Brinker International Inc (EAT) 2014 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Brinker International third quarter of 2014 earnings call. (Operator Instructions).

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

Thank you, Tom. Good morning, everyone, and welcome to Brinker International's third quarter of 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 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 intraperiod sales or other key operating results yet to be reported as the data may not accurately reflect the final results of the quarter referenced.

On our call today, you will hear from Wyman Roberts, Chief Executive Officer and President of Brinker International, and Marie Perry, Interim CFO, Controller, and Treasurer. Following their remarks, we will take your questions. Now I will turn the call over to Wyman.

Thanks, Chris. Good morning, everyone. Thank you for joining us this morning. I am going to take a few minutes to share with you our Company results for the third quarter and some highlights from our brands, and then I will pass it over to Marie Perry, our Interim CFO, for an in-depth look into the numbers.

So, as noted in the press release this morning, Brinker reported third-quarter earnings per share before special items of $0.84. That represents a 16.7% year-over-year increase. We also saw Company-owned comp sales increase 0.7%, and our overall traffic was down 1.2%. So all-in-all what we consider another solid quarter, despite some pretty significant weather-related issues.

During the quarter, we drove double-digit earnings per sales growth, positive comp sales, and improved our operating margins 90 basis points thanks to our stellar operation teams, the work we are doing to improve our food service and atmosphere and the effectiveness of our marketing campaigns.

So even though our traffic numbers are negative, we have seen steady improvements over the last three quarters. That said, it remains our top priority to deliver positive traffic across our business. And as we talked to consumers, they are telling us they are not looking for us to give food away. They are asking us for a problem free experience at a pace of their choosing and a cool atmosphere with great food, compelling and relevant at a great value, and that is what we are committed to giving them.

So let's start with the Chili's business. Chili's comp sales increased 0.7% for the third quarter with traffic down 1.2%. Our overall US franchise comp sales were up 0.1% for the quarter. So we significantly outperformed the category again, which demonstrates the effectiveness of what we are doing to differentiate the brand from the competitive set and to drive sales and traffic in both our company-owned and franchise restaurants. Things like culinary and technology innovation, focusing on to-go and delivery as a growth vehicle, reimaging our restaurants to make our atmosphere more relevant, optimizing our marketing spend to increase our share of voice and opening new restaurants. During quarter three, we opened two company-owned locations and we are on target to hit our goal of 10 to 12 new restaurants per year. But I want to spend a little time giving you more detail around two of those initiatives that are especially exciting for us -- our Fresh Mex Platform and our new tabletop devices.

Mexican is the biggest menu category for Chili's. Our guests give us a lot of permission to play in that space, more so than any other bar and grill player. And with the introduction of our new Fresh Mex bowls and enchiladas, we now have more than 20% of our guests choosing Fresh Mex entrees. And the food is delivering great results in terms of quality, appeal and relevance. So we are excited about the initial Fresh Mex menu innovation that is going on and on its heels, we rolled out our next wave of Fresh Mex with the introduction of Guacamole Live and our new fajitas just last week. Preliminary results indicate these items are also performing really well just as we expected.

So we are renovating our Fresh Mex platform by reinventing core menu items, and we are innovating by introducing new items to the platform as well. And that is how we will continue to strategically work through our menu -- by renovating core items to make them more compelling for today's guests and innovating by bringing fresh new items to key platforms that align most closely with who we are as a brand. We are on air now with fajitas and Guacamole Live, so more to come on the Fresh Mex category as we finish up the year.

And what you will notice with Fresh Mex, as with any future food and beverage enhancements, is that we are targeting quality and relevance to further differentiate the brand from our competitive set. One of those key differentiators is freshness, which you can see in our new drink offerings like the blueberry and pineapple-infused Margarita we introduced earlier in the quarter. It has been a very successful product for us so far. In fact, it has contributed to the best alcoholic beverage mix we have ever seen taking us to over 14% year to date. Products like these enable us to not only achieve record high guest satisfaction and value scores during the quarter, but also deliver better margins year over year.

Okay, so another key to driving relevance in the brand is through innovative technology. As of yesterday, we completed the installation of our new tabletop devices in every company-owned restaurant. Our franchise locations are close behind with their rollout as well. Our primary focus with these devices is to enhance and tailor the guest experience to continue to make Chili's more relevant and to drive traffic. We think there is opportunity for PPA lift and some operational efficiencies like when a guest chooses to pay on the device rather than wait for a server to present the check, but that is not the primary benefit we believe these devices will have on our business. For us, it is about driving traffic and taking share. And longer term, there is tremendous opportunity to leverage this device to drive guest loyalty, to tailor the guest experience even further by customizing content and increasing the interaction we have with our guests.

But all these efforts are only as effective as our guests' awareness of them, so we stepped up our marketing program during the quarter as well. We invested more in media this year to regain some of our share of voice that we lost over the last few years when we held our marketing budgets flat. We are pleased with our spend around traditional, as well as digital media and we feel really good about the way we are messaging using a multipronged approach that speaks to the brand, the value proposition and our innovation.

