Earnings Call: Q3 2018

May 1, 2018

Good morning, ladies and gentlemen, and welcome to the Brinker International Q3 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, Paul. Good morning, everyone. This is Micah Ware, Vice President of Finance and Investor Relations, and welcome to the earnings call for Brinker International's Q3 fiscal year 2018. Results for the Q3 were released earlier this morning and are available on our website atbrinker.com. Wyman Roberts, Chief Executive Officer and President and Joe Taylor, Chief Financial Officer joined me here this morning in Dallas. During the comments portion of the call, Wyman and Joe will provide a more detailed overview of the Q3 and will update the progress of our strategic initiatives underway at the company. Of course, 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. Additionally, on the call, we may refer to certain non GAAP financial measures that management eases in its review of the business and believes will provide insight into the company's ongoing operations. With that, now I will turn the call over to Wyman. Thanks, Micah. Good morning, everyone, thanks for joining us to review Q3 results and our plans to build on our momentum in the quarters ahead. Brinker delivered improved performance in the 3rd quarter with comp sales of minus 0.3 percent despite a challenging winter, which had a negative 60 basis point impact. So adjusting for weather, sales would have been positive. We saw sequential growth both quarter to quarter and throughout the quarter and the trajectory of our business continues to hold strong. And though 3rd quarter sales were slightly below Black Box, our traffic results significantly outperformed the category. We understand the importance of reversing traffic trends and our plans are built on strategies designed to first close the gap, which we've done and then move to positive traffic. Q1 was about putting the strategy in place. Q2 was about implementation. In the Q3, we started to see momentum with significant changes in traffic. Now it's about building on our progress by maximizing our ability to connect with our guests and deliver on their needs. I'll touch on our Maggiano's and global business first and then we'll spend the remainder of our time on the Chili's brand. Maggiano's delivered another positive comp sales quarter with sales up 0.5%. When you adjust for the significant weather they had given their heavy presence on the East Coast, it was an impressive quarter, primarily driven by double digit increases in takeout and delivery. And we see even more opportunity to expand our off premise business moving forward, especially since Maggiano's food is so appealing to take out. We're working to add individual delivery to our already strong catering business. We're also enhancing our banquet business and we have new menu innovation around the corner, all to drive relevance and increase traffic. Our global business partners in Latin America and the Pacific had a strong quarter with positive comps, while our Middle East partners are more challenged given the dramatic economic factors impacting that region. The net was combined comps of negative 0.2%. We do continue to enjoy strong demand for the brand globally. Already this year, our partners have opened more than 30 restaurants. And we're pleased to announce our first partner in China, whose territory will cover the Shanghai region. We're in negotiations with additional partners to cover more regions across China. We're excited about what fiscal 2019 will bring as we further expand Chile's footprint in Asia. Here in the U. S, Q3 marked the 2nd quarter into our turnaround strategy and it's clear the investments we've made to increase quality, consistency and value are paying off. We're seeing sales and traffic improvements across both dayparts and we believe this momentum is sustainable because of the foundational work we've done to strengthen Chili's overall value perception. We've improved our menu, our atmosphere and we're providing a faster, more consistent and convenient experience. All of this is having a positive impact on the value perception of Chili's and a strong value perception is critical in this very competitive environment. I mentioned during our last call that we would get more aggressive at lunch. During Q3, we went on air to remind people about our lunch combo offering and we drove several percentage points of improvement in lunch traffic. Then we followed that up with our 3 for $10 promotion, which is driving traffic at lunch and dinner. We also added our $5 Margarita platform with new innovation every month, which is growing alcohol sales and contributing to traffic growth as well. We're seeing increased frequency both among heavy users and light users as they come back more often to see what's new at Chili's. And with online ordering rolled out across our company and franchise restaurants, we have a great opportunity to market our curbside program, one of the easiest takeout experiences industry. Online ordering grew upwards of 30% during the quarter and continues to climb, creating a more efficient model for us, a more compelling and consistent experience for the guests and has increased our overall to go business to more than 11% of total sales. Finally, during the quarter, we exited the Plenty program. We're excited about the opportunity to reignite My Chili's rewards and to lean further into our ability to connect with guests in the digital space. Moving forward, we'll focus on growing our already large customer database by shifting some of our marketing resources from traditional to more digital mediums so we can build relationships with our guests that drive incrementality. And we're making additional investments to further enhance the guest experience and drive top line. First, consumers clearly place a tremendous value on convenience, so we're deporting even more resources to work on Chili's off premise experience. We've assembled a new team focused on improving the infrastructure, operational processes and technology solutions to make it easier for the operator and for the increasing number of guests who want to enjoy hot, fast Chili's food away from the restaurant. Next, we're continuing to invest in food quality and menu innovation, target around what we do best, burgers, ribs, fajitas and margaritas. We have exciting new recipes coming soon designed to increase frequency as well as preserve simplicity in operations so we can maintain our improved speed and consistency. And with winter finally behind us, we'll get back to work investing in our atmosphere. We started up construction on our fleet with a goal of reimaging roughly 2 50 restaurants during fiscal 2019. What I'd like you to take away today is that our core strategy to improve our quality, consistency and value is working well for us across our entire business. We're