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Brinker International, Inc. (NYSE:EAT)

F3Q08 Earnings Call

April 22, 2008 10:00 am ET

Executives

Douglas H. Brooks – President, Chief Executive Officer

Charles M. Sonsteby – Executive Vice President, Chief Financial Officer

Guy Constant – Vice President Operations Analysis

Marie Kerry – Vice President Investor Relations, Treasurer

Analysts

Joe Buckley – Bear Stearns & Co.

Steven Kron – Goldman Sachs

John Ivankoe – J. P. Morgan

Jeffrey Bernstein – Lehman Brothers

John Glass – Morgan Stanley

Bryan Elliott – Raymond James & Associates

David Palmer – UBS Securities LLC

Operator

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

It is now my pleasure to turn the floor over to your host, Marie Kerry (sp), Vice President of Investor Relations and Treasurer. Marie, the floor is yours.

Marie Kerry

Thank you, Kate. Good morning, everyone, and welcome to the April 22nd Brinker International third quarter fiscal 2008 earnings conference call. During our management comments and in our responses to your questions certain items may be discussed which are not based entirely on historical facts. Any such items should be considered forward-looking statements with the meanings of the Private Securities Litigation Reform Act of 1995. All such statements are subject to risks and uncertainties which could cause actual results to differ from those anticipated. Such risk and uncertainties include factors more completely described in the morning’s press release and the company’s filings with the SEC.

Upcoming calendar dates include the filing of the company’s third quarter SEC Form 10Q on or before May 5th. And the company’s fourth quarter comparable sales and earnings results currently scheduled to be reported on August 5th.

With me today are Doug Brooks, Chairman and Chief Executive Officer, Chuck Sonsteby, Chief Financial Officer, and Guy Constant, VP of Operations Analysis.

On the call today Chuck will begin with the financial recap of the quarter’s operating results and will share revised development in capital expenditure projections. He will turn the call over to Doug to more fully describe our company’s long-term areas of focus which we began outlining last quarter. At the end we will open up the call for questions.

Charles M. Sonsteby

Thank you, Marie. Good morning and thank you for joining us. Our third quarter of fiscal 2008 proved both rewarding and challenging. We’re seeing success on our top line, demonstrating how the power of our world class brands coupled with the hard work and dedication of our team members can create an even stronger Brinker portfolio. By capitalizing on our previous experiences during other challenging times for the industry our team is responding to the environment and driving results.

We’re encouraged by the momentum gained on sales this quarter as comparable restaurant sales for the quarter increased to 1.1%; very good considering the impact of Easter and weather.

At Chili’s, excluding the impact of California, Nevada, Florida, and Arizona – the markets hardest hit by the sub-prime crisis – comparable restaurant sales improved to 3.5%. So the short-term trend appears positive and we’re off to a good start and expect the stimulus cheques to help in May and June. In addition it appears California and Florida are showing better. With still negative performance both those markets appear to have bottomed down in December and have shown improvement each month since.

Chili’s has outpaced the industry benchmark as reported by Navtrac on comparable sales for the last three quarters with gap widening considerably in the most recent quarter. The gap speaks to Chili’s ability to differentiate itself in the segment with strong core menu flavour profiles that capitalize on the iconic chili pepper. These menu flavours work in partnership with the advertising campaign “Pepper and Some Fun” and Chili’s re-image program to provide an atmosphere our customers perceive as uniquely Chili’s. This momentum, coupled with our previously focused actions around key priorities, will be the path for sales and margin growth driving operating results and long-term value creation for our shareholders.

Business inputs by food commodities and labour continue to rise. In fact, we experienced what we believe to be an all-time high in cost of sales as a percentage of revenue during the quarter. That being said, delivering on guest experience to profitably gross sales is a key business imperative. As such, we remain committed to delivering a business model that delivers on both the needs of our customers and our shareholders.

To further this goal Brinker must place significant focus on what’s happening within the four walls of the restaurant leveraging the strong positioning and operating strength of our world-class brands.

To support that effort we continue to refine our projected domestic company-owned restaurant openings. We now expect to open approximately 70 company-owned restaurants in fiscal 2008, approximately 15 company-owned restaurants in fiscal 2009, and anticipate even fewer restaurants in fiscal 2010. The slowing of company-owned development is driven by a narrowed focus to emphasize the experience inside the four walls and Brinker’s ongoing promise to generate appropriate returns from any new restaurant investment.

As a result, we anticipate our total capital expenditures for the fiscal year 2008 to be approximately $265 million with $150 million relating to new restaurants. Fiscal 2009 total capex will also decline to approximately $185 million to $190 million with approximately $40 million for new restaurant development.

To ensure we engage and delight our guests we’ll continue to implement our re-image program into fiscal 2009 commuting some of the decline in capital spending from new restaurant development. Currently the company has completed 77 re-images in fiscal 2008 with plans to complete an additional 80 to 90 re-images in fiscal 2009.

We’ve slowed our fiscal 2008 expectations from what we previously communicated so we could take time to read the results of the restaurant’s re-image today. From these findings we expect to reduce the average investment costs for our fiscal 2009 re-images focusing only on those elements of the re-image that resonate most with our guests and are the most relevant in driving returns. The re-image program represents approximately $45 million and $42 million of capital expenditures for 2008 and 2009 respectively.

Lastly, our fiscal 2009 capital expenditure projections include $25 million to $30 million for primarily kitchen-related technology improvements Doug will discuss later. From previous estimates we’ve reduced our total capital expenditure projections for both fiscal year 2008 and fiscal year 2009 by 20% and 14% respectively.

We continue to move our ownership mix and will achieve our stated goal of 35% franchise-owned and 65% company-owned by the end of 2008. This evolution to a more highly franchised system, both domestically and internationally, will prove beneficial by helping us win market share with a lower risk investment profile while continuing an aggressive brand penetration rate.

Our franchisees are well positioned in markets that are less penetrated and have head room for growth without significantly cannibalizing their existing restaurants. In fact, our franchise comparable restaurant sales are up over 3%. As a result, Brinker’s overall revenues will now be driven in a more balanced manner of comparable restaurant sales and increasing franchise royalties.

We anticipate opening approximately 76 franchised restaurants in fiscal 2008 with 36 openings residing in international locations. In fiscal 2009 franchise openings should range from 75 to 85 restaurants with a relatively even mix between domestic and international.

Honing our priorities to key and complementary strategies that focus on the four walls of our existing restaurants in addition to slowing domestic company development will come together in fiscal 2009 to deliver a free cash flow yield that will improve significantly over 2008 expectations and should exceed the current peer average of approximately 5%.

So let’s get to the quarter. As a reminder, all discussions will exclude the impact of Macaroni Grill unless otherwise noted.

Earnings per share for the quarter, excluding the impact of special items, were $0.33, which is a 10.8% decline from the prior year. Sixteen cents of special charges represents the impact of initiatives that will lay the groundwork for strategies Doug will outline shortly.

Consistent with Brinker’s track record of financial discipline, we continually review the portfolio of assets and take actions that create long-term shareholder value by closing restaurants that no longer perform at required levels of return and evaluating infrastructure needs to support an evolving business model. Functional needs and assets were evaluated for strategic fit with our five areas of focus serving as a filter.

