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Brinker International (NYSE:EAT)

Q2 2013 Earnings Call

January 22, 2013 10:00 AM ET

Executives

Tony Laday - VP Finance & Treasurer

Wyman Roberts - CEO & President

Guy Constant- EVP & CFO

Analysts

David Palmer – UBS

Michael Kelter - Goldman Sachs

John Glass – Morgan Stanley

Jeff Bernstein - Barclays Capital

Sara Senatore – Sanford Bernstein

Jeff Omohundro - Davenport & Company

Joe Buckley - Bank of America/Merrill Lynch

Chris O’Cull - KeyBanc

John Ivankoe - JP Morgan

Jeff Farmer - Wells Fargo

Howard Penney - Hedgeye Risk Management

Steve Anderson - Miller Tabak

Josh Long - Piper Jaffray

Operator

Good morning ladies and gentlemen and welcome to the Brinker International Second Quarter of 2013 Conference Call. (Operator Instructions). It is now my pleasure to turn the floor over to your host Tony Laday. Sir, the floor is yours.

Tony Laday

Thank you very much Tom. Good morning everyone and welcome to Brinker International second quarter fiscal 2013 earnings call which is also been broadcast live over the internet. Before turning the call over let me quickly remind you of our Safe Harbor regarding forward-looking statements. During our management comments and in our responses to questions certain items may be discussed which are not based entirely on historical facts. Any such items should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Such risks and uncertainties include factors more completely described in this morning’s press release and the company’s filings with the SEC.

On the call, we may refer to certain non-GAAP financial measures that management uses in its review of the business and believes it will provide insight into the company’s ongoing operations. Reconciliations are provided in the tables in the press release and on Brinker’s website under the Financial section of the Investor tab. Consistent with prior practice, we will be silent on inter period sales or other key operating results yet to be reported, as the data may not accurately reflect the final results of the quarter referenced.

On our call today you will hear from Wyman Roberts, Chief Executive Officer and President of Brinker International and Guy Constant, Chief Financial Officer. Following their remarks we will take your questions.

Now I will turn the call over to Wyman.

Wyman Roberts

Thanks Tony and good morning everyone. Before we get started I just want to acknowledge that this is the first quarterly Brinker call since 1999 that Doug Brooks isn’t participating. Doug’s leadership has been a driving force beyond the success of Brinker and I personally appreciate the confidence he has shown in the team and it has continued to influence during the transition over the next year, you know they just don’t get any better than Doug Brooks. So today I would like to share with you our company results for second quarter and some highlights for each of our brands and then I’ll turn it over Guy for deeper dive into the numbers before we answer your questions.

So as you sign our press release this morning we reported an adjusted second quarter earnings per share of $0.50, a 6.4% increase over a prior year. Comp sales during the quarter increased 0.9% on a 2.1% traffic decline. This marks our 8th consecutive quarter of positive sales growth. So I want to spend a minute giving you some insight into the dynamics within the quarter to give you a more complete picture of our performance. First, whether negatively impacted our results by 40 basis points but the more significant impact relates to the timing of the holiday season versus the end of our fiscal quarter which ended on December 26. Because Christmas fell on Tuesday this year the holiday break for most school districts ran later than last year which for our fiscal calendar crossed over into our fiscal third quarter.

So given these changes in holiday timing we thought it was important to talk about the first week of our third quarter because we run some of the highest volumes of the year during that holiday week. So our Brinker’s reported comp sales for December came in at 0.4% when adjusted for the holiday comp sales were up 2.1% for December and 1.5% for the quarter. And at Chili’s we continue to take share as measured by Knapp and Black Box. In fact our positive gap was over 300 points in December which is an improvement over October and November. These results demonstrate our ability to continue to deliver on our promise of strengthen in our business model with a balanced approach of increasing top line sales, improving our operational efficiencies and returning cash to shareholders and all of our businesses delivered solid results.

Q2 is an especially important quarter for Maggiano and they successfully wrap the strong holiday season last year and continued their top line sales growth trends by delivering their 12th quarter of comp sales growth. They also continued to build on the impressive margin gains they began earlier this fiscal year with a more than 90 basis point improvement for the quarter primarily through their efforts to improve waste. As we look forward we’re excited to leverage the stronger business model by growing the margins on those brands through smaller more efficient prototype.

When the process of finalizing site selection and development plans and we look forward to sharing those plans with you soon. Our global business also delivered another positive quarter marking its 12th quarter of comp sales growth as well. There are lot of companies talking about jumping into the international marketplace as an opportunity for growth. I’m proud to say we recently celebrated our 20th anniversary in Mexico demonstrating the solid foundation we’ve established with the Chili’s brand internationally. With our openings over the next several months, we’ll have close to 100 restaurants in the Mexico market and during the quarter we grew our international system by 7 new restaurants bringing our total to 274.

For Chili’s domestically after pretty tough October we saw strong results in November and when you adjust for the changes in the holiday season December’s numbers were solid as well. Margins were a little tougher to deliver in the first half because of the heavy lifting required to roll out but now that we’ve completed the new point of sale and kitchen installations for all our company owned restaurants were in our goals and we feel confident about sustaining those margins going forward.

