Brinker International Inc (EAT) 2012 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Brinker International third-quarter 2012 earnings conference call. At this time all participants have been placed on a listen-only mode. The floor will be opened 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 third-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 risks and uncertainties which could cause actual results to differ from those anticipated. Such risks and uncertainties include factors more completely described in this morning's press release and the Company's filings with the SEC.

On the call we may refer to certain non-GAAP financial measures that management uses in the 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 will 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. Well, good morning, everyone. I am going to briefly share with you our Company results for the third quarter, provide you with an update on the strategies that we are implementing to continue to strengthen our business model, and then turn it over to Wyman and Guy for deeper dives into Chili's and the number and then open it up to Q&A.

As you saw in our press release this morning our results demonstrate how we are strengthening our business model with a balanced approach that drives both top-line sales and is improving operational efficiencies. We reported an adjusted EPS of $0.60, a 28% increase year over year. Comp sales during the quarter increased 4.5% on a 1.7% gain in traffic. This was our fifth consecutive quarter of positive growth, and we have successfully lapped positive sales from last year.

Our top-line growth is a result of the changes we have made to our business to attract guests, providing everyday value, enhancing our menu, and upgrading our atmosphere. Guests are responding positively to the value platforms that we have built into our menus, with the $20 Dinner for Two and lunch combos at Chili's, and Classic Pasta and Marco's Meal for Two at Maggiano's, as well as the investments we have made in the Chili's core menu. This quarter alone we have upgraded our steaks, our fajita meat, and salad mix, and we have refreshed our lunch combo platform. Our guests obviously like what we are doing, and we continue to outperform the industry in traffic and sales allowing us to take share from our competitors.

As you know, we have also focused on strengthening our business model by improving our operating margins. We are changing the way we operate our restaurants to become more efficient, which is resulting in sustainable margin improvements, increased consistency and a better guest experience.

Two years ago at our investor conference we committed to improving our margins by 400 basis points. By the end of June we will have reached more than half of that goal. And by the end of December the new kitchen equipment and the point-of-sale systems will be fully rolled out to all of our restaurants. So these two important initiatives will be in place to help us pursue the rest of that goal.

Let me give you some highlights first about Chili's results. First, we ended the quarter up 4.6% in comp sales and 1.8% in traffic, and we continue to see operating margin expansion year over year despite commodity headwinds. In a few moments 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 and his team continue to produce positive results, 3.9% sales growth marking our ninth consecutive quarter of positive comp sales and a 1.5% increase in guest counts, representing the 10th consecutive quarter of positive traffic.

Sales growth continues across every part of the Maggiano's business, the dining room, banquet, to-go and delivery, thanks to two main and key strategies; first, the value that we built into the menu and, second, our direct marketing program, which gives us the ability to target loyal guests and look for new prospects.

As I have mentioned before, we anticipate new restaurant growth at Maggiano's, so we are still actively looking for new sites and we are excited about the growth potential of the Maggiano's business.

In our global business we grew comp sales by 2.6% and opened six net restaurants. Now since the end of the third quarter we have opened three more restaurants, bringing our total to 250 Chili's and one Maggiano's. The drivers of our global business continue to be Mexico and the Middle East, which are crucial components of our long-term strategy.

As many of you also may have heard in the news recently, the California Supreme Court reached a decision on litigation surrounding meal period and rest breaks for our team members. Basically, the court decided that California employers need to provide breaks, but don't have to force employees to take them. I want to thank our legal team, who put in many long hours working on this case for achieving a positive outcome, not only for us but for many other industries impacted by the Court's decision in the state of California.

So Brinker delivered another quarter of positive growth because of the investments we have made in our restaurants that are also elevating the guest experience. Our strategies are succeeding and I believe our growth will continue to outpace the casual dining segment.

With our financial strength, the power of our brands, and most importantly, our talented people, I'm very confident we will achieve our long-term goal of delivering 400 basis points of margin improvement and doubling earnings per share by 2015.

Now I'm going to turn the call over to Wyman to share the exciting work that is taking place at Chili's restaurants.

Thanks, Doug. Good morning, everyone. As you heard from Doug, it was a great third quarter for Chili's. We had our fourth consecutive quarter of sales growth and our fifth straight quarter of traffic growth. And it was balanced across both dayparts. Both lunch and dinner saw sales and traffic improvements in the quarter. And when you look at performance across casual dining, we outperformed KNAPP by 2.9% in sales and 2.6% in traffic, but it is not just a sales and traffic story. It is the seventh consecutive quarter Chili's has increased earnings.

This was a particularly important quarter for us as we challenged ourselves to successfully lap the introduction of our new lunch menu last year. So how did we get here?

Well, Guy will give you some detail behind the numbers in just a few minutes, but fundamentally what has enabled Chili's to achieve these results, what is really at the core of our success over the last couple of years, is our continued focus on our five strategic pillars. And they are strengthening our base menu, making the brand fresh and relevant, targeting key dayparts for growth, achieving operational excellence, and improving our business model.

We base everything we do on these five pillars, so we ensure we are working on the things that are most impactful to our guests and to our business.

Our goal is to create a strong foundation by making the right changes to our base menu and our operating structure -- changes that give our guests more reasons to come in day in and day out, which eliminates the need for a promotional strategy and also makes it simpler for our operators to execute.

