Brinker International Inc (EAT) 2016 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Brinker International first-quarter fiscal 2016 conference call.

(Operator Instructions)

Now I'd like to turn the floor over to your host, Joe Taylor. Sir, the floor is yours.

Thank you, Dave. Good morning everyone and welcome to Brinker International's first-quarter fiscal 2016 earnings call.

I'm Joe Taylor, Vice President of Investor Relations. Joining me on the call are Wyman Roberts, Chief Executive Officer and President of Chili's, and Tom Edwards, Chief Financial Officer.

On today's call Wyman will discuss operating results for the quarter and review a variety of initiatives underway at our brands. Tom will then provide a detailed review of our quarterly numbers as well as update components of our guidance for fiscal year 2016. Following closing comments we will open the call to your questions.

Before beginning our comments, please let me remind everyone of our Safe Harbor regarding forward-looking statements. During our call management may discuss certain items 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.

With that said I will turn the call over to Wyman.

All right, thank you Joe and good morning everyone. Thanks for joining us on the call today.

As you saw in our press release this morning Brinker reported earnings per share of $0.56, an increase of 12% over prior year. Comp sales were down 1.6% for the quarter and while we delivered earnings growth in line with our expectations, we know we need to improve our sales results.

As we mentioned last quarter, we anticipated some sales softness through the transition to our My Chili's Rewards program. The shift from our direct marketing program to loyalty hasn't performed as strongly as expected. And we are now adjusting the mix of loyalty and direct marketing to optimize the investment.

Additionally during the quarter we were challenged with a couple of macro factors both within our industry and in the broader economy. From an economic perspective with persistently low oil prices and the appreciation of the dollar we experienced even greater challenges within our oil markets in border towns. While we've been seeing pockets of softness within those regions for a while, the top-line challenge has expanded during the quarter across Texas, Oklahoma, Arkansas and Louisiana, home to about 30% of our restaurants.

It is unusual for us to see that much regional variability. And across the industry the battle for market share continues to intensify. We saw increasingly aggressive discounting and deal rates still at five-year highs.

This intense level of promotional activity resulted in some competitors taking share during the quarter. We take this competitive activity and the impact on our results very seriously. Over the last six months we've stayed consistently focused on our long-term strategies and have refrained from engaging in heavy promotional activity.

We built a solid foundation with our strategic work on food, service and atmosphere as well as the digital guest experience. And the good news is we've achieved the margin strength to enable us now to take a much more aggressive approach to turn the tide on sales and traffic in the near term while we maintain the health and sustainability of our brands over the long-term.

We've developed a comprehensive plan for immediate action that targets each daypart by addressing opportunities and leveraging our technology investments to help regain share and drive top line. First, we are reigniting our lunch business with the same intensity we had five years ago when we reinvented that daypart. We're introducing new products with more compelling price points and linking that new value proposition to technology like Ziosk, NoWait and our mobile app. So guests can now set their own pace that meets their needs at lunch.

At dinner we're messaging both value and new news with the launch of our Prime Rib Fajitas and the introduction of Bottomless Chips and Salsa with any fajita purchase. And we're testing big ideas that lean into value and further differentiate Chili's as a Fresh Tex, Fresh Mex brand.

We're also reinvigorating our happy hour business with the launch of a national program that offers more aggressive appetizer pricing and drink specials like a $5 Presidente Margarita. And finally we're ramping up support with local and regional marketing efforts to strengthen our competitive position and drive traffic in our oil and border town regions.

So we're taking a holistic approach by addressing opportunities at lunch, dinner, happy hour and our regional challenges to turn sales and traffic trajectory around over the next few quarters. We're also optimizing our technology investment to drive top line in the near term.

As I mentioned the My Chili's Rewards program isn't generating the incremental traffic that we need the program to deliver but there is tremendous acceptance and engagement from our guests in the program which are critical as we work to drive the incrementality. We've signed up over 3.7 million members so far, more than 16% of our checks include loyalty transactions and we know from the data that our rewards program members rate the brand even higher in terms of experience and they're much more likely to return than the average Chili's guest.

So now that the foundation is built we're focused on balancing the cost structure and optimizing the program to drive incremental traffic. This rewards program is part of our overall digital guest experience, a crucial strategy to help us learn from and communicate more effectively with our guests. For example as we launch our national happy hour program we will use all of our technology tools, digital and social media, our email database and the rewards program and Ziosk to drive awareness and excitement around the program.

And we continue to add to the list of digital options for our guests. As we announced earlier this month we're proud to be among the first restaurant companies to integrate Apple Pay into our tabletop devices later this fiscal year which will further enhance Chili's brand relevance in the eyes of new school consumers.

Globally our business delivered comp sales of positive 4.8% during the quarter driven by effective marketing platforms and regional marketing co-ops and aided by a favorable Ramadan shift. We opened six additional restaurants during the quarter including a new market entry into Tunisia which marks our 31st country for the Chili's brand and demonstrates the strength and relevance of Chili's across the globe.

At Maggiano's the brand experienced some unexpected softness in their banquet business resulting in negative sales for the quarter. But as we approach the busy holiday season we're confident Maggiano's sales will rebound. The brand is leveraging their Italian culinary expertise with a new upgraded chef specials program which is currently running 12% of sales and we also plan to open two more Maggiano's locations during the second quarter.

So despite our recent top-line challenges our operations teams continue to do a great job strengthening our business model and delivering best-in-class experiences to our guests and our team members. They also continue to make progress improving check averages. Both brands achieved year-over-year increases during the first quarter and they are already seeing even more progress at Chili's in quarter two from our increased focus on menu and beverage innovation, marketing and merchandising and greater team member engagement through contests and incentives.

