Mark Graff - Bloomin' Brands, Inc. Elizabeth A. Smith - Bloomin' Brands, Inc. David Deno - Bloomin' Brands, Inc..

Michael W. Gallo - C.L. King & Associates, Inc. Gregory R. Francfort - Bank of America Merrill Lynch Jeffrey Bernstein - Barclays Capital, Inc. John William Ivankoe - JPMorgan Securities LLC John Glass - Morgan Stanley & Co. LLC Jason West - Credit Suisse Securities (USA) LLC Jeff D. Farmer - Wells Fargo Securities LLC Karen Holthouse - Goldman Sachs & Co.

LLC Brian M. Vaccaro - Raymond James & Associates, Inc. Matthew DiFrisco - Guggenheim Securities LLC Andrew Strelzik - BMO Capital Markets (United States) Sharon Zackfia - William Blair & Co. LLC.

Greetings, and welcome to the Bloomin' Brands Fiscal Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow management's prepared remarks. It is now my pleasure to introduce your host, Mark Graff, Vice President of Investor Relations. Thank you. Mr.

Graff, you may begin..

Thank you, and good morning, everyone. 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 second quarter 2017 earnings release. It can also be found on our website at bloominbrands.com in the Investors section.

Throughout this conference call, we will be presenting results on an adjusted basis. And explanation of our use of non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures appear on our earnings release on our website as previously described.

Before we begin formal remarks, I'd like to remind everyone that part of our discussion today will include forward-looking statements including a discussion of growth strategies and financial guidance.

These statements are subject in numerous risks and uncertainties that could cause actual results to differ materially from our forward-looking statements. Some of these risks are mentioned in our earnings release. Others are discussed in our SEC filings, which are available at sec.gov.

During today's call, we'll provide a recap of our financial performance for the fiscal second quarter 2017, an overview of company highlights, and a discussion regarding progress on key strategic objectives. Once we've completed these remarks, we'll open up the call for questions. With that, I'd now like to turn the call over to Liz Smith..

Brazil posted comps of 13%, which represented the highest quarterly comp since 2014. This quarter we ran a marketing program featuring our signature Outback ribs, and it was very well-received by the Brazilian consumer.

In addition, service and operations continued to execute at a high level, allowing the Outback business to perform extremely well in a tough environment. We are also seeing success with Abbraccio and now have 10 restaurants.

As a reminder, Italian is the second largest segment in Brazil with no clear market leader providing us with significant runway for future growth. Our brand strength combined with the under penetration of casual dining in Brazil gives us confidence to continue investing capital in Brazil for high levels of return.

In conclusion, our portfolio is performing in line with expectations and we are pleased with the progress we are seeing behind our initiatives. Our investments in the core experience, off-premise and international are paying off. And with that, I'll turn the call over to Dave Deno to provide more detail on Q2.

Dave?.

after removing all adjustments from Q2 2017 and Q2 2016, general and administrative costs were $75.1 million and $68.3 million respectively. The increase in G&A is primarily related to the timing of our annual managing partner's conference. The conference in place in the first quarter of 2016, it was not held until the second quarter of 2017.

I would now like to draw your attention to our international business. International profits and margins were up significantly versus a year ago. International adjusted operating margin was 8.4%, which is up 390 basis points versus Q2 last year.

Importantly, consolidated margins will improve as our international business becomes a larger part of our portfolio. On the development front, we opened five system-wide locations in the second quarter, all of which were international locations. During the quarter, we made great progress in our capital structure.

We are close to wrapping up our very successful sale leaseback initiative. We now have less than 50 properties remaining to be sold and thus, so far, we have received $650 million in proceeds. In total, we expect over $700 million in proceeds once the whole program is completed.

We are utilizing the proceeds from these transactions to repurchase shares. Since the last earnings call, we have repurchased $155 million of stock. This is a significant win for our company and for our shareholders. Since the beginning of the year, we have repurchased $233 million of stock.

And given current valuation levels, we will continue to opportunistically repurchase shares. We now have $95 million remaining and the $250 million authorization which will expire October 21, 2018. Also of note, last week the board of directors declared a cash dividend of $0.08 a share payable on August 23.

As it relates to our 2017 guidance, we are reconfirming all aspects of the guidance which we provided in February except for a couple of items. First, we have had some favorability to the tax rate versus prior expectations. We now expect the GAAP-effective income tax rate to be between 21% and 22%.

