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Good day, and welcome to the Brinker International Q2 F2023 Earnings Call. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Mika Ware, Vice President of Finance and Investor Relations. Ma'am, the floor is yours.

Thank you, Holly, and good morning, everyone, and thank you for participating on today's call. Joining me today are Kevin Hochman, our Chief Executive Officer and President; and Joe Taylor, our Chief Financial Officer. Results for the quarter were released earlier this morning, and are available on our website at brinker.com. As we always do, Kevin and Joe will first make prepared comments related to our strategic initiatives and operating performance. Then we will open the call for your questions. Before beginning our comments, I would like to remind everyone of our Safe Harbor regarding forward-looking statements. During our call, management may discuss certain items, which are not based entirely on historical facts. Any such items should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Such risks and uncertainties include factors more completely described in this morning's press release and the company's filings with the SEC. And of course, on the call, we may refer to certain non-GAAP financial measures that management uses in its review of the business and believes will provide insight into the company's ongoing operations. And with that said, I will turn the call over to Kevin.

Thanks, Mika, and good morning, everyone, and thank you for joining us as we share insights on the momentum we're seeing in the business, progress against our strategy, and plans to maintain that momentum. I'll start with Maggiano's, which delivered a very strong second quarter sales and margin growth as some of the business model changes have had accelerated recovery. We expected Maggiano's performance to exceed pre-COVID levels during the quarter and the team delivered. Comp sales were up 21% year-over-year and margins improved significantly. One of the big drivers of growth during the quarter was the off-premise business, which delivered an 82% increase versus pre-pandemic levels. Maggiano's off-premise sales are highly incremental. Customer insights are telling us that off-premise sales, which are meals consumed at home are at different occasion than the dining get-togethers and celebrations that Maggiano's is known for. And Maggiano's guests who visit us for everyday home that replace it visit more often than the dining guest. So off-premise for Maggiano's drives two things that we really like incrementality and frequency. The solid recovery of the core business plus the incrementality of the fast growing off-premise channel coupled with an improved business model, makes us very excited about the future of Maggiano's. Now for Chili's. At Chili's, we've made solid progress strengthening the core business and generating momentum in our results. Second quarter same-store sales were up 8%. We've returned to profitability and were steadily improving the guest and team member experience. As you recall during our last call, last quarter, I shared we were starting to implement our longer-term strategy to sustainably grow the core business by focusing on the key areas that will differentiate and best position Chili's in the marketplace. While there's still a lot of work ahead of us, I am encouraged by the progress our team has made across four pillars of our strategy. The first pillar is team members with the goal of making their jobs easier, more fun, and more rewarding, which we believe will lower turnover, increase engagement, and ultimately lead to better team member and guest experience at Chili's. We continue to make meaningful progress simplifying both our menu and operational procedures in our heart-of-house. As I mentioned last quarter, simplification is not a one-time event, but an ongoing commitment to our team. Our leadership team and I continue to host listening tours all around the country. And as managers and team members see changes happening, they are feeling heard and understand that we have -- they have a direct say in the future of their operation. These changing beliefs are now resulting in both significantly improved employee engagement scores and lower turnover, especially at the manager level, which is now below pre-pandemic levels. We still have work to do on the hourly front as we claw back from staffing challenges, but the hourly turnover numbers are now also trending in the right direction. Hospitality is our second pillar. We're in the process of evolving our service model to provide better service for both dine-in and off-premise guests. Servers now have more support as we staff key positions to make sure shifts are more manageable and guests feel welcome and cared for. As a result of these changes, our restaurant teams are telling us they feel more supported than ever. In fact, a few weeks ago I was in our Florida market and all of the managers told me this is the first holiday seasoning years that the restaurant felt completely manageable with a lot less stress on their teams. These first two pillars are working together to improve team member engagement and turnover, as well as driving significant improvements to our guest satisfaction metrics. When you see team member engagement turnover and guest satisfaction all trending in the right direction, it's typically a good sign for the business. And I'm excited to see this happening because it's a confirmation that we're making inroads in the things that really matter. The third pillar is atmosphere. We're ensuring our buildings and our equipment are well maintained and we're bringing more energy and vibrancy back to our restaurants. It's a big focus for us this year to ensure that all of our equipment is in working order and that the restaurants look great. In addition to the labor changes should improve both the team member and the guest experience. We're encouraged by the progress here too, but given the levels of deferred maintenance during COVID; we still have work ahead of us. And our final pillar is food and drink. And we're committed to winning on the four core equities that sell Chili's apart: burgers, crispers, fajitas, and margaritas. Our Raise the Bar program, the Happy Hour offering, and new bar menu we launched in the first quarter, delivered impressive increases to alcohol sales, PPA and mix during the second quarter. And now we're building on the success with an updated bar menu that features more premium drink offerings to delight our guests and grow the business. This menu highlights our breadth of classic Margaritas along with some new products including the Sangria-Rita and the Henrietta. The Sangria-Rita is taking a very popular southwestern favorite, a frozen margarita swirled with Sangria and bringing it to our customers nationwide. And the Henrietta is a re-imagined Chili's favorite. The last time we launched a margarita made with Hennessy, it was wildly popular as we promoted as the margarita of the month. Now we've re-imagined this as a higher quality premium margarita that will price reflect this premium positioning. This is just the first wave of robust bar innovation pipeline the team has developed. We'll launch these updated bar offerings later this month in time for the NCAA basketball tournaments, the final month of the NBA regular season, and the start of our internal Margarita Madness program, which is a fun check driving contest we know is a huge engagement driver for our team members and translates to a more vibrant atmosphere increased sales. We'll have significantly more margarita innovation coming to the permanent menu later this year, as well as an all new CRISPRs platform that's running through our new innovation stage-gate process and is currently in test market that we're very encouraged by. We look forward to sharing more details on both platform upgrades during the June Investor Day meeting. Now let's talk about traffic at Chili's. During the first half of the fiscal year, we reset pricing strategy and reduced the amount of checks on deal as well as the frequency and depth of couponing in order to work some less profitable traffic out of our system. Now with a stronger foundation driving our improved performance, we're able to manage our investments more effectively to build incremental traffic into the business. This quarter we'll start reinvesting some of our dollars we saved from less discounting to get back on TV with a Three for Me value platform. We're excited about being on air, which will be the first time in over three years that we'll be on TV. At a time when consumers are seeing record restaurant prices in smaller portions, we're coming in with industry-leading abundant and complete meal at a sharp price point. The Three for Me platform also includes more variety than many other bundles in the marketplace. And for just $10.99 the guests gets a full size entree with unlimited chips, unlimited salsa, and a bottomless soft drink. For the business, the platform encourages trade up to more premium and margin decretive offerings at $13.99 and $15.99, which will merchandise in the restaurant. In fact, the majority of Three for Me volume moves at the $13.99 and the $15.99 price point. And now with the addition of out-of-restaurant advertising, Three for Me will play the role of traffic driver in our business. We believe promoting this platform through national media as well as the opportunity to reboot our loyalty offers will help us drive incremental traffic and win market share regardless of the macroeconomic condition. Lastly, I want to spend a little time talking about additions to our Chili's executive team that will strengthen the leadership of our organization. I'm excited to share that Jesse Johnson, a senior leader at the world class advertising agency, Wieden and Kennedy has joined our marketing team as VP of Marketing, working for our Chief Marketing Officer, George Felix. Jesse is an accomplished marketing and advertising leader who has worked on some of the world's most iconic brands, creating news and excitement to everything he touches. And most importantly, he brings an energy and a passion for our Chili's brand. Jesse has already embraced -- has already been embraced by the team as they work to develop a robust strategy to drive traffic in the near-term and strengthen the brand over time. I'm also excited to welcome James Butler as our new Senior Vice President of Supply Chain. James is a well-respected highly strategic supply chain leader who recently served as SVP leading supply chain co-op of a very large multi-unit restaurant concept. Having worked with James in the past, I know he will bring a high-level of fresh thinking and leadership to our business that will not only help make progress in our supply chain, but will help accelerate the advancement of our strategy. We believe with a world-class leadership team, stronger Maggiano's business and executing on Chili's four strategic pillars, we're making the right choices for our business, improving the experience for our guests and team members, and driving our four wall economics will help our business regardless of the macro environment. With this focus on the core business, Maggiano's will unlock its growth potential and Chili's will be a stronger more competitive brand. And that's why I'm encouraged about our future at Brinker. Now I'm going to hand over the call to you, Joe, to walk you through the numbers.

