Brinker International, Inc.
Q4 2011 Earnings Call Transcript

Published: 11 Aug 2011

[Operator:]

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

[Tony Laday:]

Thank you, Kate. Good morning, everyone, and welcome to Brinker Internationals FQ4 2011 earnings call, which is also being broadcast live over the internet. Before turning the call over let me quickly remind you of our Safe Harbor regarding forward-looking statements. During our management comments and in our responses to your questions, certain items may be discussed which are based entirely on historical facts. Any such items should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such statements are subject to risks and uncertainties which can cause actual results to differ from anticipated. Such risks and uncertainties include factors more completely described in this morning’s press release and the company’s filings with the SEC. On the call we may refer to certain non-GAAP financial measures that management uses in its review of the business and believes will provide insight to the company’s ongoing operations. Reconciliations are provided in the tables in the press release and on Brinker’s website under the financial section of the investor tab. Consistent with prior practice we’ll be silent on intra-period sales or other key operating results yet to be reported as the data may not accurately reflect the final results of the quarter referenced. On the call today you will hear from Doug Brooks, Chairman and Chief Executive Officer; Guy Constant, Chief Financial Officer; and Wyman Roberts, President of Chili’s Grill & Bar. Following their remarks we will take your questions. Now I will turn the floor over to Doug.

[Doug Brooks:]

Thank you, Tony. Good morning to everyone. I’m going to briefly share with you our company results for Q4 and for the entire fiscal year. I’ll give you a glimpse into our plans for F2012 and then I’ll turn it over to Wyman and Guy for deeper dives into Chili’s and our number results before we answer your questions. As you saw in our press release this morning we reported an adjusted Q4 earnings per share of $0.48. That is a 9% increase for the quarter resulting in a 32% increase for the entire year. Brinker ended Q4 with a 2.6% gain in both comp sales and traffic, marking our fifth consecutive period of positive growth. These results prove we’re delivering on our promises. In Q3 our focus on strengthening our business model produced significant margin improvement and we began to start seeing that same sales growth. In Q4, as we continued to work on margins, our sales building initiatives gained more traction and continued to generate positive growth in both sales and traffic. And now into F’12, the work we’re doing to revitalize our brands will build on our momentum with sales and traffic while we maintain the operational efficiencies we’ve gained from the work we started last fiscal year. Now let me give you some highlights around Chili’s results. During our last call we indicated we’d see top line improvement during the back half of the year and we delivered on that promise. We delivered positive comp sales in February and March and we continued to build on this momentum into Q4, ending the quarter up 2.1% in both comp sales and traffic, and achieving sequential improvement throughout the quarter. These results mark Chili’s fifth consecutive period of positive comp sales and traffic. The bottom line – Chili’s plan to win is working, and in a few minutes Wyman will give you a closer look at where the team gained traction in the quarter and help share the highlights of what’s coming in F’12 as they continue to build on the brand’s momentum by driving guest satisfaction. Let’s talk about Maggiano’s. I hope some of you saw Maggiano’s featured last night on ABC’s hit comedy show Modern Family. One of the little boys Manny, a twelve-year-old, insisted on Maggiano’s being the only place he wanted to spend his birthday party – so thank you, Manny. And by the way, that show is really, really funny. But impressive would be the way I describe Maggiano’s Q4, not funny, as President Steve Provost and the team continued to produce outstanding results

[Wyman Roberts:]

Thanks, Doug, I appreciate it. You’re right – there are a lot of exciting things going on at Chili’s. Earlier this year I laid out a five point strategy to drive sustainable sales growth as part of our plan to win. Today, I’ll share our results to date, walk you through highlights of each of the five points in our strategy, and tell you where we’re headed in F’12 in our journey to make Chili’s like no place else. As you heard from Doug, our plan to win is working. We drove positive comp sales in February and March as well as every period during Q4 with every period getting sequentially stronger. Comp traffic was positive for the quarter and outpaced the industry every period during the quarter. The fact that sequential sales improvements were driven by increases in traffic and not checks underscore the power of the initiatives we’ve implemented. We’re growing share by delivering a better guest experience. We’re offering more compelling products. We have operations teams focused on consistent execution and raising the bar on hospitality, and all of this is happening while we improve the margins. So let me walk you through the five points in our plan to win and highlight where we’ve gained traction, then I’ll give you a glimpse into F12. First, we’re focused on key day parts. At lunch we launched Chili’s combos in Q3, featuring great new sandwiches matched with soup or salad and served with hot, fresh fries. This has been a big win for our guests. We’ve seen strong preference and great value scores. Lunch traffic which was negative before we launched the combos has shown sustained positive trends since the rollout. We’re maintaining our margins as these new lunch combos were created with food costs in line with our overall menu, so during F’12 we’ll continue to build awareness of our strong lunch offering while we make some changes, both additions and deletions, to keep it a fresh and compelling reason to visit Chili’s. At dinner we’re focusing on key platforms, like Triple Dipper and $20 Dinner for Two to remind guests of what they love at Chili’s. We’re keeping the complexity low but we’re adding manageable new news to reinforce Chili’s unique Southwest positioning to peak the interest of those looking to try something different. Next, we’re creating a stronger base menu. We’re systematically going through our menu with the expectation that every quarter we’ll make several changes that will improve the overall performance. Changes take the form of new product specifications, alternative cooking procedures and additions of new tested items as well as deletions of items that aren’t meeting our guest expectations. Through F’11 we’ve employed this approach and the balance between guest needs and operations capacity is tight. As a result, we’ve seen significant increases in our “food tastes great” score. When we couple this with our strong platforms like lunch combos and $20 Dinner for Two, the menu is working much harder for us as indicated by value scores that are at the highest levels we’ve seen at Chili’s in years. The third part of our strategy is staying relevant and fresh. There are really two parts to this equation