We're running our business as efficiently as we ever have, growing margins and generating strong free cash flow. We believe this aggressive plan will increase our ability to grow sales and profits and to continue to generate shareholder value over the long-term.

And with that I will turn the call over to Tom to walk you through the financials. Tom?

Thanks, Wyman, and good morning everyone. I'd like to walk through details of our first-quarter operating performance and capital allocation. And then I will update our full-year guidance components, including some high-level color related to quarterly expectations.

As announced earlier this morning our first-quarter earnings per share before special items was $0.56, representing a 12% increase over prior year. First-quarter revenues were $763 million, an increase of 7.2% over prior year driven primarily by the inclusion of 103 Pepper Dining Restaurants acquired at the beginning of the fiscal year. Excluding the acquisition restaurant capacity increased approximately 0.5%.

Total company-owned comp restaurant sales decreased 1.6%, driven by a 2.1% decline in traffic and a negative 1.4% change in mix, partially offset by a 1.9% increase in price. As Wyman indicated we're taking more aggressive steps to drive revenue growth and are confident our top-line initiatives will improve mix and increase traffic as we move through the rest of the fiscal year.

Now turning to margins, our restaurant management teams continue to operate the business effectively with overall restaurant operating margin improving 10 basis points to 14.6%. This performance reflects solid margin expansion in our base business, partially offset by the mix impact of the Pepper Dining restaurants. Excluding Pepper Dining, our restaurant operating margin improved 50 basis points, driven by a 40 basis point decrease in cost of sales and a 10 basis point decrease in restaurant expense.

Restaurant labor expense was flat for the quarter. First-quarter cost of sales improved 40 basis points, reflecting 40 basis points of favorable menu pricing and 20 basis points of favorable commodity pricing, partially offset by 20 basis points of negative mix. Commodity pricing primarily benefited from lower avocado, cheese and seafood costs, partially offset by higher steak, fajita beef and poultry costs when compared to prior year.

Restaurant expense improved 10 basis points, mainly driven by a shift in advertising to My Chili's Rewards support, partially offset by deleverage in the timing of repair and maintenance expenses and other costs. While the restaurant labor expense line was flat to prior year, it included the impact of increased wage rates of approximately 2%.

Depreciation expense increased $3.6 million to $39 million in Q1. This reflects our investment in key capital initiatives such as the nearly completed reimage program and the acquired restaurants.

In addition, general and administrative expenses were $33 million, a $0.5 million increase versus prior year, primarily due to the loss of transition services income previously received from franchised Pepper Dining. This level of spend is below our planned rate of expense and reflects cost management efforts to offset top-line challenges.

Now I'd like to review our capital allocation for the quarter. Capital expenditures for the quarter work were $22 million. During the quarter we repurchased 900,000 shares for $51 million and we ended the quarter with $66 million of cash on our balance sheet.

Since the end of the first quarter, we've purchased an additional 328,000 shares for $17 million leaving an outstanding authorization of about $550 million. This includes the additional authorization of $250 million approved by our Board in August. We also raised our quarterly dividend to $0.32 per share, representing a 14% increase over prior year.

Now I'd like to turn to our fiscal 2016 annual guidance. We are reaffirming our full-year earnings per diluted share guidance range of $3.55 to $3.65, representing a year-over-year increase of 15% to 18%. We are reducing our guidance for revenues and company-owned comp sales.

We now expect revenue growth for the fiscal year to increase 10% to 12% compared to prior guidance range of 12% to 14%. Comp sales guidance for company-owned restaurants is now expected to be in the range of down a 0.5% to down 1.5% compared to the prior range of up 1.5% to 2%.

We were able to offset the change in comp sales with improvements in several areas led by commodity favorability, margin management and cost control. To give you some quarterly color we expect second-quarter comp sales to be below first-quarter levels, third quarter close to flat and we expect positive growth in the fourth quarter. This progression reflects the impact of ongoing competitive market conditions and the expected benefit of our revenue driving initiatives in the back half of the year.

Reported operating margin is unchanged from our original guidance of flat to down 25 basis points. Excluding the impact of Pepper Dining, our restaurant operating margin is also unchanged from our original guidance of up 25 to 50 basis points.

We now expect overall commodity inflation of less than 1% for the current fiscal year versus prior expectations of up approximately 2%. This reflects favorability from beef partially offset by higher produce costs.

Currently 97% of our commodities are contracted through the end of calendar 2015, 86% through the end of fiscal Q3 and 71% are contracted through the end of fiscal 2016. Also supporting margins are several operations initiatives including our gold standard execution program which extends best practices across all our restaurants to help us manage food usage, labor and restaurant expenses. In addition we are rolling out new technology in Q2 that improves monitoring and control of restaurant level expenses.

Depreciation expense is now forecasted to increase $10 million to $12 million year over year, a reduction from our prior guidance of $12 million to $15 million increase, reflecting final adjustments to the Pepper Dining asset valuation and timing of capital expenditures. Our anticipated increase in G&A expense in fiscal year 2016 is now expected to be $3 million to $6 million, down from prior guidance of $10 million to $12 million. This decrease reflects lower incentive compensation and cost savings across multiple areas.

We are reconfirming our guidance with respect to capital expenditures, interest expense, tax rate and free cash flow. We expect weighted average share count to be between 59 million and 61 million due to a lower average share price for buybacks compared to prior guidance of 60 million to 62 million.

Before I hand the call back to Wyman I want to reiterate that we are maintaining our full-year EPS and free cash flow guidance which enables us to continue to aggressively pursue our capital allocation strategy. With that I will turn the call back over to Wyman to share final comments before we open the line for questions.

