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Brinker International, Inc. (NYSE:EAT)

F2Q10 Earnings Call

January 20, 2010 10:00 am ET

Executives

Marie Perry – Vice President of Investor Relations

Doug Brooks – Chairman and Chief Executive Officer

Charles M. Sonsteby – Chief Financial Officer

Wyman Roberts – President, Chili’s Grill & Bar and On the Border Mexican Grill & Cantina

Guy J. Constant – Vice President of Corporate

Analysts

Destin Tompkins - Morgan, Keegan & Company, Inc.

Jeffrey Farmer - Jefferies & Co.

John Glass - Morgan Stanley

Bryan Elliott - Raymond James

Nicole Miller Regan - Piper Jaffray

David Palmer - UBS

[Tom Forte]

[John Ivankoe]

Brad Ludington - Keybanc Capital Markets

Steven Kron - Goldman Sachs

Jeffrey Bernstein - Barclays Capital

Joseph Buckley - BofA-Merrill Lynch

Sara Senatore - Sanford Bernstein

[Jonathan Waite – Precipia Research]

Operator

Good morning, ladies and gentlemen, and welcome to the Brinker International second quarter 2010 earnings release. (Operator Instructions)

It is now my pleasure to turn the floor over to your host, Marie Perry, Vice President of Investor Relations and Treasurer. Ma’am, the floor is yours.

Marie Perry

Thank you, Kate. Good morning everyone and welcome to Brinker International second 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; Wyman Roberts, President of Chili’s Grill & Bar and On the Border Mexican Grill & Cantina; and Guy Constant, Vice President of Corporate.

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 based entirely on historical facts. Any such items should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such statements are subject to risks and uncertainties which could cause actual results to differ from those anticipated. Such risks and uncertainties include factors more completely described in this morning’s press release and the company’s filings with the SEC.

On the call we may refer to certain non-GAAP financial measures that management uses in its review of the company’s business and believe it provides insight into the company’s ongoing operations. Reconciliations are provided in the tables in the press release and on Brinker’s website under the Financial section of the Investors tab. Please note this quarter we added the comparable restaurant sales by period to the website.

Finally, we wanted to take this opportunity to clearly state our guidance policy, which is also included in the press release. Management provides annual guidance as it relates to comparable restaurant sales, earnings per diluted share and other key line items in the income statement, and will only provide updates if there is a material change versus the original guidance. Consistent with prior practice we will not discuss inter period sales or other key operating results yet to be reported, as limited data may not accurately affect the results of the period or the quarter.

Now I’ll turn the call over to Doug.

Doug Brooks

Actually Wyman, why don’t you kick it off this morning?

Wyman Roberts

Okay. Good morning and thanks for joining us on the call today. You know over the last several quarters we’ve made some promises, so today as I talk to you about the performance and initiatives at Chili’s and On the Border, I’ll directly link our progress to those promises.

So let’s turn to the quarter. Results show improving momentum on sales as the quarter unfolded, further aided by a few items that don’t represent sustainable market improvements that Chuck will discuss later. Traffic, while still negative, is much improved as compared to the trends of last year and better than casual dining restaurant space as a whole. Chili’s sales for the second quarter outperformed the industry as measured by [Naptrack] on a one and two year basis, and our GAAP to Nap has sequentially increased for the first quarter.

And On the Border increased its steady sales performance, punctuated by a December period that featured flat traffic and over a 300 basis point sequential sales improvement versus October and November. On the Border in particular continues to make great strides in improving the business model, with second quarter operating margin improving 580 basis points on a year-over-year basis, driven by substantial improvements in cost of sales, labor and management expense that are directly linked to the impact of our food and hospitality initiatives.

And we’re not stopping there. On the Border will roll out a new menu on February 1 that adds some great items like our Street Tacos, while also meaningfully reducing the number of items.

These actions are meant to incorporate great new tastes into the menu while simplifying execution and improving consistency.

Chili’s margin improvement is more difficult to see clearly due to the margin impact of three course and investments to transform the menu. As promised, the three course promotion did drive traffic and our continued focus on improving the program has made each phase of the promotion more profitable, translating into improved bottom line as seen in our second quarter results.

Over the last several quarters, we have discussed the ambitious transformation of Chili’s menu to deliver fresh, quality food that stays true to our unique culinary heritage and flavor profile. The journey began in early fall with the rollout of our improved burgers and ribs, attacking the key menu categories first. In late November we followed on with Big, Bold flavors in our Mini Tacos and now we near completion of this primary phase of our menu development with the completely updated menu rolling out to the full Chili’s system in the next few days.

For your convenience, we’ve posted a copy of the new menu on the Investors section of the website. This menu is markedly different from its predecessor, both in terms of look and size, moving from 12 pages down to 8. Also added are items like new soups, sandwiches, salads and even some new beverages. And you may even notice an old, familiar item is back. Yes, the Caribbean Salad returns with enhanced flavor and even fresher ingredients. In conjunction, we bid farewell to some of our less popular items. We promise food and beverage excellence and this menu delivers, with improved quality on core products and distinct items in every menu category that serves to further differentiate Chili’s within the Grill and Bar segment. At the same time, we challenged every item on the menu to insure it is delivering appropriate returns, driving customer loyalty and earning its right to our valuable menu real estate.

So with the rollout of the new menu in a few short days, we cap off the primary phase of our menu journey. And while quality has been upgraded on many parts of the menu, we have consciously made those investments while keeping a close eye on returns. Investing in the menu where it is most valuable to guests and de-emphasizing those areas that were less critical to guest loyalty was the foundation for the new menu. In fact, over 75% of the menu items have a new recipe, a new ingredient or have been replaced to further deliver on Chili’s promise of bold flavors while keeping the brand integrity.

Yes, we’ve made necessary investments in these past two quarters and we’ll continue to do so with this last phase of the primary rollout, but the impact of the guest experience is significant. As is often the case with change, it may take time to get used to the new way and for restaurants that means a little time to build greater familiarity with execution of new items. For a few of our guests it may mean finding a new favorite on the menu. And keeping true to our hospitality promise, the team member helping guests will recommend another item that is similar to their old faithful with a guarantee that if they’re not totally satisfied, the meal is on us. These types of near term investments serve to build guest loyalty and team member engagement.

So in the near term, our advertising will transition from 3 C and move to a proven value message, Big Mouth Bites with our always fresh, never frozen USDA Choice Beef and Bottomless Express Lunch, which will showcase some of our new soups. This familiar and popular guest message will allow the restaurant sufficient time to master the new menu items.

Our next platform will talk more fully about our menu enhancements and capitalize on our innovative food and be supported by a value message we believe will resonate with guests. As always, we’ll strive for the most compelling marketing message that balances sales goals with margin improvements and increased, overall profitability.

