Steven Chris Bremer - Vice President of Global Development, Finance & IR Wyman T. Roberts - Chief Executive Officer, President, Director and President of Chili's Grill & Bar Guy J. Constant - Chief Financial Officer, Principal Accounting Officer, President of Global Business Development and Executive Vice President.

Christopher T. O'Cull - KeyBanc Capital Markets Inc., Research Division John S. Glass - Morgan Stanley, Research Division Joseph T. Buckley - BofA Merrill Lynch, Research Division Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division Alvin C.

Concepcion - Citigroup Inc, Research Division Amod Gautam - JP Morgan Chase & Co, Research Division Sara H. Senatore - Sanford C.

Bernstein & Co., LLC., Research Division Stephen Anderson - Miller Tabak + Co., LLC, Research Division Michael Kelter - Goldman Sachs Group Inc., Research Division Jeffrey Andrew Bernstein - Barclays Capital, Research Division Bryan C.

Elliott - Raymond James & Associates, Inc., Research Division Nicole Miller Regan - Piper Jaffray Companies, Research Division.

Good morning, ladies and gentlemen, and welcome to the Brinker International First Quarter of 2014 Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Chris Bremmer. Sir, the floor is yours..

Thank you, Tom. Good morning, everyone, and welcome to Brinker International's first quarter fiscal 2014 earnings call, which is also being broadcast live over the internet. Before turning the call over, let me quickly remind you of our Safe Harbor regarding forward-looking statements.

During our management comments and in our responses to your questions, certain items may be discussed, which are not based entirely on historical facts. Any such items should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

All such statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Such risks and uncertainties include factors more completely described in this morning's press release and the company's filings with the SEC.

On the call, we may refer to certain non-GAAP financial measures that management uses in its review of the business and believes will provide insight into the company's ongoing operation. Reconciliations are provided in the tables in the press release and on Brinker's website under the Financials section of the investor tab.

Consistent with prior practice, we'll be silent on inter-period sales or other key operating results yet to be reported, as the data may not accurately reflect the final results of the quarter referenced.

On our call today, you will hear from Wyman Roberts, Chief Executive Officer and President of Brinker International; and Guy Constant, Chief Financial Officer and President of Global Business Development. Following their remarks, we will take your questions. Now I will turn the call over to Wyman..

Thank you, Chris, and thanks, everyone, for joining us. Today, I'll detail our company results for the quarter, as well as highlights from Chili's, Maggiano's and our franchise business.

As you saw on our press release, Brinker reported first quarter earnings per share of $0.43, which represents a 16% increase over the same quarter last year and the 13th conservative quarter of EPS growth for Brinker. Company-owned comp sales were down 1.3% for the quarter. And our traffic was down 3.3%.

Before diving into our results by brand, I think it's important to ground us on the casual dining category as a whole. The numbers we've seen in the category didn't let up this quarter. Consumer sentiment is guarded at best. And the consumer confidence remains somewhat volatile.

And there's some evidence that guests have shifted some of their spending to larger ticket items like homes and automobiles. And while we believe this is a temporary phenomenon -- but one that has certainly impacted casual dining here in the short term.

And while employment rates are showing signs of improvement, casual dining in particular is being impacted by struggles many young adults are facing, particularly those in that 18 to 24 age range. Many are graduating college significantly un- or underemployed, weighed down with debt and often moving back home with their parents.

And as a parent with 2 of those, it's a scary thought. Even while casual dining segment is currently performing softer than we anticipated, the good news for Brinker is we're taking -- we returned to taking market share.

Additionally, our ability to continue to deliver double digit earnings growth even in a softer sales environment is a testament to the strength of Brinker's long-term strategy. Okay. Now let's dive into brand results for the quarter.

On the Maggiano's side of our business, we celebrated our 15th consecutive quarter of positive sales, up 0.6% for the quarter. Maggiano's is still putting up industry-leading cost of sales figures even while facing some heavy lifting during the quarter with the national rollout of the new point-of-sale and back-office system.

With our Maggiano's conversion, all Brinker restaurants are now on a single operating platform, bringing greater efficiencies to us. And Maggiano's interest in the second quarter by far the busiest of the year with better systems to leverage against during our high-volume holiday season.

As is always the case with our best performing menu platforms, we continually seek opportunities to reinforce value and create interest with new and varied offerings. For Maggiano's, that's our on-the-house Classic Pastas platform. The most recent innovation takes the form of stuffed pastas.

These 4 chef-created dishes are generously filled with quality Italian ingredients and priced at a premium. As with the rest of the Classic Pasta menu, guests ordering the new stuffed pastas will get to take home a free Classic Pasta for tomorrow. As I mentioned on our year-end call, our Italian-American brand has earned the right to grow again.

Our first new location in 5 years opened a week and a half ago in Annapolis, Maryland. This new design is complete with Maggiano's trademark features, like high ceilings and rich hardwood floors, all housed within a smaller footprint, optimized for site selection flexibility and to deliver a faster return.

And while it's early, I'm pleased to report this prototype is exceeding expectations. And the changes we brought to the business model are working as planned, remain on track to open 6 to 8 new Maggiano's locations during the next 2 fiscal years.

Maggiano's continues to align with our plan to win, to drive margin improvements, create a compelling value message to drive through this beyond special occasion and deliver the outstanding quality of service our guests have come to expect from us.