confident we can sustain this momentum. We're energized by the work the teams are engaged in and we're excited about the continued investments and opportunities ahead. Now I'll turn the call over to Joe to give you more insight into Q3's results. Joe? Thanks, Wyman, and good morning, everyone. Let me continue the overview of our 3rd quarter performance by first providing some brief represented the opportunity to move more aggressively on building momentum for the strategy implemented in the Q2. We saw that come to fruition as the weeks unfolded, as offerings we developed around our core equities drove traffic improvements that reached positive year over year levels as we ended the quarter. Our 3rd quarter revenues of $813,000,000 represents a slight improvement over the Q3 last year with growth in franchise and other revenues more than offsetting the small reduction in comp sales growth. Brinker reported comp sales of minus 0.3 -0.3 percent for the quarter, a meaningful sequential improvement as more aggressive value promotional activity drove comp sales with traffic as opposed to check. For the quarter, price contributed only 1.2% to comp sales, a necessary drop from the 2% plus levels we have been running for the last several quarters. At the brand level, Maggiano's reported positive comp sales for the quarter of 0.5%, while Chile's reported quarterly comp sales of minus 0.4%. While we took another step forward in our trajectory towards positive quarterly comp sales growth, the pace of our improvement will not reach the annual guidance of comp sales growth we provided earlier in the year. We now believe our comp sales performance for fiscal year 2018 will be in the range of -0.5 percent to -1%. For the quarter, we reported restaurant operating margin of 16.1%. The year over year reduction in operating margin of approximately 90 basis points is a result of investments in our successful promotional activity for the quarter as well as increases in labor related expenses. Let me provide a little more detail. Cost of sales for the quarter increased 70 basis points as we invested into the abundance and quality of our burgers, ribs and fajitas and experienced successful traffic driving results from our $3 for $10 promotion that started in early March. Restaurant labor increased 50 basis points as we experienced higher insurance claims during the quarter that added to the ongoing market driven wage rate pressures, which continued in the 3% to 4% range. Restaurant expenses for 3rd quarter were favorable by 30 basis points. The slight increases in property related costs were more than offset by savings in tabletop device and plenty program costs. Planned performance of the above restaurant components of our P and L supported by a reduced effective tax rate resulted in adjusted net income of $49,600,000 our earnings per share of $1.08 a 14.9 percent improvement from prior year. Cash flows from our operations remained in good stead. For the quarter, we generated $97,000,000 of free cash flow after accounting for capital expenditures of $21,000,000 This allowed us to purchase $90,000,000 worth of shares during the quarter as part of our ongoing capital allocation program. As it relates to our existing capital structure, we will refinance the bond issuance that matures in mid May under our revolving credit agreement. Additionally, a lower effective tax rate, improving operations and the resulting benefits to cash flow allow us the opportunity to review various capital transactions, including the sale leaseback of owned restaurant assets. Such capital transactions potentially would allow the use of proceeds to manage overall revolver borrowings to support strategic initiative of the brands or to include in our ongoing capital return to shareholders. In summary, we are pleased with the overall direction of our brands as they are again demonstrating the ability to grow the business in a positive, sustainable manner. With momentum established as we continue into the final quarter of our current year, we believe our strategy of focused operations, improved food and an enhanced guest experience will continue to grow traffic and capture share as we move forward. And with that, Paul, let's open the lines up for questions. Thank you. And the first question is coming from Jeffrey Bernstein. Jeffrey, your line is live. Please announce your affiliation and pose your question. Great. Thank you. Colin from Barclays. Two questions. 1, just Joe, I guess, on the comment you just made about the potential capital transactions that you're reviewing and that you're focusing on the real estate. I'm just wondering if you can give any greater granularity in terms of, guess, you mentioned sale leasebacks, so how many sites we're talking about, the potential proceeds and maybe the offset being the higher rent presumably that you'd be paying. So any color you can give initially in terms of the real estate potential transaction? Jeff, there's not a lot of additional color in that regard since we're potentially looking at transactions and don't have anything specific to report at this time. We'll keep you obviously appraised as we go through the review. What we have said before is we have owned real estate assets of approximately 190 restaurants. Now obviously, if you look at transactions, I would not expect all of those to be included in a transaction if we would do one. So it'd be somewhat lower than that. But we'll keep you updated as the review progresses. Got you. And then just on the comp trends, Wyman, I'm not sure whether you're able to provide some thoughts on the broader industry or whether you want talk specifically to Chili's, but it does seem like both yourselves and the industry has seen an uptick most recently. I'm just wondering if you could talk about what you think are either the drivers for the industry or the specific things that you think Chili's is doing that seemingly has driven the narrowing of the gap versus that industry trend? Thank you. Hey, Jeff. Yes, I think from an industry standpoint, we've seen some strengthening obviously through the quarter. And that was encouraging, especially again given it was a relatively tough winter, especially for the Northeast. It does appear that there is greater strength in some of the bigger concepts, so relative to the averages, and that's encouraging for a brand like Chili's that gets to leverage its scale and its size. And I think we're starting to see some of that play out, and putting more pressure on some of the smaller independents, which again bodes well for big brands that have the scale to get their messaging out there. With regard to Chili's and the trajectory of the sales, we've been very encouraged by after a pretty slow start out of the holidays, the momentum that we've been able to capture, both as we cleared some hurdles, making the menu changes is a process that