Hey, thanks, Kevin, and good morning, everyone. The fiscal second quarter operating results reported this morning represent a nice move forward for the business. Sales benefited from continued consumer demand, our ability to price more appropriately and strong mixed results. Our in restaurant economics started to recover and improving commodity environment became more evident, and importantly, guest feedback improved in response to our initiatives. For the second quarter of fiscal year 2023, Brinker reported total revenues of $1.019 billion, a restaurant operating margin of 11.6%, and adjusted earnings of $0.76 per share, an increase of $0.05 from prior year. At the brand level, Chili's comp store sales increased 8%. We executed incremental pricing actions in the quarter both on the menu and in third-party delivery channels resulting in year-over-year pricing of 10%. Even with this more elevated price structure, we feel comfortable with our overall price and value positioning relative to the competition. As we mentioned last quarter, an important part of our sales strategy is our concerted effort to move away from higher unnecessary levels of discounting. This, coupled with our October menu restructure of the Three for Me platform, resulted in positive quarterly mix of 5.6% for the brand. Negative traffic at Chili's of 7.6% was in line with our expectations and was clearly more than offset with the ability to incrementally price and drive mix. Maggiano's had an outstanding quarter fueled by a great holiday season. The brand reported positive comp sales of 21.2%, driven by traffic of 8.4%, price of 7.7% and favorable mix. Digging deeper, Maggiano's realized improved traffic in all revenue channels, dine-in, banquet, and off-premise, with their overall business now exceeding pre-pandemic levels. Our restaurant operating margin for the second quarter was 11.6%, representing a decent beginning to establishing stronger double-digit margins on a consolidated basis. Let me make some specific comments as to the components of our ROM. Food and beverage costs were unfavorable 110 basis points year-over-year with commodity inflation coming in around 19%, down from 24% in the first quarter. Cost increases for the quarter were largely driven by inflation in poultry and beef and recent spikes in produce related to weather and yields. While we anticipate inflationary pressure for the balance of this fiscal year, we expect these pressures to moderate each quarter, moving below 10% in Q3 and further down to the mid-single-digit range by Q4. Labor costs were 130 basis points favorable versus prior year, benefiting from sales leverage, partially offset by increased hourly wage rates, and a higher quarterly manager bonus payout due to the improved performance. Wage rate inflation for the quarter was approximately 5%. As Kevin mentioned, we are in the process of updating our labor model to improve the work environment for our team members and the dining experience for our guests. The changes to the model started late in the second quarter, and were more broadly worked their way into the system over the course of the fiscal year. We are working to fine tune the number of labor hours needed to deliver the improved experiences for our team members and guests. Early results have driven positive guest metrics and better sales flow through during peak hours, as well as contributing to improving turnover rates at both the hourly and managerial levels. Importantly, we now believe we can generate the desired improvements, while investing a bit less in the model than originally anticipated. Restaurant expense for the quarter was elevated 70 basis points versus prior year due to overall inflationary costs in several expense areas and an increase in investment for repair and maintenance. The R&M expense increase reflects our work to improve the overall condition and cleanliness of our restaurants and to catch-up on deferred maintenance as supply chain issues and labor normalize. Additional momentum for Chili's is evidenced in the performance of the brand's new restaurant development. Through Q2, four new restaurants were added to the fleet, and three more came online in January. All are opening at very strong levels, some above a $100,000 a week, as communities such as San Juan, Texas, Inverness, Florida, and Owensboro, Kentucky embrace the brand. We have seven more openings planned for the back half of this fiscal year and look forward to sharing those incremental results on future calls. At the halfway point in our fiscal year, we are taking the opportunity to update our annual guidance. This update incorporates various investments we are making into operations and assumes the continuation of the current economic environment with no material downturn. We are raising our fiscal 2023 full-year guidance to include the following. Revenue is now anticipated in the range of $4.05 billion to $4.15 billion. EPS is anticipated in the range of $2.60 to $2.90, and CapEx is expected to be between $170 million and $180 million for the fiscal year. In closing, we believe our strategic initiatives, operational investments, and heightened team member focus is moving our business in the right direction. We're excited to now reengage key traffic driving opportunities to build further momentum in our performance while understanding the short-term potential impacts from macroeconomic conditions. The heightened engagement of our restaurant teams around the direction we are taking is exciting to see, and we are highly appreciative of their efforts every day to bring the Chili's and Maggiano's experience to life for our guests. It is through them, we will see our success. Now with our comments complete, let's open the call for questions. And Holly, I'll turn it back over to you to moderate the Q&A.

