Brinker International Inc (EAT) 2016 Q3 法說會逐字稿

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

Now I would 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 third-quarter fiscal 2016 earnings call. I am Joe Taylor, Vice President of Investor Relations. Joining me this morning are Wyman Roberts, Chief Executive Officer and President of Chili's, and Tom Edwards Chief Financial Officer.

Our call this morning will begin with comments from both Wyman and Tom, after which 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 I will turn the call over to Wyman.

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 $1, an increase of 6.4% over prior year. Comp sales were down 3.6% for the quarter, with Chili's down 4.1% and Maggiano's up 0.2%. And we are pleased with the continued progress at Maggiano's. We believe in the strength of the brand and are encouraged by the business model we have developed and the potential to grow it.

But the third quarter was a tough quarter for Chili's. We did introduce our Sizzling Steak platform, which drove strong internal metrics and helped narrow our gap to the category during the quarter, but at the end of the day, it wasn't enough to drive the incremental traffic we needed. Our takeaway is we have to be even more aggressive with our value proposition and the message and media to breakthrough in this environment.

So today we will talk a little bit about the headwinds during the quarter, but we will focus most of our time on how we turned up the intensity on our approach to deliver top line in both the near term and longer term to reclaim Chili's position of strength. The last time we talked with you we were already into the third quarter and we were anticipating delivering closer to flat results. So what made this quarter so much tougher than expected?

First, we thought the industry would actually improve overall and it got softer, partly because of a tougher weather lap over last year and also because of the continued economic malaise that has created a drag on the industry. At the same time, QSR launched their latest round of pricing strategies with even stronger value offers that we believe had an impact on the category.

From a regional perspective, we saw further decline in the oil markets in Q3, which impacts us more so than others who aren't as heavily penetrated in these markets. And while these factors did create challenges for us during the quarter, we believe the key to regaining momentum lies within our control. Specifically the quality and value of the experiences we promote and deliver to our guests.

The Sizzling Steak platform we introduced during Q3 offered a high-quality product with innovative presentations and flavors that drove significant preference at a price point of $11.99, but we needed to do more with our value proposition and messaging to drive incremental traffic. So now we've come to the market with an even more compelling offer: new flavor profiles on our world-famous baby back ribs along with fries, a salad, and a dessert for just $10.99. And unlike the third quarter when the media weights were lower than last year, we are kicking off the rib promotion with media comparable to last year and we brought back our iconic baby back ribs jingle with a contemporary approach to share the new news with consumers.

This is just the first step as we continue to increase the intensity of our strategy into the new fiscal year. Our focus as we move towards fiscal 2017 is to invest back into the brand in several key areas to get us back to taking share, growing the business the right way, and delivering results through sustainable top-line growth.

First, we are recalibrating our value proposition as we evaluate how our 2 for $20 program stands up against today's competitive landscape. We are testing some aggressive options to deliver the most compelling value proposition that makes sense for our business. Second, we will push even harder on culinary innovation as we continue to enhance our core equities and bring new products to the market that broaden our reach and appeal.

Third, we know we have to shake up our marketing strategy to break through more effectively, so we are going to invest back into media more heavily and launch a whole new created campaign to reintroduce the brand to consumers. Next, we are dramatically expanding our direct marketing capabilities and reach as we integrate our loyalty program with the Plenti coalition, which reaches tens of millions of consumers nationwide. Our plan is to go live during the first quarter of fiscal 2017.

And, finally, we've talked to you about the importance of the bar and how we position that part of our business to increase brand relevance and differentiation. Our bar strategy is designed to deliver both short- and long-term results. In the year, for the year, we will build short-term momentum in first quarter through happy hour offerings that promote our new line of craft beers and expand our dominant margarita positioning. Longer term, we will later on investments in the atmosphere to make the entire experience even more relevant.

With the increased level of innovation coming to our food and atmosphere, I'm excited that the leader of this charge is the newest addition to our team, John Cywinski, Executive Vice President of Strategic Innovation. John has extensive experience in the restaurant industry as the former CMO of Applebee's, his time at McDonald's, and most recently as president of KFC USA. He is a great addition and we are thrilled to have his expertise and enthusiasm on the team.