[Guy Constant:]

Thanks, Wyman. You’ve just heard Doug and Wyman talk about the great work of our operators in delivering strong results throughout the quarter. Now, let’s take a deeper dive into those results. My commentary will be based on continuing operations and I’ll make comparisons on the basis of 13 weeks in the current quarter versus 14 weeks in the same quarter last year. Continuing the year-over-year improvement we have seen the past three quarters, EPS before special items for Q4 was $0.48 versus $0.44 in the prior year, highlighted again by our balanced approach to strengthening our business model. As mentioned in previous calls, the extra operating week in F2010 contributed approximately $0.09 on the prior year’s EPS due to leveraged gains on fixed costs with the additional week of sales. Record Q4 revenues were $717 million. Total company-owned comparable restaurant sales increased 2.6% on 2.6% traffic and equally offsetting positive price and negative mix of 1.1%. Considering the calendar shift caused by the extra operating week in the prior year, comp sales were up 3.1%. Given the 53rd week in F2010, company-owned restaurant capacity was down 7.5%. Franchise royalties and fees increased 4.8%; this is due primarily to 23 net international franchise openings and six net domestic openings since the end of F2010, as well as an increase in international franchise comp sales of 7.7%. Cost of sales decreased by 80 basis points from prior year to 26.9%. In order of magnitude, the improvement was driven by favorable impact from menu pricing and other items of 60 basis points, a more profitable mix of items within the Triple Dipper and lunch offerings coupled with menu items drove an additional 50 basis points. This was offset by unfavorable commodities of 30 basis points stemming from higher beef fajitas, salmon and ribs, partially mitigated by lower produce costs. Restaurant labor improved 10 basis points to 31.8%. As you recall, last quarter we introduced the first phase of our kitchen retrofit program which focuses on optimizing the prep process. This initiative, coupled with the continued execution of team service, drove hourly labor savings over prior year of close to 150 basis points. This tailwind was partially offset by two factors

[Operator:]

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

[John Glass:]

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

[Guy Constant:]

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

[John Glass:]

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

[Guy Constant:]

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

[John Glass:]

Then just one other in a different direction

[Doug Brooks:]

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

[John Glass:]

Okay, thank you.

[Operator:]

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

[Jeffrey Bernstein:]

Thank you, it’s Barclays Capital. Good morning. Two questions for you

[Wyman Roberts:]

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

[Jeffrey Bernstein:]

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

[Wyman Roberts:]

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

[Jeffrey Bernstein:]

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

[Guy Constant:]

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

[Jeffrey Bernstein:]

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

[Guy Constant:]

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

[Jeffrey Bernstein:]

Great, thank you very much.

[Operator:]

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

[Joe Buckley:]

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

[Guy Constant:]

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

[Joe Buckley:]

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

[Guy Constant:]

Well, I mean obviously to get to our 100 basis point number, Joe, we had to make some assumptions. It’s probably still in that 4%, low 4% inflation range, 4% to 5% inflation range that we talked about. We haven’t really seen that change so if we continue to look at what would it cost us if we were contracting at that time, making our best estimates of what would happen, we know what’s falling off when obviously, so we can track that. And we’ll obviously make the call as to whether we think it’s the right time to lock in or we want to continue to ride. Now on balance, given what’s happened with the market, you would hope that at least dampens the inflationary pressures and if we’re lucky, maybe we get a little deflation from that. But obviously we’re looking at that, we’re looking at what we have contracted; and then as you may have seen some recent announcement of a whole new supply chain organization that we have a great belief in what they’ll be able to deliver to the company. We felt that was an area that we wanted to invest some resources and have, and we think that will pay off in some big dividends; not just necessarily on the cost side but just sourcing, distribution, and all the other things we need to support in delivering great food to our guests.

