Brinker International Inc (EAT) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Brinker International first quarter of 2014 conference call. At this time all participants have been placed on a listen-only mode. The floor will be open for your questions and comments following the presentation.

It is now my pleasure to turn the floor over to our host, Chris Bremer. Sir, the floor is yours.

Thank you, Tom. Good morning, everyone, and welcome to Brinker International's first-quarter fiscal 2014 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 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, in 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 inter- period sales or other key operating results yet to be reported that 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 thanks everyone for joining us. Today I will detail our Company results for the quarter as well as highlights from Chili's, Maggiano's and our franchise business.

As you saw in our press release, Brinker reported first-quarter earnings per share of $0.43 which represents a 16% increase over the same quarter last year and the 13th consecutive quarter of EPS growth for Brinker. Company-owned comp sales were down 1.3% for the quarter and our traffic was down 3.3%.

Before diving into our results by brand, I think it is important to ground us on the casual dining category as a whole. The malaise we have seen in the category didn't let up this quarter. Consumer sentiment is guarded at best and consumer confidence remains somewhat volatile and there is some evidence that guests have shifted some of their spending to larger ticket items like homes and automobiles. And while we believe this is a temporary phenomenon, but one that has certainly impacted casual dining here in the short term.

And while employment rates are showing signs of improvement, casual dining in particular is being impacted by struggles many young adults are facing particularly those in that 18 to 24 age range. Many are graduating college significantly un- or under-employed, weighed down with debt and often moving back home with their parents. And as a parent with two of those, it is a scary thought.

Even while casual dining segment is currently performing softer than we anticipated, the good news for Brinker is we are taking -- however we have returned to taking market share. Additionally our ability to continue to deliver double-digit earnings growth even in a softer sales environment is a testament to the strength of Brinker's long-term strategy.

Okay, now let's dive into the brand results for the quarter. On the Maggiano's side of our business, we celebrated our 15th consecutive quarter of positive sales, up 0.6% for the quarter. Maggiano's is still putting up industry-leading cost of sales figures even while facing some heavy lifting during the quarter with the national rollout of a new point-of-sale and back-office system. With our Maggiano's conversion, all Brinker restaurants are now on a single operating platform bringing greater efficiencies to us.

And Maggiano's enters the second quarter by far the busiest of the year with better systems to leverage against during our high-volume holiday season.

As is always the case with our best-performing menu platforms, we continually seek opportunities to reinforce value and create interest with new and varied offerings. For Maggiano's, that is our on the house classic pastas platform. The most recent innovation takes the form of stuffed pastas. These four chef-created dishes are generously filled with quality Italian ingredients and priced at a premium. As with the rest of the classic pasta menu, guests ordering the new stuffed pastas will get to take home a free classic pasta for tomorrow.

As I mentioned on our year-end call, our Italian American brand has earned the right to grow again. Our first new location in five years opened a week and a half ago in Annapolis, Maryland. This new design is complete with Maggiano's trademark features like high ceilings and rich hardwood floors all housed within a smaller footprint optimized for site selection flexibility and to deliver a faster return. And while it is early, I am pleased to report this prototype is exceeding expectations and the changes we have brought to the business model are working as planned.

We remain on track to open six to eight new Maggiano's locations during the next two fiscal years. Maggiano's continues to align with our plan to win to drive margin improvements, create a compelling value message to drive visits beyond special occasion and deliver the outstanding quality of service our guests come to expect from us.

The global side of the business delivered another robust quarter with comp sales coming in at plus 2.7%. In Q1 of this fiscal year, our partners opened five new global locations bringing our international suite to 285 restaurants in 31 countries and two territories.

For our Company-owned Chili's restaurants, comp sales came in at minus 1.6%. Traffic was down 3.4% for the quarter. Domestic franchise comp sales reflected the category softness down 2.6% for the quarter. And although our quarter one results were stronger than the industry at large, in absolute terms we expect to deliver better performance. And I will provide detail momentarily on the initiatives we are putting in place to drive topline sales for the balance of the year.

Our re-image program continues to work hard for us. These re-imaged restaurants are (technical difficulty) and in many cases exceeding sales goals we have shared with you previously. And across our Company-owned fleet, our operations teams are running our restaurants more efficiently than we ever have.

We delivered favorability in the quarter on cost of sales and our best-ever productivity on labor hours per guest. It is important to note our recent labor and cost of sales savings didn't come at the expense of our guest dining experience. In fact, our guest surveys continue to set new records.

From a team member perspective, our overall team member satisfaction continues to grow. Playing greatly into that was a recent achievement our team members and operators are extremely proud of. As we announced yesterday, Chili's guest and team members have attained our goal of a $50 million donation to St. Jude Children's Research Hospital. The milestone donation, the largest corporate gift in St. Jude's history was delivered two years earlier than anticipated. Giving back is truly in our DNA as evidenced by the passion and dedication of our team members to support St. Jude's lifesaving work.

So now we have covered where we stand, I would like to spend some time discussing the big initiatives designed to drive sales and bolster results at Chili's in the remainder of the year.

