Chris Meyer - Group Vice President - Finance; Investor Relations Officer Elizabeth Smith - Chairman of the Board of Directors and Chief Executive Officer David Deno - EVP, Chief Financial and Administrative Officer.

Joseph Terrence Buckley - Bank of America Merrill Lynch John Glass - Morgan Stanley & Co. LLC Karen F. Short - Deutsche Bank Securities, Inc. John William Ivankoe - JPMorgan Securities LLC Jeffrey Andrew Bernstein - Barclays Capital, Inc.

Matthew James DiFrisco - Guggenheim Securities LLC Jason West - Credit Suisse Securities (USA) LLC (Broker) Michael W. Gallo - C.L. King & Associates, Inc. Jeff D. Farmer - Wells Fargo Securities LLC Brian M. Vaccaro - Raymond James & Associates, Inc. Sharon M. Zackfia - William Blair & Co. LLC Andrew Strelzik - BMO Capital Markets (United States).

Good day, everyone. Welcome to the Bloomin' Brands, Inc. Third Quarter 2015 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Chris Meyer, Vice President of Investor Relations. Please go ahead..

Thanks, Dana. Good morning, everyone, and thank you for joining us. With me on today's call are Liz Smith, our CEO; and Dave Deno, Executive Vice President and Chief Financial and Administrative Officer. By now, you should have access to our fiscal third quarter 2015 earnings release.

It can also be found on our website at www.bloominbrands.com in the Investors section. Throughout this conference call, we will be presenting our results on an adjusted basis. These non-GAAP financial measures are not calculated in accordance with U.S. GAAP, and may be calculated differently than other companies' similar non-GAAP information.

Quantitative reconciliations of our non-GAAP financial measures to their most directly comparable GAAP measures appear in our earnings release on our website, as previously described.

Before we begin our formal remarks, I'd like to remind everyone that part of our discussion today will include forward-looking statements, including our discussion of growth strategies and financial guidance. Such forward-looking statements are not guarantees of future performance and, therefore, you should not put undue reliance on them.

These statements are subject to numerous risks and uncertainties that could cause actual results to differ from our forward-looking statements. Some of these risks are mentioned in our earnings release; others are discussed in our Form 10-K filed with the SEC on February 24, 2015 and subsequent filings, which are available at www.sec.gov.

During today's call, we'll provide a recap of our financial performance for the fiscal third quarter 2015, an overview of company highlights, a discussion regarding progress on key strategic objectives, an update on 2015 guidance, and some initial thoughts on 2016. Once we've completed these remarks, we'll open up the call for questions.

With that, I would now like to turn the call over to Liz Smith..

growing U.S. sales and profitability, accelerating international growth, and driving long-term shareholder value. In terms of U.S. growth, we have plans to address our recent sales trends and are on track to grow margins this year despite an unfavorable commodity and wage environment.

This progress has been made possible by our productivity efforts which will well exceed our annual goal of $50 million this year. We are committed to closing the margin gap to our peer group and expect continued improvement in 2016.

We recognize that most of the conversation in casual dining is centered on the U.S., and we remain confident in our ability to grow comp sales as we have demonstrated annually over the past six years. However, we think the biggest opportunity in casual dining is in International.

In our focused areas of Latin America and China, a rising middle class is expected to lead the significant growth in the casual dining market over the next five years. We are uniquely suited to capitalize this opportunity and are delighted with our progress.

In Brazil, we successfully launched our second brand, Abbraccio, and are on track to open Fleming's as a franchise business in the first-half of 2016. In addition to our vibrant business in Brazil, we are building out our China business.

China represents one of the largest market opportunities for CDR brands, given the highly-fragmented market and increasing levels of disposable income. We are also expanding our efforts to open franchise restaurants globally. There was a great deal of demand for our restaurants outside the U.S., and we plan to capture this opportunity.

Finally, our strengthening balance sheet and free cash flow generation have allowed us to more aggressively return cash to shareholders. As our credit metrics continue to improve, we plan to increase the amount of cash we return over time, both in the form of dividends and share repurchases.

This is just one aspect of our overall strategy to increase total shareholder return. We have a tightly edited portfolio of brands that have leading market positions within their respective categories. Our commitment is to remain nimble and agile as we evaluate the best go-to-market strategy for our portfolio, and we are always reviewing our options.

In summary, although domestic comp results were below expectations this quarter, our International business performed extremely well. Our long-term growth thesis remains intact, and the confidence in the vitality of the portfolio remains strong. The levers provided by a focused portfolio allow us to expand restaurant margins and deliver our EPS goals.

We have strong brands and numerous opportunities for growth, and all of our decisions will be made with a lens of maximizing total shareholder returns for our investors. And with that, I'll turn the call over to Dave Deno to provide more detail on our third quarter operating results.

Dave?.

