Darden Restaurants' CEO Hosts 2013 Analysts and Investors Conference (Transcript)

Feb.26.13 | About: Darden Restaurants, (DRI)

Darden Restaurants, Inc. (NYSE:DRI)

February 25, 2013 2:00 pm ET

Executives

Matthew Stroud - Vice President of Investor Relations

Clarence Otis - Executive Chairman, Chief Executive Officer and Chairman of Executive Committee

Andrew H. Madsen - President, Chief Operating Officer and Director

Christopher Chang

C. Bradford Richmond - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division

Nicole Miller Regan - Piper Jaffray Companies, Research Division

John S. Glass - Morgan Stanley, Research Division

Sara H. Senatore - Sanford C. Bernstein & Co., LLC., Research Division

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Michael Kelter - Goldman Sachs Group Inc., Research Division

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Stephen Anderson - Miller Tabak + Co., LLC, Research Division

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Keith Siegner - Crédit Suisse AG, Research Division

Robert M. Derrington - Northcoast Research

Herbert Bruce Thomson - Thompson, Siegel & Walmsley LLC

Mitchell J. Speiser - The Buckingham Research Group Incorporated

Paul Westra - Cowen and Company, LLC, Research Division

Matthew Stroud

Welcome to Darden Restaurants 2013 Analysts and Investors Conference. My name is Matthew Stroud, and I'm the Vice President of Investor Relations for Darden. We're pleased that so many of you decided to join us for this event. We thank those of you who made the effort to come to Orlando and attend this year, and we thank all of you joining us via the Internet on the webcast. I think the theme for this year's conference is operating successfully in a new era. It's our hope that as you listen to the presentations today and tomorrow, you'll recognize and better understand how Darden is adapting to this new environment in order to profitably grow sales, earnings and cash flows to create long-term shareholder value.

And before I go any further, let me cover some logistics. As a courtesy, we ask that you please turn off your mobile devices or put them on silent. There will be one question-and-answer session this afternoon. Because we are webcasting this conference, we ask that all questions be directed to the portable microphones for the benefit of those listening on the Internet. And if you are listening on the webcast and desire to ask a question, you can certainly email me at mstroud@darden.com with your question, and we'll submit the question to the team. We will post the presentations slides on our website tomorrow afternoon. And for those of you in the room, we will give you a memory stick loaded with the conference presentations when you leave tomorrow.

So our agenda today will feature Clarence Otis, Darden's Chairman and Chief Executive Officer; followed by Drew Madsen, Darden's President and Chief Operating Officer. After which, we will have a 25-minute break. We'll resume with Chris Chang, who's Senior Vice President of Technology Strategy at Darden; followed by Brad Richmond, Darden's Chief Financial Officer. And after which, there'll be a Q&A session.

And then we anticipate adjourning the meeting today, shortly before 6:00 p.m., at 6:15 p.m. for those of you here in the room that are going to go to dinner with us, we'll have buses that are headed over to the restaurants. The buses will leave from the convention center entrance. We'll talk about that a little bit later at the end of the day.

So as we begin, let me call your attention to our forward-looking statement disclaimer. During the course of this presentation, Darden officers may make forward-looking statements, which are subject to risks and uncertainties, and investors are cautioned not to place undue reliance on those statements. Darden's forward-looking statements are made under the Safe Harbor provisions of the securities laws. We refer you to the full text of our disclaimer, which appears on this slide, and also the information contained in our 10-K, 10-Q and 8-K reports and their amendments and exhibits, which have been filed with the Securities and Exchange Commission. Additionally, financial and statistical information in this presentation required by Regulation G can be found under the heading Investor Relations on our website at www.darden.com.

Now it's my pleasure to introduce Clarence Otis, Darden's Chairman and CEO.

Clarence Otis

Thank you, Matthew. And I would like to join Malcolm -- Matthew, rather, in welcoming and saying good afternoon to everyone that's in the room today, including Malcolm, as well as those who are joining us on the web.

This year, our fiscal 2013 certainly has been a tumultuous one for us as a company, with sales and earnings that are well below what we expected at the beginning of the year. And so from our perspective, this is a very timely meeting. And it's timely because it gives us an opportunity to talk with you in some detail about a couple of things, our business situation, our current business situation; and secondly, what we believe we need to do and will do going forward. An important part of the discussion will be our view of key consumer and competitive dynamics because these dynamics, which we believe add up to a new era, are relevant to both where we are and where we need to be.

We'll also spend a considerable amount of our time together talking about how the strategic and tactical choices we're making will affect our near-term business model and our near-term sales and earnings growth expectations. And in the end, what we hope is that one thing comes through loud and clear. And that is our entire leadership team is well aware that in order to regain operating momentum and set ourselves up for sustained future success, some important changes are necessary. And as we look forward, our overarching goal is to deliver competitively superior value. And as we think about what it'll take to do that, one advantage we have is that we're an industry leader, and we have all the resources that come with industry leadership, including strong brands, considerable collective expertise and experience, an effective and efficient operating support platform, and significant and durable cash flows.

Now that said, it is clear to us that given our current business situation, we are indeed in a new era; that, that is what the consumer and competitive dynamics we're seeing right now amount to. And these new realities mean that in order to deliver the kind of value we're interested in and capable of, we have to change.

To appropriately frame the conversation about what needs to change, I'll first review our strategic history, and I'll do that because some of the things we've done strategically to earn industry leadership speak to the kinds of things we need to do going forward to maintain industry leadership. Then I'll review the current consumer competitive dynamics that we describe as a new era, and that are the catalysts for important changes at Darden, before concluding with an overview of the changes we're making. And following me, Drew Madsen, our Chief Operating Officer; and Brad Richmond, our Chief Financial Officer, are going to provide you with more detail.

Now as many of you know, Darden's leadership for the casual dining industry traced us to the industry's very start. With the creation of Red Lobster, we were one of many who helped pioneer the industry. But more importantly, we were one of a select few of those early pioneers who went on to help pioneer the creation of a national casual dining brand. And we were able to do that for 3 reasons. First, we developed strong restaurant-level operations starting with talented unit managers who were supported by people management, traffic forecasting and cost management tools that grew increasingly robust as Red Lobster increased its unit footprint.

Second, we paired strong restaurant-level operations with strong brand management. And we believe that what's most important is that our brand management approach was rooted in disciplined consumer insight, which enabled us to evolve over time key elements of our brand and guest experience including menu, advertising, service style, look and feel of the restaurants, and then to support that evolving brand and guest experience with effective promotions and in-restaurant merchandising.

And third, we were able to create an enduring national casual dining brand by complementing strong restaurant operations, strong brand management with effective and efficient support. From Red Lobster's very beginning, those leading our company understood that multi-unit success across any reasonable amount of geography would depend on great support. And so we've consistently invested in key areas of support, including our supply chain, our information technology infrastructure and our financial management and support systems. And we did so at levels that provided significant competitive advantage.

Now beyond pioneering national casual dining, our strategic history includes pioneering multi-brand casual dining. And that was the catalyst for significant value creation. When it came to delivering meaningful value-creating growth, being multi-brand was important because in casual dining, a single brand has relatively limited -- relatively few units ahead of it compared to quick service, compared to some other retail categories before it reaches national penetration. And notably an important reason we were able to achieve multi-brand success is because we put in place leadership structures and leadership teams that enabled us to successfully manage the added scale and scope that came with being multi-brand.

And looking back, it's clear to us that having 2 national brands, and more recently, a growing portfolio of other brands is not only why we achieved financial and operating scale that's the cornerstone of our industry leadership position and why we have the tremendous advantages that come with industry leadership, it's also why we've delivered competitively superior long-term shareholder value and done that despite a few more bumps and bruises along the way than we would have liked.

As we look forward, the most important thing about those bumps and bruises is how we responded to them. When faced with significant challenges or just as importantly, with significant opportunities, we've consistently taken decisive action. In the 1970s and '80s, for example, we responded to this prospect of dwindling shrimp and fish supplies and the threat that this posed to Red Lobster's ability to continue offering everyday price accessibility over the long term by helping pioneer shrimp and fish aquaculture.

In the 1980s, we responded to the compelling growth opportunity we saw in Olive Garden by disposing of all the other brands we had at the time. And those included brands that Brad Richmond, our Chief Financial Officer; and Gene Lee, President of our Specialty Restaurant Group; Dave Lothrop, who's our Comptroller, all started with. We did that so we could give Olive Garden the focus it deserved given the tremendous white space that we saw in casual dining Italian.

In the '90s, we responded to the overbuilding that we've done at Red Lobster in the face of overbuilding across casual dining by aggressively closing restaurants that were cash flow negative. And then in 2007, we responded to the increasing evidence that Smokey Bones had limited, limited national appeal, a brand that I'd led earlier in its history by disposing of that brand and acquiring LongHorn Steakhouse and The Capital Grille. And with these actions, we created a brand portfolio with a much stronger growth profile, and that's because LongHorn was well positioned for growth in the steak segment of casual dining, a segment that's much broader, much more attractive compared to the part of the industry where Smokey Bones was positioned. And because The Capital Grille provided us with the critical mass we needed to form a Specialty Restaurant Group that gives us exposure to strategically important higher end of full-service dining. And then finally, in 2011, 2012, we acquired Eddie V's and Yard House, which enhance both the sales and earnings growth contribution we can expect from our Specialty Restaurant Group.

There's one last aspect of our strategic history that's worth noting. And it's worth noting because it is the foundation for all of our other leadership attributes. And that is that throughout our history, we have been consistently willing and able to invest for the future. In Red Lobster's earliest days, the source of financial investment for the future was General Mills, which acquired the brand early on. But for some time now, the source of such investment has been our own considerable operating cash flow. And importantly, we've invested for the future financially via both capital spending, and based on various expense and margin choices that we've made over time, through our P&L.

Now beyond the financial investments we've made throughout our history, we've also consistently invested for the future by committing some of our organizational capacity to efforts focused on sustained success. And this is something that's never been easy. And it's never been easy because in a business like ours, which has such intense day-to-day retail intensity, organizational capacity has always been a scarce and valuable resource.

Now taking this look back over our strategic history and the things that we did to build industry leadership, because as we look forward, our strategic history helps us sort through what must change and what should stay the same. And as we work to strike the right balance between a level of continuity and change required to maintain leadership in our industry, from a continuity perspective, we're committed as we move forward to remaining multi-brand, that is we believe the best path for creating sustained long-term value. We also believe that the portfolio we have today is the right portfolio as we go forward. It's a portfolio that without any additional brands can drive sustained market share growth for the next decade and generate competitively superior returns. And it can do that provided we make the changes that are needed to manage what is admittedly a new level of scale and scope, and that are needed to deliver the guest experiences required to take advantage of the consumer and competitive dynamics that are the new era.

Before talking about the changes that we're making, let me quickly review the dynamics that are driving much of the need for change. From a consumer perspective, a key dynamic is that many guests are financially stretched. In some cases this is a product of life stage, and they're stretched because they're young and just entering the workplace, or on the other end of the spectrum, they're recently retired and for that reason, much more budget conscious. In other cases, guests are financially stretched because of macroeconomic factors having nothing to do with life stage that are weighing on employment and/or income growth. Whatever the reason, the result is that these guests are more focused than ever on affordability. At the same time, there are many other guests who remain financially comfortable, and they are demanding better quality offers. And importantly, the taste and preferences of the financially comfortable do influence the taste and preferences of the financially stretched. And so what we're seeing is that financially stretched guests are looking for more in terms of the quality of experience for less.

Another dynamic on the consumer front is that as we all know, there have been other significant demographic changes generationally, and racially and ethnically. So there are more millennial guests than ever, and there are more multicultural guests than ever. And these guests are important not only because of their numbers, they're also important beyond the potential visits that they represent directly because their tastes and preferences are shaping to a meaningful extent the tastes and preferences of all guests.

Competitively, what's taking place is that, as Drew will discuss in a moment, there has been steady erosion in traffic within casual dining, and this has led to a much more intense market share battle within the segment. And we're also seeing elevated competition within casual dining because for some time now, some brands have been successfully replicating many of the things that have helped Darden win in the past, things like well-conceived and well-executed limited time promotion, taking steps to increase support platform productivity and in-restaurant efficiency, steps that are helping some of them fund more aggressive price discounting.

And we're also seeing other restaurant segments be more competitive with casual dining for certain occasions. And this is being fueled by increased innovation within traditional quick service, the continued emergence of fast casual, and more and better prepared food offerings from quick service retail, which is primarily convenience stores.

In response to these new consumer and competitive realities, we've made some changes, and more change is on the horizon. Most visibly, we've reshaped our brand portfolio. We've done that by adding to our Specialty Restaurant Group, which provides us with greater exposure to new guests and new occasions and, as I noted earlier, also gives the group the scale and scope to make a meaningful contribution to our sales and earnings growth going forward.

We also made several changes this year to reshape our organization so that we're better able to respond today and tomorrow to the new consumer and competitive realities. Among other things, a new reality is that there is now much greater velocity of change from day to day, from week to week in what consumers need and want, and what competitors offer and how they offer it. And so to increase our tactical effectiveness and agility, this year, we established dedicated teams, primarily within our 3 large casual dining brands, that focus solely on winning today.

At the same time, the new consumer and competitive realities mean that to sustain success over time, we have to evolve the guest experiences we provide faster and in much more significant ways than we've done in the past. And that's to ensure that we're in sync even 18 to 24 months down the road with where guests are and where competitors are likely to be. And so to increase our strategic effectiveness and agility, we established dedicated teams at both the enterprise level and within our 3 large brands that focus on winning tomorrow.

Now looking at our recent results, it is now clear to us that these changes, which resulted in a number of people being in new roles this year, which also have meant that we've gotten new processes and new routines in some important areas, have had much greater opportunity costs this year than expected in terms of our ability to execute as effectively as we needed to. But we believe the changes are the right ones for the new era and we're committed to capturing their full benefit as we move forward.

Turning to the new teams. More specifically, the teams dedicated to more consistently winning today are focused on more competitive promotional affordability, delivering our current guest experiences well and making sure that we're much more nimble, much more multi-channel when it comes to how we communicate with guests. It is worth noting that these teams were put in place during our fiscal second quarter, so we can expect to begin to see an increasing effect on how we go to market as we end this year and move into fiscal 2014.

The other teams, those dedicated to future success, are focusing on big opportunities, involving multi-year effort that are all about redefining the guest experiences we provide in ways that significantly increase the loyalty and frequency of current guests or that add new guests. And more specifically, they're accountable for making more fundamental changes in our core menus, in our in-restaurant experiences and in how we engage guests outside our restaurants. Some of these teams, most notably at the enterprise level, have been in place for a while, and so there's been considerable progress identifying areas of opportunity and developing action plans that take advantage of those opportunities. And then during his remarks, Drew will discuss some of these efforts in a little bit more detail.

Now in addition to reshaping our portfolio and reshaping our organization, in order to more effectively respond to today's consumer and competitor realities, we're also going to temper check average gross noticeably going forward because we think that's necessary to support traffic growth today and for the next several years. And we're going to significantly reduce new restaurant expansion to Olive Garden, downshifting from the approximately 36 net new restaurant openings we've had each year for the past few years to approximately 15 net new restaurant openings a year for at least the next couple of years. And we're doing that so the brand can better focus on regaining sales momentum and better focus on the guest experience changes that are required to sustain success.

Now in addition to these strategic choices, the steps we've taken to reshape our portfolio, the things we're doing to increase our strategic and tactical agility, as we move forward, we're investing in 3 other areas. We're investing in a select few multi-year initiatives that have been identified by the teams focused on sustaining success for the future, initiatives that again, Drew will highlight shortly. We're investing in transitioning to the new health care landscape in a way that maintains strong employee engagement. And we're investing in the development of lobster aquaculture because we think that's critically important in order to preserve Red Lobster's ability to offer price accessibility over the long term.

Now while our strategic choices and investments do mean that our sales and earnings growth targets for the next couple of years will be lower than the long-term targets we've discussed in the past, 2 things are clear to us. Given today's consumer and competitive realities, and our current business situation, the strategic choices and investments we're making are the right decisions for the business at this time. And as we consider the changes we need to make, we're well-resourced to do what's necessary.