Okay, thanks, Tom. In closing, our sense of urgency is high and we're focused on executing our plans to address the sales and traffic challenges we're currently facing.

We're confident in the plans we have laid out over the next few quarters and we remain committed to our long-term strategy of continuing to deliver a better guest experience and strengthening the relevance and differentiation of the Chili's brand which gives me confidence that we'll deliver on our long terms earnings per share goals.

So now let's turn the call, let's open the line up for questions.

Dave, we're ready for questions.

(Operator Instructions) Joseph Buckley. Please announce your affiliation then pose your question.

Hi, thank you, Bank of America Merrill Lynch. Two questions.

Can I ask you to elaborate a little bit on the marketing plan going forward? It sounded at the beginning of the fiscal year that there was a big shift to My Chili's Rewards.

It sounds like you're moving down the learning curve on that but it's not as effective as you thought it was going to be. So will you shift back to more traditional TV advertising? Is that the mix shift we should expect and maybe if you could talk about TV advertising year over year in the quarter you just reported and what it might look like going forward for the balance of the year?

Sure. Hey, Joe, Wyman. Yes, we basically the shift to My Chili's Reward was really a transition from what we call our more direct marketing avenues, so using our email database to present offers and drive traffic through that medium. And we shifted over pretty much 100% to the loyalty program.

In doing so we knew there would be this transition period as the loyalty database got built and then people started to accumulate points and then we started to drive the incrementality there. And we're just learning now that the level of incrementality that we can generate out of loyalty at a little bit of a different pace than what we were experiencing from the direct program.

And so we're just fine-tuning the balance if you will, getting more direct back into the mix, adjusting the loyalty components to be as effective and as efficient as possible. The good news about loyalty as I mentioned with 3.7 million loyalty guests on board we obviously have something that resonates with the guest.

With 16% of our transactions including a loyalty component we know they are engaged in it. So it's now just about fine-tuning that and then augmenting it with some direct marketing. Because it just didn't make as much sense as we had anticipated to totally abandon that approach from marketing.

With regard to media, the media plan hasn't really changed that much. This was again it was more of a switch between direct and loyalty versus traditional on-air advertising and so that plan in the first quarter was pretty comparable to prior year. So most of the challenge we've had really are in the relationship between loyalty and direct.

Okay, and then just a question on the comment about the oil markets in the border towns. Is Texas in total showing softer than average performance or is it isolated to oil markets within Texas?

The whole state is soft. And it's soft when you look at it from an industry perspective as well. This isn't something we're experiencing in isolation, so if you were to look at the Knapp and the Black Box data regionally you would see that the whole industry is a little more challenged in Texas than in other parts of the country right now.

Okay, that's helpful. Thank you.

Nicole Miller.

Thank you, hi, it's Nicole Miller from Piper Jaffray. Can you go back and walk us through the test loyalty markets that you talked about last quarter?

I believe it was a few dozen stores across three markets, something of that nature. But it sounded like they had gone into positive comp territory in fairly short order. So I wanted to go back and make sure I documented correctly how long they were in the test and how long they comped positive just so we can maybe understand it's got to be part of this comp shift to positive towards the end of the year, like what kind of role that's playing in test versus the reality of the rollout.

Yes, Nicole, so we actually tested in three midsize markets, a pretty good number of restaurants more than you had mentioned there. The results were obviously a little more positive than we are experiencing with the national rollout.

So there was -- we always knew there would be an initial ramp-up as I said as you build your database and you get loyalty members engaged and their points accumulate. And then as is the case with our program if there isn't re-visitation in 120 days then you lose points. And so as people came to that expiration date we anticipate and we have seen increased frequency and incremental visits but it just hasn't been as robust if you will on the national rollout as we saw in the test.

So we always try and eliminate as much risk as possible by testing and we tested this program fairly robustly. But the implication or the results we've gotten on national rollout haven't mirrored it quite as well as we would have hoped. So we're now making those adjustments.

And that's again back to the positive nature of this program, it is very flexible. We have huge participation in it so we're now just trying to fine-tune it and augment it with this direct marketing approach which we have a lot of history with and that we can now even use our direct, our loyalty database to talk to those consumers from a direct perspective as well.

So we have a bigger database if you will of direct customers that we can market to than we had going in. So that's really where we're at.

What was the original launch for those test stores, please?

What was it or when was it?

When was it?

Boy, about a year ago almost. So November, December of last year. So we ran it in tests for over a quarter, probably about four or five months before we did national rollout.

And then just one last quick one, it seemed like that around the Texas/oil market conversation that things really got soft just as of late. Is that a fair assessment understanding your commentary and if why is it just the duration of the lower gas prices and it just took time to see it or is it something else impacting that? Thank you.

No, I think what we had seen really you guys have been asking us the question for quite a few calls actually if we've been seeing softness. And while there had been some pockets it'd been fairly isolated into really kind of those very specific smaller oil towns. And what we're seeing now is a broader kind of impact if you will to the larger geography and it's moved into some bigger locales.

Thank you.

Jeffrey Bernstein.

Great, thank you. Barclays. Just a couple of questions.

One, Wyman in your prepared remarks you talked about both the macro impacting casual dining and then the oil-specific commentary. I'm just wondering from the macro perspective maybe you can give a little bit more color on the discounting you were seeing, whether it's national or local?

Because it would seem like the broader industry was relatively stable in terms of comps for the quarter. So I'm just wondering maybe what you were seeing from that market share competitive landscape?

