Joe Taylor - VP-Corporate Affairs, Brinker International, Inc. Wyman T. Roberts - President, Chief Executive Officer & Director Thomas Edwards - Chief Financial Officer & EVP.

John Glass - Morgan Stanley & Co. LLC Jeffrey Bernstein - Barclays Capital, Inc. John William Ivankoe - JPMorgan Securities LLC Brian M. Vaccaro - Raymond James & Associates, Inc. Jeff D. Farmer - Wells Fargo Securities LLC Joseph Terrence Buckley - Bank of America Merrill Lynch Chris T. O'Cull - KeyBanc Capital Markets, Inc.

Karen Holthouse - Goldman Sachs & Co. Sara H. Senatore - Sanford C. Bernstein & Co. LLC Nicole M. Miller Regan - Piper Jaffray & Co (Broker) David Brian McGonigle - Copeland Capital Management LLC.

Good morning, ladies and gentlemen, and welcome to the Brinker International Fourth Quarter Fiscal 2015 Earnings Call. At this time, all participants have been placed on a listen-only mode. The floor will be opened for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Joe Taylor.

Sir, the floor is yours..

Thank you, Paul. Good morning, everyone, and welcome to Brinker International's Fourth Quarter Fiscal 2015 Earnings Call. I'm Joe Taylor, Vice President of Investor Relations, and joining me on the call are Wyman Roberts, our Chief Executive Officer and President; and Tom Edwards, Executive Vice President and Chief Financial Officer.

Wyman will begin the call's presentation with an overview of our operating results for the quarter and the fiscal year. He'll provide some of the brand highlights related to this reporting period and share his thoughts about the upcoming year and continued progress on our strategic plan.

Tom will then take you through a detailed review of our numbers as well as provide guidance for fiscal year 2016. Following closing comments, we will open the call to your questions. Before beginning our comments, please let me remind everyone of our Safe Harbor regarding forward-looking statements.

During our call, management may discuss certain items 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 subjects 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 operations. With that said, I will turn the call over to Wyman..

Thank you, Joe, and good morning, everyone. Thanks for joining us on the call today. As you saw in our press release this morning, Brinker reported fourth quarter earnings per share of $0.94.

And we ended fiscal 2015 with positive comp sales of 1.7% and earnings per share of $3.09, marking our fifth consecutive year of solid double-digit earnings growth, which is in line with our expectation and on target to achieve our $4 EPS goal by fiscal 2017.

And while I'm pleased with our results for the year, I am disappointed with our sales performance for the quarter. Overall comp sales were down 0.7%, with Chili's down 0.8% and Maggiano's down 0.1%. We're addressing the specific and temporary issues that affected our fourth quarter sales in both check average and traffic.

Let's talk about traffic first, which was impacted by a change to our marketing strategy as we transitioned to our new loyalty program called My Chili's Rewards. This program revolutionizes the way we build relationships with our guests and represents a strategic shift in our marketing spend.

To encourage migration into the rewards program, we made the decision to eliminate incentives to our e-mail database members, which had been working hard for us prior to the fourth quarter, as we assume most would transition to the rewards program.

As it turns out, most of our reward members are actually new guests, which caused an unexpected headwind for us. The good news is since many of our e-mail database members have elected to remain in the database, we're now able to leverage both of these robust direct marketing vehicles to drive future traffic.

So even though our traffic was softer than we would have liked during the quarter, Chili's did outperform the category, again, by more than 140 basis points despite challenging comps and the shift in marketing to our rewards program. So traffic was a bit of a headwind, but the bigger opportunity during the quarter was our per-person check average.

With the introduction of My Chili's Rewards, we focused our operations teams on driving sign-ups into the program, which reduced our add-on sales and resulted in a negative PPA year-over-year during the quarter. Today, our teams are focused on driving check as well as sign-ups to My Chili's Rewards, and their efforts are already paying off.

PPA trends have turned positive the last few weeks and the pace of sign-ups into the rewards program continues to be significantly stronger than our expectations. We're not quite three months into the national launch and we're rapidly approaching 3 million members.

Overall, we believe the Q4 sales softness is temporary and linked to the transition to the rewards program, and the strength of the Chili's brand remains intact. We can clearly see this strength reflected in the results of our franchise system, which hasn't yet launched the rewards program and delivered 2.1% positive comp sales during the quarter.

So while we had a couple of challenges during the transition, the actual rewards roll-out has been successful. The program is built to drive traffic and frequency, which has definitely played out in our test markets. Okay, so let's talk about the rest of the business.

From a margin perspective, Brinker ended the quarter with an 80-basis-point improvement driven primarily by cost of sales and labor management at both brands. And both brands continue to strengthen the business model, while not just maintaining, but improving our guest experience as guest satisfaction scores continue to rise.

We also made an important acquisition with the purchase of 103 Chili's franchised restaurants from Pepper Dining. I recently spent time with these teams in their restaurants, and I'm so impressed by their enthusiasm and passion for the business.

