Brinker International Inc (EAT) 2015 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Brinker International's third-quarter fiscal 2015 earnings release conference call. (Operator Instructions)

It is now my pleasure to turn the floor over to your host, Jill Cuthbertson. Madam, the floor is yours.

Thank you, Anthony. Good morning, everyone, and welcome to Brinker International's third-quarter fiscal 2015 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 risk and uncertainties, which could cause actual results to differ from those anticipated. Such risk and uncertainties include factors more completely described in this morning's press release and the Company's filings with the SEC.

On the call we may refer to certain non-GAAP financial measures that management uses in its review of the business and believes will provide insight into the Company's ongoing operations. Reconciliations are provided in tables in the press release and on Brinker's website under the Financial section of the Investor tab.

Consistent with prior practice, we will be silent on inter-period sales or other key operating results yet to be reported, as the data may not accurately reflect the final result of the quarter referenced.

On our call today you will hear from Wyman Roberts, Chief Executive Officer and President, Brinker International; and Tom Edwards, Executive Vice President and Chief Financial Officer. Following their remarks, we will take your questions. Now I will turn the call over to Wyman.

Thanks, Jill. Good morning, everyone. We appreciate you joining us on the call today.

As you saw in our press release this morning, Brinker reported third-quarter earnings per share before special items of $0.94, an 11.9% increase over same quarter last year. Brinker delivered positive comp sales of 1.7% during the quarter; but when you adjust for the movement of Christmas out of the second quarter and into the third quarter this year, comp sales would have been up 2.6%.

So another solid quarter despite, some more challenging weather across the industry than any of us anticipated. Let me jump into how the third quarter played out across our brands but, more importantly, what we see on the horizon for the business.

First, let's talk about Chili's results for the quarter and the progress we've made on our strategic initiatives. Chili's is close to wrapping up our fourth consecutive year of comp sales growth, delivering positive comp sales of 1.9% for the quarter, or 2.8% when you adjust for the holiday shift.

From a traffic perspective we're also in our fourth consecutive year of outperforming our peers as measured by KnappTrack and Black Box. As we look at the industry, we do see many of our competitors taking larger price increases; and we believe that with our strong value ratings we have room to take additional pricing.

So mid fourth quarter, we will take a price increase of approximately 1%. That will reduce the pricing gap but still keep us conservative compared to the category.

As I shared last quarter, our journey to evolve the Chili's brand centers around five strategic pillars designed to further differentiate Chili's food, service, and atmosphere and create a relevant new-school experience for our guests. Let's touch on what we executed within those strategies during the quarter and our plans for next quarter as well.

First, we've continued to evolve towards our long-term culinary vision focused on Fresh Mex and Fresh Tex. We're excited about the guest response to the clear culinary point of view we are creating for the brand, as well as our innovation pipeline for the future.

During the third quarter we established Fresh Tex as we refreshed our rib category and introduced new lighter choices like Ancho Chile Salmon and Grilled Avocado Steak. We are pleased with the innovation opportunity this pipeline opens up for our guests.

Three weeks ago we launched our spring menu featuring new Fresh Mex items like White Spinach Queso and our new Top Shelf Taco category which includes Ranchero Chicken Tacos and Carnitas Tacos. The spring menu also built on the Fresh Tex platform, adding new in-house smoked wings; and we eliminated a number of low-selling items that don't align with our new-school vision, which simplifies our menu, strengthens our culinary point of view, and streamlines our operations, enabling us to focus on areas our guests tell us are most important to them: specifically, speed of service and delivering food at the perfect temperature.

This journey to new school is about improving the guest experience and their perception of the brand. It encompasses all aspects of our business: food, service, and atmosphere.

It also includes leveraging technology as an additional way to drive relevance and differentiate within the brand. It's really an exciting time at Chili's from a technology perspective. We've laid the foundation to drive a personalized new-school experience unlike other casual dining companies, and we are reaching three significant milestones during the fourth quarter that will help us improve the guest experience and drive sales and traffic.

First, we are introducing our loyalty program called My Chili's Rewards. This program provides a fully digital experience where guests can use their mobilephone, our website, or our Ziosk device to sign up for the program and track their points; and they can use the Ziosk to redeem their points when they dine with us.

Our focus is to drive incremental visits, so we've leveraged guest feedback to craft a program that delivers what matters most to them. First, there are multiple ways to earn points. Second, the guest can choose any food item on the menu within their point balance rather than a limited set of options we choose for them.