Guy will give you more detail on that in a few minutes. In December we introduced a new menu, we freshened our Lighter Choices category with new Mango-Chile Chicken and Mango-Chile Tilapia which standard appetizer and dessert categories with the introduction of freshly baked chocolate chip cookie and soft pretzel appetizers, items that work well with our new kitchen equipment and now we’re rolling out our first major platform that takes advantage of our new ovens pizza. We’re in a process of rolling out pizzas to all our company owned restaurants early third quarter and we’ll bring in to our franchise system once their new kitchens have been installed more towards the end of the quarter. Then we will go on with these new products during the fourth quarter.

We’re looking forward to sharing some of our new product news with you during our investor conference next month in Dallas where we will give you a sneak peak at some of these great new items as well as some of the items that are still in development. We’re also eager for you to experience our new restaurant prototype in person which we opened this quarter in Dallas and North Carolina. The restaurant has a beautiful contemporary look and feel and guests are responding very well at both locations.

Regarding the next phase, our growth strategy, we’re under construction on several sites now and the pipeline is filling quickly. We’re on track to deliver on our commitment to grow the brand by 10 to 15 restaurants per year starting next year and as we look ahead to the second half of this year we’re confident we can successfully continue to take share deliver strong margins and hit our EPS targets, why is that? Because we have built a strong foundation for the brand through the hard work we have done to install a new kitchens, introduce a new service model make significant improvements to our core menu and for compelling value platforms. This foundation gives us a solid base to build from and new news to bring our consumers which has worked well for us on our two for 20 platforms and at lunch where we’re two years from introduction and we continue to grow that day part but keeping it fresh and relevant to our guests.

This strategy was more sustainable and predictable results versus the limit of time offer strategy that we view susceptible to giving up huge margins, wrapping sales that may have trouble getting back once the LPO has run its course. We don’t have those kinds of one time occurrences in the mix anymore. Our value scores continue to look good. We’ve got exciting culinary innovation in the pipeline. We continue our restaurant reimages and a smarter and more aggressive marketing strategy and our guest satisfaction scores continue to improve our both brands which indicates that our efforts the pace and sequence the volume of change for operations team is working and we’re enabling them to deliver a consistently great experience. That’s a strategy we believe will grow the business going forward. So another solid quarter for Brinker but looking at ahead we’re facing the same challenges as rest of the industry. The categories are tougher shaped than we would have thought at this point in time but the good news is we’ve developed a business model that sustains our brand through tough times like these and that’s how we’ll continue to outperform the category even when we start to see the economy improve to indicators like global employment and the increase consumer confidence.

In the meantime our commitment is to stay at course, ever mindful of our competition is doing but to run our own race and to stay committed to our strategies and with that I will turn the call over to Guy to walk you through with the financials, Guy?

Guy Constant

Thanks Wyman. As you just heard our second quarter earnings per share before special items was $0.50 demonstrating again our ability to drive ongoing shareholder value by sticking to our balanced approach of delivering everyday value to our guest and increasing profitability in our restaurants? Before we take a deeper dive into the results I wanted to remind you that we introduced a new income statement from our last quarter that separates total Brinker revenues into company sales and franchise and other revenues. So consistent with last quarter as I talk about year-over-year basis point changes for cost of sales, restaurant labor and restaurant expense please note that such changes are based on those costs as a percentage of company sales.

Now to the results, Brinker Q2 revenues were $689.9 million an increase of 1.2% over prior year. Total reported company owned comparable restaurant sales increased to 0.9% on a 1.8% price increase and positive 1.2% mix partially offset by negative 2.1% traffic. Whether negatively affected the quarter by approximately 40 basis points primarily due to the impact of Hurricane Sandy and harsh winter weather during the holiday season. Capacity was flat for the quarter. Franchise and other revenues increased 2% due primarily to 18 net franchise openings, international comparable restaurant sales of 2.7% and domestic comparable restaurant sales of 2.2%.

Cost of sales decreased 40 basis points from prior year to 27.6% driven by the favorable impact of menu pricing, the continued moderation of commodity inflation and slight improvements in alcohol mix. Currently 70% of our commodities are contracted through the end of fiscal 2013 and 41% are contracted through the end of calendar 2013. Given this visibility we project the rate of commodity inflation for full year calendar 2013 to average approximately 2% increasing throughout the year. Restaurant labor increased 10 basis points to 32.5% driven primarily by a recent rise in employee health insurance claims and overtime associated with the accelerated roll out of our kitchen equipment early in the quarter. Absent these items, restaurant labor would have improved 50 basis points year-over-year largely due to productivity associated with the new equipment.

Restaurant expense was $162 million and flat to prior year as a percentage of company sales. This included year-over-year improvements in utilities, supervision expense, repair and maintenance cost and leverage on higher company sales and as mentioned in prior calls we lapped a large favorable adjustment to workers compensation insurance in the prior year that offset these reductions.

