Mark Graff - VP, IR and Corporate Finance Elizabeth Smith - Chairman, CEO & President David Deno - EVP, Chief Financial & Administrative Officer & Principal Accounting Officer.

Michael Gallo - CL King & Associates Jeffrey Bernstein - Barclays Bank John Glass - Morgan Stanley John Ivankoe - JPMorgan Chase & Co.

Jeffrey Farmer - Gordon Haskett Research Advisors Brian Vaccaro - Raymond James & Associates Gregory Francfort - Bank of America Merrill Lynch Karen Holthouse - Goldman Sachs Group Matthew DiFrisco - Guggenheim Securities Sharon Zackfia - William Blair & Company Andrew Strelzik - BMO Capital Markets.

Greetings, and welcome to the Bloomin' Brands Fiscal Third Quarter 2018 Earnings Conference Call. [Operator Instructions]. It is now my pleasure to introduce your host, Mark Graff, Vice President of Investor Relations. Thank you, Mr. Graff. You may now 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 third quarter 2018 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. An explanation of our use of non-GAAP financial measures and reconciliation to the most directly comparable GAAP measures appear in 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 to 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 third quarter 2018, an overview of company highlights, a discussion regarding progress on key strategic objectives and an update on 2018 guidance. Once we've completed these remarks, we'll open the call up for questions.

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

Thanks, Mark, and welcome to everyone listening today. As noted in this morning's earnings release, adjusted third quarter diluted earnings per share was $0.10, and combined U.S. comp sales were up 2.9%. This result was in line with our expectation. Q3's performance marked the seventh consecutive quarter of sales outperformance versus the industry.

This reflects the continuation of the momentum we have built from our investments in the core guest experience to restore higher-quality traffic over the medium to long term. We continue to develop incremental sales layers to accelerate growth.

This includes shifting media spend from mass marketing to digital personalization, the Dine Rewards loyalty program and the rapidly growing off-premise business. Our strategic investments are gaining traction and are putting us in a position to capitalize on the change in customer-dining behavior.

Today's consumer is increasingly seeking more convenience in their dining occasions as well as having engaged and interact with brands. We believe our investment priorities are appropriately aligned with these evolving customer preferences and that momentum in share gains will continue.

In addition, we will leverage our scale, portfolio of brands and data analytics to improve engagement with high ROIs. Now turning to the brands. Outback comp sales were up 4.6% in the third quarter with traffic up 0.9%. This is Outback's fifth consecutive quarter of positive traffic and seventh consecutive quarter of positive comp sales.

It is clear that the investments we have made to elevate the customer experience are driving healthy sales growth. As a reminder, these investments were prioritized towards customer-facing improvements across food quality and portion enhancement, service upgrades and improved ambience.

Ensuring our assets are current remain a top priority, we are testing multiple design prototypes for our new interior remodel program. These new remodels will incorporate new design elements to modernize our look and feel, while also expanding the off-premise room to handle the higher expected order volume.

We anticipate it will deliver approximately 3% traffic lift, consistent with prior interior remodels. Once the prototype is finalized, we expect to substantially complete this program over a 3-year period. In addition, we are relocating Outback's restaurants as quickly as quality sites become available.

Given the strength of the pipeline, we are on track to relocate 14 restaurants this year. This relocation program continues to deliver impressive results, and recent relocations are generating a sales lift well in excess of 30%. We feel very good Outback.

This is a strong brand with great consumer appeal, the best operators in the business and is well positioned to take further market share. At Bonefish, Q3 comp sales were up 1.8%.

Our effort to simplify execution, while investing in food and the dining experience has returned the brand to its polished casual roots, known for fresh fish, innovative drinks and superior service. Beginning in October, we rolled out an all-new-branch menu and expanded branch to Saturday.

We continue to migrate our marketing resources away from national towards more impactful local programs. This local philosophy helped define Bonefish as the unchained chain and it's paying off in sales and profitability. At Carrabba's, comp sales were down 60 basis points in the quarter.

Carrabba's remains focused on building healthy traffic and providing a great authentic Italian meal at affordable prices. We have shifted the marketing strategy from more complicated and disrupted LTOs towards excellent execution of the core menu and special occasions.

We are also targeting more proprietary programs, such as our successful wine dinners and Amore Mondays as well as growing off-premise via Family Bundles and delivery platforms to drive healthier traffic.