And then when you talk about the oil-specific markets is there any way to quantify on an absolute basis or the differential between those markets and the rest of the region or the rest of the country or how it impacted the total comp? And then I have a follow-up.

Sure, Jeff. Well, with regard to -- well let me just take the oil because that's what we were on and I will just continue that conversation.

So with regard to the differential between what we're talking about as oil markets and non, it's about somewhere between 2.5 and 3 points which is more variability, obviously there's always variability in the markets, but it's a little more than we have traditionally seen and it's kind of isolated there. Another example of it is if you look at our franchise performance in the quarter and really now for the last couple of quarters you'll see obviously a fairly significant gap and that gap also is kind of driven by the two things we've been talking about, regionality and they are not in those oil influenced regions as well as they haven't transitioned over to the loyalty program due to some technology challenges that we have in some of our franchise markets, we were delaying their roll to loyalty.

So that's another indication of where the impact is. And it's probably split, if you were to split that 2 to 3 points it's probably split fairly evenly between the regionality and the loyalty opportunity.

And then the industry side of things, can you talk a little bit about what you're seeing from a competitive standpoint?

Yes, I think when we talk about the industry and you talk about stability I think the comp sales are actually I think a little softer than we had experienced as an industry. Like prior year, they seem to be running a little bit lower than what we had experienced and lower than you would expect again with kind of that same story about with the employment rate being where it's at and you would think some tailwind in the category that we'd see better than very low single-digit comps.

I think in the face of that you've got a lot of guys out there now just being more aggressive. Some of that is happening on national advertising, some of that's happening more locally and regionally, some of it's happening through direct channels but the number of very specific either price pointed or I'll call them abundance oriented offers whether it's an all you can eat or bottomless this or continuing to be fairly common out there and I think that's resonating with consumers that are looking for value.

Especially these millennial consumers who are based on all the data that we get out of NPD more prone to look for a deal and more pressured right now given their economic circumstances especially given when you compare to where they were economically pre-recession. That demo is obviously a very important demo to everybody and they are not nearly as financially sound as they were pre-recession.

And then my other question was just on the fiscal 2016 guidance. I don't know if maybe Tom you can help out here.

But in terms of well two things, one the comp sensitivity, just wondering if you can quantify what you think a point of annual comp is worth to earnings? Because you are now reducing your full-year comp guidance by close to 300 basis points, I would have thought that the earnings guidance would have needed to have come down.

So I'm just wondering if you can talk about that dynamic? And which buckets are the greatest in terms of helping offset that that the guidance really doesn't need to be changed at all?

Sure. Happy to help with that.

So on the comp sensitivity 100 basis points would be around $0.10 to $0.12. And what we're able to do to offset that is first maintain margins and that's due to some commodity favorability that we're able to pass through. And we have a lot more visibility to that through the full-year as well as other operational things that we're putting in place to help manage margins in the next quarters and a little lower comp sales environment like the gold standard execution and the other technology that we're putting in place.

On the other side is just management across the whole P&L. Frankly, Jeff, we've taken a look at everything and we have reduced our G&A forecasts and really make sure that we're tight on all that while continuing to invest in critical items like technology and IT for projects that will be critical for our digital guest experience. So those are really the components.

Should we assume pricing is still running in that 2% range within this comp similar to what you ran in this quarter or is the discounting and whatnot impact that?

We're still targeting pricing in that 1.5% to 2% range.

Great, thank you.

John Glass.

Thanks, it's Morgan Stanley. I guess two follow-ups.

First, Wyman, what are the adjustments you're making to the loyalty program? I think you said before you get a certain number of points, they expire so people are incented to come in. So do you lengthen the expiry or do you sweeten the offer, what changes have you specifically made that you think will help drive sales?

Well, some we've made and some we're going to make and we're considering. So the first one is we're just putting more direct marketing back into the mix. So again we pretty much abandoned direct marketing, walked away from it and went to a full loyalty play.

And again the learning there is first of all they are not the same, always the same customer. And so we were kind of not talking to some folks we had talked to before. So we we'll get them back into the mix.

And then even with our loyalty customers they appreciate generating the points and the value that brings but sometimes they need even more urgency than the 120 days. So we will start to give them some reasons to come back and visit us within a more immediate timeframe if you will that they appreciate.

Then we have the options then to look at the investments that we're making to that loyalty program and determine whether or not it's too rich given the results we're getting. And so we can increase point values, we can reduce the number, the length of time before points expire. We have to be very careful.

We can't be doing that on a daily basis. Obviously we have 3.7 million people engaged in this program. They are liking the program a lot.

Their intent to revisit is very high. So you just can't be making changes without some very thoughtful work done on the implications. But we are analyzing that and looking at all those variables and we have made a few changes and we will continue to fine-tune that program while not alienating that very important customer base of ours.

And it you mentioned some, I think you said some more targeted offers to those areas that are more adversely impacted, the oil patch states and areas. So is that the case and what offers or how aggressive do you think you could be in that area?

And if I could just wrap that into therefore have you baked into your forecast a higher amount of advertising or discounting required to drive sales? Is that part of the new forecast or has that not been contemplated?

Well first I mean everything is in the forecast. So we obviously contemplate what it's going to cost us to make these changes to the marketing strategy and the plans.

When we talk about the overlay if you will to support the oil and border town markets we're really right now talking about for example our radio overlay that's spot market oriented that really takes our happy hour program and puts additional weight behind it in those markets. Because we think that's something that will resonate well in those markets and it can use the additional support that a radio buy can give them.

So it's those kind of things without getting too specific and giving away too many of our marketing strategies. But it's the overlay as well as we may come up with some special ideas or offers that are just appropriate for those markets but for the most part it is probably more about additional marketing weight to counterbalance the softness in the markets.