Depreciation expense increased $1.8 million to $33 million driven by the continued roll-out of our key capital initiatives. General and administrative expenses were $31 million which was above $200,000 less than the same quarter last year despite slight increases in performance based compensation.

Interest expense was about $550,000 higher than prior year due largely to a higher average debt balance partially offset by the impact of lower interest rates. The tax rate before special charges was 32.7% versus 29.7% in the prior year, an increase of 300 basis points. The higher tax rate was driven by higher earnings and the temporary expiration of employee tax credits that were in place last year. However since these credits were reinstated as a result of the fiscal cliff discussions, we expect our steady state tax rate to return to our guided rate of around 31% for the balance of the fiscal year.

Capital expenditures for the quarter were $32.8 million with year-to-date cash flow from operations at $131.3 million. In the second quarter we completed installation of a new kitchen equipment in all company owned Chili’s restaurants and are still on track for completion of all domestic franchise owned restaurant installations by the end of March.

We also completed the roll-out of our new point of sale system in all company owned Chili’s restaurants. We have completed 255 Chili’s reimages to-date and by the end of fiscal 2013 we anticipate being complete on 370 company owned restaurant reimages. We now have fully completed the reimage in 11 markets with an additional four markets in progress. During the quarter we bought 1.5 million shares for $45.1 million funded in part through a partial draw down in our revolving credit facility and we ended the quarter with approximately $93 million of available cash in our balance sheet. Since the end of the quarter we have purchased 1.2 million shares for approximately $41 million. This brings our year-to-date share purchase to a $167 million or 5.1 million shares leaving an outstanding authorization of about $494 million.

As Wyman mentioned we continue to execute on a strategy that is built on a solid foundation for delivering LIBOR results and we remain confident we can achieve both our fiscal 2013 and longer term earnings goals. With that I will now turn the call over to Tom to open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And we’ll take our first question from David Palmer from UBS. Your line is live.

David Palmer - UBS

Two quick questions have you recently taken some pricing in company restaurants and if so what sort of year-over-year pricing are you expecting for the second half of fiscal ’13 and separately could you perhaps quantify the lift you’re seeing from reimaging so far. Thanks very much.

Wyman Roberts

Sure David pricing we took pricing in the second quarter which was a little earlier than we took last year, we took pricing in the third quarter last year so we do expect to continue to run around the middle of the 1% to 2% range that we’ve guided for pricing for this year and so we would expect that to continue through the balance of the year. As for reimages we continue to see strong results as we discussed before based on the investment we’re making in order to get a mid-teens return on that investment we need to sales of 3% or higher and we’re exceeding that comfortably in the restaurants that we’ve reimaged and as we discussed last quarter in the markets where we’ve where we’ve done a lot of the reimages or completed a lot of them to-date such as California, our regional results are even stronger than they are for the balance of the system, so we feel very good about the reimage program and it continues on as expected.

Operator

We’ll take our next question from Michael Kelter from Goldman Sachs. Your line is live.

Michael Kelter - Goldman Sachs

I wanted to ask traffic declined every month this quarter and that’s even when you adjust for weather in calendar shifts and negative traffic hasn’t happened for a quarter at Chili’s in a few years now. Has anything in the environment changed and do you need to adapt in some way or just keep doing what you’re doing?

Wyman Roberts

So we obviously we’ve seen those trends across the industry and so that’s a little disconcerting for us as well but we think it's just a more of the sporadic nature of the consumer that we have seen really over the last few years right? So we see these dips and then they tend to rebound so where the industry has been running more in the 1% traffic declines during this quarter. It drifted down to more like 2 and 3 and we kind of drifted with that. So yeah it was disappointing to see that but we don’t think it's anything significant in terms of a long term play we think it's more of the kind of the ebb and flow that we’ve seen from a consumer perspective. As far addressing it, we think our strategies continue to work well. We continue to take share at the same levels and that’s really the key for us. We believe these things will level themselves out over sometime here and the key is to continue just maintain our ability to take market share and we’re doing that both on the sale and a traffic standpoint. So we don’t see major need to adjust our strategies in any major way.

Michael Kelter - Goldman Sachs

And then separately you’re roughly fit pizza to this quarter, you previously tested it. Is that the roll out official? Can you talk about more specifically what you learned in the test and how confident you’re that it will be a robust sales driver? Anything you’re able to share would be helpful.

Guy Constant

Well we don’t really want to share a whole lot about our marketing strategy too early, you know, we’re not really going out with until the fourth quarter from an advertise perspective. So we’ll have more information we’ll share with you in February but suffice to say we’re excited about it. We wouldn’t roll it if we didn’t think it was going to be incremental to our business and from that perspective we’re you know long awaited pizza introduction is now underway and we’re looking forward to getting it in our restaurants and being able to use that as another foundational platform to continue to build the strength of the Chili’s brand.

Operator

We’ll take our next question from the line of John Glass with Morgan Stanley. Your line is live.

