Rick Cardenas - Executive Vice President Operations - LongHorn Steakhouse, Darden Restaurants, Inc. Eugene I. Lee - Chief Executive Officer & Director C. Bradford Richmond - Chief Financial Officer & Senior Vice President.

Jeff Andrew Bernstein - Barclays Capital, Inc. Michael A. Tamas - Oppenheimer & Co., Inc. (Broker) Matt J. DiFrisco - Guggenheim Partners Sara H. Senatore - Sanford C. Bernstein & Co. LLC John Glass - Morgan Stanley & Co. LLC David E. Tarantino - Robert W. Baird & Co., Inc. (Broker) Will Slabaugh - Stephens, Inc.

Joseph Terrence Buckley - Bank of America Merrill Lynch Jason West - Credit Suisse Securities (USA) LLC (Broker) Howard W. Penney - Hedgeye Risk Management LLC Keith R. Siegner - UBS Securities LLC David S. Palmer - RBC Capital Markets LLC Priya Joy Ohri-Gupta - Barclays Capital, Inc. Paul L. Westra - Stifel, Nicolaus & Co., Inc.

Stephen Anderson - Miller Tabak + Co. LLC.

Welcome, and thank you for standing by. At this time, all participants are in listen-only mode until the question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now, I'll turn the call over to your host, Mr. Rick Cardenas. Thank you, sir, and you may begin..

Thank you, Marcella. Good morning, everyone. With me today is Gene Lee, Darden's CEO; and Brad Richmond, Darden's CFO. We welcome those of you joining us by telephone or the Internet. As a reminder, comments made during this call will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Those risks are described in the company's earnings press release, which was distributed earlier today, and in its filings with the Securities and Exchange Commission.

Today's discussion and presentations may also include certain non-GAAP measurements. A reconciliation of these measurements is in our press release. In addition, we are simultaneously broadcasting a presentation during this call. We will post this presentation under the Investors tab on our website after the conclusion of the call.

We plan to release fiscal 2015 fourth quarter earnings on Tuesday, June 23, before the market opens, followed by a conference call. Following prepared remarks from Gene and Brad, we will take your questions. Now, I will turn the call over to Gene..

Thank you, Rick, and good morning, everyone. Before we begin, let me say I'm thrilled to have been chosen by the board to be the next CEO of Darden. The board and I've established a terrific relationship, and I'm excited to continue to work with them and the talented team members throughout this great company.

This morning, I want to take time to discuss several things with you. First, I will outline the priorities that define our operating philosophy as we move forward. Second, I will provide an update on the early developments for our real estate portfolio and our continuing evolution.

And, finally, I will share the details on what drove Olive Garden's solid performance during the third quarter and why we think, even though it's still early, the brand is building strong momentum.

Brad will then provide more details on our financial results for the third quarter and an update on our expectations for the fourth quarter and fiscal 2015 as a whole. My philosophy on running a great restaurant business is rooted in the fact we must have incredible focus and intensity around driving strong operating fundamentals.

I like to call this getting back to basics. This means we're focused on culinary innovation and execution inside each of our brands, delivering attentive service to each and every one of our guests, and creating an engaging atmosphere inside our restaurants.

These priorities need to be supported by smart and relevant integrated marketing programs that resonate with our guests. By delivering on these operational and brand-building imperatives, we expect to increase our market share and deliver best-in-class profitability through same-store sales growth.

Since our last call, we've further defined how the Darden support structure can enable our brands to achieve their ultimate potential. First, we will leverage our scale to drive competitive advantages in our supply chain and G&A support, both of which will improve the value equation for our guests.

Next, we'll operationalize and apply the insights collected from our significant guest and transactional databases to enhance relationships with our guests, and identify new opportunities to drive sales growth.

And finally, we will embrace the unique cultures and entrepreneurial spirit of our brands, while relentlessly driving for operating efficiencies and continuous improvement, operating with a sense of urgency and inspiring a performance-driven culture. We have made progress, as evidenced by this quarter's results, but our work is far from done.

We must continue to improve in each of these areas in order to successfully move from an enterprise-centric organization to a nimble operations-focused restaurant company with benefits of scale and the spirit of a decentralized company. Driving strong operational performance is our top priority.

We also have the responsibility to efficiently allocate our capital and utilize our valuable assets to drive shareholder value. To that end, we have been conducting a comprehensive evaluation of a wide range of opportunities to create shareholder value with our real estate, while also fortifying our credit metrics.

This is an exhaustive analysis and the effort will take some time, and will likely take place in stages. As a test case, a few weeks ago, we listed 16 properties for triple net sale-leaseback. These properties were chosen primarily because they could be sold on a very tax efficient basis.

Otherwise, they were representative of Olive Garden and LongHorn locations generally. We saw great demand for the initial 16 properties and subsequently listed an additional 15 properties.

To-date, we are extremely pleased with the success we have had securing letters of intent or contracts on the majority of the 31 properties at cap rates well below 6%. These properties will carry market appropriate rents and have favorable lease terms.

As we continue to analyze our options for our real estate, it is encouraging to receive positive feedback from the market with qualified buyers who are very interested in purchasing our assets. These results from these transactions will inform other real estate strategies that we're evaluating and may pursue for our broader portfolio.

We've also recently listed our corporate headquarters building to explore different structures, including a sale-leaseback, to create value for all our shareholders. We anticipate using the proceeds from these sales to repay debt, which is consistent with our intent to support the company's improving credit profile.

We will continue to work with our advisers to carefully assess all ways to unlock value through our real estate portfolio, and look forward to discussing this further with you in the future when we have a more fully developed strategy. Now, let's turn to the results for the quarter.

Our brands performed well, and we're pleased to report strength in business performance in the third quarter. Total sales from continuing operations were $1.73 billion, a 6.9% increase from the third quarter last year, with blended same-restaurant sales for the company up 3.6%.

