Earnings Call: Q2 2019

Jan 29, 2019

Good morning, ladies and gentlemen, and welcome to the Brinker International Q2 F twenty nineteen Earnings Call. At this time, all participants have been placed on a listen only mode and we will open 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, and good morning, everyone. Welcome to the earnings call for Brinker International's Q2 of fiscal year 2019. Leading our call this morning will be Wyman Roberts, Chief Executive Officer and President of Chili's and Joe Taylor, Chief Financial Officer. Results for the quarter were released earlier this morning and are available on our website atbrinker.com. As is our practice, Wyman and Joe will first make prepared comments related to our strategic initiatives and operating 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 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 more commonly 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, I will turn the call over to Wyman. All right. Thanks, Micah. Good morning, everyone. As you saw in this morning's press release, Q2 was a solid quarter for Brinker with positive comp sales of 2.7 percent driven by positive comp traffic of 2.8% and adjusted earnings per share of $0.89 We're pleased with our progress across the business. The positive momentum at both brands has enabled us to raise some elements of our guidance for the fiscal year, and Joe will give you more specifics on that in a moment. Chili's continues to grow the business and gain market share with comp sales and traffic both up 2.9% for the quarter, significantly outperforming the category. As we keep getting better at executing our traffic driving strategy, our results keep getting better. Q2 marks our 5th consecutive quarter of sequential sales improvements with the last 3 in positive territory, and this momentum continues into the Q3 as we maintain our positive gap to the industry. Maggiano has also delivered a solid quarter during the important holiday season with comp sales up 1.8% and traffic up 1.3%. All aspects of the Maggiano's business, dining room, banquets, takeout and catering performed well. This 25 year old brand set more than 100 sales records during the quarter, including a record breaking sales day across the brand at more than $3,000,000 and the busiest day in a single restaurant at nearly $116,000 in our 22 year old Tysons Corner, Virginia location. And Maggiano's was recently named America's favorite casual dining chain by Market Force, edging out tough competition across the industry. That speaks to the power of the brand and the strength of the business. As we look to the future of Maggiano's, we're excited to explore new potential growth areas. We just opened our 1st franchise location at the Dallas Fort Worth Airport, and it's been a big hit. And later this year we'll open our 2nd airport location. At Chili's, our sustained momentum is being driven by several key factors, specifically value, takeout and most importantly improved operational execution. We've talked with you for a while about our goal to optimize our on menu platform. We knew we needed a strong value platform at our foundation and that ours were in need of a refresh. 3 for 10 is a relevant and compelling offer that's sustainable into the foreseeable future. The platform is highly motivating from a consumer's perspective, is at the right level of preference and it's driving traffic because it meets the needs of our lunch, our dinner as well as our takeout guests. The offerings are full portion and high quality products and the platform is flexible enough to keep it fresh, so guest satisfaction and intent to return are very strong. It's simple for our operators to execute consistently, and our margins are solid. In fact, our food margins relative to the industry are some of the best. The second big traffic driver for us is our takeout business. To go sales grew 20% in Q2, driven by a significant rise in e commerce as well as more effective marketing support, improvements in packaging and better execution of the to go experience. Consumers love the variety in our menu. Couple that with the seamless experience we give them from order to checkout, to pay to pickup and you can't take get takeout any easier or more affordable than with Chili's curbside. We're meeting our guests' needs and we're delivering a great guest experience. So at 12% of our business today, we believe takeout still has plenty of upside and we plan to leverage that. Finally, and perhaps most importantly, our operational momentum is bringing guests back into our restaurants. Our guests are telling us our execution and quality are significantly better even with the higher volumes. Today, we're seeing some of the best guest metrics we've ever seen. At the same time, we're delivering the best traffic growth we've seen in 10 years at Chili's. We attribute these results to our commitment to clear the deck for our operators and let them focus on their team members and guests. We believe our ongoing commitment to keeping operations simple and getting it right for every guest will have long term impact on bringing guests back. With compelling value platform, growing takeout business and continued operational momentum, in addition to a marketing strategy that has never been as effective and efficient as it is today, we feel confident we have the strong foundation to sustain our improved performance and continue to take share. I'm impressed by our marketing team's innovative thinking as evidenced by their ability to drive traffic and sales with much lower weight levels. Additionally, we've grown our loyalty database to over 6,000,000 members, and we know there's significant opportunity to leverage that connection going forward. All these foundational elements have upside we're ready to capitalize on, which makes us comfortable with our line of sight to continue to grow the business and take share. And as we look longer term at the future of our business, we're actively pursuing big ideas to overcome challenges facing our industry and create new ways to grow the business. We're fortunate we can lean into the depth of talent in our own team to lead both near and long term growth strategies. Eli Dodi, a truly talented marketer, has taken the helm of Chili's marketing. Under her leadership, this strong team is positioned to leverage the upside in traditional and digital media I'm excited about what they're bringing to the table. This has freed up the visionary and Steve Provo and his team to go all in on longer term strategy, addressing the big disruptors facing our industry and to pave the way to move into an uncertain future with confidence. As our strategy continues to gain traction, we're growing the business and outperforming the industry in sales and traffic. And I'd really like to thank Chili's and Maggiano's operations teams who have worked hard to demonstrate that every guest counts and our restaurant support team for delivering best in class systems that help our operators run great shifts. This team is focused on getting better every day and living our passion of making people feel special. And those are just not words to us. It's our commitment to each other and to our guests. We see abundant opportunity as we look forward to continue to take share and grow the business, and we're excited about what the future holds for this great business. So now I'll turn the call over to Joe to walk you through some numbers. Joe? Hey, thanks, Wyman, and good morning, everyone. Before moving the call to your questions, let me highlight some particular aspects of our quarterly operating performance and updates to some of our previously provided annual guidance. The Q2 marked the 1 year anniversary of the launch of our traffic focused strategy, and the results reported this morning represent further progress in its