First and foremost, we are dialing up intensity on product innovation. As you have heard me mention before, our newly installed kitchens of the future open up possibilities for new menu items at Chili's and there is big exciting news ahead in Q3. We will enhance a platform that today serves as a point of differentiation for Chili's versus our peers and that is Mexican food.

Our research has shown that we can build upon our current credibility with tacos, fajitas, quesadillas, chips and salsas to further strengthen this platform. But until then, we aren't content to rest on our laurels when it comes to food. We will drive relevance with our guests by innovating and renovating our menu.

So far this year we have added new entrees, desserts and alcoholic beverages and along with many other brands, we have capitalized on the pretzel bread craze advertising our new bacon avocado chicken sandwich served on a toasted pretzel roll. And it has become the best-selling sandwich on our menu.

In just a few weeks, we will be on air with new lunch news focused on lunch break combos and for dinner innovation in the steak category. We will also be introducing a new pumpkin spice molten perfect for the fall.

And we will be telling the world about our Q2 and Q3 innovation through an enhanced media spend. The last few years we have worked hard to be efficient in our marketing spending and we have shifted marketing dollars away from TV into the digital space and as a result, we have lost some share of voice. For fiscal 2014, we are raising our TV media spend significantly. The larger accrual began in Q1 but the increased weight levels won't hit the airwaves until late Q2 and will run for the remainder of the year to support our new product innovation news.

So moving forward, we have the benefit of incremental weight levels combined with strong messaging and relevant product innovation designed to drive the topline.

This fiscal year we are also driving the business of our new technology both in restaurant and out. Our operations, IT, and marketing teams are leveraging the latest technology to create an even better to-go experience using our enhanced online ordering system. Additionally, we are offering guests speed, convenience and value with the new delivery service rolling out to more than 450 restaurants by the end of next month. We will support those lines of business through appropriate marketing and online media throughout the year.

And as many of you heard, Chili's is seeking to further enhance the guest experience with the implementation of tabletop media devices in all Company-owned restaurants. The goal here is not to alter our current level of service rather to enhance it. Tabletop media provides a great communication vehicle to market menu offerings for our guests. It creates new check building opportunities with easier ordering of second drinks, coffees and desserts and better speed of service allowing guests to pay at the table.

It truly enhances the guest experience for those who choose to interact with it and these devices will be fully deployed prior to the end of this fiscal year.

Finally, we will continue to grow Chili's topline through restaurant openings. Since last December, we have opened six new or relocated restaurants and they are delivering positive results. Our pipeline is filling quickly for future growth and we anticipate to be fully ramped up with 10 to 12 new restaurants opening next fiscal year.

When compared to other operators, our numbers of new restaurant openings may look small; however, we are disciplined about our use of capital and ensuring when we build a new location it provides great returns and doesn't cannibalize existing restaurants.

One of the biggest challenges that comes with growth is the ability to effectively staff new restaurants. Our people work and operations teams have done a stellar job of improving the guest experience through training and developing the best quality management teams in the business and Chili's controlled growth strategy allows us to offer those strong leaders career development and upward mobility as we staff up new locations creating a competitive advantage for us.

Before I turn the call over to Guy, I want to leave you with a few thoughts. It is clear that Q1 was a challenge for us. Our primary focus for the remainder of fiscal 2014 is growing sales. We will be driving that result with multiple or from multiple angles. We have dialed up the intensity of the menu innovation and our big rock initiatives to grow sales primarily tabletop media, increased marketing spend, re-images, to-go, delivery, and increased capacity through new restaurant openings.

While we are coming out of a rough quarter, we are optimistic that we will grow sales and continue taking share even in this softer environment. We have achieved double-digit earnings growth and we will continue to strengthen the brand without giving up the margin improvement we have worked so hard to accomplish over the last three years.

As a leadership team, we remain highly focused on our balanced approach of making the right investments for the business while at the same time delivering on our promised earnings growth.

Now I'll turn the call over to Guy to share specifics on our performance for the quarter.

Thanks, Wyman. As you have just heard, our first-quarter earnings per share before special items was $0.43 representing a 16.2% increase over the same quarter last year and the 13th consecutive quarter of year-over-year improvement.

First-quarter revenues were $684 million, an increase of 0.1% over prior year. Total Company-owned comparable restaurant sales decreased 1.3% driven by a decline in traffic of 3.3% offset by a 1.1% improvement in mix and a 0.9% price increase. Capacity was up 1.5% driven primarily by the addition of the Company-owned Chili's restaurants in Canada and weather had no impact on the quarter.

Franchise and other revenues were $19.4 million, a decrease of roughly $400,000 from prior year driven primarily by the removal of royalties associated with the acquired Canada restaurants and a US franchise comparable restaurant sales decline of 2.6%. These factors were favorably offset by an international franchise comparable restaurant sales increase of 2.7%.

Cost of sales improved 60 basis points from prior year to 27.2%, driven by 70 basis points of favorable mix associated with the introduction of new menu items, the mix of promotions and better waste control resulting from our new point-of-sale and back-office systems. These improvements coupled with the favorable impact of menu pricing and other items of 30 basis points were partially offset by unfavorable commodities of 40 basis points stemming from higher meat and poultry costs.