Adjusted diluted earnings per share was $0.15 versus $0.10 in 2014. GAAP diluted earnings per share for the quarter was $0.13 versus a negative $0.09 last year. Adjusted net income was $18.6 million versus $12.6 million for the third quarter a year ago. GAAP net income was $16.8 million versus negative $11.4 million in 2014.

We had significant margin gains in the quarter, and this sets us up well to deliver on our EPS guidance for the year. Now, on to our sales performance. Comparable U.S. restaurant sales were down 1.3%, while traffic decreased 2.6%. For domestic concepts, our comp sales results were as follows. At Outback, comps were up 0.1%, with traffic down 0.9%.

At Carrabba's, comps were down 2%, with traffic down 3.7%. At Bonefish, comps were down 6.1%, with traffic down 8.5%. And at Fleming's, comps were down 0.6%, with traffic down 2.3%. We knew our third quarter would be challenged as we were lapping stronger comps from a year ago, and Liz indicated our marketing program to not breakthrough as expected.

We are preparing for 2016 with significant innovation-driven platforms and new levers to drive comp sales. Turning to our International business, Q3 comp sales were up 6.1% at out Outback restaurants in Brazil. Traffic was flat in the third quarter. As a reminder, we report Brazil result on a one-month lag.

So our third quarter results include June 2015 through August 2015. This business continues to perform well across all measures. In Korea, Q3 comps were up 6% with traffic up 13.8%. We are very pleased with the progress our dedicated local team is making in a continually challenged Korea market.

The effort taken to ring-fence this business provides a more sustainable and agile business from which to grow. Turning back to our financial update, total Bloomin' Brands revenues decreased 3.6% to $1 billion. Excluding the impact of foreign exchange translation, our revenues would have been flat for the quarter.

Now, I'll provide a brief overview on margin performance. Adjusted restaurant level operating margin was 14.5% this year versus 13.8% a year ago. Our 70 basis point improvement was driven by strong International performance and sustained benefits from our productivity initiatives.

On the cost of sales line, we made great progress with our actual versus theoretical food cost initiative enabling us to mitigate pressures from double-digit beef inflation.

As a reminder, food cost would've been significantly higher after these initiatives as we did not take near-the-level of pricing to fully offset the cost increases we experienced this year.

Turning to labor, we continue to see higher wage inflation, particularly in the front of house due to minimum wage increases coupled with an improving job outlook for hourly employees. We are able to partially offset this impact through the utilization of our labor scheduling and optimization tools.

Wage inflation pressures remain a headwind and we are exploring opportunities to gain further efficiencies in this area while improving customer service. Lastly, we have done a good job managing other parts of our cost structure.

For example, we have increased the use of digital advertising which has allowed us to be more efficient with our advertising spend. In addition, this quarter, we benefited from the lapping of higher general liability expenses last year. Our GAAP restaurant-level operating margin was 14.8% this year versus 13.8% a year ago.

The difference between adjusted restaurant margin and GAAP restaurant margin was driven by a favorable resolution to a payroll tax audit. In terms of reporting segments, I would like to point out a couple of items of note from our International segment. As I mentioned earlier, we continue to be negatively impacted by foreign currency translation.

In Q3, FX translation negatively impacted our adjusted operating income by over $4 million, mostly relating to our Brazil business. In terms of margin performance, International restaurant margins are significantly higher than in the U.S.

Our strategy of investing in key equity markets with high-growth opportunities enable us to leverage existing infrastructure to drive outsized returns. We remain committed to investing ahead of growth to position our great portfolio of brands for long-term success.

Turning to our capital structure, we repurchased $60 million of stock in the third quarter. We'll be opportunistic with share repurchases, giving current evaluation levels. We currently have $40 million remaining on a share authorization that runs through the beginning of 2017.

Also of note, in October, our board of directors declared a cash dividend of $0.06 a share payable on November 25. As our balance sheet improves, we'll be more aggressive in returning cash to shareholders. Now, I would like to discuss a few key items related to 2015 guidance. First, we are reaffirming full-year EPS guidance of at least $1.27.

Second, we now expect full-year comp sales guidance to be 0.5% to 1% from approximately 1.5%. This change reflects our Q3 sales results, a strong competitive environment and our planned reduction and discounting across the portfolio in Q4.

Lastly, total revenues are expected to be approximately $4.37 billion versus prior guidance of approximately $4.43 billion. All other elements of our 2015 guidance remains unchanged. In addition to our updated guidance, it is important to call out a few things related to the fourth quarter of 2015.

First, comp sales include a 90 basis point headwind related to the timing of Halloween and Christmas. Christmas falls on a Friday this year versus a Thursday last year. Second, we had a very challenging fourth quarter of 2014 in both general liability and health insurance. We are self-insured, so claim expense can be difficult to predict.

