BLMN - NASDAQ

Greetings, and welcome to the Bloomin' Brands Fiscal Second Quarter 2023 Earnings Conference Call [Operator Instructions]. It is now my pleasure to introduce your host, Tara Kurian, Vice President, Corporate Finance and Investor Relations. Thank you, Mrs. Kurian, you may begin.

Thank you, and good morning, everyone. With me on today's call are David Deno, our Chief Executive Officer; and Chris Meyer, Executive Vice President and Chief Financial Officer. By now, you should have access to our fiscal second quarter 2023 earnings release. It can also be found on our website at www.bloominbrands.com in the Investors section. Through this conference call, we will be presenting results on an adjusted basis. An explanation of our use of non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures appear in our earnings release and on our website as previously described. Before we begin formal remarks, I'd like to remind everyone that part of our discussion today will include forward-looking statements, including a discussion of recent trends. These statements are subject to numerous risks and uncertainties that could cause actual results to differ in a material way from our forward-looking statements. Some of these risks are mentioned in our earnings release, others are discussed in our SEC filings which are available at www.sec.gov. During today's call, we will provide a brief recap of our financial performance for the fiscal second quarter 2023, an overview of company highlights, and current thoughts on 2023 guidance. Once we've completed these remarks, we'll open the call up for questions. With that, I'd now like to turn the call over to David Deno.

Well, thank you, Tara, and welcome to everyone listening today. As noted in this morning's earnings release, adjusted Q2 2023 diluted earnings per share was $0.74, which compares to $0.68 last year up 9%. Combined U.S. comparable sales for up 80 basis points with each of our casual dining brands having positive same store sales. Importantly, this reflected 110 basis points out performance on traffic versus the industry in Q2. I am pleased with our U.S. results as they continue to validate the strategic and operational framework we outlined for the year. This includes leveraging our leading off-premises business, the addition of sales layers, growing digital capabilities, and improving operational effectiveness and efficiencies. Turning to our international business, simply put, we had an exceptional quarter. This was led by our Brazil business. Q2 revenues were up 17% due to new unit openings, the Brazil tax benefit, and strong same store sales growth. Additionally, operating profits and margins were up significantly versus a year ago. Our international business is very strong with lots of growth ahead. For us, international is a unique asset in casual dining. I'd like to thank our teams and the restaurants and the restaurant support center for their continued commitment to serving our guests. Your dedication to great hospitality service and experience is what makes our company so successful. As you look ahead to the rest of the year, we are focused on achieving our full-year guidance and objectives. We continue to have competence in our strategy to elevate the customer experience while achieving sustainable sales and profit growth. As a reminder, our key strategic priorities are to drive same store sales growth, maintain off-premises momentum, become a more digitally driven company, sustain the progress we've made in operating margins, and increase new restaurant openings. Improving same store sales growth is a multifaceted approach. Sustainable traffic growth, especially at outback, continues to be the primary focus. We have several initiatives in process to achieve our goal. As I mentioned last quarter, we are utilizing innovative technology to improve execution and consistency in our restaurants. Outback servers now use handheld technology, which allows them to spend more time with guests and deliver a differentiated guest experience. Our new cooking technology in the back of the house, including advanced grills and ovens, is on track to be completely rolled out in the third quarter. Our guests will experience improved product quality and overall meal pacing. Recently, the annual ACSI Restaurant Study of customer satisfaction was released in Outback Steakhouse has emerged as the industry leader in casual dining, moving from number six in 2022 to number one in 2023. This is a tremendous accomplishment. The investments we are making are clearly paying dividends. Our guests recognize the actions we are taking to improve the overall guest experience. Over the long term, we expect this to drive sustainable traffic growth. Complementing our restaurant operations is more targeted marketing designed to drive guest frequency, leverage our heritage, and build brand equity. Earlier this year, Outback brought back the no rules just right platform leaning into our Aussie roots. This is an attitude that goes beyond just marketing. It's how we reenergize our restaurants with new food offerings, exceptional service, and importantly, it ties back to our past. No rules, just highlights our great menu and everyday value. For example, our current seasonal offerings feature new menu innovation that start at an acceptable 1699 price point. The third element to our sales building strategy is introducing additional sales layers. For example, Fleming's launched Social Hour earlier this year. This captures our creative food and drink offerings during the early evening. At Carrabba's, they have reintroduced their successful wine dinners. These highlight the quality and great value that Carrabba's is known for, and Bonefish has enhanced their weekend brunch and introduced a social hour. The response to these offerings has been positive and we are seeing early success. The final sales driving strategy is improving our asset base. We spent the last two years developing different scopes that can now be deployed dependent on a restaurant's need. This is the beginning of a multi-year effort to touch a large percentage of our restaurants. We are on track to remodel over a hundred locations this year and will accelerate our remodel pace in years to come. All the initiatives I just described are designed to build sustainable sales and traffic growth now and over the long term. Turning to our second priority, continued to capitalize on our leading off-premises business. Total off-premises was 24% of U.S. sales in Q2 and our third-party delivery business continues to perform well. Importantly, off-premises profit margins are comparable to margins of the in-restaurant business. Catering continues to be a growing opportunity for our brands. The Carrabba's team is an industry leader in this space. We recently launched Carrabba's Bistro [ph], which is a lunch focus catering option, featuring a wide variety of sandwiches that represents Carrabba's Italian heritage. We are very excited by the early results and believe this could represent growth opportunities beyond catering. We're also very pleased by the strong momentum we are seeing in catering at both Outback and Bonefish. As a result of all the above, we expect off-premises to remain a large part of our business. The third priority is to capitalize on our progress to become a more digitally driven company. Consistent with Q1, approximately 79% of Q2 total U.S. off-premises sales were through digital channels. This compares to approximately 75% of total U.S. off-premises sales in Q2 last year. We continue to see positive results with our new online ordering system and mobile app, which has three million users. Our fourth priority is to maintain the significant progress in operating margins over the last four years in a highly inflationary environment. During this time, we grew our adjusted operating margin from 4.6% in Q2 2019 to 7.8% today. This starts with growing healthy traffic across our in restaurant and off-premises channels. We reduce the reliance on discounting and promotional LTOs and reallocate advertising spend to more targeted high return digital channels. We remain disciplined in managing the middle of the P&L and are aggressively pursuing efficiencies in commodity labor and overhead. And the final priority is to build more new restaurants, especially at Outback, Fleming's and in Brazil, each have strong sales and profit margins and offer great returns. Domestically, Outback and Fleming’s have significant growth opportunity in core geographies. In Brazil, we can more than double our footprint. Today, we have 148 Outbacks and we expect to have nearly 300 Outbacks in Brazil by 2028. More to come on new unit development on future calls, but we expect to have a meaningful increase in new restaurant development in 2024. In summary, we are pleased with the success in our business for the first two quarters of 2023. We are focused on achieving our annual goals while building a great business that will continue to thrive for many years to come. And with that, I will now turn the call over to Chris who'll provide more detail on Q2 and thoughts for the remainder of 2023.