Currently 86% of commodities are contracted through the end of calendar 2013 and 44% are contracted through the end of fiscal 2014.

Restaurant labor improved 10 basis points to 32.9% driven primarily by 60 basis points of productivity associated with our new kitchen equipment. In fact this quarter marked Chili's best ever period in hourly labor efficiency, a testament to the hard work our operations team has put in to optimize staff scheduling to best leverage the new equipment installed in the past two years.

However, this savings was mostly offset by 40 basis points of higher health insurance costs associated with an increase in the severity of claims unrelated to the Affordable Care Act.

Restaurant expense was $167 million or 50 basis points higher than prior year largely as a result of increased accruals for future advertising spend, higher workers' compensation insurance expense and preopening costs.

Depreciation expense increased slightly to $33.2 million due to recent investments in key capital initiatives and the addition of the 11 Company-owned restaurants in Canada partially offset by an increase in fully depreciated assets.

General and administrative expenses were $34.4 million, a decrease of $2.9 million versus prior year driven primarily by lower stock and performance-based compensation expenses and a decrease in professional fees.

Interest expense was essentially flat to prior year. The tax rate before special charges was 31.6% versus 31.2% in the prior year driven by the impact of higher earnings and lower tax credits.

Capital expenditures for the quarter were $29.8 million with year-to-date cash flow from operations at $55.4 million.

We have also completed 453 Chili's re-images to date and are still on track to have completed a total of about 620 re-images or roughly 75% of our Company-owned Chili's system by the end of fiscal 2014.

And the rollout of the new fryers we mentioned in our last call will begin in a few days with about 130 expected to be installed by the end of the calendar year and the remainder of the Chili's Company-owned system installations occurring in the back half of the fiscal year. As a reminder, this fryer technology is expected to lower our oil usage and contribute to the cost of sales improvements we expect this fiscal year.

During the quarter, we bought 1.6 million shares for $66.3 million funded in part through a draw down on our revolving credit facility. This leaves an outstanding authorization of about $480 million and we ended the quarter with approximately $56 million of available cash on our balance sheet.

As we stated before, we are committed to a balanced approach to investing in our people and assets, managing debt, maintaining appropriate liquidity and returning cash to our shareholders. This includes the recent 20% increase in our quarterly dividend from $0.20 to $0.24 per share. This also includes first-quarter payments on our revolving credit facility consistent with our stated intent to maintain our investment-grade metrics.

As Wyman mentioned, this year is off to a challenging start as evidenced by our first quarter results. Consumers continue to navigate the new macroeconomic elements and adjust their allocation of disposable income. And we see this challenging environment continuing in the near-term with industry traffic remaining weak.

Of course we are not immune to what is impacting the industry and there remains significant uncertainty around what the coming year might hold for the consumer. But based on the current situation, our best projections sees full-year fiscal 2014 Brinker comparable restaurant sales growth between negative 1% and positive 1% with the resulting sales deleverage causing restaurant operating margin growth to be between 25 basis points and 50 basis points.

This sales projection represents an acceleration compared to our first-quarter results but it comes with the background of a second quarter that is off to a good start. We are continuing to outperform the category as measured by both KNAPP-TRACK and Black Box and we feel confident this will continue in light of the sales driving initiatives Wyman outlined earlier.

Given these sales estimates, we now project full-year fiscal 2014 earnings per share to be between $2.65 and $2.75. This guidance continues to reinforce the hard work we have put in to establish a sustainable business model in difficult times, one that will generate double-digit annual earnings per share growth and that is focused on continuing to deliver value to our shareholders.

With that, I can turn the call over to Tom to open the line for questions.

(Operator Instructions). Chris O'Cull, KeyBanc.

Thanks, good morning.

Hi, Chris.

Wyman, I understand Chili's has outperformed KNAPP or Darden this quarter but it has been underperforming other mature chains as measured by Black Box. Which of the many sales building initiatives implemented over the past couple of years is just not meeting expectations do you think?

Hey, Chris. Well first, I don't know when you talk about Black Box as a category, the group, we outperformed KNAPP this quarter and Black Box we were basically with Black Box slightly favorable to Black Box in the casual dining category. To get to your other question where are we not seeing the kind of traction we would like to on some of our innovation, I think is the root of that.

Obviously with the flatbreads and pizzas we have talked about that in the past. We didn't get quite as much of a pop on the top side as we had anticipated with that product offering. We are excited about the addition of flatbreads to our business and what it is doing from a margin standpoint and from a relevant standpoint. It wasn't quite the traffic driver we had anticipated.

Beyond that I think the new news that we have brought to the category has been pretty consistently delivering. One of the other things that we've been looking at is how we allocate our media dollars against the messaging that we are bringing to the market and in the first quarter without any what I would call significant innovation, we didn't spend heavily behind it. Actually our media spend in the first quarter from a TRP standpoint was down about 15%.

So we are continuing to innovate and when we get our innovation ready to roll to the market and we bring it, I think our hit rate has been as good as anybody's. And we are excited about the innovation that we are bringing to the market here in the late second, early third quarter.