The global side of the business delivered another robust quarter, with comp sales coming in at plus 2.7%. In Q1 of this fiscal year, our partners opened 5 new global locations, bringing our international fleet to 285 restaurants in 31 countries and 2 territories. For our company-owned Chili's restaurants, comp sales came in at minus 1.6%.

Traffic was down 3.4% for the quarter. Domestic franchise comp sales reflected the category softness down 2.6% for the quarter. And although our quarter 1 results were stronger than the industry at large, in absolute terms, we expect to deliver better performance.

And I'll provide detail momentarily on the initiatives we're putting in place to drive top line sales for the balance of the year. Our reimage program continues to work hard for us. These reimaged restaurants are fully, and in many cases exceeding sales goals we've shared with you previously.

And across our company-owned fleet, our operations teams are running our restaurants more efficiently than we ever have. We delivered favorable -- favorability in the quarter on cost of sales and our best ever productivity on labor hours per guest.

It's important to note our recent labor and cost of sales savings didn't come at the expense of our guest dining experience. In fact, our guest surveys continue to set new records. From a team member perspective, our overall team member satisfaction continues to grow.

Playing greatly into that was a recent achievement our team members and operators are extremely proud of. As we announced yesterday, Chili's guests and team members have attained our goal of a $50 million donation to St. Jude Children's Research Hospital. The milestone donation, the largest corporate gift in St.

Jude's history, was delivered 2 years earlier than anticipated. Giving back is truly in our DNA, as evidenced by the passion and dedication of our team members to support St. Jude's lifesaving work. So now we've covered where we stand.

I'd like to spend some time discussing the big initiatives designed to drive sales and bolster results at Chili's in the remainder of the year. First and foremost, we're dialing up intensity on product innovation. As you've heard me mention before, our newly installed Kitchens of the Future opened up possibilities for new menu items at Chili's.

And there's big exciting news ahead in Q3. We'll enhance the platform that today serves as a point of differentiation for Chili's versus our peers. And that's Mexican food. Our research has shown that we can build upon our current credibility with tacos, fajitas, quesadillas, chips and salsas to further strengthen this platform.

But until then, we aren't content to rest on our laurels when it comes to food. We'll drive relevance with our guests by innovating and renovating our menu. So far, this year, we've added new entrées, desserts and alcoholic beverages.

And along with many other brands, we've capitalized on the pretzel bread craze, advertising our new Bacon Avocado Chicken Sandwich served on a toasted pretzel roll. And it has become the best selling sandwich on our menu. In just a few weeks, we'll be on air with new lunch news focused on lunch break combos.

And for dinner, innovation in the steak category. We'll also be introducing the new pumpkin spice molten perfect for the fall. And we'll be telling the world about our Q2 and Q3 innovations through an enhanced media spend. The last few years we've worked hard to be efficient in our marketing spending.

And we've shifted marketing dollars away from TV into the digital space. And as a result, we've lost some share of voice. For fiscal '14, we're raising our TV media spend significantly.

The larger accrual began in Q1, but the increased weight levels won't hit the airwaves until late Q2, and will run through the remainder of the year to support our new product innovation news.

So moving forward, we have the benefit of incremental weight levels combined with strong messaging and relevant product innovation designed to drive the top line. This fiscal year, we're also driving the business through new technology, both in-restaurant and out.

Our operations, IT and marketing teams are leveraging the latest technology to create an even better to-go experience, even our enhanced online ordering system. Additionally, we're offering guests speed, convenience and value with a new delivery service rolling out to more than 450 restaurants by the end of next month.

We'll support those lines of business through appropriate marketing and online media throughout the year. And as many of you heard, Chili's is seeking to further enhance the guest experience with the implementation of tabletop media devices in all company-owned restaurants.

The goal here is not to alter our current level of service, rather to enhance it. Tabletop media provides a great communication vehicle to market menu offerings to our guests. It creates new check building opportunities with easier ordering of second drinks, coffees and desserts and better speed of service, allowing guests to pay at the table.

It truly enhances the guest experience for those who choose to interact with it. And these devices will be fully deployed prior to the end of this fiscal year. Finally, we'll continue to grow Chili's top line through restaurant openings. Since last December, we've opened 6 new or relocated restaurants. And they're delivering positive results.

Our pipeline is filling quickly for future growth. And we anticipate to be fully ramped up with 10 to 12 new restaurants opening next fiscal year. When compared to other operators, our numbers of new restaurant openings may look small.

However, we're disciplined about our use of capital and ensuring when we build a new location, it provides great returns and doesn't cannibalize existing restaurants. One of the biggest challenges that comes with growth is the ability to effectively staff new restaurants.

Our people work and operations teams have done a stellar job of improving the guest experience through training and developing the best quality management teams in the business.

And Chili's control growth strategy allows us to offer those strong leaders' career development and upward mobility as we staff up new locations, creating that competitive advantage for us. Before I turn the call over to Guy, I want to leave you with a few thoughts. It's clear that Q1 was a challenge for us.

Our primary focus for the remainder of fiscal '14 is growing sales. We'll be driving that result with multiple -- or from multiple angles.

We've dialed up the intensity of the menu innovation and our 'Big Rock' initiatives to grow sales, primarily tabletop media, increased marketing spend, reimages, to-go, delivery and increased capacity through new restaurant openings.

While we're coming out of a rough quarter, we are optimistic that we'll grow sales and continue taking share even in this softer environment. We have achieved double digit earnings growth. And we'll continue to strengthen the brand without giving up the margin improvement we've worked so hard to accomplish over the last 3 years.

