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Executives

Doug Brooks – Chairman and Chief executive Officer

Guy Constant – Chief Financial Officer

Wyman Roberts – President, Chili’s Grill & Bar

Tony Laday – Investor Relations

Analysts

John Glass – Morgan Stanley

Jeffrey Bernstein – Barclays Capital

Joe Buckley – Bank of America/Merrill Lynch

Chris [Okul] – Centros, Robinson, Humphrey

Brad Ludington – Keybanc Capital Markets

Brinker International, Inc. (EAT) F4Q11 Earnings Call August 11, 2011 10:00 AM ET

Operator

Good morning ladies and gentlemen, and welcome to Brinker International’s FQ4 2011 Earnings Conference Call. (Operator instructions.) It is now my pleasure to turn the floor over to your host, Mr. Tony Laday. Sir, the floor is yours.

Tony Laday

Thank you, Kate. Good morning, everyone, and welcome to Brinker Internationals FQ4 2011 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 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 can cause actual results to differ from 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 to the company’s ongoing operations. Reconciliations are provided in the tables in the press release and on Brinker’s website under the financial section of the investor tab. Consistent with prior practice we’ll 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 the call today you will hear from Doug Brooks, Chairman and Chief Executive Officer; Guy Constant, Chief Financial Officer; and Wyman Roberts, President of Chili’s Grill & Bar. Following their remarks we will take your questions. Now I will turn the floor over to Doug.

Doug Brooks

Thank you, Tony. Good morning to everyone. I’m going to briefly share with you our company results for Q4 and for the entire fiscal year. I’ll give you a glimpse into our plans for F2012 and then I’ll turn it over to Wyman and Guy for deeper dives into Chili’s and our number results before we answer your questions.

As you saw in our press release this morning we reported an adjusted Q4 earnings per share of $0.48. That is a 9% increase for the quarter resulting in a 32% increase for the entire year. Brinker ended Q4 with a 2.6% gain in both comp sales and traffic, marking our fifth consecutive period of positive growth. These results prove we’re delivering on our promises. In Q3 our focus on strengthening our business model produced significant margin improvement and we began to start seeing that same sales growth. In Q4, as we continued to work on margins, our sales building initiatives gained more traction and continued to generate positive growth in both sales and traffic. And now into F’12, the work we’re doing to revitalize our brands will build on our momentum with sales and traffic while we maintain the operational efficiencies we’ve gained from the work we started last fiscal year.

Now let me give you some highlights around Chili’s results. During our last call we indicated we’d see top line improvement during the back half of the year and we delivered on that promise. We delivered positive comp sales in February and March and we continued to build on this momentum into Q4, ending the quarter up 2.1% in both comp sales and traffic, and achieving sequential improvement throughout the quarter. These results mark Chili’s fifth consecutive period of positive comp sales and traffic. The bottom line – Chili’s plan to win is working, and in a few minutes Wyman will give you a closer look at where the team gained traction in the quarter and help share the highlights of what’s coming in F’12 as they continue to build on the brand’s momentum by driving guest satisfaction.

Let’s talk about Maggiano’s. I hope some of you saw Maggiano’s featured last night on ABC’s hit comedy show Modern Family. One of the little boys Manny, a twelve-year-old, insisted on Maggiano’s being the only place he wanted to spend his birthday party – so thank you, Manny. And by the way, that show is really, really funny. But impressive would be the way I describe Maggiano’s Q4, not funny, as President Steve Provost and the team continued to produce outstanding results: 5.7% sales growth, sixth consecutive quarter of positive comp sales, 5.8% increase in guest counts, our seventh consecutive quarter of traffic growth, and a 250 basis point increase in operating margins as the team continued to drive great margin improvements.

As Maggiano’s continues to lap strong, sustained sales growth, we fully expect sales momentum to continue based on three key areas. First, value: our classic pasta offers everyday value unmatched by the competition. Guests buy one entrée and go home with a second full entrée compliments of our chef. And the brand is bringing new news to classic pasta beginning this month; in fact, a new menu that we started this previous Monday. Second, direct marketing: we’re using what we believe is the largest per restaurant database in the industry to target loyalists and new prospects in every trade area with direct mail and email and we’ll continue that traction into fiscal 2012. And third, banquets and delivery, the latter of which grew by 25% in fiscal 2011. Considering Maggiano’s positive trends in sales and traffic along with ongoing margin improvements, we anticipate new restaurant growth at Maggiano’s as early as our fiscal year 2013.

The global side of our business also made valuable contributions to Brinker’s results as well. President Carin Stutz and the Global Team achieved comp sales increases of 7.7% for the quarter and 3.5% for the entire year. We opened 23 net restaurants this year bringing our total to 235 Chili’s and one Maggiano’s in thirty countries and two territories outside the US. As you know, international growth comes with its fair share of challenges. Turmoil in the Mid East coupled with violence in Mexico reduced the number of restaurants that we planned to open this past year. Looking ahead, we’re committed to our long-term goal of 425 restaurants, however we expect it may take an additional year to reach that goal.