Earnings per share, on an adjusted basis, were $0.99 in the quarter, which represents a 39% increase year-over-year.

Brand by brand highlights were included in the press release this morning, and I want to spend this time discussing Olive Garden's performance in the third quarter, as well as how some of the operational and business improvements are starting to take hold.

During the quarter, Olive Garden increased same-restaurant sales by 2.2%, the second consecutive quarter of positive sales results. This is the first time Olive Garden has had back-to-back quarters of positive same-restaurant sales since 2010. Olive Garden's restaurant level margins increased by 240 basis points versus the same timeframe last year.

This significant improvement in profitability was the result of two primary drivers. First, labor. Olive Garden achieved its best direct labor efficiency in over a decade. This was due to actions we took to simplify operations to improve productivity, as well as better sales planning and scheduling by our management teams. Second, marketing.

We reduced marketing spend compared to last year when we significantly over-invested to drive traffic. Additionally, we made a deliberate decision to have fewer weeks of price pointed promotions in the quarter.

We expected this would have negative impact on same-restaurant guest counts, but would drive higher profitability, which you can see in our third quarter results.

While cost of sales was slightly higher than last year, we did see improvement from the second quarter on a percentage of sales basis from improved cost management and moderating dairy inflation.

These results are a product of the hard work Dave George and the team at Olive Garden have been doing over the past 18 months to improve every aspect of the business.

Continued operational simplification, a focus on cost controls, new menu items, and smarter promotional investments are all pulling together to strengthen brand appeal for the consumers, and significantly improve Olive Garden's results.

We are making operational decisions more quickly and have better lines of communication to our restaurant teams due to the reduction of leadership layers in the field, which occurred this past November.

The addition of the Cucina Mia menu offering, which has an everyday price point offering point of $9.99 in most restaurants to the core menu in February last year, mitigates the need for constant price pointed promotions.

Also, as our guests look for more convenience, Olive Garden is working to meet them wherever they are and provide them the different experiences they want, inside or outside of the restaurant. A strong example of this evolution is our to-go sales, which continues to show strong improvement year-over-year, with sales up 22% this quarter.

Increases in large Parties To Go sales, this includes items like pans of lasagna and other large portions, increased our check average because we don't categorize these items into our guest counts. They accounted for 60 basis points of the 220 basis point increase and menu mix this quarter.

As we look forward, we will continue to refresh the Olive Garden brand. Our recently remodeled restaurants are performing well, with mid to high single digit same-restaurant sales increases. We will remodel an additional six restaurants over the next several months, with further refined investment levels.

We will continue to analyze the performance of our remodeled restaurants to develop a more individualized plan per restaurant and ensure the optimal investment levels going forward. I'm encouraged by the continued progress at Olive Garden and the $23 million increase in EBIT they delivered this quarter versus last year.

With more than 800 restaurants and 90,000 team members, we knew that driving change would take time, and the results are starting to show.

While we still have more work to do, we firmly believe that our focus on executing the brand renaissance will continue to enhance the guest experience and drive long-term, sustainable same-restaurant sales and profit growth. Now, I'll turn it over to Brad for a detailed margin analysis and expectations for the remainder of the year..

Thank you, Gene. And good morning, everyone. I'll start with the margin analysis of the quarter. Food and beverage costs as a percentage of sales this quarter were higher than last year, driven by continued elevated beef inflation. Dairy costs are also higher on a year-over-year basis, but have moderated significantly from the second quarter.

The impact of this inflation was partially offset by improvements in food waste. Restaurant labor costs were approximately 50 basis points lower than last year, as a percentage of sales, due to sales leverage and improved hourly labor productivity at Olive Garden, that more than offset wage rate and benefit cost inflation.

The overall improvement continued our positive performance from the second quarter.

Restaurant expenses as a percentage of sales in the quarter were approximately 80 basis points lower than last year, due to sales leverage, expense management, and lower pre-opening expense of approximately 35 basis points, associated with seven fewer openings in the quarter this year, compared to last year.

Excluding the adjustments noted in our press release for both this year and last year, general and administrative expenses were approximately 20 basis points lower as a percentage of sales from the impact of cost reduction initiatives we have undertaken over the past year, and from leveraging our sales growth.

Marketing expense, as a percentage of sales, were 100 basis points lower than last year, principally from the lower media support at Olive Garden that Gene mentioned earlier, and improvements in our non-working or the non-media marketing expense we have previously discussed, and from leveraging our sales growth.

Our income tax expense for the quarter reflects a 13% rate on continuing operations before adjustments. After the adjustments, our effective tax rate for the quarter increased to 19%. We estimate an annual effective tax rate on a reported basis to be a credit of approximately 7%, and after adjustments, to be an expense of approximately 16%.

In summary, our third quarter financial results were better than our previous expectations, producing total EBIT margin that increased 200 basis points above last year on an adjusted basis. With only the fourth quarter remaining in the fiscal year, I will provide some quarterly expectations in addition to our annual expectations.

First, we expect fourth quarter same-restaurant sales growth for Olive Garden of plus 1.5% to 2.5%, Longhorn Steakhouse of plus 4% to 5%, and our Specialty Restaurants collectively at plus 2.5% to 3.5%. We also anticipate the addition of seven net new restaurants in the fourth quarter for a total of 34 net new restaurants for the full fiscal year.

As we think about the strong growth in Q3 margins and our expectations for Q4, we expect to achieve similar year-over-year improvements again in fourth quarter margin growth.

However, we do not expect to see the same absolute EBIT margin levels in Q4, due to the normal seasonality that exists, in particular, the strong Christmas, New Year's, Valentine's Day sale weeks drive a higher absolute margin in the third quarter.