We also expect the adjusted effective income tax rate to be between 24% and 25%. This was down slightly from prior guidance of 25% to 26% for the year. Second, we now expect to open approximately 30 new system-wide restaurants in 2017 versus our prior expectations of between 40 and 50 restaurants.

This revised outlook reflects a reduction in the expected number of international franchise locations. We expect the pace of franchise development to pick up as we enter 2018. This change does not have a material impact on total revenues or on our capital expenditure expectations for the year.

However aspects of our guidance remain unchanged including the guidance for adjusted EPS and comp sale, we are pleased with our progress thus far in 2017 and we'll continue to update you as the quarter progress. Now, there are a couple of important aspects to the quarterly flow of our earnings in the back half of 2017 that I'd like to mention.

First, Outback check average is expected to be modestly negative in Q3, which is a big change from the first half. We are rolling off the menu pricing in Outback that we are choosing not to replicate as part of our investments back into the business.

In addition, the timing of the Outback promotional calendar will have a negative impact on Q3 check average. We expect this trend to reverse in Q4 where PPA will be positive. Second, 2017 is when we have our 53rd week. It falls between Christmas and New Year's Day and is the busiest week of the year. The benefit from this extra week is significant.

As a result, the fourth quarter is expected to be our highest earnings growth quarter for the year. Given these items, it is likely that your third quarter EPS is too high and your fourth quarter EPS is too low. So please take this into account as you work on your models.

Having said that, I would like to mention again, we are on track to achieve all of our financial objectives for the year. We are confident we are making the right and necessary investments both domestically and internationally to support long-term growth.

We remain disciplined stewards of capital and our improving capital structure provides us increased flexibility to return cash to shareholders. And with that, we'll now open up the call for questions..

Thank you. Ladies and gentlemen, we'll now be conducting a question-and-answer session. Our first question comes from the line of Michael Gallo with C.L. King. Please proceed with your question..

Hi. Good morning..

Good morning..

Just two-part question. As we parse out the improvement in traffic trends at Outback, obviously the best we've seen in a while. And the outperformance versus the industry, certainly the best we've seen in a while.

I wanted to parse out, where you're seeing that, what's some of the bigger sales layers that are driving that? How much of that is coming from loyalty versus delivery versus the investments? And whether you're seeing a material change in that traffic at lunch versus dinner? And then as you get into the back half, last year, obviously the traffic compares will ease significantly as you lap the reduction of discounting.

And I was wondering about how you feel about being able to actually get the traffic positive given the momentum you're seeing in that business. Thanks..

Sure, Michael. So, just a couple pieces of color for you on that. Outback's traffic does continue to strengthen. And as I said in my prepared remarks, we anticipate that it's going to continue to build through the year.

So, we don't give quarterly guidance, but the trajectory that you're referring to is something that we expect to continue and to finish out the year strong on Outback traffic, a reflection of the investments that we made.

When you talk about what's the impact of individual investments, I think the key thing for us is that it's the totality of the investments that are coming together in general to elevate the 360-degree experience. So, you're seeing increase in customer satisfaction across every single metric.

When you look at the rolling and the timing of the impact, certainly, some investments happen earlier than others. So, we get a more immediate benefit from the exterior remodel program. Although keep in mind that the exterior remodel program this year is still back half weighted.

So we did about one-third of the 150 in the first half, but there's still two-thirds of the 150 to come. That 400- to 500 basis point lift tends to come pretty quickly. When you look at the Dine Rewards Program, it had a really good impact on Outback. We're up to 3.9 million users and we really like what we're seeing.

That impact is rolling through and is at maturity. You look at delivery, when we put it in; we have talked about incremental 80% to 85%, so, that shows up. And then the reduced discount, that also, as we talk – that the comp comes out rather quickly.

But when you look at the medium to longer term impacts, the menu simplification and reduction in complexity that we did, that plays out over time, but again, I think you'll see that in the brand health measures strengthening on service and consistency and a reduction in any type of problems associated with complexity.

The other customer-facing investments and portions and quality and labor investments, given the frequency of the category of two to three times a year, that's that longer term 26- to 39-month build that we've talked about.

So, net, we feel really, really good about how all the investments that we are making in Outback are building that traffic growth, restoring the brand health and bringing that kind of higher quality traffic back in on a sustainable basis..

Thanks very much..

Thank you. Our next question comes from the line of Gregory Francfort with Bank of America. Please proceed with your question..

