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Brinker International, Inc. (NYSE:EAT)

F1Q10 (Qtr End 09/23/09) Earnings Call Transcript

October 20, 2009 10:00 am ET

Executives

Marie Perry -- IR

Doug Brooks -- Chairman, President and CEO

Todd Diener -- President, Chili's Grill & Bar and On The Border Mexican Grill & Cantina

Wyman Roberts -- Chief Marketing Officer and President, Maggiano's Little Italy

Chuck Sonsteby -- EVP and CFO

Analysts

Steven Kron -- Goldman Sachs

John Glass -- Morgan Stanley

Bryan Elliott -- Raymond James

David Palmer - UBS Securities

Jeffery Bernstein -- Barclays Capital

Howard Payne [ph]

Joe Buckley -- BAS-Merrill Lynch

Brad Ludington -- KeyBanc Capital Markets

Steve West -- Stifel Nicolaus

Destin Tompkins -- Morgan Keegan & Co.

Sara Senatore -- Sanford Bernstein

Jeff Omohundro -- Wells Fargo Securities

Nicole Miller-Regan -- Piper Jaffray

Thomas Ford [ph] – Telsey Advisory Group

Chris O'Cull -- SunTrust Robinson Humphrey

Jack Barr [ph] – Oppenheimer & Co.

Operator

Good morning ladies and gentlemen, and welcome to the Brinker International first quarter 2010 earnings release. At this time, all participants have been placed on a listen-only mode. The floor will be open for your questions and comments following the presentation.

It is now my pleasure to turn the floor over to your host, Marie Perry. Ma'am the floor is yours.

Marie Perry

Thank you, Mandy. Good morning everyone and welcome to the Brinker International first quarter fiscal 2010 earnings call, which is also being broadcast live over the Internet. Today, with us from management are Doug Brooks, Chairman and Chief Executive Officer; Chuck Sonsteby, Chief Financial Officer; Todd Diener, President of Chili's Grill & Bar and On The Border Grill & Cantina; Wyman Roberts, Chief Marketing Officer and President of Maggiano's Little Italy; Guy Constant, Senior Vice President of Corporate and Finance.

Before turning over the call, let me quickly remind you of our Safe Harbor regarding forward-looking statements. During our management comments and in our responses to your questions, certain items may be discussed which are not entirely based on historical facts. Any such items should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

All such statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Such risks and uncertainties include factors more completely described in this morning's press release and the company's filings with the SEC.

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

Now, I will turn the call over to Doug.

Doug Brooks

Thank you, Marie. Good morning and thanks for joining us on the call. As announced today, Brinker delivered solid first quarter results reflecting the immediate results of some shorter term steps to shore up the top line of our business, while also including the impact of some investments in what we believe will be a longer term revitalization of the Chili's brand.

This quarter provided evidence we can create a kind of compelling promotion that can stimulate sales, but also confirms our belief we need to invest in those ideas that will provide more sustainable longer term improvements to the business.

The economic environment continues to challenge guests and companies alike. There remains uncertainty around when a sustained improvement in the economy may occur and discounting is still prevalent in the casual dining space. However, we are poised to meet these challenges head-on and are determined to make the necessary investments to propel the business forward.

In the first quarter, we tried some new promotions. And as you will hear from Todd, Wyman, and Chuck we had some success. Traction was gained in rebuilding the top line, including a sharp reversal in the negative sales trends we saw in early July. However, our work on the top line has not done and the tactics employed while effective in driving sales also required the reinvestment of some of our most recent margin gains to create a more compelling value offering for our guests and may require us to do so again in the coming months. However, this remains a near term tactic that will provide a bridge to a longer term, more sustainable and profitable strategy for the future.

Our financial strength is allowing us to invest now during the time many are deferring discretionary expenses. We are striking a balance of moving the most impactful strategic priorities forward even in the midst of a challenging environment, while deferring those that the guests do not value as highly, to ensure greater stability of our long term health.

Brinker is acutely focused on driving innovation in our food, refining our service model to deliver a flawless gust experience, complemented with an atmosphere that accentuates the experience. These are business imperatives that ultimately work in unison to create a unique experience that is unparalleled by and differentiated from the competition. This sustained food service atmosphere and business platform will not only serve to separate us from our casual dining competitors but also from the growing fast casual industry.

Our signature hospitality style, complemented with superior food quality and flavor profiles at a variety of price points, will deliver on value in every aspect and create a compelling proposition or drive our guests to choose Brinker brands and to do so with more frequency.

So we must give guests clear reasons to choose to eat at our restaurants as opposed to those of our competitors and it starts with the food. At Chili's, we want to regain the ownership of the ribs and burger category, while also delivering compelling offerings in our salad and sandwich platforms and continue to innovate in other categories across the entire menu. We are going back to our roots and focusing first on those core menu items that our guests know us for and love us for, and capitalizing on what we have always done best, delivering great hospitality and great food at a great value.

Maintaining a competitive position on a highly challenging environment requires discipline management, a persistent focus on results, ongoing flexibility, and boundless creativity. I believe the people we have in the business today are the right people to drive our vision. Harnessing talent in new ways, cultivating new and inventive ideas, and placing accountability for managing the business in everyone’s hands is how we are going to win.

We are investing in our people at all levels and empowering every team member to own their piece of the guest experience. Our workforce is united behind a common goal and is going after it with unwavering tenacity. We are bettering the dining experience with a sharp focus on providing the ultimate guest experience at all of our restaurants.

Our investment in people extends beyond our team members and guest in the restaurants, by touching the lives of those in our communities through charitable support, community outreach, and volunteerism. Our company’s investment back into our communities is a big part of our team members’ lives and a big reason why they come to work at Brinker and why they stay at Brinker.

This time, September marked the seventh annual Create a Pepper to Fight Childhood Cancer campaign for St. Jude Children's Research Hospital. Once again, both Chili's team members and guests have shown true generosity in tough times by pushing us to 30 million towards our ultimate goal of raising $50 million for the Chili's care center at St. Jude Children's Hospital. So I would like to thank our team members, our guests, and St. Jude supporters from all over the country for their continued support of this great cause.

In addition, our On The Border team members are again partnering to raise money for the Susan G. Komen Foundation as part of its annual Fiesta for the Cure. The month of October will future events in which On The Border teammates can participate to raise money for this very worthwhile cause as well as support the fight against the disease that has touched many not only in the families of our team members, but the families of our guests as well. So I want to thank Todd and his entire Chili's and On The Border teams for a job well done and for fostering a culture of giving back.

We continue to extend our presence both domestically and around the globe as franchisees opened 12 new restaurants, five of which were international. We continue to believe our brands are well positioned to capitalize on the development of a growing middle class that is currently under-served in many parts of the world. Domestic franchisees continue to see value in our brands and are building in a financially prudent manner, taking advantage of opportunities to grow in markets that are under-served in the casual dining space. However, with the continued economic downturn and difficult credit environment, our franchisees are finding it difficult to access capital levels available to them historically.