Third, they can split their check down to the item level. And finally, their points don't expire as long as they dine with us at least once every four months.

During the fourth quarter we'll drive enrollment in the loyalty program both in-restaurant and by leveraging our extensive email database. Based on our results in test, we expect to see sales and traffic lifts in subsequent quarters.

Next, we're leveraging our partnership with Ziosk and with American Express to introduce a pay with points system for American Express customers. Chili's is the first casual dining brand to offer this option, where our guests can swipe their American Express card on our Ziosk device and pay for their meal with their AMEX reward points.

With both AMEX and My Chili Reward programs, the guest is in full control of their own transaction, without needing a server or manager to intervene. We are looking forward to realizing the sales-building potential of both these programs.

But we are not stopping there. Chili's journey to new-school technology has gone from our kitchens of the future, to new point-of-sale and back-office systems, to our tabletop devices; and now we're moving to the host stand with new technology called NoWait, which allows our hosts to provide more accurate wait times and to texts guests when their tables are ready.

In July, well enhance Chili's mobile app to enable guests to understand their wait time and add their name to the list, and then track their place in line so they can show up when their table is ready. We believe this technology will not only further improve the guest and team member experience but will also support our efforts to improve throughput by turning tables faster.

With these investments in technology, we're building an infrastructure that enables us to gather meaningful data at every guest interaction, from the host stand to Ziosk to our GEM surveys; and we're leveraging that data to build a more personalized guest relationship and shift even more of our marketing spend towards a digital direct-to-consumer strategy. We are really pleased with the continued momentum and the future of our domestic business.

On the international front, sales trends are starting to turn around despite ongoing economic challenges across the world. Global comp sales were up 1.2% during the quarter, primarily because of effective media strategies implemented in Mexico and Puerto Rico. We also opened two new restaurants, bringing our total to 318 locations in 29 locations and two territories.

The Chili's brand continues to be a strong and relevant presence around the world, as demonstrated by our results and growth potential. Our partners believe in the brand and continue to embrace and implement the strategies we've benefited from domestically.

Turning to Maggiano's, comp sales were positive 0.1%, or 1.4% with the holiday shift adjustment, marking our 21st consecutive quarter of comp sales growth. With more of the brand's footprint being in the Northeast we were more negatively impacted by weather during the quarter. But we're encouraged by the progress the team has made to strengthen the business model.

We've seen improvements to cost of sales, with the simplified menu we introduced last quarter, as well as the new waste control tools in the restaurant. These business model improvements are helping to strengthen the brand and improve the performance of the new smaller restaurants as well, which positions Maggiano's well for future growth.

So overall, another solid quarter for Brinker. We feel great about the work being done across the brands as well as the future of our business. And now I am pleased to introduce our new Chief Financial Officer, Tom Edwards.

Tom brings a wealth of knowledge and experience in international multiunit and franchise environments across the hospitality and food industry. Tom spent 14 years in finance leadership with Nabisco and Kraft Foods and most recently as the Chief Financial Officer of the Wyndham Hotel Group.

Tom is aligned and committed to Brinker's capital strategy, and he is already adding great perspective and long-term strategic thought leadership to our team. Now I'll turn the call over to Tom to walk you through the financials for the quarter. Tom?

Thanks, Wyman, and good morning, everyone. I am thrilled to be part of the Brinker team and to have the opportunity to share our results with you today.

As you just heard, our third-quarter earnings per share before special items was $0.94, representing an 11.9% increase over the same quarter last year. Third-quarter revenues were $784 million, an increase of 3.3% over prior year.

Total Company-owned comp restaurant sales increased 1.7%, representing another quarter of strong growth despite weather challenges across the industry. This comp sales increase was driven primarily by a 1.2% improvement in mix and a 0.8% price increase, partially offset by a 0.3% decline in traffic. However, when we adjust for the 90 basis point impact associated with the Christmas shift Wyman mentioned, our traffic would have been positive 0.6% for the quarter.

Restaurant capacity growth from new Company-owned development also contributed to our revenue increase. Capacity was up 1%, with Chili's and Maggiano's contributing equally to that growth.

Franchise and Other revenues were $22.5 million, an increase of $2.4 million over prior year, driven primarily by the impact of revenues from tabletop gaming and royalties from our Chili's retail food products. Additionally, the Company benefited from an increase in franchise revenue stemming from a net 12 franchise openings in the past 12 months, an increase in US franchise comp restaurant sales of 3.1%, and an increase in international franchise comp sales of 1.2%.