At this time, we will be conducting a question-and-answer session. [Operator Instructions]. Your first question for today is coming from Andrew Strelzik at BMO.

Hi, thanks for taking the question. My first one, I was just curious on the traffic cadence to the quarter, if you could speak to that. I know last quarter you said you had some early softness with the menu change, so I'm just curious how that evolved since that time and obviously the industry data in January's been quite strong. So anything you can say about whether or not that's continued or any color would be great.

Yes, Andrew, good morning. The traffic cadence throughout the quarter was actually relatively consistent. Not a huge variation as we moved through the second quarter. And actually we were strengthening as you kind of headed through December. December was a good month until you got to right at the end where you had an impact of weather. They really hit the kind of tail end of December. I think you probably saw that in some of the industry numbers you looked at. And we were not immune. But very consistent to the quarter results that that you saw. And I think the dynamics of traffic are definitely carrying forward into January. As you might expect with the COVID lap, we have seen a acceleration on the comp side of the equation very similar to what you're seeing from the industry trends. But I think the underlying dynamics that have been driving the business are still in place as we move into the first part of the calendar year. January's going to be unique with its COVID lap. Also you're seeing as I said looking at my window at the frozen tundra of Dallas, you're seeing some weather moves as you kind of work throughout January. So I look forward to thawing out and keep moving forward.

Got it. Okay. That's helpful. And then I just wanted to ask you about the investments that you made you referenced late in the quarter on the labor model. What exactly have you done so far? You referenced some improvements in metrics. If you could speak to those a little bit and how are you thinking about maybe the next round of labor investments and the timing of that. Thanks.

Yes. Just so this is Kevin, just so you understand how we designed the program. So Mika Ware has been leading a team both field leadership as well as folks in our restaurant support center at our home office to best understand if we were going to put labor investments back into the business, where would it make the biggest impact. And so the first round of those changes from that team we rolled out towards the tail end of December, it's not an on/off switch, so it takes some time to get the hours and the bodies back into the building. But the focus areas were one, on giving servers more time to focus on fewer tables so that they could better serve those tables; two, adding additional runner/buster position to try to keep tables cleaner during service more frequently in restaurants with high bar traffic we added or had the option to add a second bartender to manage that traffic, not just at the bar, but obviously the tables that was in the bar area. And then we added an expeditor position who is managing the heart-of-the-house. And that really frees up the manager to stop doing that team member task and actually do leadership things and coaching and all the things that you want a highly paid manager to do. So that's kind of the changes that we deployed in round one. Round two is still being worked on and tested, so I don't have the details to give you that until we're ready to go. The metrics that we've seen improve, so guest experiencing a problem, which is like our number one guest metric that we look at daily, has improved pretty significantly throughout the quarter. So we feel really good about that. I shared at our last call our team member engagement had significant bumps increases both in the field as well as at our RSC. So we're seeing the changes in the field having a meaningful impact on manager turnover. We were pleased to report in our prepared comments that manager turnover is now beneath where it was pre-pandemic. So we feel like we've made huge strides there and we're starting to see hourly turnover now improve too. But obviously there's some more work to do to get to pre-pandemic levels on that. So when we talk about metrics, we're talking about team member engagement, manager engagement and then obviously whether the guest is having a better experience and we're seeing all those things improve. The other thing that we're seeing is our food grade scores. We had some of the best food grade scores that we've had a long, long time. And so as you think about the team members having a better experience, having more labor in the restaurants, they can make better food. And then if they make better food and provide better service, then the guest has a better experience. And so we're seeing all those things trend in the right direction. I don't want to say that victory is accomplished and there's not a lot more work to do. But as I said in previous calls, as long as we continue to make progress every quarter, we know that we're making the right moves. We're heading the right direction.

Great. I appreciate all the color.

Your next question is coming from Dennis Geiger with UBS.

Great. Thank you. First I wanted to ask about pricing levels and what you're seeing with respect to any pushback from the customer. It sounds like the customer satisfaction levels are improving and traffic was largely consistent with your expectations, which is encouraging, but any additional commentary on what you're seeing as it relates to pricing levels and how the customer's digesting that?