Hey, guys. Maybe the first one, just on overall pricing levels in the industry. I think it's interesting you guys let the average check or some of the pricing roll off in the third quarter.

Do you think there needs to be a broader check reset for the category? And is that something that you expect might happen in the next year or two, just for overall casual dining?.

So, I think that we've talked a lot about what the role is of pricing, and I think it depends on the individual brand and the individual value equation. So, I don't want to make a general statement on pricing for the category. Let me take about our brand.

We certainly know that part of our equation is total benefits divided by price and that we have to have affordable pricing. And when we don't have that, we see some traffic erosion. So, for us, it's about having accessible price points all along the value chain.

We certainly have to have them at the entry price level, but there is still a role very much for customers wanting to pay for great experience.

We see the most compelling thing moving our customer is total benefit, the ambience investments, the quality upgrades, the increasing portions, everything that's happening at an affordable price versus reverting back to more value pricing, if you will. So, pricing is certainly important.

It has to be affordable relative to what you're putting on the plate and the experience in the box, but it's a very different answer for each of our brands. It will certainly continue to be one of the key levers that we do across with each of our brands.

But I wouldn't make any blanket statements on value pricing for us as it relates to the biggest levers for growth..

Got it. That's helpful perspective. Maybe I'll just throw one more.

What was the level of food deflation in the quarter, and maybe just with respect to the cost of sales line, how much of that year-over-year change was due to deflation, maybe, being offset by a certain impact from the investments you're making?.

Yeah. We've been planning food cost for a while. We talked about our productivity initiatives, please don't forget that. Our A versus T management has kicked in and helped, the deflation side has helped as well, but we did make some investments in our product, like Liz had talked about.

But overall, food cost came in quite nice for the quarter because of the commodity deflation and the productivity initiatives that allowed us to invest behind the business..

Got it. Thanks, Dave..

Thank you. Our next question comes from the line of Jeffrey Bernstein with Barclays. Please proceed with your question..

one, Liz, you talked about the pivot away from discounting, and I would agree that it seems like the right long-term decision even though it has showed some implications.

But do you see any change in the competitive landscape with peers, I guess, either doubling down on their discounting or perhaps following your lead with less discounting? How do you think that that should play out over the next 12 months or so? And then I have one follow-up..

Well, Jeff, I think everybody – take our brands. We have four distinct brands in our portfolio, and each one has a different "answer" depending on what the consumer wants to see in terms of investment and benefits and the balance of affordable pricing.

So honestly, I think every competitor out there has their own value equation that they're familiar with, and that's what they're making their decisions off of.

So, I wouldn't say that one action that we're taking on one brand is relevant to everybody else's brand or even indeed the same, so, growth algorithm for the other three brands in our portfolio. I think it's about really staying close to your consumer, using the data and the research to figure out exactly what is motivating them.

We see for our portfolio that's increasingly investing and elevating that customer experience. People want to go out, and they want to have that eatertainment entertainment, that 360-degree experience, that signature service, signature app, signature moment, but it has to be at affordable pricing. So, there's certainly a role of that.

But I really think it differs for every individual brand. And I think the key for us has been really getting out and mining that data about what is most motivating..

Understood.

I didn't know if you had seen maybe from your competitive landscape whether others were being more or less aggressive?.

Yeah, we've seen, kind of, nothing that makes us feel like what we do to ourselves is the most important thing for restoring growth, and that stays for us..

Got it. And then just on the refranchising that you guys announced in April, of 50 some odd locations.

I'm just wondering more broadly how you thought about that whether that was opportunistic or a conscious decision to increase the franchise mix? Whether you share any color in terms of the terms or the performance of those stores versus the system, and perhaps what stops you from increasing further? I mean, I'm just wondering, big picture, when you talk to the board about that, why not do hundred more units? What's the limiting factor?.

Sure. Well, let me – before I get into some of the details, let me step back and talk about just what we've done – Liz and I have done since we've come on. And that's really addressed our portfolio. You look at what we've done with Roy's. We refranchised Korea. We had a wonderfully successful sale-leaseback plan. And looking at our portfolio in the U.S.

is part of that. Now, before I talk about the U.S. specifically franchising, our core competency is owning and running restaurants. That doesn't prevent us from looking at different markets where we feel that may be a better marketplace to go if we have some franchisee run it. And in this particular case, that's what we decided to do.

But we will continue to look at that, but we clearly want to own and operate the restaurant. It gives us flexibility as we go forward with our strategies. And we have remarkable cash flow in a lot of places in the United States that we really do well. And I also want to say is that as we look at our franchisees, we want to have great partners.