Carin and her team continue to work tirelessly to introduce Chili’s to the world and deliver value to our shareholders. By the way, despite all the turmoil we did continue to drive positive comp sales across the Middle East. We also expanded our comp presence in the BRIC markets opening our first Chili’s in Russia and an additional restaurant in India. We now have a total of four in India, and we look forward to opening our first Chili’s in Brazil this quarter, marking the 31st country to host a Brinker restaurant outside the US.

Here in the United States, the entire restaurant industry and I think everyone in general continues to face challenging macroeconomic conditions that certainly are impacting consumer confidence: this prolific media coverage around our political environment, the unemployment rate remaining high, and elevated gas prices that hit the pocketbook of every restaurant guest. So our three primary value strategies have become increasingly important in appealing to our guests. First, the $20 dinner for two at Chili’s; second, Chili’s new lunch combos; and third, Maggiano’s classic pasta that I just mentioned.

Our ability to execute these offerings and provide everyday value to our guests have certainly helped Brinker navigate through this uncertain economic environment. And looking forward we anticipate achieving earnings growth that outpaces the rest of the bar & grill segment. Given our progress in F’11 and the plans we have in place for F’12, I’m confident we will achieve our long-term goal of doubling Brinker’s earnings per share in five years. Our strategies are succeeding even during a challenging year. We’ve improved returns on our business model and we have reinvested in initiatives that are driving sales and traffic.

We have the right teams and the right strategies in place to continue and build on our momentum and deliver long-term value to our shareholders. So speaking of the right team, I’m about to turn the call over to Wyman Roberts who coincidentally today is celebrating his six-year anniversary with the company. He tried to call in sick this morning; I told him I’d give him an anniversary day off when he reaches ten years, not six, so Wyman, nice to have you here and why don’t you update everyone on the Chili’s business? Happy anniversary.

Wyman Roberts

Thanks, Doug, I appreciate it. You’re right – there are a lot of exciting things going on at Chili’s. Earlier this year I laid out a five point strategy to drive sustainable sales growth as part of our plan to win. Today, I’ll share our results to date, walk you through highlights of each of the five points in our strategy, and tell you where we’re headed in F’12 in our journey to make Chili’s like no place else.

As you heard from Doug, our plan to win is working. We drove positive comp sales in February and March as well as every period during Q4 with every period getting sequentially stronger. Comp traffic was positive for the quarter and outpaced the industry every period during the quarter. The fact that sequential sales improvements were driven by increases in traffic and not checks underscore the power of the initiatives we’ve implemented. We’re growing share by delivering a better guest experience. We’re offering more compelling products. We have operations teams focused on consistent execution and raising the bar on hospitality, and all of this is happening while we improve the margins.

So let me walk you through the five points in our plan to win and highlight where we’ve gained traction, then I’ll give you a glimpse into F12. First, we’re focused on key day parts. At lunch we launched Chili’s combos in Q3, featuring great new sandwiches matched with soup or salad and served with hot, fresh fries. This has been a big win for our guests. We’ve seen strong preference and great value scores. Lunch traffic which was negative before we launched the combos has shown sustained positive trends since the rollout.

We’re maintaining our margins as these new lunch combos were created with food costs in line with our overall menu, so during F’12 we’ll continue to build awareness of our strong lunch offering while we make some changes, both additions and deletions, to keep it a fresh and compelling reason to visit Chili’s. At dinner we’re focusing on key platforms, like Triple Dipper and $20 Dinner for Two to remind guests of what they love at Chili’s. We’re keeping the complexity low but we’re adding manageable new news to reinforce Chili’s unique Southwest positioning to peak the interest of those looking to try something different.

Next, we’re creating a stronger base menu. We’re systematically going through our menu with the expectation that every quarter we’ll make several changes that will improve the overall performance. Changes take the form of new product specifications, alternative cooking procedures and additions of new tested items as well as deletions of items that aren’t meeting our guest expectations. Through F’11 we’ve employed this approach and the balance between guest needs and operations capacity is tight. As a result, we’ve seen significant increases in our “food tastes great” score. When we couple this with our strong platforms like lunch combos and $20 Dinner for Two, the menu is working much harder for us as indicated by value scores that are at the highest levels we’ve seen at Chili’s in years.

The third part of our strategy is staying relevant and fresh. There are really two parts to this equation: how we connect with our guests and then what we deliver when they get to Chili’s. We’re connecting with our guests on a more personal level through our email database and other social media programs. You know, over the past twelve months we’ve grown our email database fourfold, which enables us to give our guests the news they want when they want it, and when we do that we see the impact in our restaurants. And social media programs like Twitter and Facebook are showing promising potential as well. Our Facebook following is growing rapidly and it’s significantly larger than most of our key competitors.