As we'll discuss over the next 2 days, we have the brands that individually and collectively have strong competitive positions that shows in their average sales per restaurant, it shows in their restaurant-level returns and cash flows. We have collective experience and expertise that's very powerful. We have a robust, increasingly cost-effective support platform. We have significant and durable operating cash flow. And we have a winning culture with people that remain energized and engaged despite current challenges.

And it's a culture that as we make the necessary change will not change. It's one that's grounded in a shared purpose that's all about making a positive difference in the lives of everyone we come in contact with, a shared identity that's all about being the best at what we choose to do and being a place where people can achieve their dreams, and a strong set of shared values that speak to how we treat one another and to how we treat people outside the organization. And the strength of our culture shows in the fact that even as we deal with a business situation that is not what we'd like it to be, we were recognized this year, for the third consecutive year, as one of FORTUNE Magazine's 100 best companies to work for. And we're proud because this recognition relies heavily on an independently administered survey of what, in our case, are primarily frontline hourly employees. And Darden's the only restaurant company that's ever made the list.

Looking forward, this winning culture is the single biggest reason we're confident we'll successfully make the changes that are necessary to maintain a strong leadership position in our industry.

And with that, let me turn it over to our President and Chief Operating Officer, Drew Madsen, who will discuss in further detail the consumer and competitive dynamics that are the new era, and what we're doing to successfully operate in this new era. Drew?

Andrew H. Madsen

Thank you, Clarence, and good afternoon, everyone. As Clarence mentioned, I will share greater insight regarding the key dynamics that collectively we believe amount to a new era in casual dining. I'm also going to discuss the implications of these dynamics for Darden, specifically the need for us to compete more effectively in the current casual dining market share contest today, while also working aggressively to ensure our brands win the broader contest for relevance in the future. And most importantly, I'm going to review a few of the high level -- review at a high level the actions we're taking and the changes that we're making to ensure that both of these imperatives are achieved. And tomorrow, the presidents of each business will share greater detail on these actions.

So starting with industry dynamics. At a macro level, it's clear that consumers have reduced their restaurant usage since the Great Recession. Total restaurant industry traffic, including new units as reported by NPD has declined from 62.3 billion visits in 2008 to 60.5 billion visits in fiscal 2012. And the majority of this traffic decline has occurred in the mid-scale segment shown in orange and the casual dining segment shown in red. Quick service, shown in green at the bottom of this chart, has also declined. Fast casual and QSR retail, which includes prepared food purchased for immediate consumption at convenience grocery discounts and club stores, are the only 2 segments to show traffic growth over this time period.

Looking more closely at casual dining. Total traffic grew consistently at roughly 1.5% per year on average from fiscal 2000 through fiscal 2008. But total traffic has declined consistently since then at roughly 2% per year on average. This, in turn, has generated an increasingly intense battle for market share within the segment.

Now the casual dining traffic decline since 2008 has been driven by both a decline in category penetration as you see on the left, as well as reduction in visit frequency, shown on the right. Now we believe one of the key dynamics driving the decline in category penetration and frequency is the reality that casual dining is just less affordable for many consumers right now. As Clarence already reviewed, this is partly the result of life stage and partly the result of macroeconomic factors. Now this has led to a significant drop in the share of casual dining traffic coming from households with incomes below $60,000 from 38% in 2008 to 33% in 2012. It's also led to a need for greater affordability in the dining experience for these guests.

Now at the other end of the household income spectrum, there's also been a significant increase in the share of casual dining traffic coming from households with incomes above $100,000. Now these guests can still afford to visit casual dining restaurants frequently, but are often looking for higher quality or more up-to-date offerings.

Now the reduction in segment affordability has affected Red Lobster and Olive Garden even more than the category because of their broader reach that the 2 brands enjoy, which in turn has been a key driver of their competitively superior average unit volumes. So more specifically, the share of traffic from households with incomes below $60,000 has dropped from 51% to 43% at Red Lobster; and from 46% to 40% at Olive Garden. LongHorn has not dropped as much from 35% to 32%, but is slightly underdeveloped relative to the casual dining and major chain benchmarks.

Now given these trends and given the growing percent of U.S. households in this segment, improving affordability and recapturing a portion of these more financially constrained guests in a way they contributes to profitable growth is a key priority for all 3 of our large brands. In addition, all 3 of our large brands will also work to build on the progress that they've made with more financially comfortable guests shown on the far right column in green. It's also worth noting that casual dining major chains in total have maintained their share of traffic from households under $60,000. They've maintained at 38%. Now I'll discuss our thoughts on what might be contributing to this performance and the potential longer-term implications in just a few minutes.

Now in addition to the pervasive dynamic-related category affordability, there are also important dynamics related to the growing number of millennial and multi-cultural guests. And we see that casual dining overall is not keeping pace with growth in the millennial generation. Affordability is one reason for sure, but an equally important reason, in our view, is that casual dining has not effectively responded to important differences in the guest experiences that millennials want compared to the boomer generation.

Casual dining is also not fully capturing the growing opportunity with Hispanic guests. Now as Clarence mentioned earlier, we believe that the tastes and guest experience preferences of the growing millennial and multi-cultural population are actually shaping the tastes and guest experience preferences of the broader population. So as a result, we believe that making our brands more relevant for these guests will also help make our brands more appealing to the broader population.

Now beyond these consumer dynamics, I also want to highlight a few important industry and competitive dynamics. So I'll start with a quick look at how major chains are performing compared to casual dining in total and then how Darden compares to major chains. So again, while total traffic, including new units continues to decline for casual dining overall, total traffic in major chains has been gradually improving the last 2 years, as you see on the right. As a result, major chains have increased their share of total traffic from 33% in fiscal 2008 to 35% in fiscal 2012. And this share growth was sourced equally from independents and small chains. On a cumulative basis from fiscal 2008 to fiscal 2012, major chains, as measured by NPD, grew total traffic by 60 basis points. Over the same time period, the 3 large brands at Darden grew much faster with blended total traffic growth of 10%.

Compared to our primary major chain competitors, Olive Garden and Red Lobster also consistently enjoy superior average unit volumes. LongHorn has competitively superior average unit volumes compared to most bar and grill competitors, and is competitive with the primary major chain cuisine-focused competitors. Tomorrow, Valerie Insignares, who's President of LongHorn, will discuss our strategy to capture the significant opportunity for continued growth in average unit volume at LongHorn going forward. Our 3 large brands on a blended basis also enjoy competitively superior restaurant-level returns compared to our primary major chain competitors who have similar business models. And Darden overall has a competitively superior operating profit return, again compared to our primary chain competitors with a comparable business model.

Now in addition to strong average unit volumes, these competitively superior returns also reflect a significant focus on making our operating platform even more cost effective. The 4 transformational cost-savings initiatives that we have implemented since fiscal 2009 have generated cumulative savings of $120 million to $130 million, and Brad will have more to share on these going forward in his remarks later.

Now at the same time, we all know that same-restaurant traffic has been a challenge for Darden and has been a challenge for the industry. On a cumulative basis, blended same-restaurant traffic at our 3 brands has declined 7.7% since fiscal 2008, while the major chain industry, as measured by KNAPP-TRACK, has declined more than double that amount, roughly 18%. Now much of this decline was clearly driven by the Great Recession, and the industry has slowly begun to improve. However, of great importance to us is the reality that same-restaurant traffic at our 3 large brands on a blended basis has now trailed the industry since the fourth quarter of our last fiscal year. Now much of this recent industry underperformance has been driven by Olive Garden, although we have opportunity for improvement at Red Lobster and LongHorn as well. And we know that this performance isn't acceptable.

So what does all this mean for Darden? Well, we believe that there are 3 significant implications that inform and shape the strategic choices that we are making for the business. First, to win today, we must address the more intense market share contest within casual dining by further strengthening the in-restaurant delivery of our guest experiences and we must respond more aggressively to the elevated guest need for affordability. But we have to do both while being careful not to cheapen our brands or the guest experiences we offer. Second, to win tomorrow, we must meaningfully innovate and redefine the guest experiences we offer so that we can take advantage of changing guest preferences and changing guest needs and effectively address competition inside casual dining and in limited service segments as well. And finally, winning today and winning tomorrow will require tempering near-term check growth and making some other important investments.

Now I mentioned earlier that major casual dining chains have been able to maintain their share of business in households with incomes below $60,000, while casual dining in total and in our brands individually saw erosion with those guests. Now in our view, one of the reasons for this performance was a dramatic increase in guest perceived dealing among major chains that you see on the left, while guest perceived dealing among small chains and independents was essentially unchanged over the last several years.

Now this significant increase in competitive discounting, along with the consumer dynamics discussed earlier that have led to an elevated need for affordability in full-service restaurant experiences is why we have chosen to temper our check growth going forward. However, improving affordability alone is not enough. We also need to improve the guest experiences we offer more significantly and more quickly than we have in the past. This is true for the casual dining category overall and it's also true for our 3 large brands.

Now this chart from NPD shows the percent of guests rating their overall experience as excellent, as well as the reported average eater check by industry segment for the last 12 years. Now casual dining has always been more expensive than QSR and fast casual. But as you can see on the left-hand side of this chart, casual dining also used to deliver a guest experience that was clearly viewed as superior and justified the price premium. But QSR and fast casual have gotten better, faster than casual dining. The price premium attached to casual dining experiences is getting tougher to justify, especially to financially constrained guests. We must redefine the guest experiences we offer and how our brands are viewed to stay relevant and win tomorrow.

Now one of the ways that we monitor and assess brand equity is through a continuous online tracking survey of guest perceptions for 25 casual dining brands. In particular, we focus in depth on 10 of these brands that account for approximately 45% of all chain sales and nearly 70% of major chain sales. This includes our 3 large brands plus 7 additional brands of scale that have a similar guest and a similar occasion usage profile to our brands. All the competitive brands have sales of $1 billion or more and at least 250 units, with the exception of Carrabba's, which we include because we believe it's a meaningful competitor for Olive Garden. In addition for the information I'm going to show you in just a minute, we have included one smaller, slightly higher-priced, polished casual brand for added perspective on the opportunity to improve our guest experiences more significantly and more quickly.

As you can see from the graph, we asked questions and collect information about food, about service, about advertising, restaurant execution, restaurant atmosphere and value for each brand. Guest perception on these individual attributes ladder up to future visit intent. Now while actual guest behavior quarter-to-quarter can be influenced significantly by promotions and exogenous factors like weather, future visit intent correlates strongly with guest behavior over the long term. Now in the past, we focused on improving the guest experience of each brand compared to the prior year. But now given the market share contest we are in, we're more focused on improving the competitive rank of our brands because just getting better isn't good enough. We have to be clearly better than the competition we plan to take market share from.

Now when we compare guest perception in fiscal 2012 to fiscal 2008, this is what we see. Our 3 large brands all improved their competitive rank on future visit intent, which is very important for the long term. Regarding the individual guest experience attributes, Red Lobster has generally improved their competitive position. LongHorn is generally flat or up, while Olive Garden is generally flat but down on a couple attributes. Value is the one exception where all 3 of our large brands have moved down in ranking, despite improving their competitive position on many experience attributes, suggesting that in this environment, what you pay is potentially a bigger driver of short-term guest behavior and perceived value than what you get. More on that idea in a couple minutes.

So let me share just a little bit of this information with you. Here are a few quick examples of the individual attribute ratings and how our brands rank versus competition. Recall that in the past, we've described our guests frequently using bar and grill brands for a drop-in occasion either before or after some other activity, while they use other brands as more of a destination occasion, which has led to the labels that you see on this graph.

Regarding food taste, Red Lobster moved up 1 competitive position since fiscal 2008, while Olive Garden and LongHorn remained flat in their competitive rankings. Also note that one of the destination occasion brands, who we believe has been one of the more aggressive promoters, moved down 1 rank. On distinctive menu items, Red Lobster moved up 1 position, LongHorn is flat and Olive Garden dropped 1 competitive ranking position. On consistently good experience, Red Lobster moved up 1 position again, LongHorn remained flat and Olive Garden dropped 1 position.

On attentive service, LongHorn moved up 2 competitive positions, Red Lobster remained flat and Olive Garden dropped 1 position. Even though guests still rank Olive Garden above Red Lobster and LongHorn on our 2 key measures of in-restaurant execution, consistently good experience and attentive service that I just showed, their competitive position is weaker now than it was in fiscal 2008, which is one of the primary reasons we've chosen to slow future new restaurant growth at this brand.

On atmosphere, Red Lobster moved up 2 competitive positions, while Olive Garden and LongHorn remained flat. However, on value for money, we see significantly more pronounced changes than we have on any of the other individual attributes. Olive Garden dropped 1 position, but Red Lobster dropped 2 positions despite improving their competitive rank on several individual guest experience attributes and LongHorn dropped 4 positions despite maintaining or improving their rank on most individual guest experience attributes.

At the same time, all bar and grill brands improved their competitive position, with 3 bar and grill brands improving dramatically despite the lack of similar improvement on any of the individual guest experience attributes. We believe this shift is driven largely by affordability, given the lower check and lower promoted prices at bar and grill compared to our brands. Some guests who want to use our brands just cannot afford to do so as much as they would like. In addition, guests have higher expectations for the experience at our brands, given the higher check. And we are not consistently delivering against those expectations, especially for those guests who could afford to pay a little more. And this is why we're focused on providing more affordability in our promotions, a broader range of prices on our core menus and better in-restaurant delivery of our guest experiences today, as well as redefining our guest experiences for tomorrow.

The final measure we look at is future visit intent, which correlates most strongly with guest behavior over the long term. All 3 of our brands moved up on this measure, with LongHorn up 3 positions and Red Lobster and Olive Garden up 2 positions. We believe this reflects positive momentum from the work we've done recently. We also believe it reflects the bank of brand equity and guest loyalty that we've earned over many years. Now in order to strengthen our same-restaurant sales momentum, we need to make the changes that I just talked about on the previous slide. But we need to do it in a way that does not compromise this valuable long-term asset, which we believe is a risk with overly aggressive discounting or overly aggressive cost reduction efforts.

So in summary, we've made significant progress strengthening overall brand perception on all 3 of our large brands, although we've seen some erosion on a few individual guest experience attributes at Olive Garden. However, our most financially constrained guests do not feel we're in the game from an affordability perspective, which keeps them from coming as much as they would like and is negatively impacting our value perceptions and our same-restaurant sales momentum at all 3 large brands. And we believe we still have an opportunity to improve the guest experiences we offer for more financially secure guests, millennials and multiculturals.

So given all of these dynamics that I've shared, consumer dynamics, industry dynamics, competitive dynamics and the implications for Darden, what is our response? So first, as Clarence has already mentioned, we've taken steps already to meaningfully strengthen our brand portfolio. The acquisition of Eddie V's and Yard House helps broaden our exposure to financially secure guests plus millennial and Gen X guests. We've also added important capabilities related to music, on-trend food development and what it takes to run a great bar. And Eddie V's and Yard House help contemporize our portfolio overall. As a result, the Specialty Restaurant Group now has an even stronger growth profile. And as you'll hear from Gene Lee tomorrow, we expect the Specialty Restaurant Group to achieve sales of $1 billion this fiscal year and grow 17% to 19% annually after that, while generating enough cash to fund its own growth.

Now beyond strengthening our brand portfolio, a majority of our energy has been focused on making the changes required to either regain or to sustain profitable same-restaurant guest count growth at our 3 large brands. This includes taking steps to further strengthen and reshape our organization so that we are better able to respond to the new consumer and competitive dynamics we face. More specifically to win today, we have a new structure and new teams dedicated to ensure we maintain a strong foundation at each brand, execute with excellence against our current business strategies and operational standards and make important changes in our go-to-market approach. And to win tomorrow, we also have a new structure and new teams at both the brand and the enterprise level dedicated to ensure we redefine our guest experiences faster and in more meaningful ways to ensure our brands remain guest-relevant and competitively superior in the future, ultimately leading to multiyear growth initiatives that increase visit frequency of current guests and capture new guests for new occasions.

So what does this look like? I'll focus this afternoon on organization changes at our 3 large brands and some of the enterprise teams that support them. As a reminder, each of our 3 large brands has a dedicated full-time leadership team, as shown on this slide. The organization changes that we've made deal primarily with the restaurant operations and marketing teams shown on the left-hand side of this slide.