Difficult decisions were made leaving a strong foundation for long-term growth. These after-tax charges include $7.6 million of development-related costs including discontinued debt sites that we did not expect would achieve the required returns along with other asset impairments; $5.6 million related to restaurant closures or lease declines that were previously disclosed in our second quarter 10Q; and $3.3 million of severance to restructure Brinker’s restaurant support centre functions, changes which represented a 10% reduction of costs at Brinker’s restaurant support centre. And this is in addition to the deferred hiring for allowed attrition of over 100 positions since the beginning of fiscal 2008.

We expect to realize margin improvements from the removal of underperforming restaurants from the system, more focus inside the four walls, less effort towards opening new restaurants, and a more directed restaurant support centre. The charges discussed above should result in approximately $15 million of savings in fiscal 2009 G&A costs. Consistent with our commitment to hold G&A costs flat as a percentage of revenues as we evolve our ownership model. The changes made will result in more efficient operations and better operating margins, serving as a brick in our path to profitable long-term revenue growth.

Revenues for the quarter decreased 3.9% from the prior year to $908 million for the quarter. Capacity decreases to 6.7% account for the largest piece of the change with comparable restaurant sales and increased franchise revenues offsetting these declines. Consistent with recent quarters, capacity was negatively impacted by the sale of 172 company-owned restaurants to franchisees over the last 12 months, as well as 18 restaurant closures.

As noted in the press release, comparable restaurant sales increased 1.1% for the quarter, primarily driven by approximately 3% priced. Additionally, the quarter was unfavourably impacted by 40 basis points through the Easter holiday trading into the quarter from the prior year when Easter fell in April and 30 basis points related to weather.

Franchise royalties increased 75% over prior year to $15.7 million in the third quarter. Strong growth in franchise royalties is attributable to our change in mix of company-owned to franchise restaurants supporting our financial goal diversifying portfolio risk by increasing our franchise ownership and good same-restaurant sales performance by our partners.

As noted earlier, cost of sales proves to be a challenging area for us. Our competitors in the entire food industry. The third quarter saw our cost of sales increase 50 basis points to 28.9%, a company high. The commodity increase to the quarter was approximately 160 basis points mitigated by a concentration of contracted goods in key commodities, price, and leverage from franchise revenues. And this is a significant headwind to our business with increases materializing on virtually all food categories often at unusually high levels. Our operations and procurement teams have and continue to partner with each other, exploring best practices in managing and optimizing menu items with a concentrated focus on quality and value.

The actual versus theoretical tools used in our restaurants continues to benefit the business by providing the necessary insight to the operators to minimize waste. Brinker will continue to explore and employ strategies to help minimize the volatility that we experienced on this line item while maintaining our focus on the heritage of delivering food and beverage excellence.

Restaurant expense for the quarter was 56.1%, a 60 basis point increase over the prior year. Wage rates, supplies, maintenance, and insurance costs were the primary drivers of the increase. We continue to emphasize the importance of investment in the restaurants as evidenced by the increase in repair and maintenance expense on a per-store basis for the quarter, as well as costs related to an increased supplies expense driven by upgraded to-go packaging.

The increase in restaurant expense was offset in the third quarter of fiscal 2008 with lower pre-opening expenses. During the quarter we opened 17 fewer restaurants resulting in approximately $4 million of savings on this line item.

Depreciation and amortization was $40 million for the quarter while $1.3 million higher than last year. The increase in depreciation is primarily attributable to the growth from new restaurants and investments in restaurants through the re-image program.

G&A expenses were $39.6 million or 4.4%, a $2.5 million decrease on a year-over-year basis. The decline was primarily due to savings on the salary and team member related areas resulting from the company’s efforts to evolve our corporate structure to align with the increased mix of franchised restaurants as well as the expected decline in future company restaurant development.

Interest expense increased $4.4 million on a year-over-year basis for the third quarter to $10.8 million, but actually declined on a consecutive quarter basis. The year-over-year increase is primarily attributable to the $400 million term loan used to fund the company’s share repurchase program and for general corporate purposes.

Improvement on a consecutive basis is due to lower interest rates resulting from the aggressive actions taken by the Federal Reserve to ease the strain from the credit crisis. We’ll begin to lap the increasing debt during the fourth quarter of 2008.

The effective income tax rate remains a benefit to the business decreasing 1.6 percentage points to 28.1% for the quarter excluding the impact of special items. The decrease in the tax rate was primarily due to an increase in the federal Work Opportunity Tax Credit, the leverage of FICA tax credits, and offset by a decrease in incentive stock option exercises.

Cash flow for operations for the first nine months of the fiscal year was $255.8 million, an $80.6 million decrease from the prior year due to lower adjusted earnings, reduced income taxes payable, and a timing of operational payments and receipts. This was partially offset by a $76.4 million savings from lower capital expenditures largely due to opening 46 fewer restaurants on a year-over-year basis.

Credit markets continue to prove incredibly challenging, resulting in a more complex process for completing sales of company-owned restaurants. Specifically, we continue to work with multiple parties on the divestiture of Macaroni Grill. In fact, one transaction was compromised by the inability of the party to obtain financing and we remain hopeful to announce a signed agreement by the end of the fiscal year with a close date in the first half of fiscal 2009.

Additionally, the company incurred $67.1 million in an after-tax, other gains and charges in discontinued operations primarily related to the breakdown of Macaroni Grill assets held for sale to the estimated fair value cost. Fair value less cost to sell, as well as asset write-offs and costs resulting from company’s decision to close 25 underperforming restaurants in connection with its efforts to sell the brand. This charge was a result of the decline in the expected performance of the brand due to increase commodity costs and the inability of an interested party to obtain financing for the purchase.

The casual dining industry is facing some difficult times. Just as we’ve done in our 33-year history, we will make the necessary decisions to weather these times. Our company has and will continue to generate strong and reliable cash flow through system-wide growth of world-class brands, emphasis on the guest experience and delivering on their needs, as well as proven financial discipline in our operations. The top priority remains to grow profitable traffic over time.

We see progress in traction with the initiatives under way and realize we must leverage what we’ve learned from those initiatives to ramp up results for the immediate future. At the same time we’re actively looking for opportunities to make additional forward-thinking, long-term changes that will enable Brinker to achieve sustainable growth in a variety of economic environments. We believe these opportunities reside within the restaurants we have today along with international growth.

To accomplish this overarching goal we will employ actions around our five priorities of hospitality, food and beverage excellence, restaurant atmosphere, pace and convenience, and international expansion.

I’ll now turn the call over to Doug so he can share more detail on our plans around these priorities.

Douglas H. Brooks

Thank you, Chuck. Over the past three months the Brinker leadership has been dedicated to communicating an action plan that focuses on delivering positive bottom line results in a variety of economic environments. In short outline for you, we’ve seen early progress in traction with the changes made so far and will continue to leverage what we have learned with those initiatives. The improvements that we are making in the top line are encouraging, but we also understand the importance of achieving sustainable growth over the long term.

After careful review of our strategic plans, we’re confident Brinker is headed in the right direction. However, we realize our tactical approach to the strategy must be streamlined and concentrated on those few areas that make a lasting and dramatic impact on growing our core operations. So over the last 90 days we have taken action to narrow the attention of our organization on five areas of focus which we introduced to you in our January call.