Yes, I'll start and then I'll see if Joe has anything to add. So we have seen the low end customer tail off. And we saw that before we took incremental pricing. So the low end customer was coming less frequently before we even started the new strategy and that is continued. We haven't seen a change in that trend one way or the other. For the guests that are coming they are willing to spend considerably more. So we're seeing mix shifts pretty significant. So we had a 10% price increase effectively on a -- on the stack, right? And we had a 5% mix increase that is a result at the end of the quarter. And so what's happening is the folks that are not buying Three for Me, they're moving the à la carte items that are priced higher, but they're also buying more appetizers and more non-alcoholic soft drinks because they're not included in the à la carte, right? So just some of the data we have 24% less Three for Me meals that are being purchased per day. Our per check average on Three for Me purchase is up $1.38. And as I said in my prepared comments over more than half of the Three for Me menu is actually moving at higher price points, the $13.99 and the $15.99 price points. In fact, over two-thirds are moving at that. So net what we're seeing is the customers that continue to come are accepting the price increases. And the good news is our value scores this quarter actually ticked up, which would be surprising given the price increases. And we think that's because the service levels have improved, right? The idea of value is not just price point, but it's also what you get and how consistent it is. So that's how we've been seeing the guests, the guests that continue to come are willing to spend more. And the -- both the service levels have improved as well as our value scores.

I appreciate that's helpful.

Dennis, the only thing I'd -- the only thing I'd add to that Dennis would be a little insight as to what the menu price increase. You're looking at obviously year-over-year numbers at that 10% range. The actual menu increase that we took in October was about 4.25. So again, it's the sequencing and frankly, I'm not sure that a lot of guests look back a year what did -- a lot of them are looking to what did I see on my prior experience. And I think that 4.25 is probably more actionable. If you wanted to think about how they might react and so far the reaction has all been pretty favorable.

That's very helpful. Thanks, Joe. Just one more, Kevin, you spoke to driving -- focus on driving traffic share gains with Three for Me and the advertising coming up. Just curious if you could speak to what you've seen maybe what you saw in the quarter or even in January from a market share perspective. I don't know, also if it -- if you're kind of able to frame up the importance of driving market share relative to profitability, and perhaps you can get both, but just any comment there would be great. Thank you.

Yes. I can speak at a very high-level. I don't have like switching data in front of me, but from a high-level, we grew -- during the quarter, we believe we grew dollar share. So the amount of dollars versus the market based on what we see in black box to map, we believe we lost a little bit of traffic share. And as we said in the prepared comments, and we've talked about this is the shedding of some of that unprofitable traffic and we're going to continue to monitor as obviously we don't want to lose traffic. But it is something that we expected to happen, especially as we got out of some of the deep discounting coupons that we mail via e-mail. We know those customers were getting freebies in addition to layering on our lowest price point on Three for Me. And as we've shedded those customers or some of those customers, we have dragged a little bit behind the industry on traffic, but from a dollar standpoint, we believe we're growing versus the industry right now.

Great. That’s helpful.

And Kevin, I would say relative to the competition, our positioning improved as we went through the quarter in discussing our relative position with the folks that kind of monitor the overall industry, both brands really performed in December at the top of the heat. They were two of the highest performing brands in the competitive sec for that, that period. So nice relative performance as we move through the quarter.

Your next question for today is coming from John Ivankoe with JP Morgan.

Hi, thank you so much. I wanted to talk about capital allocation and priorities. I mean, this is a business historically that's obviously generated a lot of cash and obviously COVID and a number of different things kind of made that -- maybe gave that some interruptions or maybe some changes in the priorities. But how are you guys thinking about maybe medium-term CapEx obviously this year at $170 million to $180 million was kind of at the higher end maybe of where we thought that was going to be. So what's the direction of that going forward? Might that go up because of new units, might that go up because you really want to do more remodels and refits at the store level that benefit your customer and employees. And if I can, Joe, I apologize for the way I'm asking this question as I'm asking it, but as we think about debt to EBITDA and other things, I mean are -- do -- should we get there through paying down debt or are you just going to basically let those ratios improve as your EBITDA grow? I just obviously I'm trying to catch the inflection point here to where a decent chunk of money can go back to shareholders. Thanks.

Yes, and let me kind of take them in reverse. I think we will continue to absolutely pay down debt. The ratio will also we anticipate improve from EBITDA growth as we move forward. So we'll go at it from both of those. And again, as we've talked, we'd like to get the overall ratio down below 2.5x. So let's just say 2x to 2.5x on a debt to EBITDA basis. And we see ourselves moving nicely in that direction as we kind of go through the rest of this fiscal year. The -- as far as deploying incremental capital expenditures, I think yes, there's going to be those opportunities and we'll look at that, whether it's new restaurant development, we want to make sure again, we're effectively caught up as we kind of move forward with R&M investments. So I think as Kevin indicated still work to do there. So we spent about 25% more in the R&M space this last quarter is if you look at the restaurant expense side of the equation, we'll invest there. And there's also some capital opportunities as we kind of move forward. So there'll be a pacing of that. But also we'll look at some new opportunities. There's some nice kitchen equipment improvements we think that we'll be bringing into the equation as we move through the next couple of years. So that could sequence it's -- we'll determine those and obviously lay them out once we get what the actual numbers are going to be. But it wouldn't surprise me at all to see a period of time where CapEx ticks up above where moves up above where it is right now. But we'll give you great line of sight as to the why's and where that, that money's going to go. As you indicate the business can generate a lot of cash and as we improve the base operations and again lots of rationale on why to do that, but one of the clear opportunities is to generate that incremental cash flow that then we have the optionality of looking at is that going back into the business directly from a return standpoint or is there an opportunity to return some to shareholders. And I think it's just going to be a ongoing evolution, John, over probably the next 6 to 12 months as we think through all those different pieces of the equation.

That's perfect. Thank you for unpacking the question. Good job. Thanks, Joe.

Your next question is coming from Eric Gonzalez with Citibank Capital Markets.

