ability to continue taking share as we move forward.

Chili's is a great brand. We're doing some phenomenal things, all because we have an incredibly strong team. The innovations coming from our marketing and culinary teams are strengthening our brand.

And our operators have been able to align themselves and tackle some very aggressive plans to move the business forward in a very short period of time. So, we're still very excited about where we are and even more excited about where we're going.

Thanks for your time. Now I would like to turn the call over to Guy, who will walk you through our second-quarter financial results. Guy?

Thanks, Wyman. As Doug mentioned, our second-quarter earnings per share before special items was $0.47 versus $0.38 in the prior year. These results demonstrate that our balanced approach to providing everyday guest value and restaurant level profitability is driving ongoing shareholder value.

Brinker's second-quarter revenues were $682 million. Total Company-owned comp restaurant sales increased 1.7% on a 1.2% price increase and 1% traffic, offset by negative mix of 0.5%. Capacity was slightly negative with less than 1% impact, and weather had no impact for the quarter.

Franchise royalties and fees increased 2.5%. This is due primarily to 22 net international franchise openings in the last 12 months, as well as an increase in international franchise comp sales of 4.8% and domestic franchise comp sales of 1.7%.

Cost of sales increased by 40 basis points from prior year to 27.1%. The increase was driven primarily by unfavorable commodities of 90 basis points stemming from higher oils, meat, produce and dairy costs. This was partially offset by 50 basis points impact from menu pricing and other items.

Currently, about 75% of commodities are contracted through the end of fiscal '12 and about 45% are contracted through the end of calendar '12. As a result we project commodity inflation to moderate in calendar '12, averaging approximately 3%. The first half of the year will start higher than 3%, but the second half of the year will be lower.

Restaurant labor improved 40 basis points to 31.4%, driven by 50 basis points of hourly labor savings primarily due to changes in our kitchen prep procedures. Management expense was slightly unfavorable.

As you'll recall, we commenced the rollout of the new prep procedures in the second quarter of fiscal '11 and completed the rollout in the third quarter. So, on a year-over-year basis the benefit from prep procedures will reduce starting in the third quarter.

Future labor productivity gains will now come from the implementation of kitchen equipment. Today the new kitchen equipment is in 186 restaurants, with completion of all Company-owned restaurant installations still anticipated for about this time next year. Based on results from the initial rollout, we remain confident the equipment will play its key role in delivering the overall 400 basis point improvement in margins.

Restaurant expense was $2 million or 60 basis points lower than prior year. The improvement was driven primarily by lower insurance expense as a result of favorable claims experience, lower repair and maintenance expense, lower credit card fees, and leverage on higher revenues.

Depreciation expense decreased $1.3 million to $31.2 million, continuing the trend we've seen in recent quarters. General and administrative expenses were $31.2 million, relatively flat compared to the same quarter last year, driven by a decrease in performance-based compensation expense, offset by a reduction in transition services income.

Other gains and charges for the period were approximately $4 million, primarily related to lease termination charges for previously closed restaurants and asset impairments.

As you know, the second quarter is generally the time we conduct our review for potential restaurant closures. Our current business trajectory leads us to feel further restaurant closures are not necessary at this time. However, we expect that as leases come up for renewal, we may elect not to renew in favor of relocation in instances where we believe the trade area has moved.

Interest expense was about $500,000 lower than prior-year, due largely to lower rates and lower commitment fees on our credit facility. The tax rate before special charges was 29.7% versus 27.3% a year ago, an increase of 240 basis points driven by higher earnings. Capital expenditures were $26 million with year-to-date cash flow from operations of $114 million.

As you know, in addition to the new line equipment associated with our kitchen retrofit, capital expenditures also include those related to our new point-of-sale system and the Chili's reimage program. Our new point-of-sale and back office systems are in 142 restaurants today, with full rollout still projected for early fiscal '13. We also have completed 80 reimages to date, and are focused on a total of about 150 by the end of fiscal '12.

Following the completion of our test in the second quarter, we identified the next 10 markets to receive a reimage. The first of these markets is Phoenix, where we have completed the reimage on about half of the restaurants in the market.

