Earnings Call: Q4 2019

Aug 13, 2019

Good morning, ladies and gentlemen, and welcome to the Brinker International Earnings Conference Call. At this time, all participants have been placed on a listen only mode and we will open up the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Micah Ware. Ma'am, the floor is yours. Thank you, Holly, and good morning, everyone. Welcome to the earnings call for Brinker International's Q4 of fiscal year 2019. With me on today's call are Wyman Roberts, Chief Executive Officer and President and Joe Taylor, Chief Financial Officer. Results for the quarter were released earlier this morning and are available on our Web site atbrinker.com. As is our practice, Wyman and Joe will first make prepared comments related to our operating performance and strategic initiatives. In addition, we will provide guidance for modeling fiscal year 2020 performance. We will then open the call for your questions. Before beginning our comments, please let me remind everyone of our safe harbor regarding forward looking statements. During our call, management may discuss certain items, which are not based entirely on historical facts. Any such items should be considered forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Such risks and uncertainties include factors more completely described in this morning's press release and the company's filings with the SEC. And of course, on the call, we may refer to certain non GAAP financial measures that management uses in its review of the business and believes will provide insight into the company's ongoing operations. And with that said, I will turn the call over to Wyman. Thanks, Micah. Good morning, everyone, and thanks for joining us as we review our fiscal 'nineteen performance and share how we're going to build on our momentum into fiscal 2020. Brinker delivered a strong quarter and a great year with adjusted earnings at $1.36 for the quarter, up 14%, which took us to $3.93 for the year, up 12%. We drove those results primarily through the strength of Chili's comp sales, which ended the year up 2.3%, 120 basis points beat to the industry. And those sales were driven by comp traffic, up 2.3%, a 3 80 basis points beat to the industry. During fiscal 2019, we achieved or beat the performance levels we expected and set the business up for strong future performance. So we remain committed to our strategy. 1st, because it continues to drive results and second, because there's still plenty of upside, which gives us confidence in our ability to continue to take share and grow the business. Now when we laid this strategy out a year and a half ago, our objectives were 3 fold. 1st, strengthen our value proposition second, improve our operational execution and third, leverage digital technology to increase convenience for our guests. In terms of value, we'd led the industry for years with 2 for 20, but we needed to refresh that proposition. We wanted a more flexible platform that would work across both dayparts, and we've got that now. 3 for 10 is a compelling offer at both lunch and dinner. It works within our margin structure and resonates to that segment of our guests who are value driven. It's delivering the right level of performance and preference, mixing in the mid teens. It's now in our base. We've wrapped on it, and we're continuing to hold cost of sales and are now able to grow the check off this base. From an operations perspective, we narrowed our focus and gave our operators world class systems to help them execute our brand standards and become best in class operators. This one is a slower build as any leadership strategy is, but it's working. We've delivered significant improvement across our guest metrics and we're encouraged by our operators' continued focus and commitment to our guests. And now we're leveraging our years of investing in technology to accelerate our share gains. With our industry leading database, we're increasing the level of personalization used in our digital marketing. We're also using technology to drive financial efficiencies and operational effectiveness, creating better experiences for both guests and team members in our restaurants. And through our e commerce platform, guests can order Chili's takeout easier and faster than anyone else in the category. And that technology has supported growth of our takeout business in the solid teens throughout fiscal 2019. And we've wrapped on that and we're still driving solid growth and we expect that trend to continue in this crucial piece of the business. So in 1 fiscal year, we introduced a strong value proposition, drove better operational execution and leveraged technology to deliver a more convenient and personalized experience for our guests. Looking to fiscal 2020, we're building on our strategy by investing in the growth of our business. First, we're investing to grow frequency in the restaurants. With the strength of our value proposition, now we can layer in innovation and marketing support, targeting the value oriented segment of our guests, which will encourage them to return more often. And with stronger operational execution, our guests are having better experiences and fewer problems, which help us drive frequency as we challenge ourselves to take our guest metrics to new heights. We are investing in our operators both from a compensation perspective with higher bonuses and better systems, systems like our new training program that are all now that are now all digital and our new forecasting system that helps managers run the kitchen better. We're also investing to grow our off premise business. We're using the same e commerce platform to offer delivery to our guests. Delivery orders integrate into our existing operational system, which provides a seamless experience for our guests and our team members and unlocks the potential to drive significant growth. We've entered in an exclusive agreement with DoorDash and we've already seen significant incremental off premise growth that's accreted to margins. And now we're investing to grow our scale. We believe in the brand and our ability to run restaurants. So we're looking forward to welcoming 116 additional Chili's locations into our company owned fleet when we complete the pending acquisition from our biggest domestic franchise partner. We're in the midst of developing plans to invest in these restaurants at an accelerated pace with proven programs that have driven solid performance in our company owned restaurants. So fiscal 2019 was a great year and we enter fiscal 2020 from a position of strength. We're confident in our ability to deliver double digit EPS growth again in this very competitive environment. We're excited to share more specifics about our plans and show you examples of what we're planning for fiscal 2020 beyond when we see many of you here in Dallas on Thursday for Investor Day. I'd like to thank our operators at both brands for their relentless commitment to make every guest feel special. We said when we introduced this strategy, it would be a long build to strengthen the trust and confidence of our guests, and you continue to rise to the challenge every day. I'm proud to be on this team. And now I'll turn the call over