Additionally, the availability of real estate is considerably tighter than it was just a short while ago. As such, our overall franchise development for the year has been adjusted down to a range of 44 to 54 restaurants from 51 to 61. It is a time of transition and optimism with many long-term strategies evolving and the brands embarking on some new journeys. As such, I asked Todd and Wyman to join us again on this call to share firsthand the initiatives their teams are beginning to implement. The collective power of the actions we are taking will have a long-lasting impact in evolving our business model, allowing success in a variety of economic environments.

As our brands solidify their differentiated position, we will remain a dominant competitor in the industry both now and in the years to come.

Let me turn it over now to Todd Diener.

Todd Diener

Thanks, Doug, and good morning everyone. The first quarter was a busy and exciting time for our management teams and hourly team members. Both the 3 Courses promotion and the Chili's Perfect Play were new promotions launched across the entire Chili's system. At the same time, culinary was putting the finishing touches on our new and improved Big Mouth Burgers and the enhancements to our rib smoking procedures, while continuing to work on other menu categories. Additionally, we gathered our general managers, multiunit area directors, and franchisees here in Dallas along with many of the restaurant support center leadership of both of our brands -- for brands of Chili's and On The Border -- for an introduction to the exciting new changes on our menus, a reinforcement of the responsibilities of each of our team members to deliver a great guest experience and a refocus on our values, beliefs, and on our accountability for results that are part of the company’s heritage, as taught to us by Norman Brinker.

Food and beverage excellence is an ongoing strategy for Brinker, and our goal is satisfying and delighting guests with crave-able menu items that align with our brands' unique positioning has received particularly strong attention over the past few weeks and months. This attention is focused on the changes to our current menu, which has been innovated not only through the introducing of new items, but by featuring improved signature dishes and emphasizing food at a great value.

We started with our signature must win categories that are at the cornerstone of our business. Those items that touch the greatest number of our guests have been and are part of our brand heritage that our guests have told us would make them visit us more often. So, when you walk into a Chili's today what you will find is we are serving 100% never-frozen USDA Choice ground chuck for our burgers, cooked to order and built with fresh toppings of your choice. Our legendary baby back ribs have also been enhanced by improving our smoking procedures, going lower and slower and changing from mesquite to pecan wood. These changes enable us to provide our guests with ribs that now fall off the bone and are even more flavorful. You can even try them with our new sweet and tangy Shiner Bock barbecue sauce, another one of those bold flavors for which only Chili's is known.

And lastly, a great center of the plate item deserves to be complemented with crave-able side dishes, which is often those great-tasting Chili's french fries. So, we have made improvements in the kitchen to ensure that the fries are consistently delivered to the table hot and fresh. While burgers and ribs mark the beginning of the transformation of the menu, there are new items in other categories of the menu that will come to our restaurants very soon.

Food is just one platform to evolving our business. To truly differentiate our brands from the competitors we must have each of three elements -- food, service, and atmosphere, working in concert to create a unique dining experience that is signature to our brands. By connecting with our guests and being focused on hospitality, our team members can be equipped to provide a thoughtful and customized service our guests expect, whether it be the most basic of service needs, proper pace, or special requests. So at a time when some competitors are deferring expenses to preserve short-term profitability and cash flow we are proactively investing in our people. It is essential that our team members feel supported by leadership through hands-on mentoring and training to ensure that they are delivering a superior experience to our guests.

However, hospitality can be abstract and tough to articulate clearly to teammates. So over the course of the last several months, we refined a tactical approach to delivering hospitality, clearly defining what actions are most important to the guests. Specific examples of behaviors and actions were provided to team members by job function to ensure consistent and clear message. The goal is to provide team members clarity on what to do, not to give them more to do. Hospitality builds guest loyalty, as evidenced by the ongoing feedback that we gather in our guest satisfaction surveys. As we deliver an outstanding guest experience, we engage and we retain the loyal team members who enable us to deliver on our hospitality promise. In fact, it is the most engaged and loyal team members that deliver the best guest experiences. So it is engagement that we are striving to build. With our hourly team turnover at Chili's reaching levels well below our recent historic norms, now more than ever we are in a position to deliver the signature hospitality experience most consistently.

Additionally, reduced new restaurant development along with lower turnover trends translates to more continuity of management teams in our restaurants. Besides the explicit benefit of having lower manager training and relocation costs and other turnover-related expenses, a more tenured team also operates a restaurant more efficiently and better understands our unique style of hospitality, and they have the opportunity to get to know their guests who visit their restaurants most frequently. Hospitality and improving our service platform is another key way that we can create a distinct difference from our fast-casual peers that lack the attentive guest-centric experience. By taking cues from the guests, we can assure that we deliver a customized experience that meets their needs in a way that is distinct from fast-casual as well as others in the casual dining space.

Restaurant atmosphere represents the unique personality of the brand and offers a worm and welcoming setting for our guests. Atmosphere is not just the physical elements in the restaurants, but also the energy and the style that come together to deliver the distinct personality of the brand.

So switching gears to On The Border; On The Border's Fresh Look menu continues to generate excitement and is resonating well with guests and delivering more profitability. Since the rollout of the new menu and implementation of our improved service platform, guest satisfaction scores and operating margins have increased considerably. In fact, the lessons learned at On The Border from these rollouts have been incorporated into the work currently underway at Chili's. Just another example of how combining the leadership of these two brands facilitates knowledge sharing to the benefit of both of them. Additionally, On The Border continues to unlock the power of the brand with a further refinement of its marketing strategy by maximizing reach and impact with just the right balance of local television and alternative marketing channels. While strategies currently in place at On The Border are performing well. The team is focused on refining these strategies to drive even better results.

Now Wyman will provide you an opportunity -- I mean, provide you an update on marketing and culinary initiatives of the brands.

Wyman?

Wyman Roberts

Thank you, Todd. I am excited about the progress Brinker brands are making on the marketing and culinary fronts and the traction we are gaining from these initiatives despite the difficult operating environment. We continue to deepen our understanding of the guests' need for value during these challenging times and we have been focused on innovative menu offerings that deliver great food at a desired great value. The recent marketing promotions were designed in a manner that balances the current competitive environment with the over-reaching goal of driving profitable long term guest traffic. The 3 Course promotion that ran at Chili's in the first quarter responded in both categories. It provided a compelling offer, as evidenced by significant change in traffic trends which exceeded the industry benchmark as measured by KNAPP-TRACK, while driving incremental profit dollars in the company -- however, at an expensive margin. Said more plainly, guest traffic increase was sufficient to offset margin dollars lost due to the cost structure of the promotion.

However, the pause of the promotion during September was planned and necessary. The 3 Course promotion was a learning process for team members both in the heart of the house and those serving the guests, and lessons learned needed to be shared and leveraged. We wanted an opportunity to evaluate how guests were using the promotion; make adjustments that didn’t significantly impact their positive experience but enhanced our profitability when we reintroduced. Most importantly, we used the time to train our teammates on new burger and rib procedures and adjusted the promotion to drive guest preference to our burgers and ribs. These things have been accomplished. And as you have seen, the 3 Course promotion is back. But this time, the 3 Course promotion really has a dual purpose. It's not only a compelling value proposition, but it provides a perfect vehicle to introduce guests to the improvements to our core menu items of burgers and ribs. It has many of the same attributes that reversed sales trends in mid July, with changes to (inaudible) in the heart of the house while striking a balance between plentiful options for the guests and attractive food costs. As guests are greeted at the door, they will be reminded of the promotion. But once seated at the table, the attention shifts to the true star of the show, the food.