They're excited to be part of the Brinker team and we're excited about the opportunity to partner with them as we work to reimage these restaurants, grow margins, and introduce the rewards program, all in an effort to strengthen the brand and drive shareholder value.

This strategic acquisition, along with our strategy to transform the Chili's brand to a new-school experience for our guests and to grow the Maggiano's brand, demonstrates how we approach our business with a commitment to deliver over the long term.

So even though we had temporary challenges during the quarter, I'm proud of how our team delivered for the year. We remain confident in our strategy, as it continues to deliver top-line growth and increase shareholder value.

As you saw in our guidance in the press release this morning, we're guiding to double-digit earnings growth, again, in fiscal 2016. So how are we going to make that happen? Well, let me share some highlights of what you can expect during the year before Tom walks you through the guidance for the upcoming year.

First, at Maggiano's, the team remains committed to leveraging our unique heritage of scratch kitchens, on-site chefs, and high-quality food our guests love.

This year, we'll continue to balance our focus on driving top line through increased local marketing strategies, while working to evolve Maggiano's menu and strengthen the business model by improving cost of sales. We'll also continue the brand's growth during fiscal 2016.

We're on track to open three new restaurants during the year, bringing the brand to 52 locations. At Chili's, our global partners continue to draft off the success of the U.S. business. This year, we're expanding the reimage program and we expect to complete the implementation of Kitchen of the Future by the end of the fiscal year.

Additionally, we're targeting 25 to 30 new international restaurants this year. For the Chili's brand overall, we remain committed to our journey to evolve the brand into a more relevant and differentiated experience that appeals to new-school consumers.

We're transforming the entire guest experience, our food, service, atmosphere, and how we connect to guests, through technology. In fiscal 2016, we'll lean heavily into culinary and the digital guest experience. So that's what I'll focus on for the next few minutes.

From a culinary perspective, our strategy started back with Kitchen of the Future, which opened up new cooking methods and enabled us to pursue our differentiated menu vision of Fresh Mex and Fresh Tex.

Since then, we've strategically worked on building out Fresh Mex, introducing Fresh Tex and eliminating low-selling menu items that don't align with our vision, all the while maintaining and even improving the guest experience and simplifying our operations.

Guests continue to praise our food quality in both flavors, and our operations team is proud of the new food. Our recently launched tacos platform is resonating well with guests. And earlier this week, we introduced burritos with bold new flavors like prime rib and chicken smoked in-house.

These new offerings achieved solid test results for quality, value, and guest preference. So we're excited to watch them perform in the market. And there's much more to come in fiscal 2016, as we leverage our ability to smoke foods in-house, which is the key to building out Fresh Tex and further differentiating us from the industry.

We're also strengthening our beverage innovation program to drive check averages and reinforce brand developments.

Another example of our long-term strategic approach to our business is how we're building out the digital guest experience, a multi-year plan to create meaningful connections with our guests so we can delight them with a tailored experience that's relevant to their needs.

It started with our e-mail database, which enabled us to introduce a more targeted marketing approach. Then we were the first to market with Ziosk, and we continually advanced the functionality of these table-top devices. Now we've taken it to the next level by connecting Ziosk to our rewards program in all of our company-owned restaurants.

This rewards program is a proprietary system, unmatched by any of our competitors. It generates powerful guest data to help us understand their needs and personalize their experiences.

Because of the way the program is structured with points that expire in 120 days, unless the guests come back into the restaurant, we see sales and traffic begin to increase once they've been in the program for about three months, and it's primarily driven by increased frequency of lighter users.

The loyalty test markets clearly showed this increased pattern and continued to perform in line with expectations during the fourth quarter, which gives us confidence we'll deliver our comp sales targets for the year. And to ensure we're effectively handling this additional volume, we recently linked the NoWait program to our Chili's mobile app.

Now guests can add themselves to the waitlist from home, which reduces their time waiting in restaurant and increases the efficiency in our restaurants. It increases flow-through during peak times and makes for much happier guests and team members.

Our commitment to leverage advanced technology like these has created a fundamental shift in how we do business.

We're increasing our ability to use big data to make faster and better decisions and to truly know our guests and to allow our operators to focus on what's most important to their guests and their team members, so they can deliver on our passion of making people feel special.

I couldn't be more confident that our strategy and our teams are the right ones to deliver on our long-term growth roadmap and for our shareholders. And with that, I'll turn the call over to Tom for a more detailed look at the business and the upcoming year.

Tom?.

Thanks, Wyman, and good morning, everyone. I'd like to walk through our fourth quarter performance and full year 2015 highlights, then turn to the Pepper Dining acquisition and our fiscal 2016 guidance. As you just heard, our fourth quarter earnings per share before special items was $0.94, representing a 10.6% increase over prior year.

We ended fiscal 2015 with earnings per share of $3.09, which is 14% above prior year and represents our fifth consecutive year of double-digit EPS growth. Fourth quarter revenues were $764 million, an increase of 0.6% over prior year.