So as important as it is to connect with our guests in more fresh and relevant ways, they also need to see a fresher, more relevant Chili’s when they visit. And that’s where our reimage program comes in. Last quarter we completed our lab market in Oklahoma City and we learned a lot from our guests. We’re using this input to refine our design which we’ve now expanded into additional markets across the country, and those markets include multiple different prototypes. It’s still early but we’re excited about the results we’re seeing to date, and our expectation is to have approximately 250 reimaged restaurants by the end of F’12.

So far I’ve covered how we’re improving key day parts, building a stronger base menu, keeping Chili’s fresh and relevant. The fourth point in our strategy is our commitment to achieve operational excellence. During F’11 our goals were to elevate our level of service, increase consistency and improve our bottom line. Through both Team Service, which continues to pay dividends today, and Phase One of our kitchen retrofit, which has been rolled out nationwide, the results from both these initiatives demonstrate that we’ve achieved those goals. And during F’12, as we sustain those improvements, we’ll continue to elevate the guest experience even more by delivering our food faster and more consistently as we roll out Phase Two of the kitchen retrofit; and we’ll further improve our bottom line with the implementation of our new point of sale system.

But the cornerstone to achieving operational excellence is the quality of our restaurant leaders, and at Chili’s we have the best. Under the direction of Kelli Valade, our ops leaders are embracing change and challenging themselves and their team to raise the bar, and I have the utmost confidence in this team and that’s why I’m confident we’ll accomplish our aggressive plan to win.

And finally, and perhaps most importantly, is the fifth point in our strategy: our commitment to sustainable business model improvement. We carefully evaluate every strategy by its impact to our business model. If an initiative won’t maintain or improve our profitability we won’t do it, and it’s that simple. Our commitment to a 400 basis point improvement while delivering on the brand-building initiatives we just reviewed is without compromise.

Now let me share with you a little more detail about F’12. We’ve spent a lot of time fixing our business model and strengthening our core, and we’re prepared to continue this heavy lifting into next year as we build upon our foundation for future earnings growth with Phase Two of our kitchens, our systems enhancements and the reimage program. We’ll continue to drive sales and traffic by bringing new news to our guests, centered on meeting their needs to connect with family and friends. Specifically we’re placing special emphasis on our bars this year, which we’re confident will further strengthen our business model given the favorable margins associated with alcohol sales. We’ll continue to build on the happy hour day part strategy by continuing to offer specially priced beverages and menu items, and we’ll augment that with a bar service program that improves our bar guests’ experience.

We’re also excited about implementing new technology to help us grow our to go business, and another key focus for us during F’12 is menu innovation. Our culinary team is committed to leveraging new technology to enhance our menu with new cravable offerings, ensuring every ingredient and every menu item offers signature flavors and the quality our guests demand; and then partnering with marketing and operations to attract casual diners with new news and reminding them why Chili’s really is like no place else. And of course we’ll promote all this news by leveraging the power of our national advertising presence as well as our email database and other social media assets that allow us to build relationships with our guests and give them the news they want when they want it.

So as I take stock in our Q4 performance I’m encouraged by the results our Chili’s team has delivered. We’ve stabilized the brand. We now we still have work to do but we’ve turned our trends around. We’ve achieved five consecutive periods of powerful comp sales and traffic growth that have outpaced the industry. Our guest feedback scores and business model metrics improved significantly over last year and our guests are telling us that we’re doing the right thing, and in just a minute, Guy will tell you more about how our P&L has fared.

The Chili’s brand continues to get strong and gain momentum and we’re committed to our plan to win. Now, let me turn it over to Guy to give you some detailed financial perspectives. Guy?

Guy Constant

Thanks, Wyman. You’ve just heard Doug and Wyman talk about the great work of our operators in delivering strong results throughout the quarter. Now, let’s take a deeper dive into those results. My commentary will be based on continuing operations and I’ll make comparisons on the basis of 13 weeks in the current quarter versus 14 weeks in the same quarter last year.

Continuing the year-over-year improvement we have seen the past three quarters, EPS before special items for Q4 was $0.48 versus $0.44 in the prior year, highlighted again by our balanced approach to strengthening our business model. As mentioned in previous calls, the extra operating week in F2010 contributed approximately $0.09 on the prior year’s EPS due to leveraged gains on fixed costs with the additional week of sales. Record Q4 revenues were $717 million. Total company-owned comparable restaurant sales increased 2.6% on 2.6% traffic and equally offsetting positive price and negative mix of 1.1%.

Considering the calendar shift caused by the extra operating week in the prior year, comp sales were up 3.1%. Given the 53rd week in F2010, company-owned restaurant capacity was down 7.5%. Franchise royalties and fees increased 4.8%; this is due primarily to 23 net international franchise openings and six net domestic openings since the end of F2010, as well as an increase in international franchise comp sales of 7.7%. Cost of sales decreased by 80 basis points from prior year to 26.9%. In order of magnitude, the improvement was driven by favorable impact from menu pricing and other items of 60 basis points, a more profitable mix of items within the Triple Dipper and lunch offerings coupled with menu items drove an additional 50 basis points. This was offset by unfavorable commodities of 30 basis points stemming from higher beef fajitas, salmon and ribs, partially mitigated by lower produce costs.