execution by increasing our total revenues to $791,000,000 for the quarter. Central to this improvement is the continued growth in Chili's top line with positive comp sales for the quarter of 2.9%, driven by market share gaining traffic of also 2.9%. These results represent a positive gap to the casual dining industry of over 1% for comp sales and close to 4% for traffic. During the quarter, Chili's maintained a positive gap to its peer group in comp sales and traffic in all regions of the country with particular strength in our important markets in the Southwest, New England and California. Comp sales were positive for both lunch and dinner as well as for both weekday and weekend occasions. We continue to grow both dine in and off premise sales with an acceleration in Chili's year over year to go growth to just over 20%. The quarterly Chili's comp sales results also reflect our efforts to better balance the underlying impact of check-in traffic, with positive net price of 90 basis points, offsetting a similar amount of negative mix. Remembering net price is impacted by year over year change in comp expense, our target menu price remains close to 1.5%. As we mentioned on the last quarterly call, the Chili's menu introduced in early October reconstituted our on menu value offerings built around the 3 for-ten meal, our lunch combos and the new $25 3 course meal for 2. Following this menu introduction, Chili's experienced sequential improvement and positive comp sales in each month of the quarter. Maggiano's played a strong supporting role to the overall Brinker results, once again delivering a quality holiday performance. Quarterly comp sales of positive 1.8 percent effectively lapped a similar quarterly performance the prior year. Like Chili's, the brand also delivered positive sales throughout the quarter. Zwiman mentioned, the 2nd quarter was the 5th consecutive quarter of sequential improvement in comp sales for Brinker. We believe the traction we are gaining in the fundamentals of our business, coupled with the incremental effectiveness of our marketing and value oriented offerings, provide us the capacity to further grow the top line as we move through the remainder of this fiscal year. Our restaurant operating margin for the quarter was 12.4%, a 2 50 basis point reduction when compared to Q2 of last fiscal year. Let me unpack that change as it is a combination of factors, most of which are contemplated in our operating and financial strategies. We have previously discussed the margin impact from our sale leaseback transactions and the change in revenue recognition related to franchise advertising contributions now recognized outside of restaurant operating margin in franchise and other revenues. Those two factors represent approximately 180 of the 250 basis point change. Favorable guest response to our value offerings did impact cost of sales margin, resulting in a 40 basis point increase in that component of Prop. Restaurant labor costs increased through the quarter as incremental hours moved back into the business and hourly wage rates increased by just under 3%. Improved restaurant level performance also translated into higher manager bonuses that impacted margin by 30 basis points, a cost we are happy to pay. In addition, employee health insurance claims, which can fluctuate quarter to quarter, experienced a year over increase of $2,000,000 in the 2nd quarter and reduced margins by 20 basis points. We do see opportunities to improve our top line flow through with significant operational focus on better managing restaurant level expenses as we adjust to increasing guest levels. As we move into our higher volume 3rd and 4th quarters, several upward revisions to our annual guidance momentarily, we are not changing our guidance on restaurant operating margin. That being said, we do expect the decrease in our full year restaurant operating margin to be close to the upper end of the guidance range we provided on the August call, a decrease of 160 to 180 basis points in the annual restaurant operating margin percentage. Driven by the stronger top line performance of our brands, we've made the following revisions to our annual guidance. The comp sales growth guidance for Brinker has increased to positive 1.75 percent to 2.5 percent for the fiscal year. Revenues are now estimated to be up 2.0 percent to 2.75 percent. Our annual effective tax rate is estimated to be between 10% 12%, and we are increasing our fiscal year adjusted earnings per share guidance range upward by $0.05 to a range of $3.75 to $3.95 During our Q2 call last year, we commented that quarter was notable for the beginning of the implementation of our current traffic centric strategy and that we believe positive comp sales and sequential growth were attainable. 1 year later, we've experienced exactly that combination. We continue to believe this strategy has the ability to deliver positive results for the foreseeable future. Let me also echo Wyman's thanks to our team members working every day in our restaurants and here in Dallas to deliver these positive results for our business. With that said, I'll turn the call over to Kate to moderate our Q and A period. Thanks, Kate. Thank you. Ladies and gentlemen, the floor is now open for questions. Our first question today is coming from Chris O'Cull. Please announce your affiliation then pose your question. Good morning. It's Chris O'Cull with Stifel. Joe, I apologize if I missed this, but why does the company expect the year over year decline in restaurant margin to be at the higher end of the range given the comp trends have been a little better than expected? Again, as we've again, we're talking about restaurant operating margins. So some of the investments we're making back into our business have had the impact in that area. We do make up for some of that investment when you look at further down the P and L and all the way through the tax rate. So improvements you're seeing in leverage in the P and L and improvements you see in tax rate are directly reflective of that top line growth strategy, some of the credits that come on the tax side from that strategy and the opportunity to leverage some of the other fixed costs. So sales leverage will move back into the business as we move through the second half of the higher volume and as we continue to make operational improvements on the margin. So again, as we look at the business today and our beliefs around where it's heading, we still see that guidance range to be operative. And you mentioned that you expect to have tighter cost controls or programs you're looking at to address some of the industry challenges, which I assume means the wage pressure and the labor cost inflation. Can you describe some of these programs that you think will have the most impact in the back half of the year? Chris, Wyman. I think the biggest thing we're seeing and it's we're already seeing it through the Q2 is just the impact that simplification and focus has allowed our operators to deliver a stronger P and L. With the stability that we now have kind of engaging in this strategy now for several quarters, it allows operators to get their cadence right, to get their systems down even better. And we're starting to see much more consistent delivery of P and Ls throughout the quarter. So that's probably the biggest thing. I mean, we've got a lot of other programs that we're working on that, frankly, we like to keep a little bit more confidential to ourselves and that we think will help mitigate. But those are the biggest thing we can do is just give our operators the clear line of sight on what's coming so that they can operate and hold the business model intact without a lot of changes. Yes. I think specific to labor Okay. Go ahead, Joe. Sorry. Chris, I'll just add specific to labor. Again, we're seeing wage rates