Servers take time to explain the new burgers and ribs and the in-restaurant merchandising serve to further enforce the improvements to the food. We have even incorporated the improved burgers and ribs into our advertising and brought back a familiar favorite with the baby back rib jingle. It is the coordinated messaging of the advertising, promotional materials, and in-restaurant experience that enhance the power of the promotion and will create the initial trial and eventual reinforcement loyalty to the improved burgers, ribs, and fries. So, the first phase of our strategy, the improvements to burgers and ribs, have been introduced. Soon you will see the next phase, focused around tacos, including a mini taco offering where guests can choose from a selection of crispy shrimp, pulled pork, pecan-smoked chicken, and spicy beef tacos.

Let me emphasize, this is a start of a process, one that has many faces and no ultimate endpoint. We will continually challenge the menu in every category to ensure we are serving the most flavorful and crave-able items with an eye towards value for the guest and reduce complexity for our heart of the house. Ultimately, we expect the overall Chili's menu will have fewer items with each item personifying the brand's culinary promise of layers of bold flavors. We will make choices throughout the menu enhancement process to help maintain our cost neutrality over the long term.

At Maggiano's, Today and Tomorrow or T&T promotion proved successful on a couple of fronts. It leveraged the brand's reputation for generous portions and quality food; and the promotion enabled guests to choose from a selection of seven of our chef's favorite pastas and baked specialties to enjoy in the dining room and take another selection home with them for free. The message was conveyed to guests through a variety of alternative marketing channels, including e-mail, which proved to be both effective and efficient. During the promotion, Maggiano's traffic trends improved in the mid single digits from previous levels.

There is no doubt this environment has increased the prevalence of discounting. And yes, we have stepped into this game with our most recent promotion. But we believe by maintaining the integrity of the price point with higher absolute-dollar promotions we minimize the guests' likelihood of becoming accustomed to these tactics. The pathway from discounting is providing compelling reasons outside the price point to choose a Brinker brand -- namely, an experience that is unmatched by any competitor. We will do this through innovative food, flawless service, and a welcoming atmosphere that complements without intruding on the experience. The investments in these points of emphasis are the path away from discounting into an industry-leading business model.

Now I'd like to turn it over to Chuck for a discussion of the financial highlights of the quarter.

Chuck Sonsteby

Thanks, Wyman, and good morning. EPS before special items is $0.17; represents a solid rebound for the quarter, reflecting traction gained on top line sales from our marketing promotions as well as cost containment in a number of areas with varying degrees of sustainability. Expected investments made in the first quarter primarily boosted short term initiatives, while we worked on actions intended to extend our long terms strategies, such as an improved menu that emphasizes the bold flavors for which Chili's is known.

As we steadily put into action improvements focused around food and service, we are utilizing some of the margin gains we’ve experienced over the past 12 months to drive sustainable sales growth within our existing restaurant base. These investments will be most noticeable in the short term, when some one-time costs hit the operating statement as we lay the foundation for an improved gust experience. So we maintain our belief that the business will face some headwinds in the near term that will ease and improve in the back half of the year.

The uncertain economic environment continues to make guests cautious on spending, and they are inclined to manage discretionary expenses. As such, the casual dining companies are intensely competing for their fair share of the guest pocketbook with strong value messages.

During the first quarter, all three of our brands focused their marketing efforts on delivering compelling price value offerings for our guest with great success. During the quarter Chili's, On The Border, and Maggiano's comp sales outpaced the KNAPP-TRACK casual dining industry benchmark. And on a two year basis, Chili's gap to KNAPP-TRACK was even greater. So in the midst of this competitive environment, Brinker brands are outpacing the competitors while keeping focus on making progress on our longer term strategies.

So let's turn to our results and review the quarter. All comparable year-over-year numbers in today's discussion of results will exclude Macaroni Grill from prior year, for an apples-to-apples comparison. Of course this is different from what was presented in the press release, where prior year numbers still reflect the results of Macaroni Grill as required by GAAP. Our majority interest in Macaroni Grill was sold in the second quarter of fiscal 2009 and a reconciliation of our consolidated income statement is provided on our Web site.

In the first quarter revenues decreased $72.7 million or 8.5% to $778 million. This was comprised of a same restaurant sales decline of 6% as well as a capacity decrease of nearly 5% from having 46 fewer restaurants versus the same quarter last year.

Franchise royalties and fees were $15.8 million for the quarter, which was nearly flat to prior year. Cost of sales decreased 10 basis points to 28.2% in the first quarter of fiscal 2010. We continue to see a sequential easing of price inflation across our basket of commodities, which we expect to continue throughout fiscal 2010.

Operational changes made in the kitchen and improvements in actual versus theoretical food costs implemented in late fiscal 2009 also yielded benefits to cost of sales. However, these savings were mitigated somewhat by the margin impact of the 3 Course promotion and Maggiano's T&T promotion. Cost of sales was further helped by menu price increases on a year over year basis. Despite the fact that margins are impacted somewhat by the 3 Course promotion, it does provide an effective way to introduce guests to the improved burgers and ribs and as expected to increase operating income dollars versus our prior promotion.

You heard us talk earlier today that burgers and ribs are just the start of our culinary journey which will ultimately touch a significant part of the Chili's menu. During this process, the previously mentioned reinvestment of our recent margin improvements will be required. However, we have been able to opportunistically offset most of these costs in several ways, including removal of items that do not clearly reflect the personality of the brand or represent complexity disproportionate to its guest demand and ultimate profitability. And of course we believe the traction we will gain from these menu enhancements will ultimately deliver better earnings for Brinker as our guests become more familiar with the new offerings. As Wyman mentioned, the next phase of our menu enhancements will be in restaurants soon with subsequent phases continuing in very short order. Restaurant expense increased 40 basis points as a percent of revenues to 58.5% in the first quarter of fiscal 2010. The increase is primarily due to sale deleverage and an increase in labor expense resulting from marginal wage rate inflation created by the minimum wage increase, as well as a decrease in productivity due to 3 Course promotion and the initial rollout of new cooking and kitchen procedures for ribs and burgers. These headwinds were somewhat offset by a decrease in utilities on a year-over-year basis as well as benefits derived from fewer company-owned restaurant openings.

As the next phases of the menu enhancements start to roll into the system, expect to see headwinds of approximately $0.01 to $0.02 of one-time investment costs for things such training, small pieces of equipment needed to efficiently produce certain products, and other smaller items utilized in the preparation or delivery of the new menu items.