Given our updated reimage schedule, we now expect fiscal '12 capital expenditures to be around $130 million in total, about $25 million less than our original guidance. This also affects our full fiscal '12 depreciation expense, which we now anticipate will come in slightly lower than our original guidance of $130 million to $135 million.

We repurchased 2 million shares for $48 million in the second quarter, leaving an outstanding authorization of $322 million. And we ended the quarter with approximately $76 million of available cash on our balance sheet.

As Doug and Wyman mentioned, our strategies are working. We continue to report positive comp sales and our operations team is delivering on a challenging plan, a plan that was necessary to turn around the Chili's brand and deliver on the promises to our shareholders. Our traffic and sales numbers are outpacing the industry, and we are through the test phase of our major initiatives with many restaurants delivering on our margin improvement and productivity goals.

Now as we complete the rollouts, our focus is on ensuring successful execution in every restaurant, every time and on each initiative. The results achieved in the second quarter demonstrate continued progress against our goals, reflecting engagement of our team members and inspire the confidence that our turnaround will be accomplished.

With that, I will now turn the call back to Everett to open the line for questions.

(Operator instructions) John Glass, Morgan Stanley.

Thanks. I wanted to start maybe with just a couple of top line questions. Just as a broad question, I think your goal this year was 2% to 3% comps for the year on a blended basis. Given where you are quarter to date or year to date, is that still a reasonable expectation?

And then more specifically as you get into Chili's, can you just remind us when you launched the lunch promotion? So, are you actually cycling it now, or is that still something you are sort of anticipating?

And then, talk about maybe the media plan and how you plan to address driving traffic through media. I know you have been more selective this year and being dark in periods where the traffic isn't as great. Are you going to therefore put more media at this important quarter as you lap some of those early sales initiatives?

Sure. John, thanks for those questions. Let me see if I can tackle them, this is Wyman, in order.

So, from a comparison to -- well, first, the guidance we have on 2% is still our guidance. So we are still confident with the initial guidance that we gave at the beginning of the year. So we're still holding to that comp number.

With regard to the lap of lunch, so we introduced lunch last year on January 10, so we are now lapping lunch in this quarter, so we have lapped lunch. And as you know, in my prepared remarks I talked to our strategy of how we're going to continue to grow lunch as we lap the introduction.

And then with regard to media, so media is interesting, right. So in the first half of the year, we took five additional hiatus weeks this year versus last year. And we did that for a couple of reasons I shared with you last time.

One was just seasonality. As we looked at the business, we do a lower volume in our first quarter and second quarter than we do in the back half. So we wanted to align our media more appropriately with when our business is. And so we're doing that.

So as we look forward, we don't -- the plan for the back half of the year is to have the same number of on-air weeks as we did last year. So we will not be dealing with additional hiatus weeks in the back half of this year as we have in the first half.

Great. And if I could just follow up, one other question on the margin. Guy, you talked about the anticipated benefit now on the margins is coming from the kitchen equipment. You said it will deliver as expected.

Can you just remind me what you did say in the past about what you thought the expected gain is from this rollout, and which line items it impacts and what order of magnitude, do you think?

Well, John, we haven't specifically outlined what we thought the kitchen initiative would provide to us. However, we have referenced it to be team service-like in terms of size. If you recall we got about 100 basis points of improvement from team service, so our belief is the rollout of the line equipment will be similar in nature.

Most of that will come on the restaurant labor line. We will see some benefit in utilities. And we also think the new line equipment will help us reduce waste, which should help a little bit on cost of sales. But most of it will come on the labor line.

Great, thank you very much.

You're welcome.

Joe Buckley, Bank of America Merrill Lynch.

Thank you. Good morning. Can you talk about gift card sales, how you did during the December quarter in terms of gift card sales year-over-year?

So, Joe, this is Wyman. Let me take that one for you. So, gift card sales this year have been a little soft for us, really all through the year, obviously the bulk of them taking place in the second quarter.

But as we walked through our first quarter and we looked at our gift card sales trends, we noticed they were down. And so we really evaluated what it was going to take to aggressively go after those sales.