For example, early in the third quarter we introduced a new menu, making changes that aligned with our strategic pillars. At lunch we took our already successful lunch combo platform and we refreshed it. We added an awesome new cheesesteak sandwich and a new soup, and we took off a few items. There were a lot of questions regarding our lap into successful introduction of this platform. But we knew that since the introduction we have maintained the higher level of performance, so the wrap wasn't going to be that significant. It wasn't like a one-time promotional spike that we had to repeat. Our base is up, and sustaining, and, therefore, more predictable.

But the biggest news, though, is probably the success we have had with our steaks. We touched on steaks during the January call, because we had just rolled them out at the end of the second quarter, but we are now a full quarter in.

So just to refresh your memory, why steak was important for us. Well, we were considerably under indexed when compared to some of our benchmark competitors on steak, and we saw that as a big opportunity. But we also knew that to be successful we had to get a great product at the right price with a consistent quality and thickness, so that we could execute it across the system. And our supply chain and QA teams did just that. Now we have got a great top sirloin steak we offer in a six ounce cut at a value price and a 10-ounce option for folks that aren't as price-sensitive. And the results are really encouraging.

We are now selling three times more steaks than we were before this initiative went into play because we are giving our guests another compelling reason to come into Chili's. One of the benefits of this new steak is its popularity among our lunch guests. We have seen a significant number of lunch guests trading up to this item, which is increasing our lunch check. And at our price point, it still gives them a great value.

So steaks are working for us at lunch and dinner, and that is one of the reasons we have seen growth during both dayparts in this last quarter.

There are also a couple of operational initiatives that I want to bring you up to speed on that are having a positive impact on our results and helping us take Chili's to the next level. First, we are continuing our focus on alcohol sales. Even though we indexed fairly high on our alcohol mix relative to casual dining, we think we can take it even higher. The bar is a real important area for us, because the margins are good and it differentiates us from some of the fast-casual competitors in the space.

So beginning this quarter we set some goals for our operations teams to elevate the guest experience in the bar. We are providing more teaching and coaching to our bar teams. We have created some great new drinks and incorporated marketing and incentives to keep our teams focused on bar sales throughout the year.

We have already seen our alcohol mix increase 30 basis points, and we believe these sustainable, operations-driven practices will help us continue to grow sales going forward.

Another operational focus that is doing really well for us is team service, which we introduced almost two years ago. This new service model has increased our server earnings to an average of more than $18 an hour, which allows us to attract a high caliber team member. And now we are taking team service to the next level, by helping them become a more effective selling team.

We are coaching and teaching our servers to engage with guests in a way that builds our check averages and delivers a better guest experience at the same time. We introduced this new selling approach about halfway through the third quarter and we are already seeing solid results.

We are continuing to move forward on our capital initiatives, which are designed to keep our brand fresh and relevant and improve margins at the same time, so kitchen of the future, the reimages and our point-of-sale system. Guy will provide the details on those in just a moment. But at this point the hard work in terms of proving out these investments has been done.

Now we are in the rollout stage, where our talented operations teams are working to get the initiatives in place so we can reap the benefits as soon as possible.

All the improvements we are making at Chili's and staying focused on our five pillars are not just strengthening our sales, traffic and earnings. They are also improving the experience our team members and guests are receiving. We survey every team member twice a year. We just got our most recent surveys back, and for the third year in a row our engagement levels have increased and our team's belief in the direction of the brand is at an all-time high.

We place a high priority on measuring our guest experience as well, and we continue to see those scores increase to new record highs. And on certain attributes, like value, we have seen a 50% improvement over the last two years.

So at Chili's we continue to have success at growing the business and taking market share. As you heard Doug say, we are well on our way to achieving our goal of improving margins by 400 basis points.

So, in closing, we have made a lot of changes at Chili's. And one of the most significant changes we have made is how we look at ourselves. We are holding ourselves up to what we call benchmark competitors in the industry today. With improvements we have made over the last two years and the momentum we have, we are more effectively competing with that group.

Hey, the third quarter was a great quarter for us. We are excited about those results, but we are even more excited about what the future holds for Chili's. And now I will turn the call over to Guy to review the financials.

Thanks, Wyman. As Doug mentioned, our third-quarter earnings per share, excluding special items, was $0.60, versus $0.47 in the prior year, representing a year-over-year increase of almost 28%. These results demonstrate again our continued progress against our goals and reflect the engagement of our team members to ensure successful execution on each of our initiatives.

Our third-quarter GAAP revenue included a one-time, $5.2 million gift card revenue reduction. This reduction was the result of a change in the estimate of gift card breakage, driven by an increase in redemption experience. As such, my comments concerning all line item percentages of revenue and year-over-year basis point explanations will be based on third-quarter fiscal 2012 revenue numbers, excluding this negative gift card adjustment.

Third-quarter revenues were $747 million, an increase of 4.2% over prior year. Total company-owned comp restaurant sales increased 4.5% on a 2% price increase, which is up from the first half of the fiscal year and closer to the top end of our 1% to 2% guided range; 1.7% traffic; and 0.8% mix, which reflects the lap of lunch combos and the impact of steaks at lunch for Chili's, as Wyman mentioned earlier. Capacity was slightly negative with less than 1% impact.

For the quarter Chili's saw 50 basis points of comp restaurant sales improvement due to weather year over year, comprised of 110 basis points in January and 20 basis points in February. Maggiano's, whose company-owned restaurants are in more weather-affected states than the Chili's company-owned domestic system, saw 100 basis points of comp restaurant sales improvement due to weather, comprised of 220 basis points in January and 50 basis points in February.