This reflects increased restaurant capacity of 0.8%, with Chili's and Maggiano's contributing equally to that growth, as well as a 3.5% increase in franchise and other revenue, primarily reflecting royalties from our new Chili's retail food products and incremental revenues from table-top gaming.

Partially offsetting these areas, total company-owned comp restaurant sales decreased 0.7%. This comp sales decrease was driven by a negative 1.7% change in mix and a 0.7% decline in traffic, partially offset by a 1.7% increase in price. As Wyman mentioned, comp sales performance for the quarter was below our expectations.

We're addressing the causes and are beginning to see positive growth in year-over-year check averages or PPA. We expect this PPA trend to continue to improve over the next couple of months. Now turning to margins, our overall restaurant operating margin improved 80 basis points to 18.5%, compared to 17.7% for the fourth quarter last year.

Cost of sales improved 70 basis points to 26.1%, driven by 40 basis points of favorable menu pricing and 30 basis points of favorable commodity pricing, with mix relatively flat. Commodity pricing primarily benefited from lower cheese, avocado, lime and oil costs, partially offset by slightly higher fajita beef costs.

Restaurant labor was flat to prior year at 31.7%, with the benefits of lower employee health insurance expense offsetting an increase in wage rates.

Restaurant expense was $175 million or 10 basis points lower than prior year, mainly as a result of the timing of new restaurant opening costs and lower utilities, partially offset by the points expense build-up from our new rewards program. As we mentioned, the sign-up pace for My Chili's Rewards has been better than we anticipated.

Each sign-up generates new points, so we've also experienced a higher build-up of our points accrual expense. However, once the member base becomes established and guests redeem more points, we expect this to level out.

Depreciation expense increased $1.9 million to $37 million, consistent with our recent and ongoing investment in key capital initiatives. General and administrative expenses were $33 million, a slight decrease versus prior year, reflecting in part lower performance-based compensation.

Other gains and charges for the fourth quarter include transaction costs associated with our Pepper Dining acquisition as well as restaurant impairment charges. Our tax rate, before special charges, was 31.2% versus 29.4% in the prior year due to increased earnings. Now I'd like to review our capital allocation for the quarter and full year.

Capital expenditures for the quarter were $33 million, bringing us to $140 million year-to-date. During the fourth quarter, we completed our domestic Chili's reimage program, spending $48 million for the year.

For the fourth quarter, we purchased 1.5 million shares for $89 million, and we ended the quarter with $55 million of cash on our balance sheet. Since the end of the fourth quarter, we've purchased an additional 497,000 shares for $29 million, leaving an outstanding authorization of about $332 million.

Free cash flow, which is operating cash flow less CapEx, was $228 million for fiscal 2015, reflecting a 15% increase over prior year. For the full year, we returned $377 million in cash to shareholders through share repurchase and dividends, which is a testament to the strong cash flow generation of our business model.

Now I'd like to look ahead to fiscal 2016, beginning with our June 25 acquisition of Pepper Dining, franchisee of 103 restaurants located in the Northeast and Southeast.

The purchase price of $106.5 million was funded with availability under our existing credit facility, and fits within Brinker's capital allocation strategy of investing in the business, managing debt within investment-grade metrics and returning cash to shareholders.

It's important to note that any capital needs for this acquisition will be funded out of the incremental cash flows from the restaurants and will not affect Brinker's free cash flow or share repurchase direction.

The acquired restaurants have annual average sales around $2.6 million and a lower restaurant margin than our average company-owned Chili's. This different margin structure will affect our overall 2016 Brinker margin in comparison to 2015.

Going forward, we will include these restaurants in our comp sales guidance and reporting for fiscal 2016, but will not adjust historical comp sales. For reference, Pepper Dining posted comp sales of positive 1.8% in 2015. We expect this acquisition to contribute EPS in the high-single-digit penny range in fiscal 2016.

We're already implementing several initiatives to grow revenue and enhanced margin for these restaurants, as we look to deliver value for our investment. First, we have integrated these restaurants into our Chili's operations structure and are rolling out operational processes to help improve margin.

In addition, beginning in fiscal 2016 and continuing through 2017, we will reimage 87 restaurants of the 103 restaurants not yet completed, consistent with the domestic company-owned reimage program. Finally, we plan to introduce My Chili's Reward in the second quarter to help drive traffic. Now, let's turn to consolidated guidance.

For starters, as you may recall, fiscal 2016 is a 53-week year for us. We expect earnings per diluted share of $3.55 to $3.65, inclusive of the 53rd week in the Pepper Dining acquisition. This range represents a year-over-year increase in earnings per share of 16% to 19%.

Now let's take a look at the highlights of our projected revenues and expenses by major category.

We expect an overall Brinker revenue increase of approximately 12% to 14%, which includes the net benefit of the acquisition and the 53rd week; a company-owned comp sales increase between 1.5% and 2%, including a price increase of 1.5% to 2%; and company-owned restaurant capacity growth of 1% before the addition of the Pepper Dining restaurants.