Said differently, we increased EBIT margins from last year by 200 basis points in Q3, and we expect a similar level of improvement in Q4 versus last year.

This margin expansion combined with expected same-restaurant sales growth should deliver fourth quarter adjusted earnings per diluted share of $0.91 to $0.94, an increase of 69% to 74% over last year.

So as a result, our expectations for adjusted annual earnings per diluted share for the fiscal year is $2.45 to $2.48, an increase of 43% to 45% from fiscal 2014, which reflects the impact of higher share count prior to the accelerated share buyback program implemented in the fiscal year.

In addition to our business improvements and the accelerated share buyback, other drivers of EPS growth include reduced interest expense from our debt reduction and the impact of the 53rd week. We're in the midst of a detailed and deliberate planning process and anticipate sharing our outlook for fiscal 2016 during our earnings call in June.

As we continue to evaluate our real estate options, we are also evaluating the most appropriate way to deploy the expected proceeds from the real estate transaction that we may undertake, along with the $436 million of cash on our balance sheet today. We are focused on maximizing shareholder value, while also supporting our improving credit profile.

We also continue to identify additional cost efficiencies. Since October, we have identified efficiencies that will lead to total annual savings and earnings improvements of $90 million to $100 million when fully implemented.

Approximately half of these savings relate to SG&A, and the other half relate to savings in our supply chain and restaurant expenses. Our fiscal 2015 expectations assume we achieve $30 million of savings within this year, and we anticipate $40 to $50 million of additional savings in fiscal 2016.

We expect to achieve the full annual savings target in fiscal 2017, plus any additional savings initiatives that we identify. And now, with that, I'll turn it back to Gene for some closing remarks..

Thanks, Brad. And before we move to Q&A, I want to share a couple of final thoughts. As we disclosed this morning, Brad has agreed to stay on as our CFO through the end of July in order to ensure a smooth transition. I want to thank Brad for his flexibility and his significant contributions during this transition period.

We've engaged Chris Kohler Associates (19:08) and the search for a new CFO is well under way. This comprehensive search will include both internal and external candidates. Finally, I want to recognize our team members that were an integral part of our performance this quarter.

One of the key cultural shifts I set out to effect over a year ago was for our employees to put the guest first. I see this renewed enthusiasm and cultural shift taking hold, and I'm delighted to see this dramatic change throughout our restaurant teams and here at the support center.

I am confident that we can return Darden to being the premiere full-service dining company, and for that, I want to sincerely thank all of our 150,000 plus team members for embracing what makes us special, our ability to impact the special moments and experiences our guests entrust to us.

Thank you for your support and for your contribution to our results this quarter. Now let's open the mic for questions..

Thank you, sir. One moment for the first question. The first question is from Jeff Bernstein of Barclays..

Great. Thank you very much. Two questions. Just first from a fundamental perspective, and I guess I should start by saying, Gene, congratulations on the full-time promotion. My first question is specific to Olive Garden comps. It seems like there's some momentum building there. Needless to say, it seems like the industry is seeing some momentum as well.

So I'm just wondering if you could talk about the recent improvement in trend. I think you gave us some color on this last quarter as well, but how you kind of decipher what you think is Olive Garden's specific versus what you think is kind of more macro-driven.

It seems like Olive Garden perhaps is still a little bit below the broader industry, but it just seems like a very difficult task to assess how much of it is your own internal decision-making versus the kind of broader macro trend and then I had one follow-up..

Jeff, when I look at the quarter, I think there's a lot of positives in the Olive Garden performance. And I want to go back to what I was talking about in our prepared comments.

And last year in this quarter, we over-invested in media and price pointed promotions, aggressively trying to drive traffic, and we came back this year with a much more balanced approach. And we brought our media spending back to the historical levels.

We still had some price pointed promotions in the quarter, however, last year at this time, we had two in market the whole time, which drove some guests and some same-restaurant, not sales – I mean not same-restaurant sales growth, but drove guests.

When I think about the quarter now, we underperformed the industry in December and January, but we outperformed the industry in February, and February is a very difficult month from a weather perspective.

So I felt as though we built momentum through the quarter with this very balanced approach, where we were able to hang with the marketplace, the industry, but improve our margin structure and get it back to more of a historical norm.

So when I think about the quarter, I think there are signs that we're really starting to make some improvement in Olive Garden..

Got it. And then the follow-up. I think, Brad, you did a good kind of recap of the different shareholder value initiatives. I know you're evaluating the real estate and the cost saving opportunity you gave us an update on. There was no mention of the Specialty Restaurant Group which trends seem to be doing quite well across most of the brands.

I'm just wondering where we stand in terms of thoughts of spinning off those brands or whether perhaps there is a home for those brands still within the Darden portfolio?.

Jeff, this is Gene. I'm going to take this question. As you did mention, all five of our brands in the SRG performed very well. We're very pleased with Yard House's performance, best quarter since joining Darden. Right now, our strategic focus is on two fronts. It's running our restaurants better, and second, it's the real estate.

As I said last quarter, everything is still on the table. We will come back and analyze other strategic alternatives that are available to us but right now, we're focused on those two initiatives.

And I also talked in the call about our Darden philosophy and how do we get back to using scale to be a competitive advantage and allow all our brands to have a advantage in the marketplace because they're part of Darden. And I think that's key to driving long-term shareholder value..

Understood. Thanks very much..

Thank you. We'll move on to Brian Bittner of Oppenheimer..

Great, thanks. This is Mike Tamas on for Brian. As you've been doing your real estate analysis, what have you uncovered about a refranchising opportunity at Olive Garden? Specifically, if you're looking at Olive Garden's owned real estate, can that be accretive to earnings if there was a refranchising of that? Thank you..