Depreciation and amortization expense as a percentage of revenues increased 20 basis points to 5% for the quarter, but decreased in total absolute dollars by $2.3 million. The decrease is due to fewer restaurants on a year over year basis. G&A expenses decrease $2.4 million on a year over year basis to $35.9 million for the first quarter of fiscal 2010, but increased as a percent of revenues by 10 basis points to 4.6%. We continue to recognize efficiencies from the restructuring activities that took place in the second half of fiscal year 2009 as well as the income related to transitional services provided to Macaroni Grill. These benefits were slightly offset by higher insurance costs. As always, Brinker will closely manage these costs to strike the delicate balance between productivity and long-term health of the company.

Interest expense decreased by $2.5 million from the prior year to $6.9 million in the first quarter due to lower interest rates and lower average borrowings. Other net improved by $1 million in the first quarter of fiscal 2010 due to some sublease income related to the sale of Macaroni Grill.

The tax rate after adjustments for special items was 27.4% in the first quarter compared to 27.9% in the first quarter of fiscal 2009. The tax rate benefit for the quarter was due to leverage on FICA tax tip credits.

Generating strong cash flows have long been a hallmark for Brinker, driven by our stable cash flow from operations and further enhanced by management's judicious use of CapEx. In fact, for fiscal 2010, we expect to markedly improve free cash flow versus last year, further expanding our financial flexibility.

As previously stated, near-term cash flows are earmarked to reduce the company's overall leverage, helping to strengthen our liquidity position in a challenging macroeconomic environment and provide additional available capital to implement any necessary initiatives for the existing business.

As evidence of our strong cash flows and commitment to reduce leverage, we recently elected to pay down $50 million on the term loan by reducing the outstanding term loan balance to $340 million. Brinker continues to maintain sufficient cash reserves; and cash from operations should allow for further debt reduction when warranted. While the economic environment is uncertain, Brinker's cash flow is growing, our strategic vision is clear, and our commitment to transforming the business model is unwavering. As you know, our goal is to drive profitable guest counts over the long term, and this will include investments in the business that will more clearly and permanently differentiate our positioning versus our peers.

Our strong balance sheet provides the financial flexibility to allow us to take the time and make this reinvestment in our core equities -- flavorful food with an unparalleled hospitality executed flawlessly to the guest. While evidence of a consumer recovery is not yet apparent, the work that is currently underway here at Brinker will ultimately result in a superior business model that positions our brands for accelerated profitability as our country emerges from this current downturn.

And now, I'd like to turn the call back over to Mandy to open the line for questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question coming from Steven Kron. Please announce your affiliation and then pose your question.

Steven Kron -- Goldman Sachs

Hi, thanks. Goldman Sachs. I guess first to start off with -- on the sales front. Can you talk -- get a little bit more granular as to how the quarter shook out from a sales perspective, maybe August and September, compared to what you shared the first few weeks of July on your last call? And maybe you can comment on the trends to date in October, given that you have now re-launched this promotion that seemed to be so successful.

Chuck Sonsteby

Well, Steven, if we went down period by period in the first quarter, July was down 8.8% for Brinker; August was down 3.1%; and September was down 5.4%. So we did see some recovery from July into August. And then we got off the 3C and went to a more full-price promotion and gave back a little bit of that same-store sales gain. And as to October, I really hate to make any comment just because -- rather not talk about that.

Steven Kron -- Goldman Sachs

Can you talk about the changes clearly a little bit different from a food perspective on this newer promotion. What do the margins look like in the reintroduction versus perhaps what they look like the last time around?

Chuck Sonsteby

Well, we are trying to get a little bit smarter after having the experience of going through it one time. So we are working hard on getting the labor back in line. This is the second time our operations team has had a chance to go through this promotion. So that replication is going to help them a little bit more trying to gain that back. So we would anticipate both some changes to the menu and also some labor efficiencies will help us a little bit more in terms of profitability this time around.

Steven Kron -- Goldman Sachs

Okay, so it wouldn't require the same level of traffic lift per se to get the margin dollars that you seek to achieve?

Chuck Sonsteby

It will not require that. But I think what we will need is somewhere between mid-single to low single-digit declines to kind of hit our expectation. And Todd, is there anything --?

Todd Diener

Hi, Steve, this is Todd. One of the other things I want to comment on the change in items that are being offered in 3C2, as we're calling it, we also took advantage of spreading the items that hit the kitchen so that one particular station doesn't get an overabundance of orders coming in. So while still having a very broad and very appealing offering to our guest across the 3C offerings, it did help us execute better or it's currently helping us execute better by not having so many things going to one particular station. And it's all about muscle memory as well. As we get more reps under our belt and our teammates in the heart of the house and in the front of the house, in terms of understanding how to pace 3 Courses, we are getting much more efficient and better at executing it overall.

Steven Kron -- Goldman Sachs

Okay, and then just lastly, Chuck, you talked about the commodity basket. In the release you mentioned unfavorable year over year commodity trends. It seems as though in your prepared remarks you are talking about going forward things will continue to ease for you. Do you anticipate in the next couple of quarters that you actually year over year turn favorable from a commodity basket? We're hearing obviously from a lot of others out there actually seeing deflation on the food line. It doesn't seem like you are there yet, though.

Chuck Sonsteby

Marie, you want to take that one?

Marie Perry

Sure. We are expecting to see deflation really in the back half of the year. So when we look at our projections, which includes the favorable market trends, our commodity basket -- literally for the entire year we are expecting it to be flat to slightly favorable. And as the commodity prices decrease throughout our fiscal 2010 we will see a decrease in commodity inflation in the first half of the year, but then in the back half of the year actually see deflation.

Chuck Sonsteby

Steven, one of the things maybe I can help a little bit with that is we're on a chicken contract that has some escalators related to some soybean prices and also oil. But those are fixed against last year’s prices. So if you were to look at our chicken price that we're locked into right now, those escalators probably put us above market. And once we roll off that contract, we get toward the end of this fiscal year, we will start to see some benefit. Or excuse me, once we get to the end of the calendar year we will start to see some benefit on chicken. But that’s really why we haven’t seen the declines thus far in this quarter from chicken prices.

Marie Perry

Of the items that we contract in December, a significant number will actually come due for renegotiation.

Steven Kron -- Goldman Sachs

Okay. Thank you.

Operator

Thank you. Our next question is from John Glass, please announce your affiliation and then pose your question.

John Glass -- Morgan Stanley

Just first as a follow-up, I think last quarter you talked about food costs for the year being 27.5%, is that still your view?

Chuck Sonsteby

Depending on what promotional activities we choose to put in place for the balance of the fiscal year, John, yes that is pretty much our estimate.

John Glass -- Morgan Stanley

In other words, it has not changed?

Chuck Sonsteby

We are pretty comfortable with that number.

John Glass -- Morgan Stanley

Got you. And then Chuck, you talked about a couple of items hitting the P&L, $0.01 or $0.02, is that all in the second quarter and can you just go back or does that go into the back half as well? It sounds like there is some reinvestment just more broadly in the business right now and maybe you are at the phase where you have cut and now you have to put either labor or some G&A or something back into the business, is that a fair statement?