Restaurant labor improved 10 basis points to 31.8%. As you recall, last quarter we introduced the first phase of our kitchen retrofit program which focuses on optimizing the prep process. This initiative, coupled with the continued execution of team service, drove hourly labor savings over prior year of close to 150 basis points. This tailwind was partially offset by two factors: first, as has been the case throughout the year, our restaurant managers earned higher bonus payouts on increased earnings, and in Q4, these payments were affected by the deleverage associated with the extra operating week in F2010. Second, vacation expense was higher due to a change in estimate, lapping over a change of estimate that was a benefit a year ago.

Restaurant expense was 23% versus 22.2% in the prior year, primarily due to deleverage on fixed costs from the extra week in F’10. Due to our positive comparable restaurant sales, our restaurant mangers’ successful execution of key initiatives and our continued focus on cost management, restaurant operating margin was flat at 18.3% even though there was an additional operating week in F2010. If you adjust for the impact of the extra operating week, Q4 F’11 operating margin would have increased approximately 30 basis points, consistent with what we saw in Q3.

Depreciation expense decreased $1.3 million to $31.6 million due to fully depreciated assets, restaurant closures and impairments partially offset by normal asset replacements. General and administrative expenses decreased about $1 million over the same quarter last year to $36 million. This decrease was primarily driven by reduced payroll associated with lower headcount and one less operating week than F2010, partially offset by a reduction in transition services income and an increase in performance based compensation.

Interest expense is $1.4 million lower than prior year, primarily due to the expensing of deferred financing costs of $1.7 million in F2010 when Brinker entered into a new five-year credit facility. The tax rate before special charges was 28.9% versus 24.3%, an increase of 460 basis points driven by higher earnings for the year and the positive impact of resolved tax positions a year ago.

CAPEX for the year was $70 million with year to date cash flow from operations at $260 million. During the quarter we completed an additional $62.9 million of share repurchase, buying 2.5 million shares. This brought our F’11 total share purchase to $420 million or 20.6 million shares, and we ended the year with approximately $82 million of available cash on our balance sheet. In addition we’ve repurchased close to half a million shares for approximately $10 million through the first six weeks of F’12, leaving an outstanding authorization of $435 million. Earlier this week we executed a new credit facility to increase our total capacity to $500 million to take advantage of favorable pricing relative to our current facility. This also increased our financial flexibility as the five-year term further extends its maturity beyond our 5.75% notes. The new facility will mature in August, 2016, and consists of a $250 million revolving credit facility and a $250 million term loan.

With F2011 behind us let’s turn not F2012. We expect earnings per diluted share from continuing operations of $1.80 to $1.95 with fairly consistent growth throughout the year. As we dig a little deeper into our revenues and expenses, here’s our perspective on the major categories and our view on the business in F2012. We expect both revenues and our company-owned comp sales to increase between 2% and 3% and we project Chili’s taking around 1% price. The revenue increase assumes flat company-owned restaurant capacity and an anticipated franchise revenue increase in the low single digits resulting from the expansion of the restaurant base.

Currently, 61% of commodities are contracted through the end of calendar 2011 and 10% are contracted through the end of fiscal 2012. Now, while this 10% is lower than our typical contracted rate at this time of year we’re purposefully riding the market a little bit more and contracting less since we believe we are currently operating at prices that are closer to peak than they were a year ago. Based on these insights we anticipate about 100 basis points impact to cost of sales due to inflation of our commodity basket for F2012. But some of this headwind will be mitigated by operating efficiencies within the four walls from the rollout of new kitchen equipment, improved A versus T gain from implementing our new restaurant systems, a mix of menu offerings that are more profitable, and menu price increases. In all we expect cost of sales to represent between 27% and 27.5% of revenue for the year.

Restaurant labor should see further improvements from continued optimization of kitchen prep procedures, efficiency gains from the rollout of new kitchen equipment, and some benefit from a change in policy at Chili’s that will lessen our steady state vacation expense. We expect restaurant expense to improve from sales leverage as well as savings in utilities, prepared maintenance, and credit card fees. Depreciation expense is expected to increase to $130 million to $135 million due to the Chili’s reimage, the introduction of new kitchen equipment and our new point of sale back office systems. We expect F’12 CAPEX of $155 million to $165 million, including $50 million for ordinary maintenance.