So, that all comes together, Jeff, with our overall strategy. But I want to emphasize again, our core competency is owning and operating company restaurants..

Understood. Thank you..

Thank you. Our next question comes from the line of John Ivankoe with JPMorgan. Please proceed with your question..

Hi. Thank you. First a housekeeping question and then another question if I may. On the extra week in the fourth quarter of 2017, certainly understand the influence on average weekly sales or average unit volumes there.

But would that also affect same-store sales or will you make an adjustment and do it on equivalent weeks?.

We do it on equivalent weeks, John..

Okay. And then, secondly, just looking at U.S. versus international, despite what is a huge gap in restaurant-level margins, the overall operating margins were relatively the same.

And I understand there's different compositions, the store ownership, what have you, but how close are we at an inflection point especially in Brazil to begin to leverage the infrastructure that's currently in place to where you can actually see some larger gains in overall operating income? And can that be a later 2017 event, 2018, 2019, just in terms of if you think about the overall price of that market, when do you expect to slow down the growth in overall G&A or a restaurant support spend?.

Sure. First of all, like Liz mentioned, we were really pleased with the 13% comps in Brazil, I mean, hats off to that team. What a remarkable accomplishment. And we did see big time growth in margins during the quarter.

I think, John, the one thing that we are seeing it in our base business, the operating margin expansion in our base business in Outback Steakhouse in Brazil, what we are seeing is we are also investing ahead of growth in places like China and Abbraccio and that does bring down operating margins a bit.

But we are leveraging our – the operating margins in our base businesses in Brazil, and we are taking some of that money and investing it in places like China and Abbraccio to move the business forward. And as those investments take hold, yes, we will have operating margin expansion even further in our international business..

Let me just take that opportunity on the China piece.

I mean, as your core competency of owning and operating and running restaurants, I mean, does that also exist in China or are you looking at various ownership options there over time for any number of different reasons?.

Yeah, we own and operate the restaurants in China today, but we are also looking at other opportunities to joint venture or partner with people. It's a huge country as you know, John, with 40 huge cities, and there's different answers for each one of those.

And I think we clearly have the expertise in China and here in Tampa to make some of those decisions. So, right now, we're just building the business model and making sure the economics work. And then, as we go forward, we'll get equity ownership, we'll look at joint ventures, and we'll look at franchise.

But that's the big part of our growth equation..

Thank you..

And I think, John, just to build on that, I think you're going to see a different answer for different sections of China. So, we're, kind of, going to make the right decisions for the different sections and that will be partner dependent..

And is the model currently in place, the sales investment and margin, it's like something we can begin to talk about that as an investment that make sense or is it still kind of very long term in terms of when that might drive value at the store level?.

Yeah, we're making progress, John. We've got more work to do, but we're pleased with the progress we're making. We think we have an economic model that's coming together for us. We're also looking at some other opportunities to invest in different ways in China with Outback.

So, I think we got to think through the restaurant size, some of those things as we go forward. But right now, we do have an economic model that we are working on to grow..

The other thing that I think is Shanghai is a very challenging market from a cost standpoint. And, kind of, when you get to a restaurant level profit margin that you're operating that there, you can quickly leverage that as you go outside of Shanghai.

And so, our first store that's now open in Hangzhou is our most profitable – well, it's our highest sales and most profitable because you have lower investment. And so, what we like is that early indications are – is that this, kind of, business brand will play very well in those Tier II cities..

Thank you..

Thank you. Our next question comes from the line of John Glass with Morgan Stanley. Please proceed with your question..

Thank you. Just going back to the Outback brand, where are you in the reduction of discounting? Have you wrapped it up? In other words, I think you began in back half of last year last year. So, if this quarter represents, sort of, the final quarter of that progression or did you alter the pace of it somehow.

And how comparable is the back half of this year to the back half of last year on that initiative?.

Yeah. That's the right way to think about it, John. We are tapering of that. And so, I think for the back half for us, as we – as I indicated on the call, you're going to see traffic growth behind the investments and the reallocation of spending.

But kind of that incremental quarter-after-quarter of heavy lifting on Outback is tailing off as we exit the year..

But did you change the pace of it? I mean I'm trying to understand the dynamic between your traffic improvement versus the check which was a less of a driver. I mean, historically, you've got off of discounting or less discounting. The check grew more, traffic was less. And so, you've seen a less of a check improvement.

