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Brinker International, Inc. (NYSE:EAT)

F3Q2014 Earnings Conference Call

April 23, 2014 10:00 AM ET

Executives

Chris Bremer – VP, IR

Wyman Roberts – President and CEO

Marie Perry – SVP, CFO and Treasurer

Analysts

Chris O’Cull – KeyBanc Capital Markets

David Palmer – RBC Capital Markets

John Ivankoe – JPMorgan

Karen Holthouse – Credit Suisse

Stephen Anderson – Miller Tabak

Nicole Miller – Piper Jaffray

Howard Penney – Hedgeye Risk Management

Sarah Bernstein – Sanford Bernstein

Jeffrey Bernstein – Barclays Capital

Bryan Elliott – Raymond James

Jeff Farmer – Wells Fargo

Alvin Concepcion – Citi

Operator

Good morning, ladies and gentlemen and welcome to the Brinker International Third Quarter of 2014 Earnings Call. 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 then my pleasure to turn the floor over to your host, Chris Bremer. Sir, the floor is yours.

Chris Bremer

Thank you, Tom [ph]. Good morning, everyone, and welcome to Brinker International's third quarter fiscal 2014 earnings call which is also being broadcast live over the internet. Before turning the call over, let me quickly remind you of our Safe Harbor regarding forward-looking statements.

During our management comments and in our responses to 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 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 website under the Financials section of the Investor tab. Consistent with prior practice, we will be silent on intra-period sales or other key operating results yet to be reported as the data may not accurately reflect the final results of the quarter referenced.

On our call today, you will hear from Wyman Roberts, Chief Executive Officer and President of Brinker International; and Marie Perry, Interim CFO, Controller and Treasurer. Following their remarks, we will take your questions. Now I will turn the call over to Wyman.

Wyman Roberts

Thanks, Chris. Good morning, everyone. Thank you for joining us this morning. I'm going to take a few minutes to share with you our company results for the third quarter and some highlights from our brands and then I'll pass it over to Marie Perry, our Interim CFO for an in-depth look into the numbers.

So as noted in the press release this morning, Brinker reported third quarter earnings per share before special items of $0.84. That represents a 16.7% year-over-year increase. We also saw company-owned comp sales increase 0.7% and our overall traffic was down 1.2%. So all in all, what we consider another solid quarter despite some pretty significant weather-related issues.

During the quarter, we drove double-digit earnings per share growth, positive comp sales and improved our operating margins 90 basis points thanks to our stellar operations teams, the work we're doing to improve our food service and atmosphere and the effectiveness of our marketing campaigns. So even though our traffic numbers are negative, we have seen steady improvements over the last three quarters. That said, it remains our top priority to deliver positive traffic across our business.

And as we talk to consumers, they're telling us they're not looking for us to give food away. They're asking us for a problem-free experience at a pace of their choosing in a cool atmosphere with great food -- compelling and relevant at a great value. And that's what we're committed to giving them.

So let's start with the Chili's business. Chili's comp sales increased 0.7% for the third quarter with traffic at 1.2%. Our overall US franchise comp sales were up 0.1% for the quarter. So we significantly outperformed the category again which demonstrates the effectiveness of what we're doing to differentiate the brand from the competitive set and to drive sales and traffic in both our company-owned and franchise restaurants. Things like culinary and technology innovation, focusing on to go and delivery as a growth vehicle, reimaging our restaurants to make our atmosphere more relevant, optimizing our marketing spend to increase our share voice and opening new restaurants. During quarter three, we opened two company locations and we’re on target to hit our goal of 10 to 12 new restaurants per year.

But I want to spend a little time giving you more detail around two of those initiatives that are especially exciting for us – our Fresh Mex platform and our new tabletop devices.

Mexican is the biggest menu category for Chili’s. Our guests give us a lot of permission to play in that space, more so than any other bar and grill player. And with the introduction of our new Fresh Mex bowls and enchiladas, we now have more than 20% of our guests choosing Fresh Mex entrees. And the food is delivering great results in terms of quality, appeal and relevance.

So we’re excited about the initial Fresh Mex menu innovation that’s going on. And on its heels, we rolled out our next wave of Fresh Mex with the introduction of Guacamole Live and our new fajitas just last week. Preliminary results indicate these items are also performing really well just as we expected.

So we’re renovating our Fresh Mex platform by reinventing core menu [indiscernible]. And that’s how we will continue to strategically work through our menu by renovating core items to make them more compelling for today’s guests, and innovating by bringing fresh new items to keep platforms that align most closely with who we are as a brand.

We’re on air now with fajita and Guacamole Live, so more to come on the Fresh Mex category as we finish up the year. And what you’ll notice with Fresh Mex as with any future food and beverage enhancements is that we’re targeting quality and relevance to further differentiate the brand from our competitive set.

One of those key differentiators is freshness which you can see in our new drink offerings like the blueberry and pineapple infused margarita we introduced earlier in the quarter. It’s been a very successful product for us so far. In fact, it’s contributed to the best alcoholic beverage mix we’ve ever seen, taking us to over 14% year-to-date.

Products like these enable us to not only achieve record-high guest satisfaction and value scores during the quarter but also deliver better margins year over year.

Okay, so another key to driving relevance in the brand is through innovative technology. As of yesterday, we completed the installation of our new tabletop devices in every company-owned restaurant. Our franchise locations are close behind with the rollout as well.

Our primary focus with these devices is to enhance and tailor the guest experience to continue to make Chili’s more relevant and to drive traffic. We think there’s opportunity for PPA lift and some operational efficiencies like when a guest chooses to pay on their device rather than wait for a server to present the check.

But that’s not the primary benefit we believe these devices will have on our business. For us, it’s about driving traffic and taking share. And longer term, there’s tremendous opportunity to leverage this device to drive guest loyalty, to tailor the guest experience even further by customizing content and increasing the interaction we have with our guests.