perform right in line with our expectations for the year. We're working all other areas of the labor line. Clearly, in Q2, sometimes in Q2, you saw this with impact of employee health insurance claims. I mean that's a fluctuating cost that is based strictly on experience and that was based mainly on experience. And when you see a $2,000,000 quarter over quarter delta like we did, that can have an impact on the margins, but it's not something that is necessarily systemic to every quarter going forward. Thank you. Our next question today is coming from Gregory Francfort. Please announce your affiliation and then pose your question. Hey, it's Greg from Bank of America. I just had two questions on the 3 for 10 and the moves you've made on the menu. One, can you maybe quantify how much margin pressure that was during the quarter? And then I think you talked about that preference being at the right rate where you want it longer term. Have you seen that stabilizing within the quarter? Or maybe what's been the trend as you've kind of moved that onto the menu? Greg, Wyman. Yes. So again, what we talk about with 3 for 10 is this our desire really for quite a while now is to make sure that there's value embedded in the base menu. And we've had these value platforms that we have written for quite a while, for years, the 2 for 20 was a value platform we rode for many, many years and then our lunch combo platform. And we just need to refresh. And so what we did with 3 for 10, we bring it in as a new platform and that has proven to be a very compelling offer for us. The thing the beauty of it is it works across all of our dayparts. So there's not a need from a marketing perspective to be out there with multiple messages. And then we were able to offset the impact of that with some changes now to those other platforms. So 2 for 20 dollars a couple of years ago is now 2 for $25 Lunch combos that used to start at $6 are now at $8 So we've been able to mitigate much of the pressure to the cost of sales through those kind of changes in the other bio platforms. And obviously, you can see through our results, it hasn't those changes net net have still provided a much more compelling traffic driving alternative for our guests. I think Micah mentioned that the higher cost of sales number was or Joe mentioned that it was in that 30% 30 basis points, 40 basis points. Given our significant increase in traffic, it's a much that's a very manageable cost of sales impact. The preference is in the lowtomidteens, which again for us, you're going to need something that has breadth and that's great. And the fact that it's working again against a lunch check average, that's a $10 price point is pretty good. Against dinners, there may be some trade. Against takeout, the beverage component of that doesn't have as much trading implications because beverage incidents on takeout is pretty low anyway. So it's a great value proposition for our guests that doesn't really have as much trade implications. So we have a pretty good understanding obviously of all the margin giveback. But when you just look at our cost of sales as a component, you'll see we lead the industry in cost of sales. It's very favorable. And so that's not that's an area we have we had some room to give a little bit back, and we're doing that, but it's much it's very manageable. It's a really helpful perspective. Thank you. All right, Craig. Thank you. Our next question today is coming from Sara Senatore. Please announce your affiliation and then pose your question. Thank you. Bernstein, and I have a question and a follow-up, if I may. The question on the margins, to your point, you do have very attractive food margins versus the industry. I guess at the risk of sort of being glass half empty, I guess what does that say about the value proposition to the customer just in so far sometimes high food margins can be a reflection of perhaps less value proposition. And so would we expect to see sort of structurally just more pressure going forward on the COGS line? And then a follow-up please. Hey, Sarah. I think obviously the COGS is an important aspect of the value proposition, what you're putting on there, but it's also balanced with what you're charging. And obviously, when you're putting a price point out there like we're putting out there, for example, with 3 for 10, and again, it's not the bulk of our guests that are eating that offer, but if you're a value oriented guest, that's a compelling offer, unmatched, I think, in the industry, and I don't know if many can match it. I think the thing that's probably surprising to many is that we can do this and be really strong across the P and L and continue to maintain good margins, especially within cost of sales. So what we do know about our value ratings and our value positioning as a brand at Chili's is that it's we're one of the strongest in the industry. And that's a combination of what you pay for what you get, and we're committed to actually improving that. Part of the value proposition with 3 for 10 that is just being discovered by a lot of consumers is the quality of the food that's being offered. So again, when we first started that message, there were a lot of consumers that assumed that to put an offer out there like that was going to require us to either reduce portions or reduce quality of the product, and the exact opposite is actually true. We've invested in the quality of the product. We've invested in the portion on some of those items. And so what we're seeing now is the intent to return from those guests that are experiencing it. And it always starts with your heavier users, but now as lighter users come into the mix and we change their initial perception of that offer that we're seeing, obviously, the sustainability to drive traffic. And we think that will continue to grow. So that's kind of how we look at the whole value platform and the positioning within the brand. Great. Thank you. And that's actually a good segue to my follow-up question, which is just to the extent that you have customers coming in and using this menu, do you have any indication about your ability to either trade them up at some point or to increase frequency, but in a way that they aren't exclusively using that menu? Just trying to understand the extent to which you're using value to drive traffic can be a stepping stone to call it more profitable traffic versus just sort of retaining them at this from a value perspective? Sure, sure. Well, again, the big thing is just looking at absolute preference and mix, right? So when you're looking at an offering that's in the low teens, it's not like we're trading the bulk of our guests into this offer. So that's the first thing. So that's not the risk there isn't as great. So and then obviously, we are at every opportunity looking for people to add on, whether it's through additional, appetizers. Obviously, we are very excited about our Margarita selections and the value propositions we have there as well as just the selection. So yes, our operators do a great job of continuing to move people and our marketers with regard to merchandising to move people and to market maybe some higher margin items and some higher price items, but also making sure that, that value component is there for those consumers that are really looking for maybe even that lower priced alternative. And that's the beauty of the Chili's menu. It gives you the selection gives you value in multiple different ways. Thank you. Thank you. Our next question today is coming from Andrew Strelzik. Please announce your affiliation and then pose your question. Hi, good morning, BMO. I guess I have 2 questions. My first one, we've heard from some of your peers that have historically pursued a value centric strategy that they're either going to be shifting away from discounting or taking