Darden Restaurants F2Q08 (Qtr End 11/25/07) Earnings Call Transcript

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 |  About: Darden Restaurants, Inc. (DRI)
by: SA Transcripts

Darden Restaurants, Inc. (NYSE:DRI)

F2Q08 Earnings Call

December 19, 2007 8:30 am ET

Executives

Matthew Stroud - Investor Relations

Clarence Otis - Chairman of the Board, Chief ExecutiveOfficer

Brad Richmond - Chief Financial Officer

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

Gene Lee - President, Specialty Restaurant Group

Analysts

Glen Petraglia - Citigroup

John Glass - CIBC

Jeff Bernstein - Lehman Brothers

Steven Kron - Goldman Sachs

Bryan Elliott - Raymond James

John Ivankoe - J.P. Morgan

Dan Hinchman - Thompson, Siegel & Walmsley

Mitchell J. Speiser - Telsey Advisory Group

Andrew Barish - Banc of America Securities

Joseph Buckley - Bear Stearns

Stephen Anderson - MKM Partners

Rachael Rothman - Merrill Lynch

Operator

Good morning, ladies and gentlemen. Thank you for standingby. Welcome to the second quarter earnings release conference call. (OperatorInstructions) I would now like to turn the conference over to our host ofinvestor relations, Mr. Matthew Stroud. Please go ahead.

Matthew Stroud

Thank you, Rachel. Good morning, everyone. With me today areClarence Otis, Darden’s Chairman andCEO; Drew Madsen, Darden’s President and COO; Brad Richmond, Darden’s CFO; andGene Lee, President of Darden’s Specialty Restaurant Group. We welcome those ofyou joining us by telephone or the Internet.

In addition to webcasting the audio portion of thispresentation, we are also webcasting a PowerPoint presentation discussing oursecond quarter results and other financial information. You can access thispresentation by visiting our website and following the instructions there thatallow you to view the webcast.

During the course of this conference call, DardenRestaurants' officers and employees may make forward-looking statementsconcerning the company’s expectations, goals, or objectives. Theseforward-looking statements could address future economic performance,restaurant openings, various financial parameters, or similar matters.

By their nature, forward-looking statements involve risksand uncertainties that could cause actual results to materially differ fromthose anticipated in the statements. The most significant of these uncertaintiesare described in Darden’s Form 10-K, Form 10-Q, and Form 8-K reports, includingall amendments to those reports.

These risks and uncertainties include the impact of intensecompetition, changing economic or business conditions, the price andavailability of food, ingredients, and utilities, supplies, interruptions inlabor insurance costs, increased advertising and marketing costs,higher-than-anticipated costs to open or close restaurants, litigation,unfavorable publicity, a lack of suitable locations, government regulations, afailure to achieve growth objectives through the opening of new restaurants, orthe development or acquisition of new dining concepts, weather conditions,risks associated with Darden’s plans to expand the newer concepts, BahamaBreeze and Seasons 52, the closure and disposition of certain Smoky Bonesrestaurants and the anticipated sale of the remaining Smoky Bones restaurants,our ability to combine and integrate the business of RARE HospitalityInternational Incorporated, risks associated with incurring substantialadditional debt, and other factors and uncertainties discussed from time totime in reports filed by Darden with the Securities and Exchange Commission.

A copy of our press release announcing our earnings, theForm 8-K used to furnish the release to the Securities and Exchange Commission,and any other financial and statistical information about the period covered inthe conference call, including any information required by Regulation G, isavailable under the heading Investor Relations on our website at Darden.com.

We plan to release fiscal 2008 third quarter earnings andsame-restaurant sales for fiscal December, January, and February 2008 onTuesday, March 8th, after the market close. In addition, we will hold ananalyst and investor meeting in New York City on February 12, 2008, starting at8:00 a.m. Additional details will soon follow.

We released second quarter earnings results yesterdayafternoon. These results were available on PR Newswire, First Call, and otherwire services. Let’s begin by updating you on our second quarter earnings.

Second quarter net earnings were $43.5 million and dilutednet EPS was $0.30. This includes the effect of the acquisition of RAREHospitality, which closed on October 1, 2007, as well as other items. Morespecifically in the second quarter, integration and purchasing accountingadjustments related to the RARE acquisition reduced diluted net earnings pershare by approximately $0.09. Incremental financing costs net of operatingcontribution and tax benefits from the acquisition decreased net earnings pershare by approximately $0.01 and litigation charges related to the settlementof certain legal issues in California reduced diluted net earnings per share byapproximately $0.02.

In aggregate, these items adversely affected diluted netearnings per share by approximately $0.12 in the second quarter. We reporteddiluted net earnings per share of $0.41 in the prior year second quarter. Inthis year’s second quarter, diluted net earnings per share from discontinuedoperations were $0.00 compared to diluted net earnings per share fromdiscontinued operations of $0.04 in the prior year.

As you will recall, on May 5, 2007, we closed 54 Smoky Bonesand two Rocky River Grillhouse restaurants and announced our intent to sell theremaining 73 Smoky Bones restaurants. Additionally, we closed nine BahamaBreeze restaurants on April 28, 2007, to position the brand for future growth.The Smoky Bones results and the related impairments and costs are classified asdiscontinued operations, as are the results and related impairments in costsfor the nine closed Bahama Breeze restaurants.

Brad will now provide additional detail about our financialresults for the second quarter and a revised fiscal year outlook. Drew willdiscuss the business results of Olive Garden, Red Lobster and LongHornSteakhouse. Gene will discuss the specialty restaurant group, followed byClarence with some final remarks. We will then respond to your questions.

Brad Richmond

Thank you, Matthew, and good morning. Darden’s total salesfrom continuing operations increased 17% in the second quarter to $1.52billion, driven by the addition of LongHorn Steakhouse and The Capital Grilleand meaningful new and same-restaurant sales growth at Olive Garden.

The incremental sales from LongHorn Steakhouse and TheCapital Grille totaled $163 million for the fiscal month of October andNovember. Excluding the acquisition, sales growth for the quarter would havebeen 4.6%.

At Olive Garden, same-restaurant sales were up 3.2% for thequarter, its 53rd consecutive quarter of same-restaurant sales growth and itstotal sales increased 8.2%.

Red Lobster reported same-restaurant sales increase of 0.1%for the quarter and total sales increased 0.6%.

LongHorn Steakhouse same-restaurant sales decreased 3.9% forOctober and November only, and decreased 2.5% for the period of September,October, and November.

The Capital Grille had same-restaurant sales increase of0.7% for October and November only, and same-restaurant sales increased1.2% for the September, October, andNovember period.

Bahama Breeze had same-restaurant sales increase of 0.1% forthe quarter.

For context, industry same-restaurant sales as measured by Knapp-Trackand excluding Darden were down approximately 2% for the quarter. Thus, relativeto the industry, you can see that in aggregate, Darden performed solidly.

Now, let’s discuss the margin analysis of the secondquarter, which is complicated by the acquisition of RARE Hospitality, to offermore clarity and an apples-to-apples comparison of our year-over-year results,we are comparing results from continuing operations this year and last yearadjusted to include RARE Hospitality’s October and November operating resultsfor fiscal 2007. Thus, results from Smoky Bones and closed Bahama Breezerestaurants are not included for either fiscal 2007 or fiscal 2008 but theresults of the acquisition of RARE Hospitality are included for the months ofOctober and November in both fiscal 2007 and fiscal 2008.