Much has been accomplished in the last several months at Chili’s, but there’s still more to come. The improved menu will further solidify our differentiated food position in the Grill end of our segment. Our signature style of hospitality will serve to enhance the experience, letting time with your family, friends or co-workers be the main attraction. We are and will continue to aggressively pursue opportunities to improve margins, but not at the expense of guests. Investments already made in the business and investments on the horizon will come together, forming a dining experience unsurpassed in the industry.

Thanks, and now I’d like to turn the call over to Chuck for a detailed discussion on the financial results.

Charles M. Sonsteby

Well, thanks Wyman, and good morning. Let me outline a few highlights from the quarter that demonstrate the traction we’re gaining from some of our recent initiatives and also reinforce some of the ongoing strengths of Brinker’s brands.

Earnings per share for the quarter, excluding the impact of special items in Mac Grill, increased 7.4%, in part due to the sales momentum gained through the quarter. On December 14, we announced the completion of the Muy Mucho franchise transaction, a demonstration of the strength of Chili’s as well as Brinker’s ability to execute franchise deals in the midst of a difficult credit environment. This re-franchise transaction, along with the opening of 15 new franchise locations in both domestic and international markets, delivers on our promise to advance our franchise mix, which now sits at 42% as of the end of the quarter.

Strong cash flows in Q2 and the expectation of strong cash flows for the foreseeable future enabled Brinker to pay down $140 million of our long term debt, reducing our term loan balance to the capacity of our $250 million revolving credit facility, again, delivering on our promise of paying down debt and strengthening our balance sheet. And these results were encouraging, although expected and communicated on past calls. So while we delivered on these initial commitments, we’ve not lost sight of the next goals.

So let’s turn over to our results and review the quarter. All comparable year-over-year numbers in today’s discussion of results will exclude Macaroni Grill for an apples-to-apples comparison. And this is different from the press release, where prior year numbers reflect the results of Macaroni Grill and that’s 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 website. In the second quarter, revenues decreased $47.2 million or 5.7% to $781.9 million. This was comprised of a same restaurant sales decline of 1% as well as a capacity decrease of nearly 4.6% from having 63 fewer restaurants versus last year. Mix is negative due in part to promotional activities at each of our brands. Traffic, while down 2.6%, represents continued sequential improvement from down 9.5% in the fourth quarter of fiscal 2009 and down 5.3% from the first quarter of fiscal 2010, and that’s an encouraging sign.

Franchise royalties and fees were $17.3 million for the quarter, an increase of $1.1 million compared to the prior year, primarily due to an increase in royalties from our growing franchise system, both domestically and internationally. Cost of sales increased 80 basis points to 28.9% in the second quarter, primarily due to the margin impact of Three Course and Maggiano’s Today and Tomorrow promotion. However, these costs were partially mitigated by improved kitchen operations, which were implemented in late fiscal 2009 and menu pricing.

We also continued to see minor sequential easing of price inflation across our basket of commodities, which we expect to continue throughout fiscal 2010. As an evolution of the marketing focus Wyman discussed, and newly negotiated contracts on commodities roll into the system, cost of sales should see sequential improvement starting in the third quarter and even further improvement going into the summer season.

Many of our commodity contracts run on a calendar year basis, and with the recent contract renewals, approximately 80% of our commodities are under contract through June of 2010, and that percentage slightly decreases to just below 70% by December of 2010. Therefore, we may lag the industry in terms of feeling the impact of rising or falling costs, but the effect is Brinker has a more stable commodity basket that helps us make better decisions around menu price and offerings. In particular, we should see significantly favorability on chicken this calendar year due to an annual price recess which were based on input costs in our long term deal, and a new contract for a portion of our chicken supply. So as goods purchased under the new contracts make their way into the restaurants, we’ll see favorability in cost of sales from a commodity perspective. However, some of the savings may be offset in the third quarter by the impact of the recent winter weather.

The improved traffic from our promotions helped restaurant expense, which decreased 90 basis points to 56%, thus offsetting our cost of sales increase. Included is a $0.04 of EPS benefit resulting from a $3.3 million credit card fee settlement and some reduced insurance expenses. These decreases were partially offset by sales de-leverage and a decrease in labor productivity due to the Three Course promotion, the initial rollout of new kitchen procedures for the upgraded menu and one time investment costs for training in small wares. The impact on restaurant expense for these items related to the menu transformation was approximately 20 basis points and I expect a similar impact to the third quarter for the final phase.

Depreciation and amortization expense as a percent of revenues was flat for the quarter, but decreased in total by $2.4 million. The decrease is due to 63 fewer restaurants and represents the anticipated trend for the remainder of the year. General and administrative expenses for the second quarter decreased $4.6 million on a year-over-year basis to $33.1 million or 4.2%, and we’re realizing ongoing efficiencies from the restructuring activities that took place in the second half of fiscal 2009 as well as income related to transitional services provided to Macaroni Grill.

The quarter also benefited from approximately $1.4 million of credits related to lower health insurance and a canceled manager conference. Other gains and charges for the quarter are $18.8 million and primarily relate to non-cash charges for the closure of 12 restaurants and impairment of 14 underperforming restaurants.

Interest expense decreased by $3.7 million from the prior year to $6.8 million in the second quarter due to lower interest rates and lower average borrowings. So other net improved by $1.5 million in the second quarter of fiscal 2010, primarily due to sublease income related to the sale of Macaroni Grill.

After adjustments for special items, the tax rate increased to 27.6% versus 22.4% last year, primarily due to increased income and lower tax credits. So all in all, it was a very good earnings quality quarter.

We’re on track to generate substantial free cash flow in the range of $190 to $200 million during the fiscal year. Additionally, the dissolution of our captive insurance company freed up previously restricted cash. The dissolution is substantially complete, allowing us to access $75 million of cash this quarter. However, it will require total cash payments in fiscal fourth quarter and first quarter of 2011 of approximately $22 million in aggregate. The result? As promised, we paid down $140 million of debt, lowering our outstanding term loan balance to $250 million, equal to the capacity of our revolving credit facility.

We accomplished one goal of paying down our term loan balance to the capacity of our revolver and expect to accomplish our second goal of reaching investment grade metrics in the near term. These actions underscore Brinker’s commitment to maintain our financial flexibility and keep a strong balance sheet.

With strong and stable free cash flow in place and projected for the foreseeable future, Brinker looks to invest in strategies to grow earnings, further our brand differentiation and return cash to shareholders. To this end, Brinker will hold an investor conference on March 26 to outline the details of this next phase in the evolution of our business. At that time, we’ll discuss plans to both grow earnings in the core business and methods to increase shareholder value, as well as give you an opportunity to meet our management team.

There’s been significant traction on our key priorities. The balance sheet and business fundamentals of Brinker are strong and our cash flows are secure and stable. We’re not satisfied with where we are and we’re aggressively pursuing further changes in the business to deliver a superior dining experience to our guests, and I look forward to sharing these plans with you in March.

And now I’d like to turn the call over to Doug.

Doug Brooks

Thanks, Chuck. And as you have heard, our solid second quarter earnings are the results of our improving traffic and sales trends at each of our brands. Additionally, a key focus on operations continues to insure that we hold margins in line during this difficult operating environment.