Now turning to margins. Our overall restaurant operating margin improved 30 basis points to 18.9%, compared to 18.6% for the third quarter of fiscal 2014.

Cost of sales increased 30 basis points to 26.8%, driven by unfavorable commodity pricing and mix, partially offset by favorable menu pricing. Commodity pricing was unfavorable by 30 basis points, driven by increases in the price of burger meat, which is largely market-based and not contracted, as well as higher fajita beef and seafood costs.

Mix was unfavorable by 20 basis points, mainly due to our new Fresh Tex menu items lapping prior-year Fresh Mex features, partially offset by lower oil usage related to our new fryers. Menu pricing was favorable by 20 basis points, helping to offset commodity pressures in the quarter. Currently, 69% of commodities are contracted through the end of calendar 2015.

Restaurant labor decreased 10 basis points to 31.5%, largely resulting from leverage on higher sales and an adjustment to lower employee health insurance expense associated with recent claims experience, partially offset by higher wage rates. Restaurant expense was $173.6 million or 50 basis points lower than prior year, mainly as a result of leverage on higher sales and adjustment to lower workers compensation insurance expense associated with recent claims experience, lower maintenance costs, and fewer asset write-offs associated with our decreased restaurant capital spend. This was partially offset by higher tabletop device rental and credit card fees.

Depreciation expense increased $2.4 million to $36.6 million, consistent with our recent and ongoing investment in key capital initiatives. General and administrative expenses were $35.2 million, an increase of $1.2 million over prior year, driven primarily by an increase in technology and innovation expenditures.

As you know, our increase in G&A has been slower than we originally planned, as some of this technology has taken longer to design and implement. However, relative to our level of spend in the third quarter, we do expect an increase in technology in overall general and administrative expense to close out the year. This is critical to deliver several short- and long-term key revenue-generating programs including the loyalty and NoWait initiatives Wyman mentioned.

Other gains and charges for the third quarter primarily reflect a favorable settlement resulting from a class action lawsuit with MasterCard and Visa. Our tax rate before special charges was 31.5% versus 30.6% in the prior year, driven by increased earnings, partially offset by tax credit changes.

Now I'd like to review our capital allocation in the quarter. Capital expenditures for the quarter were $27.6 million, bringing us to $107.1 million in capital expenditures year to date. Our Chili's reimage program is effectively complete, with just a handful of sites concluding over the next couple of months.

During the quarter, we refinanced our existing term line loan and revolver into a $750 million revolver-only facility. We had strong support from our bank group and were able to upsize our facility while achieving better pricing. The new facility provides strong liquidity to support our investment-grade credit rating and our deployment of capital, including our share repurchase program.

Free cash flow, which is operating cash flow less CapEx, was about $168 million through the first three quarters of fiscal 2015. This strong free cash flow generation was deployed to support the business, pay dividends, and repurchase shares.

For the quarter, we bought 1.7 million shares for $104.2 million; and we ended the quarter with $63.5 million of available cash on our balance sheet. Since the end of the third quarter, we've purchased another 926,000 shares for $56.2 million, leaving an outstanding authorization of about $394 million.

With that, I'll turn the call back over to Wyman to share final comments before we open the line for questions.

Thanks, Tom. It's great to have you on the team.

In closing, we feel really good about our continued momentum. We're excited about the upcoming initiatives we shared with you as well as our long-term strategies for the business.

But most importantly, we are proud of the quality of the team we have in place. Our restaurant operators and our restaurant support teams are second to none, and we're confident we will continue to take share and reach our target of a $4.00 earnings per share by fiscal 2017.

With that, we'll open it up to comments, questions.

(Operator Instructions) Jeffrey Bernstein, Barclays.

Good morning. Thank you; and Tom, welcome to the team.

Thank you.

Two questions for you, just one specific to guidance and your policy. I know this comes up a lot on the quarterly calls; but with now only one quarter left in your fiscal 2015, you can essentially back into what the fourth quarter would be.

It would seem to imply earnings in the $0.85 to $1.00. And the comp is getting more attention because it would seem like you could do a negative comp and still -- a modest negative comp in the fourth quarter and still do your 2%, which is the high end of your 1% to 2%.