Before I hand the call over to Tom it's important to note that we know we have work to do, but we also know we have great brands that we are proud of and that consumers love. We haven't lost brand appeal. We just need to make ourselves more relevant in today's environment and we know what we need to focus on to make that happen. And now we know we have to be significantly more aggressive in our approach.

We are committed to investing in a way that we believe can keep our business model intact and continue to deliver the cash flow and dividends our shareholders have grown accustomed to, while growing the top line and starting to take share like we have been known for in the past.

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

Thanks, Wyman, and good morning, everyone. Today I will highlight the major drivers of our Q3 results. I'll also provide a broader perspective of our fiscal 2016 performance and share a few preliminary thoughts as we look forward to fiscal 2017.

Looking at Q3, I believe there are two key takeaways. First, we've narrowed our issues to one challenge: traffic. And, as Wyman said, we are committed to taking more aggressive actions to address this challenge and grow comp sales.

Second, our flexible business model continued to deliver bottom-line results and free cash flow. We reported Q3 adjusted earnings per share, before special items, of $1, a 6.4% increase over prior year. And we generated free cash flow of $223 million year-to-date, which supports our investment in the business and ongoing return of capital to shareholders, including repurchasing 2.6 million shares in Q3 for $126 million.

Moving to sales, total company-owned comp sales declined 3.6 points. Maggiano's comp sales improved to growth of 0.2%, building on momentum coming out of the strong holiday season. Chili's comp restaurant sales declined 4.1%, driven by a 4.9% decline in traffic and 0.3% lower mix, partially offset by a 1.1% increase in price.

Traffic was the big change versus our expectations, reflecting softer industry performance, weaker oil markets, and the need for even more impactful value and innovation efforts on our part. Restaurants and markets with meaningful exposure to the energy industry, about 17% of our system, were down 7.6% during the quarter, about 100 basis points lower than Q2 and 430 basis points below the rest of our system.

Chili's price increase of 1.1% includes 1.7% of menu pricing partially offset by 60 basis points of higher expense, primarily related to loyalty points redemption. This is a reduction from prior quarters. We've taken further steps to reduce this cost and expect to see better results ahead of our transition to Plenti in Q1 2017.

Mix performance reflected continued positive results from a similar combination of promotions, innovation, merchandising, and in restaurant contests that were successful in driving add-on sales in Q2. This performance was offset by the negative mix impact of value offerings, such as our new Sizzling Steaks. We feel confident in our ongoing initiatives to drive add-on sales and we expect to see a balance in mix as we invest in value and innovation to drive traffic, including our Q4 ribs bundle.

Now let's turn to Q3 cost and margin performance. A key factor for the quarter was lower corporate general and administrative expenses. G&A was $30 million, a decrease of $5 million versus prior year, primarily due to lower incentive-based compensation. While we certainly don't want to rely on this type of savings, our incentive plans are tightly aligned with our targets and part of our overall business model designed to deliver bottom-line performance.

Restaurant margin was lower versus prior year, but in line with our expectations, including lapping some favorable adjustments from last year. On a reported basis, overall restaurant margin decreased 150 basis points to 17.4%. Excluding the anticipated mix impact of the Pepper Dining acquisition, restaurant margin was down 120 basis points, driven by a 110 basis point increase in restaurant labor and a 20 basis point increase in restaurant expense, partially offset by a 10 basis point improvement in cost of sales.

The 110 basis point increase in restaurant labor expense was driven by higher wage rates, up slightly more than 2%; an increase in employee health costs as we lapped a favorable prior-year adjustment, and deleverage on lower sales. Excluding the impact of deleverage and the prior-year employee health adjustment, labor would have been up around 30 basis points.

The 10 basis point improvement in cost of sales reflects 40 basis points of favorable menu pricing and 10 basis points a favorable commodity pricing, partially offset by 40 basis points of negative mix. Commodity pricing primarily benefited from lower burger meat, cheese, and seafood costs partially offset by higher state, produce, and poultry costs. Currently, we are 85% contracted for commodities through Q4 with 62% contracted in Q1 of fiscal 2017.