So let’s begin by reviewing our results for the secondquarter which are shown here on this slide labeled fiscal 2008 Q2 results. Theleft and middle columns show our reported results for this year and last year.I would like to draw your attention to the right column of the slide, which ishighlighted for you. This column represents our second quarter results adjustedfor the impact of transaction and integration related costs and the impact ofpurchase accounting adjustments related to the acquisition of RARE Hospitality.

In other words, this represents second quarter resultsexcluding the various costs and adjustments associated with the acquisition.More specifically, when compared with our reported second quarter results shownin the left column, you see the various acquisition related adjustments: one,adversely impacted restaurant expenses by approximately 10 basis points;adversely impacted selling, general and administrative expenses by 120 basis points;and adversely impacted depreciation and amortization costs by approximately 10basis points.

In sum, the various acquisition, integration, and purchaseaccounting adjustments adversely impacted our second quarter results byapproximately 130 basis points, roughly $21 million, which equates to dilutednet earnings per share of $0.09. We anticipated additional acquisition,integration, and purchase accounting adjustments in the third and fourthquarter of approximately $0.03 per diluted share and $0.02 per diluted sharerespectively, which includes approximately $0.01 per diluted share each quarterfor purchase accounting adjustments.

On this next slide labeled fiscal 2008 Q2 results adjusted,we show our second quarter results in fiscal 2008 adjusted for the variousacquisition related costs I just mentioned and compare that to second quarterresults last year in fiscal 2007 adjusted to include the operating results ofRARE Hospitality for October and November 2006.

While these results are unaudited, we believe they offer abetter understanding of the year-over-year performance. This information wasincluded in last night’s press release. I will discuss the margin analysis forthe second quarter based on this presentation of results.

Food and beverage expenses were approximately 30 basispoints higher than last year on a percentage of sales basis adjusted for theinclusion of the RARE brands, primarily because of commodity cost inflation.The most significant inflation was on dairy, bread, and some seafood products.Menu mix changes at Red Lobster also contributed to higher cost of sales.

As many of you know, the cost of dairy and wheat inparticular has increased dramatically in recent months, especially in Octoberand November. We are not able to effectively hedge our dairy usage and so therewe operate with market risk. We do however hedge our wheat related products,primarily with contracts on bread and pasta, but had to renew some of ourcontracts on those products during the quarter at higher than expectedyear-over-year prices. Bread in particular was a major contributor to our foodand beverage unfavorability this quarter.

We have taken pricing to offset some of the expected costinflation this year and we’ll take more pricing if we believe there is astructural change in the commodity cost environment. Rarely will an increase inany single one of these product categories have a major effect on the businessbut unfortunately, this quarter we see a significant combined rise in theircosts.

Second quarter restaurant labor expenses were 60 basispoints higher than last year on a percentage of sales basis adjusted to includethe RARE brands, due primarily to wage rate inflation of about 5%, which wasnear our expectation and driven mostly by minimum wage increases.

We also chose to carry additional managers at Red Lobsterand Olive Garden that were transferred from the Smoky Bones restaurants weclosed in May 2007. The cost of these additional managers was approximately 10basis points, or $0.01 on an earnings per share basis in the second quarter.However, we expect these costs to be offset later in the year by lower managerhiring and training costs.

Restaurant expenses in the quarter were 50 basis pointshigher than last year on a percentage of sales basis adjusted to include theRARE brands, primarily because in last year’s second quarter, there were 45basis points of workers’ compensation, public liability, and insurancefavorability.

Selling, general, and administrative expenses were 20 basispoints lower as a percentage of sales adjusted for RARE, primarily due to salesleveraging and lower incentive performance pay. This favorability was slightlyoffset by the California litigation charge. As mentioned previously, thislitigation charge adversely impacted diluted net earnings per share byapproximately 30 basis points or $0.02 per share in the second quarter.

Now, I’d like to update you on our revised 2008 annualoutlook.

For the full year, we continue to expect combined same-restaurantsales growth for Red Lobster, Olive Garden, and LongHorn to be between 2% and4% but more in the lower to middle part of the range, given the currentconsumer environment.

We expect a net new restaurant increase of approximately 65restaurants and that includes the growth at LongHorn and The Capital Grille forOctober through May, putting total sales growth for the year in the range of19% to 20% compared to reported sales of $5.57 billion in fiscal 2007.

With the addition of LongHorn Steakhouse and The CapitalGrille for the period October 2007 through May 2008 and the more challengingcost environments, we have new expectations for costs and expenses as apercentage of sales in fiscal 2008.

We expect food and beverage costs to be approximately 30% ofsales in fiscal 2008 and that’s about 100 basis points higher than we expectedcoming into the year but about 70 basis points of this increase reflects theincreased protein mix attributable to LongHorn and The Capital Grille, whilethe remaining 30 basis points relates to higher seafood costs, particularlylobster, increased costs for the imported products due to currency valuation,and the current commodity environment previously discussed.

We expect labor costs as a percent of sales to be approximately32% in fiscal 2008 and that’s about what we expected. Restaurant expenses as apercentage of sales are expected to be approximately 15% in fiscal 2008, alsonear our expectation. We now expect that selling, general, and administrativeexpenses will be approximately 10% of sales in fiscal 2008. This includestransaction and integration costs and the impact of purchase price accountingadjustments related to the acquisition of RARE. As I mentioned earlier, thesecosts total approximately $0.09 per diluted share in the second quarter and weanticipate an additional cost of $0.03 and $0.02 per diluted share in the thirdand fourth quarters respectively, or about 40 basis points for the year.

We expect as a percentage of sales depreciation and amortizationexpenses will be approximately 4% this year, and finally, we believe our annualtax rate will be approximately 29% for the year.

With these expectations for costs and expenses, we nowanticipate that diluted net EPS growth from continuing operations will be 2% to4% including transaction integration related costs and the impact of purchaseaccounting adjustments related to the RARE Hospitality acquisition. These costsand adjustments will impact net diluted earnings per share growth byapproximately five percentage points. So excluding the transaction andintegration related costs and purchase accounting adjustments, we estimate theacquisition of RARE Hospitality to be accretive to our EAT, neutral to dilutednet earnings per share, and that total diluted net earnings per share growthfor Darden will be 7% to 9% in fiscal 2008.

While we believe this is solid EPS growth in a challengingenvironment that has been temporarily impacted by our reduced share repurchaseexpectations this year, we anticipate repurchasing between $125 million and$175 million of our stock. This is less than half of what we spent last year aswe focus on reducing our debt accumulated from the acquisition. In fiscal 2009and beyond, we expect to return an increasing amount of our strong cash flowsto shareholders through share repurchases, lowering our share base.

Now let’s turn to an integration update. Our integrationplans are on track. We have made considerable progress working with the peopleat RARE to better understand how to combine these companies. To leverageresources and full expertise, we created the specialty restaurant group, whichcombines The Capital Grille, Bahama Breeze, and Seasons 52. As we disclosedbefore, the specialty restaurant group, or SRG, is headed by Gene Lee and in amoment, he will discuss in more detail the rationale behind this structure.

