Brinker International Inc (EAT) 2012 Q4 法說會逐字稿

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

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

Thank you, Kate. Good morning, everyone, and welcome to Brinker International's fourth-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 a response 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 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 to review 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 on 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 we 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 fourth quarter and for the full year, then turn it over to Wyman and Guy for a deeper dive into Chili's and their results before we answer any questions you have.

As you saw in our press release this morning, we reported an adjusted fourth-quarter earnings per share of $0.61, a 27% year-over-year increase and an adjusted full-year earnings per share of $1.96, a 29% year-over-year increase.

Comp sales during the quarter increased 2.1% on a 0.9% gain in traffic. This was our sixth consecutive quarter of positive growth and we successfully lapped positive sales from last year.

These results are evidence that we continue to deliver on our promises. Over two years ago at our investor conference in Dallas, we told you we needed to rejuvenate our brands by improving service and food quality while at the same time improving our profit and loss to drive margin improvements. We laid out aggressive goals and I want to update you on how we are performing against those goals.

Our fiscal '12 EPS at $1.96 puts us well on the way to reaching our EPS goal of $2.75 to $2.80. We have also achieved over half of our 400 basis point operating margin improvement and I am confident that as we complete the rollout of our initiatives, we will achieve the remaining savings.

And we've dramatically turned around our sales and traffic trends. We've achieved six consecutive quarters of positive growth even in the midst of a challenging economic environment and we continue to distance ourselves from our competitors and gain incremental market share.

We achieved these results by changing the way we operate our restaurants, which has resulted in sustainable margin improvements and we've taken those savings and reinvested them into the business to drive sales and traffic in a more predictable and sustainable way.

So at Chili's, highlights around their results, we ended the quarter up 2.2% in comp sales and positive 1.2% in traffic 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 will share with you the highlights of what's ahead for fiscal 2013.

At Maggiano's, Steve and his team continued to produce positive results, a 1.9% sales growth making our 10th consecutive quarter of positive comp sales. They did have an 0.8% decrease in discounts but a 170 basis point margin improvement driven by improved kitchen training, more rigorous waste control, and more disciplined daily prepping of food and some favorable impact from pricing.

Maggiano's, already a strong brand, continues to strengthen its business model and as I mentioned before, we are actively looking for real estate sites to grow the business.

In our global business, we grew comp sales by 1.3% and opened 10 net restaurants this quarter bringing our total net restaurants opened in fiscal 2012 to 22. We currently operate 257 Chili's and one Maggiano's restaurant in 31 countries and two territories. The drivers of our global business continue to be Mexico and the Middle East, which are important components of our long-term strategy.

Looking back at fiscal 2012, I'm very proud of our accomplishments. We achieved positive sales in traffic in all 12 periods, which resulted in us significantly outperforming the industry and gaining share throughout the year. We improved our operating margins 90 basis points and we have completed the test phases of our remaining initiatives and we've started to roll them out to all of our restaurants.

We are looking forward to continuing to build on this momentum in fiscal 2013 as we look for real estate sites to build a pipeline for future growth. As Wyman said last quarter, we're holding ourselves to delivering financial returns in line with what we call the benchmark competitors in the restaurant industry. The progress that we've made against the goals we laid out two years ago and our plans for F'13 will allow us to continue to successfully compete with that group.

Our strategies are succeeding even in a challenging economic environment and I believe that demonstrates the strength of our business model. With our commitment to shareholder value, our financial strength, the power of our brands, and most importantly our talented people, I am confident we will achieve our long-term goal of delivering 400 basis points of margin improvement and doubling our earnings per share.

Now I will turn the call over to Wyman to share the exciting work that is continuing to take place at Chili's.

Thanks, Doug, and good morning, everyone. As you just heard, Q4 was another strong quarter for Chili's. Our comp sales were up 2.2% compared to a flat industry as measured by KNAPP-TRACK. The thing we are most excited about though is delivering a 1.2% increase in traffic versus a negative 2.6% for the industry. That marks our sixth consecutive quarter of traffic growth, which demonstrates our strategy of bringing more guests into our restaurants every day, continued to work for us in the fourth quarter.

This caps an entire year of great results for Chili's. We ended the year up 2.5% in sales up 1.5% in traffic which is significantly better than the industry, while maintaining strong margins and a great guest [NT] number experience.

In just a few minutes, Guy will walk you through the details of how our topline gains flowed through to profits. But for now let me take a moment and recap how our strategy has been working for us.

Let's go back a couple years to when Brinker made the commitment to improve our margins by 400 basis points and talk about how we prioritized the build toward that goal. First, we attacked the initiatives that we knew would improve our bottom line and generate cash for us to reinvest back into the brand to keep it fresh and relevant.

Early in fiscal 2011, we implemented team service and the first phase of our kitchen of the future and we started to reap the benefits of a stronger P&L right away. This enabled us to reinvest in initiatives with longer lead times, things like menu innovation, reimages, compelling everyday value platforms like 2 for $20 and lunch combos.

We then began to leverage some really solid marketing approaches like building a database that allows us to be more flexible and strategic in how and what we market to our guests. And our operations team has been working hard not only to execute the capital investments we've made in the brand but also to improve the guest experience by elevating the skills of our servers and bartenders, improving their salesmanship and strengthening their ability to connect with our guests. That has helped us grow our alcohol sales and our overall check average, again at a time when the entire industry is struggling with those kind of numbers.