Chuck Sonsteby

That is not a fair statement. I do not think it is really that we cut and we’ve now got to put it back. I think the choices, we are trying to upgrade some of the menu items that are on our offerings and the rollout of those may take additional equipment, the rollout of those may take additional training and so we will have those costs primarily in the second quarter which we anticipated and then we will see a little bit of it in Q3 also. But again, we believe that that is part of the expense of rolling out some great new items that we hope and think will drive guest traffic.

John Glass -- Morgan Stanley

And then last question is how do you envision exiting this promotional period? Restaurants have historically, when they have been more promotional, have this dilemma of how they exit it, whether they just go cold turkey and see a drop in traffic or wean themselves from it. How do you envision getting away from being more promotional without damaging traffic?

Chuck Sonsteby

Wyman, you want to take that one?

Wyman Roberts

Sure. It is all about giving them another more compelling reason to come in and that is what we are focused on with the changes that we are going to make to the base menu, and that is really the strategy, is to give them other reasons – the guests other reasons to come in and eat with us besides the promotional value that the 3 Course promotion provides. So as we aggressively upgrade our food, we think that is going to be the key and how we actually introduce that food to them may or may not be linked to a promotion but it definitely would not have to be linked to a promotional offer like the 3 Course. So there is the foundational issue of just getting better and more compelling food out there that will drive that increased traffic that we are currently relying on promotion for the most part.

John Glass -- Morgan Stanley

Is there a specific end date right now for the 3 Course promotion?

Wyman Roberts

Well there is but we do not share our marketing calendars so stay tuned.

John Glass -- Morgan Stanley

Got you. Thank you.

Operator

Thank you. Our next question is from Bryan Elliott. Please announce your affiliation and then pose your question.

Bryan Elliott -- Raymond James

Good morning, Raymond James. Just a couple of clarifications, really. First, on the CapEx side, have -- given no units now explicit for this year, the last CapEx guidance was $85 million. Would that come down a bit, give that?

Chuck Sonsteby

No that was really baked into our estimates the whole time, Bryan.

Bryan Elliott -- Raymond James

Okay, all right. And we are going to see most of the perspective and that is meant for kitchen equipment to support the newer items that you have been talking about flow through the income statement and not be capitalized, right?

Chuck Sonsteby

Yes, we are talking about small costs there. We are not talking about anything that is that expensive. We have had some things that cost $175 apiece, and things that are well below our capitalization limits, then those would go through the income statement.

Bryan Elliott -- Raymond James

Okay. And on the balance sheet you gave us, could you break out cash and how much of it is sequestered for the captive insurance?

Marie Perry

Absolutely. We actually as you know, Bryan, actually for the first quarter we ended with a $134 million in cash, of that $75 million is what we really call cash reserve with the remainder being either cash in transit or to your point what we have for our captive insurance.

Bryan Elliott -- Raymond James

Last clarification from me, the lack of explicit guidance in the press release, I think there is some uncertainty out there about what that means, not repeating it means it has not changed or has it been suspended and can you give us a sort of a policy statement for future reference.

Chuck Sonsteby

Thanks for giving us that opportunity, Bryan. I think really what we wanted to move to is we will give an annual guidance at the start of the year and kind of go from there, and we have talked about what we think our upcoming quarter’s marketing strategies will be. We have got a pretty good idea today of what we talked about on cost of sales so we would anticipate that folks would just derive their estimates off of that information.

Bryan Elliott -- Raymond James

So I guess I am still confused and that means that --

Chuck Sonsteby

We are not going to update guidance on a quarterly basis.

Bryan Elliott -- Raymond James

So that means it is suspended or the $1.15 to $1.30 is still a good guidance number or we do not have any guidance except for the line by line information.

Chuck Sonsteby

I would say that the second piece would be accurate.

Bryan Elliott -- Raymond James

Alright. Thank you.

Chuck Sonsteby

Good Bryan.

Operator

Thank you. Our next question is from David Palmer. Please announce your affiliation and then pose your question.

David Palmer - UBS Securities

Hi guys, UBS. This question is for Wyman or Todd. I wonder if you think and this is a theoretical question -- but such a price oriented menu, as the 3 Courses $20 menu could or should be a permanent part of casual dining much like we saw everyday low-price menus in fast food work without cheapening the brand. My thought is maybe it could be something like the Guiltless Grill that is a boxed part of the menu that is always available for that type of user looking for that type of occasion making it permanent gives the reassuring feeling that the value is there without you having to scream it all the time on your advertising. Relatively I wonder if you think Chili’s and the casual dining type scale advertising budgets allow you to kind of play two tiers like supporting a value tier like this and the premium food news at the same time. And is that a particularly vexing issue? Thanks.

Wyman Roberts

This is Wyman. So it is an interesting idea and it is always an option for us to restructure the menu and consider other ways to provide options for guests. Obviously we are doing this as a promotion now and we do not anticipate it becoming a part of the menu in the near term but we will adjust according to the marketplace and to the competitive and to the consumers needs. With regard to multiple messaging and our ability with our marketing leverage to kind of target different groups that is something we currently do. We do it against dayparts with lunch and dinner messages. We also have the opportunity to do that – again as you talked about we could choose to message different parts of the dinner dining occasion, we do not do that currently but it is an option and that is one of the nice things about a brand like Chili’s that has the leverage that we have and the marketing clout that we have that kind of helps us competitively relative to the other folks in the category. So it is always an option, not one we are currently working on the way you have lined it up. But we do use it really more from a daypart standpoint.

Todd Diener

Hi David, this is Todd. The only other thing I may add to that is that the Chili’s menu has broad enough that we have compelling value throughout the entire menu already from sandwiches and burgers and salads to the lunch items that we have with our bottomless soup, salad and chips and we have plenty there from an offering. So what the future looks like, TBD I guess at this point.

David Palmer -- UBS Securities

Thank you.

Operator

Thank you. Our next question is from Jeffery Bernstein. Please announce your affiliation and then pose your question.

Jeffery Bernstein -- Barclays Capital

Thanks, Barclays Capital. Two questions. One just more of a clarification on the comp trends. In terms of the color you gave by month, if I remember correctly, for the most of July I think you said you were down low double digits and then had improved to down low-to-mid single digits in August, and it looks like based on what you gave from a Brinker standpoint down 8.8% in July improved meaningfully in August, and it sounds like you removed the 3 for $20 promotion and it slipped a couple of hundred basis points in September. Is it safe to assume now that you have returned to the kind of 3 for $20 promotion and I know those initial comments were around truing up the top line and stimulating sales but there still has been some benefit to the return to the 3 for $20 versus where you were in September when you were more full priced?

Chuck Sonsteby

We really do not want to talk too much about October sales not because we are worried about them just because we hate to get too far in advance of talking about just what has happened so far this period. But your restatement of what happened in July and August and September is accurate. We did see a nice rebound when we put 3 C in, in July, and that is what got us to that negative 8.8% after being down as you said really low double digits in terms of comps. So that was a nice return. We saw a little rebound in August and gave some back in September, which we understood that, given us a chance to both look at the promotion and also go to something that had more full price and it was less discounting. So we anticipate giving some of that back.