But all these efforts are only as effective as our guests’ awareness of them, so we stepped up our marketing program during the quarter as well. We invested more in media this year to regain some of our share voice that we lost over the last years when we held our marketing budgets flat. We’re pleased with our spend around traditional as well as digital media and we feel really good about the way we’re messaging using a multi-pronged approach that speaks to the brand, the value proposition and our innovation.

And listen, we know that in this environment, guests have no tolerance for a disappointing experience. So our operations teams are committed and focused on delivering problem-free experiences. We minimized operational complexity by eliminating limited time offers which allows our team to focus on delivering a great guest experience. As a result, we continue to see significant reduction in the number of guests who have a problem in our restaurants.

On the global side, our business also delivered strong third quarter results of 0.6% in comp sales and we’ll continue to grow that business as well. Our partners opened 10 restaurants during the quarter and the new locations we’ve opened so far during the fourth quarter take us to over 300 restaurants in 30 countries and two territories around the world. We’re proud of the worldwide presence of the Chili’s brand and achieving this milestone is a testament to the strength of the Chili’s brand and demand for the brand globally.

Our partners believe in the direction of the brand as well and they’re embracing the key capital initiatives we’ve implemented domestically like Kitchen of the Future and the reimage program. We look forward to continuing the growth and expansion of our global business and working with our partners to deliver strong business results.

Moving to Maggiano’s, the brand etched positive in sales during the quarter with a 0.2% increase. That’s the 17th consecutive quarter we’ve delivered year-over-year sales growth. While tougher weather in Chicago and the Northeast didn’t help any of the sales, the brand was carried by a resurge in banquet business which is growing both social and corporate sales this year. Combined with the broad appeal of classic pasta which has helped evolve the brand from special occasion to a more accessible everyday option, Maggiano’s earned a designation of America’s next great restaurant chain by Entrepreneur magazine last month.

Over the next six months, we’ll open four more locations with smaller footprints like our Annapolis location and we’re excited about the growth potential this brings to the Maggiano’s brand.

Finally, last month I had the chance to talk to many of you during the investment meetings we participated in in Boston, New York and Las Vegas which was a great opportunity to reiterate our commitment to the strategies that we’ve been – that have been working so well for us over the past four years. Part of that strategy is for us to continue to deploy capital consistent with the plan we laid out, specifically to invest back in the business where we feel confident we can get targeted returns to support our dividend strategy, to service our debt and when all that’s done, to give the rest back to our shareholders in the form of share repurchase.

We feel good about the future of all three of our businesses. We’ve been able to deliver on our promises and what’s frankly been a little more challenging business environment with more competitive pressure than we anticipated when we created the plan four years ago. Nonetheless, our strategies are working for us and we’re confident they’ll continue to work for us going forward.

We remain committed to our goal of doubling our fiscal ‘12 earnings per share by fiscal ‘17 and we’re confident about our ability to deliver for our shareholders. And with that, I’ll turn the call over to Marie to walk you through the financials. Marie.

Marie Perry

Thanks, Wyman. As you just heard, our third quarter earnings per share before special items was $0.84 representing a 16.7% increase over the same quarter last year. Third quarter revenues were $758.4 million, an increase of 2.1% over prior year. And despite harsh winter conditions throughout the quarter, total company-owned comparable restaurant sales increased 0.7% driven by 1.2% price and an increase of 0.7% improvement in mix.

This was partially offset by a decline in traffic of 1.2%. Capacity was up 1.6%, driven by the addition of company-owned Chili’s restaurants in Canada at the end of fiscal 2003. Franchise and other revenues were $19.2 million, an increase of $1.1 million over prior year.

International franchise comparable restaurant sales increased 0.6% and US franchise comparable restaurant sales increased 0.1%. We’ve also opened 16 mixed [ph] franchise restaurants over the past 12 months, offset by the acquisition of the 11 existing restaurants from our franchisee in Canada as previously mentioned.

Cost of sales improved 90 basis points year-over-year to a 26.5%, driven by 50 basis points of favorable mix associated with a year-over-year change in promotions, our new flatbread and Fresh Mex menu items, better waste control from continued leverage of our new point of sale and back office system and the rollout of new fryers. This improvement was further bolstered by favorable impact in menu pricing and other items with 40 basis points. Commodities were flat for the quarter with higher meat and seafood cost, offset by other items.

Currently, 46% of our commodities are contracted through the end of calendar 2014. Restaurant labor improved 40 basis points to 31.6% driven primarily by 70 basis points of benefit from reduced employee health insurance expense and leverage on higher company sales, partially offset by a 30-basis point increase in manager salaries and bonuses.

The sizable improvement in employee health insurance cost is a result of a favorable current year claims experience adjustment that is lapping a substantially unfavorable claims experience adjustment in the third quarter of fiscal 2003. Restaurant expense was $172 million or 50 basis points higher than prior year mainly as a result of increased accruals for advertising and higher utilities.

With the addition of 11 company-owned restaurants in Canada and recent investment in key capital initiatives, depreciation expense increased $1 million to $34.2 million, representing a trend toward higher levels of expense. Interest expense and G&A expense were flat to prior year. The tax rate before special items was 30.6% versus 28.9% in prior year, an increase of 170 basis points driven by higher earnings and lower tax credits.

Capital expenditure for the quarters was $44.3 million with year-to-date cash flow from operations at $277.1 million. Today, we also completed 580 Chili’s reimages and we are still on track to have completed a total of 620 reimages or roughly 75% of our company-owned Chili’s system by the end of the fiscal year.

And we’ve made substantial progress on the rollout of new fryers with about 560 completed today and the remainder of the Chili’s company-owned system implementations to occur by the end of the fiscal year. We ended the quarter with approximately $65 million in cash on our balance sheet. During the quarter, we bought back roughly 1.9 million shares for $99 million. And since the end of the third quarter, we purchased another 386,000 for $20 million.

So through today, our year-to-date share repurchases have totaled $212 million or 4.5 million shares which represents the majority of our share repurchase for the fiscal year.