We continue to challenge the current processes in place, not just to improve them but to reinvent them in a matter that is fundamentally superior. At times these new ideas may require some investment in margins, but will yield a nimble operating model that can be more adaptive to changes in the sales and economic environment.

Wyman covered the results at both Chili’s and On the Border, so I’d like to highlight some of Maggiano’s key accomplishments. Sales at the brand continue to improve, even posting positive traffic for the quarter, demonstrating particular resilience as compared to its casual plus peer group. This positive attraction can be attributed to the strength of the Today and Tomorrow promotion and our ability to harness the power of alternative marketing channels.

In addition, Maggiano’s once again had a record setting day on Thanksgiving. All restaurants in the system were open and tallied $1.5 million in sales that day, showing that Maggiano’s is the restaurant of choice for our guests that want to celebrate the Thanksgiving holiday with family but without the stress of preparing the turkey and the meal themselves.

I’d like to take a moment also to focus on people, the cornerstone of our business. Shifting talent to new roles and empowering them to be change agents who encourage innovation while delivering results is essential to our future success. As such, changes were made in key leadership positions to harness our people power.

As you know, Wyman was recently named President of Chili’s and On the Border. Steve Provo has also assumed the role as President of Maggiano’s Little Italy. More recently, Carin Stutz has assumed the position of Senior Vice President of Strategic Operations for Brinker. Carin’s impressive operational background makes her the ideal person to oversee key operational initiatives meant to improve execution and drive margin improvements in the brands across the Brinker portfolio. In her new role, Carin will partner with the leaders in operations; Kelli Valade at Chili’s, [Tony Winer] at On the Border, and Ron Ryan for Maggiano’s, to help achieve these initiatives. Now these recent changes underscore our commitment to making people, whether it be our guests, our team members or our management team, a key priority at Brinker.

Turning to the franchise business, there are a few key highlights we want to share with you. During the quarter Brinker opened 10 new restaurants in international markets, including a Maggiano’s and On the Border in Saudi Arabia, as well as several Chili’s restaurants in locations such as Mexico, India and Egypt. The Maggiano’s opening in Saudi Arabia marks Brinker’s first international franchise opening for the brand. While the essence of Maggiano’s remains intact in this new location, key attributes are modified to better serve the needs for the Saudi market with a reduced focus on banquets and adaptation of the menu to complement local customs and flavor influences.

Also during the quarter we opened our 70th restaurant in Mexico and continue to see solid performance in most regions of that country. While areas heavily dependent on tourism have been somewhat impacted, sales in other parts of the country continue to reflect a strong acceptance of the Chili’s brand.

Additionally growth in Asia continues with three openings during the second quarter and 11 expected openings by the end of the year, including our second Chili’s location that opened in India. Asia holds a great deal of promise for future international expansion and we’re excited about the results achieved thus far.

Domestically we opened five new Chili’s franchise locations and as Chuck discussed, the Muy Mucho group has acquired 21 existing Chili’s Grill & Bar restaurants in Kansas, Missouri and Nebraska, and has also agreed to about five to ten new Chili’s locations in that same geographic region. The completion of this transaction indicates the strength of the Chili’s brand, not only with potential franchisees but also with the institutions that continue to provide franchise financing for Chili’s and Brinker.

The second quarter results in top line trends are encouraging. We have made progress in evolving our business model, but there is still work to be done and investments to be made. We have made certain commitments to our shareholders and as you have heard today, we are delivering on those commitments. So as promised, we delivered overall results that are showing improving top line, favorable comparisons to the industry and stronger year-over-year margins. Also as promised, we transformed the food by improving quality and putting Chili’s signature touch on notable items to drive further guest loyalty, similar to the work put in place in 2009 of On the Border that will continue with the new On the Border menu rollout in coming weeks.

As promised, we got smarter about our promotional activity, with our 3 C program becoming more profitable each phase of the promotion. As promised, once the Chili’s menu reveal took place, we will transition from 3 C as we move forward, talk more fully about our menu enhancements and innovative foods supported by value messages. As promised, we would complete re-franchise transactions with solid economics. And as promised, we continue to grow our international business through franchise openings, including those through our joint venture in Mexico. We even saw our first franchised Maggiano’s opening this quarter.

And finally as promised, we improved the strength of our balance sheet by paying down long term debt down to the amount of our un-drawn line of credit, fully eliminating near term liquidity concerns and continuing to generate significant free cash flow. So we have and we will continue to make financially prudent decisions around our business, choosing priorities that maximize the long term impact of the business with short term investments. The guest has and always will be our guide to making decisions impacting our operating model. We will improve margins but not at the expense of the guest. Our strong cash flow allows us to make investments in the business, while other competitors may not have that same financial flexibility.

We do have reasons to be optimistic about the long term health of our brands. During our March conference you will see how we intend to harness our powerful financial position to grow value for our shareholders, as well as you’ll get a chance as Chuck mentioned to meet the entire leadership team charged with driving the company’s success.

Now I’d like to turn the call back over to Kate to open the line for questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Destin Tompkins - Morgan, Keegan & Company, Inc.

Destin Tompkins - Morgan, Keegan & Company, Inc.

Wyman, I’m curious on the strategy at Chili’s. If you could help us with the timeline, I guess first of all the 3 Course promotion wasn’t in place for the entire second quarter and then as we go forward you mentioned the advertising transitioning away from the 3 Course promotion. Will that still be in place while the advertising is transitioning? And then there was also some mention of the next platform that included maybe a new value message. So can you kind of help us through the timeline of how that will occur?

Wyman Roberts

Sure. To answer your first question, we ran 3 Course for most of the second quarter, so it was out there for the majority of the quarter. As we move forward we’ll transition to the message that I mentioned, the Express Lunch and the Bites. And we’ll carry that for a time period as the restaurants settle in on the menu and then we will change messaging towards the back half of the third quarter to start to introduce our guests to more of the new food that’s on this new menu and we will have some value components to that.

Destin Tompkins - Morgan, Keegan & Company, Inc.

So there is going to be a new value message, that may be different from the 3 Course promotion?

Wyman Roberts

Correct.

Destin Tompkins - Morgan, Keegan & Company, Inc.

On the restaurant expense line, I guess beyond the credit card settlement piece there seemed to be some other things like lower utilities, and I’m just curious what the sustainability of those is. Have you contracted natural gas or what’s the visibility look like on the restaurant expense line if you back out some of those one time benefits?

Charles M. Sonsteby

You know we do feel pretty good about where restaurant expense is. You know in terms of contracting on utilities, we do contract wherever we can do so. Some states are deregulated and we’re allowed to do contracts. Others aren’t and so in that case we’re not covered. So in that case we’ve got pretty good visibility into utilities for the rest of the fiscal year and feel pretty good about where restaurant expense is.

Operator

Your next question comes from Jeffrey Farmer - Jefferies & Co.