more price, those types of things to protect the margins. And I'm assuming from a top line perspective that could be a benefit to Chili's and certainly you didn't wouldn't want to derail some of the top line momentum that you've seen so far. But I'm wondering have you thought about taking a little extra price? Or I guess, how do you reflect on those opportunities for Chili's to maybe protect the margins in the near term at all? Well, again, I think, Andrew, you want to look at our margins overall. So our margin structure overall is fairly strong, especially when you look at cost of sales. I will say that some of the commentary around the promotional strategies and what's going on in the industry is a little bit you got to put everything in context, right? So if there's a concept out there that has an unlimited offering, a lunch value proposition every day on their menu at a very compelling price, an early dinner strategy with a very compelling low price and a dinner strategy on their menu at a very compelling price, well then the need for LTO is probably not it shouldn't be very high because their overall value is baked in, which is not a bad strategy. That's kind of what we're talking about. So there's more similarities than differences. It's just how people talk about where their value platform lays. But at the end of the day, I'd look at cost of sales as kind of a barometer for, hey, what are they giving for, what are they getting, and then I'll get absolute price points to determine the compelling nature of in terms of breadth of the target. And that's what we're doing. And we will continue to look at pricing in a way that continues to keep our margin structure intact, but also we're focused on driving traffic. We think that for too long this industry and you're starting to see it now. You're hearing people talk about comp sales growth with negative traffic growth that they haven't talked about in a while, and I think they're rationalizing that. But I think that's a slippery slope that when people are and we've been down that slope. So this isn't one that we don't talk about without some experience. How long can you continue to drive sales growth with traffic declines? That's a very interesting question and one we're not ready to kind of deal with right now. We want to continue to move traffic forward. That makes sense. It is very helpful color. And my second question is just on the to go impact, when you turned on the marketing, I believe it was in November, did you see a notable change in the trajectory or I guess an acceleration in the growth rate, which obviously has been very strong and you said accelerated. And the plan around marketing that going forward, is that going to be pulsed in and out? Or is that going to be more consistent? Any color around that would be helpful. Well, the answer to your first question is yes. The answer to your second question is we probably don't want to share that. So but obviously, if it was successful and again, the beauty of a strategy that works off a base menu platform is and that the offer like 3 for 10 allowed us to talk about the compelling offer in a to go environment without adding additional media weight. And in reality, we cut weight fairly significantly in the Q2 and drove these results, tells you that there is again other margin opportunities for us on the P and L outside of cost of sales that we are going to continue to look at. So the beauty of a compelling message that works across lunch, dinner and to go is that we can now add those other specifics to the message, if you will, without having to create a new campaign, without having to buy a separate media strategy for it. And that's something we're excited about and that the marketing team is already leaning heavily into. Great. Thank you very much. Thanks, Andrew. Thank you. Our next question today is coming from Nicole Miller. Please announce your affiliation then pose your question. Hi. A couple of quick questions. In terms of the regional performance, when you talk about the Southwest, is there anything you would say specific to Texas being just curious about Texas specifically within the regional performance of being a little bit better or the same? And what was the gap to NAP for the Chile same store sales, please? In reverse order, the gap to NAP was in that 1% range as it was for the some of the other indexes and traffic. Again, you're at that 4% range, again, accelerating gap there. Texas, yes, was a great market for us. Obviously, we look across the Southwest, legacy market, strong market and the performance there was notable differences in both comp and traffic. But I will add to Paul, we've seen breadth. The strength of the performance isn't just driven by Texas. Really breadth of our performance and our gaps to the competitors, as Joe mentioned in his comments, is consistent across the country really, and we've seen solid growth and pickup. If you look at our franchisees numbers as an example, so really strong quarter for our franchisees who are again aligned and excited about this strategy. It's an interesting comment with a lot of the pressure you're seeing in franchise organizations around margins. We have none of that happening within our organization. Our franchisees are very happy. And again, I think just an indicator of how the strategy is playing out through their P and Ls. Excellent. That's very helpful. And then just thinking about, you talked a lot about the employees that you do have across the country. How do you align the store level incentives? There's a lot going out the door off premise, and then there's still the in store sales and a lot of the things you want to do in terms of simplification and focus. So I'm just curious if you've changed how you've aligned incentives or where your focus is in that regard? Thank you. The biggest change we've made to kind of operational level KPIs, if you will, or targets has been around traffic. And again, we want the whole organization aligned around this strategy about driving traffic at Chili's, and so we've put a little bit more emphasis there. But our operation targets are balanced around sales, around profitability at the restaurant level and around guest experience. And those metrics are tracked daily basically. And our operators have really clear and clean visibility into how they're performing. And again, this quarter, one of the challenges we faced on our labor line was that we paid much higher bonuses this year than last year, and that's a good thing. And that was and that's something that we now fill that bucket up of a manager bonus back to target, and that's something that we won't have to deal with this much going forward. Thank you. Yes. Thanks, Nicole. Thank you. Our next question today is coming from Brian Vaccaro. Please announce your affiliation and then pose your question. Raymond James, just had a few questions on your raised comp guidance and then a follow-up on margins, if I could. And really on the average check expectations in the second half, Joe, could you help us with how we should think about the drag of comp loyalty expense on net versus gross pricing? And then also do you expect mix continue to be a negative until you lap the intro of 3 for 10% or perhaps there's another dynamic worth highlighting? Yes. Brian, I think a good question on that because again it is a net price. The year over year change in our comp expense is a reduction or an increase to menu price. Menu price, again, as I mentioned, we are targeting that 1.5% range. We think that is a very sustainable and appropriate level of pricing a menu standpoint, if you think about it on an annual basis. As we move through the rest of the fiscal year, and I'm not going to take it past that level, you'll see less of a comp impact to the pricing dynamic as we kind of move through the Q3. And then