And listen, we know that in this environment guests have no tolerance for a disappointing experience, so our operations teams are committed and focused on delivering problem-free experiences. We've minimized operational complexity by eliminating limited time offers, which allows our team to focus on delivering a great guest experience. As a result, we continue to see significant reduction in the number of guests who have a problem in our restaurants.

On the global side, our business also delivered strong third-quarter results, up 0.6% in comp sales and we've continued to grow that business as well. Our partners opened 10 restaurants during the quarter and the new locations we have opened so far during the fourth quarter take us to over 300 restaurants in 30 countries and two territories around the world. We are proud of the worldwide presence of the Chili's brand and achieving this milestone is a testament to the strength of the Chili's brand and demand for the brand globally.

Our partners believe in the direction of the brand as well and they are embracing the key capital initiatives we have implemented domestically, like Kitchen of the Future and the reimage program. We look forward to continuing the growth and expansion of our global business and working with our partners to deliver strong business results.

Moving to Maggiano's, the brand edged positive in sales during the quarter with a 0.2% increase. That is the 17th consecutive quarter we have delivered year-over-year sales growth. While tougher weather in Chicago and the Northeast didn't help dining room sales, the brand was carried by a resurgent banquet business, which is growing both social and corporate sales this year. Combined with the broad appeal of classic pasta, which has helped evolve the brand from special occasion to a more accessible everyday option, Maggiano's earned the designation of America's Next Great Restaurant Chain by Entrepreneur magazine last month. Over the next six months, we will open four more locations with smaller footprints like our Annapolis location and we are excited about the growth potential this brings to the Maggiano's brand.

Finally, last month, I had the chance to talk to many of you during the investment meetings we participated in in Boston, New York and Las Vegas, which was a great opportunity to reiterate our commitment to the strategies that have been working so well for us over the past four years. Part of that strategy is for us to continue to deploy capital consistent with the plan we laid out, specifically to invest back in the business where we feel confident we can get targeted returns, to support our dividend strategy, to service our debt and when all that is done, to give the rest back to our shareholders in the form of share repurchase.

We feel good about the future of all three of our businesses. We have been able to deliver on our promises in what has frankly been a little more challenging business environment with more competitive pressure than we anticipated when we created the plan four years ago. Nonetheless, our strategies are working for us and we are confident they will continue to work for us going forward. We remain committed to our goal of doubling our fiscal 2012 earnings per share by fiscal 2017 and we are confident about our ability to deliver for our shareholders. And with that, I will turn the call over to Marie to walk you through the financials. Marie?

Thanks, Wyman. As you just heard, our third-quarter earnings per share before special items was $0.84, representing a 16.7% increase over the same quarter last year. Third-quarter revenues were $758.4 million, an increase of 2.1% over prior year. And despite harsh winter conditions throughout the quarter, total company-owned comparable restaurant sales increased 0.7% driven by a 1.2% price and an increase of 0.7% improvement in mix. This was partially offset by a decline in traffic of 1.2%. Capacity was up 1.6% driven by the addition of company-owned Chili's restaurants in Canada at the end of fiscal 2003. Franchise and other revenues were $19.2 million, an increase of $1.1 million over prior year.

International franchise comparable restaurant sales increased 0.6% and US franchise comparable restaurant sales increased 0.1%. We have also opened 16 net franchise restaurants over the past 12 months, offset by the acquisition of the 11 existing restaurants from our franchisee in Canada as previously mentioned. Cost of sales improved 90 basis points year over year to 26.5% driven by 50 basis points of favorable mix associated with our year-over-year change in promotions, our new flatbread and Fresh Mex menu items, better waste control from continued leverage of our new point-of-sale and back-office system and the rollout of new fryers. This improvement was further bolstered by favorable impact in menu pricing and other items of 40 basis points.

Commodities were flat for the quarter with higher meat and seafood costs offset by other items. Currently, 46% of our commodities are contracted through the end of calendar 2014. Restaurant labor improved 40 basis points to 31.6% driven primarily by 70 basis points of benefit from reduced employee health insurance expense and leverage on higher Company sales, partially offset by a 30 basis point increase in managers' salaries and bonuses. The sizable improvement in employee health insurance cost is a result of a favorable current year claims experience adjustment that is lapping a substantially unfavorable claims experience adjustment in the third quarter of fiscal 2003. Restaurant expense was $172 million or 50 basis points higher than prior year mainly as a result of increased accruals for advertising and higher utilities.

With the addition of 11 company-owned restaurants in Canada and recent investment in key capital initiatives, depreciation expense increased $1 million to $34.2 million, representing a trend toward higher levels of expense. Interest expense and G&A expense were flat to prior year. The tax rate before special items was 30.6% versus 28.9% in prior year, an increase of 170 basis points driven by higher earnings and lower tax credits. Capital expenditure for the quarter was $44.3 million with year-to-date cash flow from operations at $277.1 million.

To date, we have also completed 580 Chili's reimages and we are still on track to have completed a total of 620 reimages or roughly 75% of our company-owned Chili's system by the end of the fiscal year. And we have made substantial progress on the rollout of new fryers with about 560 completed to date and the remainder of the Chili's company-owned system implementations to occur by the end of the fiscal year.