Now it was a tougher quarter for the industry and obviously we'd like the industry and the economy to be stronger. But the Chili's team has proven over this quarter in fact over the entire year that regardless of what happens in the environment around us, Chili's will continue to be one of the stronger brands out there and we are confident in our continued success.

Because unlike a lot of our competitors, we don't have to rely heavily on our promotions and discounting. The things we have introduced are here to stay. They are important foundational building blocks for the brand both from a profitability as well as a topline standpoint. It's just how we do business now at Chili's.

And it's now -- it's how we've achieved five straight quarters of sales growth and six straight quarters of positive guest count.

But we don't just look at our margin and topline improvements. We also listen to what our guests are telling us. We look at our guest feedback as closely as we look at our P&L and when we see a two-year positive guest satisfaction trend, we know we are on the right track.

Some of the biggest improvements we've seen are in our value scores which we know are the best indicator of future visit intent. This gives us confidence in our ability to continue to take market share going forward.

We also know that to truly make this business work, our team members have to feel good about the business. They have to be brought into our strategy and direction and they have to make money. So we survey every team member twice a year. We recently got our spring surveys back and for the fifth survey in a row, we saw significant improvement in team member engagement scores and we take these scores very seriously and seeing all our metrics trending in a positive direction indicates to us that we are still on the right track.

But we know history doesn't guarantee future success for Chili's. So what does the future look like for us? Why are we still confident in our strategies -- that our strategy will continue to build sales and traffic going forward? Well, we know that during fiscal 2013, we will complete the rollouts of our new point of sales and back-office system and the new kitchen equipment. And since these initiatives are already in place in nearly half are restaurants, and have been key to our ability to consistently grow our margins and deliver a great guest experience, we can predict similar results in the rest of our restaurants going forward.

Once these initiatives are in place, how will we sustain our sales and traffic momentum? First, we will continue the upgrades to our core menu as well as our reimage rollout. We will add new news to our value platforms to maintain preference and we will introduce new menu platforms using the new kitchen equipment.

The completion of our new kitchens this year opens opportunities for us to aggressively pursue culinary innovation so we can deliver new news that expands our potential guest base. We are working on developing new food that resonates well with consumers, that fits within our brand, delivers great margins, and that our operators can execute flawlessly.

We are also continuing to strengthen the partnership between our culinary operations and supply chain teams as we work through the upgrades to our core menu.

We have already developed strong marketing strategies both nationally and locally that during the past year have enabled us to drive sales and traffic. Going forward, we will leverage those strategies to communicate new offerings for both current and lighter users. We will also add more weeks of national media to the calendar, increasing Chili's presence and driving more traffic.

From an operational standpoint, we will be taking a more balanced approach to the pace of change we introduced to our restaurants. We have thrown a lot at our operators in the past two years. We've given them a whole new kitchen, a whole new service model, a new point-of-sale and back of house system, new menu items to execute and deliver, and in a 165 restaurants, we have reimaged.

And they've exceeded our expectations. They delivered a better team member experience. They delivered a better guest experience and they delivered profitability but there's been a lot going on.

Now we are focused on supporting our operators by simplifying their world and helping them tighten things up so that they can take that guest experience and team member experience from good to great.

With all the tools, the investments we've made as well as the leadership tools we have given our managers, we think there is tremendous potential to tighten up our execution and eliminate the variability within our restaurants. We are very excited about where the branch sits today. It was a great year. In fact, it's actually been two great years.

From a profitably standpoint, our business model is much stronger than it was two years ago and is continuing to show incremental improvement.

From a sales and traffic standpoint, our results and the momentum we carry into this year are very encouraging. The future of Chili's is still in our hands. We know we have work to do but we also know we've built the foundation and the team to deliver the results.

The Chili's team remains committed to helping Brinker reach the 400 basis point improvement target. We know what we need to do to make that happen and to continue to move this brand forward.

And with that, I will turn it over to Guy to review the financials.

Thanks, Wyman. You've just heard Doug and Wyman highlight that our operators delivered strong results again this quarter, enabling us to continue to capture market share from our competitors. Now let's take a deeper dive into those results.

Continuing the year-over-year improvement we have seen the past three quarters, EPS before special items for the fourth quarter was $0.61 versus $0.48 in the prior year, a 27% improvement, demonstrating continued momentum in our quest to strengthen our business model and transform the Chili's business.

Fourth-quarter revenues were $728 million, an increase of 1.5% over prior year. Total Company-owned comp restaurant sales increased 2.1% on a 1.4% price increase, a 0.9% traffic increase, and offset slightly by negative 0.2% mix. Capacity was slightly negative and weather had no impact on the quarter.

Gift card-related revenue was approximately $2 million unfavorable compared to prior year due to lower breakage. Franchise royalties and fees decreased 8%, due primarily to a one-time development fee refund of approximately $1 million. This was related to ceasing the previous plans we had for international development of the Maggiano's brand consistent with our focus on Maggiano's domestic new restaurant development.

This negative adjustment coupled with lower development fees versus prior year was partially offset by the impact of net positive franchise openings in the last 12 months, an increase in domestic franchise comp sales of 2.4% and an increase in international franchise comp sales of 1.3%.