But given the unusually higher level of expense in the fourth quarter of 2014, we should see some favorability this year. In addition, we now expect full year G&A expenses to be lower than 2014, excluding any adjustments.

Since we lowered our sales performance expectations for the full year, we're expecting lower incentive compensation versus our initial expectations. We've also found ways to be more efficient with our cost structure while continuing to fund growth investments.

Finally, through the third quarter, we've experienced $8 million of unfavorable FX, and looking at the forward curve, we can expect $5 million more of FX risk for the balance of the year. That is baked into our at least $1.27 EPS guidance for 2015. But for perspective, forex for the year represents an $0.08 headwind versus 2014 rates.

Before I provide some preliminary thoughts on 2016, I want to provide a brief update on our CMBS property financing, we call PropCo. As we noted on our previous call, we are evaluating strategic options for this real estate.

After much consideration and analysis, we are exploring options to terminate this existing facility ahead of the April 2017 maturity to take advantage of favorable financing and the real estate environment. The preferred approach would be to maximize value through either sale leasebacks or secured financing.

We will provide additional details as to the timing and size of the transaction on the next earnings call. I would now like to take you through our preliminary thoughts on 2016. We expect to deliver an increase in adjusted EPS within our long-term target of 10% to 15% growth, with positive comparable U.S.

restaurant sales and an increase in operating margin. Commodity inflation is expected to be approximately 1% and foreign exchange headwinds of approximately $12 million, primarily due to the depreciation of the Brazilian real. Most of this impact will incur in the first half of 2016.

We will provide detailed 2016 guidance on our fourth quarter earnings call in February of 2016. In conclusion, our results for the third quarter set us up to deliver on our full year EPS goals. We were pleased with the progress on margins while making investments both domestically and internationally to support long-term growth.

We remain disciplined stewards of capital and our strengthening balance sheet provides us increased flexibility to return cash to shareholders. We look forward to talking to you after the New Year, when we report our full year 2015 results. And with that, we will now open it up for any questions..

Thank you. We'll go first to Joseph Buckley with Bank of America..

All right. Thank you. A couple of questions on sales.

Just so we're all on the same page, could you talk about what the revised full year guidance on the blended same-store sales implies for the fourth quarter? And maybe elaborate a little bit on your comment about less discounting, how aggressive were you last year versus what the plan is for this year?.

Yeah. I'll take the first piece, Joe, and then I'll turn it over to Liz on the promotional stuff. But our guidance is 0.5% to 1% for the year. We typically don't provide quarterly guidance on sales. So I think you can kind of see where we see fourth quarter going, but we try and stay away from quarterly guidance on sales.

But our full year is going to be 0.5% to 1%..

Yeah. And, Joe, just to add to that, I think kind of some of the assumptions as we go in the back-half of the year is that we viewed it as prudent to assume some of this weekend dinner traffic headwind that we've been seeing continues. We think that's a prudent call. We talked about the base – the holiday shift timing.

And then we talked about the fact that in Q4, we are pulling back on Bonefish discounts and – well, not just Bonefish discounting, but discounting across the portfolio as we set ourselves up against significant innovation that we've been working on that's coming out across the brands in 2016.

So it's the resilience of the portfolio with the productivity in International that gives us confidence in delivering the $127 million with those kind of headwinds in the back-half of the year..

And one other thing, Joe, I just want to remind everybody, it's in my prepared remarks, there's a 90 basis point headwind due to holiday shifts in the quarter. And, also, we expect terrific sales gains in Brazil and Korea as well in Q4..

Okay. And then just a question on the third quarter composition of the Outback same-store sales. So I think you said traffic was down 0.9%. So that's a very narrower gap than what we've seen in prior quarters.

So could you talk a little bit about that? How that traffic number was down less than in some of the prior quarters?.

How the 0.9% traffic – well, let me just talk to – I think, Joe, what you're asking about is the composition of third quarter on Outback. So let me talk about that..

Correct. Thank you..

So we were obviously disappointed in the results of the third year that we ran Steak and Unlimited Shrimp, and it did not drive the incremental traffic that we had expected. So that was running for two months of the three months and it was off to a longer window than we've had in the past.

And that's really the story on traffic for Outback in Q3 that 0.9% was the dinner business associated with the Q3 promotion.

You have said that – does that answer your question on traffic, or was it a sequential question?.

Yeah. I was thinking more sequentially. Yeah, when I saw the plus 0.1%, I thought the traffic number will be far worse, just based on the couple of the prior quarters. So if you can, just fill it out for us..

Yeah. Sure, Joe. Net pricing was low this quarter and about 1%. And we didn't see some of the fee mix benefit we've gotten from prior quarters. So that's why you see the numbers that you do..

Okay. Thank you..

Yeah..

We'll go next to John Glass with Morgan Stanley..