Our five areas of focus build on and complement the Brinker strategy which we launched in August 2005. What’s changed in 2008 is our execution of that strategy. Our organization is now focused on five priorities designed to grow our base business by engaging and delighting our guests, differentiating our brands from competitors throughout the industry, reducing the costs associated with managing our restaurants, and establishing a strong presence in key markets around the world.

You’ll notice the five areas of focus primarily address growth within the four walls of our restaurants. We believe our greatest opportunities reside in leveraging the strength of our base business, so that is where we will focus our energy and our resources over these coming years. You’ll also notice that each of those five areas builds on and complements the other four areas to create an integrated and powerful advantage for Brinker and its brands.

Our most exciting area of focus is to transform the casual dining experience in terms of pace and convenience for the guest. From what our guests tell us in our satisfaction surveys, pace and convenience is all about guest choice. Putting them in control of the dining experience. Whether the guest is in a hurry or wants to relax over a leisurely meal, Brinker brands will deliver an experience like none other in the industry. Our focus on hospitality combined with process improvements and significant investments in new restaurant technologies will enable us to grow our business by delivering a tailored dining experience that is customized for each guest.

A comprehensive hospitality training emphasizes the importance of looking for clues that help the team member understand and act on our guests needs. In addition, we’re streamlining and revamping processes in the front and the back of the house so food delivery can be appropriately timed and servers can be more accessible and attentive to guests in the dining room. Finally, we’re exploring and investing in a number of enabling technologies that allow our team members to accelerate or slow the dining pace depending on what the guests prefers.

Taking together these process improvements and cutting edge technologies combined to deliver a dining experience that could be 15 minutes faster than the typical 45-minute casual dining meal. These innovations enable us to meet the expectations of guests who are looking for an expatiated dining experience. Often during the busy lunch hour, one of the most time-pressed day parts for most of our guests. But because our systems are flexible we can provide an outstanding experience that customized to the pacing preference of our guests, which gives Brinker a powerful advantage over other dining options.

At our On The Border brand we have tested a new kitchen layout in process, as well as new hand held ordering technology that gets food to guests more quickly. These improvements enable us to not only quicken the pace of the dining experience but could also potentially provide savings in the back of house staffing. We’re excited about what we have learned in these tests and look forward to exploring how we might apply the knowledge to non-traditional locations and international restaurants where our footprint is often much smaller.

Guest satisfaction scores for these test restaurants indicate improvements in the guests’ ability to place their orders quickly and enjoy a speed of service appropriate to their occasion. We’re leveraging those learnings into new tests at Chili’s with a comprehensive fully integrated technology system that dramatically changes the casual dining experience at every guest touch point. From the moment a guest enters the restaurant our team members at the host stand utilize technology to find the best seat for guests based on server availability and restaurant capacity, make more efficient use of our restaurant space, and if there’s a way, provide more accurate quote times.

Now, when the guest is ready our servers utilize technology to send orders to the kitchen electronically, which not only speeds up the ordering process but also ensures more accuracy. Drinks and food are brought to the table by runners so our servers can spend more time in the dining room providing thoughtful and attentive service to our guests.

In the kitchens our cooks take advantage of new technologies that enable them to get the food out faster and more accurately, ensure dishes adhere to brand standards, and are made to order for each table.

And once our guest has completed their meal and is ready to pay our servers use portable technology to present the cheque and process credit card transactions at the table, guaranteeing a timely pay out.

Now, as far as completion dates and investment costs, our plan is to install new kitchen technology that expatiates the cooking process and improves food quality, which is currently in a larger scale test with the expectation of the full roll out for Chili’s restaurants by the end of fiscal year 2009. We also continue to test front-house technologies that enable us to deliver a dining experience customized to our guests’ needs. We expect to have these improvements fully tested with implementation well under way by the end of fiscal 2009. All total, Brinker has dedicated $25 million to $30 million in our capital expenditure projections for fiscal 2009 for those initiatives.

While technology enables better customization of the dining experience it cannot stand alone. Attentive, responsible team members are crucial to reading each guest and delivering the overall experience they crave. Customized service platforms at each brand address the behavioural side of the equation. The goal of each program is to create an exceptional dining experience by training team members how to better understand and meet each guest’s needs.

For example, On The Border’s serving with mucho gusto program focuses on three loyalty drivers: one, establishing emotional connections with guests; two, delivering a dining experience that is relative to the pacing needs of each table; and three, getting it right the first time and through all phases of the dining experience. Each team member’s position has three specific behaviours based on their role in the restaurant and they’re all held accountable for consistently executing on those behaviours. In addition, team members are rewarded for consistent performance with an ongoing recognition program and period contests to win special prizes.

Equally important as our technology investments and team member training to support pace and convenience, our brands are also exploring service practices and menu offerings that can expedite the dining experiences for time-pressured guests. Chili’s new Bottomless Express lunch featuring unlimited soup, salad, chips and salsa served daily until 4:00 p.m. delivers a quick and satisfying meal priced for value.

Our focus on pacing convenience is not limited to just the dining experience. We are also building on our strength and innovation in to-go by implementing significant improvements that help us deliver hot, fresh orders that are on time and accurate for our guests. These improvements include new technology as well as new packaging and new processes designed to offer a superior to-go experience. These improvements will be supported by television advertising reiterating our promise to deliver to-go orders that are right and right on time.

In initial tests, to-go sales showed an 8% lift as a result of these low-cost improvements. We’re encouraged by the growth potential of these results and are moving with urgency to roll them out to the entire Chili’s system at a total investment cost of approximately $3 million. We plan to install the to-go improvements by the end of the first quarter in fiscal 2009 with approximately half of the expenses occurring in 2009.

Our next area of focus is ensuring our restaurant atmosphere. This represents the vibrant and relevant personalities of our brands and offers a warm and welcoming atmosphere for our guests. The current re-image program at Chili’s has demonstrated progress in driving instrumental traffic as guests return to the brand in fully remodelled and updated restaurants. This new more contemporary take on our well-known brand is bringing guests back to Chili’s and proving successful in enhancing the overall dining atmosphere.

As you may remember from our January call, the program targets owner, solid-performing restaurants in a need of a face lift and is resulting in positive guest feedback and traffic boosts. As we refresh and re-energize these owner locations we’ve also taken the opportunity to educate our team members on the changes and retrain on our core brand equities. This practice has proven effective in helping team members re-introduce the brand to guests. We also drive traffic with newspaper free-standing inserts inviting guests to come and see the newly redesigned restaurants and order a free order of chips and queso or a sweet shot dessert.

Since the start of the program we have re-imaged 88 Chili’s restaurants and results show mid-single-digit growth in guest counts. While we are encouraged by positive results from these initial re-images, we continue to analyze and evaluate this program. Using guest feedback gleaned from the first phase of re-images, the Chili’s team is refining the scope of future re-images with the full intent of reducing the current investment costs while preserving those elements of a re-image that clearly resonate with our guests.

Future re-images will be scheduled on a market by market basis to take advantage of efficiencies and construction and to provide a broad base of marketing news. The program will continue into fiscal 2009 as we re-image 80 to 90 additional domestic restaurants.

Across the system we’re updating our restaurant atmosphere with new flat screen TVs in the bar area. These streamlined high definition televisions make our restaurants a contemporary and relevant choice for guests who want to gather with friends to watch sports or their favourite TV programs. The new TVs will be installed across the Chili’s brand by the end of this fiscal year.