we start to lap the year over year increase in comp expense. So you will actually see a little more net price work its way back in to the system based on that year over year lap and anticipated differential in comp expense. That's how we currently see the comp program. Now again, we can we'll manage the business appropriately and we think we have some decent level of firepower if we choose to use it, to drive the businesses, again focusing on that traffic driving dynamic of the strategy. Again, I think we've been fairly consistent in the discussion around the impact of our value offerings where they do tend to play out within restaurant operating margin is on that cost of sales and the mix dynamic of that cost of sales. So to the extent there is impact, that's where it would be. Again, they're very effective traffic drivers. And again, thinking through the rest of the P and L and the sales leverage that goes with that all the way down through the tax rate. Because one of the things I would point out on the tax rate that, that differential that we're now guiding to is a direct correlation to the top line growth. It's driven by tax credits that, come primarily from the FICA tip tax credit that is important to this industry along with team member meals, deductibility of those. And as both of those have increased on the cost side of the equating either traffic from a tip standpoint or shift meals from a cost standpoint, we benefit on the tax line from those change. So it's you can't divorce the change in tax from the change in the top line. Yes, that's a helpful highlight. Thanks for that, Joe. And on the margin front, just two quick ones. First, the second quarter, the health insurance, was that because you were lapping unusually low insurance in fiscal Q2 of last year or was it up above normal in the current quarter? Great question, Brian. And it was lower last year. So we had a benefit from a year over year change in health claims experience last year, which exacerbated the difference this year. So again, the actual claims experience and particularly if you get high dollar claims experience can have an impact on quarterly numbers, but it's not a shouldn't be viewed as a run rate situation. Right. And the comparison on that, if you wanted to call it that, as we think about the second half of the year, are we did we have a normal level of claims activity in insurance in the second half of last year? Last year was relatively normal. Yes, we didn't see any meaningful good guys as it relates to our experience. Okay, great. And then just last one, I wanted to ask about the guidance and incentive comp specifically. And I think back in the day when you originally set the guidance, Joe, you had said you've got about $18,000,000 across the P and L for normalized bonuses. The question is, has that figure changed in your updated guidance? And also could you comment how much is incentive comp up year on year in the first half of the year? Thank you. We're not unpacking the specific dollar amount. I will say we paid one of the higher level of manager bonuses in the Q2 than we paid in several years. So we are seeing a nice movement on manager bonus. We anticipate continuing to see that level. Things are relatively consistent with a slight maybe bias to the high side in the back half of the year to the number that we talked about at the earlier part of the year. But we'll see how that plays out. Again, there are several different components. But I think the impact, Brian, to this year versus last year and that $18,000,000 kind of investment was greater in the second quarter than it will be moving forward. So we paid a bigger chunk of that in the second quarter. Yes. As you if last year, the low the biggest decreases we saw in manager bonus were in the second, third quarters and not much in the 4th quarter. So when you again, when you think about the same dynamic that you talked about on employee health, the as we move to the Q4, when we started to reaccrue manager bonus in the Q4 of last year, your year over year lap isn't quite as big. All right. Very helpful. Thank you. Thank you. Our next question today is coming from Robert Derrington. Please announce your affiliation and then pose your question. Yes. Hi, Telsey Advisory. Wyman, by my calculation, it looks like these past two quarters have been the best traffic trends you guys have had since, I think, fiscal 2006. Now that said, it's been against relatively easy traffic comps for Chili's. And as we go forward, those traffic comps get materially tougher, especially as you begin climbing over the 3 for 10. Is there sufficient firepower within the 3 for 10 as you roll over it that gives you confidence that you can continue to grow traffic at the rate that you have? Or should we be anticipating a modest slowdown from what the trends have been? Hi, Bob. You're right. This has been the best traffic growth that we've seen in the brand in quite some time. The potential for us to continue it, we're optimistic about for reasons that I stated before. One is when you get a value platform that's working well for you, this isn't like an LTO or a promotional message. They actually build over time as people become more familiar with them and they kind of see themselves out there in the environment. So we're optimistic about that. We also know is additional firepower within the marketing organization, especially around things like loyalty to go, how we come to the market. So yes, we're confident that we can continue to drive traffic going forward. And Bob, one thing to remind about as it relates to that, we start a lap into the utilization of 3 for 10 as we move into the Q4, but it was not an on the menu utilization of 3 for 10. So I think the structural change we made in the menu and the value platform starting in October, If I If I may, a real quick follow-up. Wyman, you've spoken about the opportunity within off premise and it's certainly shown some terrific growth as it relates to To Go. Any kind of color perspective on an update as it relates to 3rd party delivery? Well, Bob, I mean, I think we, like many in the industry, have been engaged in delivery. We're cautious with it on two fronts. One is just the business model implications are significant with the fees that the 3rd party partners are charging. But almost more importantly, the impact it has on your operations given that their integration into our systems isn't great and that from a technology standpoint, given that so many of these third parties are really priding themselves on being technology kind of experts, we're challenging them to integrate better so that the impact it has to the operation side of the business is minimized. And then the and then obviously, we're really watching closely the quality of the experience at the guest end of it. So we're engaged. We're engaged with all the big partners. We continue to look at it. We know that the convenience is not something that's going to go away. It's a consumer need that's obviously very high on the list right now, but we also are very cautious about making sure that how delivery works within the Chili's organization is handled in the appropriate way from all aspects of the business. Again, I'd like to remind people, we've been doing delivery at Maggiano's for 10 years. So we have our own delivery system. We understand the implications of delivery and both the positive and the negative. And so we just are looking to make sure that we're confident before we get too far out over our skis, if you will, on these partners. Terrific. Thank you. Very well. Thank you. Our next question today is coming from Peter Saleh. Please note your affiliation and then pose your question. Great. Thanks. From BTIG. So a couple of questions. I think this was kind of asked a little bit earlier. I just want to come back to it. Can you just