takes a little bit of time to work through when you delete 40% of your items. And once we got past that, we got past some higher pricing from prior years and then the team really started to get their marketing momentum both with lunch offerings, with their direct programs and then with their promotional strategies, and the directory has been good. As you can see, it's really a traffic based strategy and beat traffic in the Q3 and the momentum is driving a wider gap as we move out. So our focus is getting people into the restaurant and letting them experience the improvements that have been made and we're seeing that across pretty much all the markets. Great. Thank you very much. All right, Joe. Thanks. Thank you. And the next question is coming from Sara Senatore. Sara, are you on the line of line? Please announce your affiliation and pull through question. Hi, Bernstein. Thank you. I just wanted to clarify, I wasn't sure if I caught that, but the full year guidance implies you're running kind of low single digit positive comp this quarter. So that was question 1. And then question 2 was, can you just talk about the value component of this? Because if I look at your food margins, there was more compression than I might have expected, certainly given that you have a point of price on the menu. So, to what extent should we anticipate that this kind of pressure on cost of goods should continue? If I kind of back into it, it looks like a point of price, but you still had kind of net 300 I'm sorry, 3% kind of net inflation. So I'm just trying to understand what the trade off between margin and top line will look like? Thanks. Sarah, this is Joe. To the first part of your question, obviously, we don't do quarterly guidance, but I think the implications are fairly apparent and accurate with what you stated for this current quarter. And then as it relates to the margin question, yes, as we've stated on prior calls, and I think you're starting to see come to fruition, we will invest in the business through margins and cost of sales is one place that you would see that show up. And that's both the abundance booth we've made in improving the quality of the food. And then when you look at promotional activities such as the $3 for $10 that does have implications within that area. So I think the level you have seen will be relatively consistent as we kind of move through the rest of this year. Great. Thank you very much. Thank you. And the next question is coming from David Palmer. David, your line is live. Please announce your affiliation and pose your question. Thanks. RBC, could you first touch on that gap between the company stores and the franchise stores that we saw in comp store sales in the quarter? Do you see that narrowing in the future? And what were the factors that caused that to widen in that last quarter? Hey, David, Wyman. Yes, it was a combination of things, the biggest being just weather. Our franchise partners pretty much sit in the middle of the country and there was quite a bit of weather that moves through the middle and then into the Northeast. And again, relative to where a lot of our company restaurants are, California, Texas, Florida, the weather was significantly more challenging to them. Are also working a little bit they didn't all necessarily run the exact same marketing strategy. So there was a little bit of a difference there, but I think we're closing that gap. We're actually seeing that gap close now as we move through the quarter, and we're confident that we'll be significantly closer as we move throughout the rest of the year. Hey, David. And the one thing I would add just to give you a little color to that too is that the trajectory of their business performance throughout the quarter was very similar to ours too with strengthening and kind of move into positive territory as that quarter wrapped up. Awesome. And with regard to reimaging, that's something you've talked about perhaps getting back to at least a retouch type reimaging. How meaningful could that be? I know we're not getting into fiscal 2019, but any comments about that? And then also on loyalty, you've had some fits and starts with the type of loyalty you've done. How should we view loyalty programs now being a drag or boost or perhaps a net positive versus where you were? Thanks. Thanks, David. I'll take the reimage and then Waima will have some comments on your second question. But we do view it a meaningful opportunity as we start moving into that reimage program. It will be kicking off very shortly with approximately in the mid-200s to 250 is approximately restaurants targeted for reimage in 2019. As we have kind of updated you, we've gone through the testing of that program. We have expectations for a decent mid single digit lift from that kind of program and our expectation is that we would see that kind of performance as we move throughout that program. And we'll keep you updated as it actually kicks into gear and provide you some more insights to 2019 in future quarters. And then, David, with regard to loyalty, so with the plenty program going away, we had that opportunity to assess kind of where do we want to go next. We have the MyChili's Rewards program. And while it was a points based program in the past, we've decided to not get into a points based program. So we're focusing on, 1st, just growing the database. We know that with the technological infrastructure we've built, with the skill of the marketers that we have and the partners that we work with to understand how to interact with our guests digitally, we can create a really good return and drive incrementality off of unique offers that really are compelling to the individual guests. So what we're doing right now is we're really focused on just increasing the already large size of our database. So we're kind of in a recruitment mode and there's a little bit of an investment involved in that. But we are absolutely convinced that the future of marketing is going to be led by digital and we want to be on the forefront of that as well as other technology. And so that's kind of where we're headed and we're excited about it. And I think we're poised to really leverage it in ways that others can't. When I talk about some of the differences we're seeing in the industry between large brands and maybe some of the smaller brands. I think this is one of those things that could also help drive that. Thank you. Yes. And the next question is coming from Robert Derrington. Robert, your line is live. Please announce your affiliation and pose your question. Telsey Advisory. Thank you. Wyman, you all have invested heavily in technology over the last couple of years, whether it's propping up and improving your curbside to go program with Olo and refining your loyalty program. Are some of the economies of the business really allowing you to kind of hold the store