We opted to not change strategy and actually not go after that business as aggressively as some, primarily because it was going to require a bigger investment than we thought was prudent or was really in line with what we're working on. So we opted to invest our resources in other places, if you will, to grow the business. And so we were down single digits in the gift business this quarter.

I think one of the things that I'll just address now, because I'm pretty sure it's going to come up, was our December sales number. I just want to bring up one point with regard to December sales at Chili's; well, actually two things.

First, our fiscal month ended on the 28th. And so, whereas most of the concepts reporting into KNAPP go all the way through the 31st, so missing those few days probably had a significant difference in terms of results because they're such important days -- New Year's Eve being one of those days, obviously.

The other thing was that was more weather in December than we've seen recently. And while we try not to bring weather into the conversation very often, it was notable in December. When you look at our franchise system, their comp sales in December were up over 4%.

Now most of those restaurants are in the weather-related areas, and so -- with most of our Company-owned restaurants in the not as impacted weather states, we didn't necessarily see that within the Company-owned Chili's world. But the franchise (technical difficulty) on that and had a very successful December, up over 4%.

And Wyman, just to clarify that, the point you're making on weather is that the Company base was not that negatively impacted in December 2010, so you didn't get the year-over-year favorable benefit that --

Correct, and franchise world was, and they saw that benefit to the tune of up 4.2% in December.

Just want to follow-up on the initial question of same-store sales; I understand you are maintaining the guidance. What gives you the confidence to maintain that guidance when you are not in that 2% range for the first half, and the comparisons obviously get a lot more difficult going forward?

Well, again, I think it's the comparisons the way we look at them aren't that much tougher. I think everyone keeps going back to two years ago when we were doing 3 for $20, and you've got to look at that. 3 for $20 is now outside of -- as of January, and that's now we're talking three years ago. And that's what everyone is kind of focused on.

The big hurdle for us was getting past 2 for $20 and growing dinner off of that. That was what we introduced last year, and then growing off of the introduction of lunch combos, which we have now done and we've now wrapped on that. Those were the big improvements we needed to do.

One of the things that we have also -- we experienced with the shift -- with growing our lunch business, one of the headwinds we faced was mix. And we don't have that headwind now that we've lapped. So, one of the favorable things about lapping is we don't have that mix issue to deal with anymore, and so our pricing flows through at a much higher percentage.

And the initiatives that we have brought to the table, like the new steaks program and the additions to the lunch combos, continue to strengthen those businesses. We're not dealing with promotional spikes.

These are fundamental business changes we have made, and so the trajectory is much more projectable, and then, much more -- we have much more confidence in it because our guests are also telling us these things are more appealing to them than what they were getting in the past. So that's why we have confidence in our plan.

Okay, thank you.

Thanks, Joe.

John Ivankoe, JPMorgan Securities.

Great, thank you. Actually a follow-up on that, so it seems like you're kind of talking about what might be a fairly abrupt shift from negative mix to positive mix.

Do you think we're in a -- which would be great for the industry, I mean a positive mix environment that customers are, on the margin, trading up, maybe it's buying less of the promoted items or the value items, I should say, on the menu, or buying more steaks, buying more alcohol? Is that -- how much of a basis point shift might that be from -- call it, calendar 2011 to 2012?

And if I may, I think your current price that you are running is on the lower end of what you've talked about. In terms of what might be pricing for it calendar 2012, what might be some timing on price? And do you think that this is an environment where you can take it?

Okay, so two great questions. First with regard to mix, John, I'm not talking about the industry. I'm talking specifically about Chili's.

The mix impact we felt when we introduced lunch was negative, as you would expect as we grew the lunch business, which has lower checks than dinner, but grew it enough to absolutely increase sales and to increase profitability. But there was some negative mix involved in that.

We don't have that as we lap launch. You lose that mix impact. So, for us, we don't have that, so the pricing we now take flows through without that headwind up against it. And that kind of leads to your next question.