At this point, we have done no work at all at looking at refranchising. I don't want to go back and keep reiterating the same point, but we're focused on the real estate – creating value from our real estate asset to this point in time.

Once we understand and move forward with that plan, we'll come back and revisit the other strategic alternatives that are available to us..

Okay, great. Thank you..

Matt DiFrisco of Guggenheim Securities, your line is open..

Thank you. Actually, I had a question similar to that as far as the first question by Jeff with respect to the Specialty brand.

I'm just curious, advertising-wise, are any of those brands changed in your opinion as far as should we still look at them as a Specialties division independent from Olive Garden and LongHorn as far as not needing advertising support? I think previously it was always sort of the line drawn was the national brands that were casual dining that needed advertising versus the big box brands.

In your opinion, as now the longer term, permanent CEO, any of those have the potential maybe to migrate over and be an approachable casual dining national brand more so than a big box guy that only has maybe the potential to do 200 restaurants or so? Specifically, I would think either Yard House or Seasons 52, or are we going to continue to see them in their current brand positioning and size of the format?.

Matt, I think for the foreseeable future, we're going to see them as big box, high-volume restaurant operators. I think Yard House has a lot of runway when you look at our current footprint.

Longer term, there could be an opportunity to use a smaller box to deliver that brand, similar to what I would call their most liked competitor out there that's working on that today. But I like these businesses because the P&L has less than 1% marketing expense in them, which allows us to really work the value equation from a different angle.

And that's really around the food offering and the service we provide; and, to some extent, the atmosphere we create in these bigger boxes.

And so, I see them as higher volume executions with the real value in the experience that we deliver in the restaurants, and using a little bit of marketing, but it's more of that CRM one-to-one type marketing versus a national advertising type campaign..

Okay. And then just a follow-up question. You keep bringing us back to focus on the real estate.

I'm curious can you give us more color on that as far as what we should expect over the next coming calls? As far as is this going to be updates on how you're approaching it now with 15 sale-leasebacks moving to 30 sale-leasebacks, or are we looking for one significant transaction which was discussed in prior quarters from various investor groups as far as something as a REIT structure and other formats, or are those things off the table and we're looking more so as far as monetization of a store-by-store basis or market-by-market basis?.

No, Matt. Everything is still on the table at this point in time. We're using these 31 properties that we've put out here really to inform our strategy going forward. What we do think is that this is going to be – there'll be multiple executions to maximize the value of the real estate.

And so, we're not locked into one significant transaction, but we may end up doing one significant transaction. We are doing a very comprehensive review. We have great advisers that are helping us; and we're still evaluating our options very, very carefully. However, we're incredibly encouraged by the reaction in the marketplace for our properties.

A well below 6% cap rate is pretty exciting..

Great. Thank you..

And we're doing that with market rents and favorable lease terms for OpCo..

The next question is from Sara Senatore of Bernstein. Your line is open..

Thank you. I have two follow-ups, if I may. The first is on the real estate.

In the past, I know – I recognize a lot has changed, but the view was that based on what your advisors had or investment banking advisors had suggested was that a real estate transaction may not be the most value creative in the sense that it was looked at as sort of a more expensive way to add leverage.

And I guess my question is why is the analysis different now? Is it just because the cap rates are so much lower than what you had expected or what these advisors had suggested might be the case? And I guess, when I look at cap rates of 6% or even below 6%, it kind of looks similar to what kind of interest rates your debt's (30:24) carrying.

So I'm just trying to figure out why the real estate makes so much more sense now than maybe it did before? So that's the first question. The second question is just a little bit diving into the marketing spend. I think Brad said 100 basis points tailwind.

In dollar terms, is that down around 20%? Is that right? How would we think about it going forward? Thank you..

Sara, I'll take the real estate question and Brad's looking up the answer for the marketing spend. What's different is that we're just taking a fresh look at this and a comprehensive look with a new set of advisors and looking at the marketplace and seeing what's available to us. We're encouraged at this point in time.

We're moving away – or moving towards more of a asset-light approach to the business, if it makes financial sense; and I think that's how we're thinking about it, and it's what's a little different.

These cap rates that we're getting for our properties today are below or better than what we thought we would get when we originally did analysis of this 12 months to 18 months ago. And so, we're just taking a fresh look at what the possibilities are..

Yeah. And on the marketing question, Sara, it's down around 20% or maybe just a tad north of there. I think more importantly, if you look historically over time for the third quarter, which is seasonally (32:06) our best quarter, we're getting back to a typical support level for marketing that we need for that quarter, and we like that.

We think for that particular quarter, it's somewhere in – that's in the sustainable range. We've also talked in the past about some of our initiatives around the non-working or the non-media part of that expense, around the agencies and production cost and things like that. We started that initiative a few months ago. It continues to build.

So that's also a part of the driver of that reduced expense..

And we should continue to see some benefits there going forward as you focus on that?.

Yeah. We'd expect to see benefits there, particularly on the non-working part. That will continue, because a lot of those are long-dated contracts. That may take us a full year to realize that. But we will, each quarter, look at the business, the normal seasonality that we have there.

Just like as we move to the fourth quarter, we know we have to advertise a little bit more to get the sales in. That's just kind of the cadence of the business. So on a sequential basis, it will move up some, but we're continuing to right-size that as we get into each new quarter..

Great. Thank you. And congratulations, Gene..

Thank you..

John Glass of Morgan Stanley, your line is open..

Okay, thanks, good morning. I wanted to go back to the cost cuts. And Gene and Brad, you talked about $90 million to $100 million. That is less, though, than half of what your Chairman had originally proposed was probably available to the company.

So, is that just the starting point, but you still think $200 million-plus is available to you? Is this more just a – more sober assessment now that you've had a chance to – cooler heads have prevailed and you've really looked at the business? How do you frame that versus what was proposed before?.