Franchise royalties and fees increased 1.8% due primarily to seven net franchise openings in the last 12 months, an increase in domestic franchise comp sales of 3.8%, an increase in international franchise comp sales of 2.6%, and lower development fees versus prior year.

Cost of sales increased by 30 basis points from prior year to 27.5%, driven by unfavorable commodities of 60 basis points stemming from higher meat, oils and dairy costs, partially offset by lower produce costs, and unfavorable mix and other items of 20 basis points.

This was partially offset by 50 basis points of favorable impact from menu pricing. Currently 83% of our commodities are contracted through the end of fiscal 2012, and 45% are contracted through the end of calendar 2012. As a result, we project the rate of commodity inflation to decrease throughout calendar 2012, averaging approximately 3% for the year.

Restaurant labor improved 50 basis points to 31.3%, driven by 60 basis points of hourly labor savings as well as leverage on higher revenues, partially offset by manager salaries and bonus. Hourly labor costs benefited from labor productivity gains associated with the implementation of kitchen equipment and lower steady-state vacation expense associated with the change in policy.

Restaurant expense was $164 million or 70 basis points lower than prior year. The improvement was driven largely by leverage on higher revenues, coupled with lower repair and maintenance expense, credit card fees and utility costs.

Depreciation expense decreased about $1 million to $30.9 million, continuing the trend we have seen in recent quarters. General and administrative expenses were $40 million, an increase of $4.4 million over the same quarter last year, driven by an increase in performance-based compensation expense and a reduction in transition services income.

Interest expense was about $650,000 lower than prior year, due largely to lower interest rates and lower commitment fees on our credit facility.

The tax rate, excluding special items, was 28.9% versus 27.1% in the prior year, driven by higher earnings. Capital expenditures for the quarter were $31.7 million with year-to-date cash flow from operations of $233.8 million.

Currently the new kitchen equipment is in about 360 Chili's restaurants, with completion of all company-owned Chili's restaurant installations still anticipated by the end of December. Our new point-of-sale system is in 144 restaurants today. With the final phase of implementation kicking off in June, we expect to complete our full rollout by the end of December.

We have also completed 105 reimages to date, and we project to have reimaged a total of about 140 company-owned Chili's restaurants by the end of fiscal 2012. With the completion of our reimage effort in the Phoenix market, this brings our completed market total to six, and we now have begun reimage efforts in the San Francisco and Memphis markets.

We repurchased 3.1 million shares for $82.7 million in the third quarter, and we ended the quarter with approximately $73 million of available cash on our balance sheet.

Since the end of the quarter we have purchased 1.4 million shares for $39 million, funded in part by a partial drawdown on our revolving credit facility. This brings our year-to-date share repurchase to $244.5 million or 9.7 million shares, leaving an outstanding authorization of about $200 million.

Going forward we intend to opportunistically draw down on our revolver to fund additional share repurchase, but always with the filter of maintaining investment-grade credit metrics.

On March 29 we closed on the purchase of two Chili's restaurants from our South Florida franchisee. With this acquisition we acquired the remaining development rights to the South Florida market, already a very successful market in the Chili's system. As we look ahead to the fourth quarter and reflect back on our original guidance for fiscal 2012 we wanted to provide some additional insight.

First, given our updated reimage and point-of-sale rollout schedules we expect fiscal 2012 capital expenditures to be around $120 million in total. Next, full fiscal 2012 depreciation expense will be lower than our original guidance of $130 million to $135 million, as mentioned last quarter. And we anticipate a fourth-quarter and full-year tax rate between 29% and 30%.

And, finally, we expect comp sales for fiscal year 2012 to fall within the 2% to 3% range provided in our original guidance and likely to be closer to the upper end of this range.

Every quarter is important, and as Wyman mentioned, this third quarter was particularly important, and we feel good having taken another positive step on the road to achieving our goals. We successfully lapped positive sales growth from last year, combining that with positive traffic growth, and we grew restaurant operating margins by 100 basis points.

This led to a strong earnings performance for the quarter. We have accomplished a lot to date and we'll continue to build on this momentum as we complete the transformation of the Chili's business. In fact, at the end of this fiscal year we will have just crossed the halfway point to our 400 basis point improvement goal.

We are especially proud of the results delivered by both our operations and marketing teams to date, and we have great confidence in their resolve to carry out the strategies we have established to strengthen our business model. And as you heard Wyman say, even though our results outpaced the industry, placing us on par with the benchmark competitors who are leading the casual dining category right now, we know we have work to do and opportunities ahead of us as we continue to transform the Chili's brand into a compelling, relevant and formidable competitor.

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

(Operator Instructions). Bryan Elliott, Raymond James.

I guess I would like to get your thoughts on the industry environment. We just saw KNAPP numbers released this morning, and for March, and just -- so nominal demand has clearly slowed some here in March, and just wanted to get your thoughts on -- your perspective on what you think might be going on.

Bryan, as you have said, you have seen the numbers, and we all know the category has slowed somewhat over the past 4 to 6 weeks. But when we look at Chili's for Q3, not only did we outperform the category for the quarter as a whole, but the beat got sequentially better as we moved through the quarter. So given our Q3 trends, and given that we have seen so far in April there is no reason for us to believe that Chili's won't continue to see significant -- to continue to outperform the category kind of significantly.

Where the category goes, we are not exactly sure. The softness has showed up. It looks like it has leveled off, but we're not exactly sure where it is going from here.

And I didn't mean that to be a defensive question. You guys are kind of back in the saddle and clearly gaining share, doing a great job and reestablishing Chili's as a important and relative and successful brand in the space. So given that position of strength, was more interested in what anecdotally you might be seeing or thinking about or hearing.