Jeffery Bernstein - Barclays Capital

Got it, okay, but the return to the promotion more recently it seemed like that promotion had worked for you in the past, I think you said that you are going to see more efficiencies going forward more from a factual standpoint than anything about October.

Chuck Sonsteby

Yes that is all accurate.

Jeffery Bernstein - Barclays Capital

Okay and in terms of, I think you had mentioned most of the unusual expenses would be in the fiscal second quarter with a little rolling in, did you also make mention that that was somewhat anticipated when you started the year in terms of at least the line-item guidance that you had given to start the year so that is not if anything incremental?

Chuck Sonsteby

It is not incremental Jeff, it is something we anticipated, we are just trying to tell people which quarters that we would anticipate they would hit.

Jeffery Bernstein - Barclays Capital

Okay but the clarification you made about fiscal ’10 guidance when you said the latter was more accurate that was referring to look at individual line items directional guidance you gave rather than referring to the down I think 10% to 20% EPS number that you had given?

Chuck Sonsteby

No, what we do not want to do is get to a situation where we are updating guidance on a quarterly basis. We sort of set out our expectation for the year and then we will all see together how the year plays out and we just do not want to get to a situation where we are continually revisiting our guidances every quarter.

Jeffery Bernstein - Barclays Capital

Okay, just lastly in terms of franchisees, it seems like you have slowed down the growth both domestically and internationally a little bit versus last quarter, just wondering whether you can give us some qualitative picture on the franchisee health, I do not know whether you (inaudible) your franchisees or how often you get a chance to look at their financials, and how does it relate to your ongoing re-franchising and perhaps if you could talk a little bit about international and (inaudible) some directional and international color on comp trends or trends that was primarily a franchise business, so if you can give any more color on international comps that will be great.

Doug Brooks

Guy, you want to take those?

Guy Constant

Hi Jeff. So let me cover each of those questions. I guess on franchisee financials, we do have the ability to regularly review those. We have done that for the domestic system recently and we see very comfortable with where our franchise system is. As you know, the way we franchise we do not do modern pop franchising, we deal with figure more well capitalized, experienced restaurant operators and a very small number of those have a large majority of the Chili’s franchise system and we feel very comfortable with their financial situation. It is still challenging to secure credit so that is I think reflecting itself in a little bit of the pullback in the development numbers that we have put out there. We still think there are developmental opportunities for them but it is just a little more difficult in this current macro time that we are in for them to develop as much as the original agreements may have stated.

On the international side, we did get a little flavor last quarter and can again now. The comp trends are slightly better than what we are seeing in the domestic US system so we are still encouraged by what is happening internationally and in those development numbers that we gave are international numbers and they probably make up the slight majority of what you are seeing in the overall development numbers are international as opposed to domestic.

Jeffery Bernstein - Barclays Capital

Thank you.

Operator

Thank you. Our next question is from Howard Payne [ph]. Please announce your affiliation and then pose your question.

Howard Payne

Can you provide basically a little background on the strategy you are taking with Chili’s or where you are going with Chili’s from maybe a historical perspective as there are other industries, companies that had done what you are doing upgrading the quality, shrinking the menu and how far or how low or how many items do you think will ultimately come off and what is the impact to the margins from all that and maybe sort of discuss where you are going with Chili’s and ultimately is it going to be a big enough differentiator to make Chili’s stand out from the (inaudible) pack and you might not need the lower price point promotions to driving our products.

Todd Diener

Hi Howard, this is Todd. Obviously we think it is otherwise we would be going down in different paths but I think if I could just maybe use one other company or brand out there to use it as an analogy would be what McDonald’s did. You go back and take a very large existing system and try to re-energize it and that is what we are doing with Chili’s right now.

Chili’s will be 35 years young this next March and we have got a lot of success over those years but the space has obviously gotten very crowded and become some sort of a sea of sand so we know we have to break ourselves away from the pack through better food, more innovative food, better execution, more consistent execution and provide a better overall experience versus all the other competitors that are in the Grill & Bar category, part of that is value, part of that is food, part of that is service, part of that is atmosphere and it is all about executing more consistently each and every day and that is what is going to turn it around.

And if I look back through the history of Chili’s, we did the same thing back in the mid ‘90s when we put a very consorted effort against the re-dedication to food and at the end of the day people come to our restaurants to eat and we recognize that and so food comes first, always and will be forever and if we can add a little layer on top of that through more consistent execution along with hospitality I think that will be a winning combination that will work for us.

Howard Payne

When you look at the menu today obviously you have gone through it and torn it apart, how much smaller do you think it will be, 10% smaller, 20% smaller and then will it also improve the execution in the kitchen to simplify what they are doing in the back of the house.

Todd Diener

Yes, I do not know if I will comment on how much smaller but it will be smaller and I think with the fewer items and fewer skews in the back of the house at the end of the day will give us a better opportunity to execute more consistently.

Howard Payne

And then lastly when do you think you will be able to go on TV, is that part of the long-term strategy to communicate the changes, I know you are associating some of the new items with the current promotion but when do you think you will be able to communicate a bigger picture changes on broader audiences, national TV or whatever?

Todd Diener

You know we are doing it today obviously with Burgers and Ribs and we share with you that Tacos are coming very soon, you will see them shortly. We think that at that point there is new news about base menu items out there, more will be coming and consumers will start to get a sense that this is not just a one-time thing. I think after a few months they will start to get a sense that things are really changing at Chili’s in a broader way than just what the message may be conveying right now. It is not unusual for the category to have somebody come out and say they have got one new thing but after we back it up a few more times that will happen and it has already started so it just goes from here.

Howard Payne

Thanks.

Operator

Thank you. Our next question is from Joe Buckley. Please announce your affiliation and then pose your question.

Joe Buckley - BAS-Merrill Lynch

Just will start by following up on Howard’s question, do you have a sense of what the end game is for the Choice menu? Are there test markets or test stores that have what you think is your finished product, recognizing this will be sort of continuing evolution but you have something that resembles where you think you are going in tests.

Wyman Roberts

Joe, this is Wyman. Yes, so it is not an ongoing process. So one of the things we are committed to is that we are never going to kind of get caught without constantly kind of looking at where we are at with our food offering and where we are stacking up. That said, we have initiatives and we have a vision for where this menu is going and we are trying to give you as much insight into where that vision is taking us without giving too many of our competitors some insight into that. So there are restaurants out there with various tests of this initiative in place that have a new menu with significant changes that really do what we have been talking about, change the fundamental menu categories with better food.

So without getting into any specifics, we have this initiative mapped out, we have it in restaurants, we are learning from it so it could change. So if you stumble into one, do not assume that is going to be the final product but we are aggressively moving forward with a vision for this initiative. We have the next initiative fired up in the test kitchens today because we know there will be another initiative around, okay, where do we go next?

Joe Buckley - BAS-Merrill Lynch

Do you think by the end of this fiscal year there will be enough change out there for this pattern of change to be evident to the consumer?

Wyman Roberts

Absolutely.