[Joe Buckley:]

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

[Guy Constant:]

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

[Joe Buckley:]

Okay. And then just update us on the kitchen retrofits. I know you mentioned doing 500 for the year; where are you now? And talk about the mechanics of it

[Doug Brooks:]

Yeah, we can do it overnight, Joe, so we do. We don’t have to close the restaurant to do it. There is significant training involved. Sort of the way we phrase the story here would be like if you had to go prepare a big meal in someone else’s kitchen and you didn’t know where anything was it might be difficult to do so we have to spend some time training. Some of the way we’ll do that training is when we get restaurants into an area then that will become the focal point for training in that area, so that’s very helpful in getting it rolled out quickly. We’ve been making the assessment that labor savings don’t come right away so you do need some time for the kitchen to adapt to the new equipment because we want to maintain the food quality standard. We don’t want to take the labor out right away while they’re still learning the new kitchen, and that’s worked really well because in the new kitchen restaurants we have today – which we’ve got probably 15 done at the end of Q4 and we’re now in full rollout mode, we’re in two markets rolling out new kitchens. Every Sunday night, Monday night we’re putting new kitchens in restaurants now on the way to the 500, but we have seen food scores. We’re very happy with the food scores. In fact, previously the bar was we wanted the food to be as good as it was before and it was in the lab market in Dallas, but what we’re seeing now at the new restaurants we did – and I think we talked about those in Tampa – we’re seeing better food quality now than we had in the previous food, which is really good. We’ve seen significant improvements in ticket time which we’re very happy about. We see the potential for labor productivity; we have some of it and as those kitchens are in the restaurant longer we get more and more of the labor productivity. And then we haven’t yet tapped into the innovation opportunity but certainly our culinary folks are anxiously awaiting the opportunity to utilize that equipment once it gets some scale to provide new menu items as well. Does that help?

[Joe Buckley:]

That helps, thank you.

[Operator:]

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

[Chris [Okul]:]

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

[Wyman Roberts:]

It’s a great question, Chris, and I think the potential would be there that the nice thing about those investments and those specific projects is they don’t come to any one restaurant at one point in time. So we’re being very careful about how we roll these out and staging them so that no one restaurant, no one area director has to deal with all three at once. And ideally they’re coming in a stage gating process where you knock one off, get comfortable and then the next one rolls in. So sometimes there’s a little bit of an overlap but for the most part we’re able to, especially with the kitchen and the POS system because those impact the restaurant the most actually, from an operations standpoint – we keep those separated and we’ll roll one in first and then follow with the other when they’ve gotten their feet under them. So it’s absolutely a priority for us to make sure we don’t overwhelm the leaders in the restaurants. They’re excited about all of these things so the reality is they’re asking for it; we’re actually having to kind of calm some of them down to say “Let’s bring it to you in a way that’s easily managed.”

[Chris [Okul]:]

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

[Wyman Roberts:]

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

[Chris [Okul]:]

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

[Doug Brooks:]

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

[Chris [Okul]:]

Okay, great. Thanks guys.

[Operator:]

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

[Brad Ludington:]

Thanks, with Keybanc, good morning. I had a clarification

[Guy Constant:]

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

[Brad Ludington:]

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

[Guy Constant:]

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

[Brad Ludington:]

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

[Wyman Roberts:]

Yes, it’s maintaining that level.

[Brad Ludington:]

Okay, thank you.

[Operator:]

That was our final question for today.

[Doug Brooks:]

Okay, thanks Kate. This is Doug, I’ll just wrap it up here. I hope that everyone… I appreciate everyone’s interest first of all and you being on the call this morning with our business, and hopefully we were able to address a little bit about the macroeconomic concerns and at least how our business maintains a steady state. We gave you plenty of updates on some of the key initiatives and some of the exciting news about potential new restaurant growth coming down the path. Also, I just want to mention, because of everyone’s interest in the Chili’s plan to win, we would like to schedule a day with you at a Chili’s restaurant soon so you can see and experience many of the cool new things that we’re doing. So we’ve marked our calendar for Tuesday, November 15th starting first thing in the morning. We don’t have an exact restaurant location established yet, it’s kind of a Christmas question. We’re trying to find a place that has as many of the pieces in one restaurant as possible so you’ll be able to understand as much about the look and the kitchen process as possible. But we’ll get an exact location out to you soon, probably somewhere on the East Coast so you can at least tentatively mark your calendars for the morning of November 15th. We’d love to let everybody see and experience a little bit more of these things we’ve been talking about. I hope everyone can feel the confidence in our teams, our strategies and results despite the economic headwinds. I know we’ll talk to some of you later today and everyone in October. I appreciate your interest; have a good day.

[Operator:]

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