Are we looking at, for example, maybe the lower-ticket spenders reducing their spending a little more; check pressure at the bottom end of the range of checks, for example; or maybe fewer checks at the bottom end of the bell curve; or is it more kind of across the board? Just any kind of help in understanding where the deltas might be from a consumer behavior standpoint, based on your broad position out there geographically and et cetera.

So Bryan, hey, this is Guy. It is hard to look and see any real pockets of weakness across the entire business. So we look regionally and really almost all the regions are performing really well. Maybe a little bit, not quite as well in the Northeast, but California has picked up really well for us, and Texas continues to be extremely strong for us. So, really, we saw consistent strong performance across all regions.

When we looked at dayparts, still strength in all dayparts. Weekday, weekend, dinner and lunch have all done well for us, maybe lunch not quite as good as the rest of the business, but still very good, even considering the fact that we lapped the introduction of lunch combos a while ago.

Wyman mentioned our alcohol percentage was up. And if we look at add-ons, appetizers, desserts, have all been strong for us as well. So we don't see any pockets in our business.

I guess we can speculate, like everyone else, about why the softness. Typically as you and I have discussed many times, gas prices are not a long-term impact on the casual dining space in our opinion, although you have seen historically sometimes when the prices move very quickly, you see a little bit of a wobble for a 4- to 6-week period, so perhaps that is what we have gone through here. And now that gas prices have leveled off over the last couple weeks, maybe things return to the normal somewhat weak, but positive trajectory that we've seen in the casual dining space for the past year and a half or so. But, other than that, we don't have a lot of color in our business we can lend to you that would tell you why there is softness elsewhere in the space.

All right, very helpful. Thanks much.

Jeffrey Bernstein, Barclays Capital.

Great, thank you. Guy, just one clarification and then a separate question. The clarification kind of on your update for the fiscal 2012 guidance, with only one quarter to go, and I believe your fiscal 2012 guidance at $1.80 to $1.95 was a non-GAAP ex-special items, which would I guess relate to the $0.60 this quarter. It does seem to imply a fairly wide fourth quarter of what looks like $0.43 to $0.58.

Just wondering if you can give any kind of color? I know Wyman mentioned thus far in April not noting any major weakness or whatnot. But any help in terms of narrowing that range?

I think you had previously said stable through the year, which kind of would imply that high end, but we would have thought we would have seen some tightening with only a quarter to go, and then I had a follow-up.

Well, as you know, Jeff, historically we haven't gone out and changed that guidance unless we think there is a material change to what we are seeing going on. But I think it is fair to assume that any sort of reasonable look at the fourth quarter would tell you we are likely to be at the top end of that range.

Okay. And then just -- just talk about the margin side of things. It seems like you will get the first 200 basis points over the next couple of months or at least achieve that level. I'm just wondering if you can just talk kind of bigger picture. We hear a lot of people talk about the first 200 basis points was low hanging fruit and the next 200 is going to be a whole lot more challenging. We have always kind of viewed it as that next 200 basis points not necessarily harder to achieve, it's just likely to take longer, because it is more technology and equipment rollout rather than just removal of labor.

But just wondering if you could talk kind of theoretically about the 400 basis points and whether the next 200 you would view as a greater challenge or timing-wise or how you kind of think about that.

Well, I think it is fair to say, Jeff, it has all been challenging. We have asked our operators to do a lot in order to deliver on these results at the same time that they are seeing higher traffic numbers in their restaurants and lots of momentum on the top line. But -- so I don't view these as necessarily any harder than the original ones, where I think they have all been hard.

What we can say, though, is with 360 kitchens today with the new line equipment, with 150 or so restaurants with the new point-of-sale equipment, we are getting the results that we need in order to achieve the 400 basis points in restaurants today. So building off Wyman's commentary earlier, we are in rollout phase now.

We are done testing it. We know the results have proven themselves. We have a significant majority of our restaurants that have that equipment today that are delivering on the productivity goals we need to get the 400 basis points of margins. So while never easy to complete the rollout of those types of things, we know we are delivering it today in restaurants, so it is just a matter of locking it down and delivering it throughout the whole system by the time we roll out the equipment in late December.

Got it. I think you guys have previously said that once you start achieving that that it was possible to maybe re-accelerate the refranchising or whatnot? I am just wondering whether that is a consideration as these trends continue to improve.

Well, I think what we said is that if we were going to do any refranchising we would wait until we had the margin improvements delivered, because why sell now when we can sell for later at a higher price? What we are seeing, though, is with these kinds of results that you have seen today and the kinds of returns we are getting in our restaurants, if we can deliver this kind of top-line growth going forward is the need to do refranchising is significantly reduced if we can deliver these kinds of results on a consistent basis.

Got it. Thank you very much.

Michael Kelter, Goldman Sachs.

I wanted to ask about your advertising in the quarter. I know earlier in your fiscal year you had moved some things around, and it was impacting sales. The strong results you had this quarter, was it in line or increased number of weeks on air or GRPs, and was that a big driver in the quarter?

Hey, Michael, Wyman. We were basically in line with what we did last year within 100 basis points or [TRPs], so pretty much a similar media plan as we had last year. The big difference was in the first half, where we actually had several hiatus weeks, less this year than last year. So more comparable; and as we look forward into the fourth quarter we should be actually a little heavier in the fourth quarter than last year. But, again, pretty much in the same ballpark.