So just wondering if you can give any tightening of parameters in terms of earnings or comps with, again, only one quarter to go. Especially as you made that comment about the G&A going up in the fourth quarter -- and then I had a follow-up.

This is Tom, Jeff. The first thing on the guidance and policy, I guess just to start by reiterating the overall EPS guidance of the $3.00 to $3.15 which you referenced and then backed into the earnings number for the quarter or the range for it. And that's what we would reiterate.

The pieces we wouldn't really adjust unless they were materially different from expectations. We feel like the EPS number is the most important, the most critical to guide to. So we wanted to hold to that overall guidance.

Okay. So the EPS is intact. But the different pieces, you could be higher or lower, any of those; but you are still just sticking to the bottom-line EPS number?

That's accurate, yes.

Okay. Then the follow-up was just on the comp. You talk about the trends for the core Chili's brand. And ex- the holiday shift, it would seem like you beat -- at least if you look at the Knapp-Track Index -- by maybe 60 basis points or so.

I know the past couple of quarters you were beating by 100 or 200, so a narrowing. But I'm getting a sense, Wyman, from your commentary that you don't mind that narrowing if perhaps you are driving it more on traffic; competitors are maybe driving it more on check.

So I'm just wondering if you can size up whether that gap is a primary focus of yours, or whether you would be very happy to see the gap narrow if you can still drive that kind of profitable traffic and sales growth.

Yes, Jeff. Obviously, we like the -- we are all about taking share. So the narrowing of the gap is a concern to us. We want to -- we think it's critical that we continue to take share.

We monitor our weekly results compared to the industry and the gap. And while it's still a positive gap, some of the difference that we have, as you mentioned, has slipped a little bit.

We think, as you've noticed, some of that is just from a more competitive pricing strategy that folks have put out there. The industry has priced up more aggressively than we have, over the last six months especially. So as we look at that we think there is an opportunity for us to close some of that gap and take some pricing that we may have been a little bit conservative on, which again with our focus on traffic we are hesitant to be the first to price.

But as we see how the industry is playing out now we think there is some room. And as I mentioned, we will be taking a 1% price increase here in the middle of this quarter.

But more importantly, looking forward we think the initiatives that we outlined in the prepared remarks really give us confidence that we will be able to continue to gap the industry and keep that market share, kind of stealing market share that we've been able to do for the last four years, that trend intact.

Understood. Thank you very much.

John Ivankoe, JPMorgan.

Hi, thanks. A couple of questions on 2016, just as specifically as you can talk about and feel comfortable in talking about them today. Wyman, we've talked a lot in the past around a $100 million approximate CapEx number in fiscal 2016, with you always leaving the door open that it could be higher if you found some proper ROI-returning initiatives that would justify you taking that CapEx number up. So just wanted to get just an update in terms of where your thinking was on that, and then a follow-up as well.

Sure, John; this is Tom. I'll start. On the CapEx number, I mentioned that we spent year to date $107 million on CapEx. We are still in the range of the $130 million to $140 million that we provided for guidance earlier.

I would say that at the end of this fiscal year we will be complete on the re-image program, which is a significant portion of our CapEx this year. So we will have some flexibility heading into 2016; but we will not be providing that guidance until the end of our fiscal fourth quarter.

In terms of that flexibility, I mean would it -- do you see any kind of cost initiatives that might be in the pipeline? Would you take up unit development? Is there anything on the corporate side that maybe we are not thinking about?

Just explain a little bit more what you mean by flexibility.

Yes, John, again, without giving specific F16 guidance we don't have anything that we would today be out there setting up? Right? Then obviously if it's a big capital program we would have to be fairly involved in it at this point; so yes, I think you are safe to work off the assumptions that we gave and have been giving in terms of parameters.

And that $100 million plus or minus a little -- or more plus probably, not much minus -- but in that ballpark is what we said when we gave long-term guidance back to our F17 goal of $4.00. So yes, I think right now everything still holds in that range.

Okay, fair enough. Then secondly on G&A, how much was deferred from the third quarter?

The question is, again, you related to 2016. How much of a step up do you think 2016 is relative to 2015 just in terms of your overall corporate headcount, salaries, and again, initiatives on the technology side, maybe things that you've talked about or things you haven't talked about in terms of the G&A spend in 2016.

Sure. This is Tom. A good portion of the G&A spending is against some of the technology initiatives both that are coming out in the quarter and building the foundation for future technology enhancements and platforms so that we can use all the data and information to further drive revenue. What I would say is that it has grown a little more slowly this year.