Now that we've covered highlights for the current quarter I'd like to provide some perspective on how we have achieved our EPS results through Q3, given lower top-line performance compared to our original expectations. Our EPS performance reflects contributions from many factors including strong commodity favorability; resilient margin management by our operations team; prudent corporate cost control, including lower incentive compensation costs; and support from our ongoing ability to generate solid free cash flow, enabling us to buy back even more shares than planned throughout the year.

With year-to-date free cash flow of $223 million we now expect to exceed our original free cash flow guidance of $250 million to $260 million by $30 million to $40 million. As we've continued to deliver earnings, we have also continued to invest in the business through food innovation and value initiatives like our Sizzling Steak platform. We have also invested in key growth initiatives, including our new to-go and delivery platforms, as well as the upcoming Plenti roll out.

As we look to Q4, we are continuing these efforts with yesterday's launch of our new ribs bundle. However, we now expect our comp sales trajectory to be a little more extended, given our Q3 experience. We anticipate seeing a sequential improvement in Q4, but not yet returning to positive comp sales growth.

Taking these anticipated improvements into account, we expect annual earnings per share to be near the bottom end of our guidance range.

Now I'd like to look ahead to fiscal 2017. While we will provide detailed guidance on our August earnings call, I'd like to provide a few preliminary thoughts on how we are planning for the year.

From an earnings perspective, there are a couple of items that are helping earnings in 2016 but will not carry forward into our planning for fiscal 2017. Namely, the 53rd week and the lower incentive compensation. We estimate these items combine for a little over $0.40 of benefit in 2016.

What we do expect to carry forward into 2017 is our ability to generate strong free cash flow and our consistent capital allocation policy. We expect to grow earnings off a normalized 2016 base after accounting for the 53rd week and incentive compensation. Next year will also include more investment in top-line-driving initiatives as we plan to return to positive comp sales growth.

As some of you know, we are hosting an investor day on June 9 in New York. The day will be a good opportunity to hear more about our near- and long-term plans to grow our brands and provide consistent total shareholder returns and return of capital to our investors. We look forward to seeing you there.

And with that I will open up the line for questions.

Dave, we will start taking questions, please.

(Operator Instructions) John Ivankoe.

JPMorgan, thank you very much. So just a clarification just on that earnings guidance I think you were giving.

Take $0.40 out of the bottom end of 2016 and I think you are committed at this point to grow 2017 or --? I just want to make sure that we all heard the same thing in terms of that soft earnings guidance on 2017.

Thanks, John. Yes, you take $0.40 off and our long-term EPS growth target remains 10% to 15%. We will provide a lot more specifics in August. We will also be assessing the level of investment, but we still do intend to grow the EPS.

Okay, okay, fair enough. Then secondly, I mean with obviously hindsight being 20/20, I mean you guys have done a lot on the labor side really over the past couple of years in terms of really moderating those cost increases that you would have seen and G&A has obviously been significantly controlled as well.

How do you -- you know you had the moment of clarity that you may have contributed to some of those traffic declines at the store level? I mean was there anything that you perhaps could have done at the cost side that could have influenced some of the traffic underperformance? Again, with hindsight being 20/20.

Hey, John; Wyman. You know we track, both internally and externally, our guest satisfaction metrics as well as a lot of brand attributes. If we see any weakness in how the guests are kind of reacting to what we are doing in the restaurant, we are very sensitive to that. And we haven't; we have been a growing those.

So we really do believe that what we are dealing with now is a combination of competitive reactions -- some competitors out there doing some things that are new to the market, both in our category as well as kind of what is going on in QSR from really more price and value perspective -- as well as some issues going on with some of the demographic, specifically the Millennials and how they are shifting their behavior.

And so what we haven't -- again back to hindsight, what we haven't been as aggressive as we needed to be is probably addressing some of that. So when we talked about like our bar an initiative, we think we should have probably been -- even though our alcohol mix is now at an all-time high and we continue to grow that part of our business, we haven't positioned ourselves as effectively as we could have against that target that we know is there for us.