level margins, I guess, stronger than otherwise would be the case given some of the value that you're providing to consumers? Yes. I mean, we've got pressure across different line items in the P and L. But I think independently, when you think about where technology can come to bear, we've definitely used it in the past and we continue to see opportunities to use it to help us leverage labor, to be more efficient without losing that hospitality and that making people feel special culture that Chile Dan Maggiano's have. We also see it as a big advantage to kind of overcoming and offsetting the increased inflationary pressures on media and on marketing in traditional sense. So, I think those investments help balance the P and L from that perspective. But then more importantly, they really help drive the top line and that's what we saw this quarter with Olo kind of and our curbside program rolled out now nationally and the marketer is able to really unleash some marketing around it to see the kind of growth that we saw 30% and more consistently in that segment. That's just helping the top line, which then allows you to leverage P and L and that's the best way to do this through traffic and top line growth. So that's the primary way we want to leverage technology, Bob. Quick question on Maggiano's. Basically, I think one of your local I think it's an add on price of $5 or $6 to get a second entree of offering an add on or a buy one, take 1 program. I think it's an add on price of $5 or $6 to get a second entree similar to is that something is that one of the catalysts you see for the business as we move forward into Q4 here? I mentioned in my remarks, Bob, that we're excited about taking our delivery program at Maggiano's to a more individual level. And so I assume you're talking about Nashville, which is where we're testing one of those ideas. And so right now that's a test, but we're looking at ways to broaden the appeal of what's already a very popular program within Maggiano's to a much broader base of individual consumers. It's a great value. I hope you don't take it away from us. Well, I would say keep coming and we won't take it away. And I would say National is responding well to it. Yes, so far so good. Okay. Thank you. Thank you. The next question is coming from John Glass. John, your line is live. Please announce your affiliation and poll question. Thanks. Good morning. It's Morgan Stanley. Can you talk a little bit more about the to go business this quarter? I think you said it was 11% of sales, remind us what it was a year ago. How much of the growth in that business is from delivery versus traditional to go? Are you the component piece, whether it's the online piece or traditional to go? And how does that is that what is the contribution to comp? Some of your peers are talking about half of the growth in their comp is now coming from an aggregate to go business. How is it relative to the Chili's business? Hey, John. So I'll give you some specifics. Obviously, we don't want to get too detailed on some things, just from a competitive perspective. But obviously, to go for both Chili's and Maggiano's is an important piece of the business. So at 11%, it wasn't that long ago, we were at 10%. So we're seeing that number move up quite a bit as we see close to double digit growth across the category, across AltaGO, but that's really being driven, as I stated, by the online and curbside usage and the rollout of the new technology, which has been growing at more than 30%. So we're seeing that part of the business account for somewhere depending on the week and the month, it could be a third to a half of the growth that we're seeing in the improvements in comps. That's very helpful. And with the delivery sorry, John. With regard to delivery, I know that was another part of it. At Chili's, it's still a very small piece of the business. Obviously, at Maggiano's, where we've invested in the delivery program for almost a decade now, it's a bigger piece. And so we are looking to expand what we do at Maggiano's and leverage that as well as just getting understanding for the most appropriate and financially viable way to bring delivery to our Chili's guests. And so there are a lot of tests out there with a lot of third party providers as well as a new group of really smart people within the organization kind of tasked with evaluating that. But as a percentage of Chili's business, our delivery is very, very small. That's very helpful. And Joe, just on the sales leaseback, what got you over the hump to look at that? Historically, you said it wasn't as tax reform that lowers capital gains or implied the friction, if you will? And is there any way to dimensionalize for us what the cost basis is on the properties or how much of a step up there would be versus actualized cash versus sales price? We can't give you any update as it pertains to the second part of your question. But to the first part, tax reform is really one of the bigger drivers there because obviously moving those statutory rates to a lower level does materially decrease the friction that will be involved in transaction. So again, we're still in the evaluation stages of that and nothing specific to announce, but that clearly changed some of the dynamics as how you would look at that kind of transaction. Got it. Okay. Thank you. Thank you. And the next question is coming from Jeff Farmer. Jeff, your line is live. Please note your affiliation and pose your question. Thank you and Wells Fargo. And just following up on John's question. So again, why pursue sale leaseback as opposed to pushing that leverage level above, I think it's 3.25 to 3.75 is your target level. It seems to me that even with an elevated level of debt that you guys would still get, potentially a better rate from your credit facility than you would from sale leaseback. So just again, why sale leaseback? And again, I want to be clear in my comments. I said potential capital transactions that wasn't exclusive to sale leaseback. You obviously have the opportunity, Jeff, you're correct to look at a variety of options there. So that's the review process that we're undergoing right now. Okay, that's helpful. And then value has been a popular conversation this morning. Can you share what's your value perception score trends have been with your customers over the last three quarters? It sounds like that's one of the things that's really driven some better traffic for you guys. Yes. We have seen significantly a significant improvement in the value scores. They're reaching kind of the levels that were all time for us and we're encouraged by the composition as much of how we're getting those. And so again, base menu is doing better. Obviously, the promotional offers are doing well. We're starting to see that lunch category start to move for us. And I think that's when you look at the category