An ongoing area of focus for Brinker and its brands is number three priority, food and beverage excellence. We’ll continue to deliver against high standards of execution of food and beverage quality within our restaurants. We’ll also offer menu items that align with our brand positioning and satisfy our guests’ needs.

Our flag ship brand, Chili’s, continues to differentiate from others in the bar and grill segment by capitalizing on the vibrant, spicy personality of the brand’s iconic chili pepper. Guests can take a break from the mundane and every day by peppering in some fun at Chili’s. The brand delivers menu items that offer kicked up levels of flavour, familiar favourites with a south-western twist for the unapologetic indulgences that our guests crave.

Tapping into the guest preference for spicy, flavourful dishes, the brand builds on its competitive strength by introducing new twists on old favourites from the core menu. First is the addition of a sweet and spicy honey-chipotle glaze to our signature Chicken Crispers was an instant hit in the first quarter. In our second quarter our guests enjoyed three new flavours of the brand signature Baby Back Ribs: Brown Sugar Chili Rub, Blazin’ Habanero, and Honey-Chipotle. Now our new Smoke House Bacon Big Mouth Burgers, featuring special triple-thick bacon, were a strong third quarter addition to our popular burger menu; a guest favourite for overall quality and value. Our current promotion, Big Mouth Bites, which features mini-burgers served with a side of jalapeno-ranch dressing for dipping, is now the brand’s number one selling burger on the menu.

Chili’s 2008 marketing calendar was built around these punched up favourites and supported by TV and radio advertising in major market areas. Our brands are also focusing their efforts on improving core menu execution by increasing training for managers and back of the house team members, and by typing product specs for our supplier partners. Before the third quarter release of our new smokehouse burgers Chili’s hosted nation-wide all team member meetings before restaurant opening hours. This dedicated training session included new menu item tastings, ongoing training on core menu items, and a review of hospitality behaviours and much team member recognition. The brand will continue to hold similar meetings each quarter at the same date across the entire country supported by satellite training. So all team members have a chance to learn and benefit from consistent training and discussion of our strategic initiatives. By periodically reviewing recipes and greetings and processes for signature menu items, such as our Baby Back Ribs, our Chili’s team ensures consistent execution across the system.

Our On The Border brand is proudly serving the world’s favourite Mexican food and re-energizing its commitment to food and beverage excellence. Through enhanced food and management processes, also evaluations of our facility and equipment standards, and a comprehensive recertification program for every back of the house team member scheduled for later this summer, this brand will reinforce quality standards and deliver on its promise to serve picture perfect food.

The team also continues to create compelling menu items that include guest favourites, exciting new features, healthier choices, and value offerings. The brand’s Border Smart selections, which address the guest desire for healthier menu items, continues to gain popularity. In fact, the Border Smart Fajita Chicken Taco is now the brand’s number two taco selling an average of 24 per day. For those who do enjoy an occasional indulgence, On The Border featured a new value option in the third quarter, Endless Enchiladas, which offered unlimited platefuls of the brand’s signature enchiladas.

At Maggiano’s Little Italy, their culinary team has focused on continued professional development of our chefs using a very unique certification program. Across the brand culinary training in all levels, from leadership to back of house and to the front of house, has been aligned so that all team members become menu experts during the same week. In addition, the brand is simplifying back of house systems to narrow the focus of the kitchen on those processes that add the most value for guests and clearly deliver the food and beverage excellence this brand is known for.

In the third quarter Maggiano’s uses radio advertising to support chef’s specials, such as Crab and Shrimp Cannelloni, in key markets. and recently announced, Maggiano’s will be honoured by Nation’s Restaurant News with a 2008 MenuMasters Award for the best single product roll out, Braised Beef Cannelloni, described by reviewers as a “craveable dish,” this popular menu items features fresh pasta stuffed with braised beef and asiago and parmesan cheeses, and Maggiano’s will receive this award at the National Restaurant Show on May 17th.

Now, at Romano’s Macaroni Grill the brand offered a new twist on a guest favourite: Create Your Own Pasta with its Create Your Own Primo Pasta promotion in the third quarter. This promotion allowed guests to choose among six premium ingredients to add to their customized pasta selections. The brand also innovated with new signature drinks, such as the new sangria and the White Peach Sangria Martini.

Tying all these areas of focus together Brinker and its brands will create a culture of hospitality that establishes emotional connections with its guests and engages our team members. We believe that providing a consistently warm, welcoming, and engaging experience will differentiate our brands from all others in the casual dining. Hospitality also builds guest loyalty as evidenced by the feedback gathered in our guest satisfaction surveys and as we deliver a great guest experience we will also engage and retain loyal team members who enable us to deliver on that hospitality promise.

In fact, all four Brinker brands are actively engaged in implementing fully integrated hospitality platforms that are customized to the individual personality of each of our four brands. Although each program is tailored to the specific positioning and target customer base to the brand, all four include a consistent set of components. Each Brinker brand continues to utilize and benefit from our improved hourly hiring process, which enables restaurant management to identify potential team members with a natural affinity to engage and connect with guests. As a result, we have not only seen improvement in guest satisfaction scores, but also improvement in team member turn over and engagement. A similar selection system is now in place to enable our brands to better identify potential management team members who can effectively teach, coach, and model hospitality behaviours.

In addition, our decision to slow domestic development has resulted in increased manager retention and effectiveness at Chili’s. When Brinker was focused on building a record number of restaurants in the US we often depended on our most tenured managers to open new restaurants. By reducing the number of domestic openings it means our managers can develop more time to optimizing our existing restaurants, coaching longer tenured team members and taking advantage of leadership development opportunities. Providing hospitality is about cultivating relationships and with loyal and tenured team members in place we will establish stronger relationships with our guests throughout the communities that our restaurants are in.

Now, to fully leverage the power of hospitality all team members are participating in customized hospitality training, which outlines the Brinker and individual brand approach to delivering an outstanding guest experience. As team members emulate hospitality behaviours in the job they are recognized and rewarded using a unique recognition program created for each brand.

We’ll measure our progress in hospitality a number of ways, first by enhancing our existing guest experience measurement program, we’re using in-store audits, guest and team member interviews, and we’ve identified a unique set of expectations for delivering a great guest experience at every touch point. And we’ve defined these unique factors for each brand and developed fully integrated training, communication, and reporting mechanisms to enable our restaurant teams to deliver a consistently superior guest experience.

We’re also testing new program enhancements that make guest feedback more actionable for our operators. In fact, our operations team at Maggiano’s are at the forefront of these tests and have experienced significant improvement in guest satisfaction scores over the prior year.

Our final area of focus is the continued disciplined and aggressive international expansion. In a strategic move to redefine development for Brinker we’ve shifted our focus to increased franchise development both domestically and in growing international markets. Our global franchise partners continue to see comparable restaurant sales driving tremendous potential for the future.

Our competition in the casual dining segment is not as well developed in many parts of the world and western brands are very popular with guests outside the US.

Growing middle classes in developing countries are driving increased demand for the quality of full-service restaurants. In fact, returns in some markets may be superior to the US as many foreign markets have cost advantages in terms of food, facilities, and labour. Our strength has been to retain the equities of our well-known brands while being flexible enough to accommodate the local taste and customs. Currently almost 90% of our international business comes from local customers, a testament to translating the power of our brands into many different languages.