While there are many significant transitions occurring aspart of the integration, I want to update you on three in particular. We expectto complete transition of the Atlanta restaurant support center, which isRARE’s headquarters, by the end of July, 2008. We have spoken with eachemployee in Atlanta to discuss their role in the transition. Approximately 50people will be moving to Orlando over the next few months. We are also workingon transitioning RARE’s financial systems and we expect to complete that inJanuary of 2008.

And we began to transition RARE’s supply chain in twophases. The first phase will be completed in May of 2008 and the second phasewill be completed in November of 2008.

As you know, these categories are the source of many of thecost synergies we expect to see from this transaction. We’ll discuss how we seethose synergies shortly.

But let me conclude with this slide by saying that afterworking with the RARE team, we are more convinced than ever this action makessense. As we’ve said before, Darden and RARE have very similar cultures,focused on getting results the right way. In addition to having strong values,both companies are focused on what matters most -- the guest and employeeexperiences. In particular, in the case of employees, the employment experiencefor the members of our team who come in contact with the guest every day.

Acquisition synergies -- we wanted to give you an update onour expectations for cost synergies for the RARE acquisition. You will recallthat we said we anticipated generating annual cost synergies of approximately$40 million by the end of the second full year, driven primarily from supplychain and purchasing efficiencies and corporate and other restaurant supportefficiencies.

On this slide, we offer our estimated cost synergies for thenext three fiscal years. We have classified the synergies into two categories-- cost of goods sold and G&A. As you can see, we expect cost synergies of$8 million in our current fiscal 2008, $30 million in fiscal 2009, and $40million in fiscal 2010. We anticipate that the increase in these synergies willbe achieved in the second half of each fiscal year.

We are comfortable with these estimates and believe based onour current understandings that we are well on our way to achieving them. Goingforward, we will offer periodic updates on our progress towards capturing thesesynergies.

Let me end the integration update by letting you know thatwe have included some additional financial results for the third and fourthquarters of fiscal 2007. These slides are included as part of our presentationtoday and can also be found on our website at www.darden.com after listening totoday’s webcast. We offer these slides as information only and are not preparedto speak to them today. These adjusted financial results will help whencomparing our third and fourth quarter reported results.

Let me take a moment as well to update you on our recentevents concerning Smoky Bones. Earlier this month, we announced a definitiveagreement to sell Smoky Bones to an affiliate of Sun Capital Partners Inc. forapproximately $80 million. We expect this transaction to close within 30 days.The proceeds of this transaction will be used to retire debt and repurchaseshares. While it is an important transaction that better positions Darden forthe future, we also believe it is what is best for the Smoky Bones brand. As wemove forward, we certainly appreciate the contributions of our friends andcolleagues at Smoky Bones and wish them well.

Now, I’ll turn it over to Drew to comment on Olive Garden,Red Lobster, and LongHorn.

Andrew H. Madsen

Thank you, Brad. Olive Garden continued to delivercompetitively superior sales performance during the second quarter. In additionto achieving their 53rd consecutive quarter of same-restaurant sales growth,they exceeded the Knapp-Track competitive set by over five percentage points.

Olive Garden's key priority remains unchanged -- theycontinue to focus on accelerating new restaurant growth while maintainingsame-restaurant excellence. During the second quarter, Olive Garden openedseven new restaurants and in fiscal 2008, they expect to open a total of 40 netnew restaurants. Ultimately, we believe Olive Garden has the potential tooperate 800 to 900 restaurants in North America.

Olive Garden advertising during the second quarter featuredcompelling food news and strong value. First, their signature Never-EndingPasta Bowl ran in September and October. This feature was supported by newadvertising and delivered a strong message of choice, variety, and Italiangenerosity at a compelling $8.95 price point.

Next, Twist on Classics began in November and will continuethrough the holidays. It is also supported with new advertising and featurestwo new entrees, stuffed chicken Florentine and stuffed chicken prosciutto,that introduce guests to classic Italian ingredients in approachable newdishes.

Operating fundamentals at Olive Garden also remained strong.In particular, guest satisfaction improved significantly versus prior year andset a new record. Controllable cost management was also strong, especiallydirect labor productivity and food waste.

Contributing to the improved guest experience was thecompletion of our meal pacing system rollout. This system, as you know, helpsoptimize the flow of an order through our kitchen and that results in hotterfood being served to our guests, faster table turns, and increased throughputin our restaurants.

We are pleased with Olive Garden strength in thischallenging consumer environment and believe their focus on the guest and teammember experience will enable them to deliver strong performance throughout thefiscal year.

Red Lobster also delivered competitively superior salesperformance in the second quarter with same-restaurant sales more than twopercentage points better than the Knapp-Track competitive set. Red Lobster alsocontinued to strengthen its business foundation and delivered record guesssatisfaction during the quarter.

As we’ve discussed before, Red Lobster's plan to achievesustainable growth has three phases. The first phase was the strength in thebrand’s fundamentals. The second is to refresh the brand, broaden its appeal,and build guest counts. The third phase, which we expect to start in the secondhalf of fiscal 2009, will be to accelerate new unit growth.

During the current fiscal year, their primary focus will beto refresh the brand and accelerate guest count growth by improving perceptionsamong lapsed users that Red Lobster offers a variety of fresh seafood preparedwith culinary expertise.

Red Lobster ran two promotions during the second quarter. InSeptember, October and early November, they offered their signature EndlessShrimp promotion, where guests could choose between five different shrimppreparations, including new Buffalo Shrimp, and indulge their craving with allof the delicious shrimp they could eat.

The big seafood festival began on November 13th and will runthrough the holidays. It offers celebratory new dishes perfect for the holidayseason that feature colossal shrimp or colossal scallops, proprietary itemsthat are not available at any other major restaurant chain.

Our meal pacing system has been implemented in approximatelyhalf of the Red Lobster restaurants so far and is scheduled for completion inthe fourth quarter of this year. Similar to Olive Garden's experience, theintroduction of this system is improving guest satisfaction, service times, andthroughput.

Red Lobster opened three more bar harbor prototypes thisquarter in Aurora, Colorado, Lakewood, Colorado, and Reno. The bar harborprototype is named after the main fishing village and tourist destination thatinspired the design and we expect it to be Red Lobster's growth vehicle goingforward.

Red Lobster is also completing remodels of four existingrestaurants to the bar harbor theme and they expect to expand that test withadditional restaurants in the fourth quarter this year.

Most recently on the first day of the third quarter, RedLobster introduced a new core menu that has a cleaner, more elegant design,some new desserts, a new wine list, and more clearly highlighted lunch features.They simultaneously introduced more brand appropriate plateware and flatware.

We are confident Red Lobster is on the right course inrefreshing its brand and it will be ready to resume meaningful unit growth inthe second half of fiscal 2009.

Turning to LongHorn Steakhouse, as Brad mentioned, ourintegration efforts are on track and we are pleased with our progress to date.Dave George has built a strong leadership team at LongHorn that combinesexecutives from both Darden and RARE and we expect most of them to be inOrlando by the end of January 2008.

LongHorn same-restaurant sales performance in the period ofSeptember, October, and November was in line with the Knapp-Track competitiveset. However, their year-over-year comparisons were negatively impacted by fourfactors: incremental spending last September in support of their 25thanniversary; a new promotional strategy that shifted their signature filet andlobster tail promotion from September/October last year to November/Decemberthis year; media support that only included 15-second ads this year; and ageographic footprint that is concentrated in regions that have weakenedconsiderably versus last year, particularly Florida and New England.