and you see some of the differences, one of the I think your lunch presence and how much lunch kind of means to your overall business is also skewing some of that. It's a more pressured daypart and I think that's one of the things that we're really focused on, how do we continue to drive the lunch business and be successful at it and we're having some pretty good success right now and I think we've got the right kind of momentum around that daypart. So the value proposition is kind of playing itself well and we're seeing growth and strength in it really across the portfolio of guests. And then just final question. You touched on it, but how are you able to deliver on the EBITDA guidance range, implied EBITDA guidance range with the reduced same store sales and restaurant level margin guidance. What sort of piece of the income statement is allowing you guys to do that? And I know we're dealing with rough ranges here. Yes. I mean, again, I think we are performing well within the G and A side of the equation. The rough range is obviously as the trajectory of the business improves, we would expect to see some of the improvement flow through to the cash flow side of the equation. But their target ranges that we anticipate to be in or close to as we go out through the rest of the year, Jeff. Okay. Thank you. Thank you. And the next question is coming from Gregory Francfort. Gregory, your line is live. Please announce your affiliation and pose your question. Just going back to the value, I kind of think just the customer in casual dining comes a couple of times a year, and so there's probably some delay in when you reduce prices and when that's theoretically impacts traffic. And so clearly, the lower lowest pricing you've had in a couple of years now in this quarter, Do you think there's a lag effect? And how long do you think that normally is? Yes. Interesting, Greg. I kind of think of it kind of on the opposite. We've taken price at Chile specifically more aggressively in the last fiscal year and kind of rolling into this fiscal year than we have in the past. And the impact of that pricing strategy or that the impact of a little more aggressive pricing had an impact on and pressure on our traffic trends that we're kind of working our way through. And as we've kind of lapped that now in the late Q2, early Q3, I think we've got that kind of out of the way. And with a more a lower level of pricing, we're starting to see, I think, the momentum pick back up and we get past some of those more aggressive pricing impacts to traffic. So I think we're kind of maybe talking about the same impact, but we feel it more when we aggressively price. When we put value offers out there, we're pretty specific about making sure people see them and understand what they are so that we can get kind of some immediate impact because we obviously understand the impact of trading that happens fairly immediate. And so it's really we're marketers are pretty good at making sure that when we put a value proposition out there that has implications to margins and price that we get that broadly communicated quickly. We see that visit frequency pick up right away. Got it. Makes sense. And then Joe, just one question for you. In terms of putting the debt for the refinancing on the revolver as opposed to doing a longer term bond deal, what was the thought process there? And any sort of help in terms of how you guys are thinking about that? Yes, I think Greg, I think about it really more from a timing perspective. We developed a revolver to have that capacity, so that at the point of maturity, if we chose to from a market condition standpoint, from a business evaluation, from looking at, again the capital transaction possibilities. It's an easy move at the time of maturity and then we can continue to evaluate the capital structure for other appropriate moves as we kind of go forward. Understood. Thank you. Thank you. And the next question is coming from Karen Holthouse. Karen, your line is live. Please announce your affiliation and pose your question. Hi. It's Colonel Doss from Goldman Sachs. Another question on the pricing side of things. So you've started to roll off the price increase from last year. Should we think of sort of on a go forward basis, the strategy being to maintain sort of a gap to food away from home or full service food away from home? Or do you think that you only need sort of a 1 year or one time pricing reset and then can kind of go back to pricing with the industry from there? Hey, Karen. It's Wyman. I mean, I think our stated strategy is to really target somewhere in that 1.5% range, plus or minus a little bit, but to keep it in that range, which tends to be historically kind of manageable for the industry and from a guest perspective to absorb. I mean, I just think historically when you look at brands that have been more aggressive without there are examples where in the beef or the steak category where beef prices have shot up dramatically where they've maybe been able to price accordingly. But in general, that seems to be the kind of pricing strategy that works best for maintaining your traffic trends and keeping your guests kind of in line with you. All right. Thank you. Thank you. And the next question is coming from Andrew Strelzik. Andrew, your line is live. Please announce your affiliation and pose your question. Thanks, BMO. So my question, if Chili's is going to sustain positive comp momentum and gets back to positive traffic, Hoping you can help me think through the flow through of that better comp. You've already been asked about the COGS side in the value equation. But when comps were negative and traffic's been negative, you've also been matching labor to that lower sales volume. So you need to be adding back headcount from a labor perspective if the comps get better? Just trying to understand what the flow through might look like. Thanks, Andrew. I wouldn't view it as needing to add back a headcount per se. Again, as business continues to improve, volumes and traffic and restaurants continue to improve, you could see labor hours added back into the equation. We are very focused on providing good hospitality and guest experience and that is a component of our labor model thinking. So you could see volumes kind of driving some increases in labor hours and frankly from our perspective that's a good thing. But I don't envision changing it from a headcount situation per se in that regard. We are going to be very cognizant of the need to manage flow through and improve flow through as we kind of move through this process. We've been very focused on the traffic driving aspects of the strategy and we'll continue to do that. And then our operators are going to be working very diligently to manage flow through because we are making investments back into the margin side of the business and but there are still