Brinker is already one of the top three companies focused on growing casual dining outside of the US and we’re opening more restaurants internationally than ever before. During the third quarter Brinker opened three new international franchise restaurants in Qatar, Bahrain, and Mexico, and to date 171 Brinker restaurants operate internationally in 23 countries and one territory outside the US.

We’ll continue to leverage our positions of strength in the Middle East and Mexico while establishing footholds in emerging and developing regions where there’s a growing middle class. Our growth will be driven by cultivating relationships with equity investors, joint ventures, and franchisees interested in building their business interests through our portfolio.

With current high interest in our brands and a number of active agreements in place Brinker will reach its goal of 300 restaurants outside of the US by 2010. Our portfolio strategy offers a distinct advantage over other restaurant investment opportunities. While many casual dining companies offer one brand and one type of experience, Brinker offers a portfolio of options that help investors maximize their reach and penetration of key markets. Our brand offerings are complemented by the high quality support of our culinary marketing ops system and training experts.

We’re also implementing new web technology to enhance communication and data sharing with all of our international partners. Franchise partners in the Middle East are taking full advantage of Brinker portfolio by developing multiple brands and our Middle East partners are also leveraging the power of Brinker brands by forming a marketing coalition that benefits their collective interests in the regions. Members pay annual fees to invest in advertising opportunities that build guest awareness and drive traffic into the restaurants. As a result of these initial ads our partners have experienced a sequential sales increase of approximately three percentage points. We expect the campaign to continue, alternating its focus between brand awareness and specific menu item features. Our partners in Mexico have taken a similar tactic investing in national television advertising during the second half of fiscal 2009.

Now, our global development team is focused on markets where there’s a high potential to build a significant number of restaurants, such as our spacing in Latin America. There’s high demand for western ties casual dining restaurants and a high potential for building out our presence in specific regions. In our last call we announced a new joint venture with CMR in Mexico which will effectively double our presence in the country with more than 100 restaurants over the next few years. To date CMR has developed seven Chili’s restaurants as a result of the joint venture agreement and will build one more in the fourth quarter. Development will continue in the fiscal 2009 when CMR will build an additional 13 restaurants, bringing the total to 21 of the 50 planned.

In addition to Mexico, Brinker is proactively targeting a number of other Latin American countries where we’re conducting market research and establishing relationships with potential partners.

So creating a focused and strong presence in these markets served us better than developing a handful of restaurants in multiple markets. markets such as China, India, and Brazil provide the same potential and we are pursuing opportunities with potential investors in those areas.

Leading our international expansion efforts is one of the most experienced global teams in the business. With their combined expertise we are well positioned to become the globally dominant casual dining restaurant company.

Although Brinker continues to be challenged by a highly competitive environment, increase fuel and commodity costs, and an uncertain economy, we’re more focused and motivated than ever to produce positive results for our shareholders. Through specific communication on our five areas of focus both inside and outside our organization we have achieved more clarity and more commitment to those strategic goals.

We’re going to continue to optimize the use of capital by being disciplined about new restaurant development, by closing underperforming locations, selling company restaurants to strong franchisees, optimizing our debt levels, and returning capital directly to shareholders in the form of increasing dividends or stock buy backs. Just as important are our efforts to run the business efficiently by managing our operating expenses, including our G&A.

Our top priority as an organization remains increasing profitable traffic over time. We see progress in traction with the changes we’ve made and we realize we must leverage what we’ve learned with those initiatives to ramp up results for the immediate future.

The five areas I’ve outlined to you this morning are the five areas you’ll continue to hear about over the coming months. Our organization is laser focused on these initiatives and motivated to see them implemented across our system.

With that I’d like to turn the call back over to Kate to facilitate the question and answer period.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, the floor is now open for questions. (Operator Instructions). Please hold for a moment while we poll for questions. Our first question today is coming from Jeffrey Bernstein at Lehman Brothers.

Jeffrey Bernstein – Lehman Brothers

Great. Thank you very much. Actually had two questions. One, obviously very pleased to see the improvement in terms of the comp trend at Chili’s. I’m just wondering if you talk a little bit more detail in terms of what you believe to be the driver. It sounds like there was sequential improvement throughout the quarter. You may have mentioned some consumer insight studies. I’m just wondering what you discover from that, perhaps between balancing price discounting and value versus premium and the overall kind of competitive landscape. And then I have a follow up question. Thanks.

Charles M. Sonsteby

Well, Jeff, you know, we feel like we had some compelling new products hit the market here that really helped us gain some traction. I think Chili’s has always had a reputation for great food at a great value, too. I think in the tough economic time we’re starting to get a little bit of traction from that.

We put in a number of things that we tried to really move the needle on at the beginning of this fiscal year. We had our teams focused on employee turnover. We’re starting to see that number come down significantly. And we hope that’s translating to a better guest experience more focused on hospitality. So we think we’re starting to get some traction from those items too that are really playing out to a better experience for the guest.

Jeffrey Bernstein – Lehman Brothers

And versus kind of the competitive landscape. I know you said you’re out performing, but I’m just wondering perhaps what you see yourselves doing differently and whether or not something like that is sustainable.

Charles M. Sonsteby

Jeff again –

Douglas H. Brooks

I would just add, Jeff, to what Chuck said, I think we’re just focusing on a great brand, particularly at Chili’s, and focusing on the most important things: the training of the team members, lowering the turnover, hiring the right people, rolling out products that resonate with the guests that deliver on sort of the reputation of the chili pepper brand, sort of the iconic spicy flavourful. We think our new marketing with the holiday is more laser targeted towards delivering that message and we think we’re delivering in the restaurants maybe better than we have historically because of the better training focus on hospitality.

Charles M. Sonsteby

And Jeff, you asked if that’s sustainable. I think, you know, the brand positioning for Chili’s is unique within the bar and grill category. I think our team’s done a really good job of really aligning the experience in the restaurant, the food and new food products, and the advertising to deliver a consistent message to the guest. I do believe that’s sustainable.

Jeffrey Bernstein – Lehman Brothers

And then, I mean, with the comp improvement, obviously the restaurant margins are still challenged as are most others. I’m just wondering if you can kind of look at the rest of fiscal 2008 and give your initial thoughts on fiscal 2009 in terms of specifically commodity and labour cost pressures, which you’ve mentioned commodities at least being at current highs, and whether with those cost pressures being persistent whether you think you have more pricing power potential. How high would you take that? Whether you’re seeing any consumer push back on that front.

Douglas H. Brooks

Well, that’s a lot of questions all at once, Jeffrey. Let’s see if I can kind of go back. We’ll talk about 2009 and where we think we’ll be in 2009 at the next conference call and give our guidance for the year.

Commodities do look tough in the very short term. As you know, for the next couple months they probably won’t get any better. We’re still working on trying to manage our costs, as we said, working with our ops teams and also our purchasing group to try and find effective pricing and also balance with the items that we have.

We do have a few things going in our benefit as we look out. G&A is going to be down. Our pre-opening will certainly be down. We’ll have excess cash from reducing our investments in new restaurants to see if we need a pay down investment expenses or buy shares. All of which can help mitigate any impact from commodities.

Jeffrey Bernstein – Lehman Brothers

Okay. But in terms of commodities actually locked in beyond the next couple of months do you have contracts to help you protect on that front?