I guess, given Chili's I would think Chili's would have some credibility with the Mexican offerings. So do you expect these products to have more of an immediate impact --

Absolutely. (multiple speakers)

-- on transactions?

Yes, absolutely. I think to your point, we do have a lot of credibility actually our Mexican -- when you look at tacos, quesadillas, fajitas, that category represents really the biggest category that we have at Chili's, bigger than burgers. And so we know we have credibility and relevance in the category.

The work we are doing is exciting, it is bringing not just new news but also we are going to improve the quality of the products that we are ready have so we think we have got a new news message as well as some real innovations that is going to help raise the quality of the product we are delivering today.

One last question. I mean in the past you have tried to wrap some of the new products into the 2 for $20 price message. I would think Mexican offerings would provide you with the opportunity to maybe even create a new value platform. Is that -- is there the potential for that?

There is the potential.

Okay, great. Thanks, guys.

John Glass, Morgan Stanley.

Thanks. First, Guy, could you just remind us when do we really start to finally lap all the margin benefits particularly in labor but I guess food and labor? Is it is coming quarter, December or incrementally in the next couple of quarters after that? Have you come up with new iterations of those existing initiatives or new initiatives that may even give you more margin leverage then you thought before?

Well, the actual completion, John, of the kitchen rollout happened in late November last year was when we rolled out the last of the kitchen. But it was a year-long program and you can see that Kelly and her team in the operations have delivered -- continue to deliver strong labor performance even though we are lapping a lot of kitchen rollouts that have happened already. So we do think there is incremental upside and they are delivering on that right now.

The Aloha MenuLink rollout was a fairly similar timetable. It was done by really the end of the second quarter. So the improvements in waste that we saw on the cost of sales line really started coming in the February and March timeframe after that rollout was completed. So those would be the two primary things that we implemented.

Now we do have fryers coming as we talked about so that will provide some additional tailwind to cost of sales. As I mentioned in my remarks, we will have about a quarter of the system done by the end of this calendar year and the whole system done by the end of fiscal 2014 in June.

Okay, that's helpful. And then how much -- it sounds like you are actually going to spend more on advertising, it's not just a reallocation away back from digital back to traditional media. Is that correct? And how much incremental media spend are you going to have this year?

Yes, John, Wyman. So yes, we have absolutely committed to increasing the TV media budget. We have started accruing for that in the first quarter in anticipation of the budget for the year but we won't recognize those higher weight levels until really late this quarter and then throughout the rest of the year. It was a $0.02 impact to our earnings in the second quarter versus prior year -- I'm sorry in the first quarter versus prior year -- of which we won't see that benefit again until later this year.

So we are excited about the messages that we are going to bring and the heavier weight levels we will be talking to (multiple speakers).

But are you spending more or are you just reallocating back away? In other words, how much more incrementally are you going to spend on a full-year basis?

It is an increase in spending.

Okay. And then just can you finally just talk about delivery, how that gets executed, how confident you are there is a demand for it? Is it third party so there is no risk or do you do it yourself?

So first of all with the Maggiano's business, we rolled out a delivery program several years ago actually kicked it off when I was heading up Maggiano's and we had really tremendous success with that program and it's not third party. We run the program ourselves. Obviously the dynamics and the business model are a little different with the Chili's product. What we have already identified it is not necessarily appropriate for every restaurant we own but we have filters that we feel very comfortable with, identify where the demand is and where we can provide a service that is going to be appreciated.

And so we are now in the process of rolling that service out to those restaurants that we have identified where the opportunity is.

All right. Thank you.

Joe Buckley, Bank of America.

Thank you. Maybe you can follow up on that delivery question first, so if you guys do it yourselves, what kind of mix do you need to justify that incremental expense?

Well, Joe, there is very little incremental expense. We are not buying vehicles, we are leveraging assets primarily that we have. So the beauty of the delivery program that we are rolling out at Chili's is that it is very little incremental investment. So it doesn't take a whole lot of incremental sales to make this a very nice returning piece of business for us.

And it operates -- it tends to -- how people order and when you bring delivery tends to be in those off-peak hours. If you want it for lunch then we are putting it together and bringing it to you prior to our peak business at lunch. And so it does work well within our labor model to kind of leverage labor that is not necessarily working at capacity because of the shift in the timing if you will.

Okay. So the delivery people use their own cars?

Yes.

Okay. And then a couple of other questions. Guy, why won't guidance -- your kind of policy and what is in the releases -- we don't change guidance unless something material has changed and you did lower guidance on what looked like a pretty modest first quarter miss. So I guess I'm just kind of curious the thought process.

On the sales side, Joe, I think this past quarter I think for the entire industry, caught most of us by surprise in terms of the challenges we are facing and I think given that we posted a negative 1.5 call it comp and that was quite a bit below our originally guided range of 1% to 2%, we thought it was prudent to reset that particularly given the fact that as we look forward, we are obviously hopeful things can get better. But we really don't see any indications right now that the consumer is stronger than they were when we last spoke in August.

And so given that, even though we are encouraged about the start we have had to October and that the range that we guided to is an acceleration versus what we did in the first quarter, we thought it was appropriate to at least give all of you some better indication of where we thought sales could be for the rest of the year.