Our results this quarter once again demonstrate that even in a challenging business environment, our industry-leading business model enables us to deliver consistent, reliable, double-digit annual EPS growth and steadily return value to our shareholders. As Wyman mentioned, we are focused on margin improvement and traffic-driving strategies. We are confident that these strategies which are built into our fiscal 2014 EPS expectations we previously shared with you will demonstrate our food, service and atmosphere, will bring more guests in the door and elevate our top and bottom line performance.

With that, we’ll now open the line for questions.

Question-and-Answer Session

Operator

Thank you very much. Ladies and gentleman, the floor is now open for questions. (Operator instructions) And we’ll take our first question from the line of Chris O’Cull with KeyBanc Capital Markets. Your line is live.

Chris O’Cull – KeyBanc Capital Markets

Thank you. Wyman, Chili’s has made several changes to improve the guest experience, yet traffic remains negative. It seems like the only time Chili’s has been able to increase traffic is when they’ve been more aggressive with promotions. When do you think the traffic driving strategy needs to be revisited?

Wyman Roberts

Hey, Chris. I think the – well, first of all, we’re encouraged by the momentum that we’ve seen through the year, so the traffic patterns have improved. They’re still not where they need to be. Obviously, this quarter, there were some – there’s some other things impacting the results, primarily weather.

So when we factor all that in, we’re not happy with where we’re at, we want positive traffic, we know that’s important and we’re working towards that but we do feel that the strategies that we’re appointing are going to get us there and they’re working towards that as we speak.

With regard to changing the overall strategy, I don’t know if you’re saying, when are you going to think about maybe increasing the level of discounts or getting into a limited time promotional strategy and we just don’t see that working for people that are doing that either. I mean, we’ll continue to outperform the category, so we’re confident with the little strength in the category and the continued acceleration of the initiatives we have in place, that we will continue to take share and turn traffic positive in the near future, so.

Chris O’Cull – KeyBanc Capital Markets

How should we think about the increased advertising spend because it’s not a limited time offer, so should we expect the benefits of that to build over a few months, over a few quarters? How should we think about when we should start seeing some benefits from the greater ads then?

Wyman Roberts

Yes, well again, I think we’ve seen them relative to the competition fairly instantaneous. I mean, as soon as we started increasing our advertising, we did see a bigger gap to the competitive set.

I think what we’re doing is a longer term play though. I mean, we are reintroducing it to a lot of people, the brand, in a way that they haven’t expected Chili’s to talk to them. And so, talking about the brand, talking about innovation and then introducing new items at both lunch and dinner, those are messages that are going to build slower than a deal at a price point for a limited time.

Chris O’Cull – KeyBanc Capital Markets

Fair enough. And then one last question, you guys have done an excellent job of controlling your commodity inflation, maybe educate us a little bit in terms of what does Brinker do differently to be able to maintain such low commodity inflation while the rest of the industry seems to be seeing quite a bit.

Wyman Roberts

Well, I mean, I think, again, one of the keys to Chili’s especially but it works for Maggiano’s as well is the breadth of product that we use and the fact that we’re really driven by any one specific protein especially, it allows us to diversify the risks that you can see in the commodities and markets at times. And we’re able to move in and out of products with merchandising to kind of work our way around it.

So with shrimp for example, with what’s going on with the shrimp, we sell shrimp at both brands but it’s not a huge percentage of our menu mix and obviously when prices get really high, rather than having a price for it, we’ll just market and merchandise around it and actually reduce the usage on that product just through guest preference.

And that allows us to navigate through a lot of these commodity challenges I think more successfully than others that just don’t have the opportunity. If you’re a steak place and steak goes up; if you’re a seafood place and shrimp goes up, you just can’t avoid that hit as well as we can now.

We’re obviously not immune to it but we also have an unbelievably powerful supply chain team and they have walked us into some really favorable contracts. And they’re very smart and we don’t try and get the lowest all the time but we look for more stability and so we’re not trying to time the market to the lowest possible point but we’re trying to make sure that provide a very consistent experience for our guests and our shareholders.

Chris O’Cull – KeyBanc Capital Markets

I apologize if I missed it, but did you say what your commodity inflation target is for the next few quarters?

Marie Perry

Chris, hi, this is Marie. So as we talked about leaving this quarter with our commodity being flat or commodities really being flat and having visibility out through the end of the calendar year at 46%, when you look out going a little bit further, we are going to see some pressures around hamburger meat, avocados, limes and seafood but there are some offsets in some of the other categories like tops [ph], sirloin, fajita meat and poultry. And for the same reasons that Wyman mentioned, because that’s probably not the market trend but it’s probably more about the effectiveness of the contracts that we’re in and our supply chain group basically just being extremely effective.

So when you look out going further, it’s probably going to see some inflationary pressures kind of in the near term. But then when you kind of look out, when you get into ‘15, again, based on our visibility, it really doesn’t look like commodities are going to be headwinds for us.

Chris O’Cull – KeyBanc Capital Markets

Great, thanks.

Wyman Roberts

Thanks, Chris.

Operator

Our next question comes from the line of John Glass with Morgan Stanley. Your line is live.

Unidentified Analyst

Hi, this is Courtney Young [ph] for John. Wyman, can you talk just a little bit more about the Tex-Mex platform? I believe last time you targeted getting new and last users in the door. Is that still what you’re seeing and is that the plan for the new Guacamole Live and fajitas?

Wyman Roberts

Yes, absolutely, Courtney [ph]. We think with the permission we have in the Fresh Mex space that we can, through renovation, through making the products that we currently know are popular or maybe need to be stepped and brightened and freshened up like what we’ve just done with fajitas, will make our core users even happier and drive frequency with them. And then by bringing new innovative products into the platform, like the bowls, we are starting to introduce some new guests to items that they – that we didn’t offer before that are compelling for them and competitive and so we see it working on both fronts.