Marie Kerry

Hi, this is Marie. We absolutely do. Seventy-five to eighty percent of our commodities are contracted. But within those specific items they’re staggered in expiration date and then some of our longer term, like chicken that we talked about before, we have escalators for fuel and corn. So maybe just to look out over the next 90 days of the commodities that we do have contracted approximately 5% will be up for renewal and we’ll renew based on the current rate.

Charles M. Sonsteby

Jeff, I know you asked about pricing potential, we will be taking a small price increase at Chili’s in the beginning of May and again, as we look out along the landscape, I know a number of our competitors are taking pricing. We’re also seeing higher prices in food away from home at the grocery stores. So we’ve been very cautious about taking price and very diligent about how we do it.

We are seeing a lot of strength in markets. Chili’s was up around 3.5% if you exclude those sub-prime markets. So we are seeing some pretty good effects of the consumer in markets where people haven’t been as much challenged by sub-prime.

Jeffrey Bernstein – Lehman Brothers

Great. Thank you very much.

Operator

Thank you. Our next question today is coming from John Glass at Morgan Stanley.

John Glass – Morgan Stanley

Thanks very much. A couple questions. First, just with respect to the use of your free cash flow. Is it safe to assume that you’re going to use that all for your purchases in 2009 or are you thinking about dividend policy or perhaps repaying debt with that money?

Charles M. Sonsteby

Hi, John. It’s Chuck. Again, all those things will be on the table. We’ll sit down and talk about it internally and also with our board and make decisions on an ongoing basis about what’s best for shareholders.

John Glass – Morgan Stanley

Gotcha. And then just as we’re looking at 2009 and the reduction in pre-opening, what’s a good number to use on a pre-opening savings per store?

Charles M. Sonsteby

Generally about $225,000 per restaurant.

John Glass – Morgan Stanley

Gotcha. Okay. And then you talked about the Mac Grill and I guess two questions. One is, the financing environment also slowing down your refranchising efforts. I think last quarter you talked about a few announcements coming out. Also last quarter I think you talked about maybe getting book value for Mac Grill. Has the book value changed? By how much? Is that also your estimate of how much you can get for it changing?

Charles M. Sonsteby

Well, we did have to write down the book value of Macaroni Grill in the quarter, John. Yeah, we wrote it down to really what would be an expected value if we were to have a sale. The new book value is about $180 million, $190 million. It’s like $189 million, $190 million.

In terms of the refranchise, Guy, you’ve been working on some of the refranchising activity. Do you want to talk a little bit about that?

Guy Constant

John, we don’t have anything to announce today. We will expect, as Chuck focused on earlier, getting our 65/35 goal which, as you know, would still require us to do one or two smaller transactions than what we’ve seen recently and still expect to be able to announce that certainly by the time we have another call in August.

John Glass – Morgan Stanley

And is the financing environment impacting a refranchising or is it simply the attitude of franchisees in this environment that’s impacting that?

Charles M. Sonsteby

I think as we talked about last quarter, John, I think for new franchisees entering the marketing I think it is challenging. But given that most of our transactions have been with existing franchisees that have established a track record with us or in their quick-service business, which many of our franchisees have franchise businesses in quick-service as well, they’ve typically still be able to access finances.

John Glass – Morgan Stanley

Great. Thank you.

Operator

Thank you. Our next question today is coming from John Ivankoe at J. P. Morgan.

John Ivankoe – J. P. Morgan

Hi. Thanks. Just a couple of questions. I’d like just to follow up on that because your answer actually confused me a little bit. It was my understanding, and I think it was in your last 10Q that the carrying value of Mac Grill was $283 million. I think I understood from this press release that the write down was $67 million. Am I thinking about that incorrectly?

Charles M. Sonsteby

Well, John, we also closed restaurants.

John Ivankoe – J. P. Morgan

Okay. So the closed restaurants is not in the $67 million.

Charles M. Sonsteby

That’s correct.

John Ivankoe – J. P. Morgan

Okay. All right. That explains that. Secondly, you’re obviously making a fairly strong statement in terms of the long-term return potential of your brand in the US, specifically in fiscal 2010, which has to be a number fairly close to zero. Can you juxtapose the franchisees’ desire to continue to open the units in the United States, especially after paying a royalty and perhaps being a little bit more capital constrained than you? It’s kind of an inconsistency that we get asked about a lot.

Charles M. Sonsteby

Well, John, our franchisees are continuing to have good success with the restaurants that they have here in the US. They’re also in markets that are less penetrated, so where we may have slowed back on company development we own a lot of the markets that are in the South. About a third of our restaurants are located in Florida, Arizona, California, which are markets where right now we’re pulling back from growth particularly in those markets. so I don’t think it’s inconsistent to say that our franchisees can continue to expand the markets they have given their good top-line sales results and being in markets that aren’t that penetrated by the Chili’s brand.

John Ivankoe – J. P. Morgan

Okay. Thank you for that. And one final question for me. You obviously gave us a lot in terms of pace and convenience being the number one factor for guests and a lot of things happening on the technology side, both front of the house and back of the house. Has that actually been implemented and proven in stores or is that still something that has yet to come?

Douglas H. Brooks

John, this is Doug. We’ve got that in restaurants and we think that we have proven it out in those restaurants. So we’re vigorously working with equipment suppliers, with technology partners. As I mentioned, from the moment you walk in the front door to when the guest leaves there’s pieces of the experience that we’ve tried to sit back and analyze. Casual dining has stayed fairly similar in terms of the timing of the experience for a long time and it’s obvious that the guest in today’s world sometimes has needs for higher quality food but shorter time horizons. So we just took a serious approach at how we could deliver better hospitality, higher quality food, but let the guests manage time more. If casual dining restaurants mightn’t have been on someone’s radar at lunch we want to have the ability to make that happen if the guest wants that type of experience. So we have seen that happen.

Colin Powell once said when you have 70% of the information it’s time to move forward. We have somewhere close to that amount of information and based on our experience in the business now it’s just a matter of figuring out, getting the equipment rolled out, the technology created, crossing some T’s, dotting some I’s on processes in the restaurants, but we’re very bullish and very excited about that pace and convenience piece and think it can again allow our guests to have different types of restaurant experiences on different days depending on what their time constraints are.

John Ivankoe – J. P. Morgan

Sorry. Just so you can give us something to hang our hat on, is there a measurable traffic impact or quantifiable traffic impact, I guess if maybe capacity specifically at the lunch hour that you’re prepared to share with us?

Douglas H. Brooks

Yeah, in those restaurants where we have put this equipment in we have seen more table turns. For instance, one of our restaurants on Valentine’s night, both the To-Go windows and the front door were able to have more guests go through the restaurant. And part of that is the handheld technology, part of it is using this technology at the host stand that helps on wait time. So we have seen those restaurants that have all pieces of this show not just improved timing but also higher quality.

Most of our time spent, actually, John, has been on the quality of the food and making sure that the hospitality is at a higher level. If we can actually drive more guests through, great. But the primary concern here is quality of experience and allowing a guest that has a tighter time frame to come to our restaurants, particularly at lunch.

John Ivankoe – J. P. Morgan

Okay. Thank you.

Operator

Thank you. Our next question today is coming from Steven Kron at Goldman Sachs.