As we look at margins, our reported restaurant operating margin for fiscal 2016 reflects the mix impact of the acquisition. Including this acquisition, our restaurant operating margin is projected to be flat to down 25 basis points.

Excluding Pepper Dining, our restaurant operating margin would have been forecast to improve 25 basis points to 50 basis points, driven by leverage on higher sales, a shift in advertising to My Chili's Rewards support, and continued efforts to manage costs of sales.

We expect these favorable impacts to be partially offset by increased wage rates and commodity inflation of roughly 2%, primarily reflecting higher beef and poultry costs, partially offset by lower cheese and seafood costs.

Currently, 90% of our commodities are contracted through the end of calendar 2015 and 54% are contracted through the end of fiscal 2016. We expect CapEx of $110 million to $120 million in 2016, inclusive of spend associated with Pepper Dining. Excluding this incremental spending, projected CapEx would be about $100 million.

Depreciation expense is expected to increase $12 million to $15 million, reflecting past investments in reimage and new restaurants.

Our anticipated G&A spend in fiscal 2016 is expected to be $10 million to $12 million higher than fiscal 2015, due to technology expenditures in support of sales driving initiatives, the 53rd week, the Pepper Dining acquisition and planning for incentive compensation at target.

These incremental technology investments include building out the digital guest experience program, migrating to new technology platforms, and transitioning our IT and systems management to a more partner-centric model. Execution of this strategy may result in some discrete one-time expenses in 2016 that are not reflected in our guidance.

Interest expense is expected to increase $4 million to $6 million, largely due to a higher average debt balance. We anticipate incurring additional transaction and transition expenses of around $2 million related to Pepper Dining largely in the first quarter.

Excluding the impact of special items, our income tax rate is expected to be 31% to 32%; and free cash flow is projected to be $250 million to $260 million, a 10% to 14% increase over prior year. Finally, we project weighted average share count for full year fiscal 2016 between 60 million and 62 million.

In terms of quarterly perspective, we entered the first quarter of fiscal 2016 with the similar comp sales trends experienced in fourth quarter of fiscal 2015.

We expect trends to improve through Q1, as PPA initiatives take hold and higher redemption of My Chili's Rewards points begins towards the middle of the quarter, but comp results are anticipated to be lower in Q1 than the remainder of the year. In addition, we expect Q1 EPS growth to be lower than our full year guidance range.

Looking beyond Q1, we expect the continued build of rewards with a larger benefit to comp sales growth in the second half of the fiscal year. For perspective, our original rewards program test restaurants, which have now been in market about nine months, posted positive fourth quarter comp sales.

We believe this performance, coupled with strong national program sign-ups as well as our efforts to improve PPA, will support Chili's comp sales growth in 2016. That concludes our guidance for fiscal 2016. And now I'll turn the call back over to Wyman to share final comments before we open the line for questions..

Thanks, Tom. We think fiscal 2016 is going to be a great year. We're excited about our upcoming innovations around culinary and the digital guest experience, as well as the opportunities our acquisition presents.

And I couldn't be more confident, with the long-term strategies we have in place, we'll continue to deliver double-digit earnings growth and positive comp sales and to manage our strong free cash flow with shareholder value top of mind. Now let's open the line up for some questions..

Thank you. Ladies and gentlemen, the floor is now open for questions. Please hold while we poll for questions. Your first question is coming from John Glass..

Thanks. Good morning. First, just on your annual guidance for 2016, I just want to make sure I understand where the organic piece of that growth is.

So my very rough math, if you backed out the acquisition, if you backed out the extra week, at the middle of the range would suggest maybe you're planning for like 10% on a like-for-like basis growth, if that's right, first of all.

And secondly, how do you bridge that versus prior years where you had sort of more of a mid-teens target or let's say 10% to 15% target? What are the differences in 2016 versus prior years?.

So, John, it's Tom here. Your question on the organic growth, I guess, when we look at the 53rd week, we haven't broken out the specific impact because we built the plan looking across the entire 53 weeks, including assessing the level of support we needed for all the business initiatives. So we're not going to provide specific guidance on that point.

We did provide the PDI specific or more directional guidance there. So I think that you'll see organic growth in the year pretty consistent with our prior..

Okay.

On the lower mix and lower check, is it as simple as the fact that servers weren't upselling products when they came to the table, instead were encouraging folks to sign up to the loyalty program, and that's what happened? I wouldn't think mix would be that sensitive or that you were that dependent on what servers were suggesting, but maybe that was.

Or was there other components to it, either what you were promoting or maybe some resistance on check average? I'd love to understand that a little bit better, please..

Hey, John, Wyman. Yeah, it was a combination of things. It's never usually as simple as that. But what it definitely was, was in what we call add-on check, right? So it was the appetizers, beverages and desserts, and those really are influenced heavily by our servers' ability or salesmanship.

And with them focused on signing folks up for loyalty, we did see that impact their focus on trying to sell what we call add-ons. But then, there were also opportunities I think on our part to provide them with some more new and maybe innovative options to sell. So we've quickly kind of addressed those issues.