to Joe. He'll give you more clarity on our Q4 results, walk you through fiscal 2020 guidance and provide some specifics as it relates to the Q1. So, Joe? Thanks, Wyman, and good morning, everyone. Our 4th quarter ended fiscal year 2019 in good form with the company reporting another quarter of top line and EPS growth. Additionally, our restaurant operators did a good job of positively impacting operating margins in areas they control. Brinker's 4th quarter company sales of $805,000,000 up 1.7% from prior year, were driven by positive comp sales of Chili's of 1.5%. On a combined basis, Brinker recorded positive comp sales for the quarter of 1 0.2%, which also represents a successful start to lapping positive comp sales from the same quarter last fiscal year. Our adjusted earnings per share for the quarter increased by 14.3 percent to $1.36 For the fiscal year, we reported adjusted earnings per share at the high end of our guidance range of $3.93 a 12.3% increase over the prior year. As it relates to Chile's quarterly comp sales performance, let me comment on the underlying composition as detailed in our press release. The comp sales for the quarter included a price impact of 3.9%. This is a reflection of a year over year decrease in our promotional direct marketing activity. The improved performance of our Bates business allowed us to meaningfully reduce promotional activity and the related comp expense. As we have mentioned before, we account for year over year changes in comp expense as an adjustment to price. And in this case, the lower comp expense in the 4th quarter resulted in an increase in net price. Now the actual menu price increase for the quarter was 3.3%. While in the short run, this is higher than our target annual pricing range of 1.5% to 2%. It reflects a year over year timing differences to when we took price as opposed to a change in our pricing strategy. Our annual menu price for fiscal year 2019 is right at the top end of our target range and we expect to maintain annual price increases in the same 1.5% to 2% range as we move forward. Our restaurant operating margin as a percent of company sales decreased in the quarter to 14.9 percent due to the impact of the sale leaseback financing and the adoption of the revenue recognition accounting standard. Excluding the impact of these two items, restaurant operating margin would have increased to 16.5% in the 4th quarter. Positive contributions to the brand's operating margins came from sales leverage, our continued shift to more efficient and effective digital marketing, the positive impact of our Certified Shift Leaders program and improved employee health experience. Produce related commodity inflation, the negative year over year mix impact of our 3 for-ten platform and hourly wage rate increases were the primary headwinds to operating margin for the quarter. Our cash flow for the Q4 and the fiscal year remained strong with EBITDA of $110,000,000 $374,000,000 respectively. The level of cash generation from our restaurants allowed us to significantly invest back into the business through restaurant development, our ongoing reimage program and industry leading technology development. We also maintained a comfortable and stable leverage position with funded debt leverage at 3.25 times EBITDA and lease adjusted leverage at 3.96 times EBITDAR at fiscal year end. Turning to our outlook for the current fiscal year, our specific guidance of a number of performance estimates can be found in this morning's press release and on the Investor Relations area of our website brinker.com. This incorporates our existing view of the casual dining industry, our strategy to drive positive performance at our brands and our cash flow driven capital allocation programs. As noted in our press release, our guidance incorporates the previously announced acquisition of 116 Chili's Restaurants from one of our franchise partners. We anticipate closing the acquisition a bit later in this Q1. For the fiscal year, we are currently forecasting comp sales growth of positive 1.75 percent to positive 2.5 percent. Revenue growth of 9% to 10%, driven primarily by the increased capacity from the aforementioned acquisition we expect our restaurant operating margin for the fiscal year to be in the range of negative twenty basis points to flat. We expect capital expenditures for the year of $140,000,000 to $150,000,000 We will continue to reimage our reimage program and expect to complete between 140 and 160 restaurants this fiscal year. Free cash flow is estimated between $160,000,000 $175,000,000 returning us to a stronger and more typical level available for capital allocation. Finally, our adjusted earnings per share guidance for fiscal year 2020 is a range of $4.15 to $4.35 Let me wrap up my comments by providing some insight to certain impacts to our anticipated Q1 performance. We are seeing positive comp sales performance in the quarter in a manner that captures market share through comparatively superior traffic performance to our peer group. Assuming the successful closing of the RJ acquisition, we will start to see favorable year over year impact to company sales from the additional capacity, likely contributing incremental capacity in the range of 2% to 3% for the quarter beyond the revenue growth anticipated from comp sales. Conversely, we will see a reduction in franchise and other revenue as the acquired restaurants shift from generating royalty payments to company sales. We anticipate a year over year reduction of 12% to 13% for this quarter. From an earnings perspective, this is the last quarter that will have a year over year negative impact from the incremental rent related to the sale leaseback financing closed last August. As of this month, we are lapping the completion of that transaction and it is now part of our operating margin base. For the first time in recent history, we are required by vesting positions of certain senior executives to take the full annual expense of stock based compensation programs in the Q1 as opposed to over the course of the full year. The year over year increase to stock based compensation expense is approximately $3,500,000 This is purely a timing change as the annual differential for this expense is expected to be flat. Taking all this into consideration, we anticipate our Q1 adjusted earnings per share to be below last year's Q1 in a range of $0.05 to 0 point 0 $8 Naturally, this is all incorporated into our annual guidance for earnings per share. Now with my comments complete, we can move to your questions, which will last until the top of the hour. Holli, I will turn it back to you to facilitate. Thank you. Ladies and gentlemen, the floor is now open for questions. Your first question is coming from Chris O'Cull. Chris, please announce your affiliation then pose your question. For the Q4 as you lap tougher compares. And as we've seen, the segment shows some significant softness in recent weeks. So can you speak to maybe the current trend and what gives you confidence that this performance can be achieved in 2020? Yes, Chris. Yes, the Q4 was a little soft. It was especially soft early for the category, right? So April was not a great month. And then with the