Cost of sales increased 20 basis points over prior year to 27.1%, driven by unfavorable commodities of 40 basis points, stemming from higher meat and oils, partially offset by lower produce and dairy costs and unfavorable mix of 10 basis points partially offset by 30 basis points of favorable impact from menu pricing and other items.

Restaurant labor improved 50 basis points to 31.3% driven by lower vacation expense, productivity associated with the implementation of the new kitchen equipment, and the impact of leverage on higher revenues, partially offset by higher manager salaries and taxes.

Restaurant expense was $4.9 million or 100 basis points lower than prior year. The improvement was driven by lower credit card fees, utility costs, repair and maintenance expense, advertising, and workers compensation insurance coupled with leverage of higher revenues.

Depreciation expense increased slightly to $31.8 million due to the continued rollout of our key capital initiatives and normal asset replacement, partially offset by fully depreciated assets, restaurant closures, and retirements.

General and administrative expenses were $39.3 million, an increase of $3.5 million over the same quarter last year primarily driven by an increase in performance-based compensation expense, professional fees, and relocation costs.

Interest expense was about $190,000 lower than prior year due largely to lower interest rates and lower commitment fees on our credit facility. And our tax rate before special charges was 28.3% versus 28.9% in the prior year driven by an increased FICA tip reimbursement partially offset by the impact of higher earnings. CapEx for the year was $125 million with year-to-date cash flow from operations at $303 million.

Currently the new kitchen equipment is in about 620 Chili's restaurants. We project completion of all Company-owned Chili's restaurant installations by the end of December and completion of all franchise-owned restaurant installations by the end of March.

Our new point-of-sale system is in over 400 restaurants today and we are still on pace to complete our full rollout by the end of December. And as Wyman said, we have also completed 165 Chili's reimages to date and we project the total of about 380 completed Company-owned restaurant reimages by the end of fiscal 2013. We now have fully completed the reimage in eight markets with an additional four markets in progress.

During the quarter, we bought 2.7 million shares for $79 million funded partially through a drawdown on our revolving credit facility reemphasizing our intention to use available leverage on our balance sheet for share repurchase all while maintaining our investment grade rating. This brought our fiscal 2012 total share repurchase to $287 million or 11 million shares. We ended the year with approximately $59 million of available cash on our balance sheet.

Through the first six weeks of fiscal 2013, we purchased 1.1 million shares for $34 million funded in part by a further drawdown on our revolver.

With fiscal 2012 behind us, let's look ahead. We expect fiscal 2013 earnings per diluted share from continuing operations of $2.30 to $2.45, representing a year-over-year increase in earnings per share of 17% to 25%. We expect the quarters to all fall within this range save for the second quarter, which disproportionately benefited in the prior year from a sizable decrease in workers' comp insurance expense related to lower claims experience and a decrease in performance compensation expense. As a result, we expect the second quarter to fall somewhat below the stated range.

As we dig a little deeper into our revenues and expenses, here is our perspective on major categories and a view of the business in fiscal 2013.

EPS is based upon a Company-owned comp sales increase of between 2% and 3% with Chili's taking 1% to 2% price. We assumed flat Company-owned restaurant capacity and an anticipated franchise revenue increase in the mid single digits resulting from expansion of the restaurant base. Currently 54% of commodities are contracted through the end of calendar 2012 and in all, we anticipate about 2% to 3% inflation in our commodity basket for fiscal 2013. This headwind will be mitigated by actual versus theoretical improvements from the implementation of our new restaurant systems and waste control efforts and menu price increases. In all, we expect flat cost of sales compared to fiscal 2012.

Restaurant labor should improve 50 to 70 basis points year-over-year. This increase will come largely from continued efficiency gains from the rollout of new kitchen equipment along with leverage on higher revenues. And we expect restaurant expense will be slightly better year-over-year driven by sales leverage offset by higher insurance costs.

Depreciation expense is expected to increase slightly on a dollar basis consistent with our investment in the Chili's reimage, the new kitchen equipment, and the new point-of-sale system. We expect fiscal 2013 CapEx of $130 million to $140 million including about $50 million for ordinary maintenance. Our anticipated G&A spend in fiscal 2013 is lower than fiscal 2012 due to the fact that we plan our incentive compensation at target. In total, we expect approximately 100 basis points of operating margin improvement in fiscal 2013.

Interest expense will be up about $2.5 million due to the use of available leverage on our balance sheet. Excluding the impact of special items, our income tax rate should be around 31%. Naturally this rate could rise or fall with changes in earnings.

Finally, free cash flow defined as cash from operations less CapEx is projected to be $160 million to $170 million.

We continue to maintain a balanced approach to our use of cash through reinvestment in the business, debt amortization, best in class dividends, and an appropriate cash reserve with the remainder dedicated to share repurchase. The net effect projects a weighted average share count for full-year fiscal 2013 between 74 million and 76 million shares continuing to play a significant part in our projected EPS growth.

So to wrap things up, we finished fiscal 2012 with a strong fourth quarter and we enter fiscal 2013 focused on continuing the momentum. We have achieved our goals in those restaurants that have received and fully implemented our major capital initiatives in fiscal 2012 and now as we enter fiscal 2013, we will take significant steps towards full rollout and locking down those improvements across the system.