So starting with the restaurant operations. The field operations structure at our 3 large brands, which includes everything outside the 4 walls of our individual restaurants, used to be organized as you see on the left. Now as we have grown and added restaurants over time, we believe spans of control became stretched and that compromised both day-to-day operational excellence in our restaurants and it compromised strategic thought leadership for the future. This was especially true for the Senior Vice President of Operations position, which had up to 13 direct reports spread across multiple states. As a result, during the first quarter of this fiscal year, we moved to the new organization structure on the right, which includes fewer but bigger geographic divisions led by Senior Vice Presidents, who are still responsible for winning today but will now be able to spend more time defining the operational changes and innovations and standards required for winning tomorrow.

The reason our Senior Vice Presidents will be able to spend more time on winning tomorrow is because we've added a new level, the Managing Director role, that is focused entirely on winning today. And we have much narrower spans of control than our Senior Vice Presidents used to have. The Managing Directors will be able to more proactively provide timely coaching and redirection to our Directors of Operations. And they'll be able to spend more time in the restaurants that need the most help. This was a cost-neutral change, excluding some one-time moving expenses.

Now regarding the management structure inside the restaurants at our 3 large brands, we determined that in our old structure, we were not getting enough impact out of the Sales Hospitality Manager position, and that spreading the accountability for staffing, training and scheduling between 3 different managers was not an effective best practice. As a result, during the second quarter of this fiscal year, we moved to the new structure shown on the right, which includes a full-time dedicated Staffing and Training Manager focused solely on ensuring that our restaurants are fully staffed, our employees are effectively trained and our schedules consistently aligned with the needs of the business.

This enables our existing Culinary and Service Managers to focus exclusively on ensuring that we consistently delight our guests with exceptional food and attentive service that exceeds their expectations. We also created new full-time hourly roles inside each restaurant to help our restaurant managers effectively cover all shifts and to provide a more formalized path to management for our highest-potential hourly employees. Now we made a modest investment in the full-time hourly shift leader position to help elevate day-to-day operational excellence in our restaurants and build an even stronger talent bench for the future.

Regarding our marketing organization, we determined that to respond more effectively to the new consumer and competitive realities, we needed to maintain significant organizational focus on winning today. But that we also needed to strengthen our focus on winning tomorrow and that we needed to elevate our culinary innovation, which is important on both timeframes, winning today and winning tomorrow.

As a result, during the first quarter of this fiscal year, we moved to the new organizational structure shown on the right, which includes a Senior Vice President, Brand Foundation focused primarily on winning today. And that includes initiatives and priorities like annual promotion plans, annual media plans, new advertising campaigns and commercials plus tactical core menu news, like new appetizers and new desserts.

We also have a Senior Vice President, Development position focused primarily on winning tomorrow. And this team is focused on things like an elevated focus on multiyear initiatives that we believe were getting crowded out by the day-to-day tactical intensity of our business. Initiatives like multicultural marketing, digital guest engagement and new core menu platforms that incorporate multiple dishes and more fundamentally change how our guests think about and how our guests use our brands. We also added a new Corporate Executive Chef position reporting to the Executive Vice President of Marketing to enable greater culinary innovation in our core menu and in our promotions. Now we also made a modest investment in some new positions here and added capability to ensure that we are more consistently winning today and winning tomorrow.

Now finally at the enterprise level, we've also created a marketing leadership structure to provide more seasoned thought leadership and direction to each brand, while also creating an integrated and prioritized growth plan of the highest potential multiyear growth initiatives across the company. The positions you see highlighted in red have been added over the last 18 to 24 months. Now as Clarence mentioned earlier, across operations and marketing, these are big changes that have touched all of our restaurants and many of our leaders, directly or indirectly. And while there's been some near-term opportunity cost related to focus and execution, we remain convinced that these changes are critical for the new era.

Now we don't have time today to discuss all of the executives who have been added over the last 18 months or so or the executives that have been elevated into more senior roles to help further strengthen our organization and add expertise for the new era. But shown on this slide are some of the new senior leaders that we believe will make a significant difference at Darden. And this afternoon, I want to briefly highlight 3 of them.

First, Will Setliff is our new Chief Marketing Officer. Will has 20 years of marketing experience, primarily with a retail focus. He originally joined Darden as our Executive Vice President of Marketing for the Specialty Restaurant Group. But prior to joining Darden, Will was Senior Vice President of Marketing at Target, and he brings significant leadership breadth, a more nimble retail mentality and deep expertise in innovation and digital marketing that will benefit us significantly. Now Will is here this afternoon. He'll be with us at dinner tonight and again tomorrow.

Harald Herrmann has a wealth of restaurant industry experience across a range of brands and dining venues. He was recruited to help launch the flagship Yard House in Long Beach, California back in December 1996. He was made a partner less than 2 years later. And he's been instrumental in providing the vision and inspiration for what the brand has become today. He now leads Yard House for Darden, and we are delighted to have him as part of our team. And you'll have the opportunity to hear from Harald tomorrow morning.

And third, Chris Chang is our new Senior Vice President of Technology and Innovation. Before joining Darden, Chris was Vice President of Innovation and IT Strategy for Caesars worldwide, where he founded and led a new innovation team focused on developing new technologies across 50 casino properties worldwide. And in just a few minutes after our break, Chris will review our strategy to digitally engage with guests and employees on their terms to help drive business performance in the future.

So beyond strengthening our brand portfolio and strengthening our organization capability, we're also making additional near-term changes to regain momentum. And arguably the most important is improving our in-restaurant operations execution to help strengthen the guest experience. Now each of our large brands is focused on more fully leveraging the new organization structure and the capabilities that it presents that we implemented earlier this year. In addition, each of the businesses is focused on some brand-specific opportunities as well, such as reducing false weights at Olive Garden, improving server attentiveness at Red Lobster and cooking steaks to the proper temperature at LongHorn.

We're also elevating the emphasis on affordability in our promotions to better address the growing consumer need and competitive intensity in this area. Now shown here are examples of what our 3 large brands are currently advertising, including Lobsterfest, the premium-priced promotion designed for the Lenten season, which has been changed this year to include a variety of tactical affordability overlays. Each of our large brands has recently introduced new advertising campaigns as well, and all of them tested better than the campaign they replaced and are performing solidly in market. However, we believe there's still an opportunity to improve each campaign in meaningful ways.

We're also evolving our media mix as we work to regain momentum. While mass media continues to play an important role, we're also investing more in all forms of digital media. We're improving our digital foundation with a revamp of our mobile and primary websites. From there, we're extending our engagement to where our guests are, especially in the social and mobile spaces. And here are a few recent examples of what we've already done. The recent Late Night Happy Hour launch at Bahama Breeze was primarily reliant on digital tactics with a strong presence on their Web and mobile sites, mobile advertising, Elite Yelp and blogger events and Facebook.

Olive Garden used online media integration and mobile marketing when they launched their new lighter-fare menu. Mobile banners allowed browsers to use map functions and view their new menu instantly. And Red Lobster is taking advantage of high-buzz social events to engage with their guests. In this case, it was a Black Friday promotion encouraging people to relax in Red Lobster after an exhausting day of shopping. Now you will hear more tomorrow from each President regarding what they are doing specifically to improve the guest experience, what they're doing to strengthen affordability and promotions, improve their broadcast advertising and also more effectively leverage digital media.

The final topic I want to discuss with you today is our high-level thinking around how we will more fundamentally evolve our guest experiences to stay guest-relevant and competitively superior in the new era. So regarding the food and beverage experiences we offer, we believe we have an opportunity to more quickly take advantage of key culinary trends by prioritizing more of our culinary development resources against platform ideas that support multiple dishes and have the potential to drive step-change improvements in the breadth and appeal of our brands. We also have an opportunity to more consistently leverage our considerable culinary expertise and resources at all brands in the Darden portfolio. So here are a few quick examples.

To develop distinctive food and beverage experiences, we monitor macro trends, as well as food and consumption trends across a blend of guest segments, food occasions, cultures, geography and other dimensions. Most food trends are associated with larger macro trends, like the demographic shifts we already talked about, responses to personal economy conditions or health and wellness considerations. Our job is to understand which and when trends are ripe to influence menu development in one or more of our brands.

For instance, Latin inspiration, wellness considerations, value and the guest's desire to customize their experience have all led to the following culinary development. On the top left, mahi-mahi tacos on the new lunch menu at Seasons 52, made with fresh fish that's wood-grilled. In the top middle are an assortment of shareable small plates at Bahama Breeze, including chicken empanadas, Sweet Peruvian Corn Cakes and hummus with grilled pita bread and fresh vegetables. On the top right, a bacon-wrapped sirloin for just $11.99 at LongHorn. On the bottom left, a new lighter-fare menu section at Olive Garden, featuring the Seafood Brodetto dish shown here. In the bottom middle, a variety of wood-grilled fish at Red Lobster. And in the bottom right, the ability to customize your lunch at Capital Grille by picking from 3 different main plates, and then adding your choice of a soup or salad.

But we also have the opportunity to leverage our culinary expertise across brands in the portfolio more consistently, which we are starting to do. For instance, the Grilled Pork Veneto dish that was recently introduced at Olive Garden was developed in a cross-concept culinary charrette between Olive Garden and all the Specialty Restaurant Group chefs. We first introduced fresh fish tacos at Seasons 52 and Bahama Breeze, leveraging our guest experience and operational learning before expanding them across the Red Lobster system, including shrimp tacos at lunch and lobster tacos on their new Lobsterfest menu. And most recently, the improved bread recipes from The Capital Grille and Seasons 52 are now moving to our larger brands.

Now beyond the food and beverage experience, we also need to redefine our service experience. So every brand has developed a scorecard of operating outcomes they feel are critical to running a great restaurant and providing a great guest experience. And every brand has a carefully developed supporting systems and processes to help achieve these outcomes. And there's no question that more consistently executing these processes as designed will help improve guest satisfaction. That's important, but it's not enough.

Beyond the benefit of competitively superior systems and processes and beyond the benefit of nationally advertised promotions, we have an opportunity to help our restaurant operators think and act more like restaurant tourists. We have the opportunity to provide the coaching and the time and create the culture that enables more genuine and passionate guest engagement and creates a greater sense of personal accountability to grow their individual restaurant business and develop their people primarily through the knowledge, behaviors and leadership they demonstrate every day. I mentioned earlier that our Senior Vice President of Operations will now have more time to focus on operational innovations required for winning tomorrow, making this idea more than just a broad philosophy or an aspirational goal, but making it an everyday reality is one example.

Another critical dimension of the guest experience that we're working to fundamentally involve is how and when and where our guests are able to connect with our brands. To do this, we're making a significant investment in time and money to build a more powerful digital IT platform that will help make our brands more relevant and enable a wide range of new digital applications. And as I said earlier, Chris Chang will provide a comprehensive discussion of our strategy in this area after the break.

We know that different guests want different types of experiences for different types of occasions. And increasingly, more of our guests want greater convenience. Now this includes everything from more convenient reservations or Web-ahead seating options to faster lunch experience alternatives; a faster, a more guest-friendly way to pay the bill; and a significantly streamlined takeout experience, which Olive Garden is currently working on. We also know that our guest base is changing and we have an opportunity to move beyond our current one-size-fits-all go-to-market strategy and look for cost-effective ways to tailor our menu offering, our service approach and our guest outreach as Red Lobster is currently doing with their Hispanic advertising initiative. And we also have the opportunity to ensure that guest experiences we provide include a dining atmosphere that is both brand-appropriate and up-to-date. And tomorrow, you'll hear more from Dave Pickens and Dave George regarding their plans for remodels at Red Lobster and Olive Garden, respectively.

And finally, we are also moving aggressively to ensure we can continue to effectively support our guest experiences. As world population continues to grow, especially growth in the emerging middle class of developing -- of large developing nations, we believe that global demand for lobster will likely exceed global supply. That would obviously represent a challenge for many of our brands, but it represents a significant challenge for Red Lobster in particular. As a result, we have been making direct P&L investments and will eventually make significant capital investments to create the world's first integrated lobster aquaculture park. And we've been working in close partnership with the government of Malaysia to make this happen. Malaysia offers several very compelling advantages, including the right sea temperature, plenty of sea space to enable a cost-effective aquaculture platform, in a region that's largely free of tropical cyclones and other catastrophic weather plus a government very interested in helping to create a new industry and 12,000 new highly compensated jobs. When fully operational, this will help us preserve the ability of Red Lobster to offer everyday price accessibility to their guests on this brand-defining product.

Now throughout my presentation, I have mentioned that we are investing in needed change. Now here is a high-level summary of the direct P&L investments we've made the last several years, shown in blue, as well as the investment we are making in tempered check growth to provide our guests with greater affordability, shown in red. In total, we expect to invest $70 million to $75 million this fiscal year. And Brad will provide greater insight during his -- later during his presentation.

So in closing, we believe we are taking decisive action to regain near-term momentum and to position Darden to deliver competitively superior value creation in the future. To win today and win tomorrow, we're focused on strengthening our organization capability, improving the affordability of our current guest experiences and redefining our future guest experiences to ensure we are both guest-relevant and competitively superior in the new era. And we're making the necessary investments required to make these changes, protect the broad appeal of our brands and sustainably grow same-restaurant traffic.

So now I believe we'll take a 20-minute -- 30? Matthew's feeling generous.

Matthew Stroud

So thanks, Drew. Yes, I think what we'll do -- we're running a little bit ahead of schedule this afternoon, so we'll take about a 30-minute break. I know several of you just got into town and you might have to check into the hotel here. So we can come back in about 30 minutes, about 10 to 4:00. And for those on the webcast, we'll pick it up again at about 10 to 4:00 and get started with the second half of this afternoon's presentation. So thank you very much.

[Break]

Matthew Stroud

All right, good afternoon again. I think we're pretty much all reconvened in the room today, and we'll continue with the afternoon session here. It's my pleasure to introduce Chris Chang, who's our Senior Vice President of Technology and Strategy Innovation at Darden. And I'll turn it over to Chris.

Christopher Chang

Hi, good afternoon. I'm going to share a bit about our strategy and the journey that we're on. And to begin, I want to provide some context and observations about the environment within which we find ourselves operating today. I'll then describe how Darden is responding, what our strategy and vision are. We'll talk a bit about where we're at in this overall journey, this transformational program that we're undertaking. And then I'll provide a high-level view of our roadmap.

So to begin, I want to start by reinforcing something that I think we all intuitively know, which is that technology is changing very rapidly, and it's evolving quite quickly. And so as we were laying out our roadmap over the next few years, we thought it'd be instructive to take a look back at the past few. And 3 years ago, none of the following technologies existed, despite the fact that today, they're firmly integrated in many of our lives.

So the first example is the Starbucks mobile payment app. This app allows consumers to pay for coffee and other items at their Starbucks using their mobile phone. You can load your app with a gift card. You can load it with a credit card payment. You can auto-replenish your account. Consumers view, earn and redeem their rewards on their phone, and it greatly accelerates the speed of a transaction. It's built a great amount of loyalty between Starbucks and guests. And yet 3 years ago, this application didn't exist.

Another example is Pinterest. So Pinterest, which was launched actually in March 2010, so 3 years ago, didn't exist. It's known as a site that's reached 10 million users the fastest. And it's really reshaped how consumers interact with brands, and how consumers could influence the brand and the brand image.

The iPad didn't exist 3 years ago. So the iPad was launched in April of 2010. And since then, there have been over 100 million iPads that have been sold. And it's remarkable to imagine how many of us are so dependent on that device or other tablets, Galaxy and so on and so forth, and yet, 3 years ago that device didn't exist.

Square is an example of technology that has not necessarily influenced all circles, but certainly has influenced our industry. Square allows the merchant to use their mobile phone to accept credit card payment, and it certainly applies pressure to a company like Darden. Because we have team members, we have guests, asking why they could be at a farmer's market and the farmer can accept a credit card payment on their mobile phone, and yet we can't at our restaurant. And so that's certainly something for us to think about.

Instagram, launched just 2.5 years ago. It now has over 100 million users. And many of us rely on Instagram daily to share photos with friends and family. And so whether we're talking about Microsoft Connect in the gaming world or Face Time, these are all examples of how quickly technology can emerge and then become woven into our lives.

Similarly, the vendor landscape in technology is growing equally rapidly, and it's becoming increasingly complex. This slide here is a bit dated, but it represents the companies that are serving the social media space. And it's getting more and more complicated weekly. I know that based on the number of emails I get from these vendors, pitching their services and their wares, but the fact is these are emails that I can't -- we can't just easily dismiss or ignore. Because they're offering services that may be relevant to us today or may be relevant to us in the future. And this space, while complicated, other similar spaces, mobile marketing, digital commerce, are even more complicated. And so there's a wide array of companies that we have to understand, as we evaluate our options going forward.