Turning back to their advertising, LongHorn ran twopromotions during the second quarter this year. The first promotion, Eye ofPrime Rib, ran for five weeks and the second promotion, Flo’s Filet and LobsterTail, ran for four weeks. Last year, the filet and lobster tail promotion ranfor eight weeks.

During October and November, LongHorn opened seven newrestaurants and they expect to open 26 net new restaurants during fiscal 2008.Ultimately, we believe LongHorn has the potential to operate 600 to 800restaurants in North America.

Our primary focus at LongHorn over the next several monthsis to ensure that we continue to deliver a great guest experience bymaintaining a high level of operations excellence and restaurant support whilealso effectively integrating the brand into Darden.

In addition, we continue to build a pipeline of qualitysites for future new restaurant growth and we’ve taken the initial stepsrequired to accelerate menu innovation and strengthen advertising and promotioneffectiveness, including the promotion of Terry Stanley to Executive VicePresident of Marketing at LongHorn. Terry was previously Senior Vice Presidentof Culinary and Beverage at Olive Garden.

LongHorn Steakhouse has a strong foundation and a talentedteam and we are delighted to have them as part of Darden. Now Gene will discussour new specialty restaurant group.

Gene Lee

Thanks, Drew. It’s great to be here with you this morning todiscuss the specialty restaurant group. As you have heard Brad mention, thespecialty restaurant group is designed to leverage our resources and poll ourexpertise around building The Capital Grille, Bahama Breeze, and Seasons 52brands.

I see a tremendous amount of promise in each of thesebrands. By combining our efforts under one group, we believe we can moreeffectively grow these small, premium brands to be meaningful contributors toDarden. To foster this effort, we have centralized the finance and humanresource teams at these brands and are looking for other synergies as well.

The Capital Grille second quarter sales, which include onlyOctober and November, were $37.3 million, an increase of 11.3%. This growth wasdriven by four additional restaurants and a same-restaurant sales increase of0.7%.

We successfully opened two new restaurants in the quarterand we plan to open three more restaurants in this fiscal year. Guestsatisfaction continues to trend at very high levels, as measured by our mysteryshopper program, and in the coming months we will focus on a number of brandbuilding and sales strengthening initiatives.

John Martin and his team have done an outstanding joboperating The Capital Grille and we are excited about the growth potential. Wecontinue to be successful in central business districts, malls, and otherdestination locations.

Bahama Breeze's second quarter sales of $30.3 million wereone-tenth above prior year sales from continuing operations, driven bysame-restaurant sales growth. As you’re aware, Bahama Breeze has madetremendous progress over the last two years, improving the guest experience,increasing restaurant level returns, and broadening the brands appeal. Giventhis performance, the strategic focus for Bahama Breeze is to prepare thebusiness for disciplined new restaurant growth, which begins with two newrestaurants in fiscal 2009. Laurie Burns and her team have successfullyrepositioned Bahama Breeze for future growth.

Seasons 52 is performing very well. This is a uniquelypositioned brand with strong guest acceptance. Our seven restaurants aredelivering average sales volumes in excess of $6 million. Stephen Judge and theteam are focused on building the concept’s operational foundation and settingthe brand up for successful future growth.

And now I’ll turn it over to Clarence for final comments.

Clarence Otis

Thanks, Gene. As we indicated in our press release lastnight, while we feel good that our sales results continue to be industryleading this quarter, we are disappointed that those sales did not translateinto stronger earnings results.

We do recognize, of course, that that’s due primarily to avery challenging cost environment with meaningful escalation on a couple ofitems over the last two months or so and we also believe that costs are goingto remain challenging for a while.

That said though, we are confident we can successfullynavigate through this environment and that’s because we think we have threeadvantages. First, as our competitively strong sales results suggest, each ofour brands is strong. Each has premium guest appeal and that should continue toserve us well as consumers become more discerning than ever about where theychoose to dine.

The second one is that with the RARE acquisition and withthe cost synergies that come along with that, we are better positioned thanwe’ve been in the past to mitigate these near-term cost challenges.

And then longer term, as the cost environment normalizes,those synergies and the accelerated total sales growth that we are now capableof because of the acquisition are going to serve to enhance our margins, theyare going to serve to enhance our profit growth.

We feel great about the acquisition of RARE Hospitality andwe are clearly pleased to be joined by so many talented leaders who are joiningus in our quest to build what we think will be a great company.

And then finally, I think the final, very importantadvantage is our proven approach to the business. You’ve heard us talk aboutthat before. It’s an approach that involves combining strong brand managementand great operations, supported by excellence in the functions that are drivingmuch of the synergy that we expect from this acquisition, functions like supplychain, information technology, human resources, and a number of other keybusiness disciplines.

And ultimately, we think that all of these advantages andthe resulting ability that we have to create sustainable leadership value forour shareholders really rests on having great people and so we are proud of ouroutstanding people. They are outstanding in our restaurants as well as in ourrestaurant support center. They are working hard to make the integrationsuccessful and they are working hard to create a company that’s a leader in ourindustry now and for generations.

With that, we are happy to take your questions. We doapologize for the length of the presentation but there have been a number ofmoving parts in this quarter and so, Moderator, we’ll open it up for questions.

Question-and-AnswerSession

Operator

(Operator Instructions) The first question comes from theline of Glen Petraglia with Citigroup. Please go ahead.

Glen Petraglia -Citigroup

Good morning. I get the sense from your comments that itsounds like you expect the environment or the sales trends to sort of stabilizeas we go into the next half of the year. Given that traffic trends at each ofthe three core concepts seem to weaken as we move through the second quarter, Iam wondering what gives you confidence that the consumer environment won’t geteven more challenging as we go ahead.

Clarence Otis

We think that you’re right. We do expect it to actuallystabilize, improve a little bit. As we look really over the last severalquarters, what we’ve seen on the consumer side the last couple of years, quitefrankly, is a fair amount of volatility. So from quarter to quarter, sentimentbounces around a lot, a lot of it is related to the fact that some of thepressures on discretionary income bounce around.

So when you look at the second quarter, probably the thingthat stands out is gasoline prices, and that’s something that we have seen movethe consumer around, and it’s a pretty volatile price. We don’t expect it tostay at second quarter levels. We do expect it to come back a little closer towhere it’s been over the last 12 to 18 months, so that’s a part of it.

But we do expect some improvement from the second quarter,modest improvement but some improvement, and part of that’s because of thebounce -- for example, the first quarter was dramatically better than thesecond quarter from a consumer perspective if you look at total industry andlook at our brands. So that’s definitely in our thinking.

I think the other part is that we expect costs to stabilizewhere they are. We are not expecting a whole lot of favorability there. Thatmay happen. If that does, that’s upside to our current outlook.

Glen Petraglia -Citigroup

And then secondly, as you’ve gone through RARE in the lastcouple of months, is there anything that stands out to you as particularlysurprising, either on the positive or the negative side versus what maybe yourexpectations were when you made the acquisition?