In fiscal 2013, we will complete the rollout of our new kitchen equipment. We will complete the new point-of-sale and back-office enhancements throughout the entire Chili's system and we will expand the Chili's reimage program to a total of about 380 restaurants. And we will build our new restaurant development pipeline with locations for Company-owned restaurant growth beginning late this fiscal year.

As Wyman suggested, we will also sustain our revenue growth by upgrading our core menu, maintaining preference on our value platforms, introducing new menu platforms using the new kitchen equipment, generating traffic through our ongoing reimages, and continuing our international expansion. All of these initiatives will help generate EPS in the range of $2.30 to $2.45 and given these plans, we remain confident in our ability to achieve our Company goal of doubling EPS to a range of $2.75 to $2.80.

With that, I will turn the call back to Kate so she can open the line for questions.

(Operator Instructions). Jeffrey Bernstein.

Thank you, Barclays. Good morning. Two questions. First just on I guess looking to fiscal 2013, I appreciate all the granularity and I think the free cash you had said $160 million to $170 million. Just wondering if you can dive into that a little bit, whether there's any potential to accelerate maybe the CapEx spend for technology and the reimages or are there constraints beyond just cash flow that makes that harder to do? In which case, how do you balance kind of the share repo versus dividend?

And you mentioned on a few occasions kind of your leverage position. Just wondering whether there's potential to increase that with the stability of the business and perhaps more -- return more to shareholders with still the investment grade rating? And then I had a follow-up.

Okay, Jeff, yes, we have talked about all of those issues before. The constraints on rolling out our initiatives aren't cash constraints. The position of the business is very healthy from a cash perspective. As we talked about before on the reimages and really given that we are so close on the kitchens and the point-of-sale rollouts, we really can't roll those out any faster than we will given we will be done in three to four months time. The issue is really the reimages and for us it becomes an issue of just making sure that we can control the cost and control the quality of the reimage.

To the extent that we would want to move faster given our market by market approach, we would then have to expand the contractor base that would work on a project which either could result in increased costs or potentially not as high-quality contractor as we might have used before and clearly we want to make sure that we deliver the best guest experience, reimage experience possible to those who visit the restaurants without causing the cost to increase.

As for the second part of your question about could we do a little bit more on the leverage side while maintaining our investment grade profile, as you can see last quarter we talked about drawing down the revolver. We have already done that as well this quarter and so we will look for every opportunity we can in order to do that again following the guide that we would want to maintain our investment grade rating to do as much share repurchase as we possibly can.

Got it. Just separately I think both yourself and Doug mentioned the long-term guidance of $2.75 to $2.80. I know previously that was labeled as fiscal 2015 guidance. I didn't know whether we should be reading into that. It seems like now that's long-term guidance. I wasn't sure if that was pulling it forward or pushing it back. But it does seem to imply after what seems to be 20% plus earnings growth in this coming fiscal year, it's more modest kind of high single digits in the out years if it is still a fiscal 2015 target.

So I'm just wondering should we be expect -- kind of how you pace that out over of the next coming years if fiscal 2015 is still the long-term target end?

I guess my answer would be a quick one, Jeff, which is we are definitely not pushing it back.

But if it's 17% to 25% in 2013, not pushing it back is saying the latest would be fiscal 2015 or is the potential to be sooner than that? Or how do you see it playing out beyond this 20%? I'm assuming there's more benefits in fiscal 2014 from all the reimaging work you're doing in 2013. So just trying to pace it out a little bit.

I think the way you characterize it is good, Jeff. The latest would be fiscal 2015 and there's the opportunity that it could be sooner than that.

Got it. Thank you very much.

John Glass.

Morgan Stanley. I have a few questions, good morning. First just on the fourth quarter, you saw a slight negative sales mix at Chili's. Sales mix had been positive because you were lapping lunch. Can you maybe just comment on was that an unexpected reversion back to slight negative mix or what drove it and maybe what your expectation of mix going forward is?

This is Wyman, John. The sales mix issue is more to do probably with the strength of our lunch business relative to dinner. Both dayparts are still strong. We had continued strength at lunch though and that's the main driver of why we might see a little sales mix drop off there. Overall, though, we don't anticipate mix being a big part of the negative mix issue being an issue that we will deal with going forward. All of the indications are we're going to continue to grow both dayparts and add on sales so mix should be relatively positive going forward.

Okay. And then, Guy, a couple of questions on the guidance. One is you talked about flat food costs and your expectations of inflation. I think you said 2% to 3%. You had earlier talked about 3% inflation this year, commodity inflation. I don't know if that in fact where the year ended up. But it does sort of slide in the face of fairly significant inflation in grains and stuff and I understand your visibility -- or greater visibility through December, what gives you confidence though that 2% to 3%, even lower inflation in fiscal 2013 and 2012 is likely to occur?

John, we had talked the most recent conversations we had had with this group had been 3% for calendar year fiscal -- sorry -- calendar year 2012 and you may recall we thought that number was going to be higher in the front half of the year and lower at the back half of the year.

I think what we are seeing now is we don't think that will continue to accelerate during the year. We don't think it will get even lower. We think it will flatten out to somewhere between 2% and 3%.

The other point I would make is that as you know historically, John, you've followed the Company for a long time, in times of commodity inflation, we tend to do better than the space and we don't see as much inflation as others do. And of course the flipside of that is sometimes when you get good guys on the commodity side, we don't tend to benefit as much as others. So given our contract visibility, given our history, we feel comfortable with a 2% to 3% inflation for fiscal 2013.