And finally, consumers whether that's all of us in this room, whether that's our team members, whether that's our guests, we're all becoming more digitally reliant. And instinctively, we know that because of how disoriented we feel when we're away from our mobile phone, when we leave our phone at home. Or how frustrated we feel when we're in a location that doesn't have connectivity, doesn't have cell, doesn't have WiFi. And the numbers certainly bare it out as well.

So 3 years ago, Facebook had 350 million users. And today, it has over 1 billion. The number of tweets per day has gone up tenfold in the past 3 years. Text messaging, which is pretty -- right -- by now, a pretty mature technology. It's been around for about 20 years, and it's gone up. And in fact, across every age group, including those 65 and older, people send and receive more text message per day than they do make phone calls. And that disparity, that chasm grows wider as you get younger. And by the time you get to the millennials or post-millenial generation, they don't even want to talk on the phone. They just want to send a text.

The number of emails per day has gone up. Email's definitely a mature technology, and yet emails continue to go up. Now admittedly, a lot of that is driven by spam, but a lot of us are still dependent on emails in terms of communicating. And so whether we're talking about apps in the App Store, whether we're talking about the number of monthly visitors to Yelp or the numbers of videos that have been viewed per month, they all point to that same conclusion, that we're digitally dependent and that dependency is growing exponentially.

And so with that as the backdrop, at Darden it's pretty clear that we have an obligation to embrace and adopt technology more quickly. And what personally excites me is that I think we have an incredible opportunity as industry leader to shape that experience for how consumers interact with our brands and to define that experience for our industry. And so whether that involves mobile payments, much like the example that I described earlier or whether it involves sending a text message to a guest when their table's ready, perhaps around table-side ordering and settlement, maybe it's a device that's at the table when the guest arrives or a catalyst that we hand over to the guest or a mobile phone that the guest carries or a mobile handheld that a server carries, those are all things we have to consider.

And maybe it's looking at practices that other industries are experimenting with or retailers are experimenting online to deliver different prices to consumers online based on where they live. These are all things that we know we need to understand, explore and evaluate. And frankly, we at Darden feel like we have to be preparing for that guest of the future. The one who right now is staring at his iPad and thinking that's just how the world works. And so while a bit of an exaggeration, the millennials are right there, and so we have to prepare for that.

And so how are we responding? Well, our vision is focused on building relationships and loyalty with guests and team members digitally to leverage their digital lifestyle, to deliver the types of services that they expect today or that they soon will expect. So if a guest is looking for information, they're typically going to look online, and Darden needs to be there. If they're looking for a promotion or a coupon, they're typically going to look at maybe their mobile phone and their tablet, and we need to be there. And if they're looking for a recommendation for where to dine out, they're typically going to look among trusted sources, like their circle of friends and family, and Darden needs to be there. Darden needs to be present in all of those channels in order for us to, frankly, remain relevant. And we think we have a great opportunity as well to start to manage our guest relationships, both within and across our brands. And that's a theme that I'm going to come back to but a powerful one and one that we think provides a unique opportunity relative to others.

So as we go about executing this overall vision and strategy, I think it's -- we recognize that we need to acknowledge that we can't predict how technology is going to evolve. Because for every technology success that I described a few slides ago, there have been 2 to 3 orders of magnitude more failures. And so we don't know what that next technology was going to be. Maybe it's going to be RFID wristbands or near field communication. And maybe here we are at Disney, maybe Disney's MyMagic+ program, which now allows guests to use their wristband to serve as their park pass, their form of payment, their form of identification, and maybe that's going to be what thrusts RFID into mainstream. Or maybe it's going to be Google Glass, and maybe it's the idea of augmented reality, and maybe that's what we're going to have to respond to and we're going to have to react to in terms of delivering experiences in our restaurants. Or perhaps, there'll be biometrics and the notion of using my thumbprint or my eye as my form of identification, and maybe that's what we need to respond to. But we don't know. We can't predict. And so because we can't predict, our strategy is to build a platform, one that allows us to respond to changes today and respond to changes in the future.

And so internally, admittedly for dramatic effect, I've described our guest-facing digital platform to be a lot like that of an Atari, where the types of experiences that we're delivering to consumers is similar to that of Pong. Where perhaps there's a curiosity factor that such an experience still exists, it certainly doesn't afford us the opportunity to deliver the types of experiences that today's consumers demand. And so our strategy, to stick with the analogy, is to build a platform much more like the XBox 360, one that allows us to build the types of applications that are relevant to today's consumers, as well as to tomorrow's. And so whether those applications in the future involve upgraded websites, whether they involve enterprise to go ordering, web ahead, digital menus, loyalty, whatever application we can conceive of, the idea is that we're going to have a platform, on top of which we can build new applications, as well as that we can integrate third-party applications into more readily and seamlessly.

So as we go about then building this platform, there's a few strategic choices that I want to describe that very much inform our approach. And the first strategic choice that I want to talk about is the fact that we want to own guest data. That is, that we view guest data as a strategic asset. And we view every digital interaction that we have with the guest as an opportunity for us to learn more about them. And you consider the power of that opportunity gets amplified when you consider applying that across our portfolio of brands, and we think that's a very exciting opportunity.

The second strategic points that I want to talk about is that we're going to build a scalable platform, a platform that supports all of our brands on a single consolidated platform. And so meaning that we could have chosen, for example, to deploy Olive Garden on one platform and Red Lobster on another and LongHorn on a third. And in many ways, that probably would've been faster for any individual brand. But we think it makes sense to actually put everyone on a single platform for a couple of key reasons. The first key reason is that we think that there's power in just being able to more effectively maintain that platform across our brands, as well as to more quickly scale new capabilities across this platform, when everyone's on a single one.

And the second benefit that we think arises from our -- this decision is the fact that we can more quickly create cross-brand experiences, ones that would be much more easy for us to enable when everybody's on the same platform. And so that creates a lot of exciting opportunities for us.

And the third key strategic choice that I want to describe is the fact that we're going to integrate, that we're going to integrate our guest-facing technologies into our restaurants so that we can create a much more seamless experience for our guests and for our team members. So these choices that I've just described clearly influence the amount of investment and the amount of time that this transformation is going to take. But we think that these choices are worth making, and we think that we're in a unique position to make these choices by being able to leverage some foundational strengths to help us deliver real competitive advantage.

And the first of those strengths is the fact that we own all of our restaurants. The fact that we have homogenous technology environment certainly affords us an opportunity to more quickly scale out new capabilities across our restaurants. That they have its common point of sale system, that they have common restaurant systems is a great opportunity for us. The second is our strong IT platform, that we have a stable and robust platform in our restaurants, that allows the integration that I referred to, to happen much more easily. The third is certainly around our multiple brands. So the fact that not only can we create multiple brand experiences, but the fact that we have a broader breadth of understanding of our guests that we can then use to create our overall roadmap. And lastly, it's the fact that we have a centralized team, that we have technology professionals, marketing team members, HR resources available to us that we can apply towards a program of this magnitude and, frankly, to apply towards an effort that otherwise our brands on an individual basis wouldn't be able to undertake.

So to describe how this overall program is rolling out and to describe our overall status of the program, I've often internally use an analogy that it's a lot like we're building a house. And I use that as an analogy because it's much easier to relate to that than it is to software, quite frankly. And so if you've ever gone through the process of building a house, you know it's just that, meaning it's a process. Meaning that there's a fixed sequential series of activities that take you from beginning to end, that there's a logical sequence that you go through, that it's a lot of hard work. It doesn't happen overnight. And just because you wish it, doesn't therefore make it so. There's a lot of work.

And so typically, the first step that you go to when you're building a house is to define your vision. You define what is it that you want, what are you looking for? Are you looking for a house about entertaining, or maybe it's for friends and family or maybe it's for relaxation. And once you define that vision, you'll then get some help. And that help could be in the form of contractors, developers, designers, architects, the people that you trust are people that have been there, done that, that have the expertise that you need as you go down this journey.

And once you've got some help, then what you'll do is you simply sit down with them and say, "What is it that you want? How many bedrooms are you looking for? How many bathrooms? How many floors? What types of rooms are you looking for? How many garage bays?" And once you do that, then you'll typically then start to see an expression of that put down on paper. You'll create your blueprint. You'll see a floor plan, and you'll start to visualize and understand, "Okay, this really what my dream house is starting to look like." And after you go through that, then you'll cost it out. And this step tends to be a little more iterative, because what you want versus what you can afford or what you have time for, it typically doesn't match. And so you're going to have to make trade-offs, and you're going to have to throw things out. And maybe you don't need third staircase, and maybe you don't need that basketball court or that library. And so once you decide and land on what it is that you actually want, you're going to build it. And after you build it, you'll inspect it. And you'll make sure that what's being built is exactly what you had wanted, what you had specified, as well as that it meets the right regulations and codes. And after you inspect it, you're going to move in.

And so that's the exact process that we've been going through here at Darden. And so we have defined our vision. I shared a bit about it with you in terms of what our overall vision is of this program. We got some help. So we have some key partners that we're working with, really people that -- who have been there, done that, who do have specialized skills and capabilities that are needed for us to deliver the program and our vision that we have. And we've defined our wants. We spent a long time working with our brands and working and having cross-brand workshops where we sat down and said, "What is -- what are the types of experiences we want to deliver for our guest? What does that look like?" And so now we're in the process of creating our blueprint. We're going through design. And we're saying, "Okay, how is it going to look?" And we're going through an exercise around implementation planning.

And the key here is that our whole goal is to try to deliver value as quickly as possible. And so we're trying to break up this program into releases, with the notion being that the more quickly we can roll out releases, the more quickly value can be accrued. And once we do that, we're going to start building our house. And we'll go through testing, and then we'll roll it out in releases. So as we think about this overall program, there are basically 3 phases, is how we've broken it down. And so let me talk about each of those.

The first phase is around building a foundation and really getting Darden in the game. It's really about ensuring that Darden is delivering the types of experiences that today's consumers expect from our industry, as well as emulating the types of experiences that we see in other industries that we think are relevant. And so that's really about Phase 1. Phase 2 then is about determining where do we want to selectively innovate and lead. It's about leveraging some of the core strengths that I described and determining where is it that Darden wants to win. And it's figuring out those areas of winning. And then Phase 3 is leveraging our foundation, leveraging those core strengths, leveraging our wins and building sustainable advantage.

So there's a lot of things that this program is going to deliver. And I want to talk about 3 areas in which we're going to evolve. And the first area is around analytics. This concept of getting more data and insight to help us manage our business, as well as to help us better serve and attract our guests. And so as many of you know, Darden's a very data-driven company. We use decision support tools to help us manage our business,. And we think this program moves us much more from a mode of I think to a mode of I know. And so it starts by understanding our guests on a visit-by-visit, check-by-check basis. Over time, we anticipate being able to enrich and enhance this view. And then ultimately, having an understanding of our guests across our portfolio of brands to understand their distribution pattern and frequency of visitation across the network of restaurants affords us, we think, a great opportunity and a unique opportunity relative to others.

The second thing that we're going to deliver is around our digital platform, around our guest-facing technology platform. And the notion is to start by upgrading our digital experiences that we're currently providing to guests today on our sites, which at best can be characterized as on par with the industry, and perhaps more accurately portrayed as maybe in some cases, subpar. So it starts by upgrading that experience. Once we do that, then we're going to build new applications on top of that platform or integrate third-party applications through that platform that really allow us to deliver value. And then ultimately, we imagine delivering multi-brand, cross-brand experiences, all on that single platform.

And then the last strategic area that I wanted to talk about in terms of how we're going to evolve is around managing guest relationships. And it starts by capturing as many guest opt-ins as we can across all of our channels, really trying to build as many conversations with as many guests as possible. So that over time, we can learn and understand more about them. We can understand their preferences, understand their insights. And ultimately, we could manage our guest relationships across our portfolio. We know by definition that guests are going to be promiscuous when it comes to dining out. They're variety seekers. And so our hope is to use technology to help keep the guests more within our portfolio as much as possible.

And so what does success look like overall for this program? Well, for our guests, we think this program is about delivering rich experiences to them anytime, anywhere, on any device. And we certainly envision being able to tailor the experiences and guide them to new experiences and opportunities that they may not, otherwise, been able to explore themselves because of our understanding of who they are and what their preferences and interests are. And for Darden, we think this journey will allow us to have the data and insight that we need to better anticipate guest needs, to both attract new guests as well as for all of our guests to build loyalty and increase visitation and frequency to Darden's brands and portfolio.

So this is a hugely exciting opportunity for us. It's a huge transformation, and it's an amazing journey that I think we're undergoing. And so I'm personally excited to have joined Darden and be a part of it. So I appreciate very much the time that you've provided in terms of allowing me to share a little bit about it with you.

And with that, I'm going to turn it over to Brad Richmond, who's going to talk a little bit about our financials.

C. Bradford Richmond

Well, good afternoon. I'm glad to see some of you here in person and for those joining us on the webcast. I'm sure you found Chris' technology journey somewhat of interest and realized importance of this initiative to sustaining our growth and our future here for Darden. So thank you for that, Chris. I'll take this time to further detail the financial implications of our strategic choices in terms of where our business is today and what are the financial performance expectations for fiscal 2013 and what our near-term business models expect to deliver over the next couple of years and then, some important variances to that model, as we think about preliminary fiscal 2014 financial performance. Then Clarence, Drew and I will take your questions before we conclude today's formal session.

So starting with our projection for fiscal 2013. Collectively, we expect total annual sales of approximately $8.5 billion in fiscal 2013 and operating cash flows of nearly $950 million along with EBIT margins of approximately 7.8%, that is suppressed by 30 basis points related to the Yard House acquisition costs but is still competitively strong among company-owned operators.

We estimate fully diluted earnings per share of $3.06 to $3.22, that reflects a reduction of approximately $0.09 related to the Yard House acquisition cost. These results reflect consumer dynamics that Drew discussed earlier and the strategic choices we are making to respond to them, which I will discuss more later in this presentation.

New restaurant unit growth is the primary driver of sales growth this fiscal year. We're estimating restaurant unit growth in the 4.5% range for our large brands, Olive Garden, Longhorn and Red Lobster; and an even higher growth rate in the mid-13% range for our Specialty Restaurant Group brands, Capital Grille, Seasons 52, Yard House, Bahama Breeze and Eddie V's. This should deliver approximately 5% combined net new unit growth, which is approximately 100 restaurants, not including the 4 Yard House openings acquired after our acquisition of that brand.

While our current year same-restaurant sales results are soft at the large brands, we also look at the results over a 2-year period to get a sense of the pace and timing of our brand progress. For Red Lobster, 2-year results are in line with industry performance, while Longhorn 2-year restaurants results are nearly triple the rate of industry growth. Olive Garden sales have clearly trailed the industry in the current and most recent 2-year period after a decade of above-industry growth. This speaks to the brand challenges Drew noted. And as you'll hear more tomorrow from Dave George, the President of Olive Garden, actions we are taking to improve this performance.

The SRG brand same-restaurant sales performance continues strong this year and over the 2-year period, and it's up in the mid-6% range. The acquisition of the Eddie V's brand early in fiscal 2012 and the Yard House brand in September of this fiscal year also support total top line sales growth, adding 3.6 percentage points to our total sales expectations, with total sales growth expected to reach 6% to 7% for the year. Our expectations include an uptick in fourth quarter same-restaurant sales due to the culinary and promotional efforts and lapping soft down prior year -- down 2% in the prior year quarter, which is in contrast to the third quarter, where we're lapping a stronger, partially weather aided plus 4% in that prior year.

Our portfolio includes 3 large, nationally advertising -- advertised $1 billion-plus consumer brands, brands that have a very durable and successful history. Olive Garden, at $3.7 billion in annual sales, is a dominant leader in the industry, and the Italian category in full-service restaurant dining. Its 2% growth, off a large base, is fueled by unit expansion. Red Lobster, at $2.6 billion in annual sales, is a significant leader in the industry and the leader in the seafood segment. LongHorn, now at $1.2 billion in annual sales, is a rapidly growing brand, growing total sales nearly 40% in the past 3 years from a combination of strong same-restaurant sales gains and significant expansion of its unit base.