We've got a new menu that rolled out on Monday with some really exciting dessert, appetizer and beverages. And as we talked about, we're seeing the PPA increase now year-over-year, and we're feeling confident that operations are working hard to continue that momentum as we move forward..

Great. Okay. Thank you..

Thank you. And your next question is coming from Jeffrey Bernstein. Please announce your affiliation and pose your question..

Thank you. Barclays. I had two questions. One on, I guess, the comp guidance going forward. I think you said 1.5% to 2%. And, Tom, I think you mentioned that you thought that would be driven entirely by 1.5 points to 2 points of price. So that is fair. It seems like that you're not assuming any traffic growth. I'm just wondering perhaps why you wouldn't be.

And when you think about that 1.5% to 2% in the context of where do you see the industry growing in fiscal 2016, just wondering because it seemed like the Knapp-Track type numbers are already coming out in that 1% plus range. So I just want to get a feel for your expectation for yourselves relative to the industry. And then I had a follow-up..

Hi, Jeff, Wyman. The industry's been running pretty consistent at that low 1% to 2% comp number, and all of that coming from price and all of that and more.

So we anticipate that we'll continue to outperform the industry on traffic, and that that will keep us in that flat to slightly positive range, and then the price on top of that gets you to the 1.5% to 2%. So that's kind of the base assumption.

We don't see the industry running positive traffic any time in the near future just based on the current trends..

Understood.

But you're comfortable at this point the 1.5% to 2% price, that should be enough to, I guess, offset primarily, I guess, the labor cost pressure? Is that the primary driver of that bump-up in the pricing?.

The pricing, we just sort of remain consistent with the 2% and looking at where our value proposition is. So it also does help us drive margin, but it's really looking at the whole picture, Jeff..

Understood. And then the second question....

We should be able to maintain our margins, as we've laid out in the plan, with that 1% to 2%, Jeff. We don't see significantly different cost pressures next year or this year that we saw in 2015..

Yep, got it. And my second question was just on the acquisition. I don't know if I should ask Wyman or Tom, but I'm just wondering, as you look at that, whether you view that as opportunistic.

I mean, clearly it was a large acquisition, or was that part of some longer term strategy? I know Tom having recently come over from somewhat of a franchise background, just wondering how you define the right mix of company versus franchise and whether that was, again, opportunistic or we should expect the mix of company franchise to change much over the next few years in either direction.

Thanks..

Jeff, I think what I'd say is we're real comfortable with a balanced approach to franchised as well as company-owned, and this was an opportunistic situation where Pepper Dining was for sale and we had a great opportunity and a unique position to add value to the business.

So we saw it as a wonderful opportunity for us to add value and provide a great return. And that's what we're doing with all our investments in it from a top line and a margin enhancing perspective..

Great. Thank you..

Thanks, Jeff..

Thank you. Your next question is coming from John Ivankoe..

Great. Thank you. Firstly, a small question, I'm sorry if I missed it.

Could you quantify what your commodity basket is expected to be up in 2016 for the quarter and the year?.

Sure, John. Our commodity basket's expected to be up around 2% in 2016..

Okay. So therefore, you asked the question about pricing, which is currently running 1.5%.

I mean, is there a plan to take pricing up at least in line with commodity inflation? So in other words, at least 2% or should we expect more of the 1.5% level?.

We've given a range of 1.5% to 2%. It may be a little on the higher end of that range, but we do look at commodities through the year and the pricing. As we roll off, we'll be rolling in new pricing with different menus throughout the year to maintain ourselves in that range.

So it may not always be exactly at the same level or a specific level, but that's the target..

Okay. And I think most companies are talking about labor costs, labor dollars per operating week or wage rates or turnover, what have you, that would almost definitely be up in excess of 1.5% to 2% in fiscal 2016.

I mean, would you agree with that, or is there something that you guys can do specifically to keep your labor costs down in an otherwise cost inflationary environment?.

John, what we're looking at in 2016 is a wage rate increase around 3% and we've built that into our plan and that's also part of the thought process around how we manage pricing. We also have a number of initiatives to improve our productivity that we're currently working on and our operations team is active on.

So we do see that increase coming through. Part of it is minimum wage, although that is moderating versus prior year..

Okay. And the final quick one for me, share count guidance I think was 60 million to 62 million. I don't think I have my note in front of me. Here we go. The weighted average in the fourth quarter 2015 was 62.3 million, so obviously it ended at something lower than that. You bought back nearly 500,000 shares in the first quarter of 2016.

So the range of 60 million to 62 million seems like it would be very difficult for you to be not below the top end of the range, if that makes sense.

So, I mean, could you just put a little bit more color on your share count guidance relative to where you ended the year relative to where you are now? And maybe the answer is you're going to start taking some of that free cash flow and paying down debt, but if you could please explain that..

I'd go back to our capital allocation and how we use the cash. So we've lined up the investment in the business. And excess cash, if we don't have a good place to invest, will go back to dividends or share repurchase. And it's really a matter of pacing through the year.