So, did you discount more? In other words, what was the difference in check from the first to the second quarter, the check decline?.

Well, it also has to do with the cadence of our promotions, right? So, we had from May through halfway of June, we had our Aussie 4-Course Meal for $14.99. So, don't think of it as a change in the philosophy of "discounting." We're still – if you look at our straight discounts, we're still very much down on the offers.

We're down on the percentage when we do offer. So, it has to do kind of more with the mix..

Okay. And then how does the refranchising impact the store margins? It's enough stores that it's material from a total percentage basis.

Is it going to change your store margin profile in the back half?.

No, John, it's pretty modest for us. So, it's not – those don't really have a big impact on restaurant margins. It's 54 restaurants..

Okay. Okay. Thank you..

Thank you. Our next question comes from the line of Jason West with Credit Suisse. Please proceed with your question..

Yeah. Thanks. Just wondering if you guys will be willing to quantify the amount of pricing that's rolling off here, I guess, in the third quarter.

And then, secondly, just looking at the big picture here, I mean, you've obviously seen some improvement in the Outback comps which is outperforming the industry pretty nicely, but your EBIT dollars are down significantly still, especially in the U.S. business.

So, just trying to understand, is there an opportunity here to, maybe, take some G&A out as you refranchise and get the EBIT dollars up? Or now that we're starting to lap some of the discounting to John's question, will we start to see those margins really turn more positive and EBIT dollars turning more positive here going forward? Thanks..

Yeah. Sure. We're not going to parse out the pricing by quarter obviously for competitive reasons and things Liz talked about some of our philosophy there. On the EBIT side, don't' forget, we've made some investments in Outback in service, in food cost, et cetera, to help make our business move forward. And that's still – we're lapping some of that.

So, that's why you'll see some of the EBIT piece. On overhead measures, I think if you look at how we managed the company since we've gone public. Clearly we are managing for no overhead growth in areas that the company doesn't see, and we're investing ahead of growth in other key areas such as digital, international, et cetera.

So, we'll continue to do that. But on the EBIT side, we are really pleased with the investments that we're making. You're seeing it in the comps, you're seeing it in the traffic and Liz talked about some of the things of how they come together. So, on the EBIT side, once we roll through some of those investments, yes, you can see some improvements.

But I want to make sure that people know that these investments clearly are coming together and working..

Okay. Thanks..

Thank you. Our next question comes from the line of Jeff Farmer with Wells Fargo. Please proceed with your question..

Thanks. You guys did touch on it, but over the last three years, we've seen very little, if any, net new unit growth.

So, just looking forward over the next three years or so, what role do you expect unit development to play in reaching your EPS growth target which I think is – you can remind me, I think it stands at 15%?.

We've talked about 10% to 15% for EPS targets. And so, on net unit growth, what we – one of our core strategies is to grow what we own in the United States. And one of the big parts of that is our exterior remodel program, and coming up, our interior remodel program.

But, Jeff, don't forget we've got – we've been filling our relocation pipeline, and we've got 16 relocations this year, and the sales gains are very, very good and higher than our expectation actually. And so, we are going to continue to build that pipeline. We think we have at least 100 relocation candidates.

So, as we go forward with the Outback business, please factor that in your thinking..

We also are – I think we talked about we will opportunistically open up new Outback restaurants, and I think we talked a couple of years ago about there being probably 40 to 50 of them. Last year, we opened six. You'll continue to see them. We're really pleased with the fill-in.

We also will continue to opportunistically – and where it makes sense – continue to open new units. We just opened two on Fleming's, and they're performing extremely well in Plano and Pasadena.

But as Dave has said in the past, the majority of our new unit openings will continue to be internationally, and that is showing significant returns on investment. But we will still open them opportunistically where it matters on where we should and could on our existing brands.

The bigger opportunity for us is just that constant remodel program, the relocation program which really have great payback..

Fine. And just a quick capital allocation follow-up. So I think your lease-adjusted leverage ratio is something just above 4 times. Over the last few years, you guys have pointed to a target of roughly 3 times. You're well above that. I think, for all intents and purposes, you're comfortable being well above that 3 times target.

But having said that, what should we be thinking about your updated thinking on capital allocation priorities.

How do you expect to spend a lot of that operating cash flow that's coming over the next couple of years?.