Thanks, Dave, and good morning, everyone. I would like to start by providing a recap of our financial performance for the fiscal second quarter of 2023. Total revenues in Q2 were $1.15 billion, which was up 2% from 2022, driven by a 0.8% increase in U.S. comparable restaurant sales, as well as a 4.1% comp sales increase in Brazil. In our U.S. brands traffic was down 4.2% in Q2. This is in line with expectations and importantly we outperformed the industry by 110 basis points. Average check was up 5% in Q2 versus 2022. Benefits from average check will continue to move a little lower as the year progresses as menu pricing rolls off. We do not intend to replicate the same level of menu pricing this year as we took in 2022. At 24% of U.S. sales Q2 off-premises increased 100 basis points from Q1. Importantly, the highly incremental third-party delivery business remains healthy and was 12% of U.S. sales in Q2. In terms of brand performance, Outback total off-premises mix was 26% of sales, and Carrabba's was 33% of sales. Carrabba's already strong off-premises business has been supported by consistent growth in catering. Catering was over 5% of Carrabba’s sales in Q2. We are also seeing success in catering at our other brands and will continue to emphasize this sales layer across our portfolio moving forward. As it relates to other aspects of our Q2 financial performance GAAP diluted earnings per share for the quarter was $0.70 versus negative $0.72 of diluted earnings per share in 2022. Adjusted diluted earnings per share was $0.74 versus $0.68 of adjusted diluted earnings per share in 2022. The difference between our GAAP and adjusted results in 2022 was almost entirely driven by the required accounting treatment for the Q2, 2022 repurchase of a large portion of our convertible notes. Restaurant level operating margins were 16.4% versus 15.5% last year. Domestically, the benefits from our pricing and productivity initiatives continue to offset inflation. The technology we are putting into our restaurants is having an increasingly positive impact on our margins as it relates to inflation, commodity inflation was up 2.8% in Q2. We had favorability in dairy and produce, which helped to lower the overall inflation levels. We do expect commodities to be higher in the back half, particularly Q4 as we lapped some 2022 beef favorability that we were able to realize. We still expect total year inflation to be mid-single digits. Labor inflation was up 5.6%. This was in line with our full year guidance expectations of mid-single digits. Restaurant operating expense inflation remained elevated at 7.6%. This was driven by higher advertising, R&M, and utilities. Also, worth noting as it relates to restaurant margins, international segment restaurant margins were up 280 basis points. This was driven by the continued growth in our Brazil business as well as the Brazil tax exemption benefit. Total company operating income margin was 7.8% in Q2 flat from last year. Depreciation expense was up in Q2 consistent with our increased levels of capital spending and our investments in infrastructure. Overall, we feel good about our margins and we remain well above pre-pandemic levels. Turning to our capital structure, total debt was $770 million at the end of Q2. Our current lease adjusted leverage ratio remains below 3 times. In terms of share repurchases year-to-date, we have repurchased 1.8 million shares of stock for $43 million. We still have $97 million remaining on the new authorization that the board approved on February 7th. The board also declared a quarterly dividend of $0.24 a share payable on August 25th. We are pleased with our balanced deployment of free cash flow and will continue to deploy dollars against additional debt pay down, share repurchases, and our dividend. Before I turn to our guidance, I wanted to provide an update on the latest developments in Brazil as it relates to our eligibility for the Brazil tax exemption, we discussed in our February earnings call. During our February call, I mentioned the Brazilian government enacted legislation that introduced a 0% rate for both corporate income taxes as well as certain federal gross revenue taxes for a period of five years. A Brazilian court order reinforced our eligibility for this exemption and we began to realize this benefit in our financial results. Recently, the Brazilian legislature unexpectedly passed a new law that eliminated the ability for many businesses to benefit from this tax exemption impacting many restaurant companies, including our business in Brazil. This change will have the following impacts on our financial statements. First, we had a $4 million 1 time tax benefit to our Q2 financial statements as we had to revalue certain Brazil deferred tax assets. Second, we will now be subject to Brazil gross revenue taxes beginning in the fourth quarter of this year. This will reduce our fourth quarter operating income by approximately $6 million. Given the impact of the Q2 tax upside and the Q4 tax downside largely offset this new legislation should not impact our ability to attain our 2023 full year EPS guidance. Finally, beginning in 2024, Brazil will once again be subject to paying full corporate income tax at an approximate 34% rate. Although we are disappointed with this latest development, we remain on track to receive an approximate $0.25 EPS benefit from this tax exemption in our 2023 income statement representing significant cash tax savings. Now turning to our 2023 and Q3 guidance. First, we are reaffirming all aspects of our full-year 2023 guidance previously reported on our February 16th earnings call, aside from a change in our tax rate assumption. Given the 1time tax benefit we received in the second quarter, we have lowered our full-year tax rate assumption to be between 12% and 13%. And second, as it relates to the third quarter, we expect U.S. comparable restaurant sales to be 0.5% to 1.5%, and we expect Q3 adjusted earnings per share to be between $0.41 and $0.46. In summary, this was another successful quarter for Bloomin' Brands and we are well on our way to becoming a better, stronger, operations focused company. And with that, we'll open up the call for questions.