As a leadership team, we remain highly focused on our balanced approach of making the right investments for the business, while at the same time delivering on our promised earnings growth. Now I'll turn it the call over to Guy to share specifics on our performance for the quarter..

Thanks, Wyman. As you've just heard, our first quarter earnings per share before special items was $0.43, representing a 16.2% increase over the same quarter last year and the 13th conservative quarter of year-over-year improvement. First quarter revenues were $684 million, an increase of 0.1% over prior year.

Total company-owned comparable restaurant sales decreased 1.3%, driven by a decline in traffic of 3.3%, offset by a 1.1% improvement in mix and a 0.9% price increase. Capacity was up 1.5%, driven primarily by the addition of the company-owned Chili's restaurants in Canada. And weather had no impact on the quarter.

Franchise and other revenues were $19.4 million, a decrease of roughly $400,000 from prior year, driven primarily by the removal of royalties associated with the acquired Canada restaurants and the U.S. franchise comparable restaurant sales decline of 2.6%.

These factors were favorably offset by an international franchise comparable restaurant sales increase of 2.7%.

Cost of sales improved 60 basis points from prior year to 27.2%, driven by 70 basis points of favorable mix associated with the introduction of new menu items, the mix of promotions and better waste control resulting from our new point-of-sale and back-office systems.

These improvements, coupled with the favorable impact of menu pricing and other items of 30 basis points, were partially offset by unfavorable commodities of 40 basis points, stemming from higher meat and poultry costs. Currently, 86% of commodities are contracted through the end of calendar 2013. And 44% are contracted through the end of fiscal 2014.

Restaurant labor improved 10 basis points to 32.9%, driven primarily by 60 basis points of productivity associated with our new kitchen equipment.

In fact, this quarter marked Chili's best ever period in hourly labor efficiency, a testament to the hard work our operations team has put in to optimize staff scheduling to best leverage the new equipment installed in the past 2 years.

However, the savings was mostly offset by 40 basis points of higher health-insurance costs associated with an increase in the severity of claims unrelated to the Affordable Care Act.

Restaurant expense was $167 million or 50 basis points higher than prior year, largely as a result of increased accruals for future advertising spend, higher workers' compensation insurance expense and preopening costs.

Depreciation expense increased slightly to $33.2 million due to recent investments in key capital initiatives and the addition of the 11 company-owned restaurants in Canada, partially offset by an increase in fully depreciated assets.

General and administrative expenses were $34.4 million, a decrease of $2.9 million versus prior year, driven primarily by lower stock and performance-based compensation expenses and a decrease in professional fees. Interest expense was essentially flat to prior year.

The tax rate before special charges was 31.6% versus 31.2% in the prior year, driven by the impact of higher earnings and lower tax credits. Capital expenditures for the quarter were $29.8 million, with year-to-date cash flow from operations at $55.4 million.

We've also completed 453 Chili's reimages to-date, and are still on track to have completed a total of about 620 reimages or roughly 75% of our company-owned Chili's system by the end of fiscal 2014.

And with -- and the role of the new fryers we mentioned in our last call will begin in a few days, with about 130 expected to be installed by the end of the calendar year and the remainder of the Chili's company-owned system installations occurring in the back half of the fiscal year.

As a reminder, this fryer technology is expected to lower our oil usage and contribute to the cost of sales improvements we expect this fiscal year. During the quarter, we bought 1.6 million shares for $66.3 million, funded in part through a drawdown on our revolving credit facility. This leaves an outstanding authorization of about $480 million.

And we ended the quarter with approximately $56 million of available cash on our balance sheet. As we've stated before, we're committed to a balanced approach to investing in our people and assets, managing debt, maintaining appropriate liquidity and returning cash to our shareholders.

This includes the recent 20% increase in our quarterly dividend from $0.20 to $0.24 per share. This also includes first quarter payments on our revolving credit facility, consistent with our stated intent to maintain our investment grade metrics. As Wyman mentioned, this year is off to a challenging start, as evidenced by our first quarter results.

Consumers continue to navigate the new macroeconomic elements and adjust their allocation of disposable income. And we see this challenging environment continuing in the near term, with industry traffic remaining weak. Of course, we're not immune to what's impacting the industry.

And there remains significant uncertainty around what the coming year might hold for the consumer.

But based on the current situation, our best projection sees full year of fiscal 2014 Brinker comparable restaurant sales growth between negative 1% and positive 1%, with the resulting sales deleverage causing restaurant operating margin growth to be between 25 and 50 basis points.

This sales projection represents an acceleration compared to our first quarter results, but it comes with the background of a second quarter that is off to a good start. We're continuing to outperform the category, as measured by both KNAPP-TRACK and Black Box.

And we feel confident this will continue in light of the sales-driving initiatives Wyman outlined earlier. Given these sales estimates, we now project full year fiscal 2014 earnings per share to be between $2.65 and $2.75.

This guidance continues to reinforce the hard work we've put into establish a sustainable business model in difficult times, one that will generate double digit annual earnings per share growth, and that is focused on continuing to deliver value to our shareholders. With that, I can turn the call over to Tom to open the line for questions..

[Operator Instructions] And we'll take our first question from the line of Chris O'Cull with KeyBanc..

Wyman, I understand Chili's has outperformed KNAPP or Darden this quarter, but it's been underperforming other mature chains as measured by Black Box.

Which of the many sales billing initiatives implemented over the past couple of years is just not meeting expectations, you think?.