I think it's KeyBanc, but, hi, good morning. My question about labor during the quarter, the labor cost was pretty low at about 30 -- low 33%, which is a big step down and I believe the lowest in several years that period. I'm just wondering about that reclassification revenue. Maybe you can quantify if that was a driver there, but also talk about some of the drivers that margin from an operational perspective. Did you maybe underspend due to staffing environment? And then just related to that on the investments, is there any way you can quantify that? I know you said it'd be less than you previously expected, but what sort of impact should we see in the current quarter and what type of runway should we expect before those investments pay off?

Yes. And good to see you're still where you're at, Eric, but, no, I think yes, labor did -- labor really benefited from the sales leverage side of the equation and as we indicated some of the "investment back", the incremental hours that we will be putting back into the system didn't have as much of an impact in the second quarter because they were late dated when we really started that piece of the equation. So you'll see more of that as we kind of move through the rest of the fiscal year. We also were able to pay a very hefty manager bonus, so it's good to see the ability to make those team member related payments for the performance that they delivered and still deliver as a percentage of sales a nice labor positioning. There's all kinds of puts and takes as you go through the labor model. We had some benefit in there year-over-year on things like team member related insurance was a good guy and you do have a labor model that remember drives off of traffic. So there was a little benefit from the lower traffic generating less labor hour necessary relative to those volumes. But as you kind of move forward, I expect as we move through the next couple of quarters, you'll see labor as a percentage of sales tick up something -- somewhat. I think you'll probably see something in the let's say 40 to 60 basis points increase from where we were in the second quarter. Obviously a lot of that's predicated on what you do on the top-line. There is a nice leverage ability piece of the labor stories. So our ability to top -- drive top-line again can create some sales leverage as you think about labor. But again, so I don't think the delta, when you think about labor as a percentage of company's sales is going to be very out of line. I think you'll see it kind of in that 40 to 60 basis points range.

All right. Did you mean sequentially 40 to 60 basis points from the first quarter?

That's sequentially from the second quarter.

Yes. Second quarter. Okay. And then on the -- just on the to-go mix, maybe you could talk about what that was in the quarter. I apologize if I missed that, but also I know you took some price on the delivery channel, so maybe you can quantify that, but I was wondering if you're seeing any pushback on that channel particularly is it -- it's very expensive relative to carry out to the extent that the delivery mix is held up. Why do you think that's the case given the huge price differential and what seemingly deteriorating macro environment? And I'm wondering how much of that is just the aggregators being aggressive in customer acquisition or if there's any sustainability to that channel.

Yes. I -- one I think the delivery channel is again, it is proving to have resiliency and it is relates to people. I think the need stayed related to that consumer is a little different. I think the demographics using that is probably skews towards the higher economic side of the equation. So right now the resiliency and the willingness to continue to use the delivery channel is still in place. Overall, we pretty similar percentages. You're really seeing to go off-premise can remain in that 30% to 35% range for the quarter. I think that it seems to have a steady state. The nice thing on Maggiano's is again, they've introduced a whole another level of guests to their off-premise capabilities. So you've seen a very meaningful little over 80% year-over-year improvement in their off-premise side of the equation. So that that's a nice new robust channel for them to continue to grow, which we kind of move forward.

Your next question for today is coming from Chris O'Cull with Stifel.

Hi, good morning, guys. I had a follow-up question, Kevin, related to Chili's pricing and discounts. I'm just wondering how the company's determined what the impact of the pricing and discount removals will be on traffic, because I would think the company would need to conduct either a test or at least evaluate the impact over several months just given the frequency of Chili's guest.

Yes. So that's a great question and even someone asked me that the last call and candidly, I didn't think we could wait to do a pricing test. We typically would do something like that. In order to understand the impact, I think we were so far behind on pricing versus the balance of the industry. I thought we needed to lean forward so that we could start investing in the things that are going to improve the experience of the restaurant. I will say we are adamant about protecting an opening price point for the guests that would otherwise not be able to afford Chili's or casual dining. This is why we've protected $10.99 and that's why we're going to be advertising that later this quarter and really shout the abundant value as well as the quality of the food that you get. And you think about $10.99 price point for a complete meal with a unlimited chips and salsa, a full size entrée, and a bottomless drink and compare that to even fast food or QSR that's pretty unbeatable. So as I think as long as we make sure that we are honest about protecting the price points for that guest that really needs it in order to come in, I think we're generally going to be okay. And I think that's why we've seen the mix in Three for Me. A lot of the folks that we're coming in either have gravitated back to the À la carte menu when we remove the favorites out of that menu. Or they've gone ahead and traded up based on the variety that's available there. If they want steak or they want shrimp, they can still get it within Three for Me. So we'll continue to monitor it. Obviously the big question mark that everybody has and we're not immune to it either, right, is what's going to happen with the economy and maybe we relate to pricing, but we still have a pretty big delta between where our competitors are, where we are. So we feel pretty good positioned within the context of casual dining pricing. And then as long as we maintain those opening price points that we feel are really, really aggressive, regardless of the dining channel that you're in, we feel confident that we'll stay close within that one to two point delta versus the industry on traffic. If we can do that, we'll continue to grow dollar share.

You mentioned Chili's returning to TV advertising -- oh sorry. Go ahead.

Chris, I was just going to add too, remember that this is not -- this has not been a one-time event rolling out some of these changes. We actually started a lot of the discount removal back in the first quarter. That really started coming to together in kind of the August kind of timeframe. And we also then reintroduced shortly after that at the beginning of September, the new bar menu, which also took discounting out of that piece of the equation. So this has been kind of a rolling effort over the course of really the first half of the fiscal year. So many of those moves have actually been in place, and we've been watching very closely over the course of three, four months. And we can see the impact particularly, and when you look at something like the bar and the discounting that came out of that, you're seeing a really nice response and improvement on the bar side of the equation that it's exceeding our planned expectations there. So you're exactly right. You have to continue to watch for the leg effect of that, but I think a lot of the -- these moves are starting to age themselves very well. And we're not seeing any of the concerning dislocation that you might otherwise be worried about.