Got it. Thank you.

Chris O'Cull.

KeyBanc. Thanks, good morning guys. Wyman, are you concerned the negative menu mix shift is a reaction maybe to pricing that's been taken?

You know, we've looked a lot at it. It really isn't so much that I don't think. I think it's a combination of things.

First, we've been pushing the Fresh Mex platform which we like a lot but it tends to have some lower price point options in there. And so we've been selling which are fine because as you can see by our margins the margins are good. And so part of that is just what we've been pushing.

The other part is we've made some changes to our menu back in the end of fiscal 2015 to try and simplify things. It's always this challenge in every restaurant industry. I don't know, McDonald's is dealing with it right now in terms of how do you innovate and then simplify at the same time.

So we've gone through a phase of a lot of innovation and then our last menu change late last year we really probably were as aggressive as we've been in quite a while at simplifying. We took some things off the menu that didn't sell as well but actually in hindsight now were driving some incremental check and so we've identified that.

We put some of those items back on the menu or we will be putting some of those items back on the menu. We're also looking at the merchandising of our add-ons and we have reengaged our operations team to really focus in on and incent their salesmanship because that was another real opportunity area for us.

So it's a combination of what we've done to the menu, how we merchandise, how the operations team is engaging in the selling propositions that have been probably more responsible for the softness we've seen in the check in the fourth and first quarter. But as we mentioned in the scripted notes the trajectory is looking much better in terms of our ability to get our check average back up and above prior year and get our price increase to pass through.

Do you expect the check to show more improvement than the traffic given the type of initiatives you've planned for the back half?

Again I think what we're talking about is getting that traffic number to turn. What we've been fairly -- if you look at our performance over the last we're in our fifth year of this we've outperformed the industry every year in sales and traffic. And now that hasn't come without some bumps along the way and I won't remind you of them but we're obviously very aware of where we've run into some headwinds in the past.

But through this whole journey we've always have been driven by growing the business primarily through traffic. We believe that's the fundamental strength. And so as we look at our situation right now we've given up too much traffic.

We need to get the traffic patterns changed and that's what we're going, that's what we're focused on and that's what those initiatives we've talked about are really all geared for. We think there's opportunity to take some check where it's possible and to continue to grow it but for the most part we're focused on turning the traffic pattern around.

Okay, and then Tom I think you mentioned deferring some investments which allowed you to reduce your G&A and D&A expense. What were those investments?

I was talking about IT, some noncritical projects but we are not deferring anything that's critical related to delivering sales or building on the digital guest experience. So it could be some initiatives like looking at third parties and how we work and partner with them for our infrastructure that we may be looking at in different timeframe.

And just to build on your prior question I do think that you will see and we expect to see improvements in PPA and check as we move through the rest of the year. Just traffic is still the larger item that we will be moving.

And just I mean, I'm trying to understand the decision not to reduce the earnings guidance and instead defer some of these investments. Were these investments more defensive in nature?

They are not designed to really improve the margin structure or I'm assuming these investments had some level of return expected on them and you're deferring that investment. Is this, I'm trying to understand why defer investments with positive returns?

Well, Chris, it's Wyman. So a lot of the investments Tom just mentioned they really were in the IT area. And so there's two things driving this.

One is as you know almost every projection you have around an IT program is probably optimistic with regard to just being able to hit the timeframes. And so it's a combination of we had a very aggressive digital investment strategy.

We are committed to this technology position. We think it's critical. We think we lead the industry in it.

We're leveraging Ziosk, NoWait, all of those things. And so we have re-upped and doubled down if you will on that and we had that in our plan. And the reality is we are probably more aggressive than we could have realized.

So we're just rationalizing the reality to that. And then as we've wrestled with things like loyalty and okay, how do we fine-tune it, what does that take, that's part of the digital strategy so we're having to push some things off a little bit as we understand what are the implications for this and what are the implications for the next phase of the digital strategy.

Not walking away from it but just making sure we're aligned and moving in the proper direction. So that's really the biggest piece of it.

And I just want to provide a little extra or perspective, so we've significantly reduced the G&A guidance. The vast majority of that was not IT or project related. The project piece a small portion, other areas we were able to focus on that are more G&A and non-project non-return base.

And we're talking capital and just again to put it in perspective the capital spend on IT this year will be significantly higher than even with these adjustments than we've had in prior years. It's a significant investment. It's just not quite as significant as we had originally planned.

Fair enough. Thanks, guys.

Jeff Farmer.

Thank you, Wells Fargo. Just a bigger picture question to begin.

Really it's on the increasingly aggressive deal and price point activity from the peer group that you guys called out. Looking forward over the next couple of quarters especially with the real challenging comparisons I think through February, any reason to believe that you're going to see a shift in that aggressive behavior or I'd say a downshift in that aggressive behavior in coming quarters?

From the competition, Jeff?

Yes, from the competition.

No, I don't think so. I think again as people buy into this they buy into it. And I think there are some interesting dynamics that have taken place with some key players over the last year, 18 months where either change in structure or cost structure and ownership structures have I think allowed or encouraged some key competitors to step it up if you will with regard to this kind of activity, and so I don't see that changing in the short term.

So we're thinking okay, this is where the industry is going for right now. So we will compete in that arena.

Okay, and then one more. You touched on this in almost every single question but just a real bigger picture to understand as it relates to the FY16 same-store sales guidance, obviously it went down but if you go and look at traffic mix, menu pricing and you just dis-aggregate what you think happened, what continues over the next three quarters, a little bit more color there across those three metrics, meaning traffic, mix and menu pricing for your business.