[Operator Instructions]. Our first question came from Jeff Bernstein - Barclays. Please sir go ahead.

Great. Thank you, very much. Two questions. First one, just thinking more broadly about the consumer. It seems like your comp trends were pretty much in line with expectation and ahead of the industry. I'm just wondering if you're seeing any changes in behavior that you would apply any or all of your brands presumably any kind of softening. And then I had one follow-up.

Sure. Good morning, Jeff. We just see the consumer hanging in there and if you look at the economic reports and you look at everything else about the economy, we're seeing that as well. And the high end is doing well and our casual dining brands, we see the consumer hanging in there.

So, there's been no noticeable over the past few months change in trajectory, whether it's traffic or mix or anything like that. It seems like it's relatively stable.

Yeah. No. So if you look at the mix line, I think, like we said, like middle of Q4 of last year, we turned negative in mix. We were down a couple hundred basis points in Q1 in mix, still down a couple hundred basis points in Q2. I expect that negative mix trend to be somewhat consistent as we head throughout the year until we start to laugh it kind of in the middle of Q4. So, look, it's still negative. I think a lot of that on our part we believe is engineered. But there probably is some small element of consumer trade inherent in that mix number. But other than that, no. I think that, look, I mean, our guide actually implies if you look at Q3 a tick up in traffic from where we were in Q2, and if you look at Q4, you can apply another tick up in traffic in Q4. So, there is an expectation that the consumer continues to hang in there, that our trends continue to improve as we do the things we need to do to improve our trends.

Understood. And then just the follow-up related to your commodity and pricing commentary, I think from commodities, you said pretty much still mid-single digit inflation. But I'm just wondering what your thoughts are specific to beef, which seems to garner outside attention whether you expect any change. I think you're pretty well protected for this year, but as you start to think about 24, and on the flip of that, I think you said that your pricing won't be as aggressive in the second half of ‘23. So, if you could just clarify what the pricing will be in the third and fourth quarter to mitigate those inflationary pressures. Thank you.