We ended the quarter with approximately $65 million in cash on our balance sheet. During the quarter, we bought back roughly 1.9 million shares for $99 million. And since the end of the third quarter, we purchased another 386,000 shares for $20 million.

So through today, our year-to-date share repurchases have totaled $212 million, or 4.5 million shares, which represents the majority of our share repurchase for the fiscal year. Our results this quarter once again demonstrate that even in a challenging business environment, our industry-leading business model enables us to deliver consistent, reliable, double-digit, annual EPS growth and steadily return value to our shareholders. As Wyman mentioned, we are focused on margin improvement and traffic-driving strategies. We are confident that these strategies, which are built into our fiscal 2014 EPS expectations we previously shared with you, will demonstrate our food, service and atmosphere will bring more guests in the door and elevate our top and bottom-line performance. With that, we will now open the line for questions.

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

Thank you. Wyman, Chili's has made several changes to improve the guest experience, yet traffic remains negative. It seems like the only time Chili's has been able to increase traffic is when they have been more aggressive with promotions. When do you think the traffic-driving strategy needs to be revisited?

Hey, Chris, I think -- well, first of all, we are encouraged by the momentum that we've seen through the year, so the traffic patterns have improved. They are still not where they need to be. Obviously, this quarter there were some other things impacting the results, primarily weather. So when we factor all that in, we are not happy with where we are at. We want positive traffic. We know that is important and we are working towards that, but we do feel that the strategies that we are employing are going to get us there and they are working towards that as we speak.

With regard to changing the overall strategy, I don't know if you are saying when are you going to think about maybe increasing the level of discounts or getting into a limited time promotional strategy and we just don't see that working for people that are doing that either. We are continuing to outperform the category, so we are confident with the little strength in the category and the continued acceleration of the initiatives we have in place that we will continue to take share and turn traffic positive in the near future.

How should we think about the increased advertising spend because it is not a limited time offer, so should we expect the benefits of that to build over a few months, over a few quarters? How should we think about when we should start seeing some benefits from the greater ad spend?

Yes, well, again, I think we've seen them relative to the competition fairly instantaneous. I mean as soon as we have started increasing our advertising, we did see a bigger gap to the competitive set. I think what we are doing is a longer-term play though. We are reintroducing to a lot of people the brand in a way that they haven't expected Chili's to talk to them. And so talking about the brand, talking about innovation and then introducing new items at both lunch and dinner, those are messages that are going to build slower than a deal at a price point for a limited time.

Fair enough. And then one last question. You guys have done an excellent job of controlling your commodity inflation. Maybe educate us a little bit in terms of what does Brinker do differently to be able to maintain such low commodity inflation while the rest of the industry seems to be seeing quite a bit?

Well, I mean, I think, again, one of the keys to Chili's especially, but it works for Maggiano's as well, is the breadth of product that we use and the fact that we aren't really driven by any one specific protein especially allows us to diversify the risk that you see in the commodities markets at times. And we are able to move in and out of products with merchandising to kind of work our way around it. So with shrimp, for example, with what has gone on with the shrimp, we sell shrimp at both brands, but it is not a huge percentage of our menu mix and obviously when prices get really high, rather than having to price for it, we will just market and merchandise around it and actually reduce the usage on that product just through guest preference. And that allows us to navigate through a lot of these commodity challenges I think more successfully than others that just don't have the opportunity.

If you are a steak place and steak goes up, if you are a seafood place and shrimp goes up, you just can't avoid that hit as well as we can. Now, we are obviously not immune to it, but we also have an unbelievably powerful supply chain team and they have locked us into some really favorable contracts and they are very smart and we don't try and get the lowest all the time, but we look for more stability and so we are not trying to time the market to the lowest possible point, but we are trying to make sure that we provide a very consistent experience for our guests and our shareholders.

I apologize if I missed it, but did you say what your commodity inflation target is for the next few quarters?

Chris, hi, this is Marie. So as we talked about even this quarter with our commodities really being flat and having visibility out through the end of the calendar year at 46%, when you look out going a little bit further, we are going to see some pressures around hamburger meat, avocados, limes and seafood, but there is some offsets in some of the other categories like top sirloin, fajita meat and poultry. And for the same reasons that Wyman mentioned, because that is probably not the market trend, but it is probably more about the effectiveness of the contracts that we are in and our supply chain group basically just being extremely effective. So when you look out going further, it is probably going to see some inflationary pressures kind of in the near term, but then when you kind of look out when you get into 2015, again, based on our visibility, it really doesn't look like commodities are going to be headwinds for us.

Great, thanks.

John Glass, Morgan Stanley.

Hi, this is Courtney on for John. Wyman, can you just talk a little bit more about the Tex-Mex platform? I believe last time you had targeted getting new and last users in the door. Is that still what you are seeing and is that the plan for the new Guacamole Live and fajitas?