Thanks. Can I just follow, first up on that. So pricing had been running like 3.5% or 3.8%.

So, Dave, you're saying that when you let some roll off, was that just the quarterly timing or -?.

Our net pricing was up 1%, John..

Okay.

What does that mean though? Are you saying – is that mix or you're just talking about pricing?.

Net pricing; mix was unchanged..

Okay.

So why did pricing go from 3.8% to 1%? Did you choose not to – are you just choosing not to take pricing?.

We did have some roll-off in the quarter, yes..

Okay.

And is that the way to think about pricing going forward, or is this just a one-quarter timing issue?.

Our long-term goal, John, it varies from quarter-to-quarter, but our long-term goal is to have pricing between 2% and 2.5%..

Okay.

So I guess I'm still struggling, but I'll just assume that you go back to 2% to 2.5% in the fourth quarter?.

Yeah, that's pretty much our long-term trend..

Okay..

It varies by quarter-to-quarter, but our long term plan is 2% to 2.5%..

Okay. You talked about being ahead on productivity.

So where do you think you'll come in on – what was it this quarter and what do you think you'll end up at the year right now?.

Yeah. We'll be significantly above $50 million, John. We've had a really good run so far. We are ahead of plans so far.

I try not to talk about quarter-to-quarter, but we will be – given our initiatives on actual versus theoretical pricing, some of our labor initiatives, some of the things we saw in facilities management, utilities, is giving us opportunity, pretty sizeable above the $50 million..

Okay. And despite that, your U.S. margins were flat.

So I'm presuming you're offsetting a lot of deleverage? Or maybe you could just quantify what you've gained in productivity versus what you lost in de-levering?.

Sure. First of all, we don't price up to the levels of commodity inflation, number one. Number two, we did have some wage inflation, we're looking at 3% to 3.5% this year. And then number three, if you look at the release in the unallocated section, there's – general liability is down there. That's part of our U.S. business.

So we would have some favorability if you put that up in the U.S. operating margins..

Okay.

And the last question then is does that 8.9% go into restaurant margin? And are you modeling some amount greater than that for the fourth quarter, or is that just upside if you get more benefit in the general liability line?.

We have modeled the general liability trends and health insurance trends, like I mentioned in the script, in the fourth quarter. We've talked about that a lot. Last year, we had some downsize happen in general liability and health insurance last year, and so that's baked into our at least $1.27 guidance..

Okay.

And that is in the restaurant level margin on the consolidated basis?.

Correct..

Okay. Thank you..

We'll go next to Karen Short with Deutsche Bank..

Hi. Two questions. So, I guess, in terms of your comp guidance for 2016, I know you just made some comments on pricing or your long-term goal on pricing.

But I guess, in light of your embedded assumption translation of 1% and then you just gave that color on 3% to 3.5% on wage inflation, how should we think about – I mean, is 2% to 2.5% really the right number for 2016 on pricing, or is that too low?.

Well, I think we are looking at – it's early to talk about what we expect our operating margins and our pricings to be. I can talk to our long-term pricing strategy of 2% to 2.5%. But we will be talking about our long-term pricing plan – our pricing plans for next year on the February call.

So the 2% and 2.5% is our net pricing stance that we've had for the long term in our company and that does vary quarter-to-quarter..

Okay. And then, I guess....

I would just say one, I think, Karen, is that algorithm of pricing plus productivity offsetting inflation is kind of continue to be a strong algorithm for us as we head into next year as well..

Okay. That's helpful. And then I think on the last call, you had commented that you give some early comments on CapEx for fiscal 2016. So I guess, I'm wondering if you're willing to do that and maybe some color on capital allocation by brand.

And I'm asking it obviously in light of the fact that you did just allocate some capital – significant capital to buybacks?.

Yes, we expect – we won't give any detailed capital guidance this year, I mean, right now; we will in February of 2016. But we expect our capital spending to be in line with past years. And Liz talked about the exterior remodels at Outback, which we are seeing terrific returns on and we're very excited about.

We'll continue with our relocation program and we'll continue with our International spending..

Right..

But probably the biggest pivot would be the aggressive expansion of the exterior remodel program for Outback. So that should give you a sense of capital allocation differences year-to-year is that we're going full throttle now that we have the kind of years-long testing on the 33 locations..

Okay. That's helpful. Thanks..

We'll take our next question from John Ivankoe with JPMorgan..

Great. Several if I may. First, just to follow-up on that.

What is the cost of the exterior remodel package that you settled on out of the 33? I know there's kind of the medium high and low, but what is the right investment to achieve that 5% sales lift?.

Yeah....

Yeah. Go ahead, Liz..

No, go ahead. It's been – the exterior has been approximately the same as our interior remodel. So you should think of it at that level we shared with you before of $300 million to $400 million.

And again, John, that's going to really depend on where the starting base of the store, but you should think about that level of before $300 million to $400 million..