Hey, Chris. Well, first, I don't know, when you talk about Black Box as a category, as a group -- we outperformed KNAPP this quarter. And Black Box -- we were basically with Black Box, slightly favorable to Black Box in the casual dining category.

To get to your other question, where are we not seeing the kind of traction we like to on some of our innovation, I think, is the root of that. Obviously, with the flatbreads and pizzas, we've talked about that in the past. We didn't get quite as much of a pop on the topside as we had anticipated with that product offering.

We're excited about the addition of flatbreads to our business, and what it's doing from a margin standpoint and from a relevance standpoint. It wasn't quite the traffic driver we had anticipated. Beyond that, I think the new news that we brought to the category has been pretty consistently delivering.

One of the other things that we've been looking at is how we allocate our media dollars against the messaging that we're bringing to the market in the first quarter without any, what I would call, significant innovations, we didn't spend heavily behind it.

Actually, our media spend in the first quarter from a TRP standpoint, from a -- was down about 15%. So we're continuing to innovate. And when we get our innovation ready to roll to the market. And we bring it, I think where our hit rate has been as good as anybody's.

And we're excited about the innovation that we're bringing to the market here in the late second, early third quarter..

I guess, given Chili's -- I would think Chili's would have some credibility with the Mexican offering.

So do you expect these products to have more of an immediate impact on transactions?.

Yes, absolutely. I think to your point, we do have a lot of credibility. Actually, our Mexican -- when you look at tacos, quesadillas, fajitas, that category represents really the biggest category that we have at Chili's, bigger than burgers. And so we know we have credibility and relevance in the category. The work we're doing is exciting.

It's bringing not just new news, but also we're going to improve the quality of the product that we already have. And so we think we've got new news message, as well as some real innovation that's going to help raise the quality of the product we're delivering today..

One last question. I mean, in the past, you've tried to wrap some of the new products into the 2 for $20 price message. I would think Mexican offerings would offer -- would provide you with the opportunity to maybe even create a new value platform.

Is that -- is there the potential for that?.

There's the potential..

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

First, Guy, could you just remind us when do we really start to finally lap all the margin benefits, particularly in labor, but I guess food and labor? Is it this coming quarter, December or incrementally in the next couple of quarters after that? Are there -- have you come up with new iterations of those existing initiatives or new editions that may even give you more margin leverage than you thought before?.

Well, the actual completion, John, of the kitchen rollout happened in late November last year. It was when we rolled out the last of the kitchen. But it was a year-long program.

And you can see that Kelli and her team in the operations have delivered, continue to deliver strong labor performance even though we're lapping a lot of kitchen rollouts that have happened already. So we do think there is incremental upside. And they're delivering on that right now. The Aloha/MenuLink rollout was a fairly similar timetable.

It was done by really the end of the second quarter. So the improvements in waste that we saw on the cost-of-sales line really started coming in the February, March timeframe after that rollout was completed. So those would be the 2 primary things that we implemented. Now we do have fryers coming, as we talked about.

So that will provide some additional tailwind to cost of sales. As I mentioned in my remarks, we'll have about 1/4 of the system done by the end of this calendar year and the whole system done by the end of fiscal 2014 in June..

Okay, that's helpful. And then how much -- it sounds like you're actually going to spend more in advertising. It's not just a reallocation away back from digital back to traditional media.

Is that correct? And how much incremental media spend are you going to have this year?.

Hey, John, Wyman. So yes, we have absolutely committed to increasing the TV media budget. We've started accruing for that in the first quarter in anticipation of the budget for the year. But we won't recognize those higher weight levels until really late this quarter and then throughout the rest of the year.

It was a $0.02 impact to our earnings in the second quarter versus prior year -- I'm sorry, in the first quarter versus prior year, of which we won't see that benefit again until later this year. So we're excited about the messages that we're going to bring and the heavier weight levels we'll be talking to people..

But are you spending more or you're just reallocating back away? And I know it is -- how much more incrementally are you going to spend on a full-year basis?.

It's an increase in spending..

Okay.

And then just can you finally just talk about delivery, how that gets executed, how confident you are there's a demand for it, is it third-party so there's no risk? Or do you do it yourself?.

So first of all, with the Maggiano's business, we rolled out a delivery program several years ago. Actually, kicked it off when I was heading up Maggiano's. And we had really tremendous success with that program. And it's not third party. We run the program ourselves.

The -- obviously, the dynamics and the business model are a little different with the Chili's product.

What we have already identified, it's not necessarily appropriate for every restaurant we own, but we have filters that we feel very comfortable with, identifying where the demand is and where we can provide the service that's going to be appreciated.

And so we are now in the process of rolling that service out to those restaurants that we've identified where the opportunity is..

Our next question comes from the line of Joe Buckley with Bank of America..

Maybe just a follow-up on that delivery question first.

So if you guys do it yourselves, what kind of mix do you need to justify that incremental expense?.

Well, Joe, there's very little incremental expense. We're not buying vehicles. We're not -- we're leveraging assets primarily that we have. So the beauty of the delivery program that we're rolling out at Chili's is that it's a very little incremental investment.

So it doesn't take a whole lot of incremental sales to make this a very -- a nice returning piece of business for us. And it operates -- it tends to -- how you -- how people order and when you bring delivery tends to be in those offpeak hours.

If you want it for lunch, then we're putting it together and bringing it to you prior to our peak business at lunch. And so it does work well within our labor model to kind of leverage labor that's not necessarily working at capacity because of the shift in the timing, if you will..