Yeah. Sure. We look at our net debt adjusted EBITDA roughly in the high 3s. Our goal over time is still to get closer to 3 times. We can get there through EBITDA growth and other ways. We've had a very successful share repurchase program we've talked about as we've done various cash management things.

But we'll continue to make progress on our debt ratios, and we'll continue to exercise under our existing share repurchase authorization if the share price is very attractive..

All right. Thank you..

Thank you. Our next question comes from the line of Karen Holthouse with Goldman Sachs. Please proceed with your question..

Hi. Just a question on delivery for you. So, it looks like the rollout of units they're offering, it continues to expand.

From the website, it looks their breakdown right now is about 200 units that are being run in-house and about 50 that then would be third-party, which compared to only a handful of third-party units was my understanding at the end of the first quarter.

If you could, maybe, just, sort of, walk us through your thinking of in-house versus third-party, your puts and takes, and then a little bit bigger picture how – I know now that you're 250 units and six to nine months into the process.

Where are you focused on and continue on improvements to the customer experience?.

Sure.

So, Karen the first thing I want to say is that the exciting thing about off-premise and our belief and all the research that we've done that it's 25% incremental opportunity that's – a 25% increase potential that is largely incremental, i.e., it could represent 25% to 30% of the volume flowing through CDR boxes, and then it's largely incremental.

Part of the excitement we have against that strategy is it's going to start with the consumer, and we are going to allow the consumer to have and deliver in whatever way the consumer chooses. So, we are going to pursue an omni-channel approach. If the consumer wants to go through a third-party runner, it will be available through a third-party runner.

So, it's not an either/or necessarily. You see that in the hospitality industry, okay. There's an omni-channel approach that's really customer-centric. What we are finding though is that we have a different profile in general around the margins of who orders through third-party versus who orders direct. And so, these things can be very complementary.

In terms of building our own network, we're currently, as you said – I think we said 246 of our locations between Outback and Carrabba's, what we're seeing is exactly what we've talked about, about the incrementality, about the desire.

We see that our highest target value customers, those that when we help them in to delivery, they increase their total pie of their business opportunity. The opportunity for us is to continue to deliver world-class service and world-class delivery options.

They like the fact that when somebody comes to their home, it's a Outback or Carrabba's employee that can speak about the food, that can do the connection – the other benefits that confers to us by having that direct relationship is obviously we own the data, we own the relationship, we can market directly with them, we can surprise and delight them.

They participate in our Dine Rewards Program. When they order directly for us, that's a qualified visit. Dine Rewards has been really successful; visit three times, you get 50% off the fourth. So, there's a whole ecosystem built around doing it yourself, that is very attractive.

At the same time though, the customer needs to be able to get our products and enjoy our products however it is they want to engage, and we will make that possible..

Great. Thank you..

Thanks..

Thank you. Our next question comes from the line of Brian Vaccaro with Raymond James. Please proceed with your question..

Thanks and good morning. Liz, I just wanted to clarify something and circle back on a comment you made on traffic earlier in the Q&A.

Did you say that you expect Outback traffic growth in the second half of the year, i.e., year-on-year improvement or you're talking more about sequential improvement versus where you were in the second quarter?.

I don't want to give direct traffic quarterly. Let's just say that we continue to see sequential improvement, right? If you look back over the last four quarters, you've seen significant sequential improvement. We now have the highest traffic recorded since 2015 on a 0.8 base, and we continue to see that sequentially improve in Q3 and Q4.

And I don't want to peg it to a year ago, but improving off a 0.8 base does have some good runway and does augur well for continued traffic improvements..

And that is, as everybody knows, I believe, but just to state for effect that's significantly above the industry. So, we're very pleased with some of the investments we're making at Outback Steakhouse..

I think the other think I'd say is that I think we all lived through Q4 of last year, right, which was a very kind of puzzling time on the pullback, so I think everybody is appropriately going into the Q4 period, saying, are we going to see another type of change in the sales pattern, et cetera? We think that we're going to be settling in the industry towards last year and that's more typical.

So, again, we're being prudent in how we're laying it out there, but you did hear me correctly in saying that we believe the traffic will continue to sequentially improve..

Okay. Thank you. And Dave, I wanted to circle back about your third quarter comments specifically versus where expectations were previously.

Is that – just curious, is that driven by sales expectations? Maybe you mentioned the average check dynamics at Outback that weren't reflected in expectations, or is there also a margin dynamic that we should be aware of versus prior expectations that you would highlight either G&A, store level, et cetera?.