On mix also we are starting to see -- I don't know again if it's -- how broadly it's being felt in the industry. We know that as we get smarter with our bar business, for example, as we shared, and we bring better products to our guests and our operators get more attuned, and our re-images promote a more --- just a better bar environment, we can sell more alcoholic beverages. And that's what we're focused on. So, most of my comments are really specific to the Chili's world.

With regard to price, we're still maintaining a very -- a conservative approach toward pricing. That 1% to 2% is all we're looking to take. We did take a price increase with this menu that I mentioned we just introduced last week. And we're probably going to be, for the next little bit, on the top end, on the higher end of that.

But incorporated in that menu change are several key improvements to the quality of our products. So, I talked to you about steaks. We've also improved the quality of our fajita beef. We've also improved the quality of our salad mix.

So we are making investments in the quality of the product which should not significantly impact cost of sales, but are going to be covered in a little maybe more aggressive pricing. And then we wrap on some pricing later in the year that will probably bring us back to that -- right into the moderate part of that 1% to 2% range.

Great, thanks for that. And if I may, just one more. As you begin to really roll out Kitchen of the Future, obviously it's a major focus for the system in calendar '12. How long are you seeing it take for that system to become fully productive from a labor and cost perspective?

And I guess what I'm asking is, is there some period of weeks or maybe months where it actually -- it's actually a cost as opposed to a benefit as you integrate the system into the stores?

John, it's Guy. We don't see it as a cost as opposed to a benefit. We regularly do training. And really, what we've done is just shifted our training now to focus on the rollout of the new kitchen equipment. So there's not an increase there.

In terms of your question about timing, we'd say it probably takes about a month. What we do is we increase the expectations. And not the month following the implementation, but the month after that is when it now starts going into people's plans. And they have to hit those numbers if they want to get paid on bonus and hit incentives.

So, our expectation is in that four or five week time frame. They should be able to hit the labor productivity goals that are expected as a result of the rollout of the new kitchen equipment.

Great, thank you.

Thanks, John.

Michael Kelter, Goldman Sachs.

I wanted to ask about the promotional intensity in casual dining. From the outside in it kind of appears to be picking up. I guess I'm curious. Do you perceive the same pickup in promotional intensity from your competitors? And have you had to adapt, and how do you intend to differentiate yourself in that environment?

Well, Michael, obviously we track the industry and the competitive set. I'm not sure that, based on NPD data and what we're seeing, it's the deal rate if you will has jumped up that much more, so from a consumer perspective, if consumers are feeling like there are more deals out there than before. So it seems like after a peak a year or so ago, it kind of leveled back down a little bit and it's kind of been tracking in that range.

Obviously when certain people come out with offers and they have a lot of media weight, it gets our attention. But I think overall in the category it's kind of leveled off.

How we plan to differentiate ourselves is just like we have said. We plan to continue to work on the fundamental strength of the business, creating a better base menu with stronger value propositions that executes day in and day out at a higher level.

You know, changing promotional strategies or putting promotions in every six to eight weeks is confusing to operators. It makes it very difficult for consumers to understand what your value proposition is every day if it is significantly different with a promotion than it is on a day in, day out basis. So we're working on fundamental structural changes to the base menu and to the operations that provide that value on a day in, day out basis.

We'll take opportunities to leverage some media or some other -- some targeted segments occasionally, but that is really our strategy.

And one other thing I wanted to ask, you said no more Company restaurant closures -- planned closures. But this is several quarters in a row now where some of the franchise units have started to decline.

I guess I'm curious. Is there anything specific that is going on that was discrete about the last couple quarters, and that is not an ongoing trend? Or is there any reason to believe that some of the franchisees will be closing doors over the next, call it, six to 12 months?

No, Michael, there's no reason to believe that the franchisees would see any difference in closures going forward versus the Company.

What's the basis for that first comment?

It looked like the number of net units for US franchises was down eight units, which is 2% of the franchise base in the last two quarters.

No, going forward, Michael, we don't expect the franchisees to have any different closure pattern than the Company.

Thank you very much.

Bryan Elliott, Raymond James.