We will be patient in rebuilding traffic based on superior food and execution, and we'll continue to migrate from discounting, which is down 37% year-to-date. In Q3, Fleming's comp sales were up 0.5% with negative traffic.

We made the conscious decision on Fleming's to move away from legacy-value offerings, such as our 567 bar menu, $29.95 Prime Rib and some non-holiday gift card distributions. We anticipated the negative impact on traffic from these actions, however, they have had a positive impact on profitability. The brand is on track to have record profit.

Moving forward, Fleming's will work on differentiating the brand from the traditional high-end Steakhouse to a localized menu selection and customer segmentation. Our successful Dine Rewards loyalty program is performing well and now has over 7.2 million members.

The program is attracting a healthier consumer and driving strong engagement across the portfolio. We will evolve the program to further leverage the customer segmentation opportunities provided by the data.

Our investments in CRM strengthens engagement through more customer-centric communications, while providing a higher return from marketing spending. For a perspective, these investments have enabled us to reduce our advertising spend from 3.8% in 2016 to approximately 3.1% over the last two year, while improving ROIs. Turning to off-premise.

In Q2, our 240 existing delivery locations began to constantly hit established targets for several key metrics, including delivery time and deliveries per location. As a result, in Q3, we resumed the rollout of delivery and expect to add an additional 200 locations across Outback and Carrabba's by the end of the year.

We anticipate all delivery locations will be completed in 2019. We are very excited about our progress and the incremental opportunity it represents as we capitalize on the growing consumer demand for enjoying restaurant meals at home. Moving to International. Brazil comp sales were down 3.3% in the third quarter.

The country has experienced a difficult environment due to unrest living up to yesterday's presidential election.

This has led to protests and a lengthy truckers' strike that badly hurt the Brazilian economy, causing supply shortages and transportation gridlock that resulted in numerous lost operating days for many businesses, including our restaurants.

We believe these dynamics were more event-driven rather than a reflection of the improving underlying health indicators of the Brazilian economy. GDP is set to have its strongest performance in 4 years and reduced inflation and interest rates are having a positive impact on consumer demand and disposable income.

Therefore, we believe the current situation in Brazil is more temporary. We are already seeing signs of stabilization and experienced stronger trends as the quarter progressed, culminating in positive comp sales as we exited the quarter and an expectation that they will remain positive in Q4.

While the potential for near-term volatility remains, we believe consumer confidence will resume the upward trend it had been on for the last few years now that the presidential election has occurred. The demand and love for our restaurants remains high, and we are performing well in a difficult environment.

Most importantly, we remain well positioned to continue to grow and take share in an underpenetrated casual dining market. In summary, we feel very good about the quarter and the sales layers we have in place to support continued momentum and earnings growth.

We now expect our adjusted earnings per share to be between $1.41 to $1.47, up from our original guidance of $1.38 to $1.45. This represents growth of between 18% to 23% from 2017. We are on track for a very successful year at Bloomin' Brands.

I want to thank our managing partners and JVPs across our concepts for their dedication and support and taking care of our customers and our people every day. These results would not have been possible without you. And with that, I'll turn the call our to Dave Deno to provide more details on Q3.

Dave?.

First, we anticipate a $9 million or 90 basis points year-over-year benefit in incentive compensation. 2017 ended better than anticipated, and we accrued additional expense on to our year-end results in 2017. Second, we anticipate improved margins in the U.S. business. Our investments in the customer's experience are paying off.

We are seeing healthier traffic and improved flow through that we expect to carry over to the fourth quarter. Finally, as Brazil moves past the reselections, we expect to capitalize in our leading-market position and return to margin growth in our International business.

Given the strength of our fourth quarter margins, we anticipate positive operating margin growth in 2018. Please keep these in mind as you assess our fourth quarter. I would now like to provide a couple of brief thoughts on 2019. First, we expect to have positive U.S. comp sales continue our momentum from 2018.

Second, we will have meaningful margin expansion in 2019 as we work to close the gap versus our peer group. We'll provide more details on these and other items, including EPS, on our February call. In addition, we will be hosting an investor meeting shortly after issuing our Q4 results. In summary, Q3 was a very good quarter for Bloomin' Brands.