Okay, the last component of it was or last component of my question at least was just on unit growth expectations for fiscal 2013 and beyond -- and this topic has come up I know before given the success you've had in driving sales and margins and the ample free cash the business generates.

So I think you said something about ramping up at the end of 2013 but if you could just -- if that was the case can you just amplify on it? What is your current thinking since this is a year-end call about what is the longer-term goal for the Chili's brand growth maybe capacity, domestic capacity expansion in 2014 and beyond?

John, we have talked about that a lot. We are building the pipeline right now for Maggiano's and for Chili's. We believe that long-term we can grow between 1% to 2% Company-owned domestic unit growth for Chili's. We think perhaps that percentage can be a little bit higher for Maggiano's. And then of course, we have the added benefit of our domestic franchisees will start to turn on development as well and our international business continues to provide strong development going forward.

But on the Company-owned domestic side, which I think is probably more than just your question, we believe we will be able to start to open new restaurants late this fiscal year, which times very well with us making sure that we can lock down the rollout of all of the kitchens and all the new point-of-sale systems and make sure that our existing restaurant base is solid lock down and following through on delivering the rest of the results that we've already seen before we start to introduce new restaurant growth at the system.

Great, thank you.

Michael Kelter.

Sure, from Goldman Sachs. I wanted to ask first about remodeling. You guys are saying you're going to do 200 to 225 units about 25% of the system in a single year. What might be the contribution to traffic and same-store sales growth for your fiscal 2013, given the substantial number of units you are remodeling? And how much of the growth, of same-store sales growth, if you separate it out does that mean you are guiding for the non-remodeled restaurants to grow traffic at all?

Hi Michael, Wyman. So we are counting on these remodeled restaurants, and you've got the number about right, contribute to our sales growth. Probably about 1% of the overall sales growth that we are looking at is going to come from that. So it's a balance -- so our plan is balanced between that you talked about a very moderate price. The impact of the reimages, which will drive traffic to some degree, and then a baseline traffic improvement as well in the restaurant.

So we are continuing to focus on our strategy to grow the business with improved traffic trends, not just in the reimaged restaurants, although they will obviously carry a heavier weight, but also in our non-reimaged restaurants.

Then on a separate point, you mentioned in your prepared remarks some new news on value coming in your fiscal 2013. Can you maybe give us a little more color on that point?

Well, I don't think -- it's not just coming. It has been here and it's more about sustaining the value platforms that we have. So a good example is at our lunch right now, today, we are on air with lunch offering of chicken fajitas. And that's taking our lunch combo platform, adding some new news to it, some products that we are really obviously familiar with in terms of fajitas, and putting it out there. And well, it's a great value now that the beauty of that is it's in our platform that goes from $6 to $8 offerings, and that's the high-end offering at $8, so it actually helps. It's a great value but it's not necessarily the lowest price point.

So we are continuing to focus on value in the future with the new ovens and the new kitchen equipment. We think there are some other value platforms that could come off of those lines that will add to our already strong base.

Lastly, I just wanted to get your thoughts on your philosophy around your dividend. Is there a scenario where you would take the payout ratio down because if not, then it suggests a fairly robust dividend increase upcoming.

Michael, this is Guy. We are committed to maintaining the 40% dividend payout ratio and I think we have been pretty clear on spelling that out that its previous years EPS 40% of that EPS will result in a dividend that we would provide. So that is the commitment we've made in the past and there's no change to that commitment.

Thank you very much.

Joe Buckley.

Bank of America Merrill Lynch. A couple of questions. Question on the Olympics. Do you see the Olympics as taking away a little bit of sales in this -- two or three period that they are on?

Joe, Wyman. It's interesting, because after Beijing, it was kind of a nonevent and so we weren't really sure. In prior Olympics, it has had quite a big impact. This year the Friday night, the opening ceremony night, we did see a little bit of a hit. Nothing dramatic but definitely a little bit of an impact.

The beauty we have, though, now especially in our reimage restaurants with all of the TVs we've added and with our local marketing ability, we have actually been able to market directly to our guests about the appropriateness of coming on in and watching the Olympics with us. And so we are not seeing a significant impact to our business, our business trends with the Olympics the last few weeks.

Okay, just a question on the food costs as well. I think we introduced steak into the 2 for $20 options. I think you had contracts for beef I think through December if I'm not mistaken. And I am curious now if you've been able to extend that? Will you be able to do the steak 2 for $20 again in calendar 2013 given where feed costs are?

You're right, Joe, we do have steak contracted through the end of calendar 2012 so you remembered that correctly. As for calendar 2013, I don't think we would want to disclose what we would do on the call here but I will say that by doing all of the heavy lifting that Wyman and Kelly and the operators of Chili's have done to fix the middle of our P&L, it certainly gives us more options going forward than it might have if we didn't have a healthier business model operating right now than we might have had two years ago.

So we would not have had those same kind of options two years ago with the work we've done, so it does give us a couple of different ways to approach it starting in calendar 2013.

The other thing, Joe, about steak, we are thrilled to be a bigger player in steak than we have been in the past, but you've got to remember relative to most of our competitors, almost all of them, we are still a much smaller player in the beef market. So it is an important component of 2 for $20 for us but relative to our business in general, it's less than 10% of our sales are in beef. And so our ability to manage all of our commodity basket around that and our merchandising around that item and still keep it in the 2 for $20 menu, if you will, is much more reasonably or much more possible and the possibility of for us to do and maintain margins is within the realm.

So again, we will face the same kind of impact with the commodity prices as others but relative to others, our impact will be less. Therefore our pricing should be not pushed as hard.

Okay and then maybe just one more. Your share guidance seems to imply not a whole lot of activity yet you've been pretty active here in the first six weeks of the year. So just kind of tell us how you are thinking about share repurchase for fiscal 2013 relative to the share guidance.

Well, the approach there hasn't changed, Joe. So it's $50 million cash on our balance sheet. It make the capital investments that we talked about today $130 million to $140 million of CapEx. It's the 40% dividend payout ratio that we just talked about. It's some small debt amortization, about $25 million a year after that. Everything else goes to share repurchase with the added factor this year of the ability for us to draw down our revolver which we've demonstrated before.

So I wouldn't characterize our share purchase this year as diminishing in any great degree at all.

Okay, that's helpful. Thank you.

John Ivankoe.

Great, from JPMorgan. I know in the past that you've talked about when you put all the initiatives, all the operational change initiatives at the store level that you've actually seen in some cases even more than 400 basis points of net impact when you kind of run them all together as opposed to kind of looking at them as separate pieces. In other words kind of the sum is greater than the parts I guess.

Just comment in terms of how significant that may be and once the entire Company kind of has its complete system by the end of calendar 2012, if there is any real training or initiatives that you can do to kind of squeeze some more out on a consolidated basis in calendar 2013, calendar 2014 for example?

John, great question. One of the interesting things we have found as we have rolled out the new kitchen equipment and I think I talked a little bit about this last quarter but we continued to see that is that the way we rolled it out we did it to make training very efficient in that we placed a couple of kitchens or a couple of point-of-sale systems in markets in order that we could bring nearby restaurants to those kitchens to train. But now as we are rolling out and you can see all the way up to 620 restaurants now for kitchens and 400 for the point-of-sale system, we are able to attack whole areas. We now have whole areas, an area director with anywhere from six to 10 restaurants. He now has his entire set of restaurants operating on the same kitchen or same point-of-sale system. They are seeing opportunities to leverage additional margin expansion from that.

We had the previous kitchen for 30 years and we got pretty good at running that and we have only had this new kitchen in some of the areas for a handful of months and our expectations would be that the very talented operators we have in our restaurants who are very engaged and motivated because of the success we have had are going to find additional ways to generate margin expansion.

So we believe we will be able to continue to expand margins even beyond the rollout of the new equipment.

Great, thank you. If I may, you made a comment that you do more national advertising in fiscal 2013. Is that a reallocation of spend or are you actually taking up your percentage of sales?

It's Wyman. A couple of things. First off, we are holding our accrual rate or the percentage of dollars we spend on marketing flat but with increased revenue. Obviously we get some more dollars there and the media world is not coming in without some inflation so it helps us to cover the inflation but it also gives us more dollars to add to the marketing fund.

We continue to get our dollars to work harder for us so one of the things we've been doing over the last couple of years is just trying a lot of different vehicles and now we've got a pretty good sense for which ones work harder for us and are reallocating dollars there and that allows us to come back with that new media mix and still some hiatus weeks that we had on the plan.

So we be on air five more weeks this year than last year. The bulk of those in the first quarter. So four of those will be in the first quarter and so we are -- it is a combination of a little bit higher media spend but a flat percentage, better and more effective media mix allowing us to fill in some hiatus weeks which we think will help drive traffic.

And just so we have it, how many weeks were you on national television in fiscal 2012?

I don't have the number right with me. I think we were 43 and we got a 48.

Great, thanks so much.

David Palmer.

This is actually Eric Gonzalez in for David Palmer at UBS. Your guidance looks very similar to last year in terms of EPS growth and as you compare fiscal 2012 with fiscal 2013, what are some of the margin drivers that will replace the things you may already know about for 2013? So in other words, how much of the margin gain is pretty high certainty? Because you are already getting those cost savings from initiatives currently underway?

Most of it is, Eric, so in the guidance I outlined, restaurant labor makes up as I said 50 to 70 basis points of the expected 100 that we would generate and the vast majority if not all of that comes from the rollout of the new kitchen equipment and just simply the fact that we are lapping having that kitchen not in a lot of the system a year ago. So there's a pretty high degree of certainty on the margin improvement, which is why we have some so much confidence in the program. We know in 600 restaurants today we are hitting the numbers and we're just starting to hit some of those numbers in the ones that we just rolled out. And so we get the runway for 12 months after we rollout every new kitchen, we get the runway of lapping -- no labor improvements with labor improvements following the implementation of the new kitchen.

Okay, thanks.

Chris O'Cull.

KeyBanc. Thanks, guys. Wyman, do you need to have the kitchen equipment in the entire system before you introduce new menu categories?

Well, obviously we would like to have it in as many restaurants as we can. We have got it in -- we will have in all of the Company-owned restaurants and the franchisees are all committed and ramping up as well. But right now what we are focused on is really testing. So we have it in enough restaurants now where we are doing all of the groundwork to get ourselves ready for national rollouts. So we are aggressively testing and going through that process now.

So we've got it in enough restaurants to do the work we need to do now so that we will be ready to go with television support later in the year. Now obviously we don't put it on -- we can put stuff in restaurants at any point in time without the whole system having that kitchen, but when we start talking to consumers nationally about it, we would like to have it in as many restaurants as possible obviously.

Right, and I understand that. That was really my follow-up was how do you ensure that the new menu categories fit with the consumer's perception of what to expect when they go to a Chili's and so you feel that the tests --?

We have been doing concept and research for months knowing this was coming so we've been -- it starts with concept research and then menu development research before we ever even start to think about taking it into a restaurant. We have gone through all those stages already, so we already have consumer acceptance, clarification on a lot of the work we are doing, so we're now really moving towards the operational piece of that process.

Okay, great. Did you -- or let me ask a follow-up on the advertising question. Do you expect TRPs to -- or how much do you expect TRPs to increase year over year?

They don't go up by as much as you might expect given the change in op weeks but there's a slight increase.

Okay and then, Guy, what are you assuming for the inflation for the commodity items not contracted?

How do we assume for items that aren't contracted? (multiple speakers) locked in price?

Right, (multiple speakers)

So the 48 that we have done uncontracted? We understand where the market is today and where we think markets are going to the best of everybody's knowledge that is out there. And then the one thing we of course have good clarity on is exactly where the items are contracted today that we are procuring today we know that what those contracted items are. So if we take our estimation of where we think things will be versus what we are paying today, that's how we triangulate against getting a bad inflation number.

Okay, fair enough. Thanks, guys.

Jeff Omohundro.

Good morning. It's Davenport & Co. My question is you have had some real success with the beverage alcohol mixed. I think it was up about 30 basis points reported last quarter. Are those initiatives in training at the bar continuing? Do you see that mix continuing to grow in 2013? And if so, by about how much? Thanks.

Hey, Jeff, Wyman. Thanks for bringing it up. We are really excited about the work our operations team has done in our effort to really improve our alcohol salesmanship and the appropriateness of the beverages we bring. We did see that 30 basis point improvement last year and we are continuing to see that and we are counting on that for partial part of the year. When we wrap on the initiative introduction and more towards the second half, we may not see that same level of growth. Continuing to see opportunities to grow our alcohol sales and it is a combination of what we are doing with our team members and really the smart work that's being done in the marketing department with the beverage offerings that we are bringing. A lot of focus.

Our focus now on margaritas and beer and really just kind of coming up with best in class offerings in those two categories is really paying off for us.

And just one follow-up. You previously -- or the Company has previously given guidance around international expansion and the global division and some significant unit growth by 2015. Certainly Mexico and Middle East are strong for you. How are you looking at new markets say in Latin America? Where are you in the process of evaluating further opportunities? Thanks.

Jeff, this is Doug. Thanks for asking. We continue to be very strong in Mexico and the Middle East and we have expanded our footprint in Latin America. In fact this year we will open up in Costa Rica and of course last year, we went into Brazil, so Colombia is also a new market we will be expanding into, so again our brand, our menu really plays very nicely with the consumers throughout Mexico and Latin America. And we still see lots of expansion particularly in that market in the Middle East and most of the 30 or so openings this year will continue to be in those markets.

Thank you very much.

Peter Saleh.

Thanks, Telsey Advisory Group. Congratulations on a great year. I just wanted to ask about the long-term unit growth. So I know you are talking about starting to add more units later in this fiscal year. But I guess my question is when you are thinking about same-store sales, are you anticipating cannibalization as you add more units? If so, what level of cannibalization are you comfortable with?

Peter, it's Guy. Obviously that question depends a lot about where we build and how closely we are building to existing locations but one of the interesting things about Chili's is while we are the -- have the second largest number of units in casual dining and generate more traffic than anyone else does, we're fairly under penetrated in some parts of the country. As you know, we are pretty deeply penetrated in California and Texas and Florida and in the southern part of the country but there are a lot of markets where there is still penetration opportunities for our franchisees in the markets they own and in our own Company-owned markets as well.

And so cannibalization is always a consideration. There is opportunity for us to add in trade areas in markets where we already are and we will have to keep a close eye on that. But there are other parts of the country where we are under penetrated that could also present opportunities for expansion, too.

I also think, Peter, just with the moderate number of restaurants we are talking about opening, we are -- there were days when we opened hundreds in a year or over a hundred restaurants in a year or this is a much more moderate and therefore we're going to be a lot more selective on where we put these new restaurants and so our ability to make sure that cannibalization factor is reasonable will be a big priority for us.

Great. It sounds like you are well on your way to your long-term guidance that you set out two years ago. Just wondering how that has changed with what we are hearing going on on the healthcare side and what you have baked in over the next year or two for healthcare?

Peter, as far as healthcare, you know despite the ruling by the Supreme Court, it really doesn't change what we already knew when the elected officials in DC said it would start in 2014, there's nothing really any different. I think we are at the point now where we call it the regulatory stage of the process, our Company and The National Restaurant Association has lots of government relations folks and they are working with the officials at Washington looking into all the details of how the thing might roll out and trying to make it more favorable for the industry and more to come and nothing to report now.

Certainly the work we have done in eliminating some of the team members and the kitchen getting a lot more productive will help us, but a lot of details still to be worked out and the industry is going through that regulatory part right now.

Great, thank you.

Sara Senatore.

Sanford Bernstein, thank you. I just wanted to clarify next year's comp guidance. Obviously you've done a lot in terms of menu innovation this year at lunch and steak among other things. And I know you mentioned that you would have some culinary innovations thanks to the full roll out of your few new kitchen. But can you just talk a little bit about the 2 to 3 comp, what the assumptions are in terms of how much of that comes from the remodels, the lift from the remodels versus menu innovation versus any kind of change in the demand environment? It looked like things got a little better for you in June, so is there any expectation that things stabilize or get a little bit better?

Sure, Sara. Wyman. I won't take you through all the initiatives again but you obviously know we've got a pretty specific plan that works towards keeping our brands fresh and relevant and continuing the momentum with leveraging the current value platforms and the innovation that's coming.

So specifically, though, we are counting on probably a couple of -- if we were to bucket, the remodels and reimages are approximately 1% of that sales growth. When you think about our pricing, we've guided to 1% to 2%. We are continuing we think our plan is with the initiatives that we've got in place we're going to continue to grow base traffic as well. And so maybe 1% there, so -- and that would be the result of the innovation and some of the media strategies that we talked about.

So it's a balanced plan that kind of comes from reimages, some pricing, and stronger traffic based on marketing and innovation.

Thanks.

Howard Penney.

Hedgeye Risk Management. Thanks very much. I have two questions actually. The first one is about refranchising and a few years ago if I could put words in your mouth, it seemed like you could not get out of the business fast enough in terms of selling stores. I'm kind of wondering what you are thinking about the ownership of your store base. Do you see more upside owning it?

And then the second question is around traditionally when you see the success that Chili's has, you find people copying what you have done and I am just wondering if you're starting to see people that are copying your success and what you are doing? And on the flip side of that, are there things out there the competitors are doing that you my take a look at particularly extending into late night? Thank you.

Howard, Wyman. First of all in terms of running away from the business, we love this business and so we absolutely wake up just looking forward and running towards it. So as it relates to refranchising, I think Guy has kind of said in the past that with the results that we are getting, the need or the business is better to own than to franchise. So we are kind of still looking at those opportunities always but right now we are not aggressively looking at refranchising.

With regard to copying or people chasing other people's strategies, I will just say that for us it's about -- we are very much aware of what's going on at the competitive space but it really is -- it is what's driving our activity and our actions is what the consumer and our team members are telling us is right for Chili's. And so we don't -- we are I would say very specific about following our own trail and what we see again right now there's a lot of stuff going on out there as people try and deal with maybe a tougher consumer and a the tougher environment, we are holding true to our -- to what's right for our plan and for our brand.

And so we don't -- we aren't going to go chasing other people. We've got what we think is a really solid plan and it's going to work for this brand and continue to capture share.

I think as people try and copy and they get away from what really is true to their brand, they are going to be less successful and we've seen several people do some things that we think are pretty similar but we are not seeing them get the same kind of results.

So are you alluding to -- I was thinking that the $6 lunch or the $6 price point at lunch in casual dining has become famous because you've made it famous or maybe call it $6 to $7 and I would've thought six or nine months ago when you saw more and more concepts trying to introduce that same price point, you would have seen a bigger impact on your lunch business. And as you have still alluded to today a couple different times, the traffic at lunch is very strong. So why do you think that the concepts that are out there that are trying to match that price point are not successful or have not been successful?

I think consumers don't eat price points. I think they eat what's appropriate for the brand and so you see brands out there I think selling products that don't resonate with their consumers and their guests with their concepts just taking a price point.

And so if you are off strategy, a price point alone isn't going to get you the traffic. Listen, we've lived that at Chili's too. This isn't a lesson that we haven't learned ourselves. You can't just have the price point. You have to have the right offering for the concept and guess what? Then you have to deliver the heck out of it.

And the other thing we are really proud of is what our operators have done with all of this work. I know when we put these plans together, a lot of you had a lot of questions about what's the impact going to be the P&L of just rolling this to stuff out? How much damage is it going to cause? Because you've seen it and we've seen it that when you roll these kind of big initiatives out they oftentimes come at a big rollout cost.

And as you've seen over the last years with our P&L, our operators have managed this in a way that has been very efficient and have delivered a great guest experience.

So I think it has more to do with people chasing strategies that just don't resonate and a price point doesn't work if it's not the right items. So to that extent, people that chase other concepts specifics without understanding how it resonates with their guests are going to be less successful. Does that help?

Yes, that's great. Thanks very much.

I think that's our last question for this morning so I want to thank everyone for joining us. We know it is a very busy day for industry and company releases.

So it was a strong year in FY'12 for Brinker, which gives us even more confidence in the long-term. We are excited about the momentum of our business plans despite the economic uncertainty and cost headwinds. We continue to take costs out of the business and reinvest in the guest experience. We are upgrading our atmosphere. We are enhancing the menu. We are providing everyday value options and we are delighting our guests.

We are well on our way to our promises regarding continued positive topline growth, margin expansion, and earnings-per-share growth. It has been a great team effort by folks here at the Restaurant Support Center in Dallas as well as our operators all across the world and I want to thank the entire Brinker team for delivering on their promises this year in F'12.

So thanks for your interest in Brinker. Have a great day and we are signing off.

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.