Thanks. A couple, I guess, clarifications really; first, on the pricing, Wyman, did I hear you right that you are running with this new menu you just put out a bit ahead of the 1% to 2% full year range?

Yes, slightly, but in that 2% range.

Okay, and then we lap this April/May when -- I know you said we'll lap some from last year, then just refresh my memory on when (multiple speakers)

March, April.

March, April. Okay. The advertising, you said we were off five weeks less, or we had five weeks less in the first fiscal half year-over-year, and we're going to be equal on a weekly on versus off basis in the second half of fiscal '12?

Correct.

Are we spending less as a percent of sales?

No.

Okay. Are we spending the same, I guess I should've said? Similar?

Similar.

Not materially different, basically?

Not materially different.

And -- (multiple speakers)

I will just say, Bryan, obviously, we could change that. I wouldn't see us getting more aggressive with hiatus weeks. But we reserve the right at any point in time to buy more media, exchange the media plans. I've kind of given you what we see right now as the future, but obviously if we saw an opportunity to really put a message out there with more weight, we would do that if that made sense for us.

Sure, sure. And last question may be helpful to understanding the sales trends a little better, given this lapping of the lunch introduction, etc. So, maybe one way to get at that would be -- disaggregate the mix change maybe in the fourth quarter or in the calendar fourth, December quarter, or maybe over the last several quarters sort of maybe isolate it to dinner only, or something like that. And give us a little more help on understanding the impact of the lunch program on overall mix, and I guess traffic would be helpful also.

And mostly all of the mix decline, Bryan, was related to the rollout of lunch rear over year. So that was what Wyman's point was earlier, now that we are lapping lunch, we shouldn't see that negative impact of mix related to just having more traffic coming from lunch than we did from dinner.

Now, all dayparts are growing. Lunch just happened to be growing faster than other dayparts in terms of traffic, which is why it was driving some of the negative mix because, as Wyman said, the ticket was lower. Now when you get into mid-January, we don't have that impact of the new lunch rolling over. Not having that lunch program in the prior year, we now have lunch over lunch changes going forward.

Was dinner mix particularly given the alcohol increase? I don't know if you count the bar business independently or not, but when we look at dinner specifically, was mix -- what did mix look like in the December quarter at the dinner daypart only?

Well, we could see specifically as it relates to alcohol, Bryan, we're up about a half a point in terms of alcohol mix. Now, most of that happens at dinner. So it certainly helps our dinner mix when that's the case, but dinner mix was up over that time period.

Okay. And I guess is the alcohol mix kind of happy hour, new people coming in and just grabbing a drink and maybe an appetizer? Or is it people sitting in the restaurants ordering dinner? A little of both?

It's a little of both. It's this been an emphasis, Bryan. So we're focusing on both the bar business and drinks with dinner.

Okay, great. Thanks.

Jeffrey Bernstein, Barclays Capital.

Great, thank you very much. A couple of questions, just first on the commodity and related pricing side. Guy, I think you mentioned now you think the basket for, I believe, calendar '12 was up 3%. It seems like it's gotten a little bit more favorable.

I know you mentioned that your commodity basket is locked for 45%, I think, of calendar '12, but you thought it would get better through the year. So I'm just wondering if you can give some granularity in terms of what the assumptions you are making on the products that you're not locked, the other 50% some odd that you're not locked for the back half, what assumptions you are using to come up with that kind of 3%. And would the 1.5% or so pricing that you'll ultimately be on, be enough to protect the margin on that inflation? And then I had a follow-up.

Sure. So, you're right, just to clarify, so 45% of our items contracted now through calendar '12, 75% through fiscal '12. And we do project 3%.

You may recall we said for this fiscal year we thought it was going to be approximately 4% to 4.5% inflation range. We kind of still see that in the front half of fiscal '12, maybe a little bit better -- or sorry, this back half of fiscal '12. We really see the improvement come in the back half of calendar '12, you know, on a number of items.

For us we have poultry, favorability in poultry. We believe the dairy market will continue to ease, and that is one of the items where currently half our cheese is riding the market. We're not locked in on that contract and we believe it will get more favorable.