John Glass - Morgan Stanley

First just back on the holiday shifts, I appreciate that you’re quarter ended earlier maybe than some others and you picked up that extra week but I was also under the impression that earlier Christmas that shifted to Tuesday kind of freed up a weekend and so maybe there was a positive benefits, or was there a positive benefit to that shift that you didn’t mention or not?

Wyman Roberts

Yeah John there was, you pick up that extra weekend but really what happened was the impact of kids being out of school really shifted to a much greater degree into that week after Christmas and the week really the next week into that first week of January and so that had a bigger impact than just picking up that extra weekend that because that’s when consumers are out and they are arbitrary mood and they will dine more freely because kids aren’t in school.

John Glass - Morgan Stanley

Okay and then I guess I know you don’t like to talk about kind of current trends but you’ve got a couple of big things one obviously a much tougher lap this quarter. So if you just put that in context how we think about the third quarter from a lapping perspective where there any calendar shifts either around the holidays we just passed or the Easter holiday that are worth noting as well.

Guy Constant

Wyman just mentioned the school shift is obviously a help now to our third quarter as you can probably read into just when we add the period following our second quarter to our results to comment on the holiday shift as we spoke of not just in the release but earlier in the call that would certainly give you some indication that the fact that school was out this year, the week after New Year’s or the week of New Year’s which it wasn’t last year will certainly be a benefit to the quarter and as I think we have discussed a few times on the call you know these weeks during the holiday season are some of the highest volume weeks that we have and so while it did have a pretty significant impact to the second quarter the net effect of that will be that it will have a significant positive impact in the third quarter.

John Glass - Morgan Stanley

And looking forward is there anything else the change of the calendar and also maybe just because payroll tax has been so discussed in the industry. Do you have a view of that as one of the factors that you’re considering as you thing of the third quarter as well.

Guy Constant

Well no there are no other calendar shifts for the balance of the quarter other than Valentine’s moving from Tuesday to Thursday but net effect of that it not being on a weekend is certainly a positive but other than that no, as for the payroll tax issue I think it's a little early to tell I mean it's literally in the last week or so I guess that people that have been getting pay checks and seeing the impact for the first time so I can’t say that we can give you an early read on that. You know what I would say is that as Wyman talked about you know the consumer when there seems to be the discussion whether it's debt ceiling or election or any of that sort of news it's the airways, it have seem to have made consumers a little nervous so we’re anxious for some of that to stop and get back to the underlying trends. Really we’ve been seeing the last 2 or 3 years that we believe we figured out a way to compete successfully in that sort of environment and we don’t need the economy to get better, although we would like it to but we don’t need it to get better in order to continue the success so we put up the loss a couple of years.

Operator

We’ll take our next question from Jeff Bernstein from Barclays Capital. Your line is live.

Jeff Bernstein - Barclays Capital

Just a couple of questions first as it relates to the comp, it seems like obviously we’re seeing volatility or maybe wonder whether you see it's an increase in volatility or choppiness through the quarters but would that be in the case, how do you think about the restaurant margin whether it be through this quarter or going forward. You know how do you manage your business when you’re not sure week to week how things are trending. I’m just trying to first get assessment in terms of how you think about this, the margin and how we should think about that over the next couple of quarters if the choppiness prevails and then I have a follow-up.

Wyman Roberts

So let me just talk to the choppiness. You know we really haven’t seen that much choppiness, I mean it again I would call it a little more of an ebb and flow of the base in terms of the consumer but again when you adjust for the holiday timing, you know this consistent 1% to 2% positive comp sales trend is you know really kind of what we have been doing category has been and run a little bit flat and then again it's been ebbing and flowing and Guy had mentioned, we have some bad news, hits out there and consumers tend to pull back a little bit but overall there appears to be this kind of level that we moderate back to and so I don’t think it's necessarily as choppy as maybe seen at again with the adjustments for the holiday. You can see the October, November, December numbers are all you know within that 1% range basically and so we don’t see as many volatile as you maybe have seen it. I will let Guy address the margins.

Guy Constant

Jeff on the margin front, I know we have talked about this a lot but this is why we think it's so important that we have done the work we have done on the margins because it's allowed us to really produce double digit EPS growth consistency now for what we’re 9 or 10 quarters of doing that now in an environment that I think we would all say the best is okay in terms of top line and where the consumer has been given what’s been happening with jobs.

So the work we’ve done on margins does provide us that stability that we maybe would like to see a little more of from the consumer but it provides the stability in earnings we’ve been able to deliver and it's something we can rely on and other than when we spend a little extra on overtime to finish the roll out of some of these initiatives that have been big drivers in producing these good results we would expect to continue to drive pretty significant margin improvements particularly going into the back half of the year.

Jeff Bernstein - Barclays Capital

So which leaves now I guess to the follow-up in terms of you know it sounds like some of your markets have all the updated equipment, reimages and what not. Just wondering if you can use that as a segue in the terms of you know what they are seeing vis a vis your 400 basis points promises or guidance, I’m just wondering whether you’re now learning from them that there might be more upside to that or what’s been the biggest surprises in terms of the upside to the margin?