Jeffrey Farmer - Jefferies & Co.

Can you just give us a sense of how the 3 for $20 sales mix has trended over the last several months? And I guess more specifically, has it become more or less popular on the menu for your guests?

Wyman Roberts

What we saw with the 3 for $20, we were able to improve the profitability of that promotion throughout the time periods that we were running it. And the mix went from close to 30% and as we finished up the promotion here in the last week, we’re running around 23%. And so we’ve been able to minimize the mix as well as improve the profitability of the items of the guests that are ordering the promotion over the duration of the promotion.

Jeffrey Farmer - Jefferies & Co.

In terms of the new menu, how are you communicating that sort of upgraded quality to your guests? How do you do that? At Chili’s that is.

Wyman Roberts

Through advertising. We’ve been doing that as a component of the 3 Course promotion with our ribs and our new burgers, so we’ve been introducing it that way, and with our tacos most recently. And we’ll be getting a little bit more specific. But even with this interim period where we’re talking about lunch, there’s a message about some of the new soups that’ll be available for our lunch guests. So there’s been a consistent message of improvement and news in the promotional messages. We’ll be a little bit more direct as we get the menu in place and locked down towards the end of the quarter.

Jeffrey Farmer - Jefferies & Co.

It looks like Chili’s effective pricing was right at 1.2% for the quarter. I think that’s the lowest number in almost three years. Where do you see that trending over the next couple of quarters?

Wyman Roberts

We’ll stay in that 1% to 2% range as we go forward.

Operator

Your next question comes from John Glass - Morgan Stanley.

John Glass - Morgan Stanley

Chuck, if you could maybe just consolidate our bottom line to restaurant margin expectations in the back half, you know, assuming kind of a constant comp. At one time I think you had thought that food costs could decline by about 100 basis points in the back half. Is that still your view given the promotional mix? And then last year it looks like your restaurant expenses went down significantly as a percentage of revenue versus the first half and versus prior. Is that something you could match or were those sort of temporary cost controls that probably aren’t and maybe your back half of this year looks more like your second quarter from the restaurant expense perspective.

Charles M. Sonsteby

Let me start off with cost of sales, John. You know we did give guidance to that line item, somewhere around 27.5%. And if you look at where we are right now, we’re higher than that, but I still feel like some of the contracting that we’ve done will lower our commodity costs, partially in the third quarter and particularly in the fourth quarter. So I don’t think that 27.5 while maybe a shade low is still low well within reach ability. We did have a little bit of a freeze that affected tomatoes in this quarter, so we will expect to see about $0.01 hit on that, but still feel like that 27.5 while maybe a little bit low due to the promotional activity we’ve been doing, that number is offset in restaurant expense by better traffic. So all in all, the tradeoff between cost of sales and restaurant expense, there’s no material difference from what we originally stated.

As we go forward, last year there were some one time items and we sat down and talked a lot about, John, those costs of discontinuing growth. And we did see some real benefits in the third and fourth quarter last year. The thing that makes that tough is we will see better restaurant expense on a year-over-year basis because we have a 53rd week in our fourth quarter. So that will help us in terms of restaurant expense as well.

Operator

Your next question comes from Bryan Elliott - Raymond James.

Bryan Elliott - Raymond James

I wanted to clarify a couple of things that you mentioned, Chuck. The $3.3 million benefit I think from the credit cards, I think you threw out a $0.04 number in the prepared remarks as the EPS impact. Did I hear that right?

Charles M. Sonsteby

Yes. Well, there was that and then there was also some workers comp benefit that came through the line. In terms of trying to get some good visibility against the number we called both those out.

Bryan Elliott - Raymond James

So the $3.3, that’s an after tax not a pretax number then?

Charles M. Sonsteby

No, that’s pretax but there’s also some workers comp, so the combination of those items, you know, gave us somewhere around $6 million.

Bryan Elliott - Raymond James

I think you mentioned something in the G&A line as well.

Charles M. Sonsteby

We did. G&A was a little bit artificially low this quarter. You know we saw some benefits. We canceled a manager conference that we had accrued and so that helped us by about $1.4 million. That plus some health insurance benefits totaled about $1.4 million pretax. So G&A was probably a little bit artificially low. We’ll probably get back to our run rate as we see that number in the third and fourth quarters.

Bryan Elliott - Raymond James

Let me make sure I understood the guidance policy.

Charles M. Sonsteby

Hey, Bryan, let me correct that a little bit. I think we have some timing differences, so actually third quarter would probably be a little bit higher on G&A than our normal rate. But by the time we get to the end of the year, we’ll still be in that run rate we had talked about with guidance at the beginning of the year.

Bryan Elliott - Raymond James

And the restatement of the guidance policy essentially as I read it and I just want to make sure I’m reading it and hearing it properly, so the policy is going to be we’re going to give guidance at the beginning of the fiscal year and if we don’t restate it that means you remain comfortable with that guidance and only a material change from that guidance will be called out. Is that effectively the message?

Wyman Roberts

Yes, that’s correct. I think, you know, we did give a pretty wide range when we started the year and you know we really haven’t gotten into do we tighten the reigns, etc. So I think we feel pretty comfortable about where we are on the high end. Again when we gave guidance at the beginning of the year, we didn’t include things like you know the windfall we got from Visa, so those numbers probably have helped our current earnings but weren’t really in our guidance. So we’re feeling pretty good about where we are right now.

Operator

Your next question comes from Nicole Miller Regan - Piper Jaffray.

Nicole Miller Regan - Piper Jaffray

I just want to know is the 3 C available at all or is it just gone?

Wyman Roberts

You know what we do typically when we change a promotion is you know we’ll take it out of the restaurant with regard to merchandising, but you know if a guest requests it we honor those requests for a reasonable period of time. And so you know we’ll see a little bit of preference on the promotion after we actually officially walk away. But within a few days, a week or so, you know, for all intents and purposes it’s done.

Nicole Miller Regan - Piper Jaffray

And if I’m understanding the context of the conversation this morning correctly, it sounds like as you transition to the Bottomless or Express Lunch and the Big Bites and things of that nature, it sounds like there’s a better margin opportunity to be had. Is that correct?

Charles M. Sonsteby

We’re definitely thinking that we can improve our promotional margins with the strengthening of the basis of business offers and that’s what we’re planning on doing.

Wyman Roberts

Nicole, I do want to point out something. You know we really took our first foray into value this year with our first range of 3 Course. And the one great thing that I think we’ve done as an organization is we’ve learned from each and every rollout, each and every turn that we’ve taken on 3 C. We did three of them and as we looked at it, we tightened the reins of offerings, we improved profitability consistently on each iteration that we made, and I think we learned a lot. You know we learned a lot about how guests react, what guest behaviors become. And I think we’ll use those learnings as we go forward to make sure that we not only drive traffic but also maintain margins and maintain profitability so that there’s a really good balance.