opportunities to control expense and improve the flow through to the bottom line. Okay. And then just my second question, I believe you've been fairly clear in the past on the remodels that it can still fit within kind of current CapEx thinking that there wouldn't be some outsized increase, but as you're talking about that you said mid-200s next year, is that still the thinking or might we see kind of an upward trajectory to that CapEx next year? Yes. I think the key comment the key word you just said is outsized increase. Again, we've been very consistent that you would expect to see CapEx float up, somewhat while we haven't provided a specific guidance. We will be making more capital investment through the reimage program, but I wouldn't expect it to be an outsized increase in CapEx. Great. Thank you very much. Thank you. And the next question is coming from Brian Vaccaro. Brian, your line is live. Please announce your affiliation and pose your question. Ryan, your line is live. Sorry about that. Raymond James, just a few questions if I could. So first off, back to the fiscal Q3 comp and that 60 bps of weather impact, because you mentioned Maggiano's had an outsized impact. Could you just parse that out between Chili's and Maggiano's, the weather impact specifically? Yes. I think Maggiano's impact was kind of mid-1.5ish kind of range. And the Chili's number was closer to the average just because of the weighting. But yes, but over double the impact at Maggiano's just because of the presence and the impact. When weather hits a Mariano's restaurant and there are banquets booked, they go away. And they don't really rebook usually because there's usually an event that's and so when you lose a banquet Saturday night, that has a different kind of rebound effect than just having a soft Saturday in a typical restaurant that kind of bounces back maybe on Sunday or you pick it back up a little bit or sum it back up a little later. Yes. Okay. Thank you. That makes sense. And on the sale leaseback, Joe, I just want to circle back on that. And I guess thinking about the potential use of proceeds in context of your lease adjusted leverage ratio, What was that leverage ratio at the end of the quarter? And would you be comfortable taking that ratio above 4x or potentially even resetting your covenant, which I think is at 4.25 these days? We finished the quarter pretty similar to prior quarter at 3.8x leverage. And Brian, I really don't have any further comment to make on the other. Again, that's we will keep you appraised if we make any changes to that or any of the other kind of financial philosophies we have. Okay. And then on the guidance, Joe, I'm trying to understand sort of the store margin dynamics that are implied by your updated guidance. You've got comp guidance that implies return to low single digit positives, but looks like the store margin guidance implies sort of a similar year on year decline as to what you just saw in the fiscal Q3. Is that food cost primarily or are there some other puts and takes we should be aware of in the fiscal 4th quarter? I think as it relates to the Q4, it should be a fairly consistent approach as we round out the year. I would all the combination of promotional activity, food investment, I think will be in similar ranges for the Q4. Okay. And then last one for me. I just wanted to check-in on the G and A and D and A line. G and A dollars flat through the 1st three quarters. Do you still expect that to be up $5,000,000 or $6,000,000 for the year? Yes. G and A is going to be impacted primarily from the final calculations on our incentive compensation programs for those individuals that run through the G and A side of the equation. I would not necessarily expect to get back to that quite increased level. Okay. And same question on D and A, we're down around $4,000,000 The whole guidance was down $2,000,000 to $3,000,000 for the year. Is that also coming in a little bit ahead of what you were expecting? Brian, I think you're right. That will come in a little bit ahead of that guidance range. Perfect. Thank you. Thank you. And the next question is coming from Stephen Anderson. Stephen, your line is live. Please announce your first question. Yes. Good morning. Just calling to actually parse out some of the energy markets. I know that going recent quarters, it's been actually going back a couple of years, it was a sort of drag on comps. But can you parse out like what kind of positive effect that has had on your comps? And I have a follow-up. Yes. Steve Wyman. So obviously Texas and Oklahoma after having to talk about energy markets for years on the flip side, we are seeing them kind of lead the way out, and that's encouraging and exciting to see those markets kind of come back, especially as you know with our kind of overweighted presence in those markets. That said, we're seeing broad based strength across the Chili's portfolio. So led by Texas and Oklahoma, primarily some of those oil markets, but really seeing some good performance in other markets. And I think if you were to look into the black box, you'll see as a country pretty good performance in California and Florida as well as Texas and Oklahoma and some of the oil states. So it feels like maybe there's some of the broader economic strengthening in job growth and household income growth is working its way across a pretty broad section of the country. I wanted to switch gears a little bit and talk about the plenty program. I think if I remember correctly, when you first joined the program, the thrust there, well, one of the key thrusts was potential cost savings. Do you now not taking MyChili's Rewards back in house, do you contemplate bringing some of those costs back? And on the flip side of that, I mean, do you see retaining or regaining part of your customer data as part of bringing back the My Choice Rewards back in house? Well, first, Steve, on the objective or the reason we went with the Plenty program was because of the quality of the players that were involved, right? You had American Express kind of running that program as well as ExxonMobil and AT and T involved in it. And the objective wasn't really about saving costs. It was about combined leverage with really other strong brands to create a more powerful marketing model for us. The program for a lot of reasons just didn't ever really catch on like all of us had thought. Folks at American Express, AT and T, Exxon and us all thought that we had more potential there and it just didn't resonate the way that we thought it would. And so it's been kind of put to the side. As we go forward, as I mentioned earlier, we're still committed to a direct customer relationship and leveraging digital in our marketing strategies and our team and our investments in technology will allow us to do that. And we think we can do it as good as, if not better than most. So it