Okay. And then just one more. The pricing factor that you shared with us is the lowest price you have had in a long, long time and also for the first time in a long, long time, you mentioned some commodity cost pressures that you guys have done a marvelous job kind of avoiding in recent years. So if you could just sort of reconcile those and maybe talk a little bit about your thoughts on pricing.

So let me deal with the commodity cost issue first, Joe. So maybe my comments might have been misunderstood. I mean I think we basically have seen very similar commodity inflation that we have historically done. We isolate just the inflation -- there is inflation but it has been fairly moderate between 1% to 2%. But if you simply isolate that inflation, it was about 40 basis points.

Now obviously we have been able to do a lot of things with what we have done with menu innovation with some high gross margin items, what we have been able to do with the implementation of Aloha MenuLink to manage waste, what the new kitchen equipment do for us in terms of efficiency and producing product. All of that has been great for cost of sales and now when you add fryers in and other menu items that Wyman talked about that are also good for gross margin, we expect to continue to see momentum on the commodity side.

Now on the pricing side, I think it goes hand-in-hand with what you just saw with the fragile nature of the consumer right now is that I think our approach has been and it remains consistent that if we don't have to take price, we would prefer not to do so. We recognize that the consumer is in a tough spot right now and trying to take price can be a challenging thing to do and so we still believe we will be within the 1% to 2% range up. Obviously we are closer to the bottom end of that range right now in terms of pricing.

Thank you.

Thanks, Joe.

Jeff Farmer, Wells Fargo.

Thank you and good morning. Just following up on an earlier question, I guess try to post this in an interesting way. So I am curious where Chili's actually outperforms the peer group. I am just curious if there is a common theme meaning did you guys have a really strong promotion or new product introduction or in those periods where you do outperform, is it more a situation where some of your more aggressive peers are a little bit more -- came in terms of promotional discounting?

I'm just curious what you guys have seen over the last 18 months as you have both taken share and lost share in this environment?

Hey, Jeff, Wyman. So I think the story that we are seeing play out is first, you have to establish a value proposition that is relevant in the space and if you were to talk to us three years ago Chili's needed to do some work there and I think with what we have done to bolster the menu and the value proposition and make changes in the quality of some of the product, we have done that. As have some others in the category.

And so early on, there was a lot more opportunity I think for brands to take share just based on value messaging. And that landscape is now I think and what I am seeing has been level to a greater degree. So now that we have that leveling off, a lot of the promotional efforts that people are trying to throw on top of what they have already been doing aren't showing as much impact as you would have thought.

So I think what we have seen is when we bring new innovation that is compelling especially our strategy is not to do it from a limited time offer perspective but to really build on the base and foundation of the brand and put it in the base menu that we move the brand forward. We take share and we move forward. When we don't, it becomes more those gains in share and basically over the last three years, we have basically either taken share or tracked with the market. And when we track with the market, we tend to be more looking at media plans and other things in the marketplace that just kind of put us -- may put us at a little bit of a disadvantage or adjust a quarterly result somewhat just based on kind of how we market or come to market.

Okay, that's helpful. And just one other unrelated question. It looks like you have about a 65% Company ownership of Chili's right now. Just over the longer-term, what are your thoughts there in terms of re-franchising now that the restaurants are throwing off a lot more cash, the margins are up, volumes are up, a lot more attractive to franchisees on the acquisition side. So how do you think about that moving forward?

Hey, Jeff, it's Guy. We are still pretty consistent in how we think about our franchise Company-owned mix. We believe at these volumes and with some of the sales innovations to come and the margin traction that we have got that we feel pretty good about our mix right now of where we are with Company-owned and franchise. We feel like on balance it makes more sense for us to own them as a Company when we are delivering these kinds of returns in the restaurants whereas four or five years ago when things were not as good, it didn't make as much sense for the shareholder for us to own as many restaurants as we did.

But I think on balance right now if we can execute on this plan, my belief would be we wouldn't be increasing the franchise mix other than just through natural development that we are seeing in our international business and with our domestic franchise partners.

Okay, thank you.

Alvin Concepcion, Citi.

Hi, good morning. I was just wondering if you could give some comments on the tabletop ordering system. I know it is very early but what have you seen in terms of check or mix sort of end takeaways you would be happy to talk about.

Well, Alvin it is interesting. It is not really that early when you think about we have had it in over 100 Chili's now for almost two years so we have got a lot of experience with this tabletop device and I won't give you details because -- too much detail because you know that is confidential and we want to keep that a little bit closer but I will say that it works on the three areas we touched on.

It really gives us an opportunity to upsell and to communicate in a different way. With the potential to do video on the table we can tell stories about what is going on with Chili's that makes us relevant that people don't necessarily understand very well. So we are very excited about that. So the upsell ability and the ability to tell stories and create relevance. It also then allows guests to expedite their meal at their pace.

So your ability to order drinks, or coffees or desserts and then to check out whenever you want just by swiping the card at the table and having the check print there for you, all those things are really added pluses and they can add to -- you can speed up your visit if you would like which obviously can help you with throughput. But more importantly, it just enhances the guest experience when they don't have to wait around.