Could you help level set our expectations for what impact the return to TV advertising could have on traffic? I'm just wondering if was fiscal 2Q expecting to be or do you expect it to be the worst in terms of traffic performance and then sequentially improve from there?

Well, I don't think we want to give you guidance on what we expect from the advertising. What I can share with you is it'll be about abundant value at a sharp price point. We are going to have sufficient weights that we believe it will meaningfully move the business. But I can't share with you how long that advertising will be on and when will it start for competitive reasons. But I hope either at the next earnings call or at the June investors meeting to share all of that detail with you.

Your next question for today is coming from David Palmer with Evercore ISI.

Thanks. Question on dining room traffic. Could you talk about what your dining room traffic trend was year-over-year and how those traffic levels compare to 2019? And just generally speaking, how you think dining room traffic will trend the rest of the year?

Yes. We have actually -- we're actually seeing the dining room business obviously continue to grow and that's thinking through the entire comp dynamic, traffic is down a little bit relative to that pre-pandemic dining room. Obviously, when you eliminate some of the discounting that that impacts obviously your largest piece of the equation, which would be the dining rooms. And particularly when you think about some of the stuff we've done on bar. But it's not, again the business is in totality is moving in the right direction. So I think again, similar to what we talk about in the overall business, the trade within the dining room standpoint is -- has been very favorable. Kevin kind of walked through some of the things we see on the Three for Me platform. A lot of that takes place obviously within the dining rooms the reinvigoration of the margarita program. Those kinds of things obviously are going to skew more to the dining room side. So similar give up some traffic, but gain more than adequate offset on the price and mix side of the equation.

I thought that your traffic in the dining room was down double-digits versus pre-COVID, something like that. And I mean assuming I -- is that right? And I also wanted to ask about your labor hour growth. You talked about dialing that up a bit. Where do you think you are now versus pre-COVID in terms of labor hours, and where do you think you'll end up? I'm just really curious about the proportions of labor versus sort of that in dining room traffic.

Yes, again, we're starting the process of dialing that up, that really started in later December. So we'll continue to fine tune that as we go forward. I'm not as focused on pre-pandemic versus current. I think again, we're focused on how do we drive the better guest experiences and the metrics that that show that the guest is responding to better service, better food, better atmosphere. So we're going to keep, I think some of that analysis more in the current environment as opposed to looking back three years in that regard. Yes, I think your traffic at low point in the dining room is in the range that, that you're thinking. I think that's not an inappropriate way to think about it, but again, well offset by all the other moves we're making.

If I kind of struck out on that question, but if I could just ask, was the traffic decline 7%, 7.5% or so for Chili's decline, was that roughly what you would've have expected in terms of the trade-offs, the natural trade-offs you're making the business, including the pricing? And I'm wondering obviously the January is a weird month, but down the road summertime, for example, the -- maybe the comparisons become more normal. Is there a traffic trade-off that becomes not acceptable? Is there a level where you feel like maybe you have to make some adjustments? Like what -- how should we think about -- how you are thinking about traffic from here? Thanks.

So how we're thinking about is as long as we're moving in the right direction on the total business both in terms of sales and profitability, we feel pretty good about the moves. Now, obviously, if things start to get closer to where that's not true, we're not going to wait for that to not be true. We're going to make some interventions, right? So we're going to look at it very closely. Our belief is that as long as we keep a barbell strategy where we protect opening price points but then allow price points to flow through on some other items, and then be able to reinvest back into the experience, we think that will allow us to continue to grow the business. If that -- if those beliefs are untrue, especially with a macro headed in the wrong direction and we've got to revisit that we will, and we might have to go a little bit back to a little bit more discounting, or we might decide to protect some pricing. But at this point, we haven't seen anything that would lead us to believe we've got to change that strategy. And as long as we run, a couple of points away from the industry on traffic, the equation looks really good for our business and then allows us to plow back investments that we hope will then grow traffic over time, whether it's advertising improved service levels or better food. So that's our belief. We'll continue to monitor it. We reserve the right to -- we look at that strategy if the things that the data that we're seeing changes significantly, but we haven't seen it so far.

Your next question is coming from Brian Vaccaro with Raymond James.

Hi, thanks and -- thanks for taking my questions and good morning. Kevin, you mentioned the low-end consumer not coming as much, and I think you said that was the case even before the changes on pricing in Three for Me. And perhaps that's somewhat due to the macro, but I'm curious how much of that you think could be due to reduced awareness since you were off air during the pandemic? And do you have any data or studies on that that you could share as we try to think about the potential benefit as you bring advertising back online?

Yes. We -- the only data that we have on it, we haven't done any like specific studies. The data that we have is a top of mind awareness. So in marketing terms, top of mind awareness, especially in the restaurant industry is really important because you're always in the market for food. Like you're always -- you always got to eat, right? And then in this new world where a third of our businesses transacted digitally, you're literally always in the market, you could always buy Chili's, whether you're at home or you're out shopping or you're at a restaurant, right? So top of mind awareness in other words, when I'm hungry and I think about the restaurant that I'm going to dine at, it's critically important that Chili's is a part of that consideration set because if you're not then you have no chance of actually closing that, that guest, right? The top of mind awareness is what we're going to be driving for when we think about the advertising that we're going to put on TV. And that's why we're focused on; we think it's a relevant message of abundant great value at a great price point. In addition to making sure that that advertising is unmistakably Chili's using some of the things from our past as well as the things that are unmistakably Chili's like our logo and some of the jingles and things like that, right? So what I would tell you is, we have seen dramatic declines in top of mind awareness throughout the pandemic as we went dark. We would expect those trends to start moving in the right direction. It takes some time for the advertising to take hold and you just start seeing a move in those in that data points. As far as like using that data to give you an estimate of the traffic lift, it'd be very difficult to do that right now just because we've been off air for so long. Once we have more data on what the TRP is mean in terms of incremental traffic, we'll have a better idea of the impact of putting an advertising back on.