We anticipate our actual level of G&A spend in F’12 will be in the range of $135 million to $140 million, slightly above F’11, largely due to the fact that we have not completely offset the loss of transition services income from Macaroni Grill and On the Border. In total, we expect approximately 50 basis points of operating margin improvement in F’12 including the unfavorable impact of rising commodities prices. Interest expense will be flat due largely to a lower interest rate and lower commitment fees on our new credit facility, offset by a one-time write off of approximately $3 million of deferred financing costs on our previous credit facility. This write off will occur in Q1 F’12.

Excluding the impact of special items our income tax rate should be around 29%, consistent with what you saw in Q4 of F’11. Naturally, this rate will rise or fall with lower or higher earnings. And finally free cash flow defined as cash from operations less CAPEX is projected to be $125 million to $135 million. We continue to maintain a balanced approach to our use of cash through reinvestment in the business, debt amortization, best in class dividends, and an appropriate cash reserve with the remainder dedicated to share repurchase. The net effect results in a weighted average share count for F’12 between 80 million and 83 million which plays a big part in our projected EPS growth.

So to wrap things up, we finished F’11 with a strong Q4 and we enter F’12 focused on building upon that momentum. During F’12 we’ll expand Chili’s reimage program to a total of about 250 restaurants. We’ll expand the second phase of our kitchen retrofit program to more than 500 Chili’s restaurants, and the new point of sale and back office enhancements to almost the entire Chili’s system. We’ll also layer in new sales initiatives, we’ll turn on restaurant unit growth at Maggiano’s, and we’ll continue our international expansion. All of these initiatives will help generate EPS in the range of $1.80 to $1.95.

So while we’ll spend a great deal of capital on our key initiatives in F’12 not only will we see the resulting margin improvements during F’12 but that margin improvement will also naturally carry over into F’13. As a result, we now project F2013 EPS growth to be well above the steady state range of 10% to 12% we communicated at our investor conference last March. Given this confidence we reiterate our plan to achieve the company goal of doubling EPS to a range of $2.75 to $2.80 by the end of F2015. Overall, we feel good about the progress we’ve made so far.

With that, I would like to now turn the call over to Kate to open the line for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, the floor is now open for questions. (Operator Instructions.) And our first question today is coming from John Glass. Please announce your affiliation, then pose your question.

John Glass – Morgan Stanley

Thanks, it’s Morgan Stanley. Good morning. I guess just in the context of what you laid out, in the pushes and pulls on margins from some of the commodity pressures to bonuses, etc., can you just review where we are on this path to the 400 net basis points of margin expansion? Are we in fact, when you x out some of those one-time items in the extra week, about halfway there? Maybe can you talk about what the gross benefit is before the food cost that you expect to get in 2012.

Guy Constant

So the net impact of depreciation and G&A is going to be pretty flat. We think cost of sales, we ended the year slightly below 27%, John, and we project now 27% to 27.5% for next year, but yet overall on the operating line we expect a 50 basis point improvement. So I guess you’d call it what, 70 to 100 basis points better on restaurant labor and restaurant expense would be the math?

John Glass – Morgan Stanley

Okay, and then I’m just trying to get us up to date on where we are, because when you announced this plan it was 400 to 500 basis points at the restaurant level, 400 basis points and this was going to be achieved by 2013. So I guess my question is where are we in that spectrum? Are we halfway collectively there? It sounds like it’s getting pushed a little bit into ’13 from ’12 just based on your commentary about earnings growth in ’13 versus ’12, which I think was the original inflection year.

Guy Constant

I’d say getting pretty close to halfway, John, I think is a fair way to describe it. Obviously there’s a lot of investment in all the initiatives in F’12 and as reimages roll on, as kitchens are retrofitted, as restaurants receive the new low file menuing systems they’ll start to see those margin improvements. They’re built into their plans. As soon as they get a reimage, as soon as they get a new kitchen, as soon as they get a new point of sale back office system the expectations rise in terms of what needs to be delivered, but clearly since it’s going to take a lot of F’12 particularly to get the kitchens and the point of sale back office systems in place, you’ll see the lasting effect of that happen in ’13 as well. So you’re right – things are probably a little bit later than they were before, so that’s why we think F’13 growth’s going to be above that steady state we talked about last year at the investor conference.

John Glass – Morgan Stanley

Then just one other in a different direction: the market seems to believe that restaurants, or at least the restaurant consumer is in for much tougher times, today’s results notwithstanding. Is there any evidence in your business in the last few weeks, I’m not asking for July comps but is there any evidence qualitatively in your business that you are starting to see some change in behavior that’s concerning to you? Or is this more what’s happening outside your industry and much more a function of financial markets and you don’t see any change in consumer behavior?

Doug Brooks

Hey John, it’s Doug. I can’t say we’ve seen anything in the last couple of weeks other than conversations with friends and neighbors about their retirement plans and their 401Ks and trying to understand who Standard & Poor’s is. Everybody tries to personalize how it impacts them but we haven’t seen things at the restaurant, and as I mentioned, the value offerings that we put in place at the restaurant certainly play during this time. But at the end of the time when we look out at macroeconomics it’s always been about jobs and continues to be about jobs, and if job information and growth starts to get better we’ll be more optimistic; and if jobs stay where they are it’s going to be challenging. But we’re going to work our plan as we laid it out this morning, steal share, grow our profit even in this economic environment, and the results we see continue to support that. But we haven’t seen consumers shopping differently in the last couple of weeks, no.