Scale is going to drive a competitive advantage for our brands. And how do we use that scale effectively every day to give our brand an advantage in the marketplace..

And if I could just follow up, a big piece of that was looking at advertising. I know Olive Garden's advertising is down, but I think it's now still at historical levels, which run well above industry levels. Maybe you could just clarify what those levels are. I think it's like in the 5% range, maybe versus industry norms of 3% to 4%.

Is that something that's an opportunity or do you look at that and say that's really part of what the brand is and it's what got us here and we can't – that's not an opportunity?.

Yeah. This is Brad here, John. And we have lots of history here, and two things that we need to look at is, what is the level of media support that we need to effectively communicate our message. And the other part of that is the non-working piece.

We believe, and we've talked about in the past, there's significant opportunity in the non-working piece of that. If you look at our total marketing expense, it's gone to that non-working being over 20%, we think the mid teens is a better place to be. That's spending at the right level. And then, as Gene talked about earlier, the media.

What message are we supporting? Or in some cases, as we've done, we supported multiple messages. I think we've gone through that. We know we should be focusing on one primary message at the right level there. So that will continue to evolve, but it probably puts marketing in a low 4% range.

And when you look at Olive Garden's particular model and the high AUVs that it drives, part of that is what the marketing does for that brand. And given their cost structure, it's well worth it to make those investments in marketing to improve the absolute dollars that they're generating in that business..

Good, thank you..

David Tarantino of Robert W. Baird, you may ask your question..

Hi, good morning. Gene, I wanted to come back to the strategy on Olive Garden, with respect to pulling back on the marketing, I know this has been covered in several questions.

But I'm just curious to know your thoughts on the overall traffic decline that you saw in the quarter, and how much of that do you think was related to the decision to pull back on marketing? And is that going to be a theme as you move through the next several quarters, negative same-store traffic, or are you hoping to sort of turn the tide on traffic trends in the coming quarters and get back into positive territory?.

Dave, I think there's going to be pressure on traffic for the next six months, as we were aggressively trying to grow traffic last year, and doing it in a way that wasn't good for the overall business. I'm pleased with the trend against the industry throughout the quarter, we're basically on the industry for traffic standpoint in February.

The other thing, when you look at our traffic numbers, is you have to remember all this large party takeout food that we're selling, it's 60 basis points effect on the traffic number, because we're not counting those as entrees at all, so it's not in our traffic number and I expect that to continue to grow.

I mean that's a part of the business we're putting a lot of pressure on but we're not giving ourselves any guest counts for that.

And the reasons for that is it really would – the way we do our labor planning and the success that we're having with that right now, we think that changing the way we calculate our guest counts could have a negative impact in the short term on our execution.

But back to your question, we know we've got to change the momentum in guest traffic as we move forward, but we're not going to do it at all costs. We have a wonderful P&L at Olive Garden, a wonderful business model and we need to keep it more in balance.

And the one thing that we're seeing from the consumer today is we are seeing the consumer's willingness to buy less on deal and actually for the first time in a very long time, we're seeing alcoholic beverage sales growth, we are seeing add-on sales growth, we are seeing more dessert sales.

All these dynamics are coming together at once, and is really helping the Olive Garden business model. So I'm putting a lot of pressure on the operating team and the marketing team to grow guest counts, but at the same time, we're going to focus on growing guest counts the right way.

We're not going to over-invest like we did last year, as we move back to a much more balanced approach with historical media spends..

Great. That makes sense. And then one clarification on the real estate sales. I think you said that you're going to use some of the proceeds or all of the proceeds to pay down debt. And I guess maybe I'm missing something here, but it seems like even at a cap rate under 6%, a lot of your debt is actually at an interest rate below that.

So how does it create value for shareholders to do the sale-leaseback and then to pay down the debt with that proceeds?.

David, I think our plan is, first and foremost, is to improve our credit metrics to ensure that we maintain investment-grade credit profile. We will then use the proceeds and cash from operations to ensure we set up our balance sheet appropriately. We want to keep the capital structure in balance and over time, that should lift shareholder value.

We see this as a bigger than just a treasury function. We see this is really moving to a more asset-light approach and setting up our capital structure in a way that we can get the greatest return for our shareholder.

One thing that I want to keep coming back to is that these properties we're selling, we're selling them at market rents with strong lease terms for OpCo, so we think this is – again, we're using this just to inform us on a broader real estate strategy..

Okay. Thank you very much..

Thank you. Will Slabaugh of Stephens, you may ask your question..

Yeah, thanks, guys. Just a couple quick follow-ups.

On the first one, could you quantify what you think the estimate for the weather impact was in January and February?.

Yeah, for the entire quarter for our large brands, it's approximately 100 basis points. And on a month by month basis, December was impacted by about 210 basis points, January was adversely impacted by 110 basis points. In February, it actually reversed on a year-over-year basis, and there was 30 basis points hurting us this year.

So, just to repeat that, we were benefited by 210 basis points in December, 110 basis points in January but adversely affected by 30 points in February and the total adds up to about 100 basis points..

Got it. Thank you for that detail. One more quick follow-up, Gene, to a question – or to a comment, rather, you made a minute ago. It sounds like you believe we're actually seeing an inflection in the health of the consumer here.

Do you think that's the case? And is that going to change more materially how you market to them going forward? And do you think that's really going to be an inflection in profitability at your brand here?.

Yeah, that's the point I was trying to make is that we are seeing a little bit healthier of a consumer.

We're not seeing a direct impact on traffic, as you think back to discretionary income increasing, but we are seeing for the first time through Crest Data, through our own data, the guest is buying less on deal, and that's allowing us to grow our check average, and improve our overall profitability. We've been in this space for a long time.