hasn't come without some learning. But in that learning process there's been some investment, but more importantly there's been some really good knowledge learned and we've got a really strong team of digital marketers partnered with some really good agency partners that are helping us kind of move to that next generation of marketing. And Steve, as it relates to your cost piece of the equation, yes, there's reduced cost that will be seen in the restaurant expense line, offsetting with comp expenses that will be one of the components of the comp numbers we report going forward. But the critical piece is that database and the acceleration we're seeing in the sign up of individuals into the loyalty program providing their email addresses and becoming part of that program. So we've seen that acceleration and that's one of the key components of being able to build that database. And are you seeing relays of jump in food costs? When you sign up for the program, you get free beverage every time you go or free salsa. I mean, can you quantify how much of a food cost hit you see from that? No. And again, it will really be a component of the comp number that we provide you going forward and we're not seeing an impact on the food cost side of the equation. And the next question is coming from John Ivankoe. John, your line is live. Please enter your affiliation. Hi, thank you. I'm with JPMorgan. I was hoping that you identified, I guess, an average package for those 250 remodels or re images that you're doing in fiscal 2019 us to at least focus on that part of the CapEx model? John, really don't have an average package to give you. I think we're in a review process of that. Remodel, sorry, John. I thought we're going down the from I'd be curious to me to answer whatever it was that you were going to answer. I don't want to take that away from you. Sorry, getting out ahead of you, John. I think we're looking at an average package that's in the between the $200,000 $250,000 per restaurant spend. There will be some components of the re images, some restaurants that will have a lesser spend based on a number of different criteria, but most of them will be in that 200 to 250 range, John. And could you remind us customer facing, I mean, what it's going to accomplish? And I know you mentioned what you think the sales lift is going to be, but what is the customer going to see? And how, if any, is the restaurant going to be more efficient for the employees to run it? Hey, John. It's there's 2 questions in there. You slipped that last one in. But the from a consumer perspective, which is what we're really talking about, it just puts the brand in a more relevant light. All the work we've done over really the last almost year and a half as we've worked with different versions of this reimage puts a bigger focus on the bar and but more importantly opens up the restaurant to be the kind of space that is more relevant for today's consumers. I think it creates more energy. The materials that we're bringing to the forefront are more contemporary, for lack of a better word, not that it's a contemporary design, but they're just more in today's style. And you've got a brand that's unbelievably strong, but it's 43 years old. So you've got to continue to remind people that it's that we're investing to keep it relevant for today's consumers. And the today's consumer is a little different. They're looking for an experience that's got some vibrance to it that kind of conveys the message that, hey, we understand what you're looking for. And then obviously, the piece that's got to sit on top of that is the hospitality and the service and the quality of the food that we provide, which this reimage doesn't do anything to hinder that. And there are some technology, ideas that we are currently rolled out in restaurants like handhelds that we think when coupled with this reimage or not can also provide an even better guest experience that we're continuing to work with and work through and we're very excited about the potential to get that laid in to be more effective and more efficient while providing a better guest experience. So the reimage itself is more customer facing, but there are some things we're looking at that also work to make the team members' jobs easier and actually more effective. Okay, great. And then a completely separate question. Obviously, you're talking to industry trends that got better in March, they got better again in April. Certainly, in April, I mean, I think there's less of a weather, if any, weather the excess cash that's in their paychecks at the end of every month, whether it's through just their wages going up or whether it's through lower taxes. Sometimes in the past, we've seen the restaurant industry benefit temporarily from these trends and then trends kind of ease again. And maybe there are other cycles where we can sustain the trends that we're seeing in April or even improve. Every economic cycle is different. There's obviously a ton of push and pulls regarding a consumer's own income statement that dictates how they spend the money, including to grocery, including to independent restaurants. If it's fair for the call, what is your view of, I guess, the restaurant industry and branded casual dining as we move throughout the next 6, 12, 18 months? I mean, how are you guys feeling about just the overall macro as it relates to casual dining? John, we don't spend a whole lot of time trying to predict where the economy is going. It's just so far out of our control. We feel good about kind of where the economy is at today for the reasons you mentioned. I think they're going to hold for the near term. So I don't know why anything that we have kind of line of sight to would change that in the next 6, 8, 12 months. So that feels good. Low unemployment, more people in the workforce, higher household incomes and a consumer confidence level that's getting back to some historic levels. Those are all good for the economy. They're good for the restaurant industry. What we're really more focused on is how do we gain share and grow in a very competitive environment regardless of what the economy is doing. And that's through a focus on quality, consistency and value and how are we bringing higher quality, more consistency and a stronger value proposition to the consumer in a way that propels these really strong brands forward and that's how we're going to win. If the economy gets a little softer, that's still going to be our focus. We think it doesn't really change our strategies kind of moving forward. Okay, understood. Thank you. Thanks, John. Thank you. And the next question is coming from Greg Badishkanian. Greg, your line is live. Please announce your affiliation and pose your question. Guys. It's actually Fred Wightman on for Greg at Citi. Just a quick question on launch. I know last quarter you'd mentioned that that