category, we continue to improve as well, continuing to kind of take share and find that differential that we've been kind of running for most of the year as we kind of move through the quarter. So the sequential improvement through the quarter was good, and we ended the quarter in really good shape and we start this quarter in really good shape. The things that give us confidence that we can continue to see the kind of sales improvements in comps that we guided to are really threefold, and we talked about them. There's first, there's still opportunity with us in the strength of our value proposition and the marketing that we can now put into that. The delivery program is kicked off now. It's not in last year's numbers to any great degree, And we're seeing some really good movement off of that program and very excited about how that's working for us, both from a top line perspective, but also from an operational perspective. And we turned on all of our restaurants basically overnight and integrated the DoorDash system into our system, and it was seamless. And so feeling really good about our potential there. And we've got we've just got Phase 1 of that program in gear right now. We've got some very exciting things to continue to push on there. And then our operators are executing at a level that we haven't ever seen before. Our guest metrics are as high as they've ever been. We ended the 4th quarter with the best guest metrics we've ever achieved at Chili's. And so those things give us confidence that we can continue to move forward even though there have been some softer pockets here, if you will, in the casual dining space over the last couple of quarters. Just as a follow-up, can you give any color as to what you're seeing, what kind of demand response you're seeing from the delivery initiative? Go ahead, Joe. Chris, we're very encouraged by what we're seeing coming out of delivery. Again, we're early on and we're just about 2 months into the process. It is performing as we expected it to perform. It is delivering the incrementality at very high levels, right in line with what our test shows. It is delivering a better check and it's delivering a better PPA. One of the things I want to make sure that everybody understands from a profitability standpoint is we're not offering 3 for 10 on the delivery platform right now. So again, that's additive from a check standpoint and helps in that regard. I think it's clearly a good driver out of the gate. There's been a lot of commentary around the month of July that I've seen out there. July was not a weak month for us when we look at that commentary. And I think delivery was one of the reasons besides the other ones that Wyman has mentioned and coming out of the gate this quarter right in line with where we expect to be based on the guidance we just provided you. Great. Thanks guys. All right, Chris. Thanks. Your next question is coming from Will Slabaugh. Please announce your affiliation and pose your question. It's Stephens. Thanks guys. I had a follow-up question on value on your comment, Wyman. When you you said you feel that you still have a big opportunity with your value platform. Can you talk a little bit more about that both in terms of how well you would say you're doing today on value versus what you look to do and maybe what that opportunity might look like? Well, we know the proposition is extremely powerful, right? So we know that we've got a great proposition. And now our opportunity is twofold. 1 is to increase awareness. So even though we've been focused this year on keeping our operators' lives simple, so not we didn't do an LTO, no promotional activity, no new initiatives. We let our operators really run their systems and get much more comfortable running the day to day business and that paid a lot of dividends for us both from a guest perspective and from an operations perspective. What we've got now is the opportunity to take that value message and build on the awareness levels. Even though we've been out there for a year with it, there's still a lot of people that don't know about it. We know that based on our research. And then we also have the opportunity now to add some life to it by adding some innovation. And we're excited about some of the things that are in test today that could make that platform work even harder for us and continue to build off of the strength of that idea. So there's room to go and it works within the model that we're now under. And Will, two data points I'd add to that response too is, one, it is an offer that works well both dining in and to go. It's helping drive both of those businesses. Again, as we see more and more commentary around the off premise preferences of our guests, having a value platform that plays well on that side of the equation is playing right into the strengths of where we see the consumer going. And the other piece of the equation, so we've talked, I mean, obviously, for a long time in the industry about casual dining being a lower frequency business, you see higher frequency from our value guests, which makes them a much more valuable guest. When you think about moving that frequency of visits, it's working exactly how we'd like to see that happen. And as Joe mentioned, we're not even using it in delivery. And so that's a vehicle that we could play with, but we've got levers to pull as it relates to how do we continue to build on that value proposition. And I think value is going to be important as we look to the future. Thanks. And a quick follow-up on the guidance, if I could. I know you gave us the restaurant level margin guide, which looked a little better than what we were expecting. I wonder if you could talk about what type of commodity inflation and maybe what you're thinking on the proteins as far as what's incorporated there into the guide? Sure, Will. Incorporated into that is we do expect a low level and again I think it's a single digit, let's say 1% to 3% commodity inflation impact to this year. Obviously, the watching a number of things very closely, but we've also taken the steps to make sure we're taking the volatility and protecting the guidance through the contracting side of the equation. We're probably at a we are at a more aggressively contracted position. Along those things that you can contract out, particularly in the protein space, chicken and pork in particular contracted out through the year. Overall, we're contracted right now for the year close to pushing up close to 70%. We do expect some produce inflation. That's an area that the industry has kind of dealt with through the last couple of years. That's incorporated into the guidance. But right now, the markets are not reacting too much out of norm. We got some good news, on the corn crop just yesterday. When you look at some of those dynamics, it will be interesting to see, how that plays back through the space. So but I think coming off a very low commodity cycle, it's prudent for us to expect a little bit of low level inflation into it and also make sure we protect against any spikes that might hit the system from time to time. Great. Thanks for that. Your next question is coming from Brian Vaccaro. Please announce your affiliation