Yes, absolutely, Courtney. We think with the permission we have in the Fresh Mex space that we can, through renovation, through making the products that we currently know are popular, but maybe need to be stepped up and brightened and freshened up like what we've just done with fajitas, we will make our core users even happier and drive frequency with them. And then by bringing new innovative products into the platform like the bowls, we are starting to introduce some new guests to items that we didn't offer before that are compelling for them and competitive. So we see it working on both fronts. We see it working in both dayparts. It is a great strategy for both lunch and dinner. Obviously, people eat things -- pick different products, but the platform itself works against both dayparts very well for us. So we continue to work against that strategy of both driving frequency and introducing new guests into the concept.

And I think you said 20% of guests are choosing it. Do you have a breakdown at all between new guests and your core guests?

Yes, but I probably -- I mean that is probably more detail than I want to share on a call, but we are happy with the percentage growth that we've seen in the category and we think it has got more upside from there and it is working against both those targets.

Okay, got you. And then in terms of the Ziosk, I think you said you just finished rolling them out companywide. I think last time you had shared it was close to 85% touching the device. Do you have any additional learnings there, especially in terms of a checklist?

No, I mean I think all the metrics that we've shared in the past around the engagement level -- again, just to remind folks that we've had this device in over 100 restaurants for almost two years, so we had a lot of history with it. Now the rollout was unbelievably aggressive. We rolled out over 45,000 tabletop devices in six months and that was rewiring every restaurant, every company-owned restaurant. So right now though what we are seeing after a very successful rollout is the engagement levels are holding. The participation in the various activities, whether it is games or the check add-on or the surveys and paying at the table, are all consistent with what we would have expected. So we are on track for those devices to do what they were expected to do in the short term.

Our big energy and excitement around Ziosk is really what we are going to be able to do with it now that it is rolled out and how we are going to use it as we develop future marketing programs and future opportunities to engage our guests more deeply.

Got you. And then just finally on the share repurchase, I think you said you did $20 million additional this quarter. Is that it for the year? Should we be expecting a little bit more and then how to think about it going into 2015?

Yes. We will have an opportunity to provide guidance on 2015 in our next earnings call, but as you think about 2014, I mean it is really as much the math, right. So as you get earlier or later in the year, based on the waiting factor, it almost just becomes a minimal impact to the rest of fiscal 2014. But as we mentioned in our prepared remarks, kind of with the significant chunk of share repurchase, 1.9 million shares in the third quarter and then the additional 20 million in the fourth quarter, that is going to make up the majority of our share repurchase for 2014.

Got you. And then I guess just finally, I know you guys have said that you are not doing LTOs anymore, but have you seen any shift in terms of your competitors in the current sales environment, especially going into April, finally getting out of this poor weather that has been a drag on the industry?

I don't know about a shift, Courtney. I mean people continue to work that strategy, I mean in terms of especially the national players, but then obviously there are a lot of very successful concepts out there both in the casual and fast casual space that aren't leveraging a limited time offer strategy. And so I think people pick the strategy that they think works best for them. I don't see it necessarily getting more aggressive, but obviously you see the various players out there in all the segments using whatever strategy they think is going to work best for them.

All right, great. Thanks, guys.

David Palmer, RBC Capital Markets.

Good morning. A question on -- just little questions on the Ziosk. You mentioned that you are excited about the future. It's hard to believe that it wouldn't be more of a benefit so far. Right now, you have that gap to your franchisees. Is that all weather or is some of that perhaps the Ziosk providing a check benefit or table turns benefit? Any sort of measurable benefit so far from that?

Hey, David, Wyman. It's probably mostly weather. Again, our franchisees are more Midwest, more Northeast. So primarily I would say most of that is weather and one of our big franchisees has had Ziosk again for quite a while. So we don't see it being the short-term driver in terms of check and efficiencies that some are talking about, although we like it a lot, in the short term and the long term.

And you mentioned the alcohol mix is up. Are you comping higher in the bar area than you are in the dining room?

Not necessarily. We sell a lot of our alcohol in the dining room, so it is not -- Chili's isn't the kind of place that's got the same dynamic as some concepts in terms of what happens in the bar versus the dining room. We sell a lot of our alcohol in the dining room and I think we are seeing growth in both categories in both spaces.

And then just one last one, I mean last year I remember you had the pizza launch in the March quarter. Perhaps that didn't have the sustainability that you would have hoped it would have. That has implications in terms of your comparisons perhaps for the June quarter from a sales perspective, but do you think that there might also be a food margin impact from that where you have a high Mexican mix perhaps not lapping your strongest Italian or flatbread launch from last year?

Hi, this is Marie again. When you think about Fresh Mex, I mean we've mentioned in the past as well that there is definitely a mix benefit and just a margin improvement with that as well. So we talked about the same thing with pizzas and so you are really kind of trading one off for the other.

Yes, both these platforms are very favorable to our average margins.

Great. Thank you.

(Operator Instructions). John Ivankoe, JPMorgan.

Hey, guys. Thanks, it's Amod filling in. Marie, I know you will provide full-year guidance for 2015 next quarter, but just to clarify, should we interpret your earlier comments about commodities not being a headwind? I mean they'll basically be flat. And if that is the case, can you help us frame that in the context of maybe specifically beef, cheese and avocados, which all seem like they are going to be up and I think they are pretty major inputs for the new Fresh Mex items?