We see it working in both day parts. It’s a great strategy for both lunch and dinner. Obviously, people eat things, take different products but the platform itself works against both day parts very well for us. So, yes, we continue to work against that strategy at both driving frequency and introducing new guests into the concept.

Unidentified Analyst

And I think you said 20% of guests are choosing it, do you have a breakdown at all between new guests and your core guest?

Wyman Roberts

Yes, but I probably – I mean, it’s – that’s probably more detail than I want to share on the call, but we are happy with the percentage growth that we’ve seen in the category and we think it’s got more upside from there and it’s working against both those targets.

Unidentified Analyst

Okay, got you. And then in terms of the Ziosk, I think you said you just finished rolling them out company-wide, I think last time you had shared it with close to 85% touching fee device. Do you have any –

Wyman Roberts

Correct.

Unidentified Analyst

– additional learnings there or – and especially in terms of the checklist?

Wyman Roberts

No, I mean I think all the metrics that we’ve shared in the past around the engagement level – again, just to remind folks that we’ve had this device in over 100 restaurants for almost two years, so we have a lot of history with it. Now the rollout was unbelievably aggressive. We rolled out over 45,000 tabletop devices in six months and now it’s rewiring every restaurant, every company-owned restaurant.

So right now, what we’re seeing after a very successful rollout is the engagement levels are holding the participation in the various activities, whether it’s games or the check add-on on or the surveys and paying at the table are all consistent with what we would have expected. So we’re on track for those devices to do what they were expected to do in the short term/

Our big energy and excitement around Ziosk is really what we’re going to be able to do with it now that it’s rolled out and how we’re going to use it as we develop future marketing programs and future opportunities to engage our guests more deeply.

Unidentified Analyst

Got you. And then just finally on the share repurchase, I think you said you did 20 million additional this quarter, is that it for the year? Should we be expecting a little bit more and then how to think about it going into ‘15?

Marie Perry

Yes. We’ll have the opportunity to provide guidance on ‘15 in our next earnings call. But as you think about ‘14, I mean, it’s really as much the math, right? So as you get earlier – later in the year, based on the weighting factor, it almost just becomes a minimal impact to the rest of fiscal ‘14.

But as we mentioned in our prepared remarks kind of with the significant chunk of share repurchase, 1.9 million shares in the third quarter and then the additional 20 million in the fourth quarter, that is going to make up the majority of our share repurchase for ‘14.

Unidentified Analyst

Got you. And then I guess just finally, I know you guys have said that you’re not doing LTOs anymore but have you seen any shift in terms of your competitors in the current sales environment, especially going into April finally getting out of this poor weather that’s been a drag on the industry?

Wyman Roberts

I don’t know about a shift, Courtney [ph]. I mean, people continue to work that strategy in terms of – especially in the national players. But then obviously there are a lot of very successful concepts out there both in the casual and fast casual space casual that are leveraging a limited time offer strategy.

And so I think people pick the strategies that they think works best for them. I don’t see it necessarily getting more aggressive but obviously, you see the various players out there in all the segments using whatever strategy they think is going to work best for them.

Unidentified Analyst

Okay, great. Thanks for this.

Wyman Roberts

All right.

Operator

Our next question comes from the line of David Palmer with RBC Capital Markets. Your line is live.

David Palmer – RBC Capital Markets

Good morning. A question on – just little questions on the Ziosk. You mentioned that you’re excited about the future. It’s hard to believe that it wouldn’t be more of a benefit so far, right now, you have that gap to your franchisees, is that all weather or is that – some of that, perhaps the Ziosk providing a check benefit or table turns benefit? Any sort of measurable benefit so far from that?

Wyman Roberts

Hi, David, Wyman. It’s probably mostly weather. Again, our franchisees are more mid-west, more northeast. So primarily, I would say most of that is weather. And one of our big franchisees has had Ziosk again for quite a while. So we don’t see it being the short term driver in terms of check and efficiencies that some are talking about, although we like it a lot, in the short term and the long term.

David Palmer – RBC Capital Markets

And you mentioned the alcohol mix is up, are you comping [ph] higher in the bar area than you are in the dining room?

Wyman Roberts

Not necessarily. We’re – we sell a lot of our alcohol in the dining room, so it’s not – Chili’s isn’t the kind of place that’s got the same dynamic as some concepts in terms of what happens in the bar versus the dining room. We sell a lot of our alcohol in the dining room and I think we’re seeing growth in both categories, in both spaces.

David Palmer – RBC Capital Markets

And then just one last one, I mean, last year, I remember you had the pizza launch in the March quarter, perhaps it didn’t have the sustainability that you would have hoped it would have. That has implications in terms of your comparisons perhaps for the June quarter from a sales perspective.

But do you think there might also be a food margin impact from that where you have a high Mexican mix perhaps not lapping your strongest Italian or flatbread launch from last year?

Marie Perry

Hi, this is Marie again. I– when we think about Fresh Mex, I mean, we’ve mentioned in the past as well that the – there is definitely a mix benefit and just a margin improvement with that as well. So, we talked about the same thing with pizzas, and so you’re really kind of trading one off for the other.

Wyman Roberts

Yes, both these platforms are very favorable to margins – to our average margins.

David Palmer – RBC Capital Markets

Great, thank you.

Wyman Roberts

Thanks, David.

Operator

(Operator Instructions) We’ll take our next question from the line of John Ivankoe with JPMorgan. Your line is live.

John Ivankoe – JPMorgan

Hey guys, thanks. It’s a load [ph] going in. And Marie, I know you’ll provide full year guidance for ‘15 next quarter but just to clarify, should we interpret your earlier comments about commodities not being a headwind to mean they’ll basically be flat? And if that’s the case, can you help us frame that in the context of maybe specifically beef, cheese and avocados which all seem like they’re going to be up and I think they’re pretty major inputs for the new Fresh Mex items?