We remain confident that we are making the right and necessary investments to support long-term growth. Clearly, our investments in the core customer experience are paying off. We remain disciplined stewards of capital, and our improving capital structure provides increased flexibility to return cash to shareholders.

And with that, we will now open up the call for questions..

[Operator Instructions]. Our first question is coming from the line of Michael Gallo with CL King..

Just a couple of questions. Obviously, you've had now really strong performance at Outback for really the last couple of years, but particularly on the traffic side, for the last -- certainly, the last year.

I guess, as you get into those more difficult laps, you've been able to put forth healthier level of traffic, it hasn't been driven by discounting.

So I was wondering if you could give us some thoughts on how you sustain that momentum as you go through 2019 in a casual environment that continues to be fairly choppy? And then just kind of a follow-up to that.

How you plan to kind of do that and, as Dave said, materially improve the operating probability at the same time?.

Sure. So I have never felt more confident in the brand health in Outback and where Outback is. And that gives us a lot of confidence that this is not about lapping. And as you said, it's about 7 consecutive quarters of same-store sales over performance, pretty significant as well as 5 consecutive quarters of positive traffic.

And we feel very comfortable with where Outback is going to perform in Q4 as well as in the future. And I think what really gives us those confidence is the brand health and the momentum. We've invested ahead of growth and now we are able to monetize those investments. And we investment -- we invested in areas of where the consumer wants to go.

That's in food quality, portions and service. Our exterior remodels now pivoting to interior remodels, driving 4% to 5%. Our CRM and our mass personalization, a lot of time and patience went into adjust -- and into investing capital dollars ahead of growth to build our data's infrastructure capability and now we're monetizing it.

Our CRM program and our Dine Rewards program has 7.2 million customers, and we're kind of when we get [Technical Difficulty].

Ladies and gentlemen, please stand by, we are experiencing technical difficulties. Your conference will resume momentarily..

Hello, everyone, this is the Bloomin' Brands team. We join the conference call..

Mr. Gallo, please continue with your questions..

Yes. I think I had asked that I think much we had cut off. But I think I was asking about continuing the momentum. I think, when it was kind of halfway through..

Okay. Sorry about that, Michael. All of the lines in our building are down, and I'm particularly disappointed though that I got cut off during Outback, because I love talking about Outback and Outback's performance, so just to briefly catches up.

We're not concerned about lapping because we build multilayers that are based on brand health where more of the consumer are going. So momentum's going to continue to beget momentum, and I haven't ever felt as confident in Outback's forward momentum and that centered around the investment that we've made in the box on quality, service.

The vast majority of our strength is our in-house traffic and that's directly applicable to the superior execution that we're having in the box. We've got the best operators in the business with Gregg Scarlett and the entire team and that's what's driving the in-store volume.

The other things of the layers that we built in terms of the remodels have been to now to interior.

We also spent an awful lot of time investing ahead of growth in the data, infrastructure and personalization and now we're seeing the benefits and the fruits of that and we're monetizing that, whether it's been in form of Dine Rewards staying up the 7.2 million or moving from mass marketing to data personalization, which has much higher ROIs.

And then finally, I would just say off-premise continues to really rock for us, it's proving to be highly incremental.

And so when you look at the sales layers that are out in front of Outback, it's not a quarterly discussion or quarterly concern, it's just feeling like we've really positioned this brand exceptionally well for the future and that volume is going to continue to flow through and drive operating margin expansion.

Dave, I don't know if you want to elaborate on that?.

Yes, sure. Thanks, Liz. And I'm talking about Q3 like I talked about in my prepared remarks, our operating margin was up year-on-year when you normalize the incentive comp stayed down last year, first of all.

When you look at things that we're doing to drive margins, the investments in the business are behind us, we've made them, they're working and we're now trying to monetize those for the food and labor investments we've made. We have terrific tools in our restaurants, if you saw our labor cost this quarter looked good.

And then finally, we had a sales leaseback program that was extremely successful economically. It did cost us on margins and we've begin to anniversary that, that won't be a headwind anymore.

So trying to monetize the investments, manage our tools and anniversarying our sale leaseback program, like I mentioned, we're going to have a significant margin expansion in Q4 and that will set us up well for 2019..

Our next question is coming from the line of Jeffrey Bernstein with Barclays..