then pose your question. Fantastic. Thank you. Just wanted to circle back on the quarter to date comments. Did I hear correctly that you said quarter to date comps are in line with your annual guidance implying 1.75 or higher? You heard very well. Yes, we are moving through this quarter right in line with what we would expect to do for that guidance level we provided you. All right. Thank you. I had a question on the ERJ acquisition. What have you assumed in terms of EPS accretion? Could you help us with sort of the building blocks AUVs, store margins and also any incremental G and A needed to support these units? Yes. And I think and obviously on Thursday at the Analyst Day, we'll go into a little bit more detail. What I'll tell you today, one, all of those are incorporated into those numbers. I think you can think of the accretive nature. It is accretive even after taking into consideration the debt we're taking on for that. And in fact, we will pay that debt down over the year back to our current target rate. It's, I would think, mid single digits to a little bit above that would be your the thinking from an accretion standpoint. Haven't closed it yet. Obviously, we'll we're well down the path and right on track to close it here in a couple of weeks, which will also give us the opportunity to get more directly involved in the restaurants and really understand where some of the opportunities. We're not baking into this guidance a lot of upside from those restaurants until we have a better feel for where we can impact that in the short run. And they will be held as non comp restaurants during this fiscal year, too. So their performance is not assumed in that comp guidance we gave you. Okay. And when you say mid single digits, you're talking about as a percentage of you're talking about EPS accretion percentage or are you talking mid single digits EPS pennies? Pennies. Mid single digits. And then on the G and A guide for fiscal 2020, last one for me, but the fiscal 2020 G and A guide flat in dollars, I assume there's some inflation in there. I assume there's some level of incremental G and A on ERJ maybe in the regional infrastructure. Can you help us with what some of the offsets to maintain flat dollars would be into fiscal 2020? Yes, I think it's important to remember the incentive compensation piece of the equation and I'm glad you raised the point. The F 2019 performance allowed incentive compensation programs to pay out on the profit sharing side at a nice pace. When you move above target, there's like most of the programs, there's multipliers in there. So there is a over $7,000,000 year over year incremental payout related to profit sharing in the F 2019 numbers. A little over $4,000,000 of that was in the Q4. So we're happy to be able to see performance that pays our team members out at that rate, but then we bring it back to the target for next year. It's very similar to what we talked about on the manager bonus side of the equation. So resetting that target resetting that amount to target is a big piece of managing. Yes, there is some other inflation in there. There's not much incremental G and A required from an ERJ perspective in that equation. In fact, we think we can bring some efficiencies to the equation over time. So, but that's the biggest delta. But it's important to understand the expense that flowed through F 2019 and how that now sets back in a positive way. Very helpful. Thank you. Your next question is coming from John Ivankoe. Co. Please announce your affiliation then pose your question. Hi, thank you. A couple of questions on the composition of the comp please. Could you remind us, especially just in terms of the price in the Q4, and I'm sorry if I missed that, how much of that price was driven by the lapping of the Matcha's Rewards from the prior year? Yes. John, there's about a 60 basis points impact from that year over year change in comp expense. Okay. And as we go through fiscal 2020, I mean, how much do you think that will be? I mean, will we get 3 quarters of that? Do you expect any change and why? 3 quarters of the Of the 60 basis point benefit in comp expense? No, I think it will come in definitely below that. I mean, again, it depends on some of the decision making we do too relative to any quarter over quarter and when we may or may not run promotional. So our expectations is it's going to be less than that 60 basis points. You'll start to see the impact from price again move down over the next couple of quarters back into that 1.5% to 2% range. I think over time, you're going to get a fairly neutral we should get a fairly neutral impact between gross and net pricing. We'd like it to be in a smaller range. We've had last year we had in the Q4 we had a big differential. You're seeing some big differentials this year. So that will normalize over the year. But we're comfortable being in that 1.5% to 2% range. Go ahead, Wyman. Sorry. Sorry, John. I was just saying that we also offset that last year. Obviously, a lot of mix shifts with 3 for 10 being in for the whole year. That's in the base now, so you won't have that offset either. So the price will flow through more evenly. The mix will not be as dramatic probably this year as last year. And then we'll play the marketing comps, if you will, in the loyalty program really to the market. Right now, again, we're not fully we're not as aggressive as we could be or as we with our loyalty program. We're kind of saying, hey, listen, we like the trends we're on now. We don't have to be kind of pedal to the metal on the loyalty. And so we're saving some of that for maybe a future date if we need it. That's great. And actually the next question was exactly on mix. As we fully lap 3 for 10, I mean, is there any reason to believe that mix isn't something like flat in fiscal 'twenty, I mean, just as we lap 3 for 10%. And secondly, I mean, we've talked about value and the possibility of maybe doing a little bit more with that. But do you have an opportunity elsewhere in the menu for some of your higher income customers to maybe introduce some higher priced things or maybe more opportunity trade up. We've obviously seen other brands that have given opportunity for trade up that have actually been surprised at the success of that. So where are we thinking in mix for fiscal 2020 in terms of where you'd like to live? Yes. I think you kind of hit it, John. We're doing the same thing, right? We're going to address the different segments of the audience and our guests, with appropriate. So we will probably continue to put 3 for 10 out there with some innovation, some targeted marketing to those guests and value oriented families and those folks that are really kind of more focused on that aspect of it, but we are also going to have messaging and offers that appeal kind of on the other end of the menu, if you will, from a quality perspective in terms of bigger portions and maybe a more abundance. And then we've got this whole delivery channel that's got a whole different mix associated with it. So we're looking at the various guest segments and going to put offerings out there that are we think appropriate and compelling for each of those and that drive the business. Hello? You