John Glass – Morgan Stanley

Okay, thank you.

Operator

Thank you. Our next question today is coming from Jeffrey Bernstein. Please announce your affiliation, then pose your question.

Jeffrey Bernstein – Barclays Capital

Thank you, it’s Barclays Capital. Good morning. Two questions for you: first a specific follow-on as it relates to comps at the core Chili’s, a 2.1% comp this past quarter – it seems like as you mentioned 100% traffic and then offsetting positive price with negative perhaps mix. I’m just wondering whether you can walk us through. You obviously have lot of new initiatives hitting the menu simultaneously after not doing much for a while, so can you give some sort of clarity or granularity of lunch versus Two for $20 versus happy hour; kind of an estimate directionally of what they’re mixing or how much they contributed to the total, or what’s been the strongest or weakest? Anything color you can give on the mix of those and how those impact the margins, and then I have a follow-up.

Wyman Roberts

Yeah, Jeff, this is Wyman. So the good news with Chili’s especially in Q4 is we’ve had pretty balanced growth. It’s not all coming from one initiative, so lunch is working strong for us, both weekday and our weekend lunch was also significantly better than we’ve seen in the past. And then dinner, a little more early week than late week but again, we’re seeing a lot of results there based on the Two for $20 and then our offerings that we’re communicating via our email database. So without giving you the specifics I’ll just say that it’s balanced across both lunch and dinner, and then our bar business and the initiatives we’re doing there are less of an impact but still solid.

Jeffrey Bernstein – Barclays Capital

Okay. I know in the past you guys said it was going to be 50 to 100 basis points from the bar; I don’t know if it’s still tracking in a similar range?

Wyman Roberts

Yeah, we’re still in that range but probably on the low end of the 100. And then regionally we’re starting to see better movement across the country with the West getting a little stronger than we had seen in the past, so that’s also helping as these initiatives have started to resonate in some markets that were probably reacting more negatively to some of the economic pressures we’ve seen out there.

Jeffrey Bernstein – Barclays Capital

Gotcha. And then Guy, I guess to the balance sheet and cash usage, I appreciate the color you gave already. There’s an ongoing I guess repo versus dividend debate. I know you gave the share count, 80 million to 83 million for F’12 – I’m just wondering first and foremost the contribution of F’12 EPS from the share repo you did in ’11, just what percentage growth that’s contributing to the 18% to 27% growth forecast you gave for F’12. And then separately, how do you think about that repo and dividend going forward in terms of balance and wrap for F’12?

Guy Constant

So Jeff, the share purchase probably contributed a little less than half of the benefit of the F’11 EPS if you kind of do the math on that. In F’12 it’s going to comprise actually a little bit larger component of the EPS growth, in part just because of the commodity headwinds we’re getting. I mean the underlying other fundamentals and margin improvements we’ve done in the business continue to be strong; obviously sales, we project them to be in the 2% to 3% range so those will be strong. But the commodity headwinds are certainly something we’re having to wrestle with so share repurchase picks up a little bit more of the slack. But that, as you look forward to F’13 for example, that will swing back again and once we get reimages in place, kitchens in place, point of sales back office systems in place then margins start to pick up a little bit more of the slack and share repurchase doesn’t perhaps carry as much weight.

In terms of how we think about it going forward, the four tenets are the same: you know what the CAPEX investment is in the business, we’ve talked about that. We know we’re going to have to do debt amortization on our term loan which used to be $20 million a year on a $200 million term loan; now it’s $25 million a year on a $250 million term loan. We want to maintain an appropriate amount of cash on our balance sheet – that’s typically been in the $50 million range. We expect that to be the same and we’re going to hold to the 40% dividend payout ratio. So those are all the same; the remaining dollars are used for share repurchase.

Jeffrey Bernstein – Barclays Capital

And that comment about the EPS growth in F’13 being well above that 10 to 12 long-term, is that primarily driven by further success from the margin initiatives or what kind of comp assumption? I think you guys were initially talking longer-term of getting back to 3 or 4, but is it more margin-driven that gives you that confidence to talk about “well above 10 to 12?”

Guy Constant

It’s more the impact, Jeff, of just all of the initiatives getting put in place. So when you put 500 plus kitchens in place in F2012 then you just get the lapping effect of those 500 in ’13 plus the remainder that we’ll do early in the year in ’13; the labor productivity that we get from that in addition to better ticket times and in addition to better food quality which we’re seeing out of those new kitchens; and the innovation possibilities all support other parts of the P&L. But primarily the F’13 commentary’s around when you put all the point of sale back office systems and kitchens in place in F’12 you get some benefit but you get additional benefit in ’13.