So that, I think, is our bigger opportunity. It is not what we have done. It is more what we haven't done that is in front of us as the big opportunity.

Thank you.

Andrew Strelzik.

BMO Capital Markets. Thanks for taking the question. I wanted to first ask -- I was a little surprised, I guess, to hear you talk about the QSR value impacting the business. Where are you seeing that and what gives you confidence that that is playing a role?

Well, you know it is not absolutely clear yet, it is still a little early, but preliminary data -- and if you just look at what is happening in the QSR segment and the success that multiple players have had in this last quarter with these bundle offers, and then you have seen some of the softness that has kind of translated over into the casual dining category, I mean I don't think that is coincidental.

So we will get a little bit more clarity as the data gets analyzed through NPD and others, but I don't think you can offer the 5 for $4 offers that are out there and not impact lunch across the whole category. I mean there is just such a strong value proposition being played out there.

Now we don't think that that is sustainable or it's a long-term issue. I think it is more of a -- those are limited-time offers, but they are also are interesting that I think the QSR category is kind of showing us that they are rethinking how they deliver value and their value propositions. And I think that is a great lesson for us to consider as well in terms of, hey, is our value proposition, things like our 2 for $20 anchor in value, is it still as effective at conveying the value proposition across the broad spectrum of consumers as it has been in the past? Or do we need to kind of reconfigure that or shake that up to just create some excitement and energy in the casual dining category?

And then on the media spend, how much lower was the third quarter? And it sounds like, to the extent you are willing to comment on it, it sounds like next year will be a different creative but also more spend. Is that right and any guidance on how to think about that level of spend in 2017?

Media in the quarter was down moderately. What we are looking to do next year is do an optimal marketing mix between what we have done this year in reallocating some of the dollars that we spent on the loyalty program back into marketing on an advertising side. So we think it is important to get the message out for a lot of the new value and activities we will be promoting.

Great, thank you.

David Carlson.

KeyBanc Capital Markets. Just a really quick question. What is your targeted leverage ratio moving forward? Just really trying to get a sense of the sustainability of the share repurchase program at this point. Thanks.

Sure, David. Our target leverage ratio is in the BBB- range and it does vary by rating agency, but broadly speaking, it is at 3 to 3.5 times leverage. And we are fairly comfortable where we are at right in the middle of that range. Does that answer your question, David?

Yes, thank you.

Jeff Farmer.

Wells Fargo and thank you. You touched on this on a handful of questions, but from your perspective, what did drive that surprisingly weak March same-store sales performance across the casual dining segment?

Again, not really drilling down on Chili's, but just more broadly. You touched on some macro things, but what was going on with the consumer in March that led to that pretty aggressive deceleration relative to January and February?

Well, I think we talked about that. There was also -- it's been a really choppy quarter, Jeff. I mean the shifts when you look at the Knapp data period to period, week to week were pretty dramatic. More so than I have seen in recent history.

Some of that is just some of the crazy weather and where it has been hitting. We started the quarter off even with some really volatile weather, tornadoes in Texas in December, just unheard of stuff, and then obviously some of the stuff you've seen in Denver now. Which obviously they get weather, but when you start closing the airport in Denver it is a fairly rare occurrence.

So I think that has contributed to some of it, but most of it I think is the combination of just an economy that is still rather weak with not a whole lot of energy behind it. And then you start to get some really powerful kind of value propositions flowing out of QSR and I think that had an impact.

Just one more, if I may. Again, follow-up. You talking about recalibrating the value proposition and you referenced 2 for $20. Any idea that you can give us there in terms of what direction you could go in with that? What does a recalibration of a value proposition at Chili's potentially look like?

I mean, I don't want to give you any specifics on that. I just think it is time for us to reevaluate, to evaluate everything we put out there with regard to the consumer offerings that specifically we rely on to drive a value proposition and just make sure we are getting the power out of those messages that we have when we initially rolled them.