Yes, I think when we have the opportunity to get together on the next call, we will have more visibility in terms of the contracts that roll off the contracts that we have on. So I am a little bit hesitant to give that type of granular information. But, again, I think if we are talking headwinds, I mean headwinds for us is really labor around minimum wage, I mean things like that. With commodities, there is going to be some kind of bumps quarter to quarter. We were flat this quarter; not sure we are going to be able to sustain that next quarter. And then again, we will have an opportunity to provide more clarity as we get into 2015.

Okay. And then I think this was the first quarter without any benefit from some of the front and back-of-house margin initiatives that were discussed back in 2010. So I mean either Wyman or Marie if you could give us some color maybe around potential other margin initiatives that might be in test, perhaps increasing waitstaff per table, things like that that might be a driver of further margin expansion going forward if any of those are in the pipeline.

Listen, we are always looking for ways to improve the business model and maintain and improve our margins. So we have got things we are working on. I wouldn't want to share any of those with you right now. They are all kind of preliminary, but we never stop looking for ways to make the business more efficient. But at the same time, we are very cognizant of the importance of making sure our team members and our guests -- we are not deteriorating their experience. So we've always got things out there. Just like we did last year with the fryer, we found that kind of after some initial testing and it just turned out to be a nice improvement for us after initial investment. So we are continuing to roll those out and we are looking at labor opportunities as well. But they are all relatively small, I mean nothing like what we saw when we moved with Kitchen of the Future or the team service, but they are all kind of designed to continue to keep this business model strong and to allow us to deliver on that plan we shared with you guys that gets us to that target in fiscal 2017.

Great. And then I guess lastly, could you remind us what the healthcare impact was going to be for 2015, if there was going to be one of any significance in terms of the margins?

Yes, in terms of healthcare, when you -- so we just had -- obviously -- so January 1, we kind of started our new plan. Kind of visibility in terms of the impact of that plan, I think we are still studying the results. The significant -- the adjustment that we talked about on our comments earlier, that actually had to do more with claims and what is happening with claims. So going forward, we will see the new population that comes in, how that impacts our health insurance and then also there is an expectation that medical inflation rates are going to continue. So I would say on a looking forward to 2015, there is probably going to be some pressure more likely due to just medical rates going up, but then we will have to see what happens with the claims in the population.

But right now, John, we are not thinking it is going to be crazy. We don't see it as a significant headwind today. As Marie said, we are learning as we go and things are changing both within our world, as well as in the greater environment out there, both in DC and in the workspace. So we will continue to monitor it, but right now we are not seeing it as being a major headwind for the near future.

Very good. Thanks.

Karen Holthouse, Credit Suisse.

Hi, looking at the monthly trend through the quarter, we saw some choppiness if you look at it on a one-year basis versus two-year and as a standalone versus GAAP to KNAPP on. Is there anything you would call out in terms of promotional matches or advertising spending month to month for the quarter that might have affected that or I guess holiday shifts as well?

Go ahead, Marie.

As it relates to holiday shifts, when you look at the trends within the third quarter, there really weren't a lot of impacts. We've heard others talk about Easter. Well, Easter fell in the fourth quarter for us; it fell in the fourth quarter for us last year. So really weather, as we've mentioned over and over again, was an impact in the third quarter.

And if you are looking month to month, I think you can almost drive yourself a little crazy trying to track every jump or blip in a monthly number, especially with some of the weather we had this year and again promotional. So I think if you look at the quarterly numbers, you are going to get a better sense for how the business is trending and where we are at and again comparing that to the industry data will give you again a better sense I think for how we are moving through.

And one quick other question on the advertising spend in the quarter. Should we still be thinking about it as about $0.02 a share of an increase year over year?

Yes, I think that probably is about right. Yes, in that ballpark.

Okay, great. Thank you.

Steve Anderson, Miller Tabak.

Yes, good morning. Going back to some of the mentions you had on the weather, were you able to quantify the overall weather impact with both company-owned and the franchise? I know the franchises were quite a bit lower than the company-owned and that's what happened?

Well, starting with franchises, we really don't have that level of visibility on their weather, but I mean just geographically you can probably get a sense of who is impacted and who is not. For us, we are thinking -- we are looking at weather to be around 100 basis points impact in the third quarter. Now that kind of differs a little bit between Chili's and Maggiano's. Maggiano's was actually hit a little harder just basically where their restaurants -- where our restaurants are positioned.

Okay, thanks.

Nicole Miller, Piper Jaffray.

Good morning. I fear you may have already answered this, but I am going to ask the comp question a little bit a different way. Just trying to think about the way you exited the quarter. March was strong, especially on a two-year basis. I mean if I just kind of hold that logic steady, I would think that is reasonable, but then I just heard you a couple questions ago answer and say look at the quarterly results and that is a better indication of where we are at. So is there something I need to understand, a calendar shift or anything one-time in nature in the current quarter that I can't look at how you exited the quarter?