We expect a higher amount as we head into Q4 on a run-rate basis from Q3. But when you look at the full year of fiscal 2015, it won't be reaching that $10 million number (multiple speakers).

Understood. How much of that is one-time, like implementation costs versus what will become a permanent part of the cost structure?

I would look at it more as a permanent part of the cost structure.

Okay, thank you.

David Palmer, RBC.

Good morning, everyone. Best of luck, Tom. Wyman, you mentioned that the tests in My Chili's Rewards suggest that you should see an improvement in traffic and sales in subsequent periods. Based on what you were seeing in test, do you think that this should be a slow build as some loyalty programs have been, where you get a feeling that the Company is collecting guest data and getting ready to do more direct marketing, and they are going to expect more result in the future but not so much of a quick boost to sales? Or are there elements to this that you think could provide a quick hit to your sales?

Hey, David. The expectation, and what we've seen actually -- and we've been in a significant number of restaurants for over four months, so we've got really good insight into how this program is going to play. It's just a matter of gaining scale.

You've got to get members to sign in, and so that's the only reason that there is a little bit of a ramp up to driving traffic through the program. So we'll sign folks up through multiple different avenues, converting email, are significant email database over, and then in-restaurant through again a couple of different ways, and then obviously through digital marketing.

So there is -- that's what happens for the most part in the quarter, is that we are just getting the program seeded. But we will be driving traffic in the quarter with it, but it will have -- it's kind of been -- it will be ramped up and moving at a much faster speed as we exit the quarter.

Then just with regard to the NoWait technology, just so I can imagine it, can you get into the queue and -- like for instance, to the Westbury location I could off-site get in the queue, get a -- or do I need to get there first and then get in the queue? How will it work?

So starting -- the first phase will be in-restaurant. So when you walk in we'll put you on the wait through this electronic medium, and no more pages or any of that technology.

You'll give us your cellphone number and we'll page you when your table is ready. We will also let you know that there is a loyalty program that you may be interested in joining, and you can just sign on with your phone while you are waiting.

In July when we upgrade our mobile app, you'll be able to do it from your mobile app wherever you are at. Whether you're at home or whether you are in the mall, you will be able to check, see what the wait looks like, get on, and then time your arrival at the restaurant to a much closer time when your table is ready.

Nothing kills a restauranteur more than to watch people who make all the decisions to get to your restaurant, get there and decide the wait is too long and turn around and walk out. And with this technology, we will see a lot less of that. People will be timing their arrivals and then maximizing our throughput.

Thank you very much.

John Glass, Morgan Stanley.

Thanks very much. I did want to go back to the comp and this narrowing of the gap that you talked about. It does come at a time when you've got your system remodeled; Ziosks are in all your stores; a lot of menu innovation. So it would seem like this wouldn't be the time it would narrow.

So maybe just talk about what you think caused that, other than maybe just it's a competitive world out there. Were there weather anomalies that may have hurt you more?

Maybe give a sense of how the quarter flowed in comps? Was it a bad month, and if we saw the quarter, the months, we wouldn't feel as strongly?

Yes, I mean I think without getting back in monthly data we don't want to do too much of that -- but I will say the industry -- and you guys all saw and heard that January was really a strong start. There were a lot of things going on, and we didn't have as strong a start as others.

So January was kind of an outlier month for us relative to the gap. And then the pricing issue which I mentioned has also just been building over the year; and we've acknowledged it and seen it.

We've just been able to deliver the results that we were targeting, and again really focusing on making sure that our value proposition is locked and that our traffic trends are remaining positive. So those are some of the things that happened both that influenced our decision on pricing and that we also just saw in the industry from an external perspective.

We've talked about deal rates and whether or not the environment is more or less competitive. Again, everything we continue to see says that there is no back-off from the competitive set with regard to promotions and deals.

The number of guests that are eating on-deal is still has at an all-time high. So I think that pressure is continuing to be out there.

And we are not really playing that game, so there could be quarterly moves that people are making just based on limited time offer kind of activity.

If you think of those three pillars I mentioned -- the remodels, the menu innovation, the Ziosk -- when you parse those out is there any way to say one maybe hasn't contributed as strongly as you had hoped? Or is it all mixed together at this point and you don't really have that ability any longer?