Steven Kron – Goldman Sachs

Thanks. Good morning, guys. Couple of questions. First I guess a follow up, Guy, on the refranchising, recognizing over the next couple of months you plan to get a couple small deals done to get to that 35% target. How should we be thinking about fiscal 2009? What’s kind of the next hurdle beyond the 35%? Really curious based on the comments of the financing conditions how the pipeline developed beyond that.

Guy Constant

Well, we do expect to get a couple of, as you said, transactions done before fiscal 2008. We’re certainly focusing on some more aggressive goals on refranchising our On The Border brand, which we talked about last quarter as well. And as we’ve always talked about the refranchising, it’s really the math exercise that we go through as to whether it makes sense overall from a shareholder return perspective to refranchise the market or not. We’re always doing that analysis, Steven. Just right now we’re not ready to share where we would go beyond those numbers we’ve talked about to the end of the fiscal year.

Steven Kron – Goldman Sachs

Okay. It sounds as though directionally we should expect that piece of refranchising at least the current environment to come as slow a bit.

Guy Constant

I think some of that will depend on what our results are going forward. I mean, obviously better comp sales and traffic we can continue to trend will result on balance and less franchising than it would be otherwise.

Steven Kron – Goldman Sachs

Okay. And then on the G&A line, Chuck, it’s my understanding, I just have to remember that there’s still a little bit of cost in the G&A line associated with Mac Grill that couldn’t be stripped out and put in discontinued ops. Am I correct in remembering that and, if so, upon sale can you quantify how much you think will be stripped out there?

Charles M. Sonsteby

That’s correct, Steve. There is still some cost in there that are related to Mac Grill. As we look out we’re looking at trying to get rid of anywhere from $2 million to $3 million in addition to what is directly related to the brand. So about $2 million to $3 million in that continuing ops line that will come out once the Mac Grill brand is sold.

Steven Kron – Goldman Sachs

Okay. And then just lastly for me, and I apologize if you addressed this, but the same store sales as it developed throughout the quarter. Could you maybe give a little colour on that? And maybe you can comment on how the momentum’s continued into April, but I think the comparing gets a little more difficult.

Charles M. Sonsteby

Well, I think for us we had a pretty good January and we maintained that momentum really throughout the period. March was different because of weather and Easter impacts. So it was a little bit muted on the actual results. We see a good start to April. So again we think, as I said in the script, April started out pretty well and then we think with the rebate cheques coming in May and June we can prepare for previous in quarter on the same store sales line. Costs will continue to be a challenge.

Steven Kron – Goldman Sachs

Okay. So let me just follow up on that then. If I think about the quarter, EPS on a year-over-year basis down 11%, yet same store sales up over 1% recognizing the cost environment is very tough. Can you just give us a little bit of visibility as to where we stand as far as what we need from a comp standpoint to maybe start to get positive EPS growth down the road?

Charles M. Sonsteby

You know, I’d rather not get into really trying to forecast the quarterly results because I think if I answer the question, Steve, I’ll inadvertently start to give guidance on the quarter. I really don’t want to do that. I think what I’m really trying to signal and tell everybody is, I think everybody’s worried about the consumer. And rightfully so. It’s been tough over the last couple years at casual grill and bar. But we’re starting to see some signs of life in our brand and we’re pretty excited about that. I think we’ll continue to deal with all the issues related to commodities and wage pressures just like everyone else in the group, but it sure is nice to see traffic and sales going in the right direction. I think that’s really the message we’re really trying to get across today.

Steven Kron – Goldman Sachs

Thanks.

Operator

Thank you. Our next question today is coming from David Palmer at UBS.

David Palmer – UBS Securities LLC

Hey, guys. Chili’s has clearly had a hit here with these new smokehouse burgers and the Big Mouth Bites. When I was at a store recently it felt like every third table had these things on the table. Could you perhaps give a sense, just given the mix you’re seeing how much you think that those platforms, particularly smokehouse burgers, may be helping your sales? Do you have a sense on that?

Guy Constant

We do, I just don’t have that number in front of me right now, David.

David Palmer – UBS Securities LLC

I guess just really the flip side of that is, I’m wondering if, Guy, are you a little concerned that the lift from this platform might diminish in the coming months or do you think that this is kind of a platform that you’ve kind of put out there and then you have a pipeline in use that can keep the momentum going.

Douglas H. Brooks

Well, I think, David, we’re excited about one thing. Chili’s brand was developing credit on the great hamburger. I think one thing we re-established with the guests is this item that Chili’s been famous for forever, and we’ve used a lot of great conner (sp) innovation to add new flavourings. And with the Big Bites options that some guests use as an appetizer to be shared among the table and then they were something else for the entrees. Across the whole line there’s some flexibility with the product, but it’s hard to sit back and be disappointed when a product your brand was built on is having new and exciting success with innovative new versions of that product line.

David Palmer – UBS Securities LLC

Is there anything that you’re feeling like, I mean, is that, that’s a platform that has been a big success. There has obviously been a bulge of sales from that. Do you feel like that is a sustained lift and/or perhaps you’re going to be resting your hopes on some other platforms in the fiscal 2009, fiscal 2008, fiscal 2009.

Douglas H. Brooks

Well, David, I think if you look throughout this fiscal year, in the first quarter we did the Honey-Chipotle Crispers, which was again an innovative new way to do a new flavour on crispers and it became, those team of products became the highest selling item on the menu. In the second quarter we went with new versions of our Baby Back Ribs. Those then became one of the higher selling items. So I think what it shows is if we can be innovative with new versions of old favourites the Chili’s platform has a number of product lines that continue to stimulate guests and get them coming back for more and keep it balanced throughout the menu. I mean, we’ve also had good success with tilapia, this new Bottomless Express Lunch gives us a chance for value and it’s something the kitchen can get out quickly. So yeah, burgers are kind of big news right now, but there’s been a number of different products that I think have been successful this year across the menu.

Charles M. Sonsteby

One more just additional point to what Doug is saying. I think again, Chili’s does have a differentiated positioning. We’ve done a good job of matching new products with a differentiated positioning within the grill and bar space. That coupled with the advertising and what we believe is a different hospitality experience that people are getting in restaurants, I mean, it’s a combination of all those things that are driving it. Not just, I don’t think you can separate those and say it’s only the food or it’s only the advertising or it’s only the in-restaurant experience. It’s a combination of all three coupled with a differentiated positioning that’s helping to drive things a little different for us.

David Palmer – UBS Securities LLC

And just to wrap up, I’m wondering if you might be able to comment on just a few other factors. Just really quickly. The slowdown in unit growth itself. Maybe the Mac Grill closures and their general sales perhaps being, going Chili’s way because often those Mac Grills are very close to the Chili’s. And then lastly the re-imaging. Could you perhaps touch on those things and perhaps think about how those might be helping today and in the future same store sales at Chili’s?

Charles M. Sonsteby

Well, I think the slowdown in growth will obviously help us from cannibalization. We talked last year that cannibalization was costing us between one and two points. That’s down probably 50 basis points this year on a year-over-year basis.

When we look at the Mac Grill closures, most of those happened toward the end of March and really we wouldn’t have seen that come through the March sales in any kind of measureable effect.

Then last, the re-imaging. We’re still seeing sort of mid-single-digits same store sales performance. So, and that is a change between what they were trending and what they’re doing today for up mid-single-digits on the re-imaged restaurants. So we’re still seeing sufficient numbers to continue with that process.

David Palmer – UBS Securities LLC

Okay. I’ll stop there. Thanks.