They all get better. I mean I don't know, Jeff, without giving you specifics obviously we've talked about the key is getting the traffic number to move forward. We're seeing and we think we can flow through more of our price increase than we have in the past.

And we're seeing some of that already, so we think the mix and the traffic numbers get better and that obviously drives the top line. We're not changing our pricing strategy so that stays intact.

So as we move forward now that doesn't happen without some investments so if we were to invest back into some areas it's probably going to be in the cost of sales area which as Tom mentioned we've got some good tailwind there. And we also have the ability, the beauty of Chili's is with our varied menu we have the opportunity to build menu items and promotional items around products that are showing us the most favorability if you will and where we can get the best value if you will.

So whether it's chicken or beef or hamburger or cheese our guests enjoy items that we prepare, leveraging either and any of those specific proteins if you will in the case of cheese. And so we've got more flexibility than some as to how we can create a value proposition without necessarily significantly damaging our business model. That's really the key.

We've built over 400 basis points of margin improvement over the last few years. The good news is we now have a really strong business model. It generates great cash flow and we're using that cash flow wisely.

But we can also put some of that money back into the guest if we need to to create a value proposition that is more competitive. And that's what we're looking at now.

All right. Thank you.

David Palmer.

Thanks, RBC. Good morning.

A question on the loyalty program. The loyalty program, it sounds like the 3.8 million people on board is a pretty big number. How is that versus your expectation as to where you would be this time?

Significantly higher. Again so the test markets didn't necessarily give us the read that we were hoping they would give us.

On the flipside we've signed up a lot more guests than we had anticipated based on the test market results. And on the downside we're not seeing quite the level of incrementality and the overall impact so we're having to fine-tune as we've been talking about. But now the acceptance level is really phenomenal and something that we actually want to leverage going forward.

I would've thought just as a consumer with the 120-day exploding points and the fact that you give the consumer 60 points just for signing up that when you got going by this time literally the fall you would've had a lot of those points exploding and rewards literally sitting there right around now such that that enforcement of the frequency that you were shooting for would be coming true. Were you looking for an inflection point coming into this period and you're just not seeing it, to some degree you're judging this program more harshly right now?

Yes, absolutely. That's exactly the challenge with the program is we didn't see the inflection point as people started to roll off and so we're having to get, understand that better, understand how we communicate with the guest more effectively about the expiration of points, understand how they evaluate those points and then put into the mix as we've talked about a more urgent message around direct which can also link to their points.

So it's just learning, frankly. And again one of the things over this journey as we've been working to transform the Chili's brand and get ourselves into a stronger position we've taken some chances, we've taken chances on Kitchen of the Future. We've taken chances on the menu evolution of Chili's.

And sometimes we don't quite get it right at the introduction but we quickly learn and we evolve. And we've got a great team here both in marketing and in operations. And we adjust and we figure it out.

And that's what gives us confidence that we'll take this really strong broad-based loyalty program and get it working harder for us than it is right now. But it's going to take a little more effort than we had initially thought.

And David, this is Tom. Just to add on we are getting great engagement as Wyman mentioned in the earlier comment, 16% of guests are logging in with loyalty when they dine.

So the challenge here is to turn that engagement into the incrementality going forward. But not only do we have a lot of people who've signed up ahead of our expectations, we're also getting great in-restaurant usage.

Yes, the structure of the program is fantastic. Leveraging Ziosk, getting everybody engaged and signed on, it's just working on that consumer mindset in terms of okay, how do we create more urgency.

I feel like just the NoWait program if that's everywhere, arguably do you think the awareness of that might not be where you'd like it to be?

It's nowhere near where it needs to be, David, but it is again it's one of these programs that's out everywhere now. We know it works really well so we've rolled it, we've got it in place and it's just a diamond waiting to be uncovered frankly.

And it's another marketing opportunity for us to just really make sure people understand. And that's why when we talked about lunch and we talk about letting guests know that they can get to NoWait, they can look online and understand is there a wait or not which is critical and if there is a wait they can get online before they leave the office so that when they get to the restaurant they don't have to wait, they get sat, they get their order taken and then they control their departure time with Ziosk.

If they want to -- there is no risk that you're not going to be able to check out when you want to check out and leave the restaurant. And those are huge barriers we know from a lunch daypart that we have solutions for but the awareness levels, Ziosk's awareness levels are moving up but NoWaits are literally single digits.

Thank you very much.

John Ivankoe.

Hi, great, thank you. Obviously fiscal 2016 is a big year of cost controls both at the store level and on the G&A side. So I want to go a couple of places with this.

One can you discuss the labor market broadly, cost of labor, quality of labor, turnover of labor, what kind of forecasts that you have at the cost of labor in for 2016 specifically? And then secondly G&A was really tightly managed relative to expectations both in fiscal 2015 and in fiscal 2016. I know I guess to some extent you have given fiscal 2017 guidance because I think you used to be $4 and you can comment whether you still think that but are we setting ourselves up for and by definition a snapback in cost from fiscal 2016 to fiscal 2017 as you do need to make that G&A spend that you've been controlling over the last two years?

Sure, John, it's Tom here. Happy to touch on all those.

So first on the cost of labor wage rates were up 2% in the quarter. We expect them to be up for the year 3% and that hasn't changed from our prior expectations. That's driven just by normal wage pressures as well as changes in minimum wages in certain states which is all built into the forecast. And most of that minimum wage impact is California and New York State, the vast majority about 75% of it.

So we feel we have the right numbers built in to the base and forecast. What we're seeing in turnover is a little higher of turnover but it's not so much an issue of availability of labor. We do think with the slightly higher labor market and opportunities people are moving around a little bit more.