Well, again, we're on the back end of our remodel program. It's been a three-year program, so that's working its way through and we've seen a lot of the benefit of that. We've wrapped on a lot of that, so there is not a huge impact to the re-images on the numbers.

I think all the rest of the initiatives continue to work well for us. The Ziosk opportunity isn't -- wasn't just a one-time opportunity. It really is the platform that we are using to leverage things like this loyalty program which, again, based on what we've seen in tests we are very excited about its potential.

And we don't -- and the American Express program, where we're going to be the only restaurant company out there where you can go in and when you use your American Express card we will ask if you want to pay with your points right there, and you can decide. Those are enhancements that this technology allows us to bring to the guest that others aren't.

Just on an accounting standpoint, is there an accrual period where you've got to somehow adjust earnings or do a charge against earnings as people start to accrue points before they start to redeem them? Is there anything that's material in that respect?

There is nothing that is material in that respect, although they will have to accrue points and point balances over time.

But it is -- the way we structure the program, you've got to come and visit us every four months. It really is a loyalty program. There is not -- to keep your points alive and to stay engaged with us, we want you to be a loyal guest.

The beauty of what we are seeing again in the test markets is a lot of our less-frequent guests have signed up, and their visit frequency doesn't have to increase a lot for it to become an incremental visit for us.

Great. Thank you.

Jeff Farmer, Wells Fargo.

Great, thanks. Just two questions; one is to clarify something. Year-to-date remodel CapEx dollars, do you know what those numbers or those dollars are through the first three quarters of the fiscal year?

It's about $47 million.

Okay. Then as you contemplate for the final quarter, where do you expect that number to finish up for the full year?

That was a full-year number. We just had $12 million to finish in the fourth quarter.

Okay.

And as of this date a good portion of those are already done, so we feel like we're most mostly through that amount.

Okay, and then just one more. Look, with the market's increasingly heightened focus on refranchising opportunities really across all sectors here, especially for some of these maturing concepts, you get asked this every three or four calls. But what are your latest thoughts on the pros and cons of refranchising some of your company-owned restaurants?

Hey, Jeff; it's Wyman. We are always looking at alternatives. We still think there's sales and earnings and growth potential in the business.

Again, getting to a $4.00 earnings per share target in 2017 is our indication that we see the potential to continue to grow the business. So right now it's not the priority for us, but we always are looking at overall strategy as well as individual markets.

All right, thank you.

Andrew Strelzik, BMO Capital Markets.

Hey, good morning, everyone. Just along the same type of lines, you own more than 20% of the real estate in your Company-owned locations. Can you just refresh us on how you are thinking about how it makes sense or whether it makes sense to own any of that real estate?

We are, again, aware of some of the thinking around this part of the business. We've evaluated all of the alternatives, as you can imagine. It's gotten a lot of focus in the industry over the last few years, and so with our partners we've looked at what makes sense. And currently keeping the real estate in the portfolio, the way it is, is the most beneficial thing to do for our shareholders.

Okay. If I can sneak one more in, my sense is that your ability to manage the commodity inflation over the last several years has been better than most of your peers. I'm wondering as you continue to contract farther out, does that come up in conversations with your suppliers?

And as we are seeing some of the underlying commodity prices roll over, does that limit your ability to capture some of that going forward?

Well, there are a couple things we've done, Andrew, to create that environment that shows our cost of sales getting better and our ability to manage it. We have a -- we have really brought in a great team in the supply chain world for us, to help us better understand supply chain. So that, we've leveraged that extensively, this team.

The other thing that helps us is we've got a varied menu. So we are able to move around products a little bit, maybe more nimbly than some other folks, because we're not locked into one specific protein, which is typically what drives a lot of this fluctuation in commodity costs.

So I think those are a couple things we've done to allow us to be able to mitigate some of the increases that others have seen. Also, with just our new menu innovation, adding Fresh Mex and Fresh Tex, but especially Fresh Mex to the platform and leveraging that category, the profit margins on those menu items has been significantly better than the base; and so that's helped us also mitigate some of the increases.

Great. Thank you.

Howard Penney, Hedgeye Risk Management.

Thank you very much. Wyman, I had a question on pricing. I know you don't make pricing decisions in a vacuum or based on one factor. But when you look at the industry's price increase that they've taken over the last couple months it's also been coincident with the rollover in traffic from the industry.

So if they are taking price and that's not the best decision for consumer choice and behavior, why is it? Or are there are other issues that you are looking at to raise prices?