Okay.

So the delivery people use their own cars?.

Yes..

Okay. Guy, a couple other questions. Could you -- why lower guidance -- your kind of your policy and what's in your releases, we don't change guidance unless something material has changed. And you did lower guidance on, what looked like a pretty modest first quarter miss.

And so just I'm kind of curious, your thought process?.

Well, on the sales side, Joe, I think this past quarter, I think, for the entire industry caught most of us by surprise in terms of the challenges we are facing. And I think given that we posted a negative 1.5%, call it, comp, and that was quite a bit below our originally guided range of 1% to 2%.

We thought it was prudent to reset that, particularly given the fact that as we look forward, we're obviously hopeful things can get better. But we really don't see any indication right now that the consumer is stronger than they were when we last spoke in August.

And so given that, even though we're encouraged about the start we've had to October, and that will -- the range that we guided to is an acceleration versus what we did in the first quarter, we thought it was appropriate to at least give all of you some better indication of where we thought sales could be for the rest of the year..

Okay. And then just one more. The pricing factors that you shared with us is the lowest price you've had in a long, long time. And also, for first time in a long, long time, you mentioned some commodity cost pressures that you guys have done a marvelous job kind of avoiding in recent years.

So if you could just sort of reconcile those and maybe talk about your thoughts on pricing?.

So let me deal with the commodity cost issue first, Joe. So maybe my comments might have been misunderstood. I mean, I think we've basically seen very similar commodity inflation that we've historically done. I mean, we isolate just the inflation. There is inflation, but it's been fairly moderate between 1% to 2%.

But if you simply isolate that inflation, it was about 40 basis points.

Now obviously, we've been able to do a lot of things with what we've done with menu innovation, with some high gross margin items, what we've been able to do with the implementation of Aloha/MenuLink to manage waste, what the new kitchen equipment do for us in terms of efficiency in producing product. All of that has been great for cost of sales.

And now when you add fryers in and other menu items that Wyman talked about that are also good for gross margin, we expect to continue to see momentum on the commodity side.

Now on the pricing side, I think it goes hand-in-hand with what you just saw with the fragile nature of the consumer right now is that I think our approach has been and it remains consistent that we don't have to take price, we would prefer not to do so. We recognize that the consumer's in a tough spot right now.

And trying to take price can be a challenging thing to do. And so we still believe we'll be within the 1% to 2% range. Obviously, we're closer to the bottom end of that range right now in terms of pricing..

Next, we have Jeff Farmer with Wells Fargo..

Just following up on an earlier question, I guess sort of posing this in an interesting way, some periods where Chili's actually outperforms the peer group, I'm just curious if there's a common theme? Meaning did you guys have a really strong promotion or new product introduction? Or in those periods where you do outperform, it is a more situation where some of your more aggressive peers are a little bit more keen in terms of promotional discounting? I'm just curious what you guys have seen over the last 18 months as you've both taken share and lost share in this environment?.

Hey, Jeff, Wyman. So I think the story that we're seeing play out is, first, you have to establish a value proposition that's relevant in the space. And if you were to talk to us 3 years ago, Chili's needed to do some work there.

And I think with what we've done to bolster the menu and the value proposition and make changes in the quality of some of the product, we've done that, as have some others in the category. And so early on, there was a lot more opportunity, I think, for brands to take share just based on value messaging.

And that landscape is now, I think and what I'm seeing, has been leveled to a greater degree. So now that we have that leveling off, a lot of the promotional efforts that people are trying to throw on top of, of what they've already been doing aren't showing as much impact as you would have thought.

So I think what we've seen is when we bring new innovation that's compelling, especially that -- our strategy is not to do it from a limited time-offer perspective, but to really build on the base and the foundation of the brand and put it in the base menu, that we move the brand forward. We take share and we move forward.

And when we don't, it becomes more -- those gains in share, and basically over the last 3 years, we basically either have taken share or tracked with the market.

And when we track with the market, we tend to be more looking at media planned and other things in the marketplace that are -- that just kind of put us -- may put us in a little bit of a disadvantage or adjust the quarterly result somewhat just based on kind of how we market or come to market..

Okay, that's helpful. And just one other unrelated question. It looks like you have about a 65% company ownership of Chili's right now.

Just over the longer term, what are your thoughts there in terms of refranchising now that the restaurants are throwing off a lot more cash, the margins are up, volumes are up, a lot more traction to franchisees on the acquisitions side.

So how do you think about that moving forward?.

Jeff, it's Guy. We're still pretty consistent in how we think about our franchise company-owned mix. We believe at these volumes and with some of the sales innovations to come and the margin traction that we've got, that we feel pretty good about our mix right now, where we are with company-owned and franchise.

We feel like on balance, it makes more sense for us to own them as a company when we're delivering these kinds of returns in the restaurants. Whereas 4 or 5 years ago, when things were not as good, it didn't make as much sense for the shareholder for us to own as many restaurants as we did.

But I think on balance right now, if we can execute on this plan, my belief would be we wouldn't be increasing the franchise mix other than just through natural development that we're seeing in our international business and with our domestic franchise partners..

Our next question comes from Alvin Concepcion with Citi..

Just wondering if you could give some comments on the tabletop ordering system? I know it's very early, but what have you seen in terms of check or mix, sort of any takeaway if you'd be happy to talk about?.