So those are the things we are excited about. Up until this point, we have been just using the off the shelf product and what we are committed to do and what we are excited about is customizing the content now that we have committed to the tabletop device to really be Chili's-focused and we think there is upside to what we have seen in the restaurants with the off-the-shelf device and content when we start to become more specific and more directed.

Great, thank you. And then just to follow up on -- you talked about innovation being the focus to driving topline. What sort of things are you doing to improve value perception? I think Mexican might give you an opportunity there in terms of value platform but I think limited time offers were also off the table so I am just wondering what your plan is there?

So again, we have these platforms that really drive value for us so 2 for $20, the lunch combos, those are significant platforms for us that drive value but we have also put value through the breadth of the menu. We look at every menu item and we evaluate it on the value scores that the guests that are eating that item are giving us and wherever we see an opportunity, we address it.

And so what we have done over the last year is not only add platforms that really maybe communicate value in a more direct way but also address any individual item that is not delivering value to the guests that are eating it.

Obviously the Mexican category for us is a platform in and of itself and as we expand that as well as improve it, we think there is a big opportunity to create great quality food as well as drive some really nice value perception.

Great, thank you very much.

Thank you.

Thanks, Alvin.

John Ivankoe, JPMorgan.

Hey, guys, it's (inaudible) on for John. Guy, are you still expecting CapEx in the $150 million to $160 million range for the year?

We are, John, we are.

And longer-term if the tougher sales environment continues, do you think there is any changes that you might have to capital allocation plan in terms of unit growth or pace of remodels? Just thinking about looking at fiscal 2016, I remember you guys talked about being under $100 million in CapEx.

It is all returns focused, John. So I guess if there was a situation where we saw topline deterioration where we didn't think we could hurdle on a new restaurant opening, we wouldn't do it but that's -- frankly that is the filter we are using today on any new restaurant opening is it is not a hurdle at a certain return. Investment in fryers has got to produce the necessary savings in cost of sales. The kitchen investment has to drive the labor improvement.

So from my point of view, we are definitely intending to make investments that provide the appropriate returns. I think we owe that to shareholders. I don't think they want us to sit on the cash or even give it back to them if we can earn a better return by investing it into the business. And so we will continue to do that where it makes sense.

And the big difference, the big spend up until 2016 is really the re-images and they are doing very well. So I wouldn't anticipate us pulling back on those. That is the big delta between where we are at now and what we are looking like in 2016 I think.

Okay. And then can you talk about how pizza and flatbreads have trended? I think you said the mix last quarter was around 10%. Has that continued to build as consumers gain familiarity?

It has held. We are holding there and it has kind of become a nice addition to the menu. The flatbread category is especially relevant for us delivering great margins and great guest satisfaction scores. But as we have talked about before, it is more of a -- it is being viewed as more of an appetizer or an add-on than it is an entree. So that is probably the biggest opportunity there is to continue, and that will probably be a -- that will be a slower build.

And so we should basically expect that the national TV will be more focused on the Tex-Mex as opposed to the pizza and flatbreads, I guess?

Yes. Absolutely.

Okay, thank you.

Sara Senatore, Sanford Bernstein.

Hi, thank you very much. Just a question and then a follow-up on an earlier conversation. So the first question is just about share repurchase, and effectively it looks like you have purchased fewer shares than you have in the past couple of quarters. Can you just talk again about the thinking about that, which is to say I think up until now you have kind of consistently purchased shares on the view that it would pay for itself because the stock price would keep going up so you would be buying shares and creating value that way.

To the extent that operating performance, maybe we are not seeing quite as much of an inflection point, can you just talk about how you think about share repurchase and sort of the discipline around valuation?

And then the only other -- the follow-up question I have is just on advertising; if you could talk about maybe ROI on the incremental marketing spend, either what kind of comp lift you think you get or just generally the approach to that. Thank you.

Hey, Sara, it's Guy. I will let Wyman field the advertising question, but I will talk about the share purchase question. Really the strategy is unchanged from where it was before. We have the four primary uses of cash that we have historically discussed, which is the CapEx that we will invest for these high-returning initiatives that we are involved in now or any that could come up in the future.

We have the dividend that we will pay a 40% dividend payout ratio, which we increased in late August. We want to maintain $50 million cash on our balance sheet, and we are required to make a $25 million a year in debt amortization payments split quarterly. Other than that, all remaining dollars are going to go to share repurchase.

Now, if operating performance starts to impact the business as it did somewhat this first quarter, all of you would have noticed that we made a $20 million pay-down on our revolving credit facility because we are determined to maintain our investment grade credit metrics.

But as we feel about this plan, a lot of confidence in the plan and moving forward, we do continue to believe that where we buy today will be cheap versus where we will be tomorrow and we will continue to do that. Interestingly, if operating performance were to decline we would probably pull back a little bit on share repurchase but I think that would be dictated by the performance of the business.

But our expectation is we will continue to deliver double-digit EPS growth like we did this quarter which should mean that going forward, we would continue to see the stock price rise.

Wyman, do you want to touch a little bit on ROI?