there? Is there a next question? Your next question is coming from Stephen Anderson. Please announce your affiliation then pose your question. Yes. From Maxim Group, one name that hasn't been discussed on this call has been Maggiano's. I just want to ask, you're not looking for any new unit growth there. I just want to see like what you want what you're planning to do to drive top line there. And I just wanted to hear about more what you have going on with delivery as well? Okay, Stephen. Well, let me just talk about Maggiano's. Maggiano's had a good year. They ended the year with positive comp sales. It was a year with a new leader. So Kelly comes in and he's really now focused this year on how to grow organically at Maggiano's, both within the four walls of the existing restaurants, and then we're also very excited about some of the ideas about how we can take Maggiano's to new locations, both traditional and nontraditional. This year, we opened our first airport location, Maggiano's, and it's done extremely well. There's a lot of energy around that brand. It's such a powerful brand. So kind of beloved by its guests that we're we continue to just have a lot of excitement about the potential for Maggiano's to continue to grow. And this team is working on initiatives both again from a perspective of how to grow inside the four walls of the restaurants we have today, but also where can we take it to get the brand spread out because with 53 locations tons of white space for Maggiano's. Your next question for today is coming from Eric Gonzalez. Please announce your affiliation then pose your question. Hi, thanks. It's KeyBanc. Just two quick ones here. If we can go back to the ERJ acquisition and the margin guidance, can you maybe talk about what the margin impact is from ERJ? And then separately, with the 3.3% price that you had this quarter, can you talk about when that is expected to normalize in fiscal 2020? And what the pricing impact was in the quarter to date comp, if you will? Thanks. Eric, I missed the last piece of that. But the ERJ margin actually is ERJ right now, again, we do need to close the acquisition and get a little bit more in the weeds on a day to day basis. But we're looking at it from actually a fairly neutral margin perspective. From a 4 walls operating perspective, they do run margins a little bit behind us, not radically different. Some of that is based on the states that they're in and some of the cost dynamics of those states. But they're slightly below, but right in line with what we would have expected to see there. But you also have a ROM impact that in essence is some of the reversal of what you saw last year with the change in accounting standards. So where their marketing contributions ended up being moved over onto the other revenue, so franchise and other revenue side of the equation not impacting ROM because now they're coming back into the company's sales side of the equation, the support for marketing that will emanate from those 116 restaurants will actually flow through ROM and have a neutral effect due to that year over year that change in presentation. So all in all, let's say, as we bring them on board, we're expecting a fairly neutral overall impact on the ROM line. Okay. The second question was just related to the comp and how the pricing impact is expected to roll off given that you had a higher level of price in the Q4 than your targeted range. Just wondering when that's expected to normalize and if that had any impact on the quarter to date comp? Yes. I think you'll see it normalize over the 1st couple quarters. Again, it's that is the timing aspect of when you take price versus when other price rolls off. So as you kind of move through, it will come down, probably be still a little bit above that target range in this quarter and then normalize more as we get into the 2nd quarter. Thanks. Your next question for today is coming from David Palmer. Please announce your affiliation then pose your question. Thanks. Evercore ISI. Just with regard to your comp for this fiscal 2020, I would imagine that people are wrestling with the big three, which would be the industry comp and how you're going to lap the 3 for 10 and the incrementality of delivery. Maybe you have another big variable in there. But on the industry comp front, I think there would be investor concern that the comparisons look about a point tougher in the coming quarters. And then of course, there's concerns about the economy. So could you perhaps talk about what your industry same store sales base expectation is for your guidance? Yes, David, with that and again, we don't give specifics on some of those drivers, but we do start with a negative belief around the industry. Clearly, over the course of the last 6, 9 months, you've seen some volatilities up and down. So that we expect that will probably continue to go forward. But again, we think we've developed a base business and incremental drivers that work in all of those economic environments. So again, we continue to currently drive through what you have all talked about from an industry perspective recently in a positive 4%, particularly as we start to see the impacts of delivery come in. But reiterating some of Wyman's comments is we're comfortable at looking at the multiple levels. And as we build that comp, it's built off of very specific insights and confidence we have around what we can control in moving that comp forward. So delivery to go value, driving the base business from a CRM perspective are all levers that come into play and we think can drive through a variety of economic conditions. I guess the other two major things that I mentioned that 3 for 10, you're now some weeks into lapping the second phase of that from last year. And delivery, as you mentioned, that's been in place for a couple of months now. So if those are maybe the other big 2 in terms of variables, Is it fair to say that you have pretty good visibility on those 2? And that means really the big variable from here is whether those things fade as helpers or perhaps the 3 for 10 becomes more difficult or if this industry comp just falls apart later in the fiscal year? Yes, I think you've got it, David. I mean, we're sitting here today, 7 weeks into the year, and we have wrapped on 3 for 10 for quite a while now. And we've got a couple of months of delivery under us. And our operators are executing at a high level, and we are excited about some other things we have to still kind of bring forward. So that's why we gave the guidance we gave. Now the industry has seen a couple of soft spots. Specifically, April July are not great months for the category, but we continue to weather through. And we're confident that we will continue to be able to do that and we're excited about the things that we're bringing forward. So that's kind of where we're at. Hey, David. One thing that's interesting about the discussion around lapping 3 for 10 is I think that there is a belief in that discussion that that's a promotional lap, but we view it as a core value platform that we have well over 10 years experience on how to manage that and bring that forward. They have the ability to grow. We've seen it. We've done