So we have a number of items, along with just the general commodity environment appears to be easing. And we'd love to have a deflationary environment. We're not expecting that, but we think this lower level of inflation, it will be much more realistic now to expect pricing would cover that inflation in the future, as opposed to this past fiscal year where it's been tough to get enough pricing to cover the higher commodity inflation.

So at this point, would the -- with the 2% now, but likely to be a little lower than that starting in March/April, you would think that you would be able to get some cost of sales leverage as we look to the back half of calendar '12?

Yes. I think as the year goes on, our hope would be we'd get a little cost of sales leverage.

Got you. And then as it just relates to broader fiscal '12, I know we're halfway through now and I believe in the past you've mentioned that no reiteration or mention of fiscal '12 guidance implies that that is unchanged. I'm just looking to clarify.

I know -- I believe it was for 18% to 28% earnings growth for this fiscal year. I know you don't give quarterly numbers, so in the first half of the year you guys beat consensus expectations. I'm wondering, was the first half of the year completed already? Was that above your own internal expectation?

And I'm trying to gauge, as we're now halfway through the year, the second-half outlook. I know it's tougher compares. I'm just wondering whether you're assuming a deceleration in earnings growth, or any kind of update on the trend throughout the year?

No, you're right, Jeff. It was 18% to 28%, was the implied percentage range for our $1.80 to $1.95 guidance. And at the start of the year we indicated that we thought the percentage growth in EPS year-over-year would be pretty similar throughout the year. And the first two quarters have tracked with that, and our expectation would be -- our expectations haven't changed. We think it will continue to be similar EPS growth each quarter through the year.

So the first half of the year was presumably above your own internal, not the offered guidance, but above your own internal expectations?

We don't want to really refer to the internal expectation, Jeff. But we're really happy with how the first half of the year went, and we believe that we'll see consistent performance through the rest of the year.

Okay. And then just lastly as you look out now that we're closer to fiscal '13, I know in the past you had talked about if you gained some traction on these new initiatives, that in fiscal '13 you could see EPS growth above -- well, your long term is 10% to 12% guidance, based on some of these initiatives starting to kick in. Is that still reasonable on the path to the doubling of EPS by fiscal '15, that the fiscal '13 EPS growth would be above that long-term range?

Yes.

Great. Easy answer, thank you.

David Palmer, UBS.

Thanks, guys.

Hey, David.

Hey, Guy. You mentioned that weather noise in the new year's -- effect is being dragged into your numbers for December, and that sounds reasonable that we should think about that when considering your momentum. But I would love to still dig into why you have confidence in driving that 2% type same store sales in the second half. And I have a feeling there would be something instructive you could tell us about it.

I mean, one of the things that I think about is you have these sales value combo meal effect, and how you think about those. For instance, a year ago you had the lunch value and you're lapping that. Are you coming into that period in a way that, when you look at your dollar sales even on a weekly basis, that you're thinking you're going to comp positively there with some adjustments in new news?

In other words, will these combo meals type value menus prove to be sales layers? So that's question one. And then question two is, maybe there's some other things you have in the hopper or that you see playing out that will have increasing benefit to sales.

For instance, the ovens turning tables faster, reimaging, these happy hour initiatives that I think you're working on. So if you can maybe be more explicit about these two things, that would be helpful. Thanks.

David, so, absolutely we have confidence in the plan that we are pursuing. You touched on a lot of it. I will reiterate it. It was in our points.

So, first it goes by daypart segment. At dinner we're working the value platform, the layer if you will, the 2 for $20. We're bringing new news to that and steak is a big opportunity for us. And that is something that we didn't have last year that we have this year that's going to be an important part of our business going forward.

Lunch, we're leveraging the platform and bringing new news. And the trends that we have, the momentum that we initiated in the third quarter last year, we haven't lost. So we're not locking into the third quarter with a big hole.

And the bar business is the third piece of the business and the daypart we're working, and we've talked to you about the success we're having there. There are several other things that we are working on. But obviously we're not going to, on a conference call, talk about all of the new and exciting things we have got working and how we are going to grow the business, continue to strengthen and grow the business going forward.