Okay. And if I may, in the quarter obviously that other operating expense, which would normally be kind of a fixed line item is what showed the most amount of leverage.

I mean, you mentioned insurance, you mentioned advertising, could you compartmentalize what the basis point impact from those two lines were? And maybe there was also some expense in International just looking at what the International operating income last year, that gave you a favorable lap in that line.

So just to try to think about what was maybe one-time-ish in nature versus what may be recurring?.

Sure. We've got three things, John, that are approximately equal weight, but I would say that the insurance general liability was beneficial; the moving on digital advertising was also a part of it. And then we also have spent a lot time in the U.S.

on utilities and facility management and our productivity efforts and we're seeing some benefit from that. So those would be the three things that we have..

And, Liz....

(36:02) 10-Q..

Okay. I'll look for that.

Liz, I mean, your experience in marketing, I mean, do you draw a direct correlation between the reduction in advertising and the relatively disappointing sales? I mean, do you think those two are directly related or no?.

Well, I want to kind of draw two distinctions. The first one was, on Outback, we pretty much had the same advertising levels, but really saw, as I said, the third time out with Steak and Unlimited Shrimp, did not drive traffic.

The reduction in advertising that we've seen has been more against the Carrabba's portfolio as we're getting out of promoting special occasion LTOs and readying for the new menu, which we're going to go on air full throttle in Q1, which is that every day dining, okay? I think what drove Outback – I know what drove Outback traffic was the fact that we had 10 weeks window that in the past had worked for us, but was not resonating.

The good news is, is that, we've got a pipeline of innovation, of true innovation, in front of us, and we know what happens when we focus on that. And so the advertising reduction is more on the Carrabba's front as we ready for the new menu..

And finally, if I may, Liz, you mentioned the NPD CREST data said that weekend dinner traffic was down 6%, which would normally be like deep recessionary type of levels. I mean, that's a pretty profound number.

So give us your insight in terms of why you think that's happening? And I don't know that NPD CREST has always the data source that you cite, if you could kind of juxtapose that relative to what you're seeing in Knapp and Black Box as well if you know that data?.

Sure. So, look, we use NPD CREST because it's the only longstanding data source in the industry that peels down below the traffic level, right? So it's directional and it gives you a sense. But what we have seen over the last two quarters is there has been weekend pressure on traffic for dinner in Q2 and it repeated itself again in Q3.

Now, we've always said what you do to yourself impacts you more. And I think we've proven that – we know how to grow weekend dinner traffic when we have more innovative platforms. In terms of what's driving that, I think that we talked a lot about that internally. There's been a lot of shifts.

We're looking for more assessments into – more granularity into those day parts. But we think there's more competition out there from alternate formats, and we also think that it's a change a little bit of a pattern. I would caution you, though, that it's two quarters and so – but it's been two meaningful quarters in terms of how our business split.

The other thing is we really have to drive that everyday dining occasion, which is exactly what is going on with the re-launch of Carrabba's, right, to move away from just being used on weekends. And we think that's – well, we know that what's the new menu does for us.

So we're kind of attacking it on the innovation front, but also driving more everyday of the week dining..

Okay. Thank you..

We'll go next to Jeffrey Bernstein with Barclays..

Great. Thank you very much. Couple of questions. Just one on the Outback comps. You talk about significant innovations-driven platforms and new levers.

I'm just wondering, without exposing too much, what exactly does that mean? Or how would that be evident to the average consumer? Is that greater emphasis on value? Is it more shorter-term promotions, more LTO-driven? And within that, you mentioned positive comps for Outback continuing into 2016.

I'm just wondering what you're thinking the industry is going to be doing in 2016 when you give that color? I know you talk about often beating the industry by 200 basis points. I'm just trying to get a frame of reference to how you view the industry? And then, I had one follow-up..

Okay. Sure, Jeff. So here's kind of the line of sight I would give you in. When we look at Outback, we've always talked about the number of different levers available for growth, and we're really pivoting to new levers for growth to focus on for 2016; so just for some color. We did the interior remodels which had a 3% lift.

We're shifting out of the exterior remodels that have a 5% lift, and we're going to be going after those and aggressively rolling those because we know that they really work. We talked about opportunistic reloads on Outback, we're accelerating and prioritizing those reloads because we continue to see terrific results with them.

On the food innovation front, we've really used the innovation that we have had to broaden the menu beyond steak, whether it was the salads, the second best at seafood, or the sips and snacks menu. We are really shifting the food innovation towards steak and quality and cuts.

And you're going to see that authority coming through more on the plate as well. We're shifting from the roll out of lunch to the growth of lunch. We haven't talked about it, but lunch is performing extremely well for us. And then we're also shifting in – we've told you guys that we're investing ahead of growth in technology.