Yeah, sure. Well, I think that the good news is a couple things. One, from a beef standpoint, you're right. I mean, we've done a excellent job this year in mitigating exposure to beef. I think the one thing that I called out last quarter that I would continue to call out is that because we did have beef upside in the back half, particularly the fourth quarter of last year, and we were able to take advantage of some of that favorability, we do have a more challenging lap from a commodity perspective in Q4. So, our commodities in Q4 will be a little more elevated and that 7% to 8% range versus the 3% or 2.8% that you saw here in Q2. So that's something to keep in mind for the balance of the year. But look, it's way too early to be talking about 2024. We obviously see the same things that you do as it relates to commodities, but I think that one thing, our performance this year has shown is that we find a way to navigate uncertain environments in the commodity landscape, and we feel pretty good about that. In terms of pricing, if you look -- like I said, I would expect, let's just start with check average. As you work through your way through the balance of the year, I would expect check average to kind of continue to tick down. If you saw it in Q1, our average check was kind of in that 6% range. Q2, it's in the 5% range. Wouldn't surprise me if Q3, and landed in that 4% range. And then, you know, even closer, a little bit lower than that, maybe in the 3% range or so in Q4. So, I would expect that check average to continue to tick down. And I think that's driven largely by menu pricing. I think our menu pricing was pretty consistent in that 7% to 7.5% range over the first half of the year. I think it would tick down a little bit in Q3 and then it would tick down even farther in Q4, we would probably exit the year. Again, we're trying to preserve optionality as it relates to pricing. So, we're not going to, you know, marry ourselves to a pricing number in the fourth quarter, but if we were to do nothing additional for the balance of the year, you'd exit the year in that, you know, four to four and a half percent range pricing. But again, because we've had such success with productivity and because we've been able to navigate the commodity environment so effectively our intention is to not take additional pricing for the balance of the year, which is, you know, one of the reasons why we're, being pretty, we're sticking to the guidance that we've laid out for the full year.

Thank you.

Our next question came from Alex Slagle from Jefferies. Please sir. Go ahead. Please sir go ahead.

Hi. Thank you. Good morning. Wanted to ask on the development plan and your expectations for the years ahead, it sounds like, still looking for a material increase in ’24, and the comments on Brazil getting near 300 units by ‘28. I mean, are there any changes or altering your view at all on where that growth is coming from the next few years, by brand or region? Or is that still kind of in line? And then just any comments on the remodels accelerating further in ‘24 and years ahead, if that's sort of altered at all?

Yeah, sure. We'll in a future call, in the coming months we'll provide greater visibility into our development plan. But it's very similar to what we talked about prior calls. We will see a meaningful step up in development next year, and we'll seeing it in Outback and Fleming’s and which we're very excited about cause both brands have, a lot of white space ahead of them, especially in core markets. So, and we'll continue with our remodel plans in the U.S. as we upgrade our restaurants. So, the growth you'll see, we will be a new unit development will be something we haven't provided in to investors in quite some time, and we've got the pipeline to prove it and the returns as well. So that's number one. Number two, I can't say enough about the Brazil business, the sales, the margins, at one point we thought we could get to a 100 Outback’s in Brazil. We now think we can get to 300. It's got an unprecedented market position down there. And importantly they're doing it with their own cash flow. So, they're generating the cash to build the new business. It's primarily led by Outback. We do have Italian business down there we call Abbraccio, but Outback is a lion's share of development down in Brazil. So, that business just continues to perform extremely well. And then lastly, I think we can do all this and yet still maintain our long-term cash distribution strategy on paying down debt, returning cash to shareholders, and spend capital within those plans I just talked about. But more to follow in future calls.

Thanks. And as a follow-up to that, the international operating margin, I mean, it was up year over year, like $15 million in the first quarter, another $6 million year over year here in the second quarter. And you know, I know there's some of the Brazil tax exemption benefit, but I mean, it seems like the underlying margin trend's really strong. And I don't know if you could break that down a bit further and just sort of a read through of how the margins are doing there just on a base basis.

Yes. No, they continue, even if you pulled out the tax benefit, and again, it's going to be outsized. If you look at the international segment, the tax benefit from, or the tax exemption benefit that we've been receiving is certainly having a pretty material positive impact on their margins. But to your point outside of that, the benefits that we're getting from check average and from traffic in that business are really driving the day as it relates to their margin upside. Particularly when you look at the lines like cost of goods sold, where we've been pretty, pretty favorable over the last call it several quarters. I think that they're still seeing inflation. Their inflation is somewhat in line with kind of the same inflationary trends that we've been seeing here in the U.S. But again, given the volumes that those businesses generate and the ability for them to generate, high sales volumes and traffic growth, that's really what's carrying the day as it relates to the Brazil business.

Thank you.

Thank you. Our next question came from John Ivankoe, JP Morgan. Please sir go ahead.

A couple, if I may. First, it's a question on COGs. You guys obviously showed a 200-basis point decline in the second quarter, which is -- I mean, that's a really big number year-over-year for a restaurant company. And yet, at least in the U.S. same store traffic is negative. How do you -- when you think about gross margin ability to maybe reinvest some of that gross margin to drive traffic new menu, I understand just rule -- no rules just right is starts at 1699 if that's kind of the right price point. But just philosophically, how do we kind of balance that expanding gross margin with declining same store sales? Does -- we're declining same store traffic?