was disappointing, but it also sounds like the 3 for 10 had been a bit of a traffic benefit this quarter. So can you just talk about where that daypart is versus where you'd like it to be on a longer term basis? It's getting there, Fred. I think the work that we we kind of set it up last call that we were going to the team was going to really focus on driving some traffic back into the lunch day part for us. It's an industry, it's the more challenged day part out there, especially early week lunch for a lot of reasons. But just turning the marketing on and reminding people what a great offering Chili's has at lunch every day was impactful. We hadn't really gone out there with that message for a while. And then getting more specific in the promotional aspects as well as in some of the direct marketing aspects has helped move that business significantly and is a major reason why we've seen the momentum we've talked about here from kind of where we were December, January to where we sit in March April. Great. Thank you. Thank you. And the next question is coming from Will Slabaugh. Will, your line is live. Please announce your affiliation and pose your question. Hey, guys. Thanks for taking my question. Stephens, and this is Hugh on for Will this morning. Sorry for going back to digital piece, but I just want to quickly touch on mobile and see if we could get any updates around that business, its contributions from growing the overall to go business and maybe any adoption metrics you could give us there? Yes, Hilla, it's a very key component of driving the to go business. You're seeing mobile ordering push north of 40%. So between 40%, 50% of the to go orders are being delivered consistently kind of in that range. And the year over year growth rates, are again, I think as Wyman indicated, exceeding 30% on a very consistent basis. So it is an increasing workhorse as it relates to the to go business and is one we think is going to continue to increase and accelerate as we go forward. That's great. Thanks. And then just looking back at the comp, can we expect mix to run-in this level for some time at Chili's, as Chili's works to kind of figure out its value footing and level of promotional activity? And as we work through it, would you expect mix to tick higher from just the highlights of the new menu and more protein driven items? I think it will perform in the consistent level of what you're seeing right now. There's opportunities in any given quarter based on our promotional sequencing, contest, things of that nature. But I think this is a pretty indicative range to possibly maybe in slightly below this range a tick. Great. Thanks guys. Thank you. The next question is coming from Joshua Long. Joshua, your line is now open to your affiliation and pose your question. Great. Thank you. It's Piper Jaffray. My question was going back to the comp trends, it was encouraging to hear the geographic spread and how everything was more or less improving in step. I was curious if that was similar to on a weekday daypart basis as well. I know you mentioned kind of always early week lunches is a tough part of it, but curious on kind of how the performance and improvement has been trending kind of on a week or daypart basis? Yes, Jeff, we have seen improvement across all the dayparts, early week as well as late week, lunch and dinner. So again, I think from a relative perspective, it's been broad based, the improvement in the business from an absolute perspective. That early week lunch is still the more challenged daypart. I think it's the more challenged daypart again. I think I've said it a couple of times now in the industry that especially in casual dining as you see some of the strength in the fast food guys as well, and they continue to do a good job of growing their business. We know that obviously it's a heavier lunch crowd. So for those reasons, as well as a few macroeconomic and demographic issues, we think the early week launch is the bigger challenge. That makes sense. I appreciate that color and clarification. And I wanted to go back to your earlier comments, Wyman, in terms of just that kind of split between some of the larger chains and smaller chains and how performance is a little bit bifurcated in your favor. I was curious if you had if we can dig into or you're kind of seeing where some of that improved performance for your brands is coming from? Are you getting that incremental visit on kind of guests that had more or less been your core guests and you're getting them in a little bit more often? Or if perhaps you're getting and casting a wider net now and getting some people that some guests come in that maybe had been a little bit more lapsed or just not as in connected or not as connected with Chili's. It might be a little early, but just curious on kind of how you're seeing that performance from a guest set? It's actually we do track that, Josh, and we're seeing both. We're seeing increases in usage and frequency with our heavier users and with some with our lighter users, which is encouraging, right, to get some of those lighter users back into the restaurant to experience what we think are stronger menu offerings and some better execution in hospitality is what's got us excited about kind of the potential to continue to get them back in more frequently. So we're seeing it in both our heavy and our light users. Great. Thank you. All right. Thank you. And we have a follow-up coming from Robert Derrington. Robert, your line is live. Yes. Thank you. Wyman, I'm trying to understand some of your numbers here. And Joe, maybe you can help me out. As we look at the franchise and other revenue, the royalties for the company have been trending lower on an annual basis. As we look at the company's overall numbers, yet your unit counts are increasing fairly substantially. Are the new international and our franchise locations principally lower average unit sales stores or is the franchise royalty lower on those? How do we think about that? Bob, no, they're not They're fairly consistent across the board. Remember that the franchise and other revenue is a large component of things. I mean, you have the royalty income in there, you have development fee income in there, you have banquet fee income, all the gift card related expenses and incomes flow through there. So there's our gaming revenues. There's a lot of different puts and takes within that category. So I want to construe any change up or down at any given period to just the royalty piece of the equation. Got you. Okay. I'll follow-up. Thank you. Thank you. And there were no other questions from the lines. Well, great. We appreciate everybody's attendance this morning, and we look forward to talking to you again in August with our year end conference call. And everybody, have a good day. Thanks. 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.