Is it reason or fair to assume that that Chili's top of mind awareness has dropped relative to peers more than others is a lot of brands have come off air except for one large one that, that I'm aware of in terms of national chain. So is -- has it -- has Chili's underperformed or come down more on that metric? Can you tell us versus 2019 anything along those lines?

Yes. I mean, well, we will -- our top of mind awareness, this is publicly accessible data with the right research companies. Our top of mind awareness has declined versus pre-pandemic. And we'll share some of that detail with you at the June Investor Day as we talk about our marketing and advertising strategy. But it's clearly the biggest opportunity for this business and from an advertising standpoint is just to get back in the consideration set in top of mind for customers so that we're part of their consideration set of where they're going to eat.

Okay. Got it. Thank you. Joe, I wanted to just circle back on your labor comment a couple of questions I've got. I think you said, in that up 40 bps to 60 bps versus what you just saw in the second quarter. And just a quick skim of historical pre-COVID, it would seem that your second half labor cost ratio is typically a little lower than Q2 or even the first half just on higher seasonal sales volume. So I just wanted to clarify, is that 40 to 60 kind of trying to hone in on the actual investment that, that we need to think about other dynamics around seasonality or perhaps that's an all-in expectation, call it that, that you'll be kind of in the mid-33s embedded in your second half guidance. I just want to clarify that.

Yes, Brian, I put it in the latter piece of the equation. It's kind of the all-in, obviously yes, you would expect to see some sales leverage benefiting that area if you had a normalized set of hours going into the system. Obviously we're going to be putting some more hours in as we go through the rest of the fiscal year. We're also anticipating it probably some higher opportunities to on the manager bonus side of the equation, things of those nature. There's all kinds of puts and takes in that line. But the guidance I kind of gave you relates to the all-in effect of what else would expect to see coming on the labor side.

Okay. Okay. Thank you for that. And then also, Joe, while I have you, can we just drill down on the other OpEx line for a second? And I know there's a lot of moving pieces, R&M, utilities, and now thinking about bringing advertising back, just to name a few. And are there certain categories, you talked about advertising going up in the second half of the fiscal year, but are there certain categories that are expected to decline and help offset those dollar increases? Or should we expect that other OpEx dollar line to be moving higher than the high-260s it's been in recent quarters?

I think as we -- as you kind of move forward and talking absolute dollars, I would expect it to move up. Again, you cited one of the key drivers will be the advertising piece of the equation as you build that advertising accrual that goes through the OpEx line. So that's where we'll see that. I think generally speaking, R&M expense, I expect to be at a little more elevated level than you might have typically seen it as we continue to move forward on improving the condition and cleanliness of the restaurants are some of the investments you make back in such as janitorial costs flow through that line as opposed to labor. So where you might have thought that something might be going to labor, it's actually going into OpEx as it relates to more hours for the janitorial side of the equation. And again, you just have a number of things in there that are still kind of in an inflationary environment. I think most of those will start to normalize and mitigate as we move through the year. But you have to build some expectation of continued inflation when you think about things year-over-year. So yes, so I think you'll see the absolute dollars tick up over what you just cited. There's also very good chance of that's where sales leverage also starts to hit some of those items too. So on a percentage basis; I think it should be a fairly stable to possibly slightly improving on a percentage basis of sales. But we'll make the right calls as it relates to some of the expenses that are kind of run through that as it relates to advertising and R&M as we kind of move forward.

Okay. Okay, great. And then just two quick housekeeping items. Do you have the percent of sales that was off-premise for each brand in this second quarter?

I don't, Mika, do you have that? I don't have that sitting right in front of me right now where --

Yes, so Chili's --

Yes, we -- go ahead, Mika.

Chili's was just over 30% and Maggiano's was -- sorry, I'm looking at Maggiano's didn't have it memorized right here. Maggiano's --

Low-20s.

Yes. Yes, they were about 27%.

27%, Maggiano's. Okay. And last one for me, sorry to keep going so long, but the tax rate Joe, embedded in your guidance.

Again, we expect that that low-single-digits to mid-single-digits tax rate on the annual basis.

Okay. Great. Thank you very much.

That's the effective -- and that's effective tax rate.

Your next question for today is coming from Jeffrey Bernstein at Barclays.

Great. Thank you very much. Two questions, just the first one, speaking to the broader macro one of the largest QSR players yesterday spoke about an assumption for a mild U.S. recession, presumably a downturn from here. I think you mentioned not assuming a downturn. So I'm just wondering what -- what impact do you think would come from a mild recession on your business? And how would you respond in terms of maybe a change in strategy if need be? And then I had one follow-up.