Yes. Well first of all, our traffic trends outperformed the industry, so I want to make sure we're clear on that. But I completely agree, John. Managing the margin traffic trade-off is so important. And the beautiful thing about when you have strong margin performance, you can reinvest that back in the business as you know so well, right? And so, we ask yourself why are we seeing some of this cost of sales improvement? Well, it's the productivity initiative we've talked about with the ovens and other things that we've got going on in our business. So, and the supply chain team has done a great job managing cost of sales. So that's what we're seeing at John. But I can assure you, as we think about traffic building initiatives and Chris talked about how we expect traffic to build the rest of the year, we're going to use some of those margin dollars to reinvest back in the business and some of our offerings. I don't want to get into the details, but that's our philosophy.

Okay. Alright. Understood. Secondly, versus 2019, Brazil actually looked pretty consistent between the first quarter and second quarter, but obviously there is a pretty big one year fall off between the first quarter and the second quarter just over 4%, is 4% a number that you're happy with in Brazil? I mean, is that what does that kind of mean to traffic, and how is the Brazil consumer overall, and how is the Brazil consumer absorbing your expansion in the market?

The Brazil consumer is doing well. And each time we build a new restaurant, John, I tease our development team down there because their projections that they give us, they blow them away. So, every new restaurant we build is exceeding it expectations. And then the other thing is, as we've seen in other businesses and other markets, when you start going into some smaller towns outside the big cities, when you are the main player, you also have development opportunities that you didn't think were possible. We saw that in other businesses. So capital returns are strong, cash flow is strong and the Brazilian consumer's in good shape.

Yeah, and the only housekeeping item on that is, John, the only housekeeping item on that is that, obviously, last year, Brazil had a different COVID pattern than we saw here in the U.S. And so, they're Q2 is kind of the first quarter where they're absent some of those big COVID laps that we maybe saw in the first quarter. So that's going to be a little more normalized trend moving forward.

And is there a ticket comment you can make on Brazil just so we know that we're pricing?

I don't have it off the top of my head, I'm sorry. But we can get that, we can certainly get that to investors.

Okay. No, that's fine then. And the final point, and it's a follow-up to Alex's question about, development remodels. Can you at least kind of give us a sense, I think the guidance for this year and CapEx is 240 to 260. Directionally, what if you don't want to give us a specific number, I understand at this point, but directionally what you think CapEx will be ‘23 to ‘24?

It should be in the ballpark, John. I think one of the things as we uptick our remodels, we might see a slight increase, but we're not sure quite yet. But one of the things to think about is, we had a lot of it spending this year because of the ovens and the handhelds and that's coming that's coming off. So, I think, we'll be in that range. We might see a slight up to uptick, but it is, uh, it's too early to call.

Okay. Thank you.

Our next question came from Sharon

[Technical Difficulty]. But I recall prior to the pandemic, you were looking to potentially sell the Brazilian business. I'm just wondering kind of philosophically where you are on key sell strategic alternatives for Brazil?

Yeah. There really isn't a market for an IPO or sale right now in Brazil. And we are -- as you heard from last prior comment, Sharon, we're thrilled with the direction. But it's more market based and we'll always keep our optionality open about that business. But right now, our goal is to grow it as rapidly as possible, but there's no market for it right now.

Okay. Thank you. And then the second question in the second half of the year, and I know you don't normally talk about concepts, but it sounds like you have different things planned and in the first half we saw kind of Carrabba's lead and Fleming's lag and – Kind of Bonefish and Outback in between domestically from a comp perspective, is that kind of how you would expect the second half of the year to progress? Or is there anything initiative wise where you would expect one concept to strengthen or another to maybe taper off?

Well, let me talk about a couple concepts. First of all, Fleming's trends are very strong, even though they were negative in the quarter. That's because we had very high spending and fine dining in the category last year. And Fleming's all performed a fine dining category. If look at their trends we to week we see that business to be very strong. And we also see a nice add to that business, which I didn't talk about in the script, is the private dining business. We have high hopes for that is if people come back to work and come back to the office and done other things. So, Fleming’s, for us is something that we'll continue to see that moving along. So, that's the first piece of business that I think we would see some change in trend in balance of the year as far as comps go. But remember, we have to think about what we're laughing. Second one is Carrabba's they continue to just a terrific job in restaurant dining their catering business and an off-premise. And I think the main thing I want to stress is they just introduced a line of Italian heritage sandwiches that reflect the Carrabba’s brand and it's doing extremely well. And we think we have opportunity beyond catering with that business. And those sandwiches are terrific and I'd encourage our investors to get some, cause they're really great. So, I'd say Sharon, what I'll call out right now is Carrabba’s and Fleming.