Yes, so we definitely, Sara, look at the return on our marketing investments specific to the medium that we are using. Over the last few years, we have seen a better return in the digital space. And so we have shifted dollars over there. And what we are saying is even though it is a better return, we get a good return on the TV investment and we have probably taken that budget down a little lower then we should and we see opportunity there.

Again it is always with the right message. It doesn't matter -- the return of your marketing dollar is going to be directly related to the power of the message you put into that marketing. And so we are very excited about some of the messages that we have got coming up and so we are confident the return will be strong as we up the dollars in the marketing budget here in the second half.

Thank you.

(Operator Instructions). Steve Anderson, Miller Tabak.

Yes, good morning. And I wanted to discuss a little bit more about the new fryer technology. Do you see this as being any kind of a precursor to a kitchen of the future three initiative?

Well, Steve, we are definitely committed to the implementation of technology in our restaurants as I think the new line equipment demonstrates, the new fryers demonstrate and the tabletop media that we indicated earlier. So perhaps the restaurant industry hasn't been -- hasn't had as much foresight in the use of technology as maybe other industries and that may have something to do with historical labor costs. But I think what you are finding now is that we have a strong belief in the implementation of technology.

Fryers are the next step and we are absolutely keeping our eyes open for any investment in technology that we think can deliver a great return for the business.

Thank you.

Thanks, Steve.

Michael Kelter, Goldman Sachs.

A couple of things. I guess first on the marketing, you guys said it was about a $0.02 hit on the quarter from the accruals. So if we straight line that, it's around $8 million of increased spend on top of $80 million this year, so a 10% increase in ad spend. Is that directionally right and what should we -- did you say if you are going to get an incremental contribution from your franchisees as well?

Yes, that was the only point I was going to make, Michael. So your math makes a lot of sense recognizing that that is just our share of the contribution and yes, our franchisees are participating in this effort as well.

And what are the franchisees currently paying as a percentage, what is it changing to and how is that conversation gone with the group?

Well, I mean they will see a similar basis point change that we saw. So the increase in basis points that we saw in the first quarter related to advertising would be a similar one to what the franchisees would pay. And as you know as we discussed many times and Wyman has discussed on the call, we have very fruitful, robust ongoing conversations with our franchisees about this and we have discussed the change in advertising. They are very supportive of increasing the spend in regards to TV media.

And then on the new tabletop technology, given a large proportion of consumers seem to choose to pay their are checks on their own with this technology, shouldn't you be able to reduce labor once it is in-market? And I ask because some other companies that have tested these devices have talked about that being the biggest benefit of the technology that each individual server can handle maybe an extra table or two?

Well, we aren't using the rollout of the tabletops as a way to become more efficient. We are really looking at it as a way to enhance the guest experience. We will see over time. I don't think just the fact that the check get swiped by the guest is going to create a significant opportunity for you to increase the number of tables let's say that a server could take if that is it.

So currently it doesn't appear to us to be that much of an efficiency play. It is much more about enhancing the guest experience. And again with the technology in the restaurants, we will see where it moves from here and how consumers adapt to it and what other things they can do and if it creates more efficiencies, then we will leverage those. But right now that is not the way it is being played out. And it doesn't have to for us to get a great return and to do the things we want it to do.

And then lastly on pricing, which is now below 1% for both brands and you referenced the fact that you are a little reticent to take pricing in this environment. So is this some sort of new normal in the way you are approaching the business in that traffic growth has to work even harder for you to get to your same-store sales targets despite the tough backdrop?

So, Michael, this is Guy. So you are right in terms of the absolute pricing but the way we think about it, Michael, is overall check growth. So you saw that mix had increased as well. Our belief is that the consumers can only bear a certain amount of check growth. Now whether that comes in the form of price or additional add-ons or buying items that might be more highly priced on the menu, there is a breaking point there at some point and so we watch more the overall ticket growth than necessarily the specific pricing.

As you might expect, there is different elasticities for an existing item versus adding on a starter or a dessert but there is elasticity involved with any increase in check. And so the way we think about it is monitoring the entire growth in the size of the check not just the price.

Thank you very much.

Thanks, Michael.

Jeffrey Bernstein, Barclays.

Great, thank you. Just a couple of follow-ups -- one just from the comp perspective. It doesn't sound like there are too many as you mentioned encouraging signs at least in the near-term. I am just wondering, would anything change in terms of either your approach to the business in terms of value and discounting. I thought there was a mention of maybe an incremental value platform or whether you are seeing maybe some of your casual dining peers getting more aggressive?

I know typically as inflation eases, we often see the category get a little bit more aggressive so I am just wondering whether your thought process would change or whether you have seen the competitive set change of late in this environment as it continues?

Jeff, so first of all, I don't want to be too negative. I mean actually I think from a category standpoint, we are starting to see things move more positively. And as an individual company, we are also seeing that. We are also continuing to take share which is a positive thing obviously.

We talked a little bit about it in one of the questions earlier. I think this whole idea about increasing discounting and competitors getting more and more aggressive, it is just not playing out as a way to capture share as much as it has in the past. And so I think what we are seeing in the space is people are now really working off the strength of their individual brands much more than they maybe were in the past.