Some of these platforms are getting five, six years old and they need to either be refreshed, I think, to get some energy and excitement to remind the consumers about what a great proposition they are, or we need to find new ways to do that. Again, I didn't want to turn this into a QSR call, but I think that is what you are seeing in some of these re-bundlings, if you will, of their offers.

And our rib bundle that we just started yesterday is an example of that in a limited-time offer. But when we can give you a half of rack of ribs and fries, a salad, and a mini molten for $10.99, we think that is an example of a re-bundling and maybe the kind of value proposition that may be more compelling. So those are just a couple of thoughts.

Great, thank you.

Karen Holthouse.

Goldman Sachs. It is actually a question on the cost side of things, not the top-line side of things. As we are looking into 2017, how should we think about the evolution of labor and commodity inflation; how that might play into decisions for value? Not only for price point value or specific promotions, but just your overall intention to take price on the top line. Thanks.

Hi, Karen; it is Tom here. If you look at 2017, we obviously don't have details to provide, but we do anticipate there still will be a labor headwind into the year. Minimum wages obviously will continue to go up and unemployment is fairly low, but we have already thought through that in our planning, inclusive of the latest changes in California. At the same time, we are working on initiatives to help address that and offset it.

On the commodity side, we think we are heading into a little bit more benign overall commodity environment. We have gotten a great tailwind from commodities in 2016. We don't expect that type of tailwind in 2017, more of a normalized type of basis.

We see a couple markets being a little more favorable, like poultry, and some more stable on the cheese side, and some a little higher on pork. So it is going to be a little bit of a mix on that site, but feel like we have got a good handle on it and already starting to put contracts in place to manage that.

In terms of pricing, we believe we will be in the same range that we have historically been in. This year it has been in the 1.5% to 2% and believe we could carry that forward for menu pricing as we look ahead and our long-term model.

Karen, I would just add one thing and that is one of the -- I mean obviously the downside to some of the minimum wage activity and the higher hourly costs of labor are obvious to the P&L. But some of the positives are we get a workforce that is maybe a little stronger and we also get a workforce that doesn't turnover nearly as much as some of these. And so what that allows us to do in places like California is really save on the cost of training and actually get servers that are maybe a little more skilled and we can leverage that.

Then when you take that and you couple with it our embrace of technology, which we already have with Ziosk on the table, we think we can find some ways, as Tom mentioned, to leverage those things with technology to address some of these costs through a more efficient process. And that is what we are aggressively pursuing as we walk into 2017.

Great, thank you.

Jeffrey Bernstein.

Barclays. Two questions, just one on the market share front. I know in the release you talked about the goal of capturing market share.

That term gets thrown around a lot. I am just wondering if you can offer some context behind that, whether -- maybe what your current market share is, what it was, or a frame of reference maybe in years past. Actually, how you even define that, whether you get internally or from some sort of third party. Just trying to dimensionalize what your market share is today versus where it has been. And then I had a follow-up.

Hey, Jeff; Wyman. So market share, we typically look at market share through NPD and we tend to, from a Chili's perspective, use their definition for bar and grill. And so that is where we kind of derive our market share data. And the competitive set is defined by them, so that keeps it fairly consistent over time.

Our market share position has been relatively stable in that category, running right around 10% or so, so that is the --. Now what we also talk a lot about is gaining market share, and that is really when we look at it on the shorter-term or week-to-week basis, we are talking about Black Box and Knapp and the casual dining numbers that they produce and how do we compare to that group. And so there is a couple of different ways that we kind of evaluate how we are doing relative to the market, if you will.

Understood, but that 10% that you are running now it doesn't seem like -- or I should say it seems like that has been fairly stable, so it is not as if that was hundreds of basis points higher in years past for any reason.

Yes. I think, when you look at the category as a whole and the NPD data, it is much more stable for us. You have got other people losing market share and other gaining it. But so I think we are really probably more focused day in/day out on the Black Box and Knapp data to really understand, okay, how are we doing relative to that competitive set in our shorter-term kind of tactical executions.