Well, Alvin, it's interesting. It's not really that early when you think about -- we've had it in over 100 Chili's now for almost 2 years. So we've got a lot of experience with this tabletop device. And I won't give you details because -- too much detail because that's confidential and we want to keep that a little bit closer.

But I will say that it works on the 3 areas we touched on. It really gives us an opportunity to upsell and to communicate in a different way, right, with the potential to do video on the table. We can tell stories about what's going on with Chili's that makes us relevant, that people don't necessarily understand very well.

So we're very excited about that. So the upsell ability and the ability to tell stories and create relevance, it also then allows guests to expedite their meal at their pace. So your ability to order drinks or coffees or desserts.

And then to check out whenever you want just by swiping the card at the table and having the check print there for you, all those things are really added pluses. And they can add to -- you can speed up your visit if you'd like, which obviously can help you with throughput.

But more importantly, it just enhances the guest experience when they don't have to wait around. So those are the things we're excited about. Up until this point, we've been just using the off-the-shelf product.

And what we're committed to do and what we're excited about is customizing the content now that we've committed to the tabletop device to really be Chili's focused. And we think there's upside to what we've seen in the restaurants with the off-the-shelf device and content when we start to become more specific and more directed..

And then just a follow-up on -- you talked about innovation being the focus to driving top line. What sort of things are you doing to include value perception? I think Mexican might give you an opportunity there in terms of value platform. But I think limited time offers we're also off the table.

So I'm just wondering what your plan is there?.

Yes. So again, we have these platforms that really drive value for us. So 2 for $20, the lunch combos, those are significant platforms for us that drive value. But we've also put value through the breadth of the menu. We look at every menu item, and we evaluate it on the value scores that the guests that are eating that item are giving us.

And wherever we see an opportunity, we address it. And so what we've done over the last year is not only add platforms that really maybe communicate value in a more direct way, but also address any individual item that's not delivering value to the guests that are eating it. Obviously, the Mexican category for us is a platform in and of itself.

And as we expand that, as well as improve it, we think there's a big opportunity there to create quality food, as well as drive some really nice value perception..

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

It's Amod on for John.

Guy, are you still expecting CapEx in the $150 million to $160 million range for the year?.

We are, John, we are..

And longer-term, if the tougher sales environment continues, do you think there's any changes that you might have to capital allocation plan in terms of unit growth or pace of remodels? Just thinking about looking at fiscal '16, I remember you guys talked about being under $100 million in CapEx?.

It's all returns-focused, John. So I guess if there was a situation where we saw top line deterioration where we didn't think we could hurdle on a new restaurant offering, we wouldn't do it. But that's, frankly, that's the filter we're using today on any new restaurant opening, is that it's got a hurdle at a certain return.

Investment in fryers has got to produce the necessary savings in cost of sales, the kitchen investment had to drive the labor improvement. So from my point of view, we're definitely intending to make investments that provide the appropriate returns. I think we owe that to shareholders.

I don't think they want to sit on the cash or even give it back to them if we can earn a better return by investing it into the business. And so we'll continue to do that work next time..

And the big difference, the big spend up until '16 is really the reimages. And they're doing very well. So I wouldn't anticipate us pulling back on those. That's the big delta between where we're at now and where we're looking like in '16, I think..

Okay. And then can you talk about how pizza and flatbreads have trended? I think you said the mix last quarter was around 10%.

Has that continued to build as consumers gained familiarity?.

It's helped. We're holding there. And it's kind of become a nice addition to the menu. The flatbread category is especially relevant for us, delivering great margins and great guest satisfaction scores. But as we've talked about before, it's more of a -- it's being viewed as more of an appetizer, or an add-on, than it is an entrée. And so we invest.

Probably, the biggest opportunity there is to continue. And that will probably be -- that'll be a slower build..

And so we should basically expect that the national TV will be more focused on the Tex-Mex as opposed to the pizza and flatbreads, I guess?.

Yes, absolutely..

Up next, our next question comes from the line of Sara Senatore with Sanford Bernstein..

Just a question, and then a follow-up on our earlier conversation. So the first question is just about share repurchase. And effectively, it looks like you repurchased fewer shares than you have in the past couple of quarters.

Can you just talk again about just thinking about that, which is to say I think up until now, you've kind of consistently repurchased shares on the view that it would pay for itself because the stock price will keep going up so you'd be buying shares and creating value that way.

To the extent that operating performance maybe we're not seeing quite as much of an inflection point, can you just talk about how you think about share repurchase and sort of the discipline around valuation? And then the only -- the other follow-up question I have is just on advertising.

If you could talk about maybe ROI on incremental marketing spend, either at what kind of comp lift you think you get or just generally the approach to that?.

Sara, it's Guy. I'll let Wyman field the advertising question, but I'll talk about the share repurchase question. Really, the strategy's unchanged from where it was before.

We have the 4 primary uses of cash that we've historically discussed, which is in the CapEx at -- that we'll invest for these high-returning initiatives that we're involved in now or any of it could come up in the future. We have the dividend that we will pay a 40% dividend payout ratio, which we increased in late August.

We want to maintain $50 million cash on our balance sheet. And we're required to make $25 million a year in debt amortization payment split quarterly. Other than that, all remaining dollars are going to go to share repurchase.

Now if operating performance starts to impact the business, as it did somewhat this first quarter, all of you would have noticed that we made a $20 million paydown on our revolving credit facility because we're determined to maintain our investment grade credit metrics.