Just following up, Liz, on your confidence around the Outback brand. It does seem like your guidance implies the fourth quarter for the system would be in a flat up 2% comps. But I'm just wondering with your confidence around Outback and you now start to lap much more difficult compares without necessarily giving intra-quarter comps.

But just because the trajectory changes so sharply in terms of compares and you've implied the fourth quarter systems, any color around October to demonstrate that confidence? Or what you think the Outback comp would come out in the fourth quarter, specifically?.

Thanks, Jeff. So as you know, we don't give intra-quarter guidance. But I just want to reiterate that everything about the Outback comp makes the year-ago comparison less relevant as it relates to our continued momentum. I have complete confidence in the strength of Outback. We look forward to reporting on the fourth quarter trends.

I think the trends -- I think the guidance is prudent, but we feel terrific about how Outback has performed and what we expect it to perform in Q4..

Okay. Then the trends of the non-Outback brands and it seems like comps were below consensus at each brand, and the two year trends decelerated, especially at Carrabba's and Bonefish.

I'm just wondering how the actual results compare to our internal expectations, whether you're pleased or disappointed with the trajectory, the brand? It seems like maybe there's a divergence now where you're increasingly confident in Outback, but perhaps trends aren't going as well as the other two brands, any color would be great..

Sure. So the other three brands have all been in the kind of 18 months to two year multi-journey to taking out discounting out of the base. And so we -- by the end of this year, we feel really good about the fact that we will have finished for all intents and purposes.

The traffic decline that we anticipated from pulling significant discounting over -- out of the base.

And then we are going to be able to monetize the investments we put in those brands, and the portfolio has reached the point where we will -- by the end of the year, we will have lapped the majority of the discount pullback and it will not be the traffic headwinds that it has been over the last two year.

We certainly anticipate our traffic to then strengthen as we head into. As it relates to the brand specifically, because of the discounting that we pulled back, we did anticipate traffic declines and it is showing up in a much higher quality traffic that's coming back.

So for example, on Fleming's and Bonefish, we ripped out a lot of discounting, and you see the result in a healthier traffic and they're both on track to have record profitability. So we feel very good about where those brands are and where they're going, no concerns with that.

Carrabba's has been a longer road back for us because, frankly, we pivoted long -- further away from and further a longer away from its core proposition, which is authentic Italian dining at affordable prices.

And so actually the portfolio gives us the strength of the portfolio and how the others are born gives us the ability to be patient as we finish taking those tactics out that we're less on strategy.

Discounting is down 37% this year, and we continue to see the strengthening as it benefits and investing in differentiated programs, such as wine dinners, such as Amore Monday, such as our off-premise business.

So I think the way we've managed the portfolio, with the strength of Outback, has given us the ability then to put the Outback playbook in effect on all the others and getting the discounting out, that'll be behind us as we exit Q4. So we're looking for certainly a lot more traffic strength as we enter next year..

Our next question comes from the line of John Glass with Morgan Stanley..

Could you speak a little bit about your enthusiasm around margins for next year? And maybe in the context -- in 2018, are there discrete onetime cost? And I think you've talked about the time that won't recur, so we can kind of frame what that opportunity is? And then when you look at your U.S.

restaurant margin that was flattish this quarter, maybe up x the incentive comp, it's still a bit lower than the peers.

How do you think about where the biggest areas of opportunities within that P&L or then for you to start to close that gap?.

Yes. Sure. We have opportunities in managing the restaurant costs in food and labor. If you look at our Q3 labor costs, they're in really good shape, and we have opportunity to continue to closely manage our overhead. We are very committed to overhead growth in our business and getting leverage -- being leveraged on that.

So those 3 or 4 things, John, along with same-store sales growth out of the box as we continue to elevate same-store sales and traffic in our box, will really help us on the margin side. And like I mentioned, we will see on the delivery -- excuse me, on the Q4, we will see a pretty significant margin expansion as a result.

The thing that we are anniversarying is, I mentioned earlier, we're coming off of sale leaseback program, that's pretty much behind us, great economically, but it was a bit of a headwind on margin, and the investments in food and labor costs are behind us as well. Now it's time to monetize those things, so that will be important.

And then finally with Brazil, we have an outstanding business there. The events of the year are -- have happened and they're behind us. And our business continues to be very strong. Liz talked about the brand returning, the same-store sales growth in Q3, and those things will all come together to help us expand margin as we go forward..