We haven't had issues in backfilling and bringing it new hires to keep the restaurants in great operating shape. So we feel like that's in a good spot for the year as baked into the forecast.

On the G&A and tightly managed you shouldn't expect us to snap back in the next year. Our base for this year will become our base for next year and we'll manage it accordingly. So I would not expect that at all.

And regarding fiscal 2017 we've not changed our direction or guidance of $4 a share and so thanks for bringing that up. We appreciate it. We've been focused on 2016 and updating that guidance and discussing that on this call but I appreciate you bringing up 2017 as well.

John I was just going to add, just from a turnover perspective we have some of the best team member metrics in the industry. We run relative to the category in the industry, very low turnover.

It's absolutely higher than I ever want it to be but relative to what happens in the industry we've got a lot of the competition beat. So that just goes to the quality of the operations and how important we take our team members.

But it probably is fair to assume that labor does in your guidance for fiscal 2016 that labor is one of the meaningful delever points? If there is going to be one it would show up in the labor line?

Tom is talking about a 3% increase in wages and we're talking about a 2% price increase. So yes we are giving back a little bit on labor because we're not pricing.

Especially in those markets we've chosen not to necessarily go price for everything that's happening to us in California with regard to wage rates with the expectation that they will mitigate over the next year or so and we will make up some of that with a more consistent pricing strategy than trying to tick it all up in one year in those regions.

And just one final housekeeping question if I may, Tom maybe this is for you. In the cash flow statement there was the changes in assets and liabilities of around $30 million in the first quarter. Could you remind me what that was and if that's something that was recurring or just specific to the first quarter and whether we get that back later in the year?

Sure. We will get that back later in the year. It's a couple of different things.

One is it's an acquisition impact, so PDI, Pepper Dining did have an impact. The other is a couple of timing items in terms of timing of rent in the prior year which year over year the change and the change looks like a benefit and timing of incentive payout compensation this year.

So it was in line with our forecasts for the full year and changes in working capital. So it doesn't affect on any kind of an annual basis our free cash or cash flow guidance.

Thank you so much.

Howard Penney.

Hedgeye Risk Management. Wyman, this is one of those hindsight is 2020 questions and I think you've sort of alluded to it a little bit in your commentary in response to the questions.

But the last five years you said earlier you did a great job on improving the margin structure of the Company and the Company is very efficient today and you might need to give back some of that margin to get the traffic back. One, obviously do you think you went too far and maybe obviously you did go too far that's why it's kind of hindsight is 2020 question, but what would you do differently if you said well we're not going to get 400 basis points of margin, we're going to take 300 basis points and 100 is going to go back into driving traffic?

So I was just curious as to knowing that you might have to give some back what you might have done differently or thought about what you are going to do with margins to provide a sustainable increase in traffic and not just doing discounting or it's kind of a difficult question to answer. You've done a great job and stuff but --

What I want to add, though, to that Howard is as we did that 400 basis point improvement we consistently beat the category on sales and traffic every year. So we were getting the margins and winning at sales and traffic and so our challenge has been is to make sure that as we are walking ourselves down that journey that we weren't alienating guests or and all our metrics, internal metrics continue to show that the guest satisfaction levels are getting better and our value ratings are getting better.

So I think what's happened is an external factor, right. So the competition has stepped it up. So you've got to step outside.

It's a little harder to -- you've got more opportunity to be surprised by something that's happening outside your four walls obviously than something that's happening inside. So that's what if we were to be if we were to second-guess ourselves on anything, it's okay are we as tight to what's going on within the competitive set and what we have to do to continue to be as competitive as we can be and that's what I would look at.

So it really is probably more putting things back on the plate and giving the guest a value proposition there. I think everything else, though, is still up for grabs. We continue to say hey, we want to set the bar high on our service standards and we're not happy with any guest leaves unhappy.

So we continue to benchmark that. We've got data now that we can continue to set a higher standard on individual servers if you will and their performance, rewarding them with a great job but also holding them accountable for delivering great service.

So all aspects of the experience including the re-image program that we finished and so what's the next thing we're going to be doing to make sure that the atmosphere continues to stay fresh and relevant. So all of those things go into the mix but I guess to answer your specific question in the short term that we're dealing with this right now it's probably putting more back on the plate. So that's what I think the competition is doing more of that we're not necessarily as competitive with.

Thank you for that. And when you embarked on this five years ago you came up with a competitive set of companies that were sort of outside of the bar and grill segment that you wanted to compete against that you thought were a better set of companies where you were going to take this.

Has that changed? Has that group of companies changed or when you think about the competitive set that you're competing against today can you just tell us what those are or how has that changed and what are the new companies if there are new companies?

Well I think I wouldn't want to get specific names right now, Howard, but what I will just say is obviously fast casual is a major player in the dining-out space. So we really want to understand where those fast casual concepts are going, how they're resonating with consumers, how they're delivering on the value proposition and so we look at them closely.

We've really without talking about consumers what we've talked about probably more importantly is this new school, without talking about competitors we talk about new school consumers. Because we know those are the consumers that are going to dictate future brand success.

And so we're very focused on really what we have to do to be relevant with new school consumers. And that's how we know we'll be competitive because we know those are the guys that are going to drive the success of the category. Those are the consumers that are going to set the stage for future success for concepts.

Perfect, thank you.

Sara Senatore.

Thanks, from Bernstein. And I wanted to ask a follow-up question on the approach loyalty versus direct marketing. If I think back to fiscal 2014 you had switched on more digital advertising, decided maybe you needed more traditional media.