Okay. Thank you.

Next question came from Jeff Farmer Gordon Haskett, please go ahead. Please go ahead.

Great, thanks. Good morning. Just focusing on the Brazil tax legislation, street estimates as you guys know, across revenue, operating income, EPS, basically every line item does reflect the guidance that you guys provided in early February as it relates to that legislation. So, this was strongly implied in terms of not only the release in what you guys just said, but bottom line is, should we be essentially unwinding a hundred percent of those impacts in our models in 2024 and beyond at this point?

Yeah, so let me, I'll give you a little more context on that. That is correct. So, in 2024, we would resume paying full taxes back in Brazil. So, the way that it works this year is that the value added tax portion of that is what goes away starting in the fourth quarter. So, for the first three quarters of 2024, you'd have call it a $30 million reduction in sales over the first three quarters split relatively evenly. And then the corresponding, call it $15 million reduction in operating profit over the first three quarters as well. Then if you look at taxes, you're going to have, call it a $10 million to $12 million increase in tax expense spread out basically all over, all four quarters of next year. It's a little bit lumpy, but not worth calling out in any more specificity. So that's how it would unwind starting next year.

Alright. That's helpful. And just one follow-up, so you gave us a little bit of color on the operating expense inflation looks like it's come down a little bit, I think you said 7.6%. I might've missed it, but how are you guys thinking about operating expense inflation in the back half of the year?

Operating expense inflation should start to mitigate, right? So, more in that mid-single digits, it’s been more elevated in the front half of the year because you're lapping some, the utility kind of took off a little bit and so as you start to lap that it should improve as you get to the back half of the year, lower than, we're kind of in that 7% to 8% range now. It'll probably be more mid-single digits to maybe lower, low to mid-single digits in the back half.

Alright, thank you.

But it'll step down, it'll step down from Q3 to Q4.

Alright. Appreciate it.

Our next question, our next question came from Sara Senatore, Bank of America.

Hi. Thank you. I wanted to ask about, I guess the shift in your traffic, you talked about intentionally reducing, reliance on discounting and perhaps reducing traffic from consumers who might, be solely interested in those, the kind of price point offerings. I'm trying to understand sort of where, how you replace that traffic as you move towards, the goal of having positive traffic growth. Is that more visits from your core customers? Is it bringing in new customers? And I guess in that context, if you could talk about, the advertising strategy since, typically I think of traditional advertising as having a broad reach. So, as you make some of these big changes to Outback in particular, and presumably try to reach new customers, how you're thinking about the ability to do that with the digital advertising that you're kind of pivoting to?

Sure. Well, yes, you're right. We did remove our some of our discounting, and a lot of our discounting and promotions and we got the customers that you, excuse me, use that stop coming to our restaurants, but that's was planned. So, how are we going to replace that or how are we replacing it right now? And that was gets back to what I talked about earlier. With our margin performance, we can reinvest in our products, in our service, and you saw that with the ACSI ratings at Outback number one, that will be sustainable traffic moving forward. So, that's what we're trying to do as we invest behind our business. Now we've got to be, as Chris talked about, we've got to be very prudent on our pricing. So, rather than price up and discount back, we'd rather try and be prudent on our pricing and make sure that value comes to the consumer that way, along with great food and great service. Now, we learned a lot as we talked about with the pan -- during the pandemic about advertising. Yes, you can reach a broad group of people with broadcast advertising and that kind of thing. We'll continue to do some of that at the top of the funnel, but we really learned a lot about the digital space and that's where we're spending our marketing dollars to target those consumers. We want to bring back the loyal consumers more and we want to reach, continue to reach for new customers as we build traffic, but the key is going to be to take some of those margin dollars and reinvest back in the business. And we may see some of that with additional advertising spend as we go forward especially to Outback.

Okay. Understood. And then just on the -- in terms of what you already seeing are -- do you see an increase and you talked also about kind of digital and membership. Are you seeing an increase in frequency? Is there any kind of leading indicators that suggest again, maybe where that traffic is coming from, whether it's higher frequency, new guests, sort of just to help give some sense of as we, and [Indiscernible] envision improved traffic from here, how we should think about that?

Improved frequency from our dining gas and carryout guests and more reach from our third-party delivery, which is an incremental occasion. That's where we're seeing the traffic gains.

Thank you.

Our next questions came from Brian Harbour from Morgan Stanley. please sir go ahead.

Chris, we can kind of see what you're implying for the fourth quarter from an EPS perspective as well. Is any pressure here just about the Brazil change or was it -- you alluded to just commodities being there being more pressure in the fourth quarter? Any other drivers of kind of 4Q EPS as we start to think about what you're implying?