I think that’s been one of the great things that we’ve taken out of the last seven or eight months has been just the learnings of how to get better and understand what consumer behavior is in the system.

Nicole Miller Regan - Piper Jaffray

So we shouldn’t look at that as an on and off but just something in your value toolbox, I guess.

Wyman Roberts

Absolutely. Doug, do you want to add some things?

Doug Brooks

Nicole, I’ll just add too part of the strategy on the Bottomless Express Lunch also is we look at our day parts that are most challenged during this current economic time, weekday lunch is one of the day parts that we can do a better job of driving. So that item is made up of products that not only have great value but are very fast to get out of the kitchen. So for those workday lunchers that may and I think we’re as fast as possible, this has both value and pace. And so it’s a business strategy as well as a nice value promotion.

Nicole Miller Regan - Piper Jaffray

And could you just speak quickly to Maggiano’s and then I’ll hop off? But I think it’s interesting with you know what is the average higher check certainly versus Chili’s but certainly such great comp improvement. Can you just give us a little color on what’s going on there in higher end?

Doug Brooks

Sure Nicole. One of the things, the Today and Tomorrow promotion which was put in place in second quarter again great value but really great margins as well. A chance to order a pasta dish during your visit and then take one home with you. So that clearly resonated with the guests. We also saw in December some nice improvement back in our banquet business, which again as we look across the environment gives us a little bit more confidence about maybe the businessmen, the focus around expense accounts. We also saw an increase in our catering business. So there’s a bunch of lines of business at Maggiano’s and at $25 it’s a great value. It’s always been known as a lot of food for the money. People take a bag home with you. But we do see business spending up. Maggiano’s actually one of the day parts that’s up is the weekday meal experience so just the opposite of Chili’s. So good competence with the business build but overall just a lot of nice business components and I think the key core elements of the Maggiano brand which is great food prepared fresh by chefs and great value even at $25. So second quarter was very nice for Maggiano’s.

Operator

Your next question comes from David Palmer – UBS.

David Palmer - UBS

One thing that I wrestle with and I think folks generally wrestle with is how to really evaluate the same-store sales results we’re seeing not just from Brinker but from the casual dining industry lately. You know is it just signs whether things are getting better or worse? And you know let me ask it this way. Do you take heart in the fact that the December month same-store sales decline of 3% at Chili’s? Or do you view that as somewhat disheartening getting the comparisons and marketing you may have had in the month or perhaps this is just do you have to squint through these few months and just look at the general one year trend that we’re seeing for Brinker and the industry is grinding a little bit better since the summer with jobs? And then maybe by the second half of calendar ’10, we might be flat to stable as an industry and the leaders a little bit better than that as jobs get to flat versus year ago. How are you thinking about what we’re seeing here?

Wyman Roberts

I’ll take first cut at it. I think you know one of the things we look at, we’re gaining share and while the 3% comp is not what our goal is is a negative 3 comp, you know, we outlined at the beginning of the year we’d be down 2 to 4%. So we’re still within that range, Dave. So we feel pretty darn good about that. And while we’re doing it, we’ve been gaining share. We’ve been gaining share from independents. You know we think we’ve been gaining share when you look at Naptrack data versus our competition. So I think, you know, those have been things that we’re really pretty excited about. You know it’s right, job creation has not been good.

You know depending upon who you want to look at and what you want to look at, some people say it’ll get better mid-year, mid calendar year of 2010. Some people say that true recovery’s not until 2011 so you know we feel pretty good about delivering year-over-year earnings growth in this kind of period. I think the segment has held up certainly from an earnings perspective much better than people would have liked. We think we’re getting some benefits from commodities that will help us in third and fourth and for the balance of the calendar year, so we feel pretty good about those things.

Do you guys want to weigh in anything more on consumer or?

Charles M. Sonsteby

Well, I mean, just we’re never happy with negative traffic and negative sales and we’re never satisfied with that. That said, I mean again it is a battle for market share and we’re winning that battle and I think we’re going to continue to focus on how we maintain that momentum and doing it in a way that maintains our business model and our margins.

But more importantly, it improves the guest experience as we go forward. I mean that’s really the key. So all our energy right now is on that and you know when the economy gets better, whether it’s the second half or early next year, we’re confident we’re going to be in a great position to ride that momentum even further than we’re having to get momentum in this tough environment.

Wyman Roberts

Doug, do you want to add anything?

Doug Brooks

David, I think a smart guy once said up is up and so you know improving trends as Chuck said it’s not where we want to go, but I think, you know, this whole conversation falls under the category of things we can control. So when I think about things inside of Brinker it gets me excited because to steal market share we have to out execute our competitors. I talked a little bit on my prepared comments about new leadership and I’m really excited about the new leadership and these very important operations roles, Wyman running Chili’s and On the Border, Steve at Maggiano’s, Kelli Valade in her new role as Chief Operating Officer at Chili’s, Carin Stutz in this SVP Strategic Operations, I mean these four leaders they bring different perspectives, they bring different experiences and they bring different skill sets. And when you blend that with some of the old timers that are here talking right now, it’s a really nice melting pot of leadership that I’m excited about.

When I think about the transformation of the menu at Chili’s, the transformation of the menu at On the Border, these are new, better products and ingredients and our guests and our team members are excited about it. When I think about hospitality initiatives and strategies that are taking place in improving the guest experience, improving guest counts, again two of our three brands, On the Border had flat guest counts in December, Maggiano’s slightly positive the whole quarter. And of course the balance sheet and the cash positions are in good shape. So as we get strategies laid out, we’re in a position to act on, so everybody’s tired; there’s no economist in this room; we don’t even want to predict the weather, but what we can control is what happens inside our four walls and I’m really encouraged and optimistic about where we’re taking our businesses.

Operator

Your next question comes from [Tom Forte].

[Tom Forte]

I had a couple of questions on sales trends. First I wanted to know during the December quarter, how did Texas and other regions perform against the country as a whole? And then second, I wanted to know what you’ve learned from the 3 Course offering on promoting to the consumer an individual item at a price point or multiple items at a price point, and then thoughts on the use of multi-course promotion in the future.

Wyman Roberts

Well, Tom, Texas has been weak and I think you’ve heard that from some of our competition. Texas has been weak now for about a year. It had been one of the best performing markets out there and is now settled in to be average to slightly worse than average. But again as you know we’ve got a big footprint in Texas and we’ve done very well, considering we’ve had that headwind.

You know I appreciate your question about asking what we’ve learned but you know honestly we know there’s a lot of our competition on the call listening, and so you know we hesitate to really give you all of the learnings that we’ve seen over the last seven months. It’s been a lot of work, a lot of effort by our teams and we would hate to just drop that out there for somebody to get just for listening, so I think we’d rather pass on answering that question, Tom. Is there something else that we can help you with or some other way we could approach the question?

[Tom Forte]

You talked about the improving banquet sales at Maggiano’s. Can you talk about either other improving sales trends you’re seeing that suggest in addition to the successful menu adjustments at Chili’s and On the Border, you’re seeing evidence of an improving consumer?