We've had little customer-facing technology. That investment in technology is going to yield fruit for us as we roll some pretty cool stuff out in Outback next year. So as I said, the playbook is shifting to new growth levers and that's what gives us confidence that we'll be able to continue to grow, for, I guess, it'll be the seventh year on comps.

What does that say about the category? We've always said that the category would be choppy and that with traffic it would be plus and minus. And despite five quarters of positive comps, I think with (42:03) I think traffic looks like it might come in negative for the year again. So that's always kind of been inconsistent with our assumptions..

Would you still assume though that in 2016, you could be at a outpaced industry by a couple of 100 basis points? Or do your comparisons, at least for the first-half, make that more difficult to see in 2016 specifically?.

Yeah. I think we saw a dynamic change with the resurgence of some competitive activity. And so we're confident in our ability to deliver positive comps on Outback next year. Every measure – we love the new levers, we know what they can do. They've kind of been proven out in test.

But we think it's prudent to move away from pegging ourselves to a category when we can't control what the competitors' activity will be doing, if it becomes more aggressive. So I'll just speak to the momentum that I believe our investments next year will yield for Outback..

Got it. And then just the other thing just on the core side of things and on the commodity front, you mentioned a very specific 1% basket of inflation in 2016. So I'm just wondering how you're able to zone in on that, presumably it's beef and what's locked in or whatnot.

And would you think that the labor inflation is now going to totally replace the easing commodity inflation and, therefore, you're in a similar blended basket inflation scenario? Or would you think that 2016, the net effect would be more favorable with maybe labor being less inflation than perhaps commodities had been in the past couple years?.

Sure. First of all, as you know, our supply chain team has done a great job managing commodities over the years. And for competitive purposes on this call, we're not going to talk about 2016 in terms of what's been locked or what's not, just know that we're working very hard on 2016.

If the beef market continues to improve, there could be an upside to our approximately 1% guidance. But we'll see, and we'll provide additional detail on the February 2016 call. And our market basket is pretty broad; it's more than just beef. But we'll give you more detail on the 2016 call.

But we see approximately, Jeff, right now, about 1% commodity inflation number, and we'll see where the beef market takes us. On the labor front, we're looking at 3% to 3.5% next year. We do not have as much exposure to higher wage markets as some of our competitors do.

Recall, our portfolio is kind of a South Mid-Atlantic type of portfolio, but we look at wage rates to be between 3% to 3.5% next year. But we'll, again, provide more updates on the February call..

Great. Thank you..

We'll go next to Matthew DiFrisco with Guggenheim Securities..

Thank you. Just a couple of follow-up questions. On the remodel of Outback, I didn't catch it if you said it, I apologize.

What percentage of the store base or what's that rollout going to look like on an annualized basis?.

Yeah. We're going to look to complete that in three years. So it's going to be pretty aggressive. We have about a couple – so figure at a clip of around 200% a year..

Okay. That's helpful.

And then, internationally, did you just say what the check was in Brazil, given all the inflation down there?.

Our traffic was flat and our overall comps was up 6%. So that's pretty much – the rest is pretty much pricing. And, also, just to know that we – inflation tends to run higher than that, so we don't price to inflation in Brazil. But we're just absolutely thrilled with the performance in Brazil, up 6% in comps..

The other thing that we talk about a lot in Brazil is when you're on a wait; it's very hard to increase traffic. So we are looking at bump outs in existing restaurants and that's why we continue to put up restaurants as quickly as possible and they continue to perform well above plan. Even in this environment, they're exceeding their business plan.

So it's one of those situations where it's – there's a wait, so the ability to drive traffic is more limited in existing locations..

Understood, understood. So the capacity, I guess, you're going to look then to unleash some of that capacity or the bottlenecks there..

Yeah, we are. And we're also – as you know, we've kind of gone over the last five years from, like, 25 stores to 76 stores, and we continue to do that. That takes some of the pressure off the existing stores, but again those stores continue to open well above – despite the environment down there, well above the business case..

The other thing is, Liz talked about it in the script, we've opened up our second brand, Abbraccio. We have three restaurants there and now we're very pleased with the sales performance there and we're going to be going with a Fleming's franchise business in the first-half of 2016..

I was also going to follow-up on the franchising.

What else aside from Fleming's in Brazil, what other markets could we see, or do you have? Would it be the Middle East and the standard ones that we've seen some other casual dining concepts find some license partners?.

Yes. There's a tremendous desire for our brands overseas. So, Liz, has talked about in the past our equity markets being Brazil and China. We see opportunities, Matt, like you mentioned, in the Middle East, in other parts of Asia, Australia, other parts of Latin America, certainly for Outback and we'll see how the other brands resonate.

But we are building capability to increase our franchising opportunity overseas and, hopefully, more to follow there in 2016..

Thank you..

We'll take our next question from Jason West with Credit Suisse..