So yes, you lose the $6 million. It is sort of we talked about the benefit from the tax exemptions being somewhat neutral for the overall full-year guidance, but obviously, there is a bit of an interplay between Q2 and Q4, so that is a change, in fact, patterns from where we were, a few months ago in terms of how you should think about our fourth quarter. But yes, I think that the commodity piece is probably the other piece that maybe some folks hadn't fully realized in terms of the piece in the building blocks for the fourth quarter. Those are the two big pieces. The one other thing I would point out for Q4, just so we're all on the same page, is a little bit of a housekeeping is the way -- it is a 53-week year. So, just to make it clear, we're going to report our comp sales result for the fourth quarter on a 14-week basis. And we'll be able to provide a 13-week basis as well. The challenge with the way that the holiday shift this year is that if we were to report on a 13-week basis, we'd have one extra operating day in the 13 weeks because of the timing of Christmas. So, we're going to report on a 14-week basis so that you have the same number of operating days in both years, and that makes the comp a little more normalized for you. But just a little housekeeping there. But no, those are the only two pieces I'd point out Brian, in terms of how Q4 would come together.

Okay got it to thank you. And then just some of the things around like new ovens, new grills, handhelds, etcetera, is that -- are we starting to see that to some extent in -- are we starting to see in, in labor cost? Are we seeing, starting to see in food cost, maybe in the form of reduced waste? Do you think most of that's actually more in front of you? Like how should we actually kind of see that impact in your P&L?

Yeah, we're seeing it right now, and that's why the margins look so good and one of the reasons why the margins look so good. And I think we've got some more in front of us because we are still rolling out the ovens that'll be done this quarter. So, as we think about 2024, it's way too early to talk about 2024, but we'll see some of that overlap into 2024 as well. But these investments in handhelds and ovens have been a big part of our productivity this year in the margin benefit.

Thanks.

Our next question comes from Brian Vaccaro - Raymond James. Please sir go ahead.

Well, thanks, good morning. I just wanted to circle back on the new tech and equipment package. How many of your units had that package in place at the end of Q2? And I guess my question also is just on the stores that have had it in place for say six months to nine months, and I'd assume have reached some level of efficiency on it, could you quantify even if it's a range, just any of the benefits you're seeing in key operating metrics, thinking about percent of stakes sent back or average ticket time or the waste or labor savings, just any ballparks you could provide there.

So, we are about three-quarters of the way through the Chris Meyer.

Yeah, we we're about 460 Outbacks and then heading into the quarter we had a hundred or so remaining.

So, we're pretty much through the Outback system. We'll be done, Brian, during that time. For competitive reasons, I don't want to get into the pieces, parts of where we're seeing it, but here's broad very -- Brian, you see it in the P&L, we're seeing it in improved food costs as we manage that. We're seeing it in less --. We're seeing it in labor efficiency in the P&L. So, all three of those line items in the P&L we're seeing demonstrable improvement. And the most important thing, we can talk about the P&L, but the most important thing is the customer gets better service with handhelds. We get the table turns we see we can manage. We don't want to go too fast, okay? We're almost like, we got to make sure we don't go too fast, but we're seeing the customers seeing better table turns, they're seeing better product, which will lead to greater traffic, and they're getting better service. So, it's the customer side, that's the most important thing. And then on the P&L side, it's in food cost, labor, and some of the reports [ph], and things that we don't have to do anymore. So, those are the areas broadly that we see.

Then I would just add on top of that, as you look into 2024 and the reason why we're optimistic that there can be some tails on some of these productivity initiatives, I think the one thing that this new equipment does is it gives us optionality to really look at the labor model, and how we configure the kitchen and things like that. So, there's an opportunity for us to continue two weak and enhance and provide value, to the overall operating model moving forward.

And then, and then lastly, I don't think I'm getting too far ahead here, but you'd expect this out of a CEO. You know, it's obvious. I walk over to Carrabba’s and I say, well, look what Outback's done. Is there opportunity in Carrabba’s business to do similar things? It's way too early to talk about that, but we've learned a lot at Outback that we can apply to other brands.

All right. That's helpful. And Dave, you also noted some significant improvements in the Outback guest satisfaction score. Going from number six to number one, and I'm not sure what level that survey, what level of detail that that survey provides, but I'm curious, you know, what areas within that survey, what areas of the guest experience improved the most? Is there any that stood out? If you have that level of detail.

Yeah, we have our own level of detail as well, Brian and it's steak accuracy and customer satisfaction regarding how we're cooking our steaks and it’s service attentiveness and response to our customers. We want to see, I want to see our managing partners out in the restaurant talking to customers, and we want our servers to engage, but through our own internal data, you know, we see the stake accuracy and the service levels improving.

All right. And then just two quick numbers questions. Chris on other OpEx, could you share what was advertising spent in the second quarter? Maybe remind us how that compared to last year, and then what does your guidance embed in terms of the second half spend?