And the Specialty Restaurant Group of brands, collectively, is a $- billion sales business of higher-volume, higher-margin brands but, together, have a national presence and appeal to a more rapidly growing consumer opportunity. Collectively, we're on track to deliver $8.5 billion in annual sales, an increase of 6% to 7% compared to the prior year.

Now despite recent challenges, the sales and return levels of our brands remain industry leading. Shown here are the average sales volumes and restaurant-level return on sales for the 4 quarters ending in November 2012 for each brand. The return levels for each brand is above 14%. That's a level that delivers cash flow in excess of the cost of capital on the investment that we make. And for Olive Garden, The Capital Grille, Seasons 52 and Yard House, the returns are well above the necessary level and thus, adding even more significant value. While making capital deployment decisions, we compare the amount of capital deployed to the expected future cash flow, net of any guest count draw, that against our cost of capital. And combining value-creating brand returns with high average sales per unit delivers a very strong operating cash flow.

Now on the previous slide, I was speaking about restaurant-level earnings, which is different from operating profit or EBIT. We make some key adjustments, so that results are compatible from one restaurant to another within the brand and for comparison across brands. Starting with EBIT, which for the first half of the current fiscal year is what I'm using here, was 8.8%. We add back general and administrative expenses, but the selling portion or marketing, if you will, is included as a deduction in restaurant expense.

We add back a credit representing the implied interest and rent payments for leased units. This is about 150 of the 170 basis points shown here. We do this to aid in compatibility of financial performance of owned versus leased restaurants. And there's a credit for the rent average required by GAAP accounting, which looks at lease payments across the entire lease life and apply that on an average basis. On long-term leases, they have a payment increase generally every 5 years, such as ours do. This can provide a very different result than the cash flow and doesn't reflect the fact that check averages generally inflate over time. This impact is about 20 basis points.

There's also an adjustment for direct pre-opening expenses for items like opening team training expense. There are a number of other additional costs involved in opening a new restaurant. But we account for and manage them separate from this calculation. So collectively, these items add about 160 basis points to the EBIT margin to arrive at the restaurant earnings level that we use. This amount does vary from period to period but gives you the roadmap to the key financial manager of how we look at brand and new unit performance.

Again, because of high returns on high-volume restaurants, our operating cash flow is meaningful and has proven to be very durable. Over the past year -- or past 10 years, we have nearly doubled operating cash flow with a 6.8% compounded annual growth rate. In the current fiscal year, operating cash flows were projected to reach $950 million, which equates to $535,000 on a pre-tax cash flow per restaurant. Operating cash flows have proven to be very resilient, and this rests in the fact that the core business drives the substantial cash flow that we have. And while same-restaurant sales performance is important in terms of brand health and earnings growth, a 1% change in annual, same-restaurant sales changes operating cash flows about $20 million to $25 million.

Our new restaurant openings and the strong performance that we're getting from them were also strong contributors to operating cash flow growth. Additionally, with our scale and expertise, there are a number of other opportunities to improve operating cash flow, and I will touch on some of them later.

Now there are some significant variances to the operating cash flows for the most recent years. The first item is in conjunction with our supply chain transformation, which involves taking possession of inventory sooner in the cycle. This enabled us to achieve a lower purchase price, but it did mean a temporary $75 million to $90 million increase, mainly in fiscal 2012. That will reverse out, some of that we're seeing in the current year, with the remaining reversing out over the next 2 years. The other item is for payments in fiscal 2012 and fiscal 2013 to settle our long-term debt hedging. These payments will result in lower cash outflows over the life of those bonds. Including these variances, even more clearly demonstrates the level and durability of our base business operating cash flows.

This slide details operating cash flows for the 3 most recent fiscal years. The net of the slide is the cash available for dividends and share repurchase. It is more than sufficient to meet current dividend payments and consistently grow dividends. In the detail, the working capital line illustrates the impact of the inventory change I described earlier. You see some of the usage beginning to reverse out and move from a usage to what is typically a source of cash for us. You can also see our lower CapEx expenditure for fiscal 2013 compared to what we have communicated before. I will detail this in a few moments.

We deploy a good portion of our operating cash flows to protect and grow future operating cash flows. Strong cash flows enable us to continue investing in meaningful value creation new unit growth; to protect the foundation of our strong operating cash flow through remodels, relocation, rebuilds of existing restaurants and maintenance capital expenditures; and to invest for future success, targeting key levers like our technology platform.

We have made meaningful adjustments to our current fiscal year capital spending. We have reduced spending by $50 million compared to what we discussed this past summer when we first reported on the Yard House acquisition. And as you will see later, we're making even greater adjustments to what we have initially discussed regarding fiscal 2014 spending. The current year reductions are across all categories, with the largest reduction coming from new restaurant spending. And we are clearly committed to returning capital to shareholders as this chart demonstrates.

Over the last 10 years, we have evolved our return of capital from largely share buybacks to dividends. This has resulted in meaningful annual growth in the dividend for a number of years. And during the stronger performance period, a meaningful amount of capital has been returned through share buybacks to maintain debt ratios that we target. In the current period, and probably for the following 2 fiscal years, share buybacks will be limited as we work down the Yard House acquisition debt. This is not unlike what we did following the RARE acquisition. Still, with the strong operating cash flows from our base business, dividends will continue to grow. I will touch more on dividends in just a moment, but our base model cash flow generation is grounded in discipline, new unit growth and the importance of return of capital to shareholders and has resulted in $3.9 billion of capital return to our shareholders over the most recent 10-year period.

New restaurant growth, even with the current sales challenge, continues to remain value-creating. Looking at new restaurant performance on a brand-by-brand basis, Olive Garden is achieving more than 140% of the required earnings on the 79 most recent new restaurants, and that includes holding the new restaurants accountable for covering the draw impact of the guest counts on existing restaurants, which has been about 70 basis points recently. This is only marginally down from last year's 150% rate of achievement of the required earnings.

LongHorn is achieving 110% of the required earnings on the 66 new restaurants, with an average unit volume that exceeds the brand average, driven by greater awareness of the brand, as the spend on media continues to grow. However, returns are down from last year's levels. This decline is attributable to our strategic decision to not fully price within the LongHorn brand for the higher beef cost.

Seasons 52 new restaurants are achieving more than 145% of the required earnings for the 12 new restaurants opened over the 3-year fiscal period, and the Capital Grille has improved the return of its new restaurants to 115% of the required earnings. Bahama Breeze has achieved a meaningful increase in new unit performance to 135% of required earnings, and Red Lobster new unit developments were just really focused on relocations and rebuilds of existing locations in strong trade areas. And these restaurants continue to meet expectations.

Year-to-date, though -- our fiscal year-to-date through our fiscal second quarter EBIT margins have contracted 80 basis points. Same-restaurant sales deleveraging accounts for 50 basis points. Acquisition costs related to Yard House and its lower EBIT margins at that brand have also impacted our margin. The change in fair value of our benefit program lowers EBIT margins about 30 basis points. But this is fully offset in a lower tax rate on an annual basis. And we have been spending incremental dollars on marketing, putting an additional 30 basis points of pressure on margins. Transformational cost initiatives continue to strengthen margins, as well as operating closer to our existing standards in our restaurants. So as we look at the first-half margins and exclude the Yard House impact, margins are down about 40 basis points but remain strong and supportive of our cash flow projections.

And as we announced yesterday, we expect fully diluted earnings per share of $1 to $1.02 in the third quarter. For the full year, our expectations are for diluted EPS of $3.06 to $3.22. And when you exclude the Yard House acquisition-related cost, this translates to a 8% to 12% decline. We expect annual tax -- we expect an annual tax rate of approximately 23% for the fiscal year. While the annual earnings-per-share expectations is below our previous expectations, it is reflective of the current trends, the economic environment and our strategic choices.

The current performance is affecting key debt metrics. Our total adjusted capital continues to grow and is expected to reach $5.87 billion at fiscal year-end. In this amount, we recognize the cash flow commitments of operating leases as a component of both debt and capital at 6.25x minimum rents, funded debt increases in conjunction with the Yard House acquisition. The 2 key debt metrics we monitor are adjusted debt to adjusted capital and adjusted debt to EBITDAR. The adjusted debt to capital reflects the additional acquisition-related debt and remains within our targeted range at year end. The adjusted debt to EBITDAR reflects the additional acquisition-related debt and lower earnings and is currently above our targeted range. These targets support an investment-grade credit profile. We value the advantages of investment-grade credit profile and ready access to low-cost debt that it provides. Given where debt metrics are and the need for further focus at Olive Garden, we have reduced capital spending within the current fiscal year, and we'll further reduce capital spending going forward.

Our capital deployments are to ensure base business vitality through ongoing facilities maintenance, remodeling and other initiatives to drive same-restaurant sales, same-restaurant traffic growth; to protect our financial flexibility; to maintain an investment-grade credit profile; to ensure efficient access to capital; to maintain solid dividend growth by consistently growing dividends annually and maintaining at least a 50% payout ratio on a forward-looking basis over the long term; and invest in value-creating new unit growth to capture the significant opportunities within our current portfolio; and to return excess capital to shareholders through share repurchases to maintain the leverage and coverage ratios I just reviewed to support an investment-grade credit profile.

And now I'll discuss what we expect the core business model to achieve over the next 2 to 3 years. Near term, the core model for our large brands reflects the dynamics that Drew outlined earlier, a share gain where consumers are financially constrained. In this environment, we expect same-restaurant sales to be between plus 1% and plus 2%. Check growth should be in the 1% range, as we work to address affordability. We also expect that traffic growth, given our actions and environment, will be flat to up 1%.

Unit growth for our large brands will be 2.5% to 3%, with most of the reduction from current levels coming from Olive Garden, as we focus on regaining same-restaurant momentum at that brand. A further reduction in Olive Garden openings below 15 will actually cost money now, given where we are in the development pipeline. Beyond fiscal 2014, we are primarily -- we are preliminarily projecting that we will stay at the 15 net new restaurants a year. But that number would come down if business conditions warranted. With these expectations, total sales growth for our large brands comes to $275 million to $350 million.

For our Specialty Restaurant brands, the growth prospects support more robust same-restaurant sales growth and unit expansion, as these benefits -- as these businesses benefit from a higher gross guest count base, from a visit frequency and a spending perspective. We expect same-restaurant sales in the plus 2% to plus 4% range annually.

Unit growth is expected to increase to 25 to 30 units per year, or about 15%, driven primarily by the addition of Yard House brand to the portfolio. With Yard House adding 7 to 10 units per year, Seasons 52 also adding 7 to 10 units per year, Capital Grille with 3 to 6 additional new units per year and Bahama Breeze and Eddie V's adding another 5 to 8 units combined. We expect these brands will collectively generate annual sales growth of $175 million to $225 million.

When growth from our large brands and our specialty brands is combined, we expect the core model to produce total sales growth in the 5% to 6% range over the near term. And an increasingly significant tribute to our growth is coming from our specialty brands. To demonstrate the Specialty Restaurant Group's increasing important role in our growth profile, you can see their sales will increase approximately -- or increase to approximately 15% of Darden's total sales by fiscal 2015. And their portion of Darden's total sales growth will grow from 21% in fiscal 2011 to 35% in fiscal 2013 and is expected to reach 40% of our sales growth by 2015.

I want to give you a brief update on our progress with the -- with integrating Yard House into our organization. But tomorrow, Gene Lee will expand on their role on our portfolio, and you have a chance to learn a little more about this exciting brand from Yard House President Harald Herrmann.

To-date, the integration is progressing well. We have identified annual run rate cost synergies in the 3% to 4% of sales range, or about $12 million to $15 million, with the majority of that coming from the supply chain and support service areas. We expect to achieve 60% to 70% of run rate cost synergies by the end of the current fiscal year.

Yard House came into the acquisition with a pipeline of future locations, and we have 4 post-acquisition openings in the current fiscal year, fiscal 2013, and 8 locations have been identified for 2014 openings. Yard House will add 3% to Darden's 2013 sales growth, NOI of $0.04 to $0.05 and earnings per share before acquisition-related impacts of approximately $0.09. Importantly, this brand's strong business model and future growth profile is expected to deliver significant value creation to Darden for several years.

As you may recall, our par projection for fiscal 2003 (sic) [2013] capital spending was approximately $775 million upon the Yard House acquisition. We have reduced this roughly 10% to $700 million to $725 million for fiscal 2013, so a 10% reduction there, and more limited capital spending will remain the case over the near term. So over fiscal 2014, we will reduce capital spending close to an additional 15% to $600 million to $650 million. The lower capital spending is primarily from new unit and remodel spending. This is in -- this is the case for remodeling because we are holding off on much of the spending initially planned for Olive Garden. While the remodels we have completed so far continue to provide a reasonable same-restaurant sales lift compared to non-remodeled restaurants, our thinking about the look and the feel that's needed to support the appropriate brand image going forward has evolved with the leadership changes at Olive Garden.

As Dave George will discuss tomorrow, we believe the interior needs to be less old world, which is the orientation of the remodeling that's been done to-date, and more contemporary. So this is such an important factor in how the brand is positioned for the next decade and since remodels involve such a significant capital spend, we think pausing to ensure we have the right decision for the future is the right thing to do.

With these adjustments, we are still making a significant investment for our future growth. Investment in new unit growth is anticipated to be $340 million to $360 million to support new unit growth of approximately 4%. As Chris just presented, technology investments of $15 million to $25 million in fiscal 2014 are part of a multiyear phase strategy, which will add important new capabilities that will benefit our entire portfolio of brands. We will also spend to protect our current operating cash flows by investing in rebuilds, relocations and maintenance CapEx for all of our locations.

Meaningful productivity improvements has been a major focus area since the recession. And most of you are familiar with the 4 categories of growth that have been driving transformational cost reductions during the past several years. By the end of the current fiscal year, these initiatives will have removed $120 million to $130 million of costs cumulatively.

As you can see in our revised estimate of the ultimate run rate, which has been revised upwards since we last shared it with you, we still have some additional savings identified for supply chain transformation and modest additional savings planned in facilities transformation and sustainable operating priorities. We're actively evaluating additional initiatives and identified additional opportunities for labor optimization, which raises ultimate run rate savings there to $70 million to $80 million. As a result, over the next several years, we continue to see the opportunity for $20 million of cost savings reductions annually. As we consider investing even more significantly in the guest experiences we provide to both regaining current momentum and ensure a sustained future success, the substantial productivity improvements we have already realized and the additional improvements we expect to go forward help fund that investment.

Our core business model for the near term also reflects benefits from continued expansion of our international footprint, which we do through a disciplined franchising approach. We started in the Middle East and Latin America based on demonstrated acceptance by other American full-service brands. Our agreement with Americana Group in the Mideast is to develop 60 restaurants. There are currently 5 units open, and we expect 3 more to be opened by the end of the fiscal year. CMR is our partner in Mexico and they have committed to opening 37 restaurants. Two are open, with 1 more additional restaurant open -- expected to open by the end of the fiscal year.

Restaurant Operators, Inc., who had been a LongHorn franchisee for us in Puerto Rico, will be developing 14 additional restaurants for our 3 large brands. And last week, we announced an agreement with International Meal Company to open 57 locations in Brazil, Colombia, Panama and the Dominican Republic. We ultimately believe international franchising has a potential to deliver up to $50 million of incremental EBIT.

Our near-term model also includes an expansion of our consumer products business. This year, we tested selling 5 products in Sam's Club. Not surprisingly, our Olive Garden salad dressing and Red Lobster Cheddar Bay Biscuits Mix were a big hit. Estimated annual gross sales of more than $40 million exceeded expectations and made it clear that this could be expanded. The Olive Garden salad dressing will be offered in over 3,200 Walmart locations starting in March. We believe incremental earnings contribution from this model has the potential to reach $10 million in the next 5 years.

Synergy restaurants are also a part of our model over the near-term horizon. They provide us an additional opportunity for even greater unit growth in smaller markets and leverage the strong appeal of our larger brands. A synergy restaurant combines 2 of our 3 large brands into a single facility to optimize the capital investment and key operating costs in the kitchen and management team. We're in the early stages of a test with 5 units open and an additional unit plan for the fourth quarter. Synergy restaurants are exceeding sales hurdles and achieving earnings hurdles, with further efficiency opportunities identified. In fiscal 2014, we will pause and evaluate our 6 test location to see if they can sustain these results. And in fiscal 2015, we will make an expansion decision.