Yeah. I know we've talked about the pricing year-on-year and then you guys can pull it through your models and how that would come out, Brian. So, that's probably the biggest thing along with also another big thing is just the 53rd week and making sure that you think through that because it's such a big week at the end of the year.

So, we talked about in the script on the pricing piece of Outback Steakhouse, the PPA and then the 53rd week. Those will be the two pieces..

Okay. That's helpful. And then one more if I could, just a bigger picture margin discussion, if you look at your margin outlook for the year, there's obviously a lot of moving pieces lapping the sale leaseback rent, layering in, in investments, in savings, and then, obviously, the extra week impact.

But your guidance would seem to reflect a pretty positive inflection in store-level margins in the second half of the year.

Can you walk us through some of the primary drivers of that leverage?.

Yeah. I don't want to get into quarterly guidance on margins, Brian. But let me just kind of step back and talk about some of the key things that help us drive margins. And that is the productivity especially A versus T, we saw that come through in our food cost. Comp sales growth is an important piece of the margin to continue to manage G&A.

All those things come in together to help grow our margins as we go forward. I'm not going to get into the Q3 margin, Q4 margin, et cetera. And I think we've laid out pretty consistently what we expect for the year given some of our investments, given some of our sales trends, given our productivity and other areas..

Okay. And last one on the margin front.

What's your food cost expectation for the year in terms of inflation or deflation on the commodity basket?.

Yes. We will be within the range that we laid out previously. We might be – the deflation might not be quite – it'd be at the lower end of the range potentially. But for commodities, flat to down 1%, we're comfortably within that range, and we'll probably be a little bit on the lower end..

All right. Thank you..

Thank you. Our next question comes from the line of Matthew DiFrisco with Guggenheim Securities. Please proceed with your question..

Thank you. My question is with respect to just to follow up on those margins a little bit and looking at the prime cost. I guess the prime cost looked like you just sort of take labor and COGS together. Over 62%, historically, you've been sort of those two numbers combined on a relative basis, about 60% or so.

I wonder, is this sort of the new direction that you think the prime cost will be holding at given sort of the heavier lifting having to do to present to the customer a value equation to get positive traffic or a return to positive traffic?.

No. I don't think – we'll get into longer-term guidance at another time, but I don't think this is kind of the new normal or anything like that. I think one of the things that we continue to watch closely and manage is labor rate inflation and that's looking at 4% to 4.5%. And we will continue to work on productivity on that side.

We certainly don't want to hurt the customer experience but we got to look at all the things that restaurant companies look at as we continue to manage labor. And then, of course, sales gains help expand margins as well.

But I don't want to say that I'm not here today to provide guidance on prime cost going forward, but I don't think you can necessarily tell you that those two prime costs are the new normal..

But directionally, without taking price, that seems to be, absent the extra operating week, at least the pattern, I mean, I can't see anything disrupting that aside from a significant lift in traffic.

Would that be sort of the correct math as far as looking at the pressures that you just incurred in 2Q? And the cost environment with labor and with commodity cost.

If you don't take price, would that, sort of, still hold up throughout the quarter absent the extra operating week?.

Yeah. I just want to make sure that we didn't say that we're not taking price. I want to make sure that we – that's still in our overall levers and everything else. This was a flow over time.

So, there are many things we can do to manage our margins that being how we look at discounting, how we look at pricing, how we manage productivity, we look at mix, how we manage our labor. So I think – and again, I'm not going to get into Q3, Q4 margins, et cetera.

Just say that we have many levers in our portfolio to manage our margins going forward and we're not here to provide any guidance for the balance for the year on any particular prime cost. But just know that we actively manage these levers as we look at our business..

Okay. And then I'm sorry if I missed it.

But did you quantify how much that extra operating week is going to be as far as EPS for the year?.

No, we didn't. We just mentioned that it's a big week and free to take a look at your models between Q3 and Q4..

So, meaning a big week then it's going to be more than in that quarter what it would represent then of 1/13 or whatever, 1/14 to 1/13, it'll be more than that?.

It's Christmas week to New Year's week and that's – all of you know that's a big business for casual dining and restaurants in general..

Okay, great. Thank you..

Thank you. Our next question comes from the line of Andrew Strelzik with BMO Capital Markets. Please proceed with your question..

Hey. Good morning. I had another question on delivery. Where do you think that those dining occasions are coming from? You referenced we're eating at home and some of that are not all accrued in the grocery.