As we generate the cash, we will spend it, and assuming all those other items are the same, it would be on share repurchase. So it's really a matter of timing through the year of purchases, ending the year and working through in that regard..

Do you have the end of fourth quarter 2015 diluted share count, not the average, but the end, in front of you? I'm sorry for such a specific question..

Sorry, John. Don't have it here..

No. I apologize. We can also do that offline if you want..

Yeah, we have the weighted average..

Okay. We'll get close to it. I mean, if you have that, that's why I ask. I mean, it just seems like the share count guidance is, I guess, I'll say conservative relative to where you currently are. That's my point..

Yep..

Okay. Thank you..

All right, John. Thanks..

Thank you. Your next question is from Brian Vaccaro. Sir, please announce your affiliation and pose your question..

Raymond James, and thank you. My question is on your free cash flow guidance of $250 million to $260 million. I believe you had a discrete settlement payment that negatively impacted the free cash flow in fiscal 2015.

Are there any discrete items we should be aware of within that 2016 free cash flow guidance?.

No, there are no discrete items incorporated in that guidance..

Okay. And I guess as I'm looking at the forecast, et cetera, obviously the CapEx coming down, I guess that would imply a use of cash on the net working capital line.

Is there anything discrete there to call out? It would sound like no?.

No, Brian, there's really nothing discrete in terms of a change in assumption in working capital. There were, in last year, some benefits from bonus depreciation that is related to legislation, so we can't count on that in the future. So it's not a discrete item in 2016, it's rather probably an item not in 2016.

So that might help with your bridging of the years..

Okay, okay. And I'll follow-up on that. One quick follow-up.

Just regarding your accretion estimate on the acquisition in the high-single-digit pennies, is that burdened with the $2 million of costs that you disclosed that you expect to incur in the fiscal first quarter?.

No, that was included in the estimate, yes..

Okay. So it includes the $2 million of one-timers, okay. Thank you very much..

Thank you. Your next question is from Jeff Farmer. Sir, please announce your affiliation and ask your question..

Wells Fargo, and a couple of questions, if I may. So I know you're not providing a lot of granular detail, but just looking back on the filings from 2010 and that last week, you did have the 53rd week benefit, it looks like you pointed to something close to $9 million of net income benefit from that extra week.

So realizing that the business model changes and things like that, I'm just curious, is there any reason to believe that that's probably not at least in the ballpark of the level of benefit you could see from the 53rd week?.

We haven't provided that. So I think if you look at the 53rd week, you can do the math in terms of the sales benefit to the week and flow-through on an incremental basis. But as we've said, we're really looking at the full year plan across all the weeks and what we would want to spend to support the business and all the business initiatives.

So there's somewhat subjectivity in there in terms of the full incrementality of it. I would point out that, regardless of looking at the full year, the benefit will fall incrementally obviously in the fourth quarter.

So it'll be a little bit more pronounced there where we expect that, as a result, our EPS growth in that quarter will be above our full year guidance range..

Okay. And then just following up on John Ivankoe's earlier question, you did provide your commodity inflation guidance for the year.

But I'm just curious, just an update in terms of what your top four or five exposures are and whether or not you historically contract for those exposures, so just what's naked and what can move around as we move through FY 2016?.

I'd just reiterate our coverage of 90% through the end of calendar year and 54% through the end of the fiscal year. So we feel we've got great coverage in place now and we'll continue to put it on as we move through the year.

Our primary commodities are beef, poultry, seafood, dairy, and in each of those we do have positions, which we didn't want to get into that amount of detail, but feel like we've got a really good program in place and the team's doing a great job providing coverage there..

Hey, Jeff. This is Wyman. The other thing that we like to remember or remind people about with Chili's is that the strength of our menu and the concept is that, with so much variety and our ability to move our guests to specific items, we don't have as much exposure to any one commodity as others.

And so I think that's the other thing we work really closely with our supply chain team on is to understand, okay, where is the pressure coming from and then how can we avoid that through our development of menu items as well as our merchandising and marketing of those menu items.

So that really is another way we're able to mitigate some of the overall cost increases you may be seeing out there in the market..

All right. Thank you..

All right. Thanks, Jeff..

Thank you. And your next question is from Joseph Buckley..

Thank you. Just a question on the Pepper Dining acquisition. Looking at the numbers you've given us in the guidance, seems to imply that those restaurants have a very low double-digit, like 10%, 11%, restaurant level margin. And curious if that math is right.

And then what you can do to get that closer to the Chili's averages?.

Hi, Joe. It's Tom here. We didn't provide the specific margins, but as I mentioned, it's lower volume restaurants and they are in some areas with some higher cost structures and wages.

However, what we're doing is rolling out some processes and best practices that we have in our current Chili's operations and restaurants to the former Pepper Dining restaurants, which we believe will help, and also sales growth ideas that will also help lever the P&L.