Joe Buckley - BAS-Merrill Lynch

Okay and then on the hospitality service side, because as you are making these changes I am imagining you are trying to raise the bar net as well, do you change compensation practices around that to try to breathe more spirit or hospitality into the staff?

Todd Diener

Hi Joe, this is Todd. I think in terms of the compensation what we have really tried to do more than ever before is to convey I guess the belief on specially our servers’ part that the better hospitality we provide to our guests, the more often our guests are going to come back vis a vis they will make more money. Same with them getting excited and getting behind what we are doing with the menu, if we put new menu items out there that tell people something is new and different and differentiated a Chili’s versus the competitors, they are going to come to our restaurants more often. Our servers will make more money, our heart of the house teammates will get more hours, the managers should make more money through bonuses and they all kind of ladder up to that at the end of the day. So again an increased level of pride throughout the entire brand whether it be a manager or whether it be a hostess that all equates to people making more money.

Joe Buckley - BAS-Merrill Lynch

Okay and then last question, a very short-term one, Chuck did you think about the second quarter, it sounds like you are still in investment mode and albeit with better sales trends, your trend is still negative through the first quarter anyway, will restaurant level margins year over year be down in the second quarter again would you presume?

Chuck Sonsteby

Again we are going to kind of get back to guidance by answering that question but I still believe that we have not gained as much traction on top line or margin improvement as we would like and so that will still be tough on a year-over-year basis.

Joe Buckley - BAS-Merrill Lynch

Okay, fair enough, thank you.

Operator

Thank you. Our next question is Brad Ludington. Please announce your affiliation and then pose your question.

Brad Ludington - KeyBanc Capital Markets

KeyBanc Capital Markets, thank you. I just had a couple, I know it has been a long call, I will be brief, couple of kind of housecleaning questions on debt payments, I know we do not have official guidance on what you will pay down this year but is it a reasonable range to think that you could pay down up to $150 million in debt here in fiscal ’10?

Chuck Sonsteby

Yes it is.

Joe Buckley - BAS-Merrill Lynch

Okay and on the interest expense –

Chuck Sonsteby

If we can get down to somewhere around $100 million on the term loan by the end of the fiscal year.

Joe Buckley - BAS-Merrill Lynch

And on the interest expense previous guidance did say that we expect that to be relatively flat I would think by what we saw this quarter that is probably a little higher than we might see.

Chuck Sonsteby

Yes, I think we have got a little room for that, as we said last time, we left ourselves open to be able to refinance $200 million of that outstanding debt should the need arise or should capital markets be enticing for us to make that move but thus far we have not made that decision so there could be some upside.

Joe Buckley - BAS-Merrill Lynch

Okay. That covers it, thank you very much.

Operator

Thank you. Our next question is from Steve West. Please announce your affiliation and then pose your question/

Steve West - Stifel Nicolaus

Hi, I am with Stifel Nicolaus, just one follow-up question, most of mine have been answered. You talked about short term the promotional cycle that you are doing with 3-Courses for $20, can you quantify what short term would be in your view and then kind of following on to that is there a concern that you do these types of promotions too long and then train your consumer to only come in when they get these deals and we have seen that kind of phenomenon in the auto industry at the 09/11, we have seen it at the hard line and soft line retailers as we speak now. So is that something you are concerned about with the restaurant industry?

Wyman Roberts

Yes, this is Wyman. So first of all we are not going probably give you too much insight into our marketing calendar just because we do not want that in our competitors’ hands, again short term is short term. The concern about training consumers that this is what to expect every time and you do not come in without it, I think that is really a function of really the two things we have talked about. One is what is the competitive environment doing, what is out there? And then how compelling is your offer outside of the promotion? So again our strategy is to get ourselves to a point where our base menu offerings are more compelling than they are today which allows us to walk away from promotional opportunities more easily and again not that promotional opportunities will not be part of our marketing plan just that we want to have more flexibility in how we compete in the marketplace against those out there who may be forced to promote and more aggressively because they do not have the fundamental strength that we are going to have in our base business.

Steve West - Stifel Nicolaus

Alright, thank you.

Operator

Thank you. Our next question is from Destin Tompkins. Please announce your affiliation and then pose your question.

Destin Tompkins - Morgan Keegan & Co

This is Destin Tompkins from Morgan Keegan. I just have a couple of clarifications. On the commodity guidance you gave, I guess the commodity deflation potentially seen in the back half of the year, how much of that I guess is fully contracted at this point given that commodities have been volatile is there risk that you may be I guess too aggressive on that guidance. And then secondly I think you mentioned 27% cost of sales with the new menu in hand that you made, logic would say those things would maybe drive a little higher cost of sales. So with all that said, it sounds like you are still comfortable with 27% including the menu enhancements and how much (inaudible) is there on the commodity inflation or deflation depending on what happens in the stock market?

Marie Perry

As far as really kind of looking at commodities and looking at over the full fiscal year in terms of commodity cost, as we were mentioning earlier and Chuck gave the example on chicken, we do have a significant amount of commodities that you are coming due or that long-term contracts the rates are recalibrated and so with the market trends that we are seeing today, our expectation is that deflation will reoccur in the back half of the year.

Destin Tompkins - Morgan Keegan & Co

Okay but I guess are those prices locked in at this point?

Chuck Sonsteby

No they are not. When we look at market prices versus where our contracts are, we have got a pretty good history of being able to see things that are that close, I mean we are talking about contracts that were in negotiations with actually now because we are getting pretty close to the end of the year but we still expect that 27.5 number that we had given out at the beginning of the year to be something that can cover both the re-engineering of the menu and also some of the promotional activities that we are looking at.

Destin Tompkins - Morgan Keegan & Co

That is very fair, thank you very much.

Operator

Thank you. Our next question is from Sara Senatore. Please announce your affiliation and then pose your question.

Sara Senatore - Sanford Bernstein

Hi, Sara Senatore. Sanford Bernstein. I just want to follow up on the comments you were making on the franchisee growth as (inaudible) because it sounds like you were saying real estate is harder to come by but at the same time there is more credit constraints so I am just trying to figure out real estate is harder to come by because is the restaurants close by your competitors who is going after that real estate and are your franchisees somehow more constrained than maybe other people who are growing units.

Guy Constant

Sara, it is Guy, really that gets more specifically to the types of development and the types of locations or franchisees we would want to be in and the availability of those types of variants. Yes, there are vacancies out there because there have been closures but the question is, are they in the locations that our franchisees would want to be in?

Sara Senatore - Sanford Bernstein

Okay so it is not as if other restaurants are coming in and taking the desirable locations.

Guy Constant

No.

Sara Senatore - Sanford Bernstein

And then just one follow up question, actually I have been surprised when you were talking about discounting, it felt a little bit like there was some tit for tat I think Apple [ph] did 2-for $20 and you did 3-for $20 but it feels like people now our competitors have gotten (inaudible) have we hit sort of a normalized like kind of how would you expect things to intensify further?