Marie Perry

Yes, it just – I think when we have the opportunity to get together in the next call, we’ll have more visibility in terms of the contracts that roll off, the contracts that we have on. So I’m a little bit hesitant to give that type of granular information but again, I think if we’re talking headwinds, I mean headwinds for us is really labor around minimum wage. I mean things like that.

With commodities, I mean, there is going to be some kind of bumps quarter-to-quarter. I mean we were flat this quarter, not sure we’re going to be able to sustain that next quarter. And then again, we’ll have an opportunity to provide more clarity as we get into ‘15.

John Ivankoe – JPMorgan

Okay. And then I think this is the first quarter without any benefit from some of the front and back of house margin initiatives that were discussed back in 2010. So, I mean, either Wyman or Marie, if you could give us some color maybe around potential other margin initiatives that might be in test perhaps increasing wait staff per table, things like that, that might be a driver of further margin expansion going forward, if any of those are in the pipeline?

Wyman Roberts

Hey, John, Wyman. Listen, we’re always looking for ways to improve the business model and maintain and improve our margins. So we’ve got things we’re working on. I wouldn’t want to share any of those with your right now. They’re all kind of preliminary but we never stop looking for ways to make the business more efficient. But at the same time, we’re very cognizant of the importance of making sure our team members and our guests are – we’re not deteriorating their experience.

So we’ve always got things out there just like we did last year with the fryer. We found that kind of after some initial testing and it just turned out to be a nice improvement for us after the initial investments, so we’ll continue to roll those out. And we’re looking at labor opportunities as well. But they’re all relatively small. I mean, nothing like what we saw when we moved with Kitchen of the Future or the team service, but they’re all kind of designed to continue to keep this business model strong and will allow us to deliver on that plan we shared with you guys. It gets us to that target in fiscal ‘17.

John Ivankoe – JPMorgan

Great. And then I guess lastly, could you remind us of what the healthcare impact was going to be for 2015 if there was going to be one of any significance in terms of margins?

Marie Perry

Yes, in terms of healthcare, when you – so we just had – obviously for January 1, we construct a new plan, kind of visibility in terms of the impact about plan, I think we’re still studying the results.

The significant – the adjustment that we talked about on the comments earlier, that actually had to do more with claims and kind of what’s happening with claims. So going forward, we’ll see kind of the new population that comes in, how that impacts our health insurance. And then also, there is an expectation that medical inflation rates are going to continue.

So I would say kind of on a looking forward to ‘15, there’s probably going to be some pressure more likely due to just medical or medical rates going up but then we’ll have to kind of see what happens with the claims and the population.

Wyman Roberts

But right now, John, we’re not thinking it’s going to be crazy. This isn’t – we don’t see it as a significant headwind today. As Marie said, we’re learning as we go and things are changing both within our world as well as in the greater environment out there both in DC and in the workspace. So we’ll continue to monitor. But right now, we’re not seeing it as being a major headwind for next – for the near future.

John Ivankoe – JPMorgan

Very good, thanks.

Operator

Our next question comes from Karen Holthouse with Credit Suisse. Your line is live.

Karen Holthouse – Credit Suisse

Hi. Looking at the monthly trend for the quarter, we saw some choppiness, if you will, gathered [ph] on a one-year basis versus two-year and as a standalone versus GAAP to NAAP. Is there anything you would call out in terms of promotional matches or advertising spending month to month for the quarter that might have affected that or if holiday shifts as well?

Marie Perry

As it relates to holiday shifts, when you look at kind of the trends within the third quarter, there really weren’t a lot of impacts. We kind of heard others talk about Easter. Well, Easter fell on the fourth quarter for us. It fell on the fourth quarter for us last year. So really, weather, as we’ve mentioned over and over again, was an impact in the third quarter.

Wyman Roberts

And if you’re looking month to month, I think you can almost drag yourself a little crazy trying to attract every jump or blip in the multi-number especially with some of the weather we had this year.

And again, promotional; so, I think if you look at the quarterly numbers you’re going to get a better sense for kind of how the business is trending and where we’re at. And again, comparing that to the industry data will give you, again, a better sense I think for how we’re moving through.

Karen Holthouse – Credit Suisse

And then one quick other question. On the advertising spend in the quarter, should we still be thinking about it as about $0.02 a share then increase year over year?

Wyman Roberts

Yes, I think that probably is about right. Yes, in that ball park.

Karen Holthouse – Credit Suisse

Okay, great. Thank you.

Operator

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

Stephen Anderson – Miller Tabak

Yes, good morning. And going back to some of the mentions you had on the weather, were you able to quantify the overall weather impact with both company-owned and the franchise? I know the franchise were quite a bit lower than the company-owned and so what happened?

Marie Perry

Starting with franchise, we really don’t have that level of visibility on their weather but I mean just geographically, you can probably get a sense of who’s impacted and who’s not.

For us, we are thinking – we’re looking at whether to be around the 100 basis points impact in the third quarter. Now that kind of differs a little bit between kind of Chili’s and Maggiano’s. Maggiano’s was actually hit a little harder just basically because – whether restaurants or where our restaurants are positioned.

Stephen Anderson – Miller Tabak

Okay, thanks.

Operator

Our next question comes from the line of Nicole Miller with Piper Jaffray. Your line is live.

Nicole Miller – Piper Jaffray

Good morning. I fear you may have already answered this but I’m going to ask to the comp question a little bit a different way. Just trying to think about the way you exited the quarter March was strong, especially to your basis. I mean, if I just kind of hold that logic steady is – I would think that’s reasonable but then I just heard you a couple of questions ago answering, say look at the quarterly results and that’s a better indication of where we’re at.

So, is there something I need to understand in a calendar shift or anything one time in nature in the current quarter that I can’t look at how you exited the quarter?

Wyman Roberts

No, I mean, Nicole, I think you can look at all the data. I just think sometimes when you start to try and understand every month’s nuances without us walking you through what happened with that weekend, the third weekend in February’s weather, it gets a little bit – it can get a little bit difficult.