Understood. Then my follow-up question was just I guess, Tom, you mentioned the Pepper Dining acquisition and what the impact was from a margin standpoint. Just wondering if you can kind of broaden that out a little bit and talk about the strategy; how you think about that now appropriate balance of the Company and franchise ownership.

It does seem like most of your peers are moving more franchise relative to your recent acquisition, which I can understand is oftentimes opportunistic buying and selling stores, but it would seem more prudent over time to be hitting more asset light, especially as your franchisees seem to be running actually better restaurants or putting up better numbers. So I'm just wondering how you think about that mix and whether you might be more inclined to consider reversing that and heading down more the franchise route over time.

Sure. Just to start with the Pepper Dining acquisition itself, the comp sales for Pepper Dining have been running better than the overall numbers. In the quarter margin, while it was lower than the Company as we knew it would be, Pepper Dining's margins actually improved during the quarter. So our investment strategy there is something we feel really comfortable with and we believe it is driving a great deal of value.

So very comfortable with the investment and, as we said when we purchased the 103 restaurants, opportunistic. It wasn't something we were planning on doing in a further manner to increase our company-owned levels.

On the other hand, from moving more to franchise, I think we are doing that a little more organically now. We are growing our franchise number of restaurants with existing and new franchise partners. And you have seen we are adding new restaurants with them on a quarterly basis; expect to add significant number this year.

Right now we don't have any plans to do anything further, but we always want to make sure we assess anything that can create value. Right now we believe the best way to create value is to get Chili's growing comp sales again with the initiatives that we are going to be talking more about at investor day and into next year.

Got it, thank you very much.

Steve Anderson.

Steve Anderson, Maxim Group. Wanted to ask about the breakdown of our lunch versus dinner sales. I know you referenced the quick service effect on your sales, but I also wanted to see as well if you have seen any cross-traffic as well from some of your peers in the industry that may have had issues with food safety. You know who I am talking about.

Yes, yes, it is not to veiled. So, I think -- so lunch versus dinner, I think the lunch business has been under a little more pressure throughout the year. Again, I think it is a combination of things happening within the category and outside of the category.

We have a really kind of unique strategy to help address some of the issues that consumers have with casual dining in terms of speed, and that is where again we are going to leverage our technology, our no-wait technology, as well as some other technology that we are bringing to the market to help address some of those issues around speed. But, yes, lunches and dinner have both been under pressure, a little more at lunch. And that is again we think driven both by what has happened within the category and some of the more recent things outside the category.

Okay, thank you.

Joe Buckley.

Bank of America Merrill Lynch. Two questions. Tom, on the preliminary fiscal 2017 guidance, can you break down the $0.40; what the 53rd week is contributing? And then how much the lower incentive comp is making up of that $0.40?

Sure. And we noted -- I noted a little over $0.40. It is about 50/50 between the 53rd week and the incentive comp across that 40-some-cents.

I would note that the incentive compensation is not even across all of our team members; that in the restaurants we are still paying a very reasonable bonus. And I think that is a critical point to understand of keeping people engaged at the restaurant level.

Okay. So there is more than incentive comp in the G&A number? And could you update us what you are thinking on G&A? You have been giving us ranges of dollar increases. Do you think it'll actually be down again in the fourth quarter?

The incentive comp is at the G&A level, as well as above restaurant level. And to be clear, some at the restaurant.

In terms of G&A for the full year, we haven't updated guidance for every single item so just focused more on the EPS range. But, yes, directionally it will be lower than where we had last guided on the G&A side.

Okay. And then just one more; could you just update us on the loyalty program? I know you said you will be transitioning to Plenti in the first quarter. Will the entire loyalty program be shifted to Plenti or --? Just kind of update us where you are on the loyalty program.

Sure. I will do that, Joe. Hey, Joe; it is great to hear from you, too.

We are transitioning -- what is happening right now is the technological linkage, if you will, between My Chili's Rewards, our in-house loyalty program, and the Plenti system is being developed. So those bridges are being programmed right now and all of the databases are being set up to be connected and so that is why it is taking us a little bit of time. Because obviously, when you are trying to connect these two huge systems up, there is some work that has to be done.