Clarence Otis

We felt that this was really a good fit from a cultureperspective and by that, we really mean the values and what we think isimportant in terms of how you treat people and what ultimately drives businessperformance, and that’s been true. But that said, also is that we both from anoperating philosophy perspective are very similar. So we are very systemsdriven when it comes to restaurant operations and restaurant support. Thesystems are somewhat different and so that’s why the integration cost isaligning those systems. But all of that has been great.

I think from a cost synergy perspective, we had a view thatthere were significant synergies there and that’s been confirmed as we workthrough it. I think on the -- having not done this before, the integration justtakes a lot of time and energy. There are a lot of details.

We’ve been able to compartmentalize that work and keep itaway from the operators and more on the support personnel, but it is a greatdeal of work.

Glen Petraglia -Citigroup

Thanks.

Operator

The next question is from the line of John Glass with CIBC.Please go ahead.

John Glass - CIBC

Thanks very much. On the guidance, I just wondered if you couldclarify a little bit -- is the base year you are using still 253 for ’07 togrow the earnings space?

Matthew Stroud

That’s correct. That’s the benchmark.

John Glass - CIBC

Okay, and did you not then -- if you back out your, theintegration costs, have you actually changed your second half earningsguidance?

Brad Richmond

That would slightly be adjusted for the higher cost andslightly lower same-restaurant sales growth, lower in that range, so we havetaken it down so that when you put the first half of the year and look to thesecond half, you are going to get into that 8% to 10% range, so it’sessentially a 7 to 9 range.

John Glass - CIBC

Okay, I’ll talk with you after the call. It’s still a littleunclear. And then in terms of the visibility you have on the food costs in theback half of the year, I understand you expect costs to stabilize. Where areyou at risk? It sounds like there were a few things that changed quickly thisquarter maybe you didn’t have contracts on or maybe you renegotiatedunexpectedly with the vendor. Can you talk about where you still have someexposure, things you don’t know or don’t have locked down?

Brad Richmond

When we look at our particularly the food and beverage costsfor the back half of the year, we at this point have much of it contracted in.I think the ones that I mentioned earlier that were at the market risk would befor some of these dairy items would be the ones that will fluctuate. I thinkwe’ll see those move both up and down over the course of the back half of ourfiscal year.

John Glass - CIBC

Okay. Thank you.

Operator

The next question is from the line of Jeff Bernstein withLehman Brothers. Please go ahead.

Jeff Bernstein -Lehman Brothers

Thank you. First, just a follow-up on your, an earlierquestion in terms of second half guidance. I’m just wondering, in terms of yourassumptions, it seems like you are taking a stance that things will stabilizeor actually get slightly better in the third and fourth quarter. I’m justwondering, based on what we see of late and like you said, the volatility, whyperhaps you wouldn’t take a more cautious stance in the back half, kind ofbring down expectations just based on the fact that there is trend volatilityand we have seen trends decelerate just over the past couple of months. Andthen I have a follow-up.

Clarence Otis

I will start off. I would just say on the back half, I thinkBrad just said it, we have taken a more cautious look than we ended the yearwith from a sales perspective. And so we talked about 2%, 4%. I think if welooked at the front half of the year, we would have thought we’d be at the highend of that range, maybe even slightly above it and we saw that in the firstquarter. We still have that same range but we are clearly thinking that we aregoing to be in the bottom half of that range. The first half of the year isslightly above the midpoint and so a little bit more cautious.

But we are working on and strengthening our brands and wethink we’ve got strategies in place that will enable us to continue tooutperform the industry, and so that’s part of it.

On the cost side, I think as Brad just said, our outlook haschanged meaningfully and so while we don’t expect it to deteriorate from secondquarter a lot, it is still significantly higher than when we came into theyear.

Jeff Bernstein -Lehman Brothers

Okay, and then just a follow-up on the broader consumerenvironment, Clarence, I know you’ve recognize consumer pressures. You arestill far outperforming peers. I’m just wondering first kind of the specificmeasures you look at that you believe drive that and then what specifically --what are you doing to combat the more recent pressures? Any thoughts of perhapsmore value focused offerings or greater couponing? I know we’ve seen a numberof your competitors talk about going more deep discounting. I’m just wonderingwhether you have a short-term plan to help combat that or whether it’s statusquo.

Clarence Otis

Well, I’ll start with just the overall measures. I mean, welook at clearly disposable income growth and then digging below that to try toget at discretionary income growth, and so that’s what we look at. And ofcourse, as a result of that, we’re looking at all of the outlay pressures,whether it’s gasoline prices, home fuel prices, mortgage rates. And so we lookat the level of adjustments, et cetera, et cetera and we do that region byregion. And so it’s really many of the same things that you look at as we tryto get a handle ultimately on discretionary income growth.

In terms of our thinking about how to navigate through this,I’ll let Drew take the first stab at that.

Andrew H. Madsen

Well, in an environment like this, we are really focused onthree or four key things. When consumers choose to spend their discretionarytime and money with us, we have to give them a great experience. As I saidbefore, we need compelling food news for sure. We need appropriate value overthe course of the year, and the fourth thing is we need to make sure we arebuilding a brand and a base business that we can carry into the future.

So we are looking at making sure that we have a greatexperience, that each of our promotions feature new products and new foods newsthat’s compelling to our guests, and that throughout the next six months in thesecond half, there’s going to be periods of appropriate value emphasis.

But I wouldn’t say -- you mentioned deep discounting before.I think that would be inconsistent with how we are thinking about building abrand and a base business for the long term that we can carry into the future.But we are going to make sure we have appropriate news and value over thecourse of the second half.

And I would just say stepping back and looking at it from astrategic perspective, each of our big brands are in different places in termsof where they are, in terms of strength of promotional pipeline and news. Andwe talked about it before, Olive Garden clearly leads the industry on thatscore. Very strong, well ahead, a year-and-a-half, two years out on promotionalpipeline. That’s where we’ve been trying to get with Red Lobster. We’ve madetremendous progress over the last several years but we’ve still got more workto do.

And at LongHorn, they really have done a lot of work on thepromotional side. We think there is a lot more that we can do to strengthen thepromotional pipeline there and so that’s some of the work that we’ve gotdesignated there.

Jeff Bernstein -Lehman Brothers

Thanks.

Operator

The next question is from the line of Steven Kron withGoldman Sachs. Please go ahead.

Steven Kron - GoldmanSachs

Thanks very much. Good morning, guys. A couple of questions;one, I guess first just looking at Olive Garden and looking at the pressrelease and seeing what I think is even excluding the one-time item deleverageagain in the P&L, despite an above 3% comp and I suspect that’s where youare getting a lot of the commodity pressure. But I guess can you just talkabout that and what your expectations are from a margin standpoint at thebrands going forward and baked into your guidance?

And related to that, you mentioned pricing and how youobviously continue to keep an eye on that, particularly in the currentenvironment. When might that decision come as far as further pricing and whatkind of pricing power do you have at that brand right now?

Andrew H. Madsen

Well, you are absolutely right. Olive Garden is experiencinga disproportionate amount of the commodity cost pressure -- dairy, bread, wheatin particular, and that was reflected in their second quarter performance.

On the question of pricing, our pricing decisions have tobalance two things: we want to make sure that we have a strong consumer valueequation and broad price point accessibility on the one hand. And on the otherhand, we know we need to maintain strong unit level margins.

We believe that our scale and our operating infrastructureis a competitive advantage because it allows us to take less pricing than someof our competitors, still maintain strong unit margins and perhaps take somemarket share.