Yeah, so if you look at advertising in Q2, we spent, call it $27 million in total, including international. And last year we spent $23 million. So, we had about a $4 million pickup. And I would say that you're going to see, you're going to see year over year increases in advertising. I don't know, we're still TBD on kind of the level of that, but I think that you can expect to be up year over year in Q2 and Q4.

Okay. And then just on pricing, you talked about it earlier, but I just wanted to confirm your second-half guidance assumes you take no additional pricing from here. And then can you remind us also of any pricing actions that you took in the second quarter or the first half of the year?

Yeah, we took a little bit in the second quarter. So that takes away some of the need to take pricing in Q3 or Q4. It was obviously pretty low levels of pricing. I think that in Q3 or Q4, we're still going to kind of retain the right to change our minds, in terms of how we take or think about pricing. But certainly, in the guidance that we provided, yeah, we're not contemplating material levels of increased pricing at all over the back half of the year from this point.

All right. Thank you very much.

Thank you, Brian.

Our next question came from Dennis Geiger for UBS.

Thank you. I want to ask another one about the expected improvement in traffic trends and the strength and the satisfaction scores that you spoke to. Just based on the strength of that survey. Curious if you could touch a little bit on improving satisfaction and sort of how you think about converting that, to visits, what kind of lag that there might be based on the number of times that your customers visit per year. You're probably starting to see some of that, but just curious if you could provide a little more color on that benefit and the timing perhaps of that.

Yeah, we, that will build, because we're not a business that has, people come every month or 20 times a year, something like that. They come a few times a year. Our frequent users come more often, so, obviously they'll see it, but this is something that sustainably will build with this kind of improvement. And then when you put on top of it, improve the ambiance with remodels, right? This is going to have a sustainable improvement in our traffic trends. And then the good thing about it is we're going to be able to see it because we're remodeling by sections of the country. So, we're starting in Florida, so we'll be able to see what, how that looks, and so we'll be able to adjust our strategy accordingly. But this is something that's going to build over time, because of the guest frequency of our business.

Very helpful, thank you. And then, just one more, a lot of good things going on within the restaurant, but can you talk a little bit more about the off-premise and delivery opportunities from here, and sell results in the quarter, but just curious how you're thinking about those opportunities going forward and sort of how you're sort of looking to capitalize on the opportunity that's still out there for you.

Yes, the consumer wants convenience. And we've built our capital strategy around providing that convenience and our to-go rooms and our delivery rooms. And through our technology, we're continuing to make significant progress in our technology to ease ordering for our customers. And so, therefore, with that business between carry out and in a restaurant, there's a lot of overlap, right? The customers either come in to eat or do carry out, but in delivery, especially third-party delivery, that's an incremental occasion, and we'll continue to invest heavily in that because that's a customer opportunity for us. And then finally, we're seeing that the consumer loves our catering business. Again, it's an off-premise opportunity. Carrabba's is leading the way in that, and they just developed their line of sandwiches that, I'm not going to get into details on it, but boy, it’s being customer's responding and we think we've got opportunity beyond catering in our restaurant. So, this was a great example of how an off-premise business can help, and in restaurant business and the innovation we can use in other places in our business. It is clear, the customer likes convenience and we're there to deliver it.

Great thank you.

Our next questions can be from Andrew Strelzik from BMO Capital Market. Please go ahead.

Good morning, thank you very much. My first question is about Carrabba's development. And within your kind of optimistic unit growth outlook that you've talked about over the coming years, it's really outback in and Fleming's driven, which has been very consistent. What would it take for Carrabba's to play a more meaningful role, especially given the off-premises, and catering kind of and the optimism you've talked around there? I would think maybe new formats or markets. I don't know if you think, there's more of an opportunity there. Any color would be great.

Yes, there's an opportunity in Carrabba's. I generally don't like to go public or anything until we have a pipeline built, and I can talk about some more, but there's an opportunity with Carrabba's. Clearly, the performance has been terrific. The team is doing a great job. But until we build the pipeline a little further, it's something that, I'll continue to hold back on a little bit, but certainly we're looking at it and thinking about it. Having said that, the pipeline at Flemings, Brazil, and Outback is filling up every day and looks very strong. So, more to come on development. The Carrabba's certainly earned the right to more expansion.

Okay, great. And my other question was just on competitive activity within the category. I mean, what are you seeing? Does it feel still pretty rational and I guess with most expecting pricing to roll off, any concern that there might be more kind of over traffic driving efforts across the category and what that might mean?

Yeah, in the categories we play in, it's been very rational. And we certainly don't want to do any discounting and things like that. We intend to build value other ways, like we've talked about on this call, but it's been a very rational environment in our section of the business. Other parts, I don't really, we don't want to comment on because we don't really play in those areas, but it's been a very rational way about going to business.

There is no further question at this time. I would like to turn the floor back over to Mr. Deno for closing comments. Please, sir, go ahead.

Thank you, everybody, for listening and your interest in our business, and we look forward to talking to you in October and our Q3 call. Take care.