Wyman Roberts

Well, you know, it starts with business and as Doug said you know business spending has come back a little bit. You know we’ve seen more banquets at Maggiano’s during the holidays. We have seen weekday improvement at Maggiano’s. And so I think as business spending goes, you know, the rest of the consumers will hopefully follow. Maggiano’s again is a great value at $26 for a business person to go to a meal, so you know maybe that’s the initial foray into seeing that part of the economy coming back.

You know gift cards were better than what we had expected in the year. So I think there’s a number of small bright lights in the economy that maybe are starting to pick up a little bit.

Operator

Your next question comes from [John Ivankoe].

[John Ivankoe]

You know the first question is on the 3 Course combo. I mean it’s mixing so high, I mean I just want to get a sense in terms of what you know your tests or thoughts are going to be for the returning customer, you know, that wants that promotion, if you’re fearful you know that it can be traffic diluted and materially traffic diluted and you know why, for example, you can’t figure out a way to have some kind of scaled down full margin version of that on the full menu. And related to that, is the new menu that’s online proven to be average ticket additive or average ticket dilutive? And what are your thoughts regarding that?

Doug Brooks

Wyman, do you want to take the 3 C?

Wyman Roberts

Sure. Sure. With regards to the promotion, Don, one of the things that you have to remember with that promotion and the high preference that it’s driving is it has a lot of items on it and they’re base menu items. So we’re not as concerned about the impact. We have run it as a promotion. We’ve stepped away from it even over the last five, six months as we’ve used it as a promotional vehicle for us. We’ve walked away from it several times, and so we’ve got learning on what happens when we step away from that promotion. So that’s why we’re confident about what we’re doing in the future.

Our biggest concern is we don’t want to alienate or disappoint guests. You can’t always have the same promotion out there forever. So I think in this environment consumers know that, but if somebody comes in in the near future and is really looking forward to that and asks for it, we make it available for them and we’ve got that factored into our business moving forward.

As far as putting it on the menu, yes, we could do that but we don’t think packaging it up at full margins, you know, guests can order the appetizer and the dessert they want for full margin and it happens every day. So rather than create more complexity on the menu, we’ll just let them order the way they normally do to get that kind of value around the offerings we have.

[John Ivankoe]

And Wyman, on the new menu, I mean are you seeing that?

Wyman Roberts

Oh, yes. It’s pricing margin neutral so we built it that way, it’s played out that way in tests and so as we said in the prepared notes, you know, we’ve made improvements but we’ve been smart about how we portioned, how we priced. We took very little price in terms of even the new items. We did some things with large and smalls on some of the new salads you’ll see. So we think we’ve been able to find a real nice balance of adding new news to the menu, bringing up quality product on almost every item without significantly impacting the check, positively or negatively or the margins. So I’d encourage you to go eat that and give us your feedback.

[John Ivankoe]

And Chuck, a question for you on CapEx and free cash on the balance sheet, you made the comment that your term loan is now at $250 which is what you’re un-drawn revolver is, which is great. So is there a need for refinancing? Are you anticipating a refinancing of that term loan or would you draw down your revolver at this point in time? And then related to that, I mean clearly you have plans in 2011 for development or lack of development and remodels or lack of remodels. What should we expect for 2011 CapEx relative to 2010? And what would be the most likely use of that free cash flow?

Charles M. Sonsteby

Well, John, a lot of questions there. First of all let me go backwards, I think. We expect our CapEx for this fiscal year to still be somewhere in the neighborhood of $80 to $85 million for CapEx. As we go forward, you know, honestly we’re sitting down and taking a look at that. We’ll have a long discussion with our board next week about plans for what do we do with our cash, what do we do with our balance sheet, what do we do with financial policy and that’s really one of the underlying stories that we’ll have to tell at the end of March. I think we are in great shape from a cash perspective. We will not go out and refinance the term loan today, just because we’ve got a great interest rate. It’s 95 basis points over LIBOR. To put it onto our revolver would actually increase our interest expense so you will see that in the Q that gets filed. That will be listed somewhat as current and some in long term, but again we don’t feel like there’s a need to go refinancing today because it would be more expensive, just give more money to the banks than we feel like we need to do.

[John Ivankoe]

Do you have a sense without talking specifically you know where the buckets would go, what fiscal ’11 CapEx would be relative to ’10 or do you not want to answer that yet?

Doug Brooks

No, I mean right now, John, we’re still planning on being somewhere in that $80 to $85 million range. That’s been a good run rate for us. We can reinvest back in the business, we keep the restaurants looking up to date. The question is, you know, we’ll sit down and talk about whether we should spend more money on anything else as part of our investor conference.

Operator

Your next question comes from Brad Ludington - Keybanc Capital Markets.

Brad Ludington - Keybanc Capital Markets

I wanted to start off with since you freed up that $75 million in restricted cash and paid down some additional debt, what is the cash balance at the end of the second quarter and is there any restricted cash in that balance?

Marie Perry

As of the end of second quarter we ended with $110 of cash and as Chuck mentioned since we unwound the captive insurance, the majority of that cash is now completely unrestricted. There is just a minimal amount we’re still trying to unwind. It’s less than $4 million, but really when you look at that $110 million a lot of that money can be used for any purpose.

Brad Ludington - Keybanc Capital Markets

Going forward should we expect to see some additional sales to franchisees in fiscal ’10?

Charles M. Sonsteby

We’ll continue to take a look at the market-by-market analysis to make certain that we’re operating in that market as a company operation and receiving better shareholder value than if it was franchised. And if we determine that it’s better to be franchised, we certainly would take on that process.

Brad Ludington - Keybanc Capital Markets

I’ve been looking at the menu you posted. It looks good. You know when the 3 C comes off, this week or next, should we expect that you would be considering maybe not the same deal but some other kind of bundling promotion in the coming months and quarters?

Wyman Roberts

We’d hate to get too far out and talk about marketing programs today so right now we’re running the Bottomless Express Lunch and Burger Bites and just stay tuned.

Doug Brooks

I do think, you know, we’ve had a lot of conversations today about the consumer and turnaround and it’s still a very value oriented consumer and the marketplace is still very competitive, so with that I’ll just say we plan to continue to gain market share and we’ll do what we need to do.

Brad Ludington - Keybanc Capital Markets

I think you said there’s a $22 million payment due with the unwinding of that captive insurance. When is that due?

Charles M. Sonsteby

There’s two payments. We make one the fourth quarter of fiscal year 2010 and then we’ll pay the balance in the first quarter of 2011, fiscal. And that’s a $22 million in total. That’s the grand total of the payments.

Operator

Your next question comes from Steven Kron - Goldman Sachs.