But as we feel about this plan, a lot of confidence in the plan and moving forward, we do continue to believe that where we buy today will be cheap versus where we'll be tomorrow. And we'll continue to do that. Interestingly, if operating performance were to decline, we would probably pull back a little bit on share repurchase.

But I think that will be dictated by the performance of the business. But our expectation is we'll continue to deliver double digit EPS growth like we did this quarter, which should mean that going forward, we would continue to see the stock price rise.

Wyman, do you want to touch on ROI for marketing?.

Yes. So we definitely, Sara, look at the return on our marketing investments specific to the medium that we're using. Over the last few years, we've seen a better return in the digital space. And so we've shifted dollars over there. And what we're saying is even though it's a better return, we get a good return on the TV investment.

And we've probably taken that budget down a little lower than we should, and that we see opportunity there with -- again, it's always with the right message. And it doesn't matter. The return of your marketing dollar is going to be directly related to the power of the message you put into that marketing.

And so we're very excited about some of the messages that we've got coming up. And so we're confident the return will be strong as we up the dollars in the marketing budget here in the second half..

[Operator Instructions] We'll take our next question from the line of Stephen Anderson with Miller Tabak..

I wanted to discuss a little bit more about the new fryer technology.

Do you see this as being kind of a precursor to a Kitchen of the Future 3 initiative?.

Well, Steve, we're definitely committed to the implementation of technology in our restaurants, as I think the new line equipment demonstrates, the new fryers demonstrate and the tabletop media that we indicated earlier.

So perhaps the restaurant industry hasn't been as -- hasn't had as much foresight in the use of technologies and maybe other industries. And that may have something to do with historical labor cost. But I think what you're finding now is that we have a strong belief in the implementation of technology. Fryers are the next step.

And we are absolutely keeping our eyes open for any investment in technology that we think can deliver a great return for the business..

Our next question comes from the line of Michael Kelter with Goldman Sachs..

A couple of things. I guess, first, on the marketing, you guys said it was about a $0.02 hit on the quarter from the accruals. So if we straight-line that, it's around $8 million of increased spend on top of $80 million this year. So 10% increase in ad spend.

Is that directionally right? And what should we -- yes, did you say if you're getting an incremental contribution from your franchisees as well?.

Yes. That was the only point I was going to make, Michael. So your math makes a lot of sense recognizing that that's just our share of the contribution. And yes, our franchisees are participating in this effort as well..

And what are the franchisees currently paying as a percentage? What is it changing to? And how has that conversation gone with the group?.

Well, I mean, there you'll see a similar basis point change that we saw, Mike. So the increase in basis points that we saw in the first quarter related to advertising would be a similar one to what the franchisees would pay.

And as you know, as we discussed many times, and Wyman's discussed on the call, we have very fruitful, robust, ongoing conversations with our franchisees about this. And we've discussed the change in advertising. They're very supportive of increasing the spend in regards to TV media..

And then on the new tabletop technology, given a large proportion of consumers seem to choose to pay their checks on their own with this technology, shouldn't you be able to reduce labor once it's in market? And I ask because some other companies that have tested these devices have talked about that being the biggest benefit of the technology, that each individual server can handle maybe an extra table or 2?.

Well, we aren't using the rollout of the tabletops as a way to become more efficient. We're really looking at it as a way to enhance the guest experience. We'll see over time.

I don't think just the fact that the check gets swiped by the guest is going to create a significant opportunity for you to increase the number of tables, let's say, that a server could take at that. So currently, it doesn't appear to us to be that much of an efficiency play. It's much more about enhancing the guest experience.

And again, with the technology in the restaurants, we'll see where it moves from here and how consumers adapt to it and what are the things they can do. And if it creates more efficiencies, then we'll leverage those. But right now, that's not the way it's being played out.

And it doesn't have to for us to get a great return and to do the things we want it to do..

And then lastly, on pricing, which is now below 1% for both brands, and you referenced the fact that you're a little reticent to take pricing in this environment.

So is this some sort of new normal in the way you're approaching the business? And that traffic growth has to work even harder for you to get to your same-store sales targets despite the tough backdrop?.

So Michael, this is Guy. So you're right in terms of the absolute pricing. But the way we think about it, Michael, is overall check growth, right? And so you saw that mix had increased as well. Our belief is that the consumers can only bear a certain amount of check growth.

Now whether that comes in the form of price or additional add-ons or buying items that might be more highly priced on the menu, there's a breaking point there at some point. And so we watch more the overall ticket growth than necessarily the specific pricing.

As you might expect, there's different elasticities for an existing item versus adding on a starter or a dessert, but there's elasticity involved with any increase in check. And so the way we think about it is monitoring the entire growth on the side of the check, not just the pricing..

Our next question comes from Jeffrey Bernstein with Barclays..

Just a couple of follow-ups, one just from the comp perspective, then you found like there were too many, as you mentioned, encouraging signs at least in the near term? So I'm just wondering would anything change in terms of your approach to the business in terms of value and discounting? I thought there was mention of maybe an incremental value platform? Or do you see maybe some of your casual peers getting more aggressive? I know typically as inflation eases, we often see the category get a little bit more aggressive.

So I'm just wondering whether your thought process would change or whether you've seen the competitive set change of late in this environment as it continues?.

Yes. Jeff, so first of all, I don't want to be too negative. I mean, actually, I think from a category standpoint, we are starting to see things move more positively. And as an individual company, we're also seeing that. We're also continuing to take share, which is a positive thing, obviously.