it. We expect that as we move forward, we have confidence in the incrementality we can bring out of a value platform and how we can lean into those gaps. As I've mentioned before, we see increased frequency come out of that, which we would expect to continue to pick up as we move forward. So we don't think of it maybe in the same vein that I think underlines that question as being a lap of promotional activity. It's a solid base business that we can grow as we move forward. Thank you. All right. Thanks, David. Your next question is coming from John Glass. Please announce your affiliation then pose your question. Hi, it's Morgan Stanley. I wonder if you could talk about labor for a moment. I think it was more favorable versus our view at least on your labor ratios. And you cited a few things, including managerial labor. I think that's part of your certified shift leader program. Where are we on that journey? Is this accelerating at this moment? Or in how many quarters do you have to go before it's lapped? Or is it not is that the right construct to think about it? And what else was in the labor line that may have been offsetting that wasn't structural? In other words, I don't know, health care, whatever, was that a one time benefit, etcetera? Let me talk about it. From a CSL standpoint, that certified shift leader program, we're getting close to kind of the target, which means from again, we just talk about labs. So which means we still have a lot of potential favorability in the first half of this year for that program before we get kind of full up to full up. But in the next couple of quarters, we should be fully certified, if you will, with all of our shift leaders kind of out there at the target levels that we want them to be at. And that program is providing really what it's done beyond the financial impact, it really has changed our belief about where do we develop and recruit new leaders. And we went from significantly external recruits to now mostly internal recruits. And what that has also done is it's proven to be much more effective. The turnover is lower. The results from our all of our guest metrics are better. And now we have a career path for our team members that start at the hourly level to move into management and then move their way all the way up through the operational ranks to some really nice career options. So we kind of really love the program and it's probably about halfway fully rolled, if you will, if you think about this year. Joe? Yes, John. I think as I mentioned, besides Certified Shift Leader, we saw a year over year benefit from the employee health experience expenses related to that. Going forward, we continue to feel that that's an inflationary market. We build that into our thought process on the current guidance. Now we are again continuing to work programs and wellness opportunities to try and manage and mitigate through that. It is an expense that you do see some volatility in because it's based significantly on that in the quarter experiences as they develop. So that was definitely one of the other items I cited in there. Okay. And then Joe, just following up on your free cash flow guidance. What is the use of the free cash? What are your assumptions built into the guidance on buyback, maybe just in a $1,000 How much leverage or how much deleveraging? What do you expect to get to your on your balance sheet from a target leverage perspective during fiscal 2020? Thanks. Yes, John, we don't typically give a dollar amount. Again, we do anticipate being in the buyback market this year. Obviously, we have the acquisition to complete here in the short run. That will be financed in the short run under the revolver. We're going to we will return over the course of the year by year end to that, that we ended the fiscal year. So year over year ends, we should be relatively similar from a debt leverage perspective. We will use obviously the free cash flow from a dividend payout scenario as we kind of move when we just approved the dividend, which is part of the press release you saw there. We'll continue to use that. And then the rest will be available for share repurchase. So we will be back in the market as we move throughout the year. Thank you. Your next question is coming from Andrew Strelzik. Please announce your affiliation then pose your question. All right. Thank you very much, BMO. I'm curious how you're expecting the delivery business to interact with to go? Is it your expectation that those are different customers? What are you seeing so far given that TO GO has been such a nice contributor to comps? Yes. I think they're significantly different today, especially because most of the delivery is coming through DoorDash's marketing channels, right? So there's very little crossover in the future. We'll be pushing some initiatives that may have more direct relationship or more direct contact with our guests that we know are our current guests. And so we may see some trade offs there, but we think the trade offs are going to be well worth it and we'll monitor that as we go forward. But right now, we're not we like the incrementality that we've seen both in test. And it's funny, we introduced this DoorDash partnership, but it comes after over 2 years of testing delivery with all of the big players and over an extended period of time through multiple different channels. So I feel like we the team has done a great job setting ourselves and our operators up for success with delivery. We've got the right model. We've got the right partner, and we're excited about its ability to grow the business and not cannibalize at a level that has us too concerned. And then on the My Chili's Rewards program, you're just over 12 months post the relaunch there. Could you kind of take a step back and give us your assessment of how that's gone? Are you happy with the sign ups, the deal constructs? How do you plan to leverage the data incrementally going forward now that you have a little bit of hindsight on the program? No, we're extremely happy with the work that's been done to build My Children's Reward. The level of engagement with our guests in that program is fantastic. It continues to be a real strong element to our marketing program and to continuing to drive traffic. We are able to flex in and out of that program with additional offers, but the base offer is in our mix now and is manageable. So we like all the things about it and we're just getting smarter and smarter. It seems just now with more and more information, more and more data points, the ability to bring in machine learning and some artificial intelligence to help us better understand exactly what each of those guests would like to motivate them more to come into the restaurant is there and the team is using it and we just will continue to kind of move forward to grow that aspect of the marketing program as we look forward to F 2020. Great. Thank you very much. The next question for today is coming from Dennis Geiger. Please announce your affiliations and pose your question. Thanks. It's UBS. Just another one on your margin guidance beyond what you've already mentioned. Just wondering if you could talk a bit more about how to think about the impact from