Yes. Let me start with just how we think about like where we're positioned and then I'll talk to you about what I think how the customer's going to change based on if the macros were to worsen. So number one, I'd like where we're positioned on value even with the recent price increases that we've taken, we're playing catch-up versus the industry, and so there's still a pretty large gap versus where our pricing is versus our competitors. So I feel good about that. Our value scores have actually improved since we took the pricing in October on the everyday menu. I think that's a function of improved service levels. The other thing that we have that we didn't have in the recession back in 2008 several others have too, but we have 12 million loyalty members and we have a direct way to talk to them. And so we can target value a little bit sharper than we could back then. So I think it's a huge opportunity for us, because then you can go a little sharper if you need to go sharper with the guests that would need a better value than the one that doesn't, right, versus the -- before you had that capability, you had to advertise it to everyone. So you could be more laser-focused on value. And then lastly, the fact that we're getting back on air with advertising with a -- what I think is unbeatable in the restaurant industry at $10.99. I think we'll have a nice impact on traffic. From a customer standpoint, if the -- if that recession or if the macros continue to get worse, what you see them do is they can't afford to have a bad experience. And so because dollars are tighter, and so what'll happen is they're going to gravitate to the places that they think they can get consistent value, not necessarily the lowest price, but things that they can count on and trust. And so regardless of whether the recession or not, the idea of the strategy of improving service levels, improving food and being a more consistent concept, that's going to help us whether the macros get worse or not. And so my direction to the team is we got to stay focused on that. That might slow down our investments because we can't be as aggressive if we're -- we don't have a tailwind on the macros. But the things that we're doing to fix the labor model and to provide better service levels to make sure that the restaurants look great and that our food is consistently perfect. Those are all really important things that we need to do regardless of what happens with the macro. As far as like the changes that we would make if things did get worse, I think one, we'd get a lot sharper with some of our CRM value and our loyalty value against the guests that we know need it because we'll be able to see if they pull back on their trips. So we instead of just having blasting out a value to everybody. I think the second thing is that we've got to continue to accelerate our simplification and get to a place where we're making a fewer items, we're making them a whole lot better, and that's going to improve margins and as well as allow us to invest some of that back into the business. And then I think the third thing is I think we got to try to stay on advertising on a hot price point, because that's going to obviously mitigate the traffic headwinds that you're going to get from a macro. I think those are the things that we would then tweak, but I don't see us like a major reverse course of our strategy. I do think you'd see the pendulum swing back a little bit more to the center in terms of balancing the long-term investments with some of the short-term traffic drivers.

Understood. And then just the follow-up, for full-year fiscal 2023 looks like at the mid-point you raised your EPS guidance by I guess $0.10, but it looks like at least versus consensus that you beat the second quarter by $0.25. So I'm just wondering if you can maybe prioritize whether or not you think your guidance is still conservatism or perhaps the second quarter beat relative to internal expectation was more modest than maybe consensus or perhaps as you mentioned earlier, maybe you're factoring in the incremental labor and advertising and R&M and whatnot. Just trying to prioritize what led the pretty significant second quarter beat relative to the more modest increase in the full-year EPS. Thank you.

Yes. Jeff, again, as it relates to the beat relative to the consensus, I mean that -- I'm not going to get too caught up in what the consensus and how they might have arrived at some of those numbers. The -- it was a quarter that exceeded our expectations internally too, but there might have been a differential between those two numbers. And again, you're thinking about what are the -- what's the prudent level to get to as we kind of see momentum in the business, but understand some of the macros that are sitting out there also. And it does incorporate the investments we're talking about. So they're -- we really have the opportunity in some cases as we move into the second half of the year to move even a little quicker on some of those investments. If the -- again assuming the macro stays up, we want to be able to make the moves as quickly as we can. So we're thinking through all this different pieces of the equation with the weariness of the macro that you see everybody talking about that we don't need to get out over our skis on that piece of the equation either.

Your final question for today is coming from Brian Harbour with Morgan Stanley.

Yes. Good morning. Thank you. Maybe I'll just ask about the mix piece of your comps. Is that something that you actually expect to kind of pick up from here? Because obviously the reduction of discounting was kind of the most immediate impact, but what have you started to see so far from the bar initiative or some of the product changes?

Yes. I mean a big part of our strategy on what we call core four, which is CRISPRs, margaritas, burgers and fajitas. The idea is to -- how do we bring some innovation to those properties and platforms in order to drive both pricing and mix? And so like the CRISPRs test that we have currently today so for this is like an example so you can understand how we're thinking about mix. So today, we sell we have three different offers on CRISPR or two -- now it's two because we reduced one, but they're all the same size, right? So there's no opportunity to buy a bigger piece count. And so that's not really the way the guest wants to buy chicken tenders, if you see competitive concepts, they have multiple sizes. People want bigger eats and not everybody wants the smallest size. And so we're testing three, four, five. We're testing a four, five, six count. We're testing with additional sauces that we're taking from the virtual brands. We're testing upgraded sides. And what we expect to see as a result of that test would be significant moves in mix within CRISPRs and then more importantly, overall PPA and check gains from making that move because obviously if people are trading down in the CRISPRs even if it's a bigger mix, it's not going to help us, right? So that's why we test it versus just rolling. And so far as the test, we're really encouraged about what we've seen. It's clear that guests, if you solve for their -- whatever their needs are and do it in a meaningful and valuable way; they're going to be willing to spend more with you. And so I think you're going to see that show up in the bar. I think you're going to see that show up in fajitas over time. The challenge for us is we just can't do everything at once, right? The restaurants and our RSC can only handle so much change and do it in a quality high fashion manner, right? And so we are -- we've literally just gone through this exercise with our leadership team of like as we think about evolving the menu and driving mix through innovation, how do we pace and sequence it so that both the restaurant support team as well as the field teams can handle all that change, right? So that's why you're not seeing it all at once within a 12-month period. But that's how we're thinking about mix. We think that could be a meaningful source of growth for us as we think about not just having the lowest price point in the industry, but how do we create the best value for the guests.

Okay. Great. Thank you. And then just on menu pricing, you said what the number was in 2Q and I think you had previously expected it to roll down kind of closer to 7% as we end the year. Is that still the case? Like is your cost outlook still kind of supportive of that pricing level, or do you think you might add some more as the year ends?

Hey, we'll continue to take a look at different, I don't anticipate necessarily adding any incremental price on the menu this fiscal year. I do think there's some as we think about our next menu, and Kevin just outlined some of the mix opportunities there. We may look at some off menu pricing opportunities at a lower level based on where we're currently at and how we expect things to work through 2023, I would expect to exit kind of in the 8% range. As we get to that that kind of that June period, you will start to see that 10% move down now as we kind of move forward with the rest of the year and lapse some of the prior year moves ending. And again probably on an exit rate somewhere around 8%.

All right. So that concludes our call for today. We appreciate everyone joining us and look forward to updating you on our third quarter results in April. Thank you, everyone.

Thank you, everyone.