So just a follow-up.

The 2019 is really just about anniversarying some of the cost headwinds you had this year, not that they were onetime discrete or large enough to call discrete items this year just won't recur it, it's just that you don't -- they're not unfavorable next year versus this year, is that what your point was?.

That, John, it's -- there aren't any discrete items, the investments in the business is the work we do every day on productivity in the restaurants and in the home office and it's growing sales in the box. And we're very, very bullish about Q4 margin and margins for next year as a result..

[Technical Difficulty] of our comp store sales growth. That's a pretty significant year-over-year change for us. Brazil's had 20-plus years of great performance, it's back on track and performed actually quite well in a difficult environment in 2018.

But no one sees that continuing at this point, although we certainly don't control that, but it feels very good as we head into that..

Our next question comes from the line of John Ivankoe with JPMorgan..

We're just hoping to get an update on delivery, just your overall confidence in expanding that. If it's possible to talk about maybe by cohort or by quartiles how you want to talk about it.

How big of an incremental sales you're seeing in some of your more matured delivery markets? And then secondly, I mean as you have more experience and more time on this project of doing it in-house with your own employes versus third-party in terms of how that shift there may not be happening going forward?.

Right. John, first of all, we are thrilled with how delivery and off-premise is performing. We believe that it will be continuing to be a major opportunity for our company. Off-premise in total yielding into 25%-ish plus in sales. So we will -- we really think that, that will be an opportunity for us as we continue to move along.

We took the time that we had -- we rolled out 240 restaurants. We took the time to really get those absolutely humming and right and delivery times and flow through and everything else, that has happened.

And now we are rolling out an additional 200 locations at the back half of this year, and we expect all restaurants that are eligible for delivery to be competed with delivery in 2019. We have -- off-premise is now about 13% of our business and it grew in the low double digits in Q3. So everything about that business is really coming together.

Why is that? When we built the in-house capability to make that happen, and we're very pleased with the adoption by our teams of doing that. And it gives us the data. It gives us that our process flow through. It gives us complete control of the customer experience as we go forward. We will be testing an omni-channel approach.

So we are testing with a third-party. But clearly, we are very pleased with the internal team that developed and the adoption by our operators. So well, John, in wrapping up, we just see the delivery opportunity continue to be a very big opportunity, delivery and off-premise be a very big opportunity for our company..

one, incremental; and two, it's absolutely where the customers going. They want to enjoy restaurant, quality food, many times in the comfort of their home. So that is what's given us the confidence to continue to roll that in the infrastructure and the operating metrics that we're hitting where the -- what's the customer demands for delivery..

Our next question is coming from the line of Jeff Farmer with Gordon Haskett..

Just a couple on Dine Rewards.

So what is the visit frequency for your Dine Rewards customers compared to those who are not? Have you guys ever shared any metrics on that?.

Jeff, for competitive purposes we have not broken out that frequency. It's certainly having a positive effect at various levels of the engagement funnel..

Okay. And sticking with Dine Rewards, a little bit different topic. I think you mentioned close to 600,000 new Dine Rewards customers for the quarter. I think you've been maintaining the run rate close to that over the last several quarters.

So the question is, how long do you think you can maintain this pace? Is there sort of an optimal membership level that you're targeting?.

Well, we certainly believe that because of the attractiveness of the program and the success and if you look at the -- if you look at all the ratings of the loyalty program as well as our app, we certainly believe that we're still in the early innings of our loyalty journey.

We are now getting the data and developing very specific data customer profiles for our Dine Rewards program, which enables us then to market directly to the customer and have enhancements that could drive frequency further. Now I don't want to get further ahead, but certainly, there's loyalty.

We are in loyalty 1.0 with a facility now that we have the customer files to monetize that in a much more efficient and effective way. So this is going to continue to be a significant growth lever as well as differentiator for our portfolio..

Our next question comes from the line of Brian Vaccaro with Raymond James..

Just a quick follow-up. And then move to the margins real quick. But a follow-up on off-premise, you said I think 13% of sales and double-digit growth year-on-year.

Was that an Outback-specific comment?.

No..

No..

Could you provided that on an Outback-specific basis?.

We don't, but the numbers aren't materially different..