We've been trying to create value through deals for consumers to entice them to come see us and dine with us. I'm encouraged by what I'm seeing through what the consumer is purchasing on their visit.

Some of it is that we're doing a better job giving them what they want through Bold Bites in LongHorn, some of the to-go activity in Olive Garden, we're doing a better job in Olive Garden with our wine tasting program.

So I think it's a combination of better execution from our operational teams, but also the consumer today seems to be under a little less pressure and is willing to pay a little bit more for their product. And we're seeing it with our price pointed promotions.

Our preference is down on our price pointed promotions compared to where they were even a year ago or two years ago. So people are buying less on deal..

Great. Thank you..

Thank you. Joseph Buckley, Bank of America, your line is open, sir..

Thank you. I had a couple of clarification questions. Brad, I think when you were discussing SG&A, I think you were saying it was actually down 20 basis points year-over-year if you exclude adjustments, and I just wanted to verify that and find out what adjustments were in SG&A..

Yeah. The G&A portion only was what I was talking about, that's 20 points better, and 100 basis points for the marketing, so that's what you should see on the slides. And I think -- and you asked what were the adjustments. Let me go to the press release there.

They were around – for the quarter, we had some strategic action costs principally related to the real estate assistance that we're having there, and also as a part of our real estate move, we had some excess land that we impaired the value of those. And you can see those detailed further in the press release..

So some of the real estate – I think the impairment is a separate line, if I'm not mistaken, right?.

Yeah..

So if you still want to say, expiration work, some of that's in the G&A?.

Yes. And that was approximately $0.01 for the quarter..

Okay. Okay. Just on the tax rate. You gave us tax rates for continuing operations of what you're expecting.

Could you remind us why it's so low and what happens next year or the next couple of years on that tax rate? And are your existing REITs a big part of that lower tax rate?.

Well, first off, to this year and the tax rate that we expect, and we have been detailing those both on a GAAP reported basis and on a performance adjusted basis. And on the performance piece, I think, is really where you're going that we're looking at 16%. That is a little bit lower than where we see the tax rate.

So at more normalized EBT levels, that's probably in the 20% to 25% range is where we would see.

And I know over the years we've tried to communicate the advantages that our business model has, being all company-owned; and our scale gives us a lot of opportunities for tax planning, programs that we can implement, systems that we can build to make sure we capture those credits that makes it easier, non-intrusive to the operators.

And so, things around food donation, things about employment credits. That being an all company-owned model, those all accrue to us. So when I do our work here doing long-term planning, I'm putting that, depending on the EBIT level, between a 20% and 25% effective tax rate..

Okay. And then just one more, if I could, for Gene. And, Gene, congratulations on getting the CEO position with the interim removed. You mentioned scale a couple of times in answers to different questions.

Is that coloring the thinking around Specialty Restaurants? I mean that was always kind of the pro and con argument, was how much the profitability of the Specialty Restaurants was sort of feeding off the Darden G&A.

So is doing something with the Specialty Restaurants less likely as maybe the new board understands the scale benefits?.

No. I think, again, everything is still on the table and will be carefully evaluated. As we continue to move forward, we're going to have to look at the scale advantage that these restaurants in the Specialty brands do get from Darden. We have to look at the synergies that are created.

We also have to look at the growth that the Specialty brands create for the overall Darden business. But, as I said, we are going to focus our strategic energies around capturing the value that's available to us in the real estate.

And we will come back and fully analyze what is best for our shareholders, as it relates to what the brand portfolio mix is going forward..

Okay. Thank you..

Thank you. Jason West of Credit Suisse, you may ask your question..

Yeah, thanks. I was wondering if you guys would be willing to share the proceeds that you got from the sale-leaseback that you did.

And were those units, the 16 properties and then the other 15 properties, were those all fully-owned properties where you own the land or was there a mix of land lease – yeah, land lease and building owned (51:17) properties?.

Those were all fully-owned properties, and we have not received any proceeds. We've got these under contract, but we have not closed on any of them yet..

Okay, and would you expect any significant tax payments as part of these types of deals, or would they be pretty tax-free?.

No. These deals were all done in a very tax efficient way..

Okay, great. And then just on the outlook on cash flow, you guys are sitting on a lot of cash on the balance sheet. Can you talk a little bit about what the plan is there, what the long-term run rate you need on the cash balance? And then, any early color on CapEx for next year would be really helpful.

I know you're evaluating some Olive Garden remodels. I'm guessing that unit growth will be similar, if you could talk about that, would be helpful..

This is Brad. And what I would say is we think it's very important to get all this right. And so, we want to get further into our work on the real estate process, so we know the size and the form of what that activity may be before we look at deploying the $430-million odd that we have on our balance sheet.

But what we are focused on is continuing to improve our credit profile; also, looking at all the options that we have around the real estate; and to utilize this cash to improve our shareholder value creation. And so, I think – I should just step back for a moment and just talk about the power generation of our business model continues to be strong.

You can see with same-restaurant sales growth, growing the top line, the improvements that we have made in our margin, the model generates a lot of cash. And so, we need to get further in the real estate process, but the key focus is to continue to improve our credit profile and increase shareholder value.

And we'll talk more about how we'll do that in June. I think part of your question was indications on CapEx for next year. It's really too early to say on that, but you have seen us over time moderating the CapEx for new restaurants and all that. That will continue to moderate some.

But beyond that, we're still working through, as you mentioned, remodels. Might there be other opportunities that'd be very appropriate for us to pursue, we're leaving all those options on the table at this point..

Okay. And then, just one quick follow-up, the cost savings, the $90 million to $100 million.

Does that contemplate some significant divestitures of real estate and savings that would go along with that or if you guys end up to selling a lot of properties under leasebacks, would you have a lot of G&A and D&A savings that may go with those sales?.