In the current environment, we’ve had to increase ourpricing from say the 2% range in the past few years to more like 3% in thecurrent year, roughly. Most of that was driven by minimum wage, things that weknew were coming, things that we knew were going to be permanent costs in thebusiness model, so we priced to cover that.

What surprised us is, as has already been mentioned by Bradand Clarence, is the rapid run-up in several commodity costs at the same time.We are evaluating those costs now to see if we believe they are going to bewith us for an extended period, if they feel like they are more structural, andwe are looking at other ways we can offset it without pricing.

I mean, a very important part of our enterprise valuecreation going forward is the synergy from the RARE integration that wasalready talked about, which is going to help us combat some of those costpressures in a way that other people can’t.

So we are evaluating potential pricing in the future but aregoing to balance it against maintaining broad consumer accessibility.

Brad Richmond

I would just say also that if there is a silver lining, itis that the pricing pressures at Olive Garden where our margins are thestrongest and so we feel like we’ve got more choices from an Olive Garden thanwe might at some of the other larger brands.

So it really is a question and we’re talking about it, howmuch to price, how much to maintain pricing and take market share. I think ifyou look at California, it’s a microcosm of what alternatives are becauseCalifornia is one of the weakest markets when you look at Knapp-Track. But forOlive Garden, California is an extraordinarily strong market and a large partof that is because of its value leadership, and so we’ve got to make somechoices about sales growth versus pricing. And we’ll be thinking that throughover the course of the next couple of months.

Steven Kron - GoldmanSachs

So year-to-date, it looks like in that brand, the marginsare down. Is baked into your guidance for the back half an improvement inmargin trend on a year-over-year basis or more of the same as we move throughthe year?

Brad Richmond

On the food and beverage, it’s going to be pretty much whatwe are seeing now, although if you look at the restaurant labor line, as wewrap on some of those increases from last year, we expect to see someimprovements there and -- from minimum wage increases. And our efforts on theintegration and some of those synergies will start to have a very modest impacttowards the end of this fiscal year but particularly as we look to next yearwould have a significant impact on our margins and earnings growth.

Steven Kron - GoldmanSachs

Okay, and the last question just related to a couple ofother questions that were asked as far as the outlook going forward from asales perspective; you at times give some insight as to how the current monthis developing. Care to make any comments just on how December is shaking outrelative to November?

Brad Richmond

We really tend not to do that unless we are at the end of aperiod where we are about to report, and so when we went away from monthlysales, we’ve not had that need. I would tell you the obvious, I guess, thatweather has been a significant negative so far in December. But there is a longwinter just started. We’ve had tough Decembers followed by mild Januarys andFebruarys from a weather perspective. We planned a normal winter, so the threewinter months overall we are expecting to look a lot like last year. It’s hardfor us to forecast any variance from that.

Steven Kron - GoldmanSachs

Thank you very much.

Operator

The next question is from the line of Bryan Elliott withRaymond James. Please go ahead.

Bryan Elliott -Raymond James

Good morning. I wanted to get a little better insight intoLongHorn. You mentioned the exposure to Florida and the timing differences onthe promotional, marketing spending being dialed down a bit. But nominalsame-store sales there down significantly and I just wondered what you couldtalk about potentially -- you know, are we seeing disruptions from anintegration standpoint? Have we seen manager turnover rise, for instance?Anything in addition to the geography and marketing that you could help us giveus some insight into that deterioration?

Andrew H. Madsen

Sure. We don’t think, first of all, that the same-restaurantsales trend at LongHorn is related to loss of focus or disruption related tointegration. As Clarence said earlier, while there is certainly a lot of hardwork and a lot of great work going on there, we think we’ve done a good job ofshielding it from the operators.

The biggest trends that really are factors that reallyimpacted the same-restaurant sales trends were the four I mentioned earlier andit’s not a reduction in promotional support or advertising support. It’s ashift in their strategy, but let me walk you through them.

A year ago when LongHorn was celebrating their 25thanniversary, they had a significant amount of incremental marketing spending,particularly around the Atlanta area, where there is 40 or 45 LongHornrestaurants. They had 13 or 14 billboards up. They had some incremental media.They had newspaper ads that featured steaks at 1982 prices, so it had ameaningful impact on sales for a couple of months in that area.

The second factor was their promotional strategy, and I’lluse the LongHorn fiscal year here but from fiscal 2006 going to fiscal 2007 inLongHorn’s calendar 2007 essentially, they made a decision which I think is agood one to go from four promotional windows in 2006 that were pretty long,like nine or 10 weeks, to more like seven promotional windows that are shorter,say five or six weeks each. And that’s more what Red Lobster and Olive Gardendoes. It gives you a better chance to introduce more news and have more newreasons to visit your restaurant.

But in the process of doing that and putting in morepromotional windows, the last promotion of the year, the steak and lobsterpromotion, got pushed back. So four weeks, there’s about a four-week shiftthere and that had a big impact.

The geographic footprint you are talking about ismeaningful. It’s not a change year over year but they tend to be concentratedin regions of the country that have seen the biggest softness year over year --Florida, New England, South Atlantic are probably the three biggest.

We don’t expect those trends all to continue. Obviously the25th anniversary has passed. The promotional strategy shift has passed them. Weare going to be working with the team already at LongHorn to see if we can’tstrengthen their advertising and promotions going forward.

And as it relates to guest satisfaction, that continues toincrease and we haven’t seen an appreciable increase in turnover. In fact,LongHorn was just recognized with a Peoples Report Award recognizing excellencein turnover. So the fundamentals are solid.

Bryan Elliott -Raymond James

All right. Thank you.

Operator

The next question is from the line of John Ivankoe with J.P.Morgan.

John Ivankoe - J.P.Morgan

Thank you. First, just a really quick housekeeping question;what number are you using for your second quarter earnings for your 7% to 9%guidance for the year? What’s the base? Is it 39?

Brad Richmond

That would be $0.42.

John Ivankoe - J.P.Morgan

Okay, the second quarter is 42. Okay, thank you for that.Secondly, obviously LongHorn was mentioned to have some pretty toughgeographies and in much of the country is completely under-penetrated, or Ishould say non-penetrated. Where is the growth of LongHorn going to go infiscal ’08 and fiscal ’09 from a new unit perspective?

Clarence Otis

Well, in our fiscal ’08, they continue to slowly movewest. I think the further west they are going to get is Phoenix. And they arealso filling in some of the regions they are already in in new trade areas.It’s probably more of that, frankly, than there is new geography going west.But it is a gradual expansion west, but more filling in regions that they arealready in.

John Ivankoe - J.P.Morgan

Okay, but are they continuing to develop in some of theunder-performing markets or are they developing in markets that are doing muchbetter?

Clarence Otis

No, they are continuing to penetrate in those softermarkets, as well as the ones that are doing better. One of the things that weneed to do is get to the point where we can have more effective media and thatwill help in all markets. And so getting the full penetration in those marketsis important.

John Ivankoe - J.P.Morgan

When might LongHorn see national cable advertising? Is itmany, many years away still?

Clarence Otis

Well, it won’t be in the next year.