We talked a little bit about it in one of the questions earlier. I think this whole idea about increasing discounting and competitors getting more and more aggressive, it's just not playing out as a way to capture share as much as it has in the past.

And so I think what we're seeing in the space is people are now really working off the strengths of their individual brands much more than they maybe were in the past. I mean, consumers are much more savvy to, okay, what's a limited time offer and what can I count on day in and day out.

And so there's always the potential that somebody is going to come out with an LTO that's just going to have a significant impact in the short term. But longer-term now, and I think even more so in the shorter term, these increased discounting approaches aren't having the impact they've had in the past.

And that plays itself out in the NPD data as well..

Got it. And maybe I misinterpreted. I apologize for that from a category standpoint. But when we look at industry data, KNAPP-TRACK, Black Box, your data, it didn't seem like -- and your message seems to be that things weren't really moving more on the positive direction and if we are kind of lowering your guidance.

Is there something in particular you're seeing? I know you mentioned maybe October you guys have gotten a little bit better, but what's the positive signs out of the industry?.

Well, I think the October numbers are starting to get a little better. And I think the comps, for us, the first quarter was a fairly aggressive wrap for us. It was up 2.6% at Chili's. So the -- moving forward, comp numbers are not nearly as aggressive.

And when you look at our guidance, while we delivered a negative 1.5 in the first quarter, we still see ourselves getting better from there. And obviously, we'd have to get positive and we see ourselves being able to do that moving through the year. So our expectation and our optimism for our ability to grow sales is still there.

I mean, it's within an environment that's not as robust as we would have liked, and we would have expected, frankly, at this point in time. But we are definitely optimistic about our ability to drive the business and to return to positive sales..

Got it. And then just 2 guidance clarifications.

First, maybe, Guy, the 400 basis points that we've talked about now for a number of years, are we still on track to presumably hit that by fiscal '14 and then come up to 100 basis points a year beyond that? Or do you think you have the initiatives in place to keep that going?.

Well, we think we have the initiatives to keep that going, Jeff. I mean -- but if we don't believe we'll be in the 1% to 2% sales range, then we're going to experience some pressure in sales deleverage, as you saw this quarter. So that will make it a little more challenging to get quite to 400 basis points this year.

But if we're able to get traction on the sales initiatives Wyman's discussed, then there's still an outside shot that we could get there this year..

In terms of the 100 basis points going forward, we're really encouraged by what the operations teams have been able to do with hourly labor. The fact that we continue to get more and more productive with the new kitchens, which we've talked about on these calls in the past, is encouraging.

That's really got a lot of traction even in the last 3 to 6 months. So we do still believe that there is more margin to get even after we get to the 400 basis point goal that we laid out..

Got it. And just lastly, Guy, you talked about the share repurchase and kind of your priorities there. Is it still on target, then? I think the midpoint of your guidance was the 67 million share count for the full year fiscal '14.

Is there any change to that component?.

No change, Jeff. You can assume that if I didn't make a change to that, then what we originally stated is still intact..

Up next, we have Bryan Elliott with Raymond James..

Guy, I guess I'm still confused on the guidance policy. So I think others might be as well. So your press release that came out a few hours ago stated that it is our policy to not comment on guidance unless something has changed, the guidance that we give at the beginning of the new fiscal year.

And given that that's all that's said, it seemed clear that, that meant that there wasn't going to be a guidance change. And then at 11 or 10:05, we get one.

So what is the policy for the next quarter when we get the press release? Or are we going to have to wait for the call and speculate on whether we're going to get a change in guidance or not? Or are we -- so could you just explain the policy again so I understand it?.

Sure, Bryan. And so at one point, somebody once told me, I can't remember who it was, is that more transparency equals better valuation. So we're trying to follow that policy. But we did think it was important to provide some context to what it was. And that's, of course, very difficult to do in a press release.

So we felt like it was important that if we were going to give you some updated information that we allow you to have some context on the call to understand it as fully as possible. So that, obviously, you can have that full information as you prepare your commentary going forward..

Okay.

So therefore, guidance is uncertain until after the prepared remarks on the call as a matter of policy?.

Well, we'll try and give you as much information as we can when we can, Bryan. But we're going to want to do it with as much context as we can. So that it's as fully understood as it can be..

Our last question comes from the line of Nicole Miller with Piper Jaffray..

Going back to the media spend, I think you said you were down 15% year-over-year in the first quarter.

So can you give us what you will be up in the remainder of the year by quarter?.

Nicole, I don't have it by quarter right with me, but our increases for the back half or from now until the remainder of the year are going to be double digit up and pretty much consistent throughout the rest of the year..

Okay. So we can expect and because you had it in the past and why you're making a return of some kind of comp lift to some degree.

But that it shouldn't be pronounced in any one quarter then from here on out?.

No, not -- again, starting late second quarter. So November through, we've got a much more robust media plan and spend throughout the rest of the year..

Okay.

So to be very conservative, we could most of it in the third and fourth quarter, a little bit in the second?.

Yes..

Okay.

And is your guidance -- does your comp guidance include this incremental spend and the lift that you saw historically?.

Sure. And if you think about kind of the number that we delivered in the first quarter and how do we get to that other range, that's one of the factors that we're excited about in terms of delivering better sales results in the rest of the year..

Okay, gentleman, we have no further questions in queue at this time..

Thank you..

Thanks, Tom..

Thank you very much, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation..