Brinker International Inc (EAT) 2013 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Brinker International fourth-quarter of 2013 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. Chris Bremer, Vice President of Investor Relations and Global Development. Sir, the floor is yours.

Thank you, Kate. Good morning, everyone, and welcome to Brinker International fourth-quarter fiscal 2013 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 its review of the business and believes will provide insight into the Company's ongoing operations. Reconciliations are provided in the tables in the press release and on Brinker's website under the financial section of the investor tab.

Consistent with prior practice we will be silent on inner period sales and 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 Wyman Roberts, Chief Executive Officer and President of Brinker International, and Guy Constant, Chief Financial Officer and President of Global Business Development. Following their remarks we will take your questions. Now I will turn the call over to Wyman.

Thank you, Chris, and good morning, everyone. Today I will cover details on our Company results for the quarter and the year, as well as highlights from Chili's, Maggiano's and our franchise business.

As you saw in our press release, we reported adjusted fourth-quarter earnings per share of $0.77, which represents a 26.2% increase over the same quarter last year and the 12th consecutive quarter of earnings per share growth for Brinker.

Additionally, we reported adjusted full-year EPS of $2.34, marking a 19.4% year-over-year increase. Brinker delivered solid earnings growth for the fourth quarter and the year despite a challenging consumer environment and we attribute that to culinary innovations that delivered outstanding new menu items, improved operating margins that led to a strengthened business model and our commitment to our plan to win strategy that focuses on consistently improving the guest and team member experience.

This quarter we continue to see a fairly lethargic category and some of the macroeconomic elements aren't quite as good as we had hoped they would be at this point in time. While we remain optimistic that the back half of the calendar year will contain improvements in key metrics like consumer confidence and employment, the restaurant industry isn't recovering as fast as we had hoped.

Brinker in particular was impacted by increased pressure and deep discounting by our closest competitors during the fourth quarter. We chose not to match that aggressive discounting in our brands, but instead stayed focused on our plan to win strategy. While we once again delivered strong earnings growth, our sales were not where we would like them to be. Company owned comp sales were down slightly for the quarter and we finished the year slightly positive but softer than we had anticipated for our guidance.

Our confidence in Brinker's ability to grow top-line though hasn't wavered. Moving into fiscal 2014 we remain focused on building sales through initiatives that enhance the in-restaurant experiences of both team member and guest and by strengthening our brands' relevance through menu innovation and improving our atmosphere. So let's dive into Chili's results.

At Chili's Company owned comp sales came in at minus 0.6%. However, we closed the fiscal year with comp sales positive 0.5%. Traffic was a challenge, down 2.1% for the quarter and down 1.8% for the year. As I mentioned a moment ago, competitive pressures were stronger this quarter than we'd seen in recent past. Other casual dining players increased their marketing spend to message deeply discounted offers.

And in Chili's case we've carefully evaluated using similar tactics but it's not the right move for us at this time. Deep discounting always remains a lever we can pull, but we continue to employ our strategy to balance sales, profitability and innovation to deliver long-term value for the guest.

Over the quarter our sales mirrored the industry as measured by [NAP]. However, it is important to note that throughout the quarter we saw sequential improvement versus our peers, returning to outperforming the segment in June and we're seeing that trend continue through July.

In May we rolled out three new flatbreads -- a California chicken, a Margherita and a chipotle chicken. Flatbreads delivered on our key business drivers. Through favorable cost of sales they fit into our margin improvements, further strengthening our business model. The guest experience surveys show this product is delighting our guests as satisfaction scores on checks containing flatbreads are significantly higher than the rest of our menu. And the culinary integration afforded by our new kitchen equipment continues to make us more relevant in the face of a broader consumer base.

In Q4 we initiated a widespread sampling of the product with the flatbread giveaway, which not only drove trial, but augmented one of our most powerful marketing tools, our email database. Due to our favorable cost of sales we were able to initiate this widespread sampling and gain credibility in the pizza category without sacrificing margin. Currently we are seeing the pizza and flatbreads mix right where we had anticipated at almost 10%.

Until now though, guests have been thinking of flatbreads primarily as an appetizer. Our opportunity with this category lies in successful exhibition of flatbreads not only as an appetizer but also as an entree. As we change guests' use of the product we expect to see incremental traffic to go along with the great cost of sales numbers we have been seeing.

Looking ahead for the brand (inaudible) drivers of relevance to the consumer is continued menu innovation. We have a strong pipeline to draw upon and will continue to develop new products for lunch and dinner as well as strengthening our existing platform. In fact, we will be on air with new news in the coming weeks with one of our most popular signature platforms, our triple dipper.

And we are applying that same rigor to innovating our bar business. This summer we rolled out drink innovations with the introduction of a new top shelf Petrone Margarita and a whole new category of watermelon drinks that include the Margarita, a lemonade and a cooler. And this seasonal category is really resonating with our guests and performing even better than we had expected.

On the Maggiano's side of the business Q4 brought the 14th consecutive quarter of sales growth and we posted comp sales of 0.2% for the quarter and up 0.5% for the year. The past two years through kitchen retraining and discipline, supply chain innovations and smart pricing Maggiano's has dramatically improved their cost of sales, which has led to a 150 basis point margin improvement in the most recent fiscal year.

Importantly, the Maggiano's team has done this while continuing to anchor their menu on classic pasta, one of the most compelling value tactics in casual dining, and driving those 14 consecutive quarters of sales growth. In fiscal 2014 our challenge at Maggiano's will be to continue to attract new guests to our brand and leverage our improved cost structure by following the success of classic pasta with proven menu innovations and by expanding on our category leadership in direct marketing.

But the big news for Maggiano's will be the Q2 opening of the brand's new smaller prototype in Annapolis, Maryland. We will incorporate the beyond special occasion menu changes like classic pasta as well as reengineered P&L, plus a substantially lower investment model and we'll combine these three improvements and apply them to our future new restaurant openings, ensuring our upscale casual business remains profitable as we return to building new restaurants.

Moving to the franchised business, Chili's domestic franchise comp sales for the quarter came in at positive 0.5% and for the year they were up 1.6%. We are continuing to see growth and solid comp sales on the global side of our business as well. Our 282 global restaurants reported comp sales of positive 2.3% for the quarter and positive 2.7% for the year. In quarter four we opened eight new restaurants outside the US bringing the total to 33 new international locations opened this past fiscal year.

Additionally, in quarter four we completed the acquisition of 11 restaurants from our largest Canadian franchisee. With these locations primarily in Alberta, but good consumer acceptance for the brand across the country, we are bullish on the growth potential for Chili's in Canada.

So in closing, fiscal 2013 we delivered double-digit earnings per share growth and continued to drive shareholder value even in today's competitive environment. For fiscal 2014 there is no shortage of ideas for programs offering significant margin improvement while still delivering a great guest experience that drives sales.

For our two Brinker brands we are exploring new technology in both the back and front of the house. All of our team member, guests and business model metrics point to our ability to successfully integrate new platforms without interrupting our positive brand and guest experience momentum.

At Chili's we are eyeing growth potential opportunities like delivery in our significant to-go business to offer guests speed, convenience and value. Both Chili's and Maggiano's will be opening new prototype restaurants, the Chili's brand has earned the right to grow again and next fiscal year we will open 11 to 12 Company owned restaurants.

Additionally, we will be relocating three existing restaurants to more profitable trade areas. And the Maggiano's brand will build upon proven margin improvements, layering in sales building programs and returning to profitable new restaurant growth with six to eight new locations scheduled to open over the next two fiscal years.

So as we put a highly competitive quarter behind us it is important to reiterate the significant progress Brinker has made against our long-term initiatives this year. As mentioned previously, earnings per share grew 19.4% year over year to $2.34, marking three consecutive years of double-digit earnings growth. And next year we'll hit our previously stated goal of a 400 basis point margin improvement as well as a doubling of our 2010 earnings per share a full year ahead of the schedule laid out.

We still have our eyes on the prize and feel confident in our ability during fiscal 2014 to continuously strengthen the business model and our brand's relevance without impacting and in fact even improving the experience for our team members and guests. And now I will turn it over to Guy to share specifics on our performance for the quarter and a look ahead to fiscal 2014. Guy?

Thanks, Wyman. As you just heard, our fourth-quarter earnings per share before special items was $0.77 representing a 26.2% increase over the same quarter last year and continuing the year-over-year improvement we've seen the past three quarters. And with a full-year fiscal 2013 EPS of $2.34 we're 85% of the way to doubling our fiscal 2010 EPS to $2.75 to $2.80.

Before we dive into the quarterly numbers we wanted to mention our recent acquisition of 11 existing Chili's restaurants from our long-time Canadian franchise partner, Speedy Creek. This transaction closed on June 1 and the Company owned restaurant impact is integrated into the Brinker consolidated income statement as of period 12 of fiscal 2013 and will be reflected in our line item guidance for fiscal 2014.

Now let's dig into the results for the quarter. Fourth-quarter revenues were $730 million, an increase of 0.2% over prior year. Total Company-owned comparable restaurant sales decreased 0.5%; capacity was slightly positive with less than 1% impact and weather had no impact on the quarter. Franchise and other revenues were at $20.9 million, an increase of $2.7 million over prior year. This included the lap of a one-time development fee refund we discussed last year.

International franchise comparable restaurant sales increased 2.3% and domestic franchise comparable restaurant sales increased 0.5%. Cost of sales decreased 100 basis points from prior year to 26.9% driven by favorable mix changes associated with the introduction of new menu items, better waste control resulting from our new point-of-sale and back-office systems and lower commodity inflation.

Restaurant labor decreased 40 basis points to 31.7% driven primarily by productivity associated with our new kitchen equipment. With the rollout of kitchen equipment and point-of-sale back-office systems now complete with the end of fiscal 2013, Wyman and I both want to recognize the outstanding performance of our operators as they absorbed a significant change while delivering a great guest experience and delivering superb results. Our operators are truly an outstanding team.

Restaurant expense was $5.5 million or 80 basis points higher than prior year, largely as a result of increased workers compensation insurance expense. Depreciation expense increased slightly to $32.7 million due to recent investment in the Chili's image, new kitchen equipment and new point-of-sale back-office systems.

General and administrative expenses were $32.2 million, a decrease of $7.1 million driven by decreased performance based compensation expense and lower professional fees. Interest expense was about $1.4 million higher than prior year as a result of a higher borrowing balance which occurred prior to the retirement of our existing 5.75% notes.

The tax rate before special charges was flat to prior year at 28.3% driven by the impact of higher earnings and lower tax credits offset by prior year state tax adjustments and deductions related to increased stock option exercises.

Capital expenditures for the year were $131.5 million with year-to-date cash flow from operations at $290.7 million. We've completed 383 Chili's reimages to date and by the end of fiscal 2014 we will have completed about 600 reimages or about 75% of our Company-owned Chili's restaurant system. We now have fully completed the reimage in 16 markets with an additional six markets in progress.

During the quarter we bought 3.5 million shares for $141.6 million funded mostly through our note issuance, 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 2013 total share repurchase to $333.4 million or 9.3 million shares, giving an outstanding authorization of about $330 million. And we ended the year with approximately $59.4 million of available cash on our balance sheet. Through the first five weeks of fiscal 2014 we have purchased 1.3 million shares or $53.2 million funded by a drawdown on our revolver.

With fiscal 2013 behind us let's look ahead; we expect fiscal 2014 earnings per diluted share from continuing operations of $2.70 to $2.85 which will allow us to accomplish our goal of doubling our fiscal 2010 EPS a year early. This range represents a year-over-year increase in EPS of 15% to 22%, which is above the annual guidance issued at our investor conference in February.

We expect EPS growth in the first half of fiscal 2014 to be above this range as we lap the implementation of key initiatives, and EPS growth somewhat below this range in the back half of fiscal 2014.

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 2014.

We expect Company-owned comp sales increased to be a between 1% and 2% and Company-owned restaurant capacity growth of about 2% for an overall Brinker revenue increase of 3% to 4%. The revenue increase assumes between 1% and 2% price and a franchise and other revenue increase of 1% to 2%.

We expect cost of sales to continue to improve in fiscal 2014 driven by actual versus theoretical improvements from implementing our new point-of-sale back-office systems, significant and continued progress in waste control efforts at Maggiano's, the impact of higher gross margin menu items like pizzas and flatbreads, lower oil usage and an improving inflationary environment for commodity. And with 71% of our commodities contracted through the end of calendar 2013 and roughly 25% contracted through the end of the fiscal year, we anticipate about 1% to 2% inflation in our commodity basket for fiscal 2014.

Coupled with leverage on higher revenues we will also see continued labor and other operational efficiency gains associated with the implementation of our new kitchen equipment, especially as we lap the rollout in the first half of the fiscal year. These factors result in an overall anticipated improvement in restaurant operating margin of 50 to 75 basis points.

We expect fiscal 2014 CapEx of $150 million to $160 million; about $20 million higher than previously guided at our investor conference due to rollout of new fryer technology in our kitchens in the first half of the fiscal year. By reducing oil costs these new fryers will contribute to the cost of sales improvement previously mentioned. As a result depreciation expense is expected to increase slightly on a dollar basis, consistent with our recent and ongoing investment in key initiatives.

Our anticipated G&A expense in fiscal 2014 is slightly higher on a dollar basis than fiscal 2013 due to the fact that we plan our incentive compensation at target. Interest expense will be essentially flat on lower interest rates despite the higher average debt balance. Excluding the impact of special items our income tax rate should be around 32%. Naturally this rate will rise or fall with higher or lower earnings.

And finally, free cash flow, defined as cash from operations less CapEx, is projected to be $180 million to $190 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 purchase. The net effect projects a weighted average share count for full-year fiscal 2014 between 66 million and 68 million shares, continuing to play a significant part in our projected EPS growth.

So to wrap things up, we finished fiscal 2013 with a 26.2% fourth-quarter growth in EPS and a 19.4% full-year growth in EPS. These results demonstrate again our ability to deliver value to our shareholders. And so, as Wyman said, we enter fiscal 2014 focused on continuing to strengthen our business model and brand relevance while enhancing the experience of our team members and our guests.

With our new point-of-sale and new kitchens in all Company-owned Chili's restaurants, our Chili's reimage nearly 50% complete and expansion of proven waste control efforts at Maggiano's well underway; we can now leverage these investments to drive future growth. And with improved margins also comes a return to Company-owned restaurant growth.

In fiscal 2014 we will expand the Chili's reimage program to 75% of the Company-owned system, increase our capacity by about 2% through Company-owned restaurant growth, introduce new fryer technology to all of our Company-owned Chili's restaurants and install the new point-of-sale and back-office systems throughout our Maggiano's system.

And we'll also look to sustain our marketshare trend by continuing to optimize our core menu offerings, maintaining preference on our value platforms, expanding on menu innovation using the new kitchen equipment, leveraging our larger more detailed email database, eyeing growth opportunities like delivery and to-go and continuing our international expansion.

All of these initiatives will help generate EPS in the range of $2.70 to $2.85 and springboard us toward our new Company goal of doubling fiscal 2012 EPS to over $4 by fiscal 2017. With that I will turn the call over to Kate to open the line for questions.

(Operator Instructions). Michael Kelter, Goldman Sachs.

I guess the big question for me is what gives you confidence in 1% to 2% same-store sales for the year when NavTrak is running minus 3% to 5% in July to start off the year? And I guess it seems like you're presuming the recent deceleration is temporary and, if that's the case, why? And if industry trends do continue -- I am just kind of nervous you'll have to lower guidance as the year progresses.

Hey Michael, Wyman. It's a great question. And obviously there are a couple of things that factor into us giving the guidance of 1% to 2%. First, things we can control, right, so we talk about innovation all the time and we do believe that it is critical to continue to take share and to grow sales.

We feel good about our innovation -- not just on food and food platforms, which tends to be where we focus, but really the innovation that we are bringing to the business across the board. Our reimage efforts, our new prototype, our -- and the new technology that we are using to innovate how we sell, we are very excited about some initiatives that we are going to roll out this year that bring bigger sales opportunities to the front of the house using some new and exciting technology, as well as leveraging some technology to help us grow our to-go business and really start to think about a delivery line for us that -- a new business for us. So a lot of things that we control that give us confidence that we can see positive sales.

Now we also think that we are going to have to continue to grab share. And so, we do look at the category and the industry and the macro trends aren't that strong right now and, as I mentioned in my points -- talking point, we do anticipate them getting better. As the industry continues to run and has stopped as they ran in July based on NAP, you are right, it would be difficult.

I mean, even though we anticipate taking share, it would be difficult if the industry were to continue to run down at this level. We don't anticipate that to be the case. We think this isn't going to be the run rate for the rest of the year. So our focus is on continuing to take share through that innovation and to see the industry and the economy get a little bit stronger than it is running right now.

And can you talk about the fact that your Company owned same-store sales underperformed the franchise same-store sales by 1 point? And I guess I am particularly surprised because the Company owned side has the benefit of the remodels in there. But are the remodels not helping as much as you thought they might?

No, quite the opposite. The remodels are doing really as we had projected in what they need to do to deliver the return. There are some regional stores in our franchise business that are helping. But that 1% plus or minus on the franchise business versus the Company owned, it is pretty typical. I mean last year, a year or so ago, we were a little bit stronger and you get some regional variations and competitive pressures in the market and because most of our franchising is regionally done, that is probably more of the story.

The good news is our franchisees are running great restaurants, we are very closely aligned. And you will see over time that when you average it out over a multi-year span we are basically running fairly comparable. And our metrics, we measure the same things in their restaurants as our restaurants like guest satisfaction and team member satisfaction and we perform at very comparable levels.

Thank you very much.

John Glass, Morgan Stanley.

Can you maybe just comment on how much you think the flatbread promotion actually helped comps during the quarter? And did that -- was redemption into July or was that contained in the month of June?

Thanks, John. Yes, flatbreads in terms of helping comps in May and June and then into July, I mean you can see the sequential improvement in our performance relative to the category, so we think it did help us. It didn't help us as much as we would have liked and it is primarily for two reasons.

We knew flatbreads were going to be a little bit of a push and a stretch for Chili's, it is not a product offering that is closely associated with the brand, but it is a product offering that is very much in line with our strategy of becoming more and more relevant. And so, there is a little bit of an investment there in terms of, hey, let's get a new product category out there that we can do a letter preference on, it starts to reposition, if you will, a little bit -- or actually just improve the relevancy, if you will, across a broader consumer base.

And so we have done that. That is what flatbreads did for us. And it also -- the margin story is probably what it did more for us than the top-line sales story. And we think there is still top-line potential as more and more guests eat it, come back and realize the credibility that we now have in this category.

Okay, great. And just Guy had mentioned the fryers and that was something you maybe alluded to earlier, but you didn't really quantify the benefit. Is there -- if you -- how do you scale that in with the other sort of initiatives you have laid out over the last several quarters in terms of benefits to margins?

Yes, John, on fryers we expect to -- so, on the capital side we expect to spend close to about $20 million to replace the fryers. That will be in all of our Company-owned restaurant system and we think that will be done by the end of the calendar year. Based on tests we think we will see returns in the form of oil savings that will show up on our cost of sales line; it will be similar to the kind of returns we saw with the previous implementation of kitchen equipment at the Chili's restaurants.

So seeing meaningful returns above our hurdle in order to hit that number, but we feel very good about that. In addition to the fact that we should see some marginal or incremental utility savings. And the other aspect as we have seen improved food quality scores and tests as well. So it really hits on all aspects again, it has to have most of these investments we have made.

Great, thank you very much.

Alvin Concepcion, Citi.

Just another follow-up on the guidance for fiscal 2014 of 1% to 2% same-store sales growth. That is below your long-term target of 2% to 3% domestically. And I know it can be volatile from year-to-year and there is weakness currently. But relative to your long-term target is it mostly lower because of a more temperate industry growth outlook or is it that the market share gains won't be as strong as you anticipated?

Alvin, absolutely more just the current reality of where the industry is running. And so, in the face of that and the good news (technical difficulty) continue to see a softer environment we are able to with the good work of a lot of strong operators continue to deliver at or above the target in terms of earnings. And so that's what we are excited about is that we eventually will see a stronger macro environment and that (technical difficulty) anticipates in some stronger sales potential.

Great. And then you mentioned again market share in June and July, but you didn't match the competitive promotion. So to what extent was that driven by the product innovation versus more creative advertising?

Yes, we think that's what it is; it is the floor build on the pizza. We also think it is a foundational strength. Again I think what we see when we lose some of our strength with regard to capturing marketshare, which we have been a consistent marketshare gainer over the last two years, it is usually a promotional blip, somebody comes in or several key competitors come in, do something pretty dramatic but not sustainable, whether it is a media buy strategy, we sell a lot of aggressive media purchased and the fourth quarter.

And -- or with its -- or with the messaging that is just really not sustainable from a margin perspective. And we like our strategy of more sustained long-term growth.

And just one last one. Sorry if I missed this. But were you able to quantify how much of a benefit pizza and flatbreads had to margins in the quarter?

We haven't quantified that, Alvin, but there is no question it had a positive impact on cost of sales in the fourth quarter. Even saw it a little bit at the end of the third quarter when we only at that point rolled out pizza. So we do think that the types of cost of sales gains we have been seeing recently, a big part of that is supported by the rollout of these types of menu items. And some future innovation down the road to that will also be better on the gross margin line.

Thanks a lot.

Joe Buckley, Bank of America-Merrill Lynch.

Just a couple of bookkeeping questions first. Guy, what was the guidance for the franchise and other revenue line?

Up 1% to 2%.

Okay, and why so modest? Is there less international expansion going to occur or is it something else?

No, the international expansion we think, Joe, is going to be 30 plus net restaurants next year. So we feel really good about the international expansion. You did see some closure activity on the franchise side in fiscal 2013 so you get a little bit of carryover on that line coming into fiscal 2014 as well. So that is what is muting a little bit of what would be otherwise underlying better franchise and other revenue growth.

Okay and then one more just kind of fact. I Think one of the questions was on the flatbread coupons. They were completely contained in June, were they not, in terms of redemption dates?

Basically, Joe. There was a little bit that carried over into July, but it was small versus what you saw in June.

Okay. And then last and a little bit bigger picture, you mentioned the promotional competitive activity picking up, what form is that taking? Where are you seeing that showing up most aggressively? Is it in televised price points or digital media or couponing? What kind of form is that emerging in?

Yes, Joe, yes, all of the above (laughter). So you have seen -- and a combination, right, so now you are seeing people on TV saying go to the website and get the coupon for 50% off your second entree. You are starting to see people chasing people or directing people to other forms of media direct obviously in digital to deal. So it was fairly aggressive quarter.

And again, people have been clear about some of their strategies. There have also been some new introductions, so people introduced some lunch lines, some other things that they spent aggressively to introduce, which makes sense. Just your reaction to those is what we are always kind of evaluating, do we want to respond, do we want to -- how do we want to respond?

Okay, maybe one last one if I could. You mentioned new technology with respect to the front of the house and maybe the to-go business. Can you elaborate a little bit on that?

I could, but I'd probably want to save some of that for a little bit later and not just share too much with the competitive world out there as well. But we -- there are things out there that we think can help enhance the guest experience in the front of the house using new technology that we are rapidly moving towards. So we will have more information shortly. But I don't want to share too much on this call.

Sure, I understand. Thank you.

Jeffrey Bernstein, Barclays.

A couple of questions as well. First, we have talked a lot about the industry and the more recent aggressive value push. You have mentioned market share on a couple of occasions. I'm just wondering, maybe you could walk us through, one, how you measure it, but I think you had mentioned versus two years ago. Just wondering, where was it two years ago, what is the percentage today and kind of how do you measure that? And then I have a follow-up.

Yes, Jeff, a couple of ways we look at it. For the more immediate data sources you have got BlackBox and NAP and you are just looking primarily at our changes versus changes in comp business for the most part versus others. But then we also look at the NPD data over longer-term, it is not nearly as timely, but for big market share moves on more of an annual basis, we use that database because it incorporates a much broader kind of view of the industry.

What do you estimate the actual market share of Chili's is in the US, like of bar and grill?

(inaudible)%.

What is it?

10% bar and grill.

Got it. And that is up from -- what do you think it was -- what timeframe or --?

It is relatively -- on that big scale it is relatively similar, so we haven't -- but probably up 1 point or 2 points, 10.1 or 10.2 kind of thing. It hasn't gained a full share yet. We are not up 10%, so we haven't moved a full point yet.

And then on the discounting front, I know you mentioned you think long and hard about it during the quarter. I was wondering what would push you to be more aggressive with value. Obviously some of your peers are doing a little bit of everything. If the trends continue the way they are now in July is that something that you would start to consider? And when you do -- if you were to push that value lever, is it primarily for the 2 for $20 or what other options might you -- or have you had success with in the past?

Yes, I mean, we obviously want to use our platforms, we really want to stay away from jumping into a limited time offer. And as we talked about in the past, the implications of limited time offers to the operations team, all the energy that goes into something that lives in a restaurant for six or eight weeks and then goes away and then you have to restart, there are just a lot of costs as well as a lot of energy that goes away from providing a consistent guest experience.

We will leverage our platforms whenever possible. But there are tactics we can employ like everybody can, whether they are direct or through televised media messaging. But right now it is just -- it doesn't appear to be driving long-term success for those folks. Now some people are getting some sales out of it. But as we look at how they report earnings to you and other folks, we just don't see the profitability.

And so again, we are not looking for hollow sales. And given that our model isn't an all franchise model -- we run restaurants, so we are very much interested in the bottom line of our restaurants as well as our franchisees' bottom line. And we partner with them to make sure that everyone is on board with, hey, this is a good marketing decision. And it is not just going to drive sales; it is going to make sure that our P&L and our cash flows are staying strong.

And then just the last questions in terms of the new product news. It sounds like traffic trends maybe started -- were disappointing on the flatbread and the pizza. Just trying to assess, it sounds like trends have improved with the giveaway. And if that is the case, is the next platform still -- I think you had said first calendar quarter of each year. So would that be the first calendar quarter of 2014, with I believe the Mexican; is that the next platform or might that change?

Yes, so first on your first point. Our relative position to NAP has definitely improved, and that is what we have been talking about, is they are relative to the market and to our measurements against the category. We are back gaining share and outperforming the category. With regard to future marketing promotions, I am not going to give you too much detail there just because, again, it is a very competitive environment and we have got a lot of things going in the innovation pipeline. And we just prefer to kind of let those kind of take place in the marketplace a little bit before we have those conversations here.

Understood. Thank you.

Jeff Omohundro, Davenport & Company.

First, just getting back to this front of house technology question. What is your thinking about timing for implementing some changes there? And is this something really new or something we may have seen at some of your larger franchisees? Thanks.

Hey, Jeff. Yes, our timing is fairly quick and the technology is probably stuff you may have seen out in some of our franchisees and others. I think our execution -- what we are very excited about is how we are going to use new technology and differentiate. I mean right now everything that has been out there that we have been looking at, and, again, we have been testing things for over a year, has really been kind of off the shelf.

But as we commit to the investment in the technology and the partnership, we really think there is a lot more upside to it as we throw a lot of our resources and innovation and kind of marketing skills into the mix at a much higher level. So that's kind of the story. But we are moving as quickly as we can, frankly.

Great. And then on a separate question, looking at the pizza flatbreads, I just wonder if you can update us a little bit on consumer response across dayparts. Is that achieving how you thought it would play out?

Yes. The actual mix and preference, as we call it, across the dayparts is good. And I think this whole idea that flatbreads can be more than an appetizer, that it could actually be your entree, couple it with a salad and you've got a really nice meal, affordable and fresh is what we are working towards. Just kind of helping our guest better understand, letting other people that know that better kind of understand that is an option at Chili's.

It seems to be working really well for us at lunch or better for us at lunch. And now we are just educating the dinner guest about that. And so, the beauty of flatbreads, again, is that there is a great margin story. And so, as we are building the category we've got great margins, but more importantly the guests that eat it are really excited about it. Pleasantly surprised and our food scores are better on flatbreads than they are on the rest of the menu. So we've got a category that has got the potential to really delight and move more people into it and that is what we are excited about.

Great. Congrats on the strong EPS. Thanks.

Chris O'Cull, KeyBanc.

Wyman, I know you are reluctant to talk about the Tex-Mex items in detail, but can you tell us whether the operational issues have been overcome?

With Tex-Mex?

Yes.

We are still working on some. We have got -- we do have options on platforms like Tex-Mex and other platforms we've shared with you and some of you that have been here have actually eaten some of the product. So we have ways of bringing a significant credible platform like in Tex-Mex to the market today. But we are still working through a couple of opportunities to bring in what we consider is an even broader maybe stronger platform to the market.

We are confident that we will resolve and get this new kitchen to work as hard for us as we know it can and do things that we could never have done before without it. But we are actually having to just reconfigure some things and then work through that process. It's a fairly complicated process, kind of rethinking the production line. But we are in that process of moving things around to give us better opportunity, even put a more competitive or a more exciting Mexican line out there. So I guess the answer to your question is, yes, but we think there is more room to go and we are still working on some of those issues.

I would think that those type of offers would be more aligned with the brand and the way people think about the brand (inaudible) could potentially be a pretty unique value platform for the Company. Is that a fair --?

Oh, yes, absolutely. Our research -- and we do research, as everyone does, on this stuff. And obviously with Chili's, a Mexican centric offering is going to play a lot closer to the current attributes of the brand versus let's say a pizza flatbread offering. But we think both of them have a home for us and do the pizza flatbreads -- it's going to be a little bit of a longer build, but gives us that relevancy and a new kind of target audience that we hadn't as of late been talking to as much.

And Mexican is pretty much right in our -- it's right in our wheelhouse. We just want to make sure that when we bring that new message forward -- because we obviously a lot of great Mexican food now or Southwest or Mexican centric -- but when we come out with a new message about it that it's exciting, that it really does deliver on all the things that we kind of filter against.

Okay, great. And then --.

Margin, guest satisfaction as well as operational ability to execute.

And then one question on the pizza. What are the plans for the traditional pizza product given you are wanting to push the flatbreads more as an entree?

Yes, I think pizzas -- we are actually -- guests are more excited about flatbread product. Pizza is doing fine, but I think we like the flatbread product as well. It just feels like it is more in line with what works for us and kind of where the consumer is going a little bit more, at least with our concept.

And so, we've got, again, this great platform now. It has got enough preference that we can do and bring new innovation to it whether we bring it to the pizza line or the flatbread line, it is in the mix now and it allows us to leverage a significant piece of our guest preference to bring new news and I think we can go either way. But I would say that flatbreads are working harder for us.

And then, Guy, my last question, would you tell us what trade-offs the Company would make if the comp trend doesn't improve soon to that 1% to 2% range? I mean, would the Company be more inclined to cut growth CapEx, reduce its share repurchases or go above its previously targeted three turns of adjusted leverage?

So, a great question, Chris. So in the context of, and I think what you have seen in the last three years, we promised a number. In fiscal 2010 we promised a number and every year at that this call, as we are doing this year, we are promising a number for next year. And we are extremely motivated to deliver on that promise.

And as you can see, even this year where we originally guided to 2% to 3% sales but only finished at a 0.5% increase in sales, we still delivered the number. And so we take those promises really seriously when we make them here. And so, it is our plan to deliver on that.

Now in relation to your question as to where we would reduce, I think we've always said that there are four uses for our capital first and then all remaining cash goes to share repurchase. And so, as we look at investments that we are going to make in the business, as we did in this year with what we are talking about with fryers, we have CapEx guidance, we believe it will come down in future years, but if there are opportunities like investing in something like fryers that gives us the kind of returns that we need, we are going to make those investments.

It really ladders down exactly in that way. So, yes, we have to do debt amortizations, we certainly made a commitment to the dividend. But if there are opportunities to make longer-term investments or investments in the brand that can deliver good returns we would tap down share repurchase in order to do that.

But when we have capital that isn't allocated and where we can't get the returns, we are definitely very happy to put that towards share repurchase because there is a return on that too. But if we can get higher returns with our capital spend we will put our money there as we did this year with fryers.

So you would be more inclined to reduce share repurchases than to go well above the three turns of adjusted leverage you targeted?

We right now have new plans to go above the three turns of adjusted leverage.

Okay, great. Thanks, guys.

Steve Anderson, Miller Tabak.

I know you were talking about some of your alcohol sales. How has that been trending in terms of your total mix and do you see any reason with the recent pullback in overall consumer spending has that gone down as well?

Yes, we have seen positive results in our alcohol mix especially in the first half of the year. It's leveled off a little bit more recently. But we have had over -- especially over the last 18 months as we kind of implemented a whole new strategy, recalibrating or reevaluating our beer offerings, really kind of getting ourselves more aligned with the craft movement that is out there, focusing on this margarita centric business that is so much Chili's.

Maggiano's is having some really good success now with their nine ounce pour on their wine and some of the new wine initiatives that they've brought in. So across both brands overall good movement. I would say at Chili's it has leveled off a little bit here more recently as we have got to some new highs, but we are excited about some of the new things that we are bringing to the table in the future. And Maggiano's continuing to see some really nice progress in growing their percent of alcohol with some of the integrations they are brought to the table.

Thank you.

Bryan Elliott, Raymond James.

(Technical difficulty) talk about the labor market. So the government tell us every month that restaurants are Hoovering up employees, biggest job creator out there in the broad economy. Is your headcount up at all say from six months or a year ago at the store level?

No, in fact, Bryan, it is probably down a little bit because when we implemented the kitchens in our restaurant --.

Well, that is true, yes you are not representative because of that. A related question is are you seeing any increased turnover hourly or management store level folks, other indicators potentially of a meaningful tightening of the restaurant labor market?

No, I mean, we really have actually -- our metrics are going the opposite way. So our turnovers are down. We think that it is directly related to our focus on the experience of our team members and really making sure they are making as much money and in as good an environment as possible. And so, we have talked to you more in detail about this probably in the past. We don't talk about it a lot recently.

But we continue to monitor and challenge ourselves to put as much money in our team members' pockets as possible and I think they get that. They understand the value of the job at Chili's and Maggiano's. And so our turnover numbers are well below the industry on the hourly side. And from a management perspective they are kind of at or slightly below industry standard.

And clearly looking at your numbers there is not much wage inflation that you are seeing.

No, we are not saying that. Bryan. I mean, as you know, there are some states here and there that have their annual wage inflation cycle or increases in minimum wage. But no, to date broadly speaking not much wage inflation.

Great, all right, thanks, much.

John Ivankoe, JPMorgan.

I mean, a follow-up on a lot of the sales commentary that you are making, I think it's pretty loud and clear that you expect to outperform the industry -- at least you want to outperform the industry for 2014. I want to ask a question specifically as it relates to the first quarter, I mean since we have everyone together here.

What level of industry sales are you assuming for the first quarter? And of course I ask this in the context of you kind of -- you are giving us some sense of what the earnings are going to be, I mean what that sales forecast is more or less to generate those earnings. So just -- it is such an important line just to make sure that we are all on the same page here.

So, John, yes, we do assume that, as Wyman said, that what is going on right now in the industry will not continue for a long period of time. But I do think what's happening right now is this. So, the macro numbers are -- we are certainly starting to see some positive signs on macro numbers, which I think is a good thing. And we all know sitting on this call how long we have been waiting to start to see at least some positive indication on the macro. And while we are not jumping for joy and thinking that things are great now, there are certainly some signs that it could get better.

Interestingly what is happening though is I think it has also spurred the consumer to jump in and get involved in the housing market and maybe now start to make some higher ticket purchases that they might have deferred before like you see with the growth in automobile sales.

So I do think right now that is resulting in some crowding out of discretionary spending for the consumer that's causing the industry to be down in July. But broadly speaking this is the start of what we hope is a turnaround in macro numbers that we have been waiting for for a long time.

So we do view the depths of what is going on here in July in the industry as being somewhat temporary. I think it is hard to predict what we think will happen going forward, but I think it is fair to say that for this first quarter here we are going to see some fairly tepid macro trends in the industry in terms of discretionary spending. But our anticipation is that in the second quarter we will start to lift out of that.

Okay, and not to completely put words in your mouth, but I mean is that a fair assumption that 1Q is the low quarter of the year and maybe even is below what your annual guidance is, is that how we should be thinking about it?

Well, I think it is hard to know, John. But I would anticipate, at least from what we have seen now, that 1Q will be the low point of the year.

Okay, fair enough. And thank you for that additional color. And then secondly, regarding the Canadian acquisition, how much does that affect Company store margins? I would guess it would be dilutive to Company store margins, but I might be wrong. But how much does that affect your year-over-year Company store margin growth positively or negatively in 2014 versus 2013?

On different lines it might be a little different, John. So labor costs are a little bit higher in the Canadian market. So -- but cost of sales is better and our ability to leverage some other lines is a little bit better. So net-net overall margins are pretty similar for the Canadian business maybe a shade lower, but we do think there is a lot of opportunity in that business to implement some of the changes we made here in the domestic market to even drive that forward. So we feel pretty good about what that business can do in the long term.

Okay, thank you.

Mitch Speiser, Buckingham Research.

I just want to clarify, you did say within the fiscal 2014 guidance that you expect the first half EPS growth to be above the second half, correct?

That is correct.

Okay, and can you just maybe help us out with that? It sounds like comps are probably below your guidance. Is there something in the G&A line or anywhere else that provides that pretty significant offset as we build out this calendarization?

No, I think, Mitch, what you are seeing is it is more around the cost side in that we've had really strong cost of sales performance here in the back half of the year. And certainly with almost three quarters of our commodity basket contracted in the first half of the year we feel that we have pretty good visibility that we can continue to generate some good numbers on the cost of sales line.

And then of course, as you will recall, we at this time last year were still implementing a lot of our new kitchen rollout. In fact we were accelerating a lot of it as we got to the end of the first quarter into the second quarter. So we are still benefiting year over year from that roll out, by the time we get to the back half of the year we are lapping some of that rollout. So you are seeing more of the incremental growth we've seen since the implementation than necessarily the initial pop labor benefit we got as we first implemented.

Okay thanks. And another question I have is just in terms of the definition of deep discounting. I think everyone defines it a little differently. When you did the free giveaway for the flatbreads, do not consider that deep discounting? Can you just give us a sense, because you said you are not doing the discounting others are doing. How do you characterize a free giveaway like that?

That is a fair question. I think the way we looked at it was kind of a sampling thing. And so, it did have an impact. It was a very short-lived I mean couple of weeks kind of thing, it was really meant to get the sampling of the product out there and it wasn't an extended promotion, it wasn't a major media buy and it wasn't -- it wasn't the implementation of a let's say a couponing strategy that we are now seeing.

And we have seen other businesses get involved and it becomes pretty much part of their day-to-day pricing strategy almost where you can go onto the website and find a coupon at any point in time for significant dollars off the main entree. So that is how we looked at the flatbread giveaway, it was really more of a sampling. And so that is a marketing tactic, but it didn't fall into what we are seeing more broadly, which are those kinds of things I just mentioned.

Great, thanks. And if I can slip in one last question. It sounds like a new product platform is potentially the Tex-Mex. Now Chili's is already very much Tex-Mex, again definitionally what maybe products within that Tex-Mex category do you not offer now or is it more of a new and improved line of some of the Mexican products that you already offer?

Yes, there are new products that we don't offer that we are developing, so there are product innovations that work along those lines as well as as you mentioned. So it is both. We've got opportunities to innovate around some of the current product offerings that would qualify for that category, that platform. So we are working both ends.

Okay, thank you.

Peter Saleh, Telsey Advisory Group.

I just wanted to ask on the advertising strategy in the first half of the year, can you just talk about that? Are you going to be spending more, less, how does that compare to last year?

Pretty comparable in the first quarter and in the first half. We are evaluating other alternative media strategies, so I can tell you that this may or may not change. We are in the middle of upfront negotiations with networks, we are also looking very closely at our digital strategy. We've got our -- our customer relationship marketing program kind of moving more aggressively forward.

So we are evaluating the mix. So with our partners at our agencies, we are still finalizing exactly how the plan will play out for the year. But I think for the first quarter you can -- you will see a fairly comparable play to last year.

And then just given all the discounting you are seeing across the sector, have your value scores changed at all?

They haven't. I mean they've been improving over the last three years; our value scores have significantly improved within the brand as we measure them both internally and externally. And we continue to have a very strong value proposition out there and we think that is key to continuing to take share and grow the brand. So, but we haven't seen anything significant across the category or with any competitors yet. So they would be a lot closer to that than we are.

And, Guy, I just wanted to ask on remodels, the lift that you guys are seeing on the remodels, is that continuing about 3% or a little bit higher than that?

It is continuing better than that 3% that we anticipated. And we are through a pretty good chunk of the markets now or at least started in some other markets, so we are down to only a couple of territories. Still fairly large territories, but a couple territories less that will be addressed here in the next year and half as we finish the rollout of the program.

Great, thank you very much.

Thank you. We have no further questions in the queue.

All right, thanks, everybody for being on the call, we appreciate it. And we look forward to talking to you in October.

Thanks, guys.

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.