John Ivankoe - J.P.Morgan

Right, that’s what I assumed. And finally, and I think thequestion has been asked before but I want to see if I can get perhaps adifferent answer; what is your sense of the consumer in terms of pricing rightnow? It seems like QSR companies and casual dining companies are all takingpricing. Have you tested levels of pricing and what the consumer’s reaction isin terms of what they order on the menu, in terms of frequency? Or have theconsumers in your mind just accepted the fact that we are living in aninflationary environment?

Clarence Otis

Let me start. I think consumers are highly sensitive toprice and so we see that in how they navigate the menu in terms of preferenceon items and in terms of add-ons, beverage sales, and so a pretty heightenedsensitivity to pricing. And so that is definitely a constraint. It also is an advantagefor Olive Garden because Olive Garden is the value leader in casual dining, andso it certainly helps.

I think that given that kind of consumer environment, wefeel pretty good, for example, about Red Lobster's relative performance, thefact that it’s outperforming Knapp-Track by two points when its average checkin that Knapp-Track set is definitely toward the higher end and I think thatspeaks to the brand strength there.

John Ivankoe - J.P.Morgan

Are there any significant pricing laps that we should beaware of, either at Red Lobster or Olive Garden in the near term? Or should thecurrent pricing trend continue, assuming you don’t take more pricing?

Brad Richmond

First, let me go back to your first question on the EPS forthe second quarter. We are using it ex the acquisition integration costs, so itwould be $0.39, not adjusting for anything else.

On the pricing, probably the biggest thing there is a yearago this coming January was when there was some significant minimum wageincreases that we in those selected states did take some increases for, so wewill be lapping on those as we move into the January timeframe. So we have somepricing on a year-over-year basis that would be a little bit less but directlyattributable to the minimum wage increases in those selected states.

John Ivankoe - J.P.Morgan

And to push you a little bit further, is that when you areprepared perhaps to take pricing to offset some of your commodities or mightthat -- or would that be somewhat delayed?

Brad Richmond

I think we are still studying it. We would not be preparedto make a comment on that right now.

John Ivankoe - J.P.Morgan

Okay. Thank you.

Operator

The next question is from the line of Dan Hinchman with Thompson Siegel. Please go ahead.

Dan Hinchman - Thompson, Siegel & Walmsley

Good morning, guys. A quick question about the one-timecharges you had. Earlier in the call, you highlighted the integration and thepurchase accounting adjustments and how they affected each line item. I was wonderingif you could do the same thing for the litigation expense and the $0.02 chargethere, where that appeared in the income statement. If you could also justquickly highlight the pretax dollar amounts for each of these charges.

Brad Richmond

The litigation charge would appear on the G&A line andit would be in the range of $0.02 per share.

Dan Hinchman - Thompson, Siegel & Walmsley

Okay, and what would the pretax dollar amount on that chargebe?

Brad Richmond

Around $4 million.

Dan Hinchman - Thompson, Siegel & Walmsley

Four million -- and what would those be for the integrationand purchase accounting adjustments as well?

Brad Richmond

I believe those combined for about -- let me check here --about $20 million to $21 million.

Dan Hinchman - Thompson, Siegel & Walmsley

Okay, great. Thanks.

Operator

The next question is from the line of Jeff Omohundro withWachovia. Please go ahead. Mr. Omohundro, your line is open. You may talk now,sir. We’ll take the next question from the line of Mitch Speiser with TelseyAdvisory Group. Please go ahead.

Mitchell J. Speiser -Telsey Advisory Group

First off, LongHorn, if you were just to try and flush outthe promotional mismatches, I’m just wondering what you think the comps were inthe quarter. And secondly, it does look like, it’s been brought up earlier inthe call that the third quarter, fourth quarter earnings growth expectationsare probably in the 10% to 13% range. And if that is true versus the kind of 9%down in the fiscal second quarter, where do you see the delta to drive thattype of earnings growth in the second half of the fiscal year? Thank you.

Brad Richmond

On your first question regarding LongHorn comps for thequarter, those factors that I mentioned are probably about a point.

And regarding, if I understood your question right, what’sdriving the back half of the year, what do we see there, won’t get into a lotof perspective there but I think the first, the comment I mentioned earlier iswe are wrapping on minimum wage increases that are now a year ago, so on therestaurant labor line you’ll see some improvements there. On the food andbeverage line, we talked about stabilization on that line item, as well as thecontinued efforts of the integration and the synergies that will be driven bythat, would probably be the real leverage points as we look back to the thirdand fourth quarter.

Mitchell J. Speiser -Telsey Advisory Group

And if I can slip one more in there, Capital Grille comps,it looks like traffic was negative. I think that might have been the first timein a while where Cap Grille’s traffic was negative. Can you give us a sense,the upper end, do you think this does imply a slow down at the upper end orwere there any nuances in the quarter to explain the weak traffic? Thank you.

Gene Lee

We have definitely seen a guest pull -- traffic pull back atall levels in full service dining but we have seen a pull-back in upscale, asyou compare us -- also compare our other peers, we’ve noticed that they’ve hadnegative guest counts also.

Overall, we do believe long term that we can continue togrow guest counts on a very high base and continue to open five to six newrestaurants a year for several years.

Mitchell J. Speiser -Telsey Advisory Group

Thank you.

Operator

The next question is from the line of Andrew Barish withBanc of America. Please go ahead.

Andrew Barish - Bancof America Securities

Just wondering on shrimp, your largest item, you do importall of that; how might that cost item be affected by the dollar weakness as youbring it back into the U.S. and are you totally protected on contracts forfiscal ’08? And maybe kind of dovetailing into how that might look goingforward on that major item.

Brad Richmond

In our guidance, we’ve contemplated that we have, because wepurchase all this food, we have about 90% of our remaining usage is alreadycovered in our guidance. And that would be at prices that are very favorable,despite the currency fluctuations.

Andrew Barish - Bancof America Securities

So the weak dollar has not had an impact on that food costitem yet?

Brad Richmond

Well, it has had an impact but there are other structuralchanges that are driving prices down, so it still remains pretty favorable. Itwould have been better and we would have preferred to see it that way but it’sstill favorable.

Andrew Barish - Bancof America Securities

Thank you.

Operator

The next question is from the line of Joe Buckley with BearStearns. Please go ahead.

Joseph Buckley - BearStearns

Thank you. First just a question on the wheat costs youmentioned. Is the primary impact of that on pasta at Olive Garden? And could Iask you to talk about whether you are covered going forward or hedged goingforward in some way to mitigate that if wheat stays high?

Andrew H. Madsen

The primary impact is on bread but there is an impact onpasta as well. And we are renegotiating a number of those contracts now --maybe a third of our contracts are in place and the others are beingrenegotiated as we speak.

Joseph Buckley - BearStearns

Okay, and then a question on LongHorn; comps obviously alittle bit weaker than expected. You mentioned charges in the third and fourthquarter I think of $0.03 and $0.02, a penny of which in each case is purchaseaccounting. So is this dilutive on an operating basis now for fiscal ’08? I’mkind of curious what your expectations were when you bought in on thesame-store sales numbers versus what we are seeing.

Brad Richmond

Let me address your question on its impact on our earnings.Actually, as we’ve gone through this, we’ve had no change in our expectations.It will add to our earnings after tax on an absolute basis. As I mentioned, theshare buy-back though, there’s not as much of our free cash flow going to thatso on an EPS basis, we still see it as being dilutive.