And the steaks, you said you sold three times as many as pre-promotion. I'm just curious if you could talk about now that it has kind of gone on a little bit here, is there any evidence that this is a legitimate step change and could be sustained for a while and change in the way consumers consume the Chili's brand? Or was there evidence that maybe it was just a very successful promotion, and then the sales lift might be a little fleeting?

Yes, absolutely, we feel it; it is not a promotion. It is on the base menu. It is something that we think will change how a segment of the casual dining population views Chili's. Didn't necessarily think of us as a place to go get a steak, and now I think we are going to be put in that consideration set, which opens us up for an ongoing opportunity. And that is, again, why we don't -- why we are focused on building these foundational platforms that are not really promotionally driven.

The sustainability, we think, is going to be very similar to what we saw with our lunch platform, which now that we have lapped that for over a year, we anticipate seeing a similar kind of result with the introduction of steak.

Thank you very much, guys.

John Glass, Morgan Stanley.

As all of us are trying to understand how sales build year on year, and Wyman, I think you talked about improving the menu and core items and steak was a highlight. Maybe I underappreciated this quarter, we got the lunch, but steak was maybe a little bit of a surprise. And you talked about how you under imaged or under indexed in that category. What other major categories do you think you under index in and that may be relevant to take a look at again? And maybe just what size steak for us -- how big a category is it for you? Is it 5% of your sales typically and it is now 10%? Or maybe give us some relative expectations on that.

Well, it is interesting, John. I don't want to really give you too much, because I think there may be some other people listening that I wouldn't necessarily want to have them know what we are working on, but I will tell you this. There are other options. There are other categories that we think are viable for Chili's to continue to steal share from that we are not taking our fair share in today. They are significant and they work really well off our new kitchen platform.

So as we start to finish the rollout of our new kitchen, that also opens up opportunities in these areas where we may be underpenetrated today, but we may have been underpenetrated because we could not deliver the product. And now we will have a platform that will allow us to deliver that product. So there are several. There are basically four that we are very excited about.

I am not going to get into the detail of what those are, but I will tell you there are four that we think could be very viable for us as we look to the future, how we grow the business and continue to make Chili's even more relevant going forward without necessarily adding to the complexity of the operation, which is always our balance, right?

That is helpful. And then as you -- so that segues into -- the new kitchen equipment and POS are coming into restaurants now; and Guy mentioned it gives you confidence in the next 200 basis points of margin capture or part way there. What have been the experiences so far? In other words, have there been positive or negative incremental training costs you didn't expect or people understanding how to use this equipment faster? Has it been difficult to put both POS and the kitchen equipment in the restaurant at the same time? So is there anything that you have taken away from this that is either a upside surprise or maybe one that is more cautious in terms of either the piecing or the expense of rolling it out? That would be helpful.

Well, John, I will talk to you about the experience. Guy can update you on how the financials have played out. From -- listen, when we go into a restaurant, in some places we have actually done a re-image, a kitchen of the future, and the new POS, it is a lot. That is a lot to ask for our operators, but they're very excited about it. They're asking for it.

And while it takes them a little bit of effort, a lot of effort, frankly, to get everything put in, they are actually getting it in place in a relatively short period of time. And when they are through with the introduction and the new learning, there is nobody that would go back.

So when we ask our cooks, after they have learned the new line, if they would like us to bring back the old equipment, there is nobody that is signing up for that. So we think the investments are obviously working for us, but they are also helping deliver a better guest and team member experience.

But there is effort. It is hard work. And our operations team has done an outstanding job, just getting themselves aligned and focused on making this happen. This doesn't happen without some really good operators putting a lot of hard work and effort into changing our system.

Hey, John, let me jump in on your question around some of the financials and what we are seeing. So in terms of training costs, really, we do lots of training every quarter, every year, and so really all we did was shift existing training budgets to focus more on the rollout of the new equipment and the new point-of-sale system, so no significant increase there in terms of the cost.

In terms of the results, I think what is interesting is -- and where frankly we have had some challenges is the way we decided to roll this out is by putting some kitchens in every area or every region of the country first so that we could bring people there to do the training as opposed to flying people around the country, so much more efficient from a training point of view.

What it did, though, is we created situations where an area director, a regional director had only partial or portions of their area that had the kitchens and other portions that didn't. And so as you can imagine, managing the old kitchen line and the new kitchen line within your same area you don't get quite the same efficiencies that you would if you had the entire area all with the kitchens.

Now that being said, we still have the vast majority of our restaurants that are hitting on the labor productivity goals, and you really see that kick into gear when we get a whole area populated with the kitchen line equipment.

So do we think there is upside? Once our operators get their hands on new equipment and can consistently operate it, I think things like the prep initiative that we came out with earlier, that was driven by operators getting new tools and new reporting and new processes in their hands and working it and providing better results, I think once they get the same sort of familiarity with the new kitchen line equipment there will be opportunities to deliver even better results, not just in terms of labor productivity, but in the guest experience as well.

On the POS side, hey look, we thought we would be more rolled out today than we are at this point right now. Again, back to that, we want to get it right. We don't want to mess up the experience for the guests by throwing technology at our servers that they may not be able to execute on. We now feel like we have it right, and that is why we are kicking off the last phase of the rollout in June, and we will be done by December.

So it hasn't come without some difficulty, but the results are there now, and we feel like it is just a matter of rolling it out and locking it down.

Thank you.

John Ivankoe, JPMorgan.