Yes, it's a great question, Howard, and you're right. I think as the industry is rolling up -- I think, based on a piece you may have put up, it's rolling up at 3%, and there has been some traffic decline. And I think 3% is too aggressive.

What we are talking about is going from right now we are rolling at about a 1% to take it closer to a 2%. And that's the range I feel historically we've been able to maintain our value proposition, keep our traffic where it needs to be.

But I think you start getting significantly over 2% and history hasn't been kind for the industry in general. Obviously, every brand has its own elasticities. But as an industry, once you start pushing much over 2%, it doesn't seem to go unnoticed, and we start to see some pressure at the traffic level.

Great. Thank you very much. Just the next question I have is -- I'd put it in the category of kind of a random question. But operating in California with the water restrictions that we read and hear about, are there issues that you will face down the road? Or just curious how the industry is being impacted by what's happening in California.

Well, so far there hasn't been anything significant. Obviously, they've been in a tough situation for a while.

So we've been dealing with it and understand the importance of conserving water wherever we can. There are also, though, similar situations throughout the country on a more localized basis, and we are familiar with how to make sure that we are conserving.

I think from an industry perspective, we will just have to wait to see how -- if it has an impact on any of the commodities and any of the products that get produced out of California. That is probably the bigger impact right now.

But there isn't any issue in terms of the guest experience or washing dishes or just --

No, no.

It's kind of a random question, I know, but it's --

No, and people -- whether you get water on the table without asking, you'll go through those scenarios; and people will have to ask for water. And you will just have to be very sensitive to: okay, how are we using our water?

But that sensitivity has already been dialed up fairly high really across the country, but obviously in places that are wrestling with some drought conditions.

Okay, thank you.

Chris O'Cull, KeyBanc.

Thanks; good morning, guys. My question relates to traffic momentum and just some of the initiatives over the past few years. In theory, Wyman, guests come into a restaurant, see all the improvements, and then come back more frequently.

Chili's had some traffic build in the first and second quarter, but then it slowed here in the third. Are you concerned that guests are not finding a reason to visit more frequently?

No, I think there are, first of all, macro issues out there that are continuing to provide some headwinds for consumers. We ebb and flow with the industry on some of those things.

I think the initiatives that we've got out there and everything we can see with regard to our guest satisfaction tracking results, internally and externally, tell us that they are finding the improvements that we are making to be significant, that they are driving a desire and an actual repeat. I think it's just a tougher market out there, and so you are going to have to really step up your game to take share.

How will the loyalty program improve that response or frequency, other than through incentives?

Well, I think it does a couple of things. Again, this loyalty program, the level of detail we have and the ability to interact with our guests, it's much more specific than a lot of loyalty programs. So what we are able to do is tailor the conversation to be much more specific to what makes -- appeals to you.

So based on the information you share with us and what we get from our system, we will know your dining preference and your food preference and your drink preference. And we can help tailor the loyalty rewards, if you will; because there is a reward, but it will be more specific to what's appealing and motivating to you individually, versus some broad general offer.

In addition, the points will expire after 120 days. So there is an incentive for people to keep coming back to renew them or to get more points.

Okay, okay. Then lastly, you mentioned shifting marketing spend towards digital. Do you expect the number of TV airings to be down going forward?

Well, it's really an F16 strategy that we are in the middle of laying out. So we'll have a lot more color on that.

But as loyalty rolls and we have more of a conversation directly with our guests, then we may be shifting dollars away from more mass. Doesn't mean we will use marketing less; just means we will be shifting channels.

Will that shift go towards that gross to net difference, I mean to the incentives?

Some of it could go there, yes.

Okay. Thanks, guys.

Sara Senatore, Bernstein.

Thank you very much. Just a couple of follow-up questions. First, on the comp drivers, historically it feels like every year you've launched a platform, and it's had a big initial lift and then maybe leveled out. So whether that was Fresh Mex more recently, or all the way back to when you relaunched steak, I guess I was just trying to figure out with the Fresh Tex launch, did it meet your expectations?

Is that the way to think about it, that this is the biggest order and then it dissipates a little bit? Or just trying to calibrate this versus other menu initiatives you've had. And then I do have another, please.

That's a great question, Sara. I think as we stated when we introduced Fresh Tex, it's a little bit less intuitive to consumers, obviously, then Fresh Mex. Right? So we know there is a build on Fresh Tex because we have to educate the marketplace on what exactly it is.