Jeffrey Bernstein – Barclays Capital

Great, thank you very much.

Operator

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

Joe Buckley – Bank of America/Merrill Lynch

Bank of America/Merrill Lynch. Good morning. A couple of questions, Guy, just going back to the food costs. I guess you said you’re 61% covered through calendar year-end, and then the second half – is that what the 10% refers to? You’re just 10% covered for the second half needs?

Guy Constant

Yes, that’d be the way to look at it, Joe.

Joe Buckley – Bank of America/Merrill Lynch

Okay. So what kind of assumptions are you making on commodities in the second half behind the food cost forecast?

Guy Constant

Well, I mean obviously to get to our 100 basis point number, Joe, we had to make some assumptions. It’s probably still in that 4%, low 4% inflation range, 4% to 5% inflation range that we talked about. We haven’t really seen that change so if we continue to look at what would it cost us if we were contracting at that time, making our best estimates of what would happen, we know what’s falling off when obviously, so we can track that. And we’ll obviously make the call as to whether we think it’s the right time to lock in or we want to continue to ride. Now on balance, given what’s happened with the market, you would hope that at least dampens the inflationary pressures and if we’re lucky, maybe we get a little deflation from that.

But obviously we’re looking at that, we’re looking at what we have contracted; and then as you may have seen some recent announcement of a whole new supply chain organization that we have a great belief in what they’ll be able to deliver to the company. We felt that was an area that we wanted to invest some resources and have, and we think that will pay off in some big dividends; not just necessarily on the cost side but just sourcing, distribution, and all the other things we need to support in delivering great food to our guests.

Joe Buckley – Bank of America/Merrill Lynch

Okay. And then I know you said the earnings growth would be fairly even throughout the year. Do you expect the same store sales growth to be fairly even? I mean obviously comparison’s a lot easier the first half than the second.

Guy Constant

Yeah, so on the EPS side you’re right, Joe – the range that we gave, we would expect that to be fairly consistent. I think it’s probably fair to say you’re right that the laps get a little tougher in the back half of the year so our assumptions maybe reflect that to some extent but I wouldn’t over-read too much into that. It’s not dramatically different but as you look at the numbers we would expect the back half of the year would be a little tougher than the first half.

Joe Buckley – Bank of America/Merrill Lynch

Okay. And then just update us on the kitchen retrofits. I know you mentioned doing 500 for the year; where are you now? And talk about the mechanics of it: what happens in the restaurant? Do you do it overnight or do you have to close down? Is there a significant training involved? Just what are the operational mechanics of the program as you start to roll it out?

Doug Brooks

Yeah, we can do it overnight, Joe, so we do. We don’t have to close the restaurant to do it. There is significant training involved. Sort of the way we phrase the story here would be like if you had to go prepare a big meal in someone else’s kitchen and you didn’t know where anything was it might be difficult to do so we have to spend some time training. Some of the way we’ll do that training is when we get restaurants into an area then that will become the focal point for training in that area, so that’s very helpful in getting it rolled out quickly.

We’ve been making the assessment that labor savings don’t come right away so you do need some time for the kitchen to adapt to the new equipment because we want to maintain the food quality standard. We don’t want to take the labor out right away while they’re still learning the new kitchen, and that’s worked really well because in the new kitchen restaurants we have today – which we’ve got probably 15 done at the end of Q4 and we’re now in full rollout mode, we’re in two markets rolling out new kitchens. Every Sunday night, Monday night we’re putting new kitchens in restaurants now on the way to the 500, but we have seen food scores.

We’re very happy with the food scores. In fact, previously the bar was we wanted the food to be as good as it was before and it was in the lab market in Dallas, but what we’re seeing now at the new restaurants we did – and I think we talked about those in Tampa – we’re seeing better food quality now than we had in the previous food, which is really good. We’ve seen significant improvements in ticket time which we’re very happy about. We see the potential for labor productivity; we have some of it and as those kitchens are in the restaurant longer we get more and more of the labor productivity.

And then we haven’t yet tapped into the innovation opportunity but certainly our culinary folks are anxiously awaiting the opportunity to utilize that equipment once it gets some scale to provide new menu items as well. Does that help?

Joe Buckley – Bank of America/Merrill Lynch

That helps, thank you.

Operator

Thank you. Our next question today is coming from Chris [Okul]. Please announce your affiliation, then pose your question.

Chris [Okul] – Centros, Robinson, Humphrey

Yes, Centros, Robinson, Humphrey. Good morning. Wyman, the operators in the field have seen quite a few changes in the past twelve months. Do you think the kitchen changes, the point of sale changes, remodeling that are all occurring it seems like over the next 12 to 24 months, can that lead to operators just being overwhelmed by these changes?