So I guess in general it feels like we've seen a couple of bumps where maybe expectations about whether it's new media or loyalty weren't quite met. So can you just talk about is casual dining different from some of the other segments in terms of customer or how responsive they are to these different approaches to marketing?

Is it maybe your testing processes aren't giving you quite as good a read as you need? And I guess in that sense if you could put it on Company versus segment, break it down that way, that would be helpful.

Yes, Sara I mean I can't speak for other concepts. But I think from an industry standpoint the whole shift towards a digital social media platform is being embraced by the industry and by the consumers that the industry is going after, similar to what you're seeing in other categories in other industries. Every industry is a little unique in terms of how the purchase process takes place and their use of media and marketing to influence that.

But there is no doubt that the influence of social and digital in the marketing mix is powerful, effective and appropriate to be taking what has been the more traditional media mix share if you will. So that shift from traditional to digital and social is absolutely appropriate and I think effective.

How this additional conversation around loyalty versus direct, that's just something that as we get through the process of actually trying to better understand how to motivate consumers in short and longer term durations we're learning. And that's just the process we're going through.

The test market as we've mentioned already before didn't give us as good a read as we would have liked. Sometimes they work really well and sometimes they don't work as well and this one was a little bit of a misread for us with regard to the specifics. But with regard to the general acceptance of a loyalty program in our concept it's huge.

It was actually underestimating how many people would actually be encouraged and desire to play in this arena. So for us it's not about well the people want to be engaged in your loyalty program, it's just a matter of okay, how do we get them to be, how do we get that loyalty program to work more effectively for us.

And so that's the journey we're on right now. I'd much rather be dealing with that issue about okay, we've got this huge population that wants to be engaged with the brand and we've got to figure out how to get it to be more effective versus we put an offer out there and nobody came and nobody wanted to play.

So that's how we find it. And in the world of marketing there's always it's always fluid and you're always trying to determine how much of it is the medium versus the message. That's part of the mix as well.

Okay, thank you. And then just one other follow-up which is on the commodities and the comp which is I think it's pretty much the case that we see this whenever there's disinflation or deflation which is industry margins look better and top line looks a little bit softer.

Is there any difference, is that what we should probably attribute most of what's going on, the discounting and maybe slightly lower than expected comps to just the more deflationary environment we're in? Or there some other dynamic that has fundamentally shifted which would make this more of a structural change rather than again I think historically those of us who have been observing the industry note this just seems to happen when commodity prices come down.

This is Tom here, Sara. We're just seeing and having a view to future commodity prices. So we saw some favorability in the quarter but the majority of it is built into the forecast for rest of year.

So we're seeing them begin to turn. Therefore I don't think it's as much of a change in what we're seeing from a commodity perspective, linking it back up to the industry.

Yes, I think Sara if you're talking about when retail prices versus -- when restaurant prices versus grocery prices start to get to that inflection point where one is higher than the other you start to see a shift in traffic from consumers. Like you said as you followed this industry for many years you know that tends to be a little bit of a truism. And so we're probably getting to some of those inflection points and that's creating some of the slower growth in sales and that also then provides with these lower commodity cost opportunities for restaurant companies to put more back there to incent consumers to do more.

I think you're also seeing if I'm looking at the data correctly that the rolling price increase if you will that the industry is taking is starting to come back down. It was pushing over 3% a little while ago and now it's running lower than that.

Now we've always been on the conservative side of that which from the one standpoint says well we may be leaving money on the table but we've always been much more cognizant I think than some about hey, we want to make sure that we're keeping guests in for the long haul. And that's why that 2% or less pricing strategy for us is where we like to benchmark.

Thank you.

David, if we have anyone else in the QA I think we have time for a couple more questions.

Karen Holthouse.

Hi, Goldman Sachs. So looking through the App Store for just reviews of the My Chili's app it seems like there's been some technological problems, with the app people complain of points being dropped and not being able to login.

I'm just wondering what is sort of the timeline for getting some fixes for that in place? And do you have a sense to the extent that it's underperforming versus expectations and the tests are underperforming versus test markets, how much of that could just be execution on the actual backend of it isn't going as well outside of the larger sample size?

Yes, Karen, that's not our issue. I think a lot of again we're very much engaged with our guests and what's working. It's a new program and its technology-based and so there can be some of those glitches.

I think the biggest challenge we have is just timing. So again sometimes with credit cards you'll see in our industry sometimes they will put an extra charge on for a tip then it comes off, but people that are checking their statements every minute which they can sometimes get confused and then that's the same thing that happened in the loyalty program. Just because you've earned loyalty programs this instant doesn't mean it automatically -- it's not an instantaneous update to your account.

We have to poll it and it takes some time and sometimes in that process people think their points haven't been loaded in and so then they get nervous or they get concerned. So for the most part that's what we've seen. There may be some one-off examples where that's not the case but for the most part it's really just getting comfortable with how the process works.

The system has been and we've spent years developing the system and millions and millions of dollars. It's a proprietary system and it works very well relative to most technology I've experienced.

And again we tested it for over five, six months. So we're almost a year into it and now we're really getting to be much smarter about how we can communicate and the data we can mine from it. And we're taking it to that next level, but overall it's been performing very well technologically.

Great, thank you.

Joseph Buckley.

I'm good for now. Thank you.

Well, great, thank you Dave for hosting today. And I'd like to thank everyone for participating in the call this morning.

I would note that our next quarterly earnings call is scheduled for January 20, 2016. And with that everyone have a very good day. Thank you.

Thank you very much. Ladies and gentlemen, this concludes today's presentation.

You may disconnect your lines and have a wonderful day. Thank you for your participation.