Wyman Roberts

Well I mean cost of sales has been a nice surprise in terms of margin upside that isn’t necessarily directly associated with the initiatives although certainly the implementation of how menu link will help us so that we just completed that in November. So we actually think there is continued upside to that going forward. I think the great work that’s been done in our supply chain group and their partnership with Culinary in terms of what we have been doing with new menu introductions has really helped us do better on that line than we had originally thought. You may recall we talked about that line being flat this year and this is the second quarter now, we beat cost of sales I think we’re pretty comfortable saying now that we’re going to see cost of sales lower year-over-year when you take into the account the impact of the full year. So that’s been a bit of a surprise as for the achievability of the 400 basis points of margin improvement, we’re absolutely confident we will be able to do that and our experience with the markets that have all those initiatives gives us that comfort and as we said last quarter on the call, I think our operators have done a great job now that they are getting some experience and a little more time with the equipment that I think they do believe that there is additional upside to that target as well that we’ll be able to factor into our long term plans.

Guy Constant

I just think the biggest surprise with this whole margin play and the improvement we have seen over the last few years and we’re continuing to see is the impact it's had on our ability to improve margins, take market share, grow sales, increase guest satisfaction and increase team member engagement, you know that’s really been the biggest surprise and the thing that’s kind of changed the game for us is that in the middle of a major margin improvement strategy we have been able to strengthen the brand and really make a much more competitive promise to our guest and our team members and that’s a thing that has got us really excited about where we’re going.

Jeff Bernstein - Barclays Capital

Clarify I think you both mentioned in your prepared remarks that you’re comfortable with the earnings guidance for fiscal ’13 and beyond I’m just wondering we should therefore assume the 17% to 25% is there any unusual in the third and fourth quarter or should we still assume third and fourth quarter both within that earnings growth range.

Wyman Roberts

Yes Jeff everything is still as planned as you may recall we always thought the second quarter was going to be below 17% to 25% guidance which by its nature would imply that we would be closer to the higher end of that range in the back half of the year we still believe that will be the case.

Operator

We’ll take our next question from Sara Senatore from Sanford Bernstein. Your line is live.

Sara Senatore - Sanford Bernstein

A couple of follow-up questions, one is just in terms of the traffic trends or the composition of the comps. Can you just talk about quickly, do you think there was anything any impact from having taken price a little more quickly than you had expected other than you had last year and also if you can just talk a little bit about where the positive mix is coming from, was it from the lighter choices category. Are you still getting benefit from some of the other platforms that you’ve introduced and then I had a follow-up on the unit growth question?

Wyman Roberts

The pricing we did take it a little earlier but not real early in the second quarter so we have only got several weeks, we took it in December and so it wasn’t the major driver to the changes in the mix or the PPA. So and we don’t think because it was taken late in the quarter that it had a major impact to our traffic trends, we didn’t see anything that was related to the price increase as far as traffic trends go. In terms of the other thing that are helping our mix, it's really across the board, it's some of the new items that we’ve added to continued alcohol program that we’ve now been out aggressively pushing and the operators have been focused on for over a year now, we continue to drive that piece of business so we’re getting it from several pieces of business obviously all that we know are more favorable to us and so we’re focusing on them to help improve the overall profitability. So between the price and the alcohol beverage program, the rest of its all fairly small pieces that add-up.

Sara Senatore - Sanford Bernstein

Great and then just on the unit growth can you just talk a little bit about the idea of going back to unit growth. I think you started off the commentary by saying the main environment is a little bit weaker than you would have expected at this point. Is there any risk you know it's relatively modest phase of unit growth but even a 1% pace you absorb some of the share gains that you have been getting in the forms of comps through unit growth.

Guy Constant

I think as with any investment we have made over the past couple of years, we have been very careful to make sure that we deliver the kind of return on incremental invested capital that I think has a lot of has to deliver the kind of results we’ve for the lasted a while so we’re always careful. I think one thing to remember about Chili is while we’re everywhere, we’re fairly deeply penetrated in some markets and we’re somewhat under penetrated in other markets and so there are opportunities in trade areas that we’re not in today that present opportunities for growth and so as with any investment we’re going to be very careful to make the right decisions but we do believe that the modest unit growth that we’re looking at is something that can be observed as long as we keep the focus on making sure you get good returns.

Wyman Roberts

Especially after a four year hiatus. We haven’t really built restaurants in the U.S. in quite a while so there are some opportunities that have made themselves available over the last few years that will take advantage of it.

Operator

(Operator Instructions). We’ll take our next question from Jeff Omohundro from Davenport & Company. Your line is live.

Jeff Omohundro - Davenport & Company

Just two quick ones, first on the tax rate that commentary, could you just elaborate a little bit more. Was the commentary that you returned to the 31% in Q3, Q4 or was it for the full year, this just might be a little bit improvement in Q3, Q4 and then G&A was a bit lower year-over-year, are you still comfortable with the expectation for on a full year basis achieving down G&A. Thanks.