No, I mean, Nicole, I think you can look at all the data. I just think sometimes when you start to try and understand every month's nuances without us walking you through what happened with a certain weekend in February's weather, it gets a little bit -- it can get a little bit difficult. I think overall the trends are showing kind of how we are seeing our business, which I think relative to our absolute performance and our competitive performance is encouraging. Obviously, if you pick March, it's probably a better story than if you picked February. So there is nothing abnormal in any of the months; it is just -- they all have their own peculiarities and without getting into really minute detail, we are just kind of leaving it at that.

And I very much appreciate that, so I think we might walk away saying there is encouraging trends as you exited. There is no one reason why you can't sustain that offset with a conservative level or dose of conservatism about, hey, this is what the industry looks like. So it is a mix of those two. Is that kind of fair?

Yes, I think that is fair and I think what I would like you to take away is that we are optimistic. We are sitting here saying we are very optimistic about our business. We are excited about what we are doing both to position the brand aggressively and effectively in the marketplace. We are excited about the returns that we are getting from the business model results and we are consistent with our use of capital and our ability to continue to return investments back to our shareholders. So we are optimistic.

Thank you.

Joe Buckley, Bank of America.

Hey, this is Greg on for Joe. My first question -- I know you guys have talked in the past about Maggiano's perhaps maybe looking to sell it. I know the commentary shifted more towards utilizing the brand as a growth vehicle. I was wondering what drove the change and what would cause -- what would you have to see in the business to cause you to think about selling it?

Greg, I don't know exactly what you are referencing with regard to that first part of the comments. We have always said Maggiano's is just a real important part of the business. Obviously, with the improvements that the brand has made over the last few years to their business model, it makes sense to deploy capital around growing it again, which is again the same filters we are using for every aspect of the business. When we see an investment that makes sense from a returns perspective, we put capital behind it and we grow the business that way. And Maggiano's is under the same kind of filters. And given that there is only 45 of them and there is a lot of green space out there and the brand continues to just, from a guest perspective, deliver outstanding experiences and the strength of the brand is really unquestionable, so we think there is growth. So we continue to move that forward with that strategy.

That's helpful. Thank you. And just a second question, can you give an update on the delivery initiative at Chili's, the mix maybe and I guess what margin flowthrough you see on that?

Yes, again, I think we have talked about delivery and to-go kind of as a -- we kind of look at those two initiatives together and we see opportunity in both to grow the business as consumers look for options to sitting down and spending the time and energy that is required as they are more pressed for time. And we have grown both of those businesses. The delivery business is going to be a slower growth vehicle for Chili's. It was actually a fairly fast growth vehicle for Maggiano's where that opportunity to kind of leverage and draft off of the banquet business made it more I think understandable for consumers. We are right now just growing the awareness frankly in the market that Chili's will deliver and that is going to take a little time. But between that and the enhancements we are making both from a technology standpoint and from an operations standpoint to drive both those businesses, we think it will be a nice piece of business for us going forward and will represent a significant part of the sales for Chili's, which it already does when you take to-go and delivery together.

Got it. Thank you very much.

Howard Penney, Hedgeye Risk Management.

Thanks very much. I have two questions. The first one is, based on your commentary around how you exited the quarter and the weather, do you expect traffic to be positive in the fourth quarter?

Hey, Howard, good to hear you. We can't give guidance and that would be guidance. We are optimistic about what we are doing I guess is the best I can tell you. Whether it is going to be positive or not, we think we will continue to take share, we think we will continue to grow the business and we are excited about the innovation that is taking place on the food side, the improvement in the operations experiences that we are seeing with our operations team. And then we have got this new technology platform that just kind of landed in the restaurants yesterday that gives us just a lot of options with regard to how we connect with our guests. Some of those will be short-term gains, but really I am excited about some of the longer-term opportunities now.

And the thing about that, Ziosk as well, is it didn't require us to invest out-of-pocket capital. So when you think about that tool in the restaurants without really asking the shareholders to come up with any dollars to put it in, that is a pretty nice asset we have got now that we get to play with.

A potential win-win for everybody.

Yes, we are excited.

My second question revolves more around the bigger picture question. Obviously you have seen a lot of coupons being dropped by some of the Darden chains. And I was just curious as to your thoughts to the environment you hoped to see. Would you wish for a healthy Darden concept not dropping coupons or would you rather see a struggling company dropping coupons and it being disruptive? Which is sort of a more preferred environment?

Without talking to any specific competitor, I mean I think our take on the space is that when we look at who is winning and who is struggling and our own situation, you have got to have a solid concept. You have really got to put the value proposition into the concept on a day in/day out basis. You can play around on the fringe with some discounting, if you will, but if it becomes a primary driver and there is examples, recent and past, of people that have tried to use that to get them out of trouble or to move them from one place to another. I don't think it has proven to be a long-term strategy that holds.