Just following up maybe on that last point in terms of getting the point-of-sale system right, discuss -- I guess, CapEx coming in a little bit below where you had modeled in fiscal 2012 -- what that may mean to 2013 as you kind of do catch ups, I guess, of the point-of-sale system and continue the kitchen of the future. And talk about the remodel budget that you have for fiscal 2013 as well in terms of total capital spending. So that is I guess the first part of the question.

And then, secondly, maybe the opposite of re-franchising, you acquiring the franchise rights for South Florida, including development of that obviously important market. Is it the case now where we should expect new unit CapEx from Chili's materially in fiscal 2013, or is that a fiscal 2014 event, and are you beginning to plan for that?

Well, I will take both those. So our CapEx, we think, is probably going to be in the range of about $150 million in fiscal 2013. We will provide a lot more specifics when we get to the August call, but as a ballpark number now to work from. That is probably pretty consistent to where we thought it was going to be, even at the start of fiscal 2012. But, clearly, you're right, our capital has come in a little bit lower than that.

The remodel is probably about $60 million of that budget for next year. And, again, our goal is to try and get anywhere between 60 and 75 remodels a quarter done in the system. And we have lots of markets teed up now after these first six that are ready to go and permits are being done and drawings are being done and so all the legwork that you need to do before you can kick that off is well underway.

In terms of new unit growth, other than focusing on trying to get some restaurants that are company-owned near you, John, no, I think going forward new unit growth is going to be a part of the Chili's plan. We had talked about turning that on, starting in fiscal 2013 at both Maggiano's and Chili's.

We are actively looking for sites right now. We have identified some relocation opportunities for Chili's at the start of the process. But there will be, as we talked about on the last call, probably 1% to 2% unit growth at Chili's on an annual basis starting at some point in fiscal 2013 as we start to get new units seeded.

In terms of a broader sort of strategy to buy back franchise locations, it is possible. It is an avenue by which we can add store weeks fairly quickly, so it is an opportunity for us to look at that, but I wouldn't consider that a material part of our strategy going forward.

Great, thank you.

Joe Buckley, Bank of America Merrill Lynch.

Can you talk about the supply of the steak product? And do you think you can stay at the price points that you are currently featuring for an extended length of time?

Hey, Joe, it's Guy. Yes, there is no doubt there is pressure on beef prices out there. I don't think we would be unique in talking about that. But this is why the broader strategy that we are operating right now fits, Joe.

So I know some have been concerned about when we cut costs that we are taking too much away from the guests or whatever that case might be. What we are really doing is reinvesting back into the guest value proposition, be it reimages to improve the atmosphere, be it kitchen line equipment so we can cook food faster and we can introduce new platforms; or introducing value platforms like lunch combos and Two for $20 or being able to put higher quality products on our menu where guest feedback has told us that we are not hitting the mark the way we should. And steaks are one of those areas.

So, yes, we do believe we can hold price points when it comes to steaks. And, yes, the product will be a little bit more expensive, but I think when you have the strength in the middle of the P&L, you can make these kinds of investments to make the guest value proposition better, and it is showing up in our sales now.

One other point, Joe. I think when we look at the category, while we have significantly increased our steak presence, we are still well below some of the key competitors. And so its impact on us relative to the impact it is going to have on some of these other key competitors is going to be less. And so from a pricing standpoint and our ability to move through fluctuations in the price, we will be less impacted than those folks.

And so our ability to weather it and maintain pricing or price, as Guy said, offset that impact with others, with other things we do in our business to maintain that 400 or deliver that 400 basis point improvement, net of all these things, is still very doable.

Okay. Guy, just one more on the expense line. When does the depreciation line start to show year-over-year growth?

Well, again, we will be able to give you a little more color on that starting in August, Joe. We talked about fiscal 2013. But clearly this year is when -- this calendar year is when we are putting in the bulk of the 800 kitchens and we have now got 100 reimages done. We are going to try and do 60 to 75 a quarter. So my belief would be in fiscal 2013 you'll start to see a little bit of a tick up in depreciation, but we will give you a lot more color on that in August.

Okay. Is there anything significant that sort of ran off that depreciation numbers are down?

I think some of it is just the timing of the capital spend, Joe, this year. So we had thought the start of the year we might do something more in the 150 range and now we are around 120. And then you may recall as well, Joe, that five years ago at this time is when we were peaking out in terms of our unit growth plans. In 2007 I think we built 150 restaurants that year, so some of those five-year life items associated with those builds are starting to come off the book now.

Okay, thank you.

Mitch Speiser, Buckingham Research.

Definitely a strong quarter with very solid comps. If I look at the monthlies, though, it does look like March did slow a bit, and we know the industry slowed. I was wondering just maybe putting aside the industry pressures, was there anything to point out as to why traffic at Chili's did decelerate from the January and February? Of course, there was weather too, but the up 0.5% traffic in March, just wondering if that was in line with internal targets, and if you feel -- if that 0.5% was maybe -- could be explained away by some other factors?

Mitch, it was mostly the -- if you look at the weather going through the month. If you strip out the weather we were 4.7, 4.3, 3.5 on the sales line, so a lot more consistent than it might appear at first blush when you look at it. But no, other than that, nothing unique that we would point to necessarily in terms of traffic trends. We were very pleased with how that went. And of course, on a sequential basis we got significantly better than KNAPP over those three periods. So actually March was a better performance versus the category than even January was.

Okay, you know, but on a fundamental basis that traffic of 0.5%, it seems like that wasn't affected by weather. The first two months were -- that you're comfortable that -- if that were a run rate you would be comfortable with that? Or is -- I'm just trying to get a sense of if that 0.5% was, I guess, internally considered good. Of course, the category was slow, but you are also doing a lot of initiatives. And the expectations have certainly risen on your ability to drive comps.