But there are other things we're working on in both culinary and in marketing, and in operations, that we think will continue to grow our business and allow us to take share in this market. We are getting confidence that we can do that also by just the metrics that we look at. And so, when we look at our test scores for ideas that we have out in market, and when we look at our consumer feedback, they all indicate that we're doing the right thing, that we're getting better and stronger results with our guests and with the consumer.

And that is a good indication that you could see some positive momentum continuing through the future. So that's why we have confidence in the numbers that we have shared with you.

Thank you very much.

Thanks, David.

Mitch Speiser, Buckingham Research.

In the first half of this year versus last year, can you drill down to the second quarter? Was it -- or the number of weeks that were advertised less in the second quarter versus a year ago?

Yes. We were off air two additional weeks this year than last year in the second quarter.

Got it. Can you give any more color on what months those advertising mismatches came in?

I don't have that right in front of me. I think --

Mitch, I think there was one October and one November. I don't have that in front of me either.

Okay. I could follow up on that. Thanks. And separately, can you talk about the franchisees and how they're viewing all the equipment upgrades? Are there any onboard just yet? And where do you see that timetable for them to adopt all the initiatives that you are putting into the Company stores?

It's Guy. Our franchisees, they see the returns. They see the productivity gains that we're getting on the Company side. So they are excited about the opportunity to make changes to the kitchen as well.

And of course, they see the innovation opportunity, which is normally how these types of things are sold to the franchisees in the broader space, right? Put new equipment in and the franchisor will innovate and they will be able to draft off that.

The beauty of what we have with the kitchen is not only can we give them those innovation opportunities, but we can also give them a return on the labor productivity. So we feel like with both sides of the equation, that is what is driving a lot of the excitement with franchisees.

Now, we're in the process of rolling them all out to our Company-owned locations. And it is going to take until the end of the calendar year to do that, but our expectation would be that many of the franchisees will get on board when that's complete, and also have their equipment as well.

Great, thanks. And my final question just on CapEx, which you indicated will be lower than what you previously thought, is it safe to assume that those incremental dollars might go into share buyback?

That's a safe assumption.

Great, thank you very much.

You're welcome.

Brad Ludington, KeyBanc Capital Markets.

Thank you, morning. I wanted to ask Guy just on a couple of things that you went through. Can you quantify what the lower credit card fee benefit was in the second quarter? And then also just looking at repurchases, should we assume that it's at a similar rate in the back half of the year as we saw in the second quarter?

Well, let me answer your second question first. We're going to use all excess free cash flows. As you recall, Brad, we've indicated on a few occasions that once we finish CapEx, once we pay out our 40% dividend, once we do our $25 million loan amortization, and once we keep $50 million on the balance sheet, everything else is going to go to share repurchase.

So results, timing of CapEx, as Mitch asked earlier, all factor into share purchase. So we'll continue to use all excess cash to do that.

In terms of predicting what that will be as we go on through the back half of the year, really I guess it's going to depend on what you're modeling in terms of what you would estimate we could do, but clarity around what the use of that cash will be. Sorry I've forgotten your first question now, Brad. Can you repeat that?

Debit card.

Debit card, sorry, your debit card question. So it's not as much as we thought it was going to be when the legislation first rolled out, because when the implementation of that legislation came through, there were a lot of scalebacks of what the initial thought was. But all in all, we think it's maybe a 10 or 15 basis point good guide for us going forward, in terms of order of magnitude.

Okay. And then, Wyman, on the -- as many questions as you all have gotten on mix going to positive in the coming quarters and everything else, is it a safe assumption that your guidance assumes continued positive traffic at Chili's in the coming quarters?

Yes.

Okay, thank you.

Chris O'Cull, SunTrust Bank.

Good morning. Thanks.

Good morning, Chris.

Guy, you mentioned the Company is pleased with the first-half results, but it looked like performance incentives were down during the quarter. Why was the bonus accrual down and what was the benefit in terms of basis points?

It was down a little bit from our plan in part. We've got challenging goals we have for our operators in order to -- when these new initiatives roll out. Some of it was related to timing of new initiatives, too, Chris.