Steven Kron - Goldman Sachs

A couple of follow ups if I can. I wanted to go back to the transition off the 3 Course for a second. You know we talk a lot on these conference calls about the battle for market share and you know as you guys alluded to this is kind of your first foray into getting something more value oriented on the menu. It seems as though you gained market share this quarter when you’ve really kind of stepped up you know the frequency with which you were in market with that 3 Course promo, but you’re kind of at a critical point here because you’re making the decision to kind of sort of move off that and eventually get to a more longer term, sustainable driver that you at least can kind of get traffic in the door. And I guess there’s a bit of an education process that’s associated with that for the consumer.

And when you moved off the promotion I think last quarter, intra quarter for a brief period of time, your comps softened so I guess how are you thinking about it internally on your expectation, of traffic expectations, and how firm are you that this is the right approach? And maybe in answering that you can get into the testing of the product. Was it in those markets? Was it exactly what you planned to do now as far as pulling 3 Course and going out with this new menu?

Charles M. Sonsteby

Well, Steven, there’s a couple of different themes through there. I think the first time we ran 3 Course we were still learning and we didn’t co-op it. It was branding news to the marketplace and we did see sales get softer once we came off it. But if we look at earnings and margins, margins also were much better during that same period. So on a profitability basis we didn’t feel like we gave up much by coming off at all. In fact, it was fairly neutral. We did get smarter with promotion, we did get better, but we also believe that as you can see, you know, because we’ve tightened the number of items, the combinations that were on the 3 C, preference did go down. So we think the lap or I should say the transition from 3 C to non-3 C should not be as big as it was over the first two times, at least that’s what we’re planning and modeling.

We do think that we’ll probably give up a little bit of traffic from it but we think we’ll see increased profitability on a comparable basis, or at least something that’s relatively neutral.

Wyman Roberts

Well again, yes, you run a promotion for so long and it doesn’t become a promotion anymore, right? It loses that sense of urgency and I think we’re starting to feel like 3 C has lost some of that sense of urgency, which is great. Let’s put it to rest and bring some new messages to the table. And they will have value components to them. So again when you’re looking at our results, sometimes we’ll put messages out there that are less value oriented and then we may see a more significant impact to traffic, but obviously the tradeoff is in the margins. And what we’re planning to do is continue to stay fairly focused on value, not as aggressive as 3 C but we’re not going to walk away from value messaging.

And again the next message that we just shared with you have a value component to them that we know is compelling. We’ve run these offers before so we have a pretty good history of what to expect with regard to traffic and the margin impact.

Steven Kron - Goldman Sachs

And in the markets that you’ve tested this transition, was it mimicking exactly what you plan to do here as far as pulling 3 C from those markets temporarily?

Wyman Roberts

Well, we don’t test promotional messages, if that’s what you’re asking. So we haven’t tested the promotional message change. We have history and we have a lot of research that goes into the impact and the motivational power of the different promotional messages, but we don’t do in market advertising testing of promotions.

Steven Kron - Goldman Sachs

And then, Chuck, on the balance sheet, when you made the comment that a goal of yours is to get to have the balance sheet for investment grade companies. In your discussions with rating agencies what do you think you need to do further at this point?

Charles M. Sonsteby

Well I think we’re getting pretty close to those metrics now. We’re very close. We’re currently rated investment grade by S&P. We’re a notch below at Moody’s. And so I think we just need to demonstrate the same strong cash flow that we’ve seen and a prudent financial policy.

Steven Kron - Goldman Sachs

As far as the franchisee and their access to capital at this point it seems as though out there it remains still pretty tough for the franchise community. It seems as though you’ve been able to get some transactions done and franchisees are still building some stores. Can you comment on the current credit environment as it relates to them?

Charles M. Sonsteby

I think it’s getting a little bit better, honestly, you know, you’re not seeing the kind of access to capital you saw two years ago but you know we’ve seen it thaw a little bit. There’s some new players coming into the franchise market who have had capital to lend and that’s been a welcome thing. And Chili’s with its strength and unit economics in terms of having top line in excess of $3 million, that makes us a pretty bankable deal so you know our franchise partners have had more access than maybe others in this space. But the overall environment has gotten much better I’d say over the last nine months.

Doug Brooks

Steven, our domestic partners are going to open 12, 13 restaurants this fiscal year so they’re still building restaurants, even in this tricky time.

Operator

Your next question comes from Jeffrey Bernstein - Barclays Capital.

Jeffrey Bernstein - Barclays Capital

Earlier we were talking about the sequential comp trends. It looks like through the quarter it was relatively stable. I know it was brought up in terms of year ago comparison. I’m just wondering, I don’t see the year ago monthlies. Is that something you guys have distributed and perhaps can you talk about the [inaudible] trend based on what we heard about December that would still be I guess a deceleration on a two year basis? I’m just wondering if we can get some color on the year ago in terms of monthlies.

Charles M. Sonsteby

Jeffrey, you’re right. December was weaker so when we look at the whole quarter December was weaker than October and November were. So you would be correct in saying that December on a two year basis was a little bit worse.

Doug Brooks

I do know we’ve had some issues on calendar flips, with Thanksgiving, so we did have a situation where Thanksgiving flipped from one period to the next, while comparing last year to this year so I think while that statement made be true on a factual basis, I think we made a modification for the calendar flip. It may not exactly reflect that.

Jeffrey Bernstein - Barclays Capital

Is it ex that shift, I mean kind of flushing out from normalized numbers does it appear like it’s still on a two year basis of deceleration or would that shift really make it as if?

Doug Brooks

We would have to do the math.

Jeffrey Bernstein - Barclays Capital

Okay, but there’s no plan as of this point to I guess put up all of last year’s monthly numbers like you’re doing now for this quarter?

Doug Brooks

No, there’s no plan to do that.

Jeffrey Bernstein - Barclays Capital

Macaroni Grill I think you mentioned again the transitional services provided to the brand. I mean I don’t think we ever got it before but total dollars or EPS? I mean is it significant and how long should we expect that benefit contribution?

Charles M. Sonsteby

Well, we’re locked in for the balance of the fiscal year and are we contractually allowed to talk about that? It’s around $7 million that we get for those transitional services.

Jeffrey Bernstein - Barclays Capital

For the full year or this quarter?

Charles M. Sonsteby

The full year.

Jeffrey Bernstein - Barclays Capital

And then just lastly in terms of gift card sales through the holiday season, just wondering how that went pre and now redemption rates relative to the year ago period.

Doug Brooks

We’re at 5.3% versus last year with good success, particularly at Maggiano’s and a lot of our third party partners had double digit growing sales in some of those locations so overall despite what some of the gloomy predictions were, we sold more.

Operator

Your next question comes from Joseph Buckley - BofA-Merrill Lynch.

Joseph Buckley - BofA-Merrill Lynch

I know you think there’s no more possible questions on 3 C but I have a couple. Did we see work as a way to feature the improved menu items? Did you get pretty good mix on the burgers and the ribs and the tacos?