Wyman Roberts

So I’ll do the second one first Jeff, yes we feel very comfortable, we will achieve the estimate that we had that it will be down in G&A for the year, on your first question our study state tax rate now going forward will be around that 31% guided rate now that those credits are back in place.

Operator

We’ll take our next question from Joe Buckley from Bank of America/Merrill Lynch. Your line is live.

Joe Buckley - Bank of America/Merrill Lynch

Just wanted you to clarify the holiday shift again, is the real key that your quarter ended the 26th this year and some of the 28th last year so you got two few or those big sales days is that the significant part of it?

Wyman Roberts

A little bit Joe but it really you lose a little of those days that get pushed into the third quarter but again it really had more to do with the when kids were out of school and so last year with Christmas falling on the weekend schools were out free that week before and with the following on the Tuesday schools didn’t really get out until the week of and then extended out further which pushed a lot of the holiday school vacations into our third quarter those days and those are big days, again as we have talked about those are days when people are out and it's primarily those weekdays right that become a little more like a weekend because kids aren’t in school.

Guy Constant

I think Joe the other thing that exacerbates is I know as everyone on the call would know is we run a Thursday to Wednesday week when much of the industry runs a Sunday to Saturday week and so if you looked at our last week of the quarter you know our gap to the industry so back to your earlier question everyone in the industry would have experienced that shift in school timing. So we’ll were faced with that to some extent but because of the way we count our week from Thursday to Wednesday versus the rest of the industry our gap to the industry I mean we were negative in the last week of the period but we were significantly positive in the first week of the third quarter. The overall lap being that if you looked at the two weeks as a whole you know our gap to the rest of the industry actually increased a little bit in that two week period. So some of it also has an impact on when we count our weeks versus the rest of the space.

Joe Buckley - Bank of America/Merrill Lynch

Just a question on the food cost guidance for calendar 2013, how do you expect that 2% of flow. I think you said it will be more modest in the first half of the calendar year and a little more of a second half and can you comment beef is part of what is in the 40% or so that’s contracted or covered?

Wyman Roberts

Sure yes Joe you heard me right, we expect it to be little lower than that earlier in the year and perhaps closer to that number in the back half of the year so we’re expecting commodity inflation to increase somewhat as the year goes on. As for beef some of it is part of the contracted, we can’t really contract for ground beef anymore that tends to be something we can just lock and supply but not price but for things like steaks and (inaudible) beef those items are under contract.

Joe Buckley - Bank of America/Merrill Lynch

Okay maybe just one more quick one, how is the gift card this year versus last?

Wyman Roberts

Yeah it was okay Joe; we were basically flat down a point. We choose not to be as aggressive some of the competition out there. So again keep track of what the competitive environment looks like, you saw several players step up their level of discounting, some of them at levels that were really pretty amazing in terms of trying to get people to and get a buy gift cards. So we felt pretty good about our ability to maintain our basic business without discounted any deeper than we had in the past and taking advantage of the shifts and the categories that continue to evolve in that business as the consumers move more towards purchases and third party versus purchase in restaurants so we’re continuing to do a good job I think from a marketing perspective on adjusting and doing the right thing to balance that.

Operator

We’ll take our next question from Chris O’Cull from KeyBanc. Your line is live.

Chris O’Cull – KeyBanc

Guy I believe you said excluding the overtime in health insurance claims, labor would have improved 50 basis points year-over-year this past quarter.

Guy Constant

That’s correct.

Chris O’Cull – KeyBanc

Is that the run-rate we should expect in the back half of this fiscal year?

Guy Constant

We talked about at the start of the year Chris; we thought our labor line would be 50 to 70 basis points better for the year. We’re still comfortable with that guidance.

Chris O’Cull – KeyBanc

Okay is there any unusual quarter to quarter, is there any unusual claims that you’re going to be lapping or charges?

Guy Constant

Not for the balance of the year now.

Chris O’Cull – KeyBanc

Okay great and Wyman my question really is regarding Maggiano. Since the soft traffic the past 12 months at Maggiano’s change your view on the development potential, are they accelerating the development at Maggiano’s the next few years?

Wyman Roberts

No I mean we’re looking at it obviously, we want to look strength the business across all the metrics but overall the profitability and the returns for the brand are looking very, very good. With the cost of sales improvements, the business model is actually getting stronger. Now again we do look at traffic and we’re trying to understand and while we do understand where those trends are coming from and what’s driving some of that. So mainly the balance the model a little bit to address some of the softer traffic aspects of the business but overall Maggiano’s team has done an outstanding job improving the overall profitability to business even with some of those lower traffic numbers and getting us even more excited about growing that brand as we go forward.

Chris O’Cull – KeyBanc

And I apologize I mean this, what we was the development expectation for the brand over the next year or two?

Wyman Roberts

We think in the neighborhood of 12 Chili the next year and two to three Maggiano’s.

Operator

We’ll take our next question from John Ivankoe with JP Morgan. Your line is live.