the different efficiencies that you have looking into this year. The CSL program, I think you covered pretty well, but also just on technology, marketing efficiency as well as any kind of year over year tailwinds relative to a little bit of a rebase this year? And then just the last piece to that, if there's any thought with an update to what kind of comp levels you're thinking about to kind of hold margins flat, if you care to address that today? Thanks. Go ahead, John. Again, we do think there's continued opportunities to work at efficiencies around margins. I think Wyman's talked a little bit about the marketing aspects that continue to move we have to the digital side of the equation, which has efficiency to it, but it's also a more effective pace. Sales leverage is a big piece of the equation. We've been seeing sales leverage move through the margin for the last couple of quarters. I think now is some of the other aspects as we lap through sale leaseback accounting changes, think of that, you're probably getting you're seeing it a little more directly. So that's obviously a piece of the equation. There's variability that builds into our margins from an incentive compensation standpoint on both restaurant operating margin and G and A. And that's the manager bonuses and profit sharing pieces of the equation that flex with the business. So, it's something that maybe not be as appreciated as much as we look at it. So again, if performance is there, because we set these to targets in your guidance, the performance is there. We will pay out on those programs close to or above the target. If performance is not there and it's top line and flow through performance and guest metrics that all combine into that, you'll see some below target payouts, which protect the margins to that extent. And you'll see that both in the restaurant operating margin and the G and A side of the equation. So there's a flex point in there that I think may not be quite as appreciated. So again, we continue to operate the business at a high level. Managers are looking for those efficiencies. We're making sure we're taking care of the restaurants, disciplines around R and M spend, things of those nature that can get away from if you're not careful and if you don't have the systems in place, which the RC spends a lot of time and effort on making sure that the systems are in place to help guide and control those spends. And I just would add, I think, again, if you're just thinking about last year and relationship to this year, the introduction in the of 3 for 10 to the platform, it had some impact on the mix and the margins fully anticipated and kind of where we want to be, but we won't have that kind of margin challenge as we move forward. So our pricing and our merchandising and the things we do to kind of lift check and help margins will flow through at a much higher rate and that will help as well. Thank you. Yes. The next question is coming from Jon Tower. Please announce your affiliation then pose your question. Great. Wells Fargo, thanks for taking the questions. Just pretty much two clarifications. First, Joe, on the comments about 1st quarter earnings being down $0.05 to $0.08 year over year, are you talking about off of the $0.47 base from last year? And then secondly, Wyman, I think you mentioned earlier in the call, developing plans for the 116 acquired stores, including the potential to invest in the store base. On that potential investment, are you speaking about potential margin investment or potential CapEx? And if so, are either of those captured in your fiscal 2020 guidance? Thanks. The first quick answer, yes, that's off the adjusted $0.47 from last year. Okay. So with regard to the acquisition, yes, we think there's similar to the acquisition we made a few years ago of a franchise partner. I think there's power in there's power in that program. So where they fall into the Joe mentioned in his comments that we are going to continue our reimage program. Where these new restaurants fall into that cycle, then we may move some of them up to the front a little more. And then there are some technology investments as well as some other investments that we'll make that we know have shown proven results in our company on restaurants that we're very excited about bringing to these restaurants. These restaurants have been well run. I don't want to give the impression that they're not great restaurants. They're great restaurants. It's a great franchise partner. Junior Bridgeman, you couldn't have had a better franchise partner than Junior. So they've chosen to kind of move in a different direction of their company and we were just excited to get the opportunity to bring 116 chilies back into the company on full because it really fits our strategy around scale. We believe in this market, in this environment right now, scale is it's powerful, and you can bring so much more to the restaurants when you can leverage these investments in technology across a broader base, for example. So that's what we're talking about. They are in the numbers. We've factored those in. This isn't going to be a surprise in the 3rd or Q4 with, oh, we need some more capital to go do this, but we're excited about bringing those restaurants in. Thanks, John. Holli, I think we have time for a couple more questions as we come up against 10 o'clock. The next question is coming from Nicole Miller. Please announce your affiliation then pose your question. Piper Jaffray, thank you. Good morning. On that last question, could you talk a little bit more specifically about the CapEx buckets for this year? I imagine like you just said, the big ones are remodels, technology and then also maintenance. Just kind of compare and contrast with the year just ended, what might be going up? Can't imagine any more necessarily going down. Thanks. The same big buckets are in place, I think for 2020 as opposed to 2019. We do have a little bit larger spend targeted for a new restaurant development. Again, we think we have the with the new prototype coming to the market, we think we have incremental opportunity to increase capacity, nothing radically different than in the past, but we'll start to take that up a notch or 2. The reimage program is continuing along pretty much at the established level. I think the overall spend for Re Image 2020 versus 2019 is actually probably going to be down a little bit. We've been able to reengineer as we've moved through that program some of the cost dynamics of it. So still getting the same positive response to it. We want to be able to be as efficient as we can. And again, the R and M spend and the IT spend continuing along at those levels that we've talked about on a combined basis. Those 2 buckets are typically in that $60,000,000 to $70,000,000 range, which we think is necessary to keep the condition of the fleet as it should be and also continue to move the technology basket forward. So those are the big thing. One thing that falls out of the equation is, the CapEx accounting that was associated with the new headquarters building, which was part of the 2019 bucket is not in the 2020 bucket since we've already done that and moved in. And then incorporated in that is some