Right. So the numbers I gave earlier are on a status quo basis, if you will. And so, those are, as we own and operate the business today, the actions that we're looking at, like you said in real estate, those will be all comprehensive.

So we would look at the value they're going to create, which, like you said, if it's moving some of that out, there should be other reductions in the dollars we spend to support those activities. But those aren't encompassed in our savings. These are, I like to say, status quo, as we're operating the business today..

Got it. Thank you..

Howard Penney, Hedgeye Risk Management. You may ask your question..

Thanks very much for taking my question. First, I just want to say it's a breath of fresh air to hear this company being managed very differently than it's been managed in the past, and a year makes a big difference.

You were just actually asked about unit growth, and I was wondering if you could comment on unit growth; and was wondering if, I think, it was – 34 would be – is that right – 34 would be the high watermark for your tenure, Gene, in terms of unit growth, or whether you think you'll accelerate that or decelerate that? I'm just kind of curious in terms of your capital allocation.

One of the things that I think was done in the past inappropriately was an aggressive – or unit openings were too high. And then, secondly, just on the shareholder value creation piece and the real estate.

Two questions; one, if we look to the Starboard presentation as to what the value of the Olive Garden real estate, is that a good proxy for that? And then, secondly, I think you've been asked a couple times about effectively whether selling $500 million of real estate would be accretive or dilutive to earnings, and the math sort of suggests that it's dilutive, which actually is okay if it is dilutive because it's a part of a broader strategy to create shareholder value.

So maybe if you could just confirm that? And then, lastly, when you speak again in terms of the next fiscal year, will you provide longer term targets for where you think this organization, this enterprise, can grow sales and earnings, and maybe where the margins can get to? Thanks very much..

All right. Good questions, Howard. Let me start with new unit growth. I think as we look to 2016, I would expect to see a few less units in 2016 than we built in 2015. Longer term, it's too early for me to comment on what do we see for unit growth long-term.

I think we have to do the work on what's the appropriate brand portfolio, what kind of growth vehicles are in the portfolio, how our businesses are performing. We're going to be very diligent on return on invested capital and our approach to building new restaurants.

If we have a portfolio of restaurants that can return well above our cost of capital, and we believe we're in good consumer segments, then we're going to build restaurants. But first and foremost, we're going to ensure that we're returning the right return on investment.

As far as the value of the real estate and is the Starboard a proxy for that, my thought on that is that we're still evaluating carefully, and thoughtfully, and methodically what's available to us in the value creation that we have available to us.

I would – I suggest that you wait to we come out with our plan, and hopefully, we will be able to get that done within the next quarter or two quarters. And at that point in time, we will define what value we expect to receive from the real estate, and whether that's one transaction, multiple transactions, is it a real estate plan over time.

Let us come to you with our plan and that will inform what the ultimate value of the real estate is. As far as when we give guidance for 2016 in June, will we be in a position to give more of a longer term outlook for the organization.

The short answer to that is, I'm not sure that we're going to be in a position at that time to have totally figured out directionally where we're going with all the strategic initiatives that are there in front of us.

When that gets into brand portfolio, that gets in is there some franchising, is there some refranchising, how's international going to play in that. And so I think June is going to be a little bit early to really define a long-term outlook.

However, I do believe that we'll be able to give you a glimpse into, directionally, where we think we're going at that time..

Okay. Thank you. I was going to – that's fine. Thanks very much..

Keith Siegner of UBS, your line is open..

Thanks. Just one quick one for me. There's been a lot of talk about maintaining the investment grade credit rating, and I just wanted to follow up a little bit on why so much attention here.

We've got pretty low absolute levels of debt compared to a lot of other restaurants in this industry, got strong top line momentum, you've got significant cost saves plan, cash flow from ops should be improving improved nicely. I'm curious as to why the cash or maybe even some of the proceeds from sale-leasebacks would get put into debt.

Won't you maintain or even improve your credit ratings just from that core improvement in the business? Help me understand why so much attention on the investment grade credit rating..

Yeah. Keith, Brad here. You're bringing in all the things that we're thinking about.

We have a few others, but we do believe – I believe for some time and continue to believe, even with the extensive discussion about Darden and where we want to be and the things we think we can accomplish, that an investment grade credit profile, as we look at it today, is one of those key elements.

To your point, improving base business helps the credit profile a lot, and so we continue to look at that. As we talk about the work we're doing in the real estate process, we want to make sure that as we do that, that it's consistent with that goal that we have.

And so the real estate actions that we're talking about are not just for the credit profile. It's one of the requirements that we have on ourself, but we want to, as a part of that, ensure that our credit profile is moving in the direction that we think it should be.

We have seen over time that the advantages that come with that, the access to capital at lower cost, is a competitive advantage for us, and we want to retain that with where we see ourself today..

Thank you..

Question is from David Palmer of RBC..

Thanks. Congrats, Gene. Wanted to revisit Olive Garden.

Aside from the economic factors, are there trends that are perhaps less obvious to us that are – and of course we're looking at traffic numbers – that speak to the brand health at Olive Garden, which presumably is making you more bullish as you look forward?.

Thanks, David. A couple things that aren't visible. We think that one of the biggest moves that we've made to improve the operations at Olive Garden is to align our organizational structure with less layers. We are communicating, Dave and his team are much closer to the front line today. Communication has improved dramatically.

We are seeing instantaneous movement in the focus areas of the operations teams. And that, to me, is one positive sign. The fact that we have this $9.99 price point on the menu every day, that defines everyday value, that was missing in Olive Garden. And we're seeing a clientele develop in that menu category that we actually weren't anticipating.

And the customization of that product is something that the Millennials are really attracted to, and so we think that's a platform that we can continue to beef up.

To-go is an exciting piece of the business, and I'm really excited about to-go, and we have got a product and a platform in Olive Garden that is meeting a huge need for the consumer, which is convenience.