So at some point, you have got to have that base concept value proposition figured out and that is what we are focused on and whether or not everyone gets there or how people get there in their own world, I am less concerned about that. What I am -- what we do watch though is it doesn't appear that consumers are as driven by the deal, if you will, as they have been in the past. Now there are levels of effectiveness, but it doesn't seem to be shifting share as much as it used to. And so that is encouraging I think for all of us to be able to say, hey, let's get our concepts working off whatever their point of differentiation is and their value proposition is and then let's go head-to-head that way.

Great. That's very helpful. Thanks so much.

Sara Senatore, Sanford Bernstein.

Thank you. Just a couple follow-ups. One is about advertising and just generally speaking, it is a little higher I think this quarter. I thought most of the expense was going to be -- the pressure was going to be kind of frontloaded as you spent around the creative. So I'm just trying to get a sense of whether going forward this is a higher bar because it is important to drive traffic in this kind of environment. And the second question was a related question. I think in the past you've talked about trying to bring in potentially new customers, kind of differentiating between your core Chili's customers, but also trying to expand it, again, in the context of declining traffic. Can you talk about whether you've seen success with the Mexican menu launches, whether you have actually seen evidence that you are doing that or have the trends sort of persisted in terms of what your customer base looks like? Thanks.

Hi, Sara, I'll start off with the advertising question. So in past quarters, we have kind of talked about an advertising mismatch, if you will, where really in the P&L and what you see on the expenses, advertising is honestly spread out over the full year and so the expense is pretty consistent. Our attempt in past quarters was trying to really help clarify maybe why you were seeing a higher advertising expense in the first half of the year and not really or kind of really second quarter and not really maybe seeing the impact yet. So we really started the advertising --.

Yes, we've kept the accrual consistent throughout the year, so the quarterly accrual rates are consistent. The spends within didn't really -- we really didn't start increasing the spend levels until mid-second quarter because of the upfront buy and kind of the inventory we owned. And so pretty consistently now through the year, the spend levels would be about the same relative to prior year and will wrap through that whole process if we keep this strategy in the first quarter of next year.

Thank you. And then the custom --?

On the customer side, I think similar to what I mentioned before, Sara, is we are I think -- we think our strategies are working on both fronts. We are hearing and seeing some guests come in that haven't come in for a while on some of the new innovation that we are out there talking about and advertising. And so when we talk about bowls, we are starting to attract and interest some new or lighter or lapsed users into the brand or back to the brand that haven't been here for a while. And then obviously as we start to renovate items that are favorites, but are now taking up a step or two, we are starting to hear and see frequency on some of those guests with regard to their willingness and desire to come back as they tell us the food is better, the experience is better. So it is working on both fronts.

Thank you.

Jeffrey Bernstein, Barclays.

Great, thank you. A couple of questions. Just one on the Chili's pricing front, it looks like you are in that low 1% range. I was just wondering if you can give some context around that, whether we should assume that holds going forward or might you vary that. I'm just trying to think, as you talk about the cost side of things, whether or not that 1% would be enough to protect or drive margin. I think you mentioned that COGS would be somewhat benign looking past this next quarter, but labor would be a larger headwind. So how you think about that 1% price and if traffic is still weak, would you do less price and sacrifice the margin to kind of help the traffic along or do you want to absolutely protect that margin?

Hey, Jeff, Wyman. Again, we are very cognizant of the margins. We are also very much aware of our price and the elasticity of price and what it does to drive traffic or put pressure on the traffic. So we are constantly evaluating those. Our point of view, our position right now is try and keep pricing as low as we can in that 1%, 1.5% range would probably be a good number and see if we can get the business model to work and other things that we can do inside the business to mitigate any kind of headwinds we see from a cost perspective. And we have been pretty successful at that over the last few years and we want to continue to do that.

We also think that, again, if we can get the mix to work for us and we have been very successful at getting mix to help us overcome some of the challenges as well, we are going to continue to push that. So things like a higher alcohol percentage is another way to mitigate just straight price. So between that and being very cognizant as we've talked about it several times about driving traffic, we would try and keep our pricing somewhat low.

Got it. And then just two follow-up questions; one just on the tablet. I think you mentioned a per-person average lift and a speed-of-service benefit and whatnot, but I thought you had separately mentioned that maybe you weren't seeing so much of that just yet. So I am just wondering what history has shown with those 100 plus units that you have had for a long time or more recently what you have seen in terms of specifics on whether it is the average check lift or the speed-of-service lift or the pay at the table percentage or any kind of metrics around that.

Yes, again, for really competitive reasons, we don't want to share too much of the results. We think we have made the investment, we have made the commitment, we have put literally tens of thousands of these in our restaurants and we are going to work them hard for our business results. So without trying to be too cryptic, we think there is shorter-term opportunities and longer-term opportunities and we just want to keep some of that stuff more inside as we take our first-mover advantage and go to town with this product.

I got it. And then just lastly, I know in the press release you mentioned your standard language around your guidance policy. It sounds like at this point that's a reiteration of that policy, but now that we are entering the fourth quarter, I didn't know -- the range is still somewhat wide. I think EPS culminated at $2.65 to $2.75 and then you gave some comp capacity and margin expectations, but is there any kind of directional trend we should assume in terms of -- within that fairly wide range or at this point you are just leaving it kind of culminating in a $0.10 wide width for the fourth quarter?