Even with the headwinds that we faced and the strategic choices we're making to win in the new era, there is continued opportunity to leverage our scale and drive margin expansion. Our core model over the near term reflects leverage from new unit growth that should deliver 15 to 20 basis points of EBIT margin expansion; the net effect of our same-restaurant sales growth that, because it reflects modest traffic growth and tempered check growth, is likely to reduce margins 20 to 30 basis points; the transformational cost savings outlined earlier will drive margin expansion of 25 to 30 basis points.

Other investments we are making to ensure future success will pressure margins in the near term by 10 to 15 basis points. And finally, the EBIT contributions of international franchising and consumer products will help margins by 5 to 10 basis points. So in total, our core model can generate annual margin expansion in the 10 to 30 basis points range over the near term. And when you combine that margin expansion with top line sales growth of 5% to 6%, operating cash flows are expected to grow $40 million to $60 million a year. This is driven primarily by new unit growth, which delivers $40 million to $50 million of incremental operating cash flow annually, and you can see the impact of the other margin items that are detailed here on the slide for you.

So given the consumer and competitive dynamics of the new era and the strategic choices we are making to respond to and take advantage of those dynamics, our model's capable of 5% to 6% sales growth over the near term, driven by 4% new unit growth and 1% to 2% same-restaurant sales growth, which, combined with margin expansion of 10 to 30 basis points, can drive diluted net EPS growth of 5% to 10% and produce incremental operating cash flows of $40 million to $60 million. Earnings growth, combined with the consistent annual growth in our dividend supports a competitive total shareholder return over the near term.

However, there are some important adverse variances in our fiscal 2014 projection, which I'll take you through in the next section. So let's review those variances. Sales growth for fiscal 2014 is consistent with what our business model is capable of over the near term, except for the impact of Yard House acquisition. Unit growth will be 3.5% to 4%, driven primarily by the reduction in expansion at the Olive Garden, and same-restaurant sales are projected to grow between 1.5% and 2.5%. However, an additional 1% in sales growth is expected in fiscal 2014 beyond our core near-term expectations due to our acquisition of Yard House in September 2012. So total estimated sales growth of plus 6% to plus 7% in fiscal 2014 will be about 1 point higher than you would expect from our core model.

Cost inflation is also pretty consistent with what we expect as we think about our business model over the near term. Combining our commodity cost outlook that Jim Lawrence will share in greater detail with you tomorrow along with our other cost outlooks, we expect year-over-year overall inflation to be in the 2% to 2.5% range for fiscal 2014. Cost savings initiatives will reduce inflationary pressure by 0.5% from a combination of the transformative cost initiatives I talked about, as well as ongoing additional operating costs and efficiencies and reductions. So we look at net inflationary pressures in fiscal 2014 that should be in the 1.5% to 2% range, slightly higher than the inflationary pressures that we experienced in 2013, as food inflation returns to a more normalized level, but again, consistent with our thinking as we look at our core business model for the near term.

In terms of investments we're making to support future success, those are also consistent with our core model expectation. However, I wanted to share with you some more detail on those P&L investments, as well as other cash flow spending. During fiscal 2013, we made some changes to our operational organization structure, as Drew discussed earlier, and invested in other growth initiatives that'll help us win today and tomorrow. Those 2 items totaled $9 million this year and will be about $5 million in 2014. We have started to make some pretty significant progress on our IT platform, and you see investments to capture that opportunity as Chris just detailed. These investments will continue into 2014 and later.

Finally, as Drew discussed earlier, we have been investing in our lobster aquaculture project. And as we've made progress, those investments have increased. On a year-over-year comparison for 2014, there will be an incremental $3 million of spending, which is less than the $20 million year-over-year increase in the current year. Furthermore, there is some non-P&L spending to support these initiatives that totaled $64 million this year and will require an additional $52 million in cash next year. Again, these are not P&L items but more cash flow items.

So here is a more specific look at our EBIT margin's expectations for fiscal 2014, which again, this is before some important variances that I'll discuss in a moment. They're relatively consistent with our core model over the near term. Starting with the first bar on the chart, we expect same-restaurant guest count growth to expand EBIT margins by 30 to 40 basis points. New restaurant growth will further build margins 15 to 20 basis points. Inflation, net of check growth will decrease margins by 50 to 60 basis points. Cost savings will improve margins by 25 to 30 basis points, and growth investments will reduce margins by 10 to 15 basis points. And international franchising and consumer products contribute 5 to 10 basis points. This would yield a margin expansion of 10 to 30 basis points before any variances.

Now there are 3 important variances that I want to point out for next year. The first is that we need to reset our performance-based incentives. Our pay philosophy has a heavily reliance on incentive pay. And this incentive pay starts with our frontline managers and goes up from there. This will adversely affect EPS of about 30 to 34 basis point -- excuse me, $0.30 to $0.34 per share with just over 2/3 of that amount is based in our frontline operations management teams.

Also, because of how we're choosing to transition to the new healthcare landscape, there will be an adverse EPS impact that will be in the 5% to 6% range for the January through May period. This is an estimate based on what we spend today but also our understanding of the new regulations. The regulations continue to evolve, and as such, this estimate could change some. Finally, lower Yard House acquisition cost on a year-over-year basis, which is not a part of the core business model, will positively impact EPS in fiscal 2014 by about $0.08.

If we take the EBIT growth of 10 basis points to 30 basis points before these adjustments that I just outlined on the prior chart and add the variances that I just mentioned, this is what EBIT margins look like with the variances: a positive impact to margins of 15 to 25 basis points due to the acquisition-related costs, a negative margin impact of 75 to 85 basis points due to the incentive resets, and a 5 to 10 -- a 5 to15 basis points impact due to the healthcare transition cost. So including the fiscal 2014 variances to the near-term model, we anticipate that margins will be 40 to 60 basis points lower next year.

Now in a similar format, I'm showing the effect of the variances on a fiscal 2014 EPS impacts. So same-restaurants guest counts are expected to grow EPS by 5% to 6%. New unit growth positively impacts EPS by another 6% to 7%. And cost inflation, net of check growth negatively impacts EPS by 7% to 8%. I won't repeat all of the other category impacts. But as you can see, EPS before growth investments, the variance is about plus 5% to 10% year-over-year, consistent with our core model is capable of delivering.

Now after the variances, which again are acquisition cost, incentive resets and health care transition, we currently anticipate fiscal 2014 EPS growth will be in the minus 3% to plus 3% range. I should stress this is our preliminary outlook. This is how we view next year today based on the choices that we have made. We'll continue to evaluate and explore the opportunities and assess our key assumptions and provide a more fully informed update to you during our June conference -- or June call, I should say.

So in summary, while sales pressure persists, especially at our large nationally advertised brands, margins and cash flows are resilient. Tempering check average and new unit growth and investing behind our other strategic choices still leaves us with solid near-term business model. Even with solid core menu and lower Yard House acquisition costs, incentive resets and health care transition costs mean a lower EBIT margin and flat earnings. But the strategic choices we are making to strengthen how we go to market today and our guest experiences for the future are the right decisions for our business.

So with that, I'll have Clarence and Drew joining me on the forum, and we'll take your calls. I think Matt is going to give us a few instructions on how to facilitate that.

Question-and-Answer Session

Matthew Stroud

Yes. We'll have some portable mics. I'll have one in the front. My associate, Andrew, have one in the back. We ask that you use the portable mics because of the webcast, we want everybody listening in will be able to hear the question. All right, so we'll start here. Let's start with David.

David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division

It's David Tarantino from Baird. My question's really about the dividend and your philosophy on the payout ratio. I think, Brad, you mentioned 50% payout ratio. But if you look at maybe the projected earnings for 2014 and even the next several years, you're going to be well above 50% payout ratio. So how do you think about that ratio over the next few years and your ability to drive up the dividend? Certainly, the cash flows are there. But perhaps could you talk about the payout ratio relative to the cash flow picture?

Andrew H. Madsen

Yes. I'll start and then hand it off to Brad. I think -- and Brad summarized it, David, but our thinking is we believe that we should have a consistently growing dividend. But over the long term, we are targeting a payout ratio that is 50% on a forward-looking basis. And so that does mean that there are some periods where we'll be above that and likely be some periods where we're below that, from year-to-year. But on a long-term basis, that's the payout target. We think with the cash flows we have, the flexibility in how we deploy capital, we ought to be able to have a modestly growing dividend every year.

Clarence Otis

No, I think that's bang on, and I think I would say is that we hear from investors is the importance of that dividend and it growing and some certainty about it growing. And as we've outlined, we have the cash flow to do that, and so we'll continue to grow that. Obviously, during -- the financial performance ended to grow at a little less than it has historically. And we've been moving up to that 50% payout ratio. So it'll grow from here. We expect it to. The flows are there to do it, but probably not at the same rate that it has in the most recent history.

Matthew Stroud

At the back of the room, we have somebody...

Nicole Miller Regan - Piper Jaffray Companies, Research Division

It's Nicole from Piper. Can we go back to the attribute slide during – we were talking during the break, but was that the first time that you had seen the 3 core brands drop in terms of value? And do you look at that as a leading or lagging indicator, and how often do you look at those results?

C. Bradford Richmond

We collect that information weekly online. We don't look at it that often. We typically look at it quarterly, and the information can move around quarter-to-quarter in ways that aren't necessarily indicative of sustainable long-term trends. But we do view the magnitude of the change in value that we've seen over the last couple years as being an indicator of what's happening short term right now, being driven by affordability. And we need to address that, we need to strengthen the affordability that we offer for our core guests. On the other hand, we view future visit intent as a longer-term indicator of brand health and ultimately, what sustains things like competitively superior average unit volumes, growth in number of units, and that sort of thing. So they're both important, but they tell us different things. But it's unusual, the magnitude of change that we saw in that value slide recently.

Clarence Otis

Yes. I'd say the other piece is when you look at their check averages, Red Lobster and Longhorn have always been in the bottom half of that list. Olive Garden's always been the leader, #1 on that list. And so it's more about the ranking change, I think that Drew talked about that is what we're looking hard at.

John S. Glass - Morgan Stanley, Research Division

It's John Glass from Morgan Stanley. I have 2 questions. But Brad, first, can you just -- what is that compensation realignment that you're talking about next year? Why is that a $0.30, $0.35 cost? What is it exactly mechanically that's happening?

C. Bradford Richmond

Well, based on years of performance, it's – that's bonuses or incentives that we're not paying out. And so paying for performance, this year's performance is not that strong and so there's a reduction in that expense. And so with next year, it's resetting that target back to expected levels, like I said over 2/3 of that is our restaurant management teams that, that goes to. And so their motivation, their pay for their success is what that's based on.

Clarence Otis

Yes, so we're paying well below target this year. And we would reset to assume that we pay out a target next year. Now what we actually pay will depend on next year's performance, but it's that reset.

John S. Glass - Morgan Stanley, Research Division

You lowered their targets, and now they can average -- there's more likely...

Clarence Otis

No, we lower our actual. Our actual payment this year is well below target, and so just to pay at that same target next year would mean no reset.

John S. Glass - Morgan Stanley, Research Division

Okay, that's helpful. And then my second question has to do with that capital allocation, the big question that everyone sort of asks of you recently is why you're spending as much as you have and how you decided how much do you spend? Generally speaking, how do you arrive at your '14 budget? In other words, do you think about a right amount of unit growth and you're filling in the different buckets depending on returns? Or have you kind of done the bottoms-up? And then secondly, why not go after Longhorn and unit reduction more aggressively since that one seems to have the weakest or closest to hurdle rate returns? I don't you've touched that.

Clarence Otis

Yes. I would say, so the way we think about it is separate by brand. And then within each brand, it really is a ground-up exercise about really what units are out there that -- new unit potential that would hurdle and how much does that add up to. And the other filter that comes along is, one other filter, is what's our management pipeline, how many can we open effectively given the talent bench that we've got. And then the third is what else is going on competitively and at the brand. And so at Olive Garden and Longhorn, both, there are a significant number of additional potential new units that would add value as we do the bottom-up in each of those. And the management pipeline issue, not as big a deal for Olive Garden given space as it is for Longhorn, where it's apparently significant issue. And so at Longhorn, we're sort of where we are, primarily, because to go any higher would challenge our ability to open those new restaurants at a high level given the management bench. And we don't want to go a lot lower because competitively, Longhorn is filling out its national footprint, and it's not the only steak player trying to do that. And whereas at Olive Garden, we're slowing down because we feel we need to focus the team on the base business and regaining momentum there even if there are that many new units out there that would deliver value and they have the bench at the restaurant manager level to accomplish more.

Andrew H. Madsen

And, John, the only thing I would add to that because I think you're referring to the decline in the percent of required earnings that Longhorn had, I mean we can trace that strictly to our choice, not to fully price for the beef costs in the worst of situations. They're still well above the threshold that they need to be at. We look at pricing on a portfolio basis. I mean, we obviously look at each brand but we look at it across the portfolio, we think that's a strategic advantage that we have. So it's a great time to be opening these restaurants and take even a bigger share in that space.

Clarence Otis

And I would say that those forecasted new restaurant cash flows for Longhorn assume that this market, this beef market is what it is for a while. But we do assume that the cycle goes back the other way in a few years. To the extent that this was structural, they would have a different set of assumptions about the forward cash flows for new restaurants that might affect how we think about how many there ought to be.

Andrew H. Madsen

In addition to the competitive imperative that Clarence mentioned on pace of openings for Longhorn, there's also the opportunity as they expand to continue to add media pressure, which is not competitive today, and that will help further build average unit volume and make the returns even stronger.

Clarence Otis

So and Val will talk about it tomorrow. What we've talked about national cable for Longhorn, but Longhorn still spends 35% of what is nationally -- the nationally advertised national brand spend, including Red Lobster and Longhorn. So a fraction of it.

Sara H. Senatore - Sanford C. Bernstein & Co., LLC., Research Division

Sara Senatore, Bernstein. I just wanted to ask another question on incentives, maybe a little bit higher up. First of all, I think -- and I get a lot of questions about this, the incentives for senior management are more aligned with revenue and EPS growth. And so I was wondering, are there changes to that level of incentive compensation? And if so, is it a rebasing or is it a different approach to incentivization? And also, what role does like return on invested capital and that kind of thing play into the compensation?

Clarence Otis

Yes. So I would say a couple of things. One is targets don't -- haven't changed. And so the payouts at the senior level will be well below target this year as well. And the accruals next year will be assuming the same targets and assuming that we'll actually hit targets until we see what actual results were, and those accruals will be higher or lower than target. So that doesn't change. The primary driver of compensation above the restaurants is really earnings growth. I mean that's 70%, and that shows in our proxy statements. So 70% is earnings growth. The sales and earnings targets that we set for each year reflect a cash flow return on investment model that we run on the entire business, and inside that model is a hurdle for the business, that is above the cost of capital. So it's a pretty stretch hurdle, but that is what sets the targets. And so last year for example, we had a comp target that was high enough that at 1.8% positive, we were 70% below -- 70% of that target, even at almost 2%. So it's a fairly high target that's based on cash flow return on invested capital.

C. Bradford Richmond

So I just want to emphasize. It's not growth, it's growth above a certain target. So that target already has that growth which is based on cash flow to return on investments that we are making. So we hope it changes next year.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

It's Joe Buckley with Bank of America Merrill Lynch. So just on being the -- resetting the incentive targets for debt, so for a flat EPS here in 2014, it's going to be another $0.30 to $0.34 of incentive payment?

Clarence Otis

It's resetting incentive, so that's what the target is. And the Compensation Committee will have to decide what that target's going to be based on the core performance, the underlying performance, so that remains to be seen. But at the restaurant level, we will reset to target based on what Brad described. At the executive level, that remains to be determined.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. And then just a question, Brad, your slide on new restaurant margins being -- new restaurant sales being accretive to margins, if I'm remembering from what you showed us a year ago, the profitability of new restaurants is way below the profitability of same-store sales growth. So how are they accretive to margins now?

C. Bradford Richmond

Well, because even new restaurant growth is above the company average EBIT returns because we're leveraging much for infrastructure, they're leveraging our distribution costs, they're leveraging the advertising and all that. So I use restaurant earnings as the example, that's the key metrics. So that level is accretive when you work that down to the EBIT levels from where we are today and where we are projected to be over the next 2- to 3-year time period.