Operator

Thank you. Our next question today is coming from Joe Buckley at Bear Stearns.

Joe Buckley – Bear Stearns & Co.

Thank you. A couple questions as well. First on the other question on the sales trend. Can you tell me on what you’re seeing lunch versus dinner or weekday versus weekend? Anything that stands out?

Charles M. Sonsteby

We’re seeing lunch about 100 basis points worse than the dinner decline, but we’re not really seeing any huge drastic change between through the week and weekend. It seems to be relatively consistent in terms of where traffic and sales have been down.

Joe Buckley – Bear Stearns & Co.

Okay. And the Bottomless Express Lunch, has that a pretty good share at lunch? Has that sort of caught on for you?

Charles M. Sonsteby

Well, it’s brand new for us. We just started advertising it last week. We’ve been offering it for a while in restaurants on the menu. So this is our first opportunity to see how it’s going to do backed by media. Hopefully we’ll be able to talk about that next quarter.

Joe Buckley – Bear Stearns & Co.

Okay. And then a question on the technology initiatives you mentioned. Is this $25 million to $30 million of capex in 2009, is that enough to roll this out throughout the entire Chili’s brand?

Guy Constant

Joe, it’s Guy. Yes, on the kitchen technology side that Doug talked about it is enough to roll it across the Chili’s brand, but it only represents the start of the implementation for the technology that we talked about in the front of the house. Some of that will continue on into fiscal 2010 as well.

Joe Buckley – Bear Stearns & Co.

Okay. So $25 million to $30 million is back of the house. Is it sort of an enhanced KDS type thing?

Douglas H. Brooks

Part of it, actually, Joe, is new kitchen equipment. As we discovered at On The Border, changing the process, changing the way that different pieces of equipment work together and the fact that the front of the house is connected through KDS there’s more information getting in the kitchen about when guests enter the restaurant. And through the hand-held technology the items get to the kitchen much quicker, so you combine all of those things and we’re getting food out of the kitchen faster in all these test restaurants. But some of it is kitchen technology. Actually the equipment that allows us to have high quality but actually get the food prepared faster.

Joe Buckley – Bear Stearns & Co.

Okay. Does it include the hand-held devices then? Is that part of the 2009?

Douglas H. Brooks

That’s not part of that number at this time, Joe.

Joe Buckley – Bear Stearns & Co.

Okay. And then one last question, Doug. You talked about hospitality and behaviours. This may seem like a funny question, but are you trying to script team members’ behaviour a little bit more?

Douglas H. Brooks

No, actually we’re probably doing just the opposite. I think if you look across not just our company but casual dining, the training historically has been a lot of functional scripting of steps of service and here’s all the information about the food items. We’re actually hiring the right person. This pre-employment test, we call it Covertus (sp) because that’s our partner, it’s helping us have more confidence that the person we’re hiring actually has what we call the hospitality gene. We’re making sure they understand how big the chicken breast weighs and what the marination is made out of and then giving them more freedom, actually, to get to know the guests, find out what the guest needs are, and to create that emotional experience. So actually we’re doing a little more up front training on how to create a connection and then giving them actually more freedom to wow the guests with their own personality and their own style.

Joe Buckley – Bear Stearns & Co.

Okay. Sounds good. Thank you.

Operator

Thank you. Our final question today is coming from Bryan Elliott at Raymond James.

Bryan Elliott – Raymond James & Associates

Good morning. Just a couple little detail questions here. First, you may have done it but I may have missed it, you gave us a lot of info in the scripted remarks. The advertising swing. Did you quantify or give us some ability to think about how much advertising we had this year versus last?

Marie Kerry

I’ll actually take that one, Bryan. Literally when we look at the third quarter, and we’ll focus on Chili’s kind of for January we actually do not have advertising last year, advertising this year, the same for February. But when you look at March it’s about equal.

Bryan Elliott – Raymond James & Associates

Okay. And then going forward, when you think about fourth quarter and beyond, some of the other initiatives that you referenced earlier, is that going to be kind of consistent with Q1 or should we assume a little bit of bump in spending maybe? Or with calendar Q1. Sorry.

Charles M. Sonsteby

It’s pretty flat year over year when you look at total advertising spent on a year-over-year basis, Bryan. It’s flat.

Bryan Elliott – Raymond James & Associates

Okay. And we should assume that basically going forward?

Charles M. Sonsteby

We’re still talking about 2009.

Bryan Elliott – Raymond James & Associates

Okay. All right. Fair enough. The weather impact was slightly negative in March, I think you said, right?

Charles M. Sonsteby

Yes.

Bryan Elliott – Raymond James & Associates

And last year I know in February Valentine’s Day was a big washout. Was there a big recovery that helped you in February from that or not really?

Charles M. Sonsteby

Yeah, it did help. It did help in February, Bryan.

Bryan Elliott – Raymond James & Associates

Fifty BPs maybe in the quarter or was it not that high?

Charles M. Sonsteby

When we get the 30 basis point number I think that’s all in.

Bryan Elliott – Raymond James & Associates

Okay. All right. Coming back to a question, sorry, about the magnitude of the testing here, I appreciate the Colin Powell quote and wouldn’t take issue with it –

---Laughter

-- but it will kind of help with how many stores we’re talking about and what duration did we have some of the kitchen plus the integration? How many stores sort of have the whole package where it’s all integrated and we have the hand helds and the credit card and payments at the table and all the things that Doug went through?

Douglas H. Brooks

Well, Bryan, the honest truth is there’s various stages of the technology. For instance, the hand helds, we were testing one that wasn’t designed actually for a casual dining restaurant use to make sure we didn’t spend a lot of money and it didn’t integrate with the other parts of the technology. We have a prototypical, we have a partner that’s creating a prototypical one that will adapt better. So there’s different phases and stages, a limited number of restaurants. Less than 20 restaurants have had pieces of all this, but the results are conclusive enough to us to know that we have something here that we want to move forward with if for no other reason to understand the guest needs right now. Wanting to sometimes, I mentioned lunch a couple of times but dinner is the same thing. We know there’s lots of families who at dinner may cross a casual dining experience off their list because of the schedules with their family and kids. If we were able to tell them that if they want to have a great casual dining experience in 30 minutes we can provide that. We think that’s a big message to consumers. So we do have enough information as long as we’ve been in the casual dining business to know we think we have a big idea here even though we haven’t tested it in a large number.

It’s not new. In Europe, for instance, where we have restaurants we’ve used hand-held technology there for years. It’s kind of funny; over in Europe technology has been cheaper than people. Now what’s happening here in the US is the cost of labour is going up and the cost of technology is going down. So this is a really neat, sort of we call it a hospitality technology partnership, we’re in these locations where the hand helds are in place. Just the fact that we were able to meet the guest’s time needs their satisfaction scores about service and hospitality went way up. That’s part of the equation. So we think what’s exciting here is we actually had better hospitality and the technology allows us to meet their time needs and it’s a win-win for casual dining.

Bryan Elliott – Raymond James & Associates

Great. All right. Very helpful. Congrats. Thanks.

Operator

Thank you. There are no further questions in the cue at this time.

Marie Kerry

All right. Well, thank you for your continued interest in Brinker. This will conclude the call.

Operator

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

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Source: Brinker International, Inc., F3Q08 (Qtr End 3/29/08) Earnings Call Transcript
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