Wyman Roberts

It’s a great question, Chris, and I think the potential would be there that the nice thing about those investments and those specific projects is they don’t come to any one restaurant at one point in time. So we’re being very careful about how we roll these out and staging them so that no one restaurant, no one area director has to deal with all three at once. And ideally they’re coming in a stage gating process where you knock one off, get comfortable and then the next one rolls in. So sometimes there’s a little bit of an overlap but for the most part we’re able to, especially with the kitchen and the POS system because those impact the restaurant the most actually, from an operations standpoint – we keep those separated and we’ll roll one in first and then follow with the other when they’ve gotten their feet under them.

So it’s absolutely a priority for us to make sure we don’t overwhelm the leaders in the restaurants. They’re excited about all of these things so the reality is they’re asking for it; we’re actually having to kind of calm some of them down to say “Let’s bring it to you in a way that’s easily managed.”

Chris [Okul] – Centros, Robinson, Humphrey

And are you still remodeling the stores after these service changes have been made? I guess my point is, is a lot of the kitchen initiatives are designed to improve speed of service, quality of food. Are you doing that before you advertise it with a remodel program?

Wyman Roberts

Not necessarily. Again, because of the way that it’ll all work out we’ll have a few that’ll get reimaged before they have a kitchen but the timelines on the kitchens and the POS are more accelerated than reimages. So at some point we will have everyone with the new kitchen and the new POS and we won’t have everything reimaged, so at that point we’ll be reimaging restaurants that have all those other systems in place. But right now we may have a market that gets a reimage that doesn’t have all the restaurants with the other two pieces because we don’t want to slow down. I mean to hit the aggressive goals we’ve got out there we need the impact of the reimage and the impact of the POS systems and the new kitchens.

Chris [Okul] – Centros, Robinson, Humphrey

Okay, fair enough and then one last question. Doug, Maggiano’s has been doing obviously very well the last seven or eight quarters. Why aren’t we seeing more openings or at least openings in F’12?

Doug Brooks

Well thanks, Chris, for teeing that one up for me. In my prepared comments I mentioned that we now have I guess taken the leash off and we have real estate people that are out in the market. We do feel good enough about the brand, its results, the business model, all the things that Steve and the team have done, and so sometime pretty soon we’ll probably announce some new real estate locations that have been signed. There’s nothing I can say today but just there’s usually about an 18-month timeframe. So we’re in the market looking at real estate today; sometime in F’13 we’re hopeful we’ll be opening Maggiano’s restaurants again.

Chris [Okul] – Centros, Robinson, Humphrey

Okay, great. Thanks guys.

Operator

Thank you. Our next question today is coming from Brad Ludington. Please announce your affiliation, then pose your question.

Brad Ludington – Keybanc Capital Markets

Thanks, with Keybanc, good morning. I had a clarification: I think you mentioned development guidance for F’12 running through, and I think I heard 1% increase in the franchise base. Is that accurate?

Guy Constant

We talked about having openings both international and domestic, although a smaller number domestically than we’ll have internationally, but we do think low single digit franchise revenue growth which is a combination of course of both comp sales growth and development of units – primarily international, some domestic.

Brad Ludington – Keybanc Capital Markets

Okay, and on timing of those, will those be more backend weighted you think?

Guy Constant

No, not necessarily. I think they’re fairly evenly spread out throughout the year.

Brad Ludington – Keybanc Capital Markets

Okay. And then when you talked about lunch traffic being positive still, I think on the last call you talked about it was up low single digits. Is it maintaining that level or has it moderated a little bit since the initial rollout of the lunch combos you did?

Wyman Roberts

Yes, it’s maintaining that level.

Brad Ludington – Keybanc Capital Markets

Okay, thank you.

Operator

That was our final question for today.

Doug Brooks

Okay, thanks Kate. This is Doug, I’ll just wrap it up here. I hope that everyone… I appreciate everyone’s interest first of all and you being on the call this morning with our business, and hopefully we were able to address a little bit about the macroeconomic concerns and at least how our business maintains a steady state. We gave you plenty of updates on some of the key initiatives and some of the exciting news about potential new restaurant growth coming down the path.

Also, I just want to mention, because of everyone’s interest in the Chili’s plan to win, we would like to schedule a day with you at a Chili’s restaurant soon so you can see and experience many of the cool new things that we’re doing. So we’ve marked our calendar for Tuesday, November 15th starting first thing in the morning. We don’t have an exact restaurant location established yet, it’s kind of a Christmas question. We’re trying to find a place that has as many of the pieces in one restaurant as possible so you’ll be able to understand as much about the look and the kitchen process as possible. But we’ll get an exact location out to you soon, probably somewhere on the East Coast so you can at least tentatively mark your calendars for the morning of November 15th. We’d love to let everybody see and experience a little bit more of these things we’ve been talking about.

I hope everyone can feel the confidence in our teams, our strategies and results despite the economic headwinds. I know we’ll talk to some of you later today and everyone in October. I appreciate your interest; have a good day.

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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