John Ivankoe - JP Morgan

First as you look at introducing some new products, menu (inaudible) your new kitchen platform, do you think that will be a positive mix or your potentially negative mix of some of those items unlike be shareable in other words what is the impact as you have kind of some visibility of what the impact will the average ticket?

Wyman Roberts

So John are you talking about the things we just introduced the thing I talked about or are you talking about more are you talking specifically about pizza?

John Ivankoe - JP Morgan

Well yeah I mean pizza being one and whatever else you guys are going to have in your pipeline that presumably we’ll see in the a couple of months. In another words your thinking about fourth quarter even into fiscal ’14.

Wyman Roberts

Yes obviously the key to a lot of this is we don’t do anything without thoroughly testing it right, so we have a real good understanding before we role anything nationally as to the impact it's going to have on our check and our cost of sales and so obviously we wouldn’t do that if we thought it was going to be detrimental. We continue to see things like the things we just added, the Mango-Chile Tilapia and the Mango-Chile Chicken which are on a lighter section menu. We’re able to actually get better margins on that part of our menu so they are helpful and prove to the margin there and obviously with pizza we have kind of positioned it in a way that it isn’t, it doesn’t look like it's been shared that much. We have kind of designed it around an individual portion, it's a good portion so maybe you can take some home and we’re not seeing a lot of sharing and obviously the cost of sale on that item are very favorable. So we’re encouraged by that and we continue to just make sure through the testing process that we have all those things kind of figured out before we roll.

John Ivankoe - JP Morgan

That’s a very good color. Thank you and then secondly you know a foot note in your release off the balance sheet quantify your net book value will end in building and there has been obviously a lot more discussion about companies that pursue a (inaudible) structure, perhaps you know kind of unlock some of the market value of these properties might be seeing getting more than your net book value. So if it's inappropriate they need to talk about I mean what would be the positives and the negatives of a structure like that and is that will be something that you can consider in the future?

Wyman Roberts

So John as you can imagine we look at all of those opportunities on a fairly regularly basis but given our investment grade credit rating and the access we have to be able to tap into the debt markets as you have seen we have gone on our revolver and we believe that that capacity exists. It's a lot more expensive proposition for us to monetize our real estate than it would be for us to look at the credit markets.

In part to what you said the market value is significantly higher than the book value of our land and so the tax hit that we would take in addition to the cap rate that we would experience by doing that, it just makes a whole lot more sense for us to go tap into 4% or 5% money than it would to spend more to monetize the real estate.

Operator

We’ll take our next question from Alvin Concepcion with Citi. Your line is live.

Alvin Concepcion – Citi

I was just wondering year-over-year, have you seen a major change in the promotional environment in the industry so far that here relative to what you saw in December or even the quarter how you would like to talk about it and then secondly I think you have previously talked about advertising being pretty similar year-over-year for the remainder of the year, is that still the current thinking?

Wyman Roberts

Yeah Alvin, so we haven’t, we have heard rumblings and we continue to look but we haven’t seen any impact to to-date and historically it really hasn’t been the thing that drives share when people get aggressive like with promotion margin. So we will continue to monitor but we’re committed to our strategies going forward and we think that those are the ways you continue to build a business for the long haul and with regard to marketing spend for the back half yeah basically we’re in that same levels as last year. We’re always aggressively looking to shift our mix to where we get the biggest impact and so from a budgetary standpoint we’re very similar to prior year.

Operator

We’ll take our next question from Jeff Farmer from Wells Fargo. Your line is live.

Jeff Farmer - Wells Fargo

Just coming back to I think it was John’s question earlier about pizza. I’m curious at this point you guys have a standalone platform since you roll it into two for 20, how do you anticipate merchandising?

Wyman Roberts

Jeff I mean we obviously have it all figured out, it's rolling in a couple of weeks I don’t know if I really want to get too specific before it rolls this from a competitive standpoint so I think I’ll just.

Jeff Farmer - Wells Fargo

Yes let’s leave it there that works.

Wyman Roberts

Yes and we can go in and see in the restaurant you will see.

Jeff Farmer - Wells Fargo

Okay and then on a different topic just sort of coming back to the margins. So I guess if you just go back and look at that first group of restaurants that received the new kitchen equipment and POS system. Are they continuing to deliver I guess I will call it incremental margin favorability or is that margin benefit largely achieved in the first couple of quarters and then they sort of done their job and the next group of upgrades takes over, how should I think about that?

Wyman Roberts

I think there is a couple of different levels Jeff. So it's fairly quick impact that we see the productivity improvements particularly around the implementation of the kitchen line, kitchen of the future equipment but we saw so that’s the first level you get in and there is a second level that comes when you can get an entire area or an entire region with the kitchen equipment because now they can draft up each other and you have got the area director or regional director working one consistent system across all the restaurants rather than still trying to manage old lines and new line. So I think that bumps upto a second level and I think there will be a third level in fact I know there will be a third level because as our operators now many of them have had the kitchen equipment for a number of months now and you know we had our old kitchen for 35 years but some of our restaurants have only have the new kitchen for 35 days or 35 weeks and so I think once you get muscle memory and practice and experience with the existing kitchen I think our operators are already identifying opportunities to maybe hit a third level of savings and productivity improvements around the kitchen, not to mention faster ticket times and improved food consistency and the ability to roll out new items. So I think there will be another level of margin improvement in addition to what we have seen so far.