Guy Constant

I do not think we expect things to intensify further. We are hopeful that things can sort of settle down and we get back to again something that is a more normalized marketing approach where we talk about the breakthrough that we have got on menu and can drive people in to come and get those products.

Sara Senatore - Sanford Bernstein

Okay, got it, thank you.

Operator

Thank you. Our next question is from Jeff Omohundro. Please announce your affiliation and then pose your question.

Jeff Omohundro - Wells Fargo Securities

Thanks, Wells Fargo Securities, just wondering if you could let us know how you are thinking about the total marketing spending this year and update on that. Are you stepping up the spending to message the changes at Chili’s and if so will there be a front end loading over the course of the year, thanks.

Chuck Sonsteby

First I will let Wyman answer the question but we are even on advertising spending on a year-over-year basis in the first quarter so I do not know if you might talk about what the full year would --

Wyman Roberts

I think our strategy and we talked about it last call is to continue the business model that we have in place with the advertising allocations that we have in the model work for us. We are always optimistic. If we have a message that we feel we want to invest more in, then we see opportunity in the market where there is some real value out there with regard to the inventory or the vehicle, we will go after it but right now we are I think from your perspective we are locked into the business model that we have been running at Chili’s and look comfortable with the spend levels that that allows us to utilize.

Jeff Omohundro - Wells Fargo Securities

Thanks.

Operator

Thank you. Your next question is from Nicole Miller-Regan. Please announce your affiliation and then pose your question?

Nicole Miller-Regan - Piper Jaffray

Piper Jaffray. I just wanted to gel down on the promotional strategy, looking at the Chili’s traffic improvement this quarter, do you have a way to let us know how much of that was driven by the promotional strategy I guess by the 3 C versus what are the other traffic drivers that work and so what I am getting at is at what point could we possibly see an inflection point where mixed shift is not negative anymore?

Chuck Sonsteby

I think what we are hopeful is of the new menu items that we start to bring in that that will start to drive traffic because obviously you are right the promotional impact we had had has had negative mixture and slowed us by about 3.5 points so we are hopeful that we can get PPA back up again and get people coming in for again a great new product that Wyman has talked pretty significantly about it as has Todd, the next couple of months what we are trying to get done is introduce people to the new products using the 3 C, that is what we are doing now in October, so we should hope that as we go forward we may or may not need those kinds of vehicles.

Nicole Miller-Regan - Piper Jaffray

Okay and then anything you can speak to regionally, which markets were the best and which were not so good?

Chuck Sonsteby

We are seeing really some pretty good performances when we look up at the Northeast and Mid-Atlantic states, they have done very well, Ford [ph] is starting to look a little bit better and California still is weak.

Nicole Miller-Regan - Piper Jaffray

Thank you.

Operator

Thank you. Our next question is from Thomas Ford [ph]. Please announce your affiliation and then pose your question.

Thomas Ford – Telsey Advisory Group

Thank you, Telsey Advisory Group. I wanted to ask you a question on mix and on pricing, with the 3 for $20 promotion, what percent of mix is that representing and then what is the opportunity when you cycle the new Burgers and Ribs off of that promotion if you take price on those items and what are your thoughts on pricing for both the near term and longer term?

Chuck Sonsteby

We really do not want to talk about what our mix is on the item for competitive reasons. As we look about pricing, we will stand at 1% to 2% range as we go forward and we will lap about 80 to 90 basis points in each of the next couple of quarters so we will be reviewing pricing as we go through there.

Doug Brooks

The promo really does not dictate whether we priced those items or not. We have various different entrees on the promotion at various price points. So we can price, the promotion does not limit or that perfection, the 3 C promotion, does not limit our ability to price at any time we want. There will be a steeper discount to folks that offer the EP item on that promotion but we can price for the base menu anytime.

Nicole Miller-Regan - Piper Jaffray

Okay, thank you.

Operator

Thank you. Our next question is with Chris O'Cull. Please announce your affiliation and then pose your question.

Chris O'Cull - SunTrust Robinson Humphrey

Hi, SunTrust Robinson Humphrey. Chuck, I understand the July comps were especially weak in the quarter but can you help us understand the impact the month had on the restaurant margin for the quarter?

Chuck Sonsteby

Well again it is predominantly from a seasonal basis where we make most of our money in the quarter and so the first couple of weeks of July were so hard that it did have a significant impact on margins in the first quarter. So as we look sequentially we would expect margins to get better because it was a very tough quarter to give that slow start.

Chris O'Cull - SunTrust Robinson Humphrey

Okay and then what are the goals with the 3 C $2, to improve labor productivity to offset higher food costs, it seems like the food costs in this new promotion would be a little higher given Ribs is the hero.

Chuck Sonsteby

Yes but we also made some changes on going through the items that are listed. We have given some people some options on a different dessert other than just the Molten, got a new brownie that tastes really great and it is the combination of items really Chris that we are looking at. We anticipate making a little bit more through at the second time that we have had it out there.

Chris O'Cull - SunTrust Robinson Humphrey

Okay, great, thanks guys.

Operator

Thank you. Our next question is from (inaudible). Please announce your affiliation and then pose your question.

Jack Barr – Oppenheimer & Co.

Hello, this is Jack Barr [ph] for Mat, I am calling from Oppenheimer & Co. I have a first question on employee turnover. I am wondering whether you can give the current level as well as how that relates to the historical rates and just how it has been?

Todd Diener

This is Todd. Our hourly key member turnover at the lowest level was at Manhattan I think probably forever. We were right around 80% for our hourly turnover which historic norms for our business and for the industry is about 100.

Jack Barr – Oppenheimer & Co.

Okay and do you have any estimates as to how much that is helping in the labor productivity maybe as a percentage of sales?

Todd Diener

I am not sure I can quantify that exactly but all I can tell you is the stability impact that it has for our managers when they come in knowing that the same team mates are going to be showing up each day, it helps them operate their restaurant more efficiently and at the end of the day provide a better experience for our guests as well.

Jack Barr – Oppenheimer & Co.

Can you put in the context of tables per server, is there any statistics that you can give us to give us an idea how much more efficient people are being?

Todd Diener

Not really. I mean it varies depending on the volume of the restaurant and the layout of the restaurant so hard to be that specific.

Jack Barr – Oppenheimer & Co.

Okay. And then last question about closings, you did not have very many in the quarter, just wondering whether you can give us an idea for the coming year, how many stores you expect to close or whether you have done with the more serious closing?

Doug Brooks

We do not plan for closing but I would say as you know we have been fairly aggressive and when the opportunities arise we will certainly close restaurants that are non performing but there are no planned number of closings for the year.

Jack Barr – Oppenheimer & Co.

Thank you very much.

Operator

Thank you. That was the last question for today. Do you have any closing comments?

Marie Perry

We would just like to thank everybody for joining us today. This concludes our call and our question-and-answer session. We look forward to following up with some of you this afternoon and talking to everyone again on January 20 when we report our results for the second quarter. Thank you.

Operator

Thank you ladies and gentlemen. This concludes today’s conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.

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Source: Brinker International, Inc. F1Q10 (Qtr End 09/23/09) Earnings Call Transcript

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