So we do believe and expect that we'll see margin growth and enhancement for the acquisition..

Hey, Joe. This is Wyman. I do think the best way to get the margins up in a restaurant is to grow the top line, and that's really one of our big focuses. Obviously, with the reimage program, we see that program hasn't really been implemented there in most of those restaurants, so that's right off the top a big idea.

And then we've got some real heart for other marketing approaches that we think we can take in those specific restaurants that haven't been leveraged as much.

So the top line is probably how we'll get the margins closer to company averages and when we start to see their sales volumes get closer to company averages, and that's what we're excited about trying to make happen..

Okay. And then just a question on the per-person average, the check decline in the quarter.

So what you've described, is it in-restaurant driven as opposed to what you were featuring either in the social media advertising or TV advertising?.

Yeah, it was definitely an in-restaurant experience, again, driven by what we were merchandising in the restaurants and what we were offering, as well as our focus with our servers probably putting too much emphasis, if you will, on getting guests to sign up for the loyalty program and maybe walking away a little bit from their great salesmanship skills on getting guests to purchase add-ons and get that second drink.

And so we've really kind of come back and readdressed that issue and put some better tracking in, if you will, for the restaurants to understand kind of where we're at with that issue as well as in just new items..

And just one more. Did you see any regional difference, specifically Texas? I know there was a lot of weather in Texas in May and June and there's the continued pressure on oil prices.

And just kind of curious if you saw any differences, particularly around the Texas region versus the rest of the country, but anything that stood out regionally would be interesting..

Joe, it's a great question. We saw a very minor impact related to the weather and the rains in Texas. It wasn't something that was a major driver. It was a very small impact.

On the oil side, we took a look at real specific markets and geographies that have oil-producing operations, and we did see a decline in those areas, and they were a couple hundred basis points below sort of company averages.

Those in terms of how they scale up to the overall business is not probably something that would move the needle, but we are seeing that small – that impact in oil-producing districts or DMAs..

Okay. Thank you..

Thanks, Jeff..

Thank you. And your next question is coming from Chris O'Cull..

Thanks. Good morning, guys.

Wyman, you mentioned incentives for the e-mail database was reduced, but was the total amount of incentives reduced during the quarter?.

Hi, Chris. Well, the way the incentives in the e-mail database work, they're immediate, right? So we put offers out there to the database members, and they go in and redeem them immediately and we see that transaction occur. And we obviously use it to drive specific day parts more than others.

And then with the transition to loyalty, what we see is there are costs, if you will, generated initially, but when you really start to drive incremental traffic is when the urgency or the threat of losing points is kind of placed out in front of the guests that have signed up.

And that doesn't happen, based on the way we built this program, until they're about 90 days out. You lose your points if you don't come back into the restaurant and we don't see you within a 120-day period.

And so about 90 days out, we start to let those guests know that their points are at risk, and that's when you start to see incremental traffic in the build. And then once you hit that point, then it rolls because people are constantly coming into the programs. So now you've set that momentum in place. So it's just a little bit the way you incur.

So there is an investment, I will say, in loyalty upfront, because you are still giving points away, but you're not necessarily driving the incrementality until you get to that point in the cycle 90 days out..

I guess what I'm trying to figure out is the check mix that declined, I would think if you reduced the incentives as part of the e-mail program, that would have helped the check average. But I guess I need to understand, is the bookings....

Yeah, there's....

...the incentives for the loyalty program also hitting that line or something?.

No, the impact between going from the database and migrating over to loyalty didn't really have a specific impact on the check average. That was pretty much independent of that process..

Okay.

And was the advertising or selling expense flat year-over-year for the quarter and what is that expected to look like going forward?.

We're slightly down in the quarter with our overall wait levels, as we were anticipating to be further into the loyalty program than we actually were. So we were actually running a little bit lighter wait levels, which contributed a little bit to the softness in the traffic as well.

Going through the year, we will transition some of our marketing dollars to support loyalty more in the back half of the year, and we'll just continue to monitor that as we get into the year.

But right now, our expectation is that once loyalty gets moving and if everything plays out the way we've seen it play out in the test markets, we'll start to shift some of our marketing dollars maybe more into the loyalty program..

Okay. And then just one last one. Tom, when you used the midpoint of your free cash flow and CapEx guidance, you back into a cash flow from ops of roughly $370 million, which is essentially flat year-over-year.

Why would that be the case, given your earnings are expected to grow, there's clearly some benefits with the extra operating week?.

We did have a benefit in the prior year of bonus depreciation, and that was a fairly sizable driver, and we haven't built that in because it's a legislative item and it doesn't exist yet for 2016. So I think that would be the difference.

From an operating point of view, you would be correct, we're growing the business, we have slightly lower CapEx, and those drivers are all consistent..

Okay, great. Thanks..

Thanks..

Thanks, Chris..

Thank you. Your next question is coming from Karen Holthouse..

Hi. Another question on loyalty for you. I'm just trying to put a framework around you saying that it tends to be the more infrequent users that you really see a benefit from.