Okay. A couple on the third quarter margins, if I could, just the food cost line was higher than we had expected at least internally.

And can you help us understand what drove that 80 basis point increase? Was there a particular item or category that might have caught you by surprise? And maybe more importantly, how should we think about the commodity outlook in Q4 and into '19?.

Yes. We saw food cost be unique in Q3. We feel very good about Q4 commodities. We feel good about 2019 commodities. We're about making some decisions on some of the buys we're going to make and things. Q3 was all about just the timing of various contracts for most part and how they came together within those particular 90 days. The year's fine. Q4 is fine.

We did have a little bit of elevated crab in Q3, but nothing really significant. So more -- I mean, Brian, it was just more about how the timing of the contract came together. Q4 is fine. Full year's fine, and we expect a good guidance, 2019, when we get there..

Okay. That's helpful. And sticking with the third quarter that other OpEx line. So nice to see leverage 30 or 40 pips there.

What was the ad spend year-on-year in the quarter?.

That's something we typically....

It was basically flat from a dollar standpoint. It's basically not..

Yes, yes. And you're seeing there, Brian, some good productivity initiatives as well on the energy side and everything else..

Okay. And then last one on the G&A side. So dollars around $65 million on an underlying basis, it kind of flat in dollars year-on-year despite a $7 million increase in incentive comp that you called out.

Is there any timing shift that we should be aware of? Or does that reflect underlying savings in that line? And if so, where? And then could you provide an update on your annual expectation, the 2018 G&A line?.

Yes. That is our direct reflection of the very tight cost management. We're trying to do an overhead here, especially when we consider that flat year-on-year, but know we had a $7 million benefit last year from the incentive spend.

And so there we're just continuing to push forward on our productivity initiatives and everything else in the headquarters office. I really want to call out, for instance, our accounting and control team and our IT team really working hard to manage cost in that area, while getting better and better every day, and they're doing a fantastic job.

So I think there, Brain, it's a matter of the efforts that we're doing to manage in a -- everyday..

Okay. And then just last one for me.

On deliveries, sorry if I missed it, how many units were covered by delivery at the end of the third quarter?.

Well, we had 240, and we've told you that over the back half of the year, we're rolling another 200. So we're not going to give intra-quarter numbers, but we will provide that perspective as we roll back 200 out. We expect our delivery locations to be fully rolled out by the end of 2019. Based on everything we're seeing, we're very bullish on that..

Okay. And on that '19 -- sorry, how many units you envision that, that will include that are sort of -- you said I think you were -- these were eligible.

How many units is that?.

We're looking at -- it's a little too early to give a definitive number. I'm guessing 70%, 80% of the Carrabba's and Outback system-ish would be that. But as we work through it, Brian, we'll provide more color commentary. That's kind of what I'm -- what we're guessing..

The next question comes from the line of Gregory Francfort with Bank of America..

I got two questions. The first is just the housekeeping one. So just on the tax rate guidance, what does that imply for the fourth quarter? Is it something like a mid-teens positive tax rate? Or my -- is my math wrong? And the other question I have was just on average check.

I think you've been running kind of in the 3.5-ish range, how much of that is from delivery? And is that maybe something like 2.5% or 3% on sort of an underlying basis? And then where do you expect that to trend over time? Do you have pricing power where you can keep it at this range? Or is that something you need to pair back a little bit as we go forward?.

Well, on the tax rate, we'll expect our normalized rate in Q4, which would be kind of the low double-digits area. We don't really forecast timing of any kind of legacy option exercise and those kind of things. But that's kind of what it looks like. I'll turn it over to Liz on the PPA side..

Sure. So just keep in mind what you're seeing flowing through is our pulling back in discounting, right, versus growth pricing. So our pricing has always been the price kind of moderately in line around that 2% to 2.5%. The average check is benefiting from pulling out the legacy discounting.

[Indiscernible] if you want to imply that aside to 0 this year. We eliminated 567 and $29.95 roast beef at Fleming's. That's what's driving the -- versus any growth pricing. As it relates to pricing for next year, we'll give more open guidance, but our philosophy on that hasn't changed..

Got it. And then maybe if I'll do one follow-up.

Just who are you taking share from in this environment? And maybe what is one of the biggest drivers of the share gains?.