I think overall, the trends are showing kind of how we’re seeing our business which I think relative to our absolute performance and our competitive performance is encouraging. Obviously, if you pick March, it’s a better – it’s probably a better story than if you picked February.

So there’s nothing abnormal in any of the months. It just got – they all have their own peculiarities and without getting in this really minute detail, we’re just kind of leaving it at that.

Nicole Miller – Piper Jaffray

And I very much appreciate that, so I think we might walk away saying there’s encouraging trends as you exited, there’s no one reason why you can’t sustain that offset with a conservative level or dose of conservatism about hey, you know, this is what the industry looks like. So it’s a mix of those two. Is that kind of fair?

Wyman Roberts

Yes, I think that’s fair and I think what I’d like you to take away is that we’re optimistic. I mean, we’re seeing sitting here saying we’re very optimistic about our business and we’re excited about what we’re doing both to position the brands aggressively and effectively in the marketplace. We’re excited about the returns that we’re getting from the business model results. And we’re consistent with our use of capital and our ability to continue to return great investments back to our shareholders, so we’re optimistic.

Nicole Miller – Piper Jaffray

Thank you.

Operator

Our next question comes from Joe Buckley with Bank of America. Your line is live.

Unidentified Analyst

Hey this is Gregg [ph] on for Joe. I just had – my first question is I know you guys have talked in the past about Maggiano’s perhaps maybe looking to sell it. I know the commentary shifted more towards rewriting the brand as a growth vehicle. I was wondering, what drove the change and what would it cost, sort of what would you have to see in the business to cause you to think about selling it?

Wyman Roberts

Gregg [ph], I don’t know exactly what you’re referencing with regard to that first part of the comments. We’ve always said Maggiano’s is just a real important part of the business.

Obviously, with the improvements that the brand has made over the last two years to their business model, it makes sense to deploy capital around growing it again. So – which is, again, the same filters we’re using for every aspect of the business. When we see an investment that makes sense, from our returns perspective, we put capital behind it and we grow the business that way.

And Maggiano’s is under the same kind of filters. And given that there’s only 45 of them and there’s a lot of green space out there and the brand continues to just, from a guest perspective, deliver outstanding experiences and the strength of the brand is really unquestionable. So we think there’s growth, so we continue to move that – forward with that strategy.

Unidentified Analyst

That’s helpful, thank you. And just a second question, can you give an update on the delivery initiative at Chili’s and the mix maybe and sort of – if what margin flow through you see on that?

Wyman Roberts

Yes, again, I think we’ve talked about delivery and to go kind of as a –we kind of look at those two initiatives together and we see opportunity in both to grow the business as consumers look for options to sitting down and spending the time and energy that is required, as they’re more pressed for time. And we have grown both of those businesses. The delivery business is going to be a slower growth vehicle for Chili’s. It was actually a fairly fast growth vehicle for Maggiano’s where that opportunity to kind of leverage and draft off of the banquet business made it more I think understandable for consumers.

We’re right now just growing the awareness, frankly, in the market that Chili’s will deliver. And that’s going to take a little time but between that and the enhancements we’re making both from a technology standpoint, from operation standpoint to drive both those businesses, we think it will be a nice piece of business for us going forward and will represent a significant part of the sales fortunately which it already does when you take to go and deliver together.

Unidentified Analyst

Okay. Thank you very much.

Wyman Roberts

All right, thanks.

Operator

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

Howard Penney – Hedgeye Risk Management

Hi, thanks so much. I have two questions, the first one is, based on your commentary around how you exited the quarter and the weather, do you expect traffic to be positive in the fourth quarter?

Wyman Roberts

Hey Howard, it’s good to hear you. We can give guidance and that would be guidance, we’re optimistic about what we’re doing, I guess. The best I can tell you is whether it’s going to be positive or not, we think we’ll continue to take share, we think we’ll continue to grow the business and we’re excited about the innovation that’s taking place on the food side, the improvement in the operations experiences that we’re seeing with the operations team.

And then we’ve got this new technology platform that just kind of landed in the restaurants yesterday that gives us just a lot of options with regard to how we connect with our guests. Some of those will be short term gains but really I’m excited about some of the longer term opportunities now.

The thing about that, Ziosk as well is it didn’t require us to invest out of pocket capital. So when you think about that tool in the restaurants without really asking the shareholders to come up with any dollars to put it in, that’s a pretty nice asset we’ve got now that we get to play with.

Howard Penney – Hedgeye Risk Management

A potential win-win for everybody.

Wyman Roberts

Yes, we’re excited.

Howard Penney – Hedgeye Risk Management

And the second questions revolves more around the bigger picture question. And obviously we’re seeing a lot of coupons being dropped by some of the garden [ph] chains and I was just curious as to your thoughts as to the environment you hope to see, would you risk for a healthy gardening [ph] concept or not dropping coupons or would you rather see a struggling company dropping coupons and just being disruptive? Which is sort of a more preferred environment than you [indiscernible].

Wyman Roberts

Well, without talking to any specific competitor, I mean I think the whole – our take on this space is that when we look at who’s winning and who’s struggling and in our own situation, you got to have a solid concept. You really got to put the value proposition into that concept and maintain the basis. You can play around on the fringe with some discounting, if you will, but if it becomes a primary driver and there’s examples recent and past of people that have tried to use that to get them out of trouble or to move them from one place to another.

And I don’t think it’s proven to be a long term strategy that holds. So at some point, you got to have that base concept value proposition figured out and that’s what we’re focused on. And whether or not everyone gets there or how people get there in their own, well, I’m less concerned about that. What I am – what we do watch, though, is it doesn’t appear the consumers are as driven by the deal, if you will, as they have been in the past.

There are levels of effectiveness, but it doesn’t seem to be shifting share as much as it used to. Let’s get our concepts working off whatever their appointed differentiation is and their value proposition. So that’s encouraging I think for all of us to be able to say let’s get the – our value proposition is and then let’s go to head to head that way.