talk about the marketing message maybe going forward? Are you guys going to stick with the value message? Or will you try to shift maybe to higher price points as we go forward or some more full price items in the marketing and advertising message? Peter, we probably don't want to give you too much specificity on kind of the marketing strategy around how the messaging is going to go. I think we know we have a compelling value platform. We know that it also allows us to kind of create new news within that platform. We know it works across different day parts and functionalities, so we can position it like we did over the holidays kind of around a to go platform, fairly easily. And then we also have alternatives to your point to talk about other aspects of the business, whether they're different food items or other aspects of the service or atmosphere. So those are all open to us, and we just kind of continue to evaluate. And also, they're channel specific. More and more now, we're really leaning into alternative channels. And as the traditional media becomes less and less affordable and effective, we really are evaluating how the alternative media and communication vehicles work well for us. Great. And then on the delivery side, have you considered while we appreciate the margin pressure from, I guess, the fees that the 3rd party operators charge, have you considered maybe a strategy where you shift that cost to the consumer? Is that something you guys have tried? Does that work? Is that something you will look at going forward? Yes. I mean, I think, Peter, those things are looked at and evaluated. I mean, obviously, understanding the price elasticity of our guests is important. And I think that's what we as well as these 3rd party partners need to kind of become better educated on. I don't think casual dining has the same dynamics as others in the delivery world, and they just we all need to kind of educate ourselves on how do we cover these costs, incremental costs in a way that keeps consumers engaged. Great. Thank you very much. All right. Thank you. Our next question today is coming from John Ivankoe. Please announce your affiliation and then pose your question. Hi, thank you. It's JPMorgan. In your prepared remarks, you talked about potential big ideas to overcome challenges. And I think that was in the context of labor, correct me if I'm wrong about that. But could you give us an update about a couple of the things that you have talked about, certified shift leader, for example, if that's something that we're going forward with? If you do feel like you've fully optimized handhelds at this point and if there's other technology that you could look at with Chili's or maybe things that you're seeing for others that could work for both of your brands that could make a difference in the relatively near term. And I would like to put that in the context of CapEx. I mean, I don't think we've talked about remodels on this call. If we could get an update in terms of what's going on with that program? Okay. So let me hit some of the disruptors we talked about, John. You're right, labor is a big one. Convenience on the call before was another it's another area of disruption, right, in terms of the category and the space, in terms of what we're looking at and trying to make sure that we bring our resources and some of our best thinking to it. That's why we've made some structural changes on our team, as I mentioned. So we're at specifically on things like certified shift leaders and changing the management structure. We're well into the process of rethinking how we staff management and bringing in a lot more of our hourly team members into the management position has had a real positive impact on mitigating some of our labor costs. They come in at a lower rate. But more importantly, they come in with this experience that we have had with them over years of being in our restaurant as either servers or back of the house team members. And so we have a much better comfort level and they have a much better comfort level with the operations and then their leadership tends to be accelerated up the curve, if you will. And we think that the long term impact isn't just on, hey, we get a lower cost of entry, if you will, but we also get a stronger leader that stays longer. So turnover becomes even lower and our turnover has traditionally led the industry at management and we have some more consistency within the model. So there's a lot of benefits that come through that program, but not the least of which is lowering some of the costs on labor line. With regard to handhelds, we haven't moved forward out of where we're at today with that technology. We still believe in it. Frankly, we're just getting the technology right. And our commitment to our operators is that we won't move forward with new technology until we really have it buttoned down. And that's been something that we haven't been as good at as we need to be. We've rushed some technology ideas out into the field, a little prematurely and that's why I talk about delivery and integration of that technology being critical because as we start to focus on flow through and managers delivering on a P and L while delivering a great guest experience, the systems have to work. And right now, the technology on the handhelds just isn't consistent enough to where we'd roll it. We think we're working with our partners to get it there, and we're have sense of urgency to do that. We think there is an upside to that. Well, we know there is, but it has to be dependable, and that's our focus right now. And if I could follow-up. So are we then fully rolled out uncertified Shift Leader? I mean, are we currently seeing that P and L impact? Or is that going to be more of a multiyear transition as you kind of work that new culture into the system? Yes. No, it's that's a kind of replaced strategy, right? So as we're replacing, we're moving it through. And it's moving through rapidly, but we're not at 100% for sure. And we're but we were committed to the program and we're seeing great results, both again, to mitigate some of the cost side of the business, but also on how those new managers perform relative to managers we source maybe from outside the organization before. So that's those things are kind of in process. I'd say we're more than halfway there, but not we're not 100%. Okay, helpful. And then just something quickly on remodels and maybe if there's kind of an initial look on fiscal 2020 CapEx as we build our out years? Well, the remodel program is continuing pretty much at the pace we anticipated, moving through the progression towards that approximately $240,000,000 $250,000,000 for this fiscal year. The response we're getting from team members, from guests is very encouraging. The relevancy and the look and feel that they like about the restaurants is solid. I think you'll, as we had indicated before, the impact as it relates to our thinking around top line growth starts to really work its way into the system as from this point going forward as you get more of a base into that remodel. So we would expect them to increasingly favorably impact our comp sales growth as we move forward from this point. But and then obviously, the bigger impacts coming in the next 2 years as you get the remaining sector of that fleet done. So CapEx is right on target for where we expected it to be. Probably a little biased towards the upper end of that $140,000,000 to $150,000,000 range, but no big delta changes I'd talk about this time, John. And that would presumably mean 2020 versus 2019, I mean there's nothing really special that you would call out at this point as we think about 2020? No. I think when we talked about the reimage program before we defined it as a kind of a 3 year program that would have a similar impact on year over year CapEx. So we're comfortable right where that is right now. Thanks so much. John, thanks. Thank you. Our next question today is coming from Jeffrey Bernstein. Please announce your affiliation and then pose your question. Great. Thank you. From Barclays. Two questions. 