As you know this is a highly fragmented category, right? So it's a $90 million category. And so you kind of take share from everybody as it relates to it. It's not such a concentrated category, but with the sources and usage, you can pin it down.

So you just look at it overall and you say, we're getting increased frequency, new users and new locations on our back, and that's tightening volumes from others that aren't growing.

The good news is that with the layers that we've built, we are -- as I've said a couple of times in this call, we're more confident than ever in Outback's ability to continue to take share because investments we've made, which we're now monetizing across the portfolio, are driven by where the consumer wants to go.

And I think that's why we're seeing the success and why we're going to continue to gain share..

The next question comes from the line of Karen Holthouse with Goldman Sachs..

It's pretty encouraging commentary on the pipeline for relocates.

And should we think of that as something that could actually be more than 14% or that could be then accelerated into next year? And how does that sort of tie into an overall framework for unit growth? Is there also sort of similarly positive thoughts on the pipeline for what could be sort of outright new units next year?.

Sure. I'll comment and then Dave. We are relocating these as fast as we can get the pipeline, because every time we relocate an Outback, we're seeing that 30% to 50%, so an average of 40%. And just great things happen. So this is a brand when it's given the right real estate, the AUVs in the box are terrific. So we're doing that as quickly as we can.

It took us a while given the competition for sites, as you know, in this category to build that pipeline. We would love to go faster on the remodels. The source of our paces is supply, because we're looking for those A-quality sites. So we're going to do that as quickly as we can.

As it relates to Outback, we've talked before about we see an opportunity for 50 incremental Outbacks, and that's also the pace at which we're able to do those, they're also going to be governed by the supply that's out there.

You still have a tremendous amount of restaurants, new restaurant competing for the same basis, while other restaurants are hanging onto A sites. So it's a function of the category, but we'll relocate as quickly as possible. We see an additional 50 Outbacks as a real opportunity, I'd like to get those sites. And then on the Fleming's front.

As you know, our last 5 Fleming's have just been terrific and opened well above the system average. Then so we're always on the lookout for those. So we feel very good about Outback opportunity for relos and new incremental units. We'd love to go faster. It's a function of supply..

Our next question is coming from the line of Matthew DiFrisco with Guggenheim Securities..

Just had a couple of follow-up questions. I guess with the 70 basis points in the U.S. on the -- related to the composition.

Is that all primarily at the Outback brand? Or is that evenly shared across all the brands?.

Yes, that was 70 basis points last year when we took incentive comps down. It has nothing to do with this year and is spread across the company..

Okay. So I guess in the commentary you said, you're at the record margins for Fleming's, record margins for Bonefish and obviously, you had such a strong comp at Outback, I'd have to think they were up year-over-year.

So in the U.S., is it just purely Carrabba's then that would be considered to be down on a brand basis, on a restaurant-margin basis year-over-year?.

Yes, we were talking about restaurant profits at those 2 brands and we don't get in the margin guide by brand. But like I mentioned, Q3 in U.S. was up, and Q4, we see very strong performance coming. But we were referencing record profit in those two brands..

Profit -- so profit dollars is what you're saying?.

Yes, sir..

Okay.

So that just then reflects the more stores being opened I guess or -- but if you were to say on a margin basis for '14 -- or for 4Q, are you going back to levels that you saw may be back in 2016? Or we still a ways away from there?.

Nothing in that kind of granularity on the guide, but I think you'll see significant margin expansion year-on-year. And we think we've got a 250 basis point-ish opportunity in margins and we're going to make significant progress on that quickly..

Excellent. Last question, Carrabba's.

Are there certain amount of stores? Have you done the analysis on how many of those might be potentially sort of at that level where it could be addition by subtraction? And either they would benefit from closing the overall base or are they negative cash flow independently? Are we -- is that base being sort of looked over and cleaned out? Or is there some opportunity there maybe to rationalize some of the underperforming stores?.

Yes, we do a very robust review of our closures and cash flow of our restaurants, and we don't anticipate any significant Carrabba's initiatives. But we will look at everything each quarter, all of our brands. We don't anticipate a large Carrabba's full year initiative..

And then does the Brazil problems -- in the near term, does that influence the growth strategy for the Carrabba's brand down there as well or the Abbraccio?.