Unknown Analyst

Gary Barron [ph], Wells Fargo Advisors. You've been out there very publicly in years past, saying that your, I think it's a 5-year goal is to add $2.00 to $3.50 to EPS. So maybe just kind of refresh us on that whole mindset given everything we're seeing here today.

Clarence Otis

Yes. Well, I think we were talking about a long-term sales growth targets that were 7% to 9%. And so with the reductions down to 5% to 6%, the EPS increment is going to come down as well. And I think the biggest thing that really is a change from our perspective as we looked at 7% to 9%, which had a 2% to 4% same-restaurant number in it plus the new unit growth, is that we have for a while now thought that what we were looking at really was cyclical. But here we are 5, almost 6 years in, and we have to really run the business and plan the business at this point like it's structural. And so we have to reset our view of what that sustained over most of your period comp is that's available to our big brands. And so that's the biggest reset.

Unknown Analyst

So you don't feel comfortable giving us another 5-year EPS target given what you just said?

Clarence Otis

We actually can, once we walk through our model. I mean we're pretty early in this year to think about next year. But on the June call, we can lay out a 5-year number.

Michael Kelter - Goldman Sachs Group Inc., Research Division

So I wanted to ask -- Mike Kelter. I wanted to ask, you showed some slides earlier that the biggest issue is the price value issue. And at a different point, you showed slides saying that your restaurant-level margins are much better than your peers. And I guess my question is aren't those 2 things related? And if so, even if the investments that you say you're making in technology and aquaculture and all those things, are those the right investments? Will they help people think that your restaurants are more affordable, or do you actually need the brute force of lowering your prices at this point?

Clarence Otis

Yes. I would say we are investing margin in the guest experience. We're doing that through much lower check growth than we've had in the past. That's one way to do it. But we also feel technology's important, and that's a great example because it allows us to deliver value in a much more targeted and customized way. And so the way we do it today is to temper check growth across the entire brand. Well, 35% of those people don't need tempered check growth. And so with the technology platform that we're moving toward, we can deliver that affordability where it's needed and have a different offer where it's not needed.

C. Bradford Richmond

And I'd build on that by saying that we do need to offer improved affordability, so check growth of 1% compared to, historically, 2% to 3%. But we also need to think about our experiences more deeply and innovate the guest experiences more fully, so that's why I was talking about working much harder what the food and beverage expense is and what the service experience is, so that we can give our guests a better food and beverage and service experience, not just lower the check or not just have the check growth more slowly to improve affordability. So it's really both. In the near term, the check is going to grow slower. But over time, the experience is going to evolve more significantly as well.

Clarence Otis

And then I would say on the lobster aquaculture is an example of tomorrow always comes. And so today, Red Lobster with a fairly elevated check has one that's still within reach of a lot of Americans still able to support a business that is starting to approach $3 billion, because shrimp is farmed, because salmon is farmed, because all other kind of species are farmed at a much lower cost than it would be if they weren't. And the technology to farm lobster has finally arrived, and we're working with the scientists that we think can get that done.

Michael Kelter - Goldman Sachs Group Inc., Research Division

And one other on a different point. You have – a slide you talked about, I know you have new advertising on air for all 3 of your brands right now. And you said that the advertising was effective for all 3, but yet the sales have actually gotten worse at all 3. So how do you reconcile -- maybe this is one of those examples where self-reported testing results don't correlate to the real world. If they're not getting people to go and shop to the restaurants more often, are they working?

C. Bradford Richmond

Yes. And that's a combination of the advertising campaign and the message and what the promotion is in the short term. And I think what we've seen in all of our testing is the key scores we tend to look at on brand distinctiveness, brand relevance, brand appeal for the campaign as it exists without our promote in it are all higher. When we add a promotion that in the past, was not as affordability-oriented, so with Olive Garden as an example, when we started this year with a promotion that was really all about product brand-news and new dishes, Taste of Tuscany, that wasn't as powerful as a 3-course meal for $12.95 or a 2 for $25 sort of offer. So I think the near-term trends are less about the advertising campaign, although we've got room to improve those, and the Presidents will talk about that tomorrow. In the near term, it's about the affordability in our promotions, and then as well, improving in-restaurant execution and evolving the experience.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Jeff Bernstein from Barclays. Two questions. Just first a follow-on on the kind of on the affordability front. And I know we'll hear from the brand presidents tomorrow, but I think you said you're going to temper the average check growth noticeably to support traffic. And that may be the right thing to do, hard to tell right now, but how do you prevent the slippery slope of promotions and discounting? I know in the past you've talked about the risks and dangers and how you've been through this at Red Lobster and there's no way we're going through that again, let our peers do it. But now it seems like that's the path you're going, how do you prevent a slippery slope there?

Clarence Otis

Well, I'll let Drew answer it. But that tempering comes through promotional mix, but it also comes through promotional mix, but it also come through the mix on the core menu, and so introducing items that have more approachable price points that we think will get high preference is part of it. That's probably a bigger part of it, because 80% to 90% of what people buy is off the core menu as opposed to promotions.

Andrew H. Madsen

Yes, so there's 2 dimensions to it. On the promotions, we want to construct promotions from the beginning that we feel are brand-appropriate and can drive incremental traffic and ultimately contribute to profitable growth. So a brand-appropriate promotion for us is one that delivers an experience our guests come to expect from a quality standpoint, is within reach from an affordability standpoint. So most of the price points you see from us are in the $12.50 to $13 range occasionally, maybe $15, but we don't see promoting in the $8 and $9 range, other than maybe a Never Ending Pasta Bowl once a year for Olive Garden. And then we construct dishes and invest in portion sizes and food costs that ultimately, our guests satisfying but fit that lower price. And ultimately, we get enough incremental traffic to have more guests, lower margin per guest, but more total sales and earnings. I mean, that's the goal. But you have to start with that mindset on the front end and develop dishes that fit it. On the core menu, it really is about addressing different need states and bringing in different guests than we have today. So whether that's a 3-course meal that's added to the Olive Garden menu recently, whether it's the 15 dishes for under $15 that was added at Red Lobster, the small plates menu that was added at Bahama Breeze, they're all addressing different need states to bring back different guests.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

And then separately, you mentioned Specialty Restaurant Group on a number of occasions, I know we'll hear more about it tomorrow, but just from kind of your office perspective. It seems like it's approaching Yard House in terms of total sales, so it's clearly not -- clearly, a significant component of your business going forward, and I think it said it's grown close to 20% sales, high-teens sales per year. So I was wondering how you -- like how do you get comfort that, that level of growth as appreciated in the valuation, or like when do you consider alternatives or something like that? Because clearly, it is a high-growth machine that is the size of LongHorn at this point and maybe not fully appreciated?

Clarence Otis

Well, we think it really just got to its current size with the acquisition of Yard House. So we've got to integrate Yard House and demonstrate the power of that integration, capture the cost synergies, all of that. I mean, the engine from a cash flow perspective for the Specialty Restaurant Group is Capital Grille. And we think, and Gene will talk about this, Capital Grille is a very strong brand, it still has runway in front of it, but it has significant penetration today. And so we think about that as really the driver, we've got to demonstrate the value of the rest of it as we build it out.

Stephen Anderson - Miller Tabak + Co., LLC, Research Division

It's Steve Anderson, Miller Tabak. Just I noticed the question wasn't really addressed in today's comments, but I know in the last -- in the December call, you mentioned about a near-term negative effect from the Affordable Care Act and some of the policies [ph] surrounding that. In the last few months, have you seen any change with regard to that? Have customers basically forgotten or has it gone to more like the -- more people are doing that now? What's your outlook on that?

Clarence Otis

Yes. I mean, we see a lot less chatter about it, but that's about all that we can tell you in terms of how it's affecting customers. I mean, it's one of those things that's very difficult to determine. And so a lot less chatter through the various channels that we were seeing chatter in. But on the Affordable Care Act, the rules are still being written, but we have a little bit more clarity. So we're starting to get a sense of what it might mean, but there's still a lot we don't know about how our employees and other employees will behave when they're given the choices that will be given to them.

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

Brian Bittner with Oppenheimer. Going back to this resetting of the incentive targets and the costs there associated with it, it's just such a big cost, so I want to get back to it here. So for it to be this large of a year-over-year headwind, it just seems as though at some point, those costs had come out of the business. I mean when was that tailwind? Did it occur partially this year, partially last year? I mean, how...

Clarence Otis

It occurred -- yes, both years. So last year, our achievement of target was something like 65%, does that sound right, Brad?

C. Bradford Richmond

That's right. Yes.

Clarence Otis

And this year, it's going to be well below that.

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

So are you able to tell us what the target is so that we know as you're tracking along, if that cost is going to occur this year or not? I mean is there exact target you can share with us?

Clarence Otis

I think we'll wait until the summer. So when you look at our proxy statement, you'll see what achievement of target was and compare that to the number Brad gave you, and that'll give you a pretty good feel, but that comes out in July.

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

Okay. And then the second question is just on the CapEx.

Clarence Otis

I'm sorry, I shouldn't be facetious. What you'll in the proxy statement is above the Restaurant Manager and General Manager level. They actually have a floor on their payouts, unlike the rest of us, which have no floor. So it won't be quite that mathematical.

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

So what percent of that headwind, the $0.30 to $0.34, is at the store level? I mean, is it all of it?

C. Bradford Richmond

Approaches 70%. It's in the high 60% level as our frontline managers in the restaurant, so like I said, high pay for performance, that's bonus that they haven't got this year, and so next year, with the targets we put in front of them, we would expect at a starting point, that, that's what they earn. They could earn above that if we perform higher than our expectations, or they could earn as they have this year, pretty meaningfully below that if we don't perform at the levels that are expected.

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

And is it on a restaurant-by-restaurant basis, or across the platform?

C. Bradford Richmond

It's each restaurant is evaluated in their own performance. So there are some restaurants that are getting nice bonuses, but majority of them are not getting a bonus near target.

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

Okay. And then on the CapEx on the new units, $350 million, it looks like for fiscal '14. On a dollar basis, what portion of that is SRG and what portion's the big 3?

C. Bradford Richmond

SRG, they're more expensive restaurants than the large brands, Red Lobster, Olive Garden, LongHorn. So I don't have that handy, but it's more than the per unit amount would be. So there's been, what is it, 50%, 60% more per restaurant there. But as Clarence mentioned, they're funding that as a group.

Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division

Matt DiFrisco. Clarence, the question is with respect to sort of the portfolio. You sound extremely committed to what you have in the portfolio now. In years past, obviously, you've made meaningful changes, Smokey Bones, for instance, you've exited. I'm curious with your somewhat capital constraints, with your debt levels and with some of those demographic trends that we saw pretty well displayed in the beginning of the presentation, that the quick casual looks extremely attractive and fast-growing. Is there something that prohibits your business model or your portfolio to take in a quick casual concept years down the road or even this year if you wanted to swap out brands, look to monetize one of the brands another way, to find the same synergies that you find when you bring in something like a Yard House or an Eddie V's or a LongHorn. Why haven't you entertained bringing in a quick casual that has better demographic trends?

Clarence Otis

Well, we don't have that platform. And so when we look at leveraging the platform, and that's the systems, it's the technology, it's the collective expertise of the organization, that's a different business. And so there won't be a lot of synergies, and so you really are buying a platform. It'd be tough for us to see really how we drive shareholder value that way. I think that's the gist of it is we appreciate how different that is. I think our view is that what we need to understand is what are the things about quick casual or even convenience stores that customers find appealing. So what kinds of customer needs are being satisfied, and what can we do within our brands to do a better job of satisfying some of those needs. So affordability is one of them, they're cheaper. Convenience is another, they've got denser penetration, and we're not going to have that density of penetration, but we can get more convenient than we are today. That's one of the big drivers behind the technology investments that we're making. And so I think that's how we approach it, is what's the core need that they're satisfying, what can we do to do a better job of satisfying that need. Customization of the dining experience is another one, and we can do a better job of allowing guests to put together the experience that they get in our brands.

C. Bradford Richmond

Perceived freshness is another opportunity that we could do a better job with in casual dining and in our brands.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

John Ivankoe with JPMorgan. Firstly, I guess a clarification. I think your comps assume 0% to 1% traffic, was the right for 2014 for the big 3?

C. Bradford Richmond

Yes.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

And so the industry hasn't had flat same-store traffic, I don't know, Malcolm, since 2005 or something like that? I mean it's been a very, very long time, so just kind of walk through what the logic was of coming to that number, especially if unit growth is still growing a little bit faster than employment. And then I'll have couple of questions to that.

C. Bradford Richmond

Well, I think you have to look at where our brands today and the things that Drew talked about, that we're working on, plus what you'll hear tomorrow from where the different brands are. So we look at where we are, the opportunity that exists, and see that traffic, I'd say the range was flat to 1%. And so we see that as something that we think is within the range that is reasonable for us to expect.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

And the industry assumption on that? I mean, is there one embedded in that number, or are you looking at yourself more in...

Clarence Otis

No. We don't look too much to build that. I mean, we -- there are key economic drivers that we look at, we have an economist that we look at. So the net of that is, what does employment growth look like, what does discretionary income growth look like, are the 2 biggest drivers of that with some lag. And so we see an environment that's not much better than it is today. But as we've been talking about the share opportunity from our brands and the work that we're undertaking, that's how we believe we can be at flat to up 1%.

Andrew H. Madsen

And it really does reflect over time, starting to capitalize on the changes and investments we've made. And Brad -- so Brad mentioned this, but our check is going to grow slower because we're investing in affordability. We should be able to get some traffic for that and we should be able to recoup some of those households in the under $60,000 segment that we've lost. We've reorganized our operations teams in the restaurant and in the field, so we can strengthen in-restaurant execution, deliver a better experience. We ought to be able to get a return on that as well. We've invested on the culinary side to have more innovation on our core menu. Over time, we ought to be able to get a return on that as well.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Okay, understood. And then secondly, with labor costs, I think you went through a labor scheduling module in fiscal '12 into '13 that took out in those pay practices as well, something like 50 basis points, and at least, if I saw on the slide right, that was one of like the big buckets going forward that you'll be able to take more costs out of your business. I mean, value is obviously -- it's a component of price, it's a component of food, it's also -- service is a primary component of value in the restaurant industry or quality, however you want to say it. So kind of talk about your caution to make sure whatever you do with labor, whether costs go up or costs go down, does improve the actual service experience, so we don't have to worry about you cutting too much.

Clarence Otis

Yes. I think we're very cautious of that. And we're not talking about cutting the amount of hours or the quality of the hours that are delivering the guest experience. This is around our opportunities as we look across in terms of wage-rate management, particularly around newer hires and what we're doing there, that's a pretty significant opportunity when you look at an organization of our scale. We look at the use, and Drew had this on one of the slides, about the selective use of professionals, people that are emerging to be a restaurant manager. And remember, half of our new managers come from our hourly ranks. And so using those folks, a little bit more of their skill and expertise to help run some shifts, so that managers can focus more of their attention on the guest and the guest experience. And so it's those type items that collectively, when we look at we call labor optimization, are the opportunities of the costs we're talking about. We're not talking about less server time, we're not talking about those type items that would make an impact on the guest experience.

Andrew H. Madsen

The headline for me there is we're going to run the business closer to the standard that we've identified as required to deliver a great experience more consistently in more restaurants. And we've invested in an organization to do that. So whether that's adding the managing director role, adding the full-time dedicated staffing scheduling, training manager, the full-time hourly professional role that Brad just mentioned, it's all about more consistently running the business to standard in more restaurants. For the exact reason you mentioned, we're very, very careful about not eroding the experience or the image of any our brands.

Nicole Miller Regan - Piper Jaffray Companies, Research Division

It's Nicole again with a follow-up. I don't -- not necessarily want to go back and debate that $0.30 to $0.34, mostly at the hourly level, but is it fair to make this assessment? My assessment would be you're in the businesses of human capital, ultimately, comes financial capital and you're just basically paying the hourly employees and it's bridging the gap to probably the market, otherwise, you're not going to have just structural issues and still a little bit -- but you're going to lose your best people if you don't do this, right?

Clarence Otis

Yes, well, it's a management incentive, so it's not the hourlies, but it's the restaurant managers, and general managers.

Nicole Miller Regan - Piper Jaffray Companies, Research Division

Store level. Store level versus the executive.