What we know from our guest feedback and consumer research is that it resonates, and it makes sense with the brand, and it's actually motivating. It's just not as clear, and so there is a marketing effort that's going to take a little longer to seed with consumers in terms of exactly what does Fresh Tex look like and taste like in our restaurants.

And everything we are working towards says that's still the right way to go. It's a little bit of a longer play probably than a Fresh Mex play, just because of the familiarity the marketplace has with that menu.

But the beauty of it is when you own it, you own it. You don't have to share with as many people, and so that's the investment we are making into Fresh Tex.

So yes, it met our expectations. Again, we were confident with the strategy and with the way it rolled itself out.

Okay, understood. Thank you. Then I just I have a question which may or may not be on base, but the Italian category seems to be struggling more broadly, so whether we're looking at Carrabba's or Olive Garden or certainly Romano's. They seem to be the weak link in the portfolio.

Is there anything to this idea that -- maybe changing dining habits or preferences? Is it a category issue, or is it just the vicissitudes of the consumer from quarter to quarter?

Yes, I think it's probably more the latter. Everything we can see from a research perspective, just from a culinary trends, it's still such a popular and broad category. It may be dialing itself down right now a little bit relative to some other cuisines, but it will dial itself back up.

So we think the long-term appeal of the Italian cuisine and category is solid. So we don't anticipate this being the start of a longer-term walk away from that category.

Okay. Very helpful. Thank you so much.

Steve Anderson, Miller Tabak.

Yes, good morning. The question I wanted to ask is what you are seeing in the Texas market. I think when we last spoke I saw like the -- you saw the larger metropolitan areas are still holding up rather well.

But the concern I have is with the smaller areas which are in, particularly those that have exposure to the oil and gas industry, and whether you are seeing anything broader based in the state of Texas and some of the other markets where you have a high exposure to the oil industry.

Hey, Stephen; Wyman. Yes, we haven't seen the state of Texas drive our results negatively. They are right in there with the average. So overall we are not seeing that, if you want to use Texas as probably the most likely big player to be influenced negatively by the downturn in oil prices.

Individual markets, there are so many variables that come into play. But we know that there are some small oil field markets that are going to have a negative impact. But fortunately for us, there are just not a lot of restaurants in those markets, so it shouldn't be significant.

So far we are still not seeing any significant impact that we could relate to the decrease in oil prices.

Thanks.

Joseph Buckley, Bank of America.

Thank you. Two questions on the cost side. I know you mentioned the G&A spend for fiscal 2015 is unlikely to show that full $10 million increase, just based on timing of some of the IT projects. So will that bleed into fiscal 2016, do you think?

Have your thoughts on the total IT spend changed at all? Or will that just be a timing thing that we will see in 2016?

Well, we haven't provided that, and we will do that shortly at the end of the fourth-quarter call. I would say it may not necessarily be an increment, because it could all just phase a little differently. So we are working through that right now as we speak.

Okay. Then just another question on the cost side. There is mention in at least a couple places about workman's comp and I think healthcare insurance being favorable this quarter.

Is there anything unusual there, or something we should think about that was big enough to have impact on the overall numbers? Or was it more modest favorability?

The favorability that we are seeing is coming from really improved experience or incidences in claims across both areas, workers comp and healthcare. What we've seen is those claims coming down over the recent couple of years.

It's coming down to what we would say is more historical levels, because it had risen in the past. So what we feel is we are pretty adequately priced at this point with regard to those costs, and we do have a number of programs in place to help mitigate and manage and reduce those costs on an ongoing basis.

So there is opportunity in the future. But I would say right now we're in a reasonable spot.

Okay. Maybe one more if I could. The international franchise Chili's growth number was cut back a little bit for this year. Could you just talk about that? Maybe what regions were scaled back.

In terms of the regions, I would say Middle East was one; and some parts of I think Northern Africa. The reasons are really timing and phasing.

So we fully expect that those franchisees will open those restaurants. Some of them are pushing into fiscal 2016; a lot of them due to the pace of the development surrounding the restaurant. For instance, if it's in a mall and how that is getting built and the phasing for that.

Okay. That's helpful. Thank you.

Thank you very much, ladies and gentlemen. I would like to turn the floor back to your host.

Thank you for joining us on the call today, and thanks for your continued interest in Brinker. We look forward to speaking to you again in August when we report our fourth-quarter results.

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