expectation around spend for ERJ that fits into those buckets I just talked to you about. So again, we're in that 140 to 150 range and accomplishing all those programs as we kind of go forward. Very helpful. Thank you. On the 116 units acquired, how have they been comping? Is it similar or higher or lower than your company owned system? Or if you want to compare it to the franchise system, I'm not sure what's best? And then help us think about when they do fall in the comp base going forward, why would they be higher or lower? Would they essentially comp in line? Thank you. 1, and again, just so we're clear, we're going to hold them as non comp. So I'll talk a little bit about that, but I just want to make sure that people don't embed that into the thinking around the comp guidance we provided. They've been positive. They have been positive comps over the course of really more than a year now. They've been kind of a low single digit kind of in that range that you expect they drive the comp that you've seen of the franchise network. Again, they're the largest piece of that equation. So that was one of the things we've been pleased about in working with them as franchise partners and now understanding the restaurants that we will be picking is the momentum they've been building into those restaurants from a comp perspective. Thank you. Your next question is coming from Sara Senatore. Please announce your affiliation then pose your question. Hi, Ms. Bernstein. I just wanted to ask a couple of quick follow ups on the delivery business. You said it was accretive to margins. I just want to make sure I understand. Presumably that's because it's incremental as opposed to having sort of a similar margin profile as on premise, unless you're able to sort of minimize the amount of labor associated with it in the store and that way offset the delivery charges, the delivery fees. So I guess that's the first, if you can just sort of clarify the increment or the accretive nature of it. Is it only accretive because it's highly incremental? And then also on the higher PPA, I know you said no 3 for 10. I was a little surprised because I would have thought you might get less attach beverages and desserts and that kind of thing. So it sounds like though you're seeing not just higher check because you have bigger groups that are doing delivery, but also, higher per person orders? Thanks. Yes. Thanks, Sarah. It definitely in our mind and it's a piece of the equation that obviously you will analyze and watch on an ongoing basis. But through the testing we've done and early on, in the process, it is a profitable piece of business. And that starts with the deal that we negotiated. Again, kind of the base cost structure is in our minds, the best in the industry. And we're very comfortable with that commentary. Incrementality plays a big role in it. And we're seeing incrementalities at very high levels in excess of 80%. And that's what we saw in our testing, and that's what we're continuing to see as we roll it forward. But it also has a lot I mean, there are a lot of costs. If you fully allocate costs down through the restaurant, the different channels, there are a lot of costs associated within restaurant dining that don't get applied when you're thinking about to go or delivery. So they each have different cost attributes and we look at it at a fully allocated basis. The mixed piece of the equation and not having 3 for 10 in obviously helps in that regard too. Delivery plays frankly probably to a different target customer. The to go customer has a higher preference for value, which I think basically equates to the fact that if I'm a value oriented guest looking for that strong of an offer, there's probably some willingness to get it on a to go basis. I think playing delivery is probably playing to a less value oriented customer, which we have significant numbers of. And I think there's a lot of responsiveness to the ability to get that from a delivery and less sensitivity to maybe some of those charges that go with it. But it is a very profitable guest, driven by a number of different attributes now. Now you watch that over time and incrementality and shifts in the business will be a piece of the equation that you watch closely. And marketing channel. Again, we're just running through one marketing channel right now, basically the DoorDash channel for delivery. So we'll see what happens as we open up additional channels and as we really start to market and partner more aggressively with them. Thank you. All right. One more question. Your last question is coming from Jeffrey Bernstein. Please announce From Barclays. Just one question for me. Wyman, you talked about being excited to bring in ERJ and how scale is powerful. I'm just wondering on the flip side, obviously, you're reducing your franchise mix. I recognize that you view yourselves as restaurant operators and prefer the company operated model. I'm just wondering, is there demand from new or existing franchisees if you were interested in refranchising? Just wondering if you've examined the implications of refranchising, which would seemingly help to insulate against the sales volatility you mentioned earlier and then labor and potential commodity inflation. I'm just wondering not that you're pursuing it now, but whether there's interest from existing or new franchisees and why you would not potentially consider that going forward? Jeff, I think with the power of our brands, there's always interest in being part of this business. It's a good model and it's a good business. I think strategically, we look at casual dining and we think that being an operator in casual dining, at least to a large degree, whether it's 100% company owned or a significant portion of your restaurant's company owned is important. I think that, again, bringing scale to the organization and to the brand is powerful. And when you end up franchised into too small of units, it makes it difficult. Speed is important in this day and age. And I think in our we're able to move more quickly when we have a large restaurant base that are company owned. So there are strategic reasons that we like the company owned model as a predominant model for us. And but that doesn't mean there aren't people interested in being part of the organization if we were to put the brand out there to franchise. We just strategically think it's a better model to be company owned predominantly. And we love our franchise partners that are out there. And they also because we are so embedded in the operations of the business day in, day out, not just driving top line sales, not just with promotion, but what's going on in the kitchens, what's going on with the service models, that we have a partnership that I think is as deep as you can get. And it starts with all of kind of focusing on the overall aspect of this business from the top line all the way down to the bottom line. Understood. Thank you. All right. Thanks, Jeff. All right. Thank you, everyone. Thanks for joining us today. We appreciate it. And we look forward to seeing many of you here in Dallas on Thursday for our Investor Day. Bye. Thanks, everybody. 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.