So, is that really where you think you're seeing it from? And on the cost side, are you prepared at this point to give us some way to think about what the cost associated with the delivery investment will be and is that included in the $25 million reinvestment? I'm assuming no, but just wanted to clarify..

Sure. So, I'll take the first piece on the consumer and where that's coming from. I mean, the interesting thing about delivery is that what you're seeing is you're seeing a return to dine at home to levels that haven't been observed since 1992.

But the good news is that dine at home doesn't just mean anymore cooking at home, right? It means, I'm enjoying food at home at levels – at increasing levels that haven't been seen much – haven't been seen since kind of 1992. The great thing is that they want different ways to enjoy food at home.

And so, we have moved our set of brands, which used to be just dine out, into the in-home occasion, which is four times the size of when I decide to go out. So, that's why we're seeing the incrementality.

So, we know that the reason we're seeing that 80%, 85% incrementality is that we are participating in a whole separate occasion four times as large which is called when I want to dine in my home, not necessarily cook in my home. So, that's how that's playing out. I'll let Dave talk about the investment side..

Sure, sure, the off-premise piece is part of our investing ahead of growth bucket, shall we say, the Outback service and food pieces are separate. And I think it's a bit too early to talk about what we're seeing on the cost side and everything else. When the time comes, we'll be happy to do that. But....

Still scaling..

Yeah, it's scaling and we're working through it. So, I – it's a little bit early. But like Liz has said, we like what we've seen so far in this opportunity..

If I could ask one more on the loyalty side as well, it sounds like you're seeing most of the usage accrued to Outback.

Is that right, or are you kind of seeing it more broadly across the brands? And reaching maturity kind of at the time line that you have at the high end of what you saw in the test, are you surprised that that's as quick as it was or is that more consistent with what you'd seen in the test? Do you think maybe we can continue to see that build from where we are today?.

So, the first one is that the portfolio is broadly benefiting which is what we had hoped for and we're seeing cross-usage which also the benefit of having four brands. You can kind of dine around the table. So, it's performing as we had hoped it was.

In terms of the rent, I mean, look, we're delighted with how it's doing and we're up to 3.9 million customers. What we also like is that it's continuing to grow every month. We're continuing to add more customers. What we also like, though, is that it's giving us a really, really rich data set.

We've increased our data set 50% on the data profiles that we have of our direct customers, I think, since 2014, I want to say. So, that's giving us the ability to have this direct marketing relationship with more of our customers. We know all about their preferences, what they want, and what they do.

And so, one of the really interesting areas for us in loyalty is now continuing to mine that data and what are the kind of loyalty 2.0 things that we can do now that we have that relationship..

Great. Thank you very much..

Thank you. Our next question comes from the line of Sharon Zackfia with William Blair. Please proceed with your question..

...about analytics from loyalty.

I guess maybe an addition to the analytics you're doing, kind of what are you learning or what is surprising you about your customers and then in terms of that marketing, are you doing segmentation? Are you at the point where you're doing true personalization at this point? And maybe as a follow-up too, are you integrating loyalty as well into delivery?.

Okay. So, a couple of things. In terms of data analytics and what we're seeing from loyalty, you know what, for proprietary reasons, I want to stay away from kind of unlayering the data and what we're having loyalty.

Like any loyalty program, right, your early entrants and your bigger enthusiasts are the ones that know you, and so it's not playing out dimensionally different as the circle broadens on loyalty, on how our curve is unfolding than what you've probably seen in the past. In terms of data mining on loyalty, great question.

I would say we're building the tools to be able to mine the data, and in the past, we've used like an innings analogy. We now have increasing data, and we're increasingly – that's the investment ahead of growth in technology, in IT, so we're increasingly building the tools to be able to.

That's something that's going to fold out over the next year in terms of our ability to mine sophisticated and do personalization at a routine and customary level.

We're probably still in the second or third inning which is really exciting because we know when we do the personalization, we're able to get – click-through open rates two and three times what I'd call like a generic targeted – a generic method. So, a lot of that, Sharon, is in front of us as we build those tools.

And in terms of delivery, when you order and deliver direct from us, yes, it does count as a qualified business, and we are seeing that, and that is very well received..

All right. Thank you..

Thank you. Ladies and gentlemen, that's all the time we have for questions today. I'd like to turn the floor back to Liz Smith for closing comments..

Well, we appreciate everyone joining us today, and we will look forward to updating you on our portfolio on the Q3 call. Thanks a lot..

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..