In terms of our policy, as you stated, we do provide annual guidance. We do that once a year. Any kind of insight we would probably provide would end up being some kind of a quarterly insight and we absolutely would not want to do that. So there really is no commentary on guidance at this time.

Got it. Thank you.

Bryan Elliott, Raymond James.

My question was asked. Thank you.

Jeff Farmer, Wells Fargo.

Thank you. Hoping to shift gears a little bit on you guys, so as you look to further accelerate international unit growth, how should we be thinking about the growth rate of that franchise royalty and fee revenue line? I know there is a lot of things captured in there, but again a pretty healthy amount of that is going to be acceleration of your international unit openings. So I am curious about that. So what rate of growth makes sense moving forward given your sort of planned unit openings through FY17? And then any color you can provide whatsoever on flowthrough again would be helpful largely considering that I believe you have a big chunk of your infrastructure already in place for some of that international development. So a lot of questions, but again any color would be helpful.

Yes, in terms of international growth, I mean what we will share and what we shared in the past is really our expectation of how many units we will open. And so we've talked openly and publicly around 30 to 35 openings a year and really having that continue on. So you can almost kind of take those numbers and incorporate a revenue impact.

And then nothing on profit flowthrough considering that that is a very high-margin royalty dollar?

Consistent with what we've seen. I think it is consistent with what you would expect from franchise royalty income. Obviously much better than a company-owned revenue stream, but pretty consistent with what you've experienced this year.

Okay.

And I think that is the value of our business model when you look at Brinker as a whole and look at our mix between company-owned and franchise. To your point, when you get, if you will, 4% royalties kind of coming through, that does help on the bottom line.

And then one follow-up question, which I believe is just a different way to ask something that has already been asked. So my understanding was that media waits were up low double-digit percentage in that March quarter. I did hear you say something about $0.02 per share of incremental cost pressure related to media, maybe I didn't, in the fiscal fourth quarter. But as I'm just thinking about the June quarter, is it fair to assume that you are going to see another quarter where your total rating points or your media wait does increase by a low double-digit percentage relative to the prior year?

Yes, a couple of things. First, it's not low double-digit growth. So again, when you think about media inflation being 6%, we took the budget up probably 10%. So the budget has gone up, but the wait levels have not gone up that much. What we talked about was just we've given back some share of voice as we kind of leveled our media spends over the last few years and what we did this year was we just took them up to mitigate some of the inflation that has been taking place over the years in the media world that we weren't compensating for. So wait levels are up, but they are not up to that level and again, they have been up probably mid to low single digits starting in the second quarter, mid-second quarter. Again, we anticipate that taking -- continuing that strategy through the fourth quarter and we will make a determination as to whether or not we employ that going into 2015 and we will give guidance on that as we get into 2015.

All right, thank you.

Alvin Concepcion, Citi.

Thank you. As you look into the product innovation pipeline for the rest of calendar 2014, do you see the focus on more major new platform launches or will it be more on existing primary platforms? And I guess related to that, I know they are going to be more skewed towards the recent trend of the higher-margin low check items.

Hi, Alvin. Yes, I think when we look at strengthening the relevance of the brand, food innovation is key. We are focused on taking key platforms and those are the ones that really resonate with the consumer and our brand. So I mean obviously Fresh Mex is one of those. You could probably think of the other three or four that also work very well within our brand and doing what I mentioned in the prepared remarks, which is renovate items that need to be kind of brightened, freshened and rethought from a presentation perspective and other aspects and then bring into that platform some new items that add energy and relevance to consumers that are interested in the category, but maybe aren't seeing the offerings within the category that resonate with them the most.

So that is the strategy we are working forward on. We've really got a plan mapped out for quite a while now that has a pipeline that allows us to take those opportunities and leverage them on those fronts. And we think that again is a strategy that is going to work best for us. And it is not just in menu items. As I mentioned, it is our beverage strategy, it is our appetizer strategy and I think Guacamole Live, which we just rolled out, is a great example of taking an item -- we've had guacamole forever. Our guests love it. We have just freshened it up and we are bringing it to them now in a way that really shows the freshness and the quality of the product that Chili's makes. Every day, we were always making fresh guacamole, but now we bring it right out front and we show them and we let them also customize it. And so it just starts to not only add to the options they have as a guest, but it starts to change some of the perceptions around what is really going on in a kitchen at a Chili's.

Great. And obviously, you've got some pretty good leverage on your cost of sales line and you called out several items that contributed to that. Is there any way you can break out the magnitude of the benefit from things like the new menu items, Fresh Mex or at least rank the largest contributors to the leverage in the quarter?

So the order in which we talked about -- the order in which we talked about the impact to cost of sales is really kind of the order of magnitude.

That's it from me. Thank you very much.

All right. Thank you.

That was our last question. I will now turn the floor back to Chris Bremer for any closing comments.

Thanks, Tom. This concludes the call for today. We look forward to your participation in our fourth-quarter earnings call on August 7. Thank you very much.

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.