So we are investing in all of that programming and we are getting that done. And that should -- right now we think that transition will happen this summer and we will be over to a Plenti-based program in probably sometime mid to late first quarter.

In the meantime, we have been fine-tuning and, if you will, calibrating the loyalty program down in terms of the cost structure and that was really our biggest challenge with the loyalty program, My Chili's Rewards. It was just too rich. So we have taken some steps to kind of reduce the costs there more appropriately.

It gets totally recalibrated when we move over to Plenti because Plenti has a whole different basis. It basically turns us -- gives us what I would consider the biggest direct marketing database in the industry, the most flexible because we have this system, and it will be a marketing tool that we will be able to leverage ongoing that I think it is going to be very powerful.

It's just taking some time to get there and some investment to do that, but it is well worth it. Especially given the ongoing inflationary costs of the traditional media that is significantly above our pricing flexibility. And that is why it is important for us to find alternative ways to market and we think this is going to be a real powerful tool for us, similar to what we were doing with our email database, but now on a scale of multiple, multiple times larger.

We know consumers care about it. We have got 5 million people now signed up for loyalty and we have got about 20% of our transactions engaged in a loyalty that tell us -- that engage a loyalty component. So you have got scale already and you have got engagement, we just have to get the fundamentals right around how to drive incrementality around that. Then when you open it up to a database that is multiple times larger, we think we have got something there that is going to be powerful.

Okay, that is helpful. Thank you.

Howard Penney.

Hedgeye Risk Management. Wyman, when I see your words like invest in value and investing in the business and all of the terms that you are trying to do that try to restart growth again and get comps going, it suggests that it is more of a business reset than you can grow earnings. And if I look at valuation of Brinker relative to another large casual dining peer, the market service suggests you can't grow either. So is it the time to maybe reset the business for future growth and not worry about growing earnings next year?

Hey, Howard. No, I think we can do both. I think we can do both. We will calibrate with you as we kind of fine-tune what the future looks like, what that means and how that plays out.

I think the reason we can do both is -- I mean I just talked to you about loyalty. This year has been a year of investment and learning in the marketing world on multiple fronts and so we really haven't grown very aggressively this year. There has been investment; it hasn't been necessarily done the way we would have ideally liked it to do in hindsight, but it is done and it is in the bank now. And so we should be able to leverage that.

So I think we can -- well, I know we can do both, it is just a matter of scale, but we are pretty optimistic. But I do think we do have to address some of these fundamental issues that we have talked about and be more aggressive about moving forward.

Now we have -- and our capital helps us a lot as well.

And, Howard, this is Tom here. Just to be clear on the growth base, we do think it is important to talk about the little over $0.40 to adjust our base in 2016 and we will grow from that. And that growth includes the top line contributing to the bottom line, which we haven't seen this year.

So I think that is a key component of how we are looking at next year and delivering growth off of that normalized base.

Great, thank you.

Nicole Miller.

Good morning, Piper Jaffray. I was wondering how nimble is the menu or marketing pipeline. For example, were ribs planned as the current promotion or is that something you pulled forward? I just wanted to understand the balance of that pipeline in terms of core offerings, LTOs, and value going forward.

Hey, Nicole. You know, we have an innovation pipeline and it has a standard calendar and we try to adhere to that. Obviously, when we find ourselves either with an idea that we didn't have on the calendar that we think is really powerful, we can move it forward. Or if we find ourselves in need of something that is more aggressive, if you will, than what is out there, we can move it forward.

But we do that with a lot of understanding that there are operators involved and restaurants that have to plan and product that has to be moved, so there is flexibility. One of the things about owning most of our restaurants is we probably have more flexibility than a franchise, a fully-franchised system, just because we can communicate and control and make these decisions more rapidly because we are making them for most of the US-based restaurants anyway.

So I would just say it is more of an art. We try and stick to a plan, but we can pull things forward and ribs was probably one that was accelerated. Always been an idea for us, but we accelerated it.