Yeah, thanks. Just shifting gears a little bit to the balance sheet, cash flow.

Dave, can you talk about what the costs would be to exit the CMBS early? And I guess in terms of the balance sheet overall, why you would be thinking about paying down debt at this point given where the stock valuation is? And would you sort of consider maybe holding on to this level of leverage and focusing all your free cash flow and buybacks? Thanks..

Sure. The amount of the prepayment – if we pay down before January of 2017, the amount of prepayment will be dependent on when we pay it down. And I'll provide more details on that as we look at the February call because we'll have – we'll be further along in this. But we are going to go early on the matter.

On share buyback and dividend, yeah, we agree. I mean, we think the stock is a very attractive valuation. We believe we can expand our credit metrics based on our EBITDA growth. And you'll see more from us in that, in the returning cash to shareholder arena going forward.

So we don't really expect to pay down too much debt, we have to pay down small amount contractually for our credit agreement every year. But certainly, we've shifted now to returning more cash to shareholders..

Great. Thank you..

We'll go next to Michael Gallo with C.L. King..

Hi. Good morning. Dave, I think you commented in your prepared remarks about starting to see some of the benefits on actual versus theoretical. I was wondering, how much of that benefit's still in front of you and what we should think about in terms of actual versus theoretical and overall productivity gains for 2016? Thanks..

Sure. First of all, our operations team has done a marvelous job rolling this out. And everybody's been – it's all been rolled out now, trained, and we are seeing significant gains in food waste management that we either can take the bottom line or reinvest in the business.

Actual versus theoretical will be part of our $50 million plus productivity opportunity next year as our targets have always been in the past. I think we have a couple years left to go to continue to capture the upside, and the team's just done a marvelous job..

Thank you..

We'll go next to Jeff Farmer with Wells Fargo..

Great. Just actually following up on that and some other questions. With 1% commodity inflation, sounded like low-single-digit menu pricing in the actual versus theoretical you just discussed. How should we be thinking about potential COGS favorability in 2016? I know it's early, you're not going to give me a lot, but any color would be helpful..

Yeah. We'll see margin favorability overall next year as we continue to get margin gains and approach our competitors.

Obviously, Jeff, we're not going to give the details that we – on our COGS and everything right today, but we expect nice margin expansion next year in our portfolio and we'll provide more details in February, but certainly going into a more favorable commodity environment, certainly with our productivity performance doing as well as we've done and, importantly, with our growing International business that has higher margins.

These are the things that'll help us expand margins as we go into next year and beyond..

Okay. Thank you. And then you pointed to marketing miscues. I think weekend dinner headwinds for the entire segment are some of the drivers of the below-plan Outback same-store sales for the quarter.

Is there anything else you guys would point to beyond that?.

Well, I think we said we weren't happy with how our marketing programs broke through, right? So I think, overall, that the traffic in the category has been challenged and choppy for a long time. And that we have seen this dynamic of dinner traffic on the weekends, but it's been a – call it, a two quarters.

So I think that that's a little early to call it a long-term trend, but we've seen it in the CREST data, and we've seen it in our own data. That being said, I think we've always been kind of pretty outright with the levers that we have, determine our ability to grow at Outback.

And, I guess, the really – the most important thing is that we have lined up additional and new levers for growth that we're kind of gearing up to support. So we're excited about where that's going to take us for 2016..

All right. Thank you. Just one more.

I think you were having this conversation with John earlier, but just in reference to the year-over-year declines that you've seen in the other operating expense line, how should we be thinking about that going into Q4 and heading into 2016? I know you said that there's theoretically some Carrabba's spending ramping back up.

But what are some of the other factors that could potentially move that expense line a little bit more into a normalized level in coming quarters?.

Well, a couple of things. First of all, those of you who had followed us know last year, in the back-half of the year, we faced significant general liability and health insurance expenses. We get to lap that now. So that's a big part of what you can see in Q4 margins.

Secondly, we have done a very good job in productivity, managing our facility costs and managing utilities. So those things we can see going forward as well.

So we are a self-insured company, so things do move up and down in insurance, but we had significant headwinds last year that we now get to laugh in Q4 and that's an important part of our story for this year..

Thank you..

We'll go next to Brian Vaccaro with Raymond James..

Hey. Thanks and good morning. Just two quick clarifications for me.

First, Dave, on the food costs, can you give us what the overall year-on-year inflation was on your basket in the third quarter?.

Yeah. It's been pretty consistent all year, Brian, between 3% and 4%. So that's what our basket looks like, around 3% for Q3 and we'll finish the year in the high-3%s..

Okay. And then thinking about your 1% commodity inflation outlook in 2016, I know you said there could be upside if beef moves lower.

But I just wanted to clarify, does the 1% assume down year-on-year beef inflation in that 1%?.