Howard Penney – Hedgeye Risk Management

Great, that’s very helpful. Thanks so much.

Operator

Our next question comes from the line of Sarah Senatore with Sanford Bernstein. Your line is live.

Sarah Bernstein – Sanford Bernstein

Thank you. Just a couple of follow-ups. One is about advertising and just generally speaking, it’s a little higher I think this quarter. I thought most the expense was going to be – the pressure was going to be kind of frontloaded as you spent around the creative. So I’m just trying to get a sense of whether going forward this is a higher sort of just a higher bar because it’s important to drive traffic in this kind of environment.

And the second question was a related question. I think in the past you’ve talked about trying to bring in potentially new customers, kind of differentiating between your core Chili’s customers if they’re also trying to expand it, again in the context of declining traffic. Can you talk about whether you’ve seen success with the Mexican menu launches whether you’ve actually seen evidence that you’re doing that or have the trends sort of [indiscernible] in terms of what your customer base looks like? Thanks.

Marie Perry

Hi, Sarah. I’ll start off with the advertising question. So in past quarters, we’ve kind of talked about advertising mismatch, if you will, where really in the P&L and what you see on the expenses, advertising is honestly kind of spread out kind of over the full year. And so the expense is pretty consistent.

Our attempt in past quarters was trying to really help clarify maybe why you were seeing a higher advertising expense in the first half of the year and not really or kind of really second quarter and not really maybe seeing the impact yet. So we really started the advertising –

Wyman Roberts

Yes, we’ve kept the accrual consistent throughout the year. So the quarterly accrual rates are consistent, the spends within didn’t really – we really didn’t start increasing the spend levels until mid second quarter because of the out front buy and kind of the inventory we owned. And so pretty consistently now for the year, the spend levels will be about the same relative to prior year and we’ll wrap through that whole process if we keep the strategy in the first quarter of next year.

Marie Perry

Yes.

Sarah Bernstein – Sanford Bernstein

Thank you. And then the custom –

Marie Perry

Yes.

Wyman Roberts

Yes, on the customer side, I think similar to what I mentioned before, Sarah, is we’re – we think our strategies are working on both fronts. We’re hearing and seeing some guests come in that haven’t come in for a while on some of the new innovation that we’re out there talking about in advertising. And so when we talk about bowls, we are starting to attract and interest some new or lighter or lapse users into the brand or back to the brand that haven’t been here for a while.

And then obviously as we start to renovate items that are favorites but are now taken up a step or two, we’re starting to hear and see frequency on some of those guests with regard to their willingness and desire to come back if they tell us the food’s better, the experience is better. And so it’s working on both fronts.

Sarah Bernstein – Sanford Bernstein

Thank you.

Operator

Our next question comes from the line of Jeffrey Bernstein with Barclays. Your line is live.

Jeffrey Bernstein – Barclays Capital

Great. Thank you. A couple of questions. Just one on the Chili’s pricing front, it looks like you’re in that low 1% range. I just wondered if you can give some context around that, whether we should assume that holds going forward or might you vary that. I’m just trying to think – as you talk about the cost side of things whether or not that 1% would be enough to protect or drive margins. I think you mentioned that cost will be somewhat benign looking past this next quarter but labor will be a larger headwind.

So how do you think about that 1% price and if traffic is still weak, would you do less price and sacrifice the margin to kind of help the traffic along is do you want to absolutely protect that margin?

Wyman Roberts

Hey, Jeff. Again, we’re very cognizant of the margins. We’re also very, very much aware of our price and the elasticity of price and what it does to drive traffic or put pressure on the traffic. So we’re constantly evaluating those. Our point of view, our position right now is try and keep pricing as low as we can. In that 1%, 1.5% range would probably be a good number and see if we can get the business model to work and other things that we can do inside the business to mitigate any kind of headwinds we see from a cost perspective.

And we’ve been pretty successful with that over the last few years and we want to continue to do that. We also think that, again, if we can get the mix to work for us and we’ve been very successful at getting mix to help us overcome some of the challenges as well. We’re going to continue to push that. So things like a higher alcohol percentage is another way to mitigate, it’s just straight [ph] price. So between that and being very cognizant, as we talked about several times about driving traffic, we would try and keep our pricing somewhat low.

Jeffrey Bernstein – Barclays Capital

Yes. And then just two follow-up questions, one just on the tablet. I think you mentioned if a person [ph] average list and the speed of service benefit and whatnot, in the past what you had definitely mentioned that maybe you weren’t seeing so much of that just yet. So I’m just wondering what history are you’re showing with those 100 plus units that you’ve had for a long time when more recently what you’ve seen in terms of specifics on whether it is the average checklist or the speed of service list or the pay of the table [ph] percentage or any kind of metrics around that.

Wyman Roberts

Yes. Again, for really competitive reasons, we don’t want to share too much of the results. I mean we think we’ve made the investment, we’ve made the commitment, we’ve put literally tens of thousands of these in our restaurants and we’re going to work them hard for our business results.

And so without trying to be too cryptic, we think there is shorter term opportunities and longer term opportunities and we just want to keep some of that stuff more inside as we take kind of our first mover advantage and go to town with this product.

Jeffrey Bernstein – Barclays Capital

I got it. And then just lastly, I know in the press release you mentioned kind of your standard language around your guidance policy. It sounds like at this point that’s a reiteration of that policy. But now that we are entering the fourth quarter, I didn’t know the range is still somewhat wide, I think EPS culminated in 265 to 275 and then you gave some comp capacity and margin expectations. But is there any kind of directional trend we should assume in terms of within that fairly wide range or at this point you’re just leaving it kind of culminating on a $0.10 wide width for the fourth quarter?

Marie Perry

In terms of our policy, as you stated, we do provide annual guidance. We do that once a year. Any kind of insight we would probably provide would end up being some kind of a quarterly insight and we absolutely would not want to do that. So there really is no commentary on guidance at this time.