Clarence Otis

Store level. And that's why they have a floor, because of competitive reasons. We don't want to lose our best people in our tough years, so there's a floor to how low their annual bonuses are going to go. There's not that floor with the folks above them, for exactly that reason.

Nicole Miller Regan - Piper Jaffray Companies, Research Division

Right. Just want to make sure you're not losing people at the store level. Okay, on tempering the price, I'm surprised you wouldn't go to use a third party. I think it's understandable that you would engineer menus to set a different margin profile, but what about using a third party to understand where you could take price down and where you could take price up, so you don't leave anything on or off the table?

Andrew H. Madsen

So you're getting at how we take the pricing that we want to take? Yes, we've got an awful lot of work on that with more than one third party. And we've identified that there is opportunity for us to be a little -- to be guided by a more insight in terms of where the price elasticity is and isn't geographically and by brand in terms of where we take pricing, which is different from how we've done it historically. Maybe you want to...

C. Bradford Richmond

Yes. I would just say, in this digital age, we're able to collect more and more information, we've established a number of statistical relationships to a number of factors, so that the pricing that we can take can be more smarter. And so we have elasticity factors on many different items, so that as we take pricing, it's smarter pricing, and so that allows us to take less to deliver the same impact to the business. And when you're taking less, it's better for our guests in the restaurant. So we continue to get more robust and our analytics around that, and more information that's available, and so we'll applying more of that with our pricing as we go into the new fiscal year, but...

Nicole Miller Regan - Piper Jaffray Companies, Research Division

[Indiscernible]

Clarence Otis

No, it really hasn't. It hasn't hit the market yet as much as it will as we go forward from here. But we have engaged third-party analytical firms because I think you're right. I mean, across not just restaurants but a lot of retail, pricing has not been as structured as it ought to be, as insightful as it should be. So we've tended -- the headline would be, we've got different menu price tiers around the country, they tend to reflect our cost of doing business as opposed to what customers are able to afford. And so there are some places that are relatively low cost, where customers can afford more, and there's some places that are relatively high cost, where customers cannot afford the pricing tiers that we've got. So we've got to change those, and we've been doing the work to try to do that smartly.

C. Bradford Richmond

I would say, to your point, it's a constant evolution, but I think there's more of a step change in our analytics that will be applied as we move into the new fiscal year, is how I would look to that continuum.

Keith Siegner - Crédit Suisse AG, Research Division

This is Keith Siegner. Two questions. The first one, Brad, a not insignificant contributor to the bottom line EPS growth over the last decade has been a steady decline in your effective tax rate towards a pretty enviable level now. Beyond fiscal '14, as you get back to that new normal target, what is the headwind from tax rate, say, you were recovering back towards those levels? And if it is meaningful, have you considered as an offset to that, the possibility of a property opco structure?

C. Bradford Richmond

Yes. What I would say is that we invest a fair amount in tax planning. There are a number of opportunities that exist for a all-company-owned platform, and so we're able to take advantage of those. And so that does lead to a lower tax rate than typically, you see in our industry. And so a more normalized rate, with where we are right now is probably in that 27%, maybe 28% range, a little bit lower right now given the taxable earnings that we have versus the credits that we generate. I won't go into those planning activities, other than say, if I was looking at my long-term model, a tax rate I would use is somewhere between 26%, 28%, depending on the taxable earnings in that particular year.

Keith Siegner - Crédit Suisse AG, Research Division

The second question has to do with given the tough year for sales for the 2 largest concepts in particular, how many of the current stores are cash flow negative, if any? And when you look at this year's target for, I think on Friday's release, it said 105 net new units. What's the gross, and maybe, how many closures as an offset?

C. Bradford Richmond

Yes. And what I would say -- I won't go into great detail, but we only have 1 restaurant that's not cash flow positive. The base -- I think if you go back and look at that operating cash flow, that tells you just our base business is so strong, it's so big, it generates a lot of cash. That one new restaurant is a restaurant that's just maybe 2 years old now, relatively, what I'd call a greenfield project. And so I wouldn't want to close it because I think it has good dynamics. But cash flows of this business, as I've demonstrated, are pretty strong, pretty robust. So they're like I said, only one exception.

Clarence Otis

But I think the reason why it's only 1, is we do close a handful of restaurants a year and so...

C. Bradford Richmond

Yes. We talk net new restaurants, a portfolio of our size, it's like 4 to 8 restaurants a year that we close. So we talk net restaurants, not to be too confusing, but in our new unit CapEx at 6 to -- or let's say 5 to 8 years is what you'd look at going forward to take those lower restaurants out. And sometimes it's, like I mentioned, the rebuild or relocations. It's a great trade area to be in, traffic patterns have changed to whatever, or the retail focal point has moved a few blocks away from us. And so those are -- a lot of those closures, outright closures for poor performing restaurants, is like 1, 2, maybe 3 year is all, if that much. I mean that's the work that we do on the front end, the tools, the information we have to make strong site selections to avoid those, because those are very costly to get out of.

Robert M. Derrington - Northcoast Research

Drew, this is Bob Derrington, Northcoast Research. Looking at the tightened span of control for your -- at your store level, from the Directors going from 13 stores, the Managing Directors now have 3 to 5. Life as a manager at an Olive Garden or a Red Lobster probably has been relatively difficult in recent years. What can you tell us about the – you're clearly making an investment in their compensation, what can you tell us about the morale of the troops in the field? Are you investing this because you're seeing turnover creep up, or because the quality of the service level at your stores isn't as good as you'd like? What can we -- conclusion should we properly draw from this investment?

Andrew H. Madsen

Well, 2 separate questions, really. The reason that we went to this new organization structure is really, that our business has grown, our number of our restaurants has grown, and guests expect more. And so we really needed to look at spans of control and roles and role definitions and say that what we had before really was developed when we only had 400- or 500-unit business, and now as they're bigger, just doesn't work anymore. And second, we identified an opportunity inside the 4 walls of a restaurant with that staffing training manager just to really -- to do a much better, more consistent job. Now that's really what was driving our reorganization, just the opportunity to manage our scope and scale better and to execute better. In terms of morale, sales have been down, bonuses aren't as high, turnover is still substantially better than the industry, and that really is a testament to the loyalty that we've been able to develop over time, which is why we got the Fortune 100 Best Companies to Work For recognition that Clarence went through. But everyone wants to do better, everyone wants sales to be positive, everyone wants bonus to be at target. And that's why there's a lot of energy to embrace the changes that we've talked about, and to do the things that we need to do going forward.

Robert M. Derrington - Northcoast Research

Is this somewhat of a preemptive move to try and make sure that the turnover doesn't begin to climb?

Clarence Otis

No, I think as Drew said, it's more about trying to make sure that we can deliver at a high enough level to meet rising guest expectations. And so that's the critical piece of it, I think. I think the hourly frontline employees, I think morale is good. I mean, I think the Fortune recognition really simply reflects the survey of that group. They're dedicated. Brad talked about the higher average unit volume. That means they make more, the employees simply make more at our restaurants than they do elsewhere.

Herbert Bruce Thomson - Thompson, Siegel & Walmsley LLC

It's Tom Thomson with Thompson, Siegel. Brad, could you give us some detail on the changes in your healthcare plans that are going to drive that $0.05 to $0.06 in 2014? And then back on the incentive reset, if 60% to 70% of that is attributable to frontline management, the balance is due to senior management, but I thought I heard Clarence say that the board hadn't yet determined how those targets would be set. So how do you budget that at this point?

Clarence Otis

I would say, on the second question, the balance of that is management above the store level. So that includes financial analysts, that includes a pool of 1,000 people. So even above the restaurant level, it's a pretty broad pool. And so the board come -- we have to give the board a plan. I think Brad was giving you a framework, but ultimately, the board's going to look through that framework and make adjustments and that's why it's very preliminary, and more to come in June. I think on the healthcare side, it's premature to really talk about details for a lot of reasons. First of all, the rules aren't set yet, and secondly, we don't really know what the rates for next year are going to be, which is the biggest driver of healthcare costs, and so it's a very rough number at this point.

C. Bradford Richmond

Yes. The 2 things I'd add on that last point is there's a lot of individual choice that everyone's kind of guessing on. And to Clarence's point, they don't know what's going to cost, that their choices are, so there are some assumptions there. But also that we invest a fair amount today against healthcare, because we do look at an engagement factor with all of our employees, and so we offer insurance, everything from day 1 to your traditional PPO plans. And so we have some investment that we already make against that. So I'm really talking there, when I'm putting out really guestimates that's there with a lot of assumptions kind of trying to frame what that might be, knowing that it could change a lot as regulations get more finalized, they continue to evolve and as we learn more about the individual choice.

Herbert Bruce Thomson - Thompson, Siegel & Walmsley LLC

Based on what you know, do you think you've been conservative in making those estimates?

C. Bradford Richmond

It's my best guess.

Sara H. Senatore - Sanford C. Bernstein & Co., LLC., Research Division

Sarah Senatore again. I just wanted to follow up on also the unit growth from a margin standpoint. I think you've talked about leveraging G&A as the system gets bigger, but if I look back at the history of your G&A ratio, it's been pretty constant over the last 5 or 10 years even. So can you -- and I recognize that to some extent, in the last couple of years, maybe comps have come in a little bit light. But can you talk a bit about what gives you confidence now that G&A can -- you leverage that, I think it was something like 30 basis points going forward, and sort of what -- to what extent some of these cost savings are that you've talked about are in there?

Clarence Otis

Yes. I'll start and hand it off to Brad. But our support costs, as we think about them, are much bigger than the G&A line in the reported P&L. So all of these managers and managing directors that Drew talked about are indirect labor. But in our world, those are support costs. Those support costs in our business, I don't know, Brad, I got into trouble last time I said it, but it's something like 20% to 35%, you tell them exactly what...

C. Bradford Richmond

So we're leveraging a big number. It's in this world.

Clarence Otis

Yes, yes. It's not 5% or 6%. So that's where the accounting quite doesn't match up to. But it's all of those support costs, distribution costs, which are also in other line items like food costs, cost of goods. And so it's that whole bucket of things that gets leveraged in addition to marketing and the central office G&A that's shown in the reported line.

C. Bradford Richmond

Yes. And so if you just go back, a little bit of the math, all of our brands are 14% or better, most particularly, the ones that we're expanding are well above that. And so that already includes the marketing costs. Now marketing for Red Lobster, Olive Garden, we don't add more marketing as we expand those. They already have a national media plan with fixed number of weeks, all things being equal, that they do. And so that's an item that you leverage as well. So if you take that 14%, 17%, or better range, take out the marketing costs, which I detailed in the slide, that tells you the incremental margins they have. So it's in the high-teens, if not approaching 20% for some of the new restaurants. And so you're leveraging that against your EBIT returns, which on the year are very high single-digit. So incrementally, they're adding some each year. Now I also detailed, there's preopening costs and things like that as you wrap on those and the GAAP accounting for leases and things like that, that can distort that a little bit. But if we look at it over time, particular our G&A x new initiatives, we've talked about investing and growing the opportunities for future success, most of that cost is on the G&A line, and so that's investment in our future success. But when we look at core marketing expenses, core support costs, they're being leveraged with the new addition of restaurants.

Mitchell J. Speiser - The Buckingham Research Group Incorporated

Mitch Speiser, Buckingham Research. And I have a couple questions on the comps guidance, which is 1% to 2%; check, I think you said, up 1%; and flattish to up 1% on traffic. And just from a big picture standpoint, it seems tough to drive traffic with a higher ticket in this environment. I guess my question is first, on the check, can you give us a sense of what you're thinking on price and mix within the check? And with affordability seeming to be a key issue with the brands right now, just like to understand why wouldn't the focus maybe be on lowering the ticket and striving for traffic growth, maybe at a higher rate versus trying to get both components moving in the right direction?

Clarence Otis

Yes. I think you're looking at the average. And so the check for a lot of guests is going to be flat to down, depending on promotion and what they buy, what they don't buy. And so we're trying to be smart about check growth. But a lot of our guests will see flat to slightly down checks, depending on, again, promotions and what we're doing with the core menu. So a lot of folks are coming into Red Lobster's, 15 items under $15. So their experience is cheaper, and so we're trying to target the check to the guests that need the check relief. But there are a lot of guests that come in and they order the ultimate feast, which is still one of the highest preference items there at plus $20, and that may be 2% higher. So the average sort of mutes all of those differences.

C. Bradford Richmond

Yes. In fact, as mentioned earlier, a rough rule of thumb is 80%, 85% of the people that come into our restaurants are not buying the promoted items. And so whatever pricing we take x other mix changes, are going to be reflected there. And the affordability is coming, at least in the short term, largely through those promotional efforts.

Clarence Otis

And so if you think about the 3 groups of household income demos that Drew gave you, we're not trying to mute check for that 30%, 35%, that's north of $100,000 all that much. I mean, that's not our goal there. And sort of given where they buy, they're not likely to see that kind of check number. It may be different than some of the other income continuums -- other incomes on that continuum.

Mitchell J. Speiser - The Buckingham Research Group Incorporated

Just follow-up on that question. So the pricing then would be a little bit north of the 1% on average, is that what you're saying?

Clarence Otis

No, no. It's just the preference. So pricing may still be relatively low, but the pricing where these people eat is -- may be significant higher than here, where we may not take pricing at all.

C. Bradford Richmond

And that's back to the way we take pricing. So I think we mentioned this a minute ago, historically, we used to define our price regions based on our cost of operations, our labor cost in particular. And in the future, with this modeling that we've done, we're going to base more of our pricing decisions, based on ability to pay and price elasticity, which is what could lead to some people seeing more than 1%, some people seeing less.

Mitchell J. Speiser - The Buckingham Research Group Incorporated

Okay. And then just another one on the dividend, just wasn't quite clear, obviously, you're committed to the dividend where it is, and the payout is -- you'd like to get the 50%. But I mean, would you raise the dividend even at the payout, north of 60%, like it is today? Or are you talking about, down the road a few years from now, you would continue to raise the dividend?

C. Bradford Richmond

No. We're talking about raising the year consistently each year. We know the importance of doing that to the consumers, which will, as we are right now, lead us a little bit above that. And as we have a stronger performance, as we've done in the past, we'll continue to raise the dividends, but we'll probably also buyback some shares to keep our leverage ratios where we want them to be. We don't want to be paying down debt too much. We want to protect the investment grade credit profile. But you get to the point near where we would return capital through share repurchases after we're appropriately growing the dividends.

Matthew Stroud

Gentlemen, we have time for one more question. Paul, you wanted ask a question? All right, make it a good one, it's the last one.

Paul Westra - Cowen and Company, LLC, Research Division

Actually, I was looking more specific on your value message, why haven't you adopted, maybe a price pointed full meal bundling like your -- the success you saw in some of your bar and grills that moved up on the slides you showed us. Why is not that -- why didn't you adopt it, maybe, in a permanent level? And two, assuming that you have a – well not near term going to, it implies that your strategy now of kind of mass customization of messages to customers who maybe want that type of deal, you can get to them through your social media and not give it away to people who may not want it. How do you give us confidence that you can give such a wide array of, I guess, marketing and opportunities to different sets of customers?

Clarence Otis

I may not understand your question on bundling, but we have added a 3-course meal for $12.95 to the Olive Garden menu every day. We've added a similar 4-course meal to the Red Lobster menu every day, which is a broad -- obviously a broad-based messaging that you can come into these restaurants and find something that's affordable and highly satisfying. And as I mentioned, we are getting more aggressive in the digital space in the near term, where we can be a bit more targeted. But that's one of the biggest reasons that we want to improve our analytics capability, why we want to build this IT platform in a way that allows us to own the guest data and understand their behavior, so that we can be much more targeted. That's not going to be the next quarter or 2, that's going to be more over time.

Matthew Stroud

Thank you very much, Clarence, Drew, Brad, thank you. And of course, Clarence, Drew and Brad will be here tomorrow as well. We'll get Clarence and Drew back up on the podium for some questions at the end of tomorrow's session. I just want to go through some logistics. Tonight, those of you who are going with us to dinner, the buses will leave from the convention center entrance, which is just out here to the right, and a quick left, promptly at 6:15. For those of you that are driving yourselves, we do have some maps and directions, if you want to go back to the check in desk, you can grab a map or directions to get to the restaurant there. For those of you who are not joining us tonight, enjoy your evening. We hope to see you tomorrow morning at 8:00, when we start again. So if you have any questions, though, let us know. And thank you very much for being here today.

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