Wyman Roberts

Well, that’s actually a great question, Joe, so even though it seemed like we’d exhausted them, that was a good one. Yes we did. It worked exactly as we hoped. So let’s just take these new tacos. We probably sold you know two to three times more of those tacos than we would sell just on a base menu item. So the promotional preference really helped put those new flavors in a lot of guests mouths who wouldn’t normally have come to Chili’s to eat a taco because their favorite was a burger or something else on the menu. So we were able to do exactly what we had hoped to do strategically and that’s get those new products in more of our guests mouths. And especially again you’ve got to remember with 3 C we were driving some lighter and less frequent guests in and so exposing them to some of the new things that we’re doing at Chili’s were a real strategic imperative for us and it worked very well to do that.

Doug Brooks

And again as we move to different promotional ideas, we’re going to continue to use the promotional messages like with lunch to get the new soups in people’s mouths. We’ll continue to leverage that strategy, just not necessarily with the 3 Course vehicle.

Joseph Buckley - BofA-Merrill Lynch

You made reference to the history you’ve had advertising Big Mouth Bites and Bottomless Express Lunch. Can you share a little bit of that with us? Have they been pretty effective drivers of traffic in the past?

Doug Brooks

Sure. Yes. I mean I would hope you’d know that if they wouldn’t we wouldn’t be bringing them back, but yes they’ve worked very well for us and we haven’t been on that message for a while, so it’s some fresh news to the marketplace. And again, it gives us an opportunity, maybe not as aggressively or as direct, but you know those are burgers now made with fresh, USDA beef so the improvements to our hamburgers are centered and again we’ve got new soups. So both of those things kind of add to the newness of the promotion. But yes, the promotion worked very well for us in the past.

Joseph Buckley - BofA-Merrill Lynch

Chuck, a question on the guest flows and I know you probably want to hold a lot of this for the March meeting, but as you talk about both trying to move to investment grade at Moody’s as well as S&P and also when you talk about returning cash to shareholders, there’s an implied bias there towards dividends as opposed to share buyback to achieve both goals.

Charles M. Sonsteby

Well, Joe, I think you’re right. I think that’d be a great thing we can address in March. I think you know right now we’d hate to just step out and pick one or the other.

Joseph Buckley - BofA-Merrill Lynch

But returning cash to shareholders, you mentioned briefly can we assume that will be kind of a stepped up goal as the balance sheet now is closer weighing on it and so forth?

Charles M. Sonsteby

I think we can do both. I think we can, you know we’re entering into a position where as I think John may have asked, you know, we don’t have a lot of new restaurant development in the pipeline right now. You know we certainly don’t have openings of any significant number at all planned for the next 18 months. So we will be generating a huge amount of cash flow. So the question is how do we build the business? How do we also return cash to shareholders? And you know historically we’ve been able to both keep an investment grade balance sheet and pay a dividend and do share repurchase. So I think we’ll look to accomplish all four of those goals in some way, shape or form, and talk about that in March.

Operator

Your next question comes from Sara Senatore - Sanford Bernstein.

Sara Senatore - Sanford Bernstein

Just a question about the other gains and charges along with asset impairment. I just wanted to get a sense of how you decided to take that this quarter and should we expect any more? I mean essentially it implies lower cash flows from I think you said 14 restaurants and a couple of closures, but you know why those restaurants and why are they different from the rest of your store base where you haven’t taken impairments?

Charles M. Sonsteby

Well, we do run an analysis that’s required every two quarters. We do it during the second quarter and fourth quarter of each year and we take a look at under accounting regulations, we look at the cash flows of the restaurant, discount those back and then compare those to the asset value and then to that book value that we have for that restaurant. If there’s a gap, if the net present value of the cash flows are less than the asset balance, we have to take an impairment. And so we’ve done that on 18 restaurants during this quarter. The decision to close is somewhat different. You know we’ll take a look at and talk with our operators about are we in the right market? And we may be as the market perhaps moved away from where we are, maybe we’re not renewing a lease. Perhaps we’re just in a place that development was supposed to happen and never came.

You know there are still some of those places where we built a restaurant, expecting development to be built out and it didn’t occur. So if we’re experiencing negative cash flow, we will go ahead and close that restaurant. And we impaired 14 restaurants not 18. I’m sorry. So they either fall into those other two buckets. The good news is the rest of the restaurants that we have don’t fit in either of those categories. So we did take an impairment and we’ll evaluate it again in the fourth quarter.

Sara Senatore - Sanford Bernstein

But just to clarify, so the distinction between those 14 and the rest, I mean obviously you look at the cash flow but was it geographic or were they older or can you just give me a sense of why it might be? Because that looks like, you know, I mean it’s a pretty big chunk.

Charles M. Sonsteby

There’s really no pattern. You know 14 out of our 1,000 restaurants, you know, each one of them had a reason.

Sara Senatore - Sanford Bernstein

Okay. Thanks.

Charles M. Sonsteby

There’s no consistent hey, we did this or this didn’t occur, it’s just the restaurant is not cash flowing and our operators said hey, this is not a restaurant we should be in.

Operator

Your next question comes from [Jonathan Waite – Precipia Research].

[Jonathan Waite – Precipia Research]

On the consumer discussion here, the 3 C is mixing a little lower here. I mean is it a better environment from a discounting promotional perspective from the consumer angle? I mean should it look healthier going forward as far as how much discounting you do? And then the second question would be is there any seasonality in that $7 million on the Mac Grill income?

Charles M. Sonsteby

There’s no seasonality on the $7 million. I’ll handle the easy question first. Wyman, you’ve been our 3 C expert. Do you want to?

Wyman Roberts

Yes. So I guess the question, I’m not exactly sure what the question was, in terms of do we anticipate it being a less aggressive kind of promotional marketplace out there? There’s no indication that that’s necessarily the case, although the depth of the discounting we do believe can be moderated. So that’s kind of what we’ve been talking about here. Again, value is still important. All the metrics from an economic standpoint tell us that and the competitive environment out there, which you guys know as well as we do, is still very aggressive. But we think there is room for us to deal less deeply.

[Jonathan Waite – Precipia Research]

What gives you that kind of comfort? Is that more than the traffic trends or what’s?

Wyman Roberts

Yes. You know, learnings from within, history with the different promotions. Again we’ve taken 3 C through several different [iterations], our learning there, research we do with the consumer that’s proprietary on promotional offers, a lot of variables that go into our marketing plan. And then you know looking at the marketplace and again we’re banking on the core of our business, the things that we’re improving like the menu and the food and the service to help strengthen the brand, so that that’ll carry more of the weight and the promotions won’t have to as much. And so that’s ideally what we’re working towards and really relying on much more as we move forward.

Operator

Thank you. We have no further questions in the queue at this time. Do you have any closing comments you’d like to finish with?

Marie Perry

We just want to thank everyone for joining us today. This concludes our earnings call and we look forward to talking to several of you this afternoon and actually hoping to see a lot of you and speak to you on our investor conference on March 26. Thank you.

Operator

Thank you. Ladies and gentlemen, this does conclude 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. F2Q10 (Qtr End 12/23/09) Earnings Call Transcript
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