1, Wyman, you mentioned earlier in a response to a question about the slippery slope in terms of some players are getting comp growth, but with traffic declines and how that's presumably concerning and we would agree. Just wondering how you think about the I guess it's a trade off because there's also a slippery slope. It seems like you guys are getting the comp and the traffic growth, but then you perhaps faced more of the margin pressure. So I was wondering how you decide which is more attractive or perhaps less painful because it would seem like on both fronts you wouldn't be happy, you'd want kind of the grist always greener type idea? And then I had a follow-up. Yes, Jeff. Obviously, we want both, right? You want to get sales growth through traffic that translates to earnings growth, and we think that the path we're on does that. It, again, quarter to quarter and some changes in the structure. But when we look at the overall dynamics of the business, we think that's doable with kind of the approach we're taking. So I think in today's environment, if this is a good economic environment with unemployment and income growth the way it's kind of laid itself out, If you're not getting traffic growth in today's environment, I'd be concerned because as pressure mounts on the category and you don't have that established value proposition, that loyalty with your frequent guests and traffic driving strategies, what's going to happen if things start to turn? So that's the other way we kind of look at it is now is the time to be really building your pace and getting that loyal consumer into the house so that if it starts to become a little bit tougher out there, you've got that loyalty and you've built those that customer into your portfolio. I guess at this point, it's okay to do it at the expense of margin just because, right, you want to be driving the traffic first and foremost? Yes. I mean, the margin give up relative to the traffic growth is not that significant. Again, the margin pressure we're experiencing isn't driven primarily by the value propositions. It's really a structure a lot of the margin challenges we're saying really had a lot to do with the financing and then some more one time kind of ideas that are out there. So we're more than comfortable that the margin give up that we're investing in, if you will, with this value proposition is manageable to do both. Understood. And then Joe, could you just clarify what you mentioned earlier? I mean, I was thinking of asking about it just seemed like the fiscal 2019 guidance, you raised the comp and the revenue, raised the earnings by a nickel, but the lower tax rate seemingly benefited fiscal 2019, but what seems to be close to $0.15 which would imply kind of a $0.10 reduction in the underlying business, which presumably would be concerning with these comps. But your message earlier, if you could just clarify, I guess, you believe that the lower tax rate is truly favorably attributed to the sales growth and therefore you don't view it as you struggle to look at those independently. I'm just wondering how much of the tax rate reduction would you attribute to good things in terms of favorable sales versus just a lower tax rate, which is obviously lesser quality? Well, again, I think the lower statutory tax rates were already worked into our numbers that you got at the beginning of the year. So the delta changes are almost are primarily driven by the operating business. And the biggest one we have is the FICA TAC TIPS credit that being a tax credit has a meaningful impact on the ETR as you grow again, as you grow top line, volumes increase, obviously, what you would typically see where TIPS increasing as part of that dynamic, that credit has a relatively powerful impact on the ETR as we kind of go forward. And you're starting to see that play out in the business and that is really what is driving the re guide that we gave you on the tax line. So they're directly linked. When I think about annual guidance from an EPS standpoint, again, I'm looking holistically at the business. We think that guidance is very appropriate increase. I think the best takeaway from that is indicative of the directional improvement we're seeing in the business. And as again, we're committed to do is we want to continue to drive those improvements, improve our margins, get the sale leverage, and then the rest will speak for itself as it works its way through the bottom line and how those numbers actually come to fruition as we move throughout the year. Thank you very much. Thank you. Our next question today is coming from David Palmer. Please announce your affiliation then pose your question. Thanks RBC. I think the market is concerned that Chile same store sales trends will slow at least a little bit as it lapsed the initial launch of 3 for 10. And I think this is true particularly as industry comparisons also get tougher through the year. There's precedent for value messages like Olive Garden's starting at 99, 999 pastas and even Chili's old 2 for 20. Those contributed to sales over multiple years, but there's plenty of others that have failed to contribute in year 2. So just what gives you confidence you can make this something that can sustain momentum after the spring? And I'll have a follow-up. Thanks. Yes, David, I think it's just that. It's being positioned as a value platform. It's gaining momentum in terms of awareness levels, very and trial, light user trial on that offer is very low. We know once people try it, the acceptance is extremely high and the intent to return is great. So we continue to also have additional I mean it's not like that's the only thing we've got in our pocket, if you will, to continue the momentum. The most important thing though is just operational consistency and the improvements that are being made in the restaurant day in and day out to drive operational consistency are meaningful and being recognized by the guests. And so when we think about what are the drivers to future growth, it's not just the viability of value platform, it's that coupled with, okay, where does your takeout strategy go from here? How does your operational momentum build to the future with regard to consistency and winning guests back from that perspective? We're counting on and we're confident in that it that we're counting on and we're confident in that it will allow us to continue to grow the business. And just a small follow-up on pricing. I think you did a little less than 1% in the quarter and you said your targeted amount is 1.5%. Does that mean that you're going to oscillate to either side of that 1.5% that you might have more pricing going forward? Thanks. Yes. And again, that 90 basis points is net pricing. So there is a year over year comp expense aspect to that, that menu pricing was closer to that target, 1.5. We should be consistently in that range. At any given point of time, depending on timing of when you wrap pricing, you might get some fluctuations, but it's going to be in a pretty tight delta to that. And then the net price we talk about will give you some line of sight to either the reduction or addition from the year over year comp change. Thanks. Hey, Dave. Thank you. Our next question today is coming from Karen Holthouse. Please note your affiliation. That pose your question. Hi, Goldman Sachs. Most of my questions have been asked and answered. So just one quick housekeeping one. On the franchise and other line item in the model, what was the breakdown between royalties and other revenue? We typically don't provide all of the breakdown. I