You may recall that we were expecting to be maybe a little bit further down the line with some of these initiatives than where we are today. The fact that we're not as far along as we thought is not a reflection of the fact that we don't think they'll be successful. It's just simply a matter of the timing of the rollout, and as Wyman said earlier, wanting to make sure that we pace and sequence these well enough so that the operators can accept it.

But in terms of the bonus good guys, I said manager expense was slightly unfavorable. So, overall, it wasn't really that significant a benefit. But it was a little bit of an aid in the second quarter.

Okay. And then, Guy, the labor savings -- it sounds like it will be coming more from the new kitchen equipment going forward. Do you expect a similar year-over-year improvement in the labor line during the back half of the year?

So, Chris, obviously embedded -- and when I say that, it is on a year-over-year basis, because embedded in our numbers is the fact that we've locked down team service and we got that 100 basis points. The prep procedures were getting us 50, maybe a little more than 50. That's all locked in.

So we're still getting those labor savings, just on a year-over-year basis they don't show up now because we've lapped them. So this is now where the kitchen equipment starts to pick up the slack moving forward. And one area where we have been a little ahead of where we thought we would be is on the labor line, and we would expect that to continue going forward.

So, continue at about around 30 to 40 basis point benefit?

Yes.

Okay, and then one last question; Wyman you measured -- you said the 2%-plus pricing, it sounds like, with this new menu, are you all counting the new steaks as a lift to the pricing or as an expected benefit to mix?

It can have both impacts, right, so it is -- there is a price element to that, because we had steaks on the menu. And we did price for some of the upgraded product on the base menu items, the 10 ounce and the 12 ounce.

But then also we could get favorable mix depending on how the guests respond to eating this item, especially if we can convince some lunch guests that a 6 ounce steak is a pretty good lunch item. That would be -- probably have a positive mix impact at lunch. So it could impact both of those elements.

So, just as a follow-up, steaks are probably going to be a hero in a lot of your promotions the back half of this fiscal year as you are trying to drive mix?

We're going to put a lot of effort behind introducing this product.

Okay, great. Thanks.

Destin Tompkins, Morgan Keegan.

Thanks. Just a couple quick follow-ups, I guess one on the restaurant expenses. You kind of quantified the credit card fees. But I wonder if you would be willing to quantify the R&M and the workers comp, and maybe clarify kind of what you are thinking about going forward? It sounds like credit card fees will continue the next few quarters, but what about the lower R&M and workers' comp?

So, Destin, on R&M, as we start to roll out the reimage program more aggressively than we have to date, we should start to see some benefit on R&M. Obviously when you do a reimage, you are putting new tables, new chairs, new fixtures in the restaurant that don't require you to follow up on an R&M cycle until much later than perhaps you might've originally thought.

So, a key part of doing any sort of reimage program is your opportunity, if you time it right, if you sequence it well and you plan it correctly, is your opportunity to potentially skip an R&M cycle on many items because you are replacing it with new. So I would think we will have opportunities to keep R&M favorable going forward.

On workers' comp expense, this was a pretty good run we've had of managing our restaurants very safely. Our operators have done a great job doing that, and we have continued to see benefits on that line. At some point will those benefits -- will we reach a point where the benefit opportunity isn't as great? I'm sure that will happen. But to date we have continued to see benefits from that line.

Thank you ladies and gentlemen, but that's all the time we have for questions today. I'd like to turn the floor back to Management for any closing remarks.

Thanks, Everett, and I appreciate everyone joining us this morning and all the great questions. I would just close by saying how pleased we are with our results and how confident we are with our FY '12 guidance, both top and bottom line. Our strategies are working.

We have exciting new news for the guests in the back half of this year, along with the continued steady pacing of all our in-restaurant initiatives -- the kitchen equipment, the technology, the building reimage and the bar work. Just to remind you, part of that excitement is five quarters in a row of earnings growth, four quarters of sales and traffic growth and we're stealing share from other casual dining brands.

So, look forward to talking to everyone in April. Thanks again for joining us this morning.

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.