We've gone from this approach where we're trying to drive people into our restaurants and people today are less likely to, over time, want to come every single day to the restaurant, but they want to use your product. And we've been able to meet the consumer with this to-go program where the consumer wants to be met.

And we originally thought this was, we could move takeout from 8% of sales to maybe 12% of sales. We're starting to think that this is a huge opportunity. And 20% of our sales could come from takeout in the future in Olive Garden. And the satisfaction level of the consumer that's using this product is really, really, really high.

We are over delivering on takeout, and some of that is just that our product travels so well. But the last thing that I'd bring you back to is that Olive Garden will serve more guests this year than we've ever served in the history of the brand.

And So some of that is coming from our new restaurant development over the years, but we continue to gain market share in all of casual dining and for me, that tells me the relevance of this brand.

And the last thing I would leave you with on Olive Garden is, we are over-indexing with Millennials, and Millennials are really attracted to this brand, and we need to find ways to allow them to use the Olive Garden brand the way they see fit..

Thank you..

Priya Ohri-Gupta, your line is open..

Great, thank you. First off, congratulations, Gene, and thank you so much for all the comments on supporting the IG rating. Brad, I was hoping that we could dig in just a little bit into your comment around using some of the proceeds from your real estate transactions to pay down debt.

It looks like your balance sheet doesn't show much in the way of short-term borrowing, so you would likely need to have to go after some of your long-term debt. Is that a fair assessment? And should we expect that sort of over the next quarter or two quarters? Thanks..

I think – when I look at the real estate and where we are in the process, it's hard to be definitive as to exactly what's going to come out of that. And so I'm trying to be cautious to talk about the investment-grade credit profile, which is high on our list of things that we want to accomplish.

And we haven't really talked about the size of what the real estate deal will be. We'll do it to the point where it makes sense, and there's different forms that it could take.

And so as we have more clarity with that information, I can probably answer your question a lot better other than knowing the priorities that we have in terms of increasing value to our shareholders and improving our credit metrics, as we do all this work, those are two of our guiding principles..

Fair enough. Thank you..

Paul Westra of Stifel, you may ask your question..

Great. Thanks and good morning. Just a follow-up question on your menu pricing strategy going forward and how that might compare to your best guess of the commodity basket and labor inflation as you look out next fiscal year.

And specifically, I was wondering if you could give some guidance again on whether we should be expecting about a 2% or so menu pricing going forward, how you maybe arrived at that, which does appear to be below the industry's number which is closer to 3%..

Morning, Paul. We're planning on trying to price Olive Garden slightly below the industry and to continue to grow our value leadership position. We'll give more guidance or more expectations in our June call on what the commodity basket will look like next year.

However, I will say for Olive Garden, we will obviously have less pressure in dairy, which had a big impact on the P&L throughout the majority of the year, but our expectation for next year and into the future is to price Olive Garden slightly below the industry in order to regain and continue to be the value leader in casual dining..

And it sounds like you are doing less discounting year-over-year.

As you do the calculation, would that year-over-year less discounting, would that be captured completely in menu-mix number or on the pricing that you just bought?.

Yes. When you look at our press release, we break that out. So you look at February, for example, we had 1.8% in pricing, and 2.8% in menu-mix, with 0.6% of that menu mix just being attributed to the bulk takeout orders that we're selling..

Right.

But philosophically, would – maybe end the question with, would you expect your ability to price and compare that to your underlying, I guess, food and labor, I mean, we shouldn't expect a big deviation between those two numbers?.

No, I think there's going to be balance. I think we're going to continue to look at what we can do from a cost save standpoint, what we can do from an efficiency standpoint. Long term, when Olive Garden is at its best, it is the clear-cut value leader in all of casual dining.

We lost that position over time over the last few years as we took more price than we should have been taking. And now, we are very conscious of maintaining that value leadership, and we will continue to look for other ways, other than just pricing, to offset inflation..

Fair enough. Thank you..

Thank you, sir. Steve Anderson, Miller Tabak, your line is open..

Yes, thank you. As we look at your takeout strategy, and by the way, it's very impressive given the strength of the 20% (01:10:26) plus gain there. But, are you concerned about the margins? Particularly given that the takeout sales traditionally have delivered lower margins, so that you don't really see the beverage or alcohol sales.

What are your thoughts on that? Do you think it's more important that you get the actual absolute value on the top line gain?.

When I look at the margins on the takeout business, especially as we move people to the bulk ordering, the margins are actually better. Because when you're doing bulk ordering, you're having less packaging. It's actually much easier to prepare, if we're just selling you a big sheet of lasagna and a big bowl of salad.

And so we think the margins on that part of the business are better. As we start to work more towards catering, we think we will have good margins in that. The check average on the online ordering is up 30%, vis-à-vis someone calling over the telephone or ordering in line. So we believe that our margins are protected at this point on to-go.

They're not enhanced, obviously, because you lose the alcoholic beverage, so on and so forth. But we do have teams working on, how do we create a more comprehensive to-go experience. And can we – are we able to sell some beverages along with that experience, how else can we enhance that to ensure that we maybe actually increase.

This is a different guest occasion, and we've got a team that's working on it and thinking about it differently than how we run our in store operations. This is a huge opportunity. It is a need state that the consumer needs to be filled, and Olive Garden is meeting the consumer where they want to be.

And we can do that because of the product that we serve.

Thank you..

And at this time, we have no one else in the queue..

Okay, so thank you all for your attention and great questions. I want to remind you that we expect to release our fourth quarter results on Tuesday, June 23, before the market opens, followed by a conference call. We look forward to speaking with all of you again, and have a great weekend..

This will conclude today's conference call. Thank you for your participation. All parties may disconnect at this time..