We are looking to drive better traffic than that, Mitch, if that is what you're asking. We are looking to drive better traffic than that long term.

Okay, thanks. And on Maggiano's that March traffic did slip. Were there any calendar mismatches in March for Maggiano's?

Hey, Mitch, well, Maggiano's did get more help in January and February because of weather, but again, if you look at Maggiano's over a period of time, they are on a pretty remarkable run of nine consecutive quarters of sales and 10 of traffic. And although we were disappointed in the March numbers, Maggiano's really mirrored more of where the industry was.

And just in terms of what Steve and his team have done, those two value menu options, their preference continues to grow. So we believe that it is going to help in the future make Maggiano's a choice, not just for special occasions, but just for a Tuesday night when they are looking for something to go eat pasta.

They have also seen, just like at Chili's, great guest experience numbers. They have seen some growth in their value scores, which is really important in these sort of times. So we weren't as pleased with March as we would have liked, but we see continued positive movement going forward at Maggiano's.

Great, thanks. If I could slip in another question -- on the franchisee group of about 35% of your units, have any implemented the point-of-sale system or the new kitchen equipment or have they undergone any reimaging just yet?

So, Mitch, this is Guy again. So point-of-sale systems, they all -- they have a number of different point-of-sale systems in our franchise system, but some do have the Aloha/MenuLink systems that we're implementing at Brinker. So we are not mandating that they change their point-of-sale systems. We feel comfortable in our ability to get the data and the information from them even with the systems that they have.

As for having some implemented kitchens, yes, some have. And they have certainly implemented some of the reimage elements. In fact, some of the elements we have included in our reimage came from some of the work that the franchisees have been doing as well. So it is a good partnership in rolling those two initiatives forward.

Great, thanks. And just one last one -- just on the breakage, we have seen other companies report that over the years. Is that -- and sometimes there might even be a second breakage adjustment. Are you comfortable that this is the full breakage adjustment? And does that -- I guess affect how you do promotions or coupons, as now the consumer seems to be using them more, which of course could be somewhat of a margin hit?

Well, Mitch, as has been the case with many retail and restaurant peers, as you said, we have seen that gift card redemption experience change over the past few years as the economy has become a little softer. And I think something a little more specific, maybe to our industry, is the mix in sales channels because we used to sell a lot of gift cards in restaurants, and now we sell them at third party as well.

But we review breakage regularly. And our analysis this quarter just had us reach the conclusion that the redemption experience had adjusted -- to an extent that we just needed to reduce our breakage assumption slightly. Now given the volume in gift cards that we sell, a small adjustment in breakage resulted in the estimate that you saw.

But, as has been the case in the past, we will continue to monitor it, but based on the best knowledge we have today of redemption, we believe this is the change we need to make at this point.

Great. Thanks very much.

Peter Saleh, the Telsey Advisory Group.

Congratulations on a great quarter. Just quick question on FY 2013, I know historically you guys had said you expect the earnings there to be well above the 10% to 12% range. Just wondering if anything has changed in your thought process there? And then my second question is on alcohol sales -- where do you stand on mix as a percentage of sales today and where have you been historically?

Maybe I will take the first one, Peter, and I will let Wyman take the second one. No, our thoughts have not changed in terms of fiscal 2013. We do think it will still be well above the 10% to 12% range. Wyman?

Yes, so, Peter, we run around -- slightly below 14% and now we are moving up over the 14% of total sales now at Chili's -- our alcohol sales. (multiple speakers).

Great. Thank you.

Thanks, Peter.

Sara Senatore, Sanford Bernstein.

Actually, a few follow-ups. First, on some of the margin benefit or the margin expansion you saw this quarter -- I guess 100 basis points if you stripped out the breakage. That is obviously quite good. You did have a 4.5 comp, so that is sort of in line with maybe what I would have expected. You usually do like 20 bps for a point of comp, that kind of leverage.

I guess I'm just trying to figure out, are you still seeing lingering benefits from some of the other -- from some of the initiatives that you have already had in place? Or are you starting to see a normalization around, whether it was -- like you talked about the kitchen prep or the team service -- those things usually do have a long tail, but eventually you kind of lap the full benefit.

So that was one part of the question. And then the other part was, with the POS, I don't know if you have ever broken out what the impact is. A lot of people seem to be doing -- in restaurants -- doing new things with POS. If you could just talk a little bit about what the margin benefits -- remind us again what the margin benefits might look like there.

Okay, so --- Sara, this is Guy. So the commentary around margin improvement -- so, clearly, strong comps helped us in terms of leverage on some of our fixed costs and our commentary earlier certainly nodded to that. And you know we do need comps, although perhaps not as strong a comp as we used to need before in order to generate that kind of leverage given the strength of the middle of the P&L.

In terms of team service and the original prep changes we made, both of those now well beyond a year ago. I think we fully lapped the impact of those. And interestingly, we had always thought that this third quarter might be a little bit of a lull in margins, because the real heavy lifting on rolling out the kitchen equipment where we are seeing great results to date, but it is still fairly early on in the process. We had 360 done by the end of the quarter, but a lot of those were put in during the quarter. So we would expect that as well as the point-of-sale, back-office systems to start to kick in now and pick up the slack now that the previous two initiatives have been fully lapped.