Jeffrey Bernstein – Barclays Capital

Got it, thank you.

Wyman Roberts

Thank you.

Operator

Our next question comes from the line of Bryan Elliott with Raymond James. Your line is live.

Bryan Elliott – Raymond James

My question was asked. Thank you.

Wyman Roberts

All right, Bryan.

Operator

Our next question comes from the line of Jeff Farmer with Wells Fargo. Your line is live.

Jeff Farmer – Wells Fargo

Thank you. I’m hoping to shift gears a little bit on you, guys. So as you look to further accelerate international inner growth, should we be thinking about the growth rate of that franchise, royalty and fee revenue line? I know there’s a lot of things captured in there. But, again, a pretty healthy amount of that is going to be an acceleration of your international unit openings.

So I’m curious about that. So at what rate of growth makes sense moving forward given your sort of planned inner [ph] openings throughout 417 [ph] and then any color you can provide whatsoever on flow through again would be helpful, largely considering that I believe you have a big chunk of your infrastructure already in place for some of that international development. So a lot of questions, but again, any color would be helpful.

Marie Perry

Yes, in terms of the international growth, I mean what we will share and what we shared in the past is really our expectation of how many units will open. And so we’ve talked openly and publicly around 30 to 35 openings a year and really having that continue on. So you can almost kind of take those numbers and then incorporate our revenue impact.

Jeff Farmer – Wells Fargo

And then nothing on profit flow through, just considering that that’s a very high margin royalty dollar?

Wyman Roberts

Consistent with what we’ve seen, I mean I think that it’s consistent with what you would expect from franchise royalty income. Obviously, much better than a company-owned revenue stream but pretty consistent with what you’ve experienced this year.

Jeff Farmer – Wells Fargo

Okay.

Marie Perry

And I think that is the value of our business model when you look at Brinker as a whole and look at our mix between company-owned and franchised, to your point, when you get, if you will, 4% royalties kind of coming through, that does help on the bottom line.

Jeff Farmer – Wells Fargo

And then one follow-up question which I believe is just a different way to ask something that’s already been asked. But, so my understanding was that media weights were up low double-digit percentage in that March quarter. I did hear you say something about $0.02 per share of incremental cost pressure.

Related to media maybe I didn’t – in the fiscal fourth quarter, but as I’m just thinking about the June quarter, is it fair to assume that you’re going to see another quarter where your total rating points or your media weight does increase by a low double-digit percentage relative to the prior year?

Wyman Roberts

Yes. Well, a couple of things. First, it’s not low double-digit growth. So again, when you think about media inflation being in 6%, we took the budget up probably 10%, so the budget has gone up but the weight levels have not gone up that much. What we talked about was just we’ve given back some share of voices as we kind of leveled our media spends over the last few years. And what we did this year was we just took them up to mitigate some of the inflation that has been taking place over the years in the media world that we weren’t compensating for.

So weight levels are up, but they’re not up to that level. And again, they’ve been up probably mid below single digits starting in the second quarter, mid second quarter. And again, we anticipate that taking – continuing that strategy through the fourth quarter and we’ll make a determination as to whether or not we employ that going into ‘15 and we’ll give guidance on that as we get into ‘15.

Jeff Farmer – Wells Fargo

All right, thank you.

Wyman Roberts

Thank you.

Operator

Our last question comes from the line of Alvin Concepcion with Citi. Your line is live.

Wyman Roberts

Hey, Alvin.

Alvin Concepcion – Citi

Thank you. As you look into the products innovation pipeline for the rest of calendar ‘14, I mean do you see the focus on more major new platform launches or will it be more on adjusting primary platforms? And I guess related to that, I mean are they going to be more skewed towards the latest trend of the higher margin, low check [ph] items?

Wyman Roberts

Hi, Alvin. Yes, I think that when we look at strengthening the relevance of the brand, food innovation is key. We’re focused on taking key platforms and those are the ones that really resonate with the consumer and our brand. So I mean obviously Fresh Mex is one of those. You could probably think of the other three or four that also work very well within our brand and doing what I mentioned in the prepared remarks which is renovate items that need to be kind of brightened, freshened and rethought from a presentation perspective and other aspects and then bring in to that platform some new items that add energy and relevance to consumers that are interested in the category but maybe aren’t seeing the offerings within the category that resonate with them the most.

And so that’s a strategy we’re working forward on. We’ve really got a plan mapped out for quite a while now that has a pipeline that allows us to take those opportunities and leverage them on those fronts. And we think that again is the strategy that’s going to work best for us.

And it’s not just in menu items. As I mentioned, it’s our beverage strategy, it’s our appetizer strategy. I mean I think Guacamole Live which we just rolled out is a great example of taking an item at guacamole forever [ph]. Our guests love it. We’ve just freshened it up and we’re bring it to them now in a way that it really shows the freshness and the quality of the product that Chili’s makes. Everyday we’re always making fresh guacamole, but now we bring it right up front and we show them and we let them also customize it.

And so it just starts to not only add to the options they have as a guest, but it starts to change some of the perceptions around what’s really going on in a kitchen at the Chili’s.

Alvin Concepcion – Citi

Great. And obviously, you’ve got some pretty good leverage on your cost of sales line and you called out several items that have contributed to that. Is there any way you can break out the magnitude of the benefit from things like the new menu items, Fresh Mex or at least rank the largest contributors to the leverage in the quarter?

Marie Perry

So the order in which we talked about the impact to cost of sales is really kind of the order of magnitude.

Alvin Concepcion – Citi

That’s it for me. Thank you very much.

Wyman Roberts

All right. Thank you.

Operator

That was our last question. I will now turn the floor back to Chris Bremer for any closing comments.

Chris Bremer

Thanks, Tom. This concludes the call for today. We look forward to your participation in our fourth quarter earnings call on August 7th. Thank you very much.

Operator

Thank you very much. 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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