That is helpful. And just one last quick follow-up. I believe earlier in the conversation it was said you had thought the industry was going to improve. I just want to understand why do you think that now. Maybe you could give us example, the rank order of what the guidance for sequential improvement is based on.

Is this something about comparisons or less QSR discounting or Texas being less or something you are seeing in April? I don't want to put words in your mouth, but I just want to get a little bit more color on that, please. Thank you.

I think you might be putting words in my mouth. I mentioned that we thought in the third quarter that the industry was going to see an improvement and it actually got softer. The reason we thought it would see improvement was it was a fairly tough winter last year in certain parts of the country and so that was the primary reason.

And we anticipated, with just some of the economic activity out there and the lower unemployment, that we would see consumers start to spend a little more freely. So between the weather lap and just the expectation that the economy was going to support a more robust spending, we anticipated it would get better or remain relatively constant, not -- but definitely didn't see it getting softer.

But you have guided for this current quarter to be a sequential improvement, did I understand that correctly? Thanks for the follow-up.

Nicole, we guided for a sequential improvement, but still negative in the quarter.

Okay. I guess I was asking more towards that, but I won't belabor the question of why that is going to happen. Is that macro or something? That was more what I meant, but thank you.

Oh, okay. Well, for us, why we see sequential improvement coming through the third quarter and then into the fourth, it really has more to do with what we are planning on bringing to market. Again, so it starts with things like the rib bundle, a media plan that is more comparable so let's drag on lower media weights. Moves to some other loyalty and direct marketing programs that we have and we had a softer lap, so our fourth quarter last year wasn't as aggressive, if you will, in terms of the lap as our third quarter was.

Those are just a couple of things, Nicole, that are giving us optimism around why we will continue to see sequential improvement going forward.

Thanks again.

Peter Saleh.

Great, thanks; BTIG. I just wanted to ask has your thought process changed around potentially monetizing some of the real estate assets that you guys may have and using that to repurchase shares, given how low we are today?

Peter, this is Tom. Our policy, and one we feel comfortable with, is to be in the market on a more ongoing business as we generate free cash flow that we don't use to invest in the business or pay a dividend and then buy back shares. On the monetization side, I think that there is some real estate there, but based on a tax basis and other considerations, that it is not a material amount to be able to affect something.

So we are focused on just continuing to drive the business and generate that free cash flow and continue to be in the market.

Great. And then just on the Ziosk. Any update on the functionality there or any changes in the functionality going forward over the next couple quarters that could help you guys either cut some costs out of the system or drive some top line?

Yes.

Okay.

I'm not going to give you a whole lot there, Peter, because as you know, Ziosk is not something -- we were the first and we -- so being the first we have lived with it the longest. We know the most about how to make that work hard for us, we believe, but we are, by no means, the only big company out there now embracing it.

And so I wouldn't want to share any of our insights as to what we want to do with it next and how we think it would work best for us on a public call. But we definitely see the power of that technology and we are working to make it work harder and harder for us every day.

Can I ask, if there is going to be changes to that functionality, should we expect it this year or next year?

This year, you mean in the fourth quarter?

Correct.

No, not a lot in the fourth quarter. I mean there is things we can do with the equipment as it is that we will probably be working on in the fourth quarter, but most of the enhancements --. Obviously, our loyalty program runs through and it is a proprietary program, so our transition to Plenti and our loyalty program is Ziosk-based, but it is proprietary to us.

So as we move from an internally-based My Chili's Rewards to a Plenti-based program that is another big enhancement, if you will, that will Ziosk will provide us. So we will have access to this massive database through Ziosk that nobody else will.

Great, thank you very much.

Thank you very much. Ladies and gentlemen, we are showing no further questions in queue. I would like to turn the floor back over to your speakers for any closing comments that they would like to make.

Well, listen we just appreciate your time and energy today. We, obviously, realize we have got work to do, but we are encouraged about the plans we have and look forward to seeing you in June. So thank you again, have a great day.

Thanks, Dave, and thanks for everyone for participating this morning. I would also note that in addition to the June investor day that our next quarterly earnings call is scheduled for August 11. We look forward to talking to you all at both of those events. 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.