I think consumers are much more savvy to okay what is a limited time offer and what can I count on day in and day out and so there is always the potential that somebody is going to come out with an LTO that is just going to have a significant impact in the short-term. But longer-term now and I think even more so even in the shorter-term, these increased discounting approaches aren't having the impact that they have had in the past. And that plays itself out in the NPD data as well.

Got it. Maybe I misinterpreted. I apologize for that from a category standpoint but when we look at industry data KNAPP-TRACK, Black Box, your data it didn't seem like -- and your message seems to be that things weren't really moving more in a positive direction and therefore you are kind of lowering your guidance. Is there something in particular you are seeing? I know you mentioned maybe October you guys had gotten a little bit better but what is the positive signs out of the industry?

Well I think the October numbers are starting to get a little better and I think the comps for us -- you know the first quarter was a fairly aggressive [wrap] for us. It was up 2.6 at Chili's so the moving forward comp numbers are not nearly as aggressive. And when you look at our guidance, while we delivered a negative 1.5 in the first quarter, we still see ourselves getting better from there and obviously we would have to get positive and we see ourselves being able to do that moving through the year.

So our expectation and our optimism for our ability to grow sales is still there. It is within an environment that is not as robust as we would have liked and where we would have expected frankly at this point in time but we are definitely optimistic about our ability to drive the business and to return to positive sales.

Got it. And then just two guidance clarifications. First maybe, Guy, the 400 basis points that we've talked about now for a number of years, are we still on track to presumably hit that by fiscal 2014? And then kind of up 100 basis points a year beyond that? Or do you think you have the initiative in place to keep that going?

Well, we think we have the initiatives to keep that going, Jeff. But if we don't believe we will be in the 1% to 2% sales range, then we are going to experience some pressure in sales deleverage as you saw this quarter. So that will make it a little more challenging to get quite to 400 basis points this year. But if we are able to get traction on the sales initiatives Wyman has discussed then there is still an outside shot that we could get there this year.

In terms of the 100 basis points going forward, we are really encouraged by what the operations team has been able to do with hourly labor. The fact that we continue to get more and more productive with the new kitchens which we have talked about on these calls in the past is encouraging. That has really got a lot of traction even in the last three to six months. So we still believe that they is more margin to get even after we get to the 400 basis point goal that we laid out.

Got it. And just lastly, Guy, you talked about the share purchase and kind of your priorities there. Is it still on target then -- I think the midpoint of your guidance was for 67 million share count for the full year fiscal 2014. Is there any change to that component?

No change, Jeff. You can assume that if I didn't make a change to it that what we originally stated is still intact.

Great, thank you.

Thanks, Jeff.

Bryan Elliott, Raymond James.

Thanks. Guy, I guess I am still confused on the guidance policy so I think others might be as well. So your press release that came out a few hours ago stated that it is our policy to not comment on guidance unless something has changed the guidance that we give at the beginning of the new fiscal year. And given that that is all it said, it seemed clear that that meant that there wasn't going to be a guidance change and then at 11 or 10.05 we get one.

So what is the policy for the next quarter when we get the press release? Are we going to have to wait for the call and speculate on whether we are going to get a change in guidance are not or so could you just explain the policy again so I understand it?

Sure, Bryan. And so at one point somebody once told me I can't remember who it was that more transparency equals better valuation.

Yes.

So we are trying to follow that policy. But we did think it was important to provide some context to what it was. And that is of course very difficult to do in a press release. So we felt like it was important that if we were going to give you some updated information that we allow you to have some context on the call to understand it as fully as possible. So that obviously you can have that full information as you prepare your commentary going forward.

Okay. So therefore, guidance is uncertain until after the prepared remarks on the call as a matter of policy?

Well we will try and give you as much information as we can when we can, Bryan. But we are going to want to do it with as much context as we can so that it is as fully understood as it can be.

Okay, all right. Thank you.

Thanks, Bryan.

Howard Penney, Hedgeye Risk Management. Mr. Penney dropped out of the queue. Our last question comes from the line of Nicole Miller, Piper Jaffray.

Thank you, good morning. Hi, going back to the media spend, I think you said you were down 15% year over year in the first quarter. So can you give us what you will be up in the remainder of the year by quarter?

Hey, Nicole. I don't have it by quarter right with me but our increases for the back half or from now until the remainder of the year are going to be double-digit up and pretty much consistent throughout the rest of the year.

Okay. So we can expect -- because you had it in the past and while you are making a return of some kind of comp list to some degree, but it shouldn't be pronounced in any one quarter then from here on out?

No, not -- again, starting late second quarter so November through -- we have got a much more robust media plan and spend throughout the rest of the year.

Okay, so to be very conservative, we could most of it in the third and fourth quarter a little bit in the second?

Yes.

Okay. And is your guidance -- does your comp guidance include this incremental spend and the list that you saw historically?

Sure. And if you think about kind of the number that we delivered in the first quarter and how do we get to that other range, that is one of the factors that we are excited about in terms of delivering better sales results in the rest of the year.

Thank you very much.

Thank you.

Gentlemen, we have no further questions in queue at this time.

Thank you.

Thanks, Tom.

Thank you very much, 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.