It's too early to give that guidance because we're in the midst of – working through our 2016, Brian. We'll give you more detail to come in February..

Okay. And then shifting gears, just a quick one on the annual guidance for 2015, is G&A – just wanted to get some color on G&A, is that still seen for the year to be flat to slightly up, or has there been some reductions on the G&A front? Thank you..

G&A will come down to be slightly negative this year as we manage our cost structure in various line items..

Okay. Thanks..

We'll go next to Sharon Zackfia with William Blair..

Hi. Good morning. A couple of questions. Liz, last year, in the second quarter, I think you weren't too happy with the marketing program at Outback, and you guys moved really, really quickly and the comps moved back in the, I think, mid-single-digit really, really quickly.

I'm just curious if you could kind of compare and contrast what you're seeing now and the shifts you're going to do in marketing and whether there is that kind of opportunity for a really quick rebound or quicker than we might imagine?.

Yeah. So I do think one of the things that we do extremely well is that we are nimble and agile, and we do have a lot of analytics at our disposal. So we can kind of zero in.

What we did in the back-half of last year was pivot back to that steak authority, which is really important for us and that's where you saw the rebound in back-half of the year, and our commitment this year to really focus on reasserting steak authority, putting it through into the advertising.

But as I said, we did go back to an old – one of the old LTOs, Steak and Unlimited Shrimp, that predated that shift, and it didn't because it was a nice value plan, and we've seen a lot of competition out there in terms of value and food abundance and that kind of thing. So we felt that we should go back to that.

It did not – it wasn't consistent – as consistent with the pivot to steak authority, it did not resonate. The good news is that we've been focused on our food innovation around steak innovation and quality. And so we're going to have that news to celebrate and talk about consistent with the shift we made last year in front of us.

So I just – I think with Outback, it had a 0.1% quarter. We're not obviously happy with it. But then when I look over the next six years, the past six years and the leverage we have in front of us, I do feel good about our ability to continue to grow this brand.

So I think you'll see the innovation on the marketing front and more meaningful innovation to talk about. But also, don't forget the other levers had proved really successful for us like exterior remodels and launching some other things..

And just to clarify, the innovation, is that something we should expect more than in the first quarter of next year? Is it too early to see a kind pre-holiday this year?.

Well, I don't want to get in for competitive reasons into what we're coming out with for Q4 for the holidays. But we do have a promotion coming out that we haven't had before from this Q4 for the holidays.

And I think as we look about – and talk about kind of the food innovation and steak and quality, that's a long-term thing that starts in 2016 in earnest..

Okay. And then last question, on the franchising globally, can you talk about any specific parameters or goals you might have around that? I'm assuming those would be more on markets that you're not already in, but any further dialog on that would be helpful..

Yeah. Sure, Sharon. It's markets that we are not in. It's a little too early to begin to state some goals as far as what we think we can do. We have some – I can tell you that we have some transactions that we're under discussion. And if they come to fruition, we'll obviously talk to people about it.

But it's a little too early to say specific numbers by year. But we will be focusing in on the Asian piece, the Middle East, Australia and parts of Latin America. And we have people on our company that know how to do this and we're building the capability to make it happen.

So more to follow, Sharon, with some specific targets, but it's a little early..

Good. Thank you..

And we'll take our final question from Andrew Strelzik with BMO Capital Markets..

Thanks for taking the question. I know when you previously talked about commodity inflation as it relates to 2016, you've been more optimistic about the back-half of the year. So I'm just wondering about the pacing in 2016 about 1% commodity inflation.

Should we expect it to be better in the back-half than in the front-half, or is it still too early to tell that?.

A little too early to tell, although, if you read the marketplace, what people are saying, they expect a better back-half of the year than the front-half. But as we finish up our work, we'll provide more granularity around that. But people, the marketplace is saying that the back-half would be better than the first-half..

Okay. And then you've been talk – you're talking about aggressively spending internationally. You've been building out your International teams. Just wondering where you are in that process.

Is there a long way to go there? Is that starting to slow just kind of where you sit today versus where you're going to end up?.

So I think we feel great about the infrastructure investments that we've made. And a lot of that was investing ahead of growth. A lot of that's happened, right? So we've got a great team now on the ground in China, a new president that started, that's been built out.

And in Brazil, we have the infrastructure we need, as you saw, that continue to launch new brands. So the whole notion of investing ahead of growth internationally that we've been talking about a couple of years has paid off, and we don't see the same pace continuing because we – now, it's about leveraging the infrastructure..

Okay, great. Thank you..

Thank you..

Thanks..

Well, thank you all for joining us. We look forward to talking to you about the year and the fourth quarter on the February call, I believe.

Operator, are there any more questions?.

There are no further questions on the phone..

Great. Everyone have a great afternoon. Thanks for joining us..

Again, that does conclude today's presentation. We thank you for your participation..