Operator

Our next question comes from Howard Penney from Hedgeye Risk Management. Your line is live.

Howard Penney - Hedgeye Risk Management

In the brand the company is struggling and then trouble there is host of possibilities that things they can do to improve the perception of the consumer whether it's tracking in the middle you know like you did maybe products and advertising maybe changing the cooking process and/or discounting where this discounting all you think about as a more competitive steps that needs you take you into your war room and say okay we need to think about the business differently and how can respond.

Wyman Roberts

Yeah so I think we’ve been clear, thanks for letting me kind of restate it again. We don’t see discounting or major margin give up as the best or appropriate strategy for a long term success right? So we really do believe it has to do creating a better consumer proposition, more relevant brand and reinvesting back into the business and adding those foundational elements to the business that are going to make us really successful and that includes new food as well as operational excellence and so that’s where our focus is now. I will say every once in a while in a region, or an area if we feel some competitive pressure we have through more subtle marketing tactics, the ability to go in and apply little more pressure or introduce something a little more specifically but we see there is a much more localized approach and not the way we want to position the brand in the broad way. We are much more sensitive to how the brand gets reviewed and we don’t think discounting broadly is the way to build the strong brand.

Operator

Our next question comes from the line of Steve Anderson with Miller Tabak. Your line is live.

Steve Anderson - Miller Tabak

Earlier on the call you mentioned about the sales in your refresh rebranded market were up above the 3% overall rate and above that in some of the (inaudible) markets. There are few markets that you renovated like you have run up against the two year market and do you have any metrics that they are still outperforming system might average?

Guy Constant

No those restaurants are holding firm so you know our goal there was to get the initial one year bump and then try and maintain that as we go forward and so you’re right the initial five sort of test markets that we did are now into year two of the reimage and we’re very happy about how they continued to perform and how guests are perceiving to reimage giving us credit for having a more relevant environment, a fresher look, a better atmosphere and of course that permeates through the other metrics as they tend to. If you’re happy about how the restaurant looks and what you’re experience is, the food tastes better and the service is faster as well which in fact they are so we’re seeing it resonate even into year two and lot of those other markets.

Operator

We’ll take our last question from the line of Nicole Miller-Regan with Piper Jaffray. Your line is live.

Josh Long - Piper Jaffray

Hi this is Josh on behalf of Nicole. Thanks for taking my question. Looking at the updated commodities guidance of 2%, kind of pushes and pull is there that lower than expected beef and pork inflation on the protein side or maybe actual deflation on the produce side, just a little commentary there and then on the Maggiano side look like the traffic trends more or less followed Chili throughout the quarter. Just wanted to get a sense for how banquet dining shaped up in particular on that year-over-year comparison is that something you did differently on the marketing side or maybe just more a result of the broader industry trends. Thank you.

Wyman Roberts

All right let me handle the commodity one and then I will talk about Maggiano. So, you know unfortunately we don’t see beef getting any better for probably a couple of years just given the pressure on that category and we’re not really seeing herd sizes expand at this point. So I would not say that beef is coming in more favorably than we thought it continues to be aligned with a lot of pressure. I think poultry prices have been favorable so we’re very happy, we just recently finalized that contract and we’re very happy where that landed and really the rest of our commodity basket, the inflation is fairly mutated really most of the inflation that we’re seeing is in the beef category and everywhere else we have done a real nice job managing that again both through what the efforts of our supply chain team and to culinary.

Maggiano, the banquet business it was interesting what happened in the quarter, you know given the way Thanksgiving fell and the Christmas fell we actually had five weekends of banquets versus four in past year so early on in the period it didn’t look very good for banquets because what was happening is four weekends the banquets got spread over five weekends but certainly that performance got dramatically better as the period came to a close and we ended up higher in banquet sales year-over-year which was a nice positive result for Maggiano lapping a very good year last year as well.

Wyman Roberts

In closing let me just wrap it and say we know there are a lot of economic and environmental factors that we can’t control, factors that impact every business and not just ours. The good news is what we can control is working well for us. With the strategies and the team we have in place, the companies financial health just keeps getting stronger and our future looks brighter. We continue to consistently deliver positive comp sales and margin improvements across the company as well as strong guest satisfaction and team member engagement scores that just keep getting better. Other work our team has done to complete our key capital initiatives gives us the foundation for further culinary and marketing innovation which will help us continue to steal share and achieve our goals. We look forward to seeing you all in Dallas on February 26 and 27 for our Investor Conference. Thank you for your time on the call today.

Operator

Thank you very much ladies and gentlemen. This does conclude today’s conference call. You may disconnect your phone lines at this time. Have a wonderful day. Thank you for your participation.

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