Yes. No, I mean the good thing about Brazil is, I think we've made a pretty compelling case that you should feel comfortable that it was event-driven and a more kind of back on track. We exited with positive comp that was across both of the brands and expect positive comps in Q4.

And then -- so I think you should feel good about the fact that Brazil is continuing to be a terrific investment for us. We have 12 Abbraccios down there performing extremely well. We have about 92 Outbacks.

There's no reason in our mind why Abbraccio shouldn't enjoy the success of the runway of the Outbacks considering Italians are #2 category down there beside -- next to beef and that casual dining is significantly under penetrated.

So I think you can never call the international markets, but I think we feel like it's a thumbs-up for Brazil and feel very good about how Abbraccio is performing..

Our next question is from the line of Sharon Zackfia with William Blair..

So a follow-up question on delivery, and then also a question on marketing.

On the delivery side, I guess of that 20% to 30% of Carrabba's and Bonefish -- I'm sorry, Carrabba's and Outback that likely won't get delivery, what are the common dynamics behind those restaurants? And then secondarily, could you break out, in your marketing spend, what percent is now in digital?.

Sure. I'll take the delivery fees and turn it over to Liz. But on marketing side, it's mainly, Sharon, just rural-trade areas or trade areas which don't have enough of household for delivery penetration, but we'll continue to always look at that piece as opportunity. That's why we're -- there is a range, I gave a range.

We'll find out further, but that's typically the characteristic..

one, is get much more efficient and effective with our marketing spend. So you saw our goal from around 3.8% to 3.1% last -- 3.2% last year, 3.1% this year. And we have shifted a big portion into digital and to data personalization where we're communicating one-on-one.

For competitive purposes, I don't want to get into specifics, but what I will say is that the investment we made in the IT infrastructure to be able to track that and identify it and monetize it is going to increasingly payoff for us..

The next question comes from Andrew Strelzik with BMO Capital Markets..

The first question I want to ask you is about the remodel that you're talking about at Outback. Sounds like it's a lot more than may be just the updated look and feel that we might normally see, shifting to meet increased demand.

So can you talk about the types of things that you're looking to achieve there? And maybe where your priorities are? Any specifics around what you're trying to do..

Sure. So the remodel program, we have a number of prototype in market, seeing which one effectively addresses all the revenue opportunity. We will be bumping out our to-go rooms as a reflection of what we are seeing in our top quartile and what we anticipate it becoming.

Remember, we said that we believe that will be 25% to 30% over -- in time and that it'll be wholly incremental. So some of the remodels in addition to kind of updating the look and the flow will be about bumping out that to-go room to serve as they entry and exit for delivery as well as to go.

I do want to -- I'm sure you know that we're not looking at a capital expenditure on those interior remodels that is anywhere different from our prior spending on interior remodels. So in that kind of $300,000 to $400,000 range, depending on the size of the box.

And so for us it's -- that's probably the biggest difference in addition to contemporizing the interior flow and where we're kind of adding more seats, because we're seeing in-house traffic grow, and so we'd love to be able to put more seats in the box as well..

That's very helpful. And my other question is just on Dine Rewards. Now that you do have the customer files and you're looking at doing more of the segmentation. Is there a strategy in place where that might start to push customers to different brands? I know before prior, it's been more across all of the brands that have really seen the benefit.

I mean, is there any desire to do that? Or as you're segmenting other clients, your customers?.

Well, I just want to clarify, when you say push to other brands, I'm assuming you mean cross fertilize and -- across our brands..

Correct. I mean, as you see the types of customers that they have, that they might apply to other brands, they don't go to in those types of things..

Yes. We absolutely are seeing a lot of the traffic lift associated with introducing customers of one brand to another brand.

And that is why you've seen so much success on the two year basis associated with the program, is that when we say it's increased frequency, it's not just increased frequency against that customer in many cases within that brand, but it's also introduce them to another brand. And you've -- we've really seen that on Fleming's as well.

So it's working exactly as we'd hope. And I think it's another example of where you really have this benefit of having a tightly edited portfolio that served different eating occasions. And we're seeing that cross-fertilization and that's a big part of what's going to be the plan going forward as well..

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Liz Smith for closing remarks..

Thanks, everyone, for joining us today. We very much look forward to updating you on our portfolio on our Q4 call, where we'll be in a position to talk more about 2019 as well. Thanks all..

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