In terms of the point-of-sale systems, and the benefits associated with that, where we really hope to see that is on cost of sales, which as I look back to your earlier commentary on margin and leverage related to sales, you can't overlook the fact that we are dealing with a lot of headwinds in the commodity environment as well, and we were still able to deliver 100 basis points even despite that. But that is really where the back-office systems will help us by reducing waste, giving real time reporting to our managers that help us control cost of sales.

And we have commented earlier that we think that could be in the neighborhood of 50 basis points of benefit to cost of sales over and above the impacts associated with the inflation in the commodity basket.

Okay, great. And just one last thing -- on the franchisees, an earlier question about the -- where they are in kitchen equipment and those kinds of things; can you -- some of what you I think talked about were the big -- the sort of four areas where you think you are under indexed. Can you make a push or a national advertising campaign to tell consumers that you're offering these things, if the franchisees are behind or lagging or whatever, haven't yet quite done the kind of kitchen equipment and remodeling that the companies have? I guess I am trying to figure out if you can have a system-wide push if part of the system maybe doesn't have the necessary equipment.

Okay, good question, Sara. So, again, reminder that 65% of our system is company-owned versus 35% franchise. So we are a little different than the typical franchise system where the vast majority of restaurants are owned by franchisees and not by the Company. And so what that creates is a great situation where we are in the same boat the franchisees are. It is very important to us that we roll out compelling new platforms that drive sales and improve the P&L, because that matters to us as well as it matters to the franchisees.

And what Wyman and his team have done is created this great partnership where we test new menu items with franchisees. We get their honest feedback about how easy those are to execute and how compelling those are to the guest. And we do have franchisees that do have the new kitchen line equipment, so we will be able to test these items with franchisees as well. And we think as they see the compelling nature of those new items, in addition to the labor productivity they're getting, we do think they will come along with us and implement the kitchens as well.

Great, thank you.

David Palmer, UBS Global.

Congrats on the quarter. I missed a lot of the call, so apologies if I missed something. The new ovens, they are in place. Are you seeing a direct benefit to sales from table turns improving?

We are certainly seeing ticket times improve, David, so more than a minute to two minutes faster cook times in the restaurants where we have the new kitchen equipment. So equating that directly to table turns we haven't done that. But we certainly know that our ticket times are faster. And particularly at lunch, as you know, David, where we are competing against some fairly stalwart benchmark competitors there, that speed of being able to deliver our product is very important.

And when you were talking about the 50 basis points before, was that MenuLink ordering sort of anticipating what sort of inventory you need, is that what you were talking about there?

Yes, I mean, today, David, that our managers don't get a report on where they're wasting items until a couple weeks after the period ends. And what we will be able to do now is give them next day reporting if need be, and those that are struggling the most, and be able to tell them exactly what happened the night before so they can very quickly jump on waste and reduce that component of cost of sales.

And there is a separate perhaps additional benefit from the conveyor belt ovens, which might improve the consistency in the cooking and, therefore, avoid some waste issues that way from overcooked or undercooked items; that is additional?

Yes, the great news about those ovens, David, is that they pay for themselves on labor productivity with very good returns but they also give us faster ticket times and they also give us more consistent product, which reduces waste and the number of meals we need to comp -- creates a better, more consistent hotter food for guests, and also allows us to do these new platforms. So it is a win all the way around, and we are only early on in the wins. And the labor productivity savings are coming and even less than half the system with that today, but all the other benefits are yet to come.

And do you feel like the reimaging, are you continuing to tweak that, value engineer that -- can you give us a sense of maybe some of the qualitative stuff around the reimaging?

Hi, David, Wyman. Yes, so we have gone through several phases of fine tuning the reimage. And I will tell you the design team and the construction teams that we have got have done an outstanding job. Every market I have gone to that has taken the learning from the previous market and made the reimage that much better and that much more effective. And the results would kind of indicate that and what we are seeing in terms of the sales lift.

I think we are probably pretty close to having what I would consider the locked-down version. Of course, every market and every -- has its idiosyncrasies and we are in a lot of different buildings. And while we have prototypes, there is really hardly ever anything that is exactly the same. But we feel very good about where we are seeing today in our most recent market, the Phoenix market, where we have put all of the pre-work into that market is delivering some outstanding results and got us very optimistic about the impact the reimage is going to have for the business moving forward.

And that pace for company stores is going to be how many a quarter?

60 to 75.

Yes, we think 60 to 75 a quarter, David, but we are still rolling out kitchens and POS systems, so we want to be careful about not putting too much on the operators at once. But once that gets done, by the end of December, we will look hard to see if even we can pick up that pace a little bit as well.

Thanks very much.

Thank you. We have no further questions in queue at this time. And I would like to turn the floor back to management.

Thank you. I want to thank everyone for joining us on this morning's call. We're obviously excited by the positive momentum of our business and the results of the recently completed third quarter. We are also confident our strategies are working moving forward. We are going to continue to take costs out of the business and reinvest dollars in the guest experience.

We are upgrading the atmosphere, we are enhancing the menu, and we are providing everyday value during this sort of crazy and fragile economic time.

Just reiterating, sales strategies at Chili's are working. The new equipment is providing additional opportunities. The reimages, as they happen, will also be a tailwind. And as we said earlier, we do have visibility into those next 200 basis points as the kitchens and the POS systems get in place.

And, most importantly, we successfully lapped the introduction of the Chili's lunch menu last year, and we grew both sales and profits year over year, materially truncating the theories that we couldn't lap success with more good news.

Have a great day, and thanks for your interest in Brinker International. Good day.

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