think the bigger delta you saw in that, Karen, again, was the move of the franchisee advertising contributions, which is roughly in the $5,000,000 range moved into that category. So that was the bigger driver. There weren't too many other major deltas one way the other as you look throughout the different components of that number. Okay. Thank you. Thank you. Our next question today is coming from John Glass. Please announce your affiliation then pose your question. Thanks. It's Morgan Stanley. Two questions. First is, how does the growth in the to go business feed into the margin profile of the business? How do you look at the margin profile of to go versus the dine in business, particularly given beverage attachment rates? And does it 3 for 10 over index in the to go business? Or is it typically is it at the rate that you would experience in the dine in business? Hey, John. It's comparable in terms of its mix. So again, very comparable across Dayparts and TO GO. With regard to to go and its impact on overall margins, packaging is obviously your biggest pressure. And we've made some investments in packaging this year to make sure that the quality given the increased sales volumes with to go. We've gotten what we think is better packaging and invested a little bit in that aspect of the business. But that's really the main difference. Overall, the labor component to it is probably if you could isolate every element, maybe a little less. But overall, it's primarily the packaging that differentiates. And the check averages are solid on a per order basis, right? I mean, it's you don't just have them sitting in your restaurants. You don't exactly how many people are eating the food that you're sending out, but the per order quantities are great. And what we're seeing is the use of the app and online ordering is really a big opportunity for us to be much more efficient as well as deliver a better guest experience. And then just quickly on the bar business, you emphasized that in the last couple of years, enhancing the bars, enhancing the offerings in the bars. Has that growth in the bar business kept pace, exceeded or lagged the overall comp? And as you think about value customer or somebody who's coming in for a 3 for 10, does that help the bar business or hurt the bar business based on, I guess, their relative sensitivity to price and overall check? I think the bigger impact to the bar business, if you look at just like alcohol mix, is really the shift in lunch and dinner, right? And so as we so as you grow your lunch mix, obviously, there's a lot less alcohol being consumed during the lunch daypart than the dinner daypart. So that probably has been the bigger impact as our 3 for 10 strategy has been a really good lunch strategy as well as dinner strategy, but it really has helped move the lunch business forward. That's probably had the bigger impact on alcoholic beverage percentages. Overall sales, I think, are probably very comparable. And just to be clear, does that mean that Alk Beverage is lower as a percentage of sales a year ago? Or is it still the same? It's a touch lower, but the number of alcoholic beverages being sold is very similar to actually slightly up. And the Margarita of the Month program, again, a great initiative that we can own, that has great brand equity associated with to it is again helping drive occasion, helping drive I think, really loyalty and relevancy to the brand. So, something we'll continue to utilize and lean into. Okay. Thank you. Thanks, Jeff. Thank you. Our next question today is coming from Jeff Farmer. Please announce your affiliation and then pose your question. Great. Thanks. Gordon Haskett, questions on the MyChili's Rewards. Curious what percent of Chili's transactions are executed by loyalty members, if you guys have that number? Hey, Jeff, I'll have to dig that back out for you at this point. So let me follow back up around with that. Sure. We'll do that. Just maybe a little bit different tack on that question. So have you guys disclosed any estimated same store sales contribution from the program? I know it's early days, but anything you guys have shared? No, not really. We haven't impacted in that regard, Jeff. Okay. And then last question, just a follow-up on 3 for 10. I believe you said low teens mix. I'm just curious if that mix had been stable over the last couple of quarters or if it was potentially a high single digit percentage of mix in the Q1 and has consistently grown into the Q2 and might be continuing to grow into the Q3? Pretty stable, Jeff. Okay. Thank you. Thank you. Our next question today is coming from Stephen Anderson. Please connect your affiliation and then pose your question. Yes. From Maxim Group. Wanted to shift gears a little bit and talk about the balance sheet. I didn't notice at the end of quarter, you saw a little bit of a tick up on the long term debt. Certainly, we're still down from where we were at the end of fiscal 2018, but I just want to see if there's been some new borrowing under your credit facility and if you see potential for any additional pay down on your existing debt? There was a if you're looking at, yes, Q1, Q2, there's an uptick, but very much in line and actually a tick below 3.90 to 4x leverage range we provided you as part of the annual overview. I think we came in at 3.89%, so let's just say 3.9%, so right at the lower end of that range. We're very comfortable with that. Again, part of the component is appropriate utilization of leverage. I anticipated staying in that range as we move forward, Steve. All right. Thank you. Thank you. Our next question today is coming from Will Slabaugh. Please note your affiliation and then pose your question. Stephen, thanks guys. I had a follow-up on to go and delivery. It sounds like your to go business continues to accelerate, I think you said 20% versus 17% or so growth last quarter. So with that working, can you talk about how you're choosing to get the word out there and what seems to be most effective? And then second, as a follow-up on delivery, I think last quarter you mentioned something like 50 some odd providers you were using throughout your systems. I'm curious if there's any appetite to narrow that down or potentially partner with another one that may could solve the sort of integration back of house or front of house? I think Will. With regard to how we market to go, again, we're using multiple channels. In the Q2, we actually used some broader based like national television in conjunction with our messaging. So we do that, but obviously, we also use more direct channels and they all seem to have a pretty good impact and effective and have been effective at getting the word out to the quality as we've seen the growth, especially in our online and app usage on to go really continue to be strong. With regard to messaging or the consolidation of delivery partners, we are absolutely working with the big guys. I mean, we have all those little guys out there because in so many markets, the big guys just don't there's not one provider. We will see we anticipate consolidation pretty dramatically in this space over time. And we're working with the known big national guys to try and see if there is a system that does what we've talked about. Integrates well within our system, delivers value to our guests and quality and then is financially viable and makes sense. So yes, we're continuing to work with all the major players in that aspect. Thank you. Okay. Thank you, everyone. With that, I think that's all the questions that we have. And we appreciate everyone joining us today on the call. And we appreciate your participation and look forward to talking to you next time. Goodbye. Thanks, everyone. Thanks. Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines and have a wonderful day. Thank you for your participation.