The purchase accounting impact, that single item is about apenny per share per quarter, so that was pretty darn close to what we hadestimated at the time of the acquisition.

In terms of our valuation when we were looking at theacquisition, we did see, you know, were anticipating some toughness on thesame-restaurant sales line so we are within that range still at this point intime.

Clarence Otis

And I would just say, Joe, the purchase accounting is justone of the one-time up-front costs. I mean, there are other integration costsrelated to integrating the systems, related to severance and all kinds of otherthings that continue to play through in the third and fourth quarter.

So when you strip all those out on an operating basis, it’saccretive and it is neutral at the EPS line, again for the reasons that Bradmentioned. It’s because we’ve got less share repurchase. But on an operatingbasis, operating income basis, accretive and so really a higher qualityearnings model post acquisition.

Joseph Buckley - BearStearns

And then just one more question just on some of the regionalcomments; you mentioned California being very strong for Olive Garden,obviously weakness in Florida and New England for LongHorn. Are you seeingweakness in Florida or other regional markets for Olive Garden and Red Lobsteras well?

Clarence Otis

Well, let me step back and say Florida and California aretwo very weak markets. Olive Garden is bucking the trend dramatically inCalifornia. For Red Lobster and Olive Garden, when you look at where thecategory weakness is, those would be weaker areas for us to but in some cases,that still means growth for Olive Garden and Red Lobster. The divergence inCalifornia is even more dramatic thought for Olive Garden.

Joseph Buckley - BearStearns

Is there any reason you’d highlight other than Florida orCalifornia, New England?

Clarence Otis

Well, Olive Garden specifically is outperforming theKnapp-Track average in every region. It’s probably closest to Knapp-Track inNew England, so that’s maybe a tougher area for everybody. And Red Lobster isoutperforming Knapp-Track everywhere except California.

Joseph Buckley - BearStearns

Thank you.

Operator

The next question is from the line of Stephen Anderson withMKM Partners. Please go ahead, sir.

Stephen Anderson -MKM Partners

Good morning. I just wanted to go through the interest lineagain. I noticed a big jump, primarily related to the acquisition related costsbut I noticed with the existing credit facility, with that expiring coming upin October, can we expect that -- how quickly can we assume that incrementalinterest rate costs to gradually just go down?

Brad Richmond

Well, the increase in interest is all attributable to theacquisition. We have termed out the bridge financing we have at rates that werepretty close to our existing debt, so that was in the low 6% range. And we dohave some of that debt, as you can see on the balance sheet that is floatingrate debt, short-term debt there. So that’s going to be subject to thatmovement but that’s by design because we -- as we intend to pay this debt downrelatively quickly, we wanted to have that availability to us.

Operator

The next question is from the line of Rachael Rothman withMerrill Lynch. Please go ahead.

Rachael Rothman -Merrill Lynch

Good morning, guys. Just a similar question on theaccretion/dilution -- I’m not sure I understand. In the press release, it saysthe company estimates that in aggregate, the acquisition and other itemsadversely affected, blah, blah, blah, blah. Is that just the acquisition costsor is that all of the one-time costs, as well as the revenues and expensesassociated with RARE? So I guess to ask it another way, are you saying thatstandalone Darden would have done $0.12 ex RARE and ex one-time items? Or areyou just saying acquisition costs?

Clarence Otis

Well, there are two separate pieces. The bulk of it isreally one-time integration costs, and then I’ll let Brad talk about that. Awayfrom that, it’s really the operating effect. So what’s the operatingcontribution from the RARE brands and how does that stack up against thefinancing costs associated with those brands, so that’s how we think about ouroperations. That piece in the quarter, the net was a minus $0.01. For the year,that piece we think will be neutral because a lot of the operating synergiesthat Brad talked about, $8 million this fiscal year, haven’t materialized yet butwill over the course of the next several months.

Brad Richmond

And just to follow-up a little bit on that, there is thepurchase accounting adjustments that are required and that’s about $0.01, andthat’s really related to the write-up of assets, fixed assets, leaseholdimprovements, items of that nature. And then as Clarence just mentioned, thecost of actually combining the two companies, relocations, additionalassistance to set us off on the right path here, that is included in there aswell and that makes a part of that $0.09. So $0.08 of that was more of aone-time, $0.01 of that will be an ongoing purchase accounting adjustment.

Rachael Rothman -Merrill Lynch

So am I correct that standalone Darden, if we just pretendedthat the RARE acquisition had never happened, would have posted $0.12 versus$0.45 last year?

Brad Richmond

Twelve-cents more --

Rachael Rothman -Merrill Lynch

Sorry, $0.42 versus $0.52 last year? Am I reading therelease correctly?

Brad Richmond

Forty-one.

Rachael Rothman -Merrill Lynch

GAAP was $0.41, yes, adjusted, $0.45?

Brad Richmond

Yes.

Rachael Rothman -Merrill Lynch

Okay, correct. Perfect. And then can you talk a little bitabout the new unit productivity at the Olive Garden stores? In the past, youguys had been opening new units at about 100% of your existing sales base andit seems like now that’s trended down to about 85%. Can you talk to us abouthow the new stores are opening? Are they seeing any difference in the ramp rateor the opening level?

Brad Richmond

When we look at new restaurant performance, we don’t seereally a down tick in that. We look at their sales performance, their storeexpectations in terms of hurdle, meeting our cost of capital, and in aggregate,they are well above our cost of capital in terms of return and they continue toperform very strong.

Clarence Otis

I think new restaurants are expected to open at sales levelsthat on an average basis are below system, because we are filling in smallmarkets, we’re filling -- et cetera, et cetera. So there is no change there.And as Brad said, they continue to meet expectations in hurdle.

Brad Richmond

And one additional comment -- the prototypes that we areusing now for Olive Garden are smaller and have fewer seats than most of theolder Olive Garden prototypes out there. But despite that, they are stillperforming very close to the average unit volume.

Rachael Rothman -Merrill Lynch

Okay, great. And then just finally on the traffic, can youtalk a little bit about -- it seems like same-store sales has mainly beendriven by pricing to this point. Can you talk a little bit about how much moreprice you feel you can take without impacting traffic negatively further?

Brad Richmond

Well, that’s the $64,000 question I guess that we’re askingourselves. We do think we’ve got more pricing power at Olive Garden because itis the value leader already and has a very strong brand. That just happens tobe where most of our unexpected commodity cost pressure is coming from. And aswe mentioned, that’s why we are considering whether it would make sense to havesome modest additional pricing there in the second half of the year but havenot yet decided.

Matthew Stroud

We’re going to have to cut off the questions there. We’vegone past the bottom of the hour. We appreciate you all being on with us today.If you have further questions, additional follow-up, you can get a hold of ushere in Orlando and we’ll be happy to take your questions. In the meantime, wewish everybody a safe and happy holiday. We look forward to seeing many of youin February in New York City. Thank you very much for being with us today.

Operator

Ladies and gentlemen, this conference will be available forreplay after 12:00 p.m. today through January 19, 2008, at 11:59 p.m. You mayaccess the AT&T teleconference replay system at any time by dialing1-800-475-6701 and entering the access code 900833. International participantsdial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844.Access code is 900833.

That does conclude our conference for today. Thank you foryour participation and for using AT&T executive teleconference. You may nowdisconnect.

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