Out of the people that have signed up, what percentage of them are the frequent users versus people that are already coming in pretty regularly anyway? And then, are there also ways once you get a little bit further into it to maybe turn it – how do you think about its ability to turn it into a check driver, whether by you using it a way to target, make people look towards different parts of the menu or add-ons or anything like that?.

Hey, Karen. Yeah, so I don't want to get too specific and give too much information about our program away, but I will just say there are a significant number of the guests that have signed up for loyalty are lighter users.

And by lighter users, would not typically make a visit to us, multiple visits in that 120-day time window, and that's again the key to driving the frequency with that group. So it is a significant number of the guests that we've signed up.

And then with regard to where do we go with this, the beauty of this program is it's so rich with data, we will understand, based on what the guest shares with us, a lot about what they like, in terms of what day parts they like to come in, what preferences they have with food and beverages.

And so, we'll be able to really target and specifically incent them around things that we know they care about. And the ability to leverage that to do numerous things in the business in terms of, as was brought up I think before, we can start to then use this to maybe build check or shift awareness of certain menu items or day parts.

And all of those opportunities are available just because of the flexibility and the richness of the data that we have in this system..

And then one other quick question.

What percentage, or even just very generally, do you think are you getting sign-ups more through people specifically downloading the app and then immediately signing up, existing app users, or really sort of in-store with the suggested selling by a server that people are doing it through Ziosk?.

It's multiple, and so we're using and having success with multiple channels. So in-restaurant is obviously a big channel, and that's where we're leveraging Ziosk, but we're also having great success converting some of those e-mail database users as well as getting online sign-ups..

Great. Thank you..

Thanks..

Thank you. And the next question is coming from Sara Senatore..

Hey, Sara..

I did want to ask about Ziosk in the context of the mix that you saw, the negative mix that you saw this time around. My sense from Ziosk has always been that that's what it's particularly good at is upselling, so at least on the revenue side driving check higher, while also potentially being a source of efficiency in terms of turning tables.

So is that the case, and was the mix, from having more transactions presumably going through Ziosk, was it offset by what was going on with your servers? Or are you seeing kind of, I don't know, a diminishing benefit over time as people get used to Ziosk? I guess if you could just update the tablet, whether you're still seeing benefits to the check and whether you're seeing an increase in the percentage of your transactions that are going through the tablets? And then I'll have a separate question, please..

Hey, Sara. That was a lot. I'm not sure I can hit them all, but let me just give you a general sense of where we're at with the Ziosk. So when we went with Ziosk over a year ago nationally, it was never really with the intent to drive check. We didn't see that in a lot of our results.

I mean, there was some opportunity there, but that wasn't the primary reason.

The primary reason we brought the technology in was really to do some of the things we're doing now with loyalty and with regard to getting more information from our guests with the guest satisfaction surveys and all the information we're able to capture that way as well as the entertainment value that it provides our guests.

So those were the primary reasons. Fourth quarter, we actually wrapped on Ziosk. So year-over-year, any impact that would have been in or attributed to the check average growth with Ziosk, we would have been rolled over on anyway. So it really wasn't the driver.

So, again, it really goes back to those two points that I talked to you about before, which is really a focus of our sales team and then just our ability to put new and exciting products in our servers' and our guests' hands..

Okay. Thank you, that's helpful. And then I guess an unrelated question is actually on your real estate. Obviously, we've seen other casual diners look to monetize their real estate, sale lease-backs and that kind of thing. You own a decent amount of real estate.

I guess, is that an idea that you ever entertain from the perspective of your asset, how asset-light you might want to be or your capital allocation?.

Hi, Sara. It's Tom here. Broadly, we're always open to value creating ideas, but I think right now our main focus on creating value is really focusing on our current growth initiatives, and that would be building out loyalty.

We think there's tremendous opportunity and upside with My Chili's Rewards and, as we mentioned on the acquisition of PDI, we think there's also a tremendous upside there. So that, along with other areas of the business, is where we think we're focused right now..

Okay. Thank you..

Thank you. Your next question is coming from Nicole Miller..

Hi. Good morning..

Hey, Nicole..

In terms of the comp guidance, I'm just trying to understand what's implied company versus franchised, or implied Chili's versus Maggiano's, and then any calendar shifts we should be made aware of..

Hi, Nicole. This is Tom here. So company versus franchised, it's really mostly company-owned. We don't really break out the pieces at that level of detail. But just by weighting, it's mostly company-owned operations that would be driving the change.

We do expect, however, to see our franchisees grow, both internationally and domestically, and are really happy and working with them to support their development. So that will be a contributing factor..

And then any calendar shifts in the mid part of the year? I think there were, last year, some shifts in 2Q and 3Q.

Will they even out?.

There are none between quarters that would impact us..

Okay.

And when you talked about current comps being similar in 1Q to 4Q, is it the same with the pieces, like traffic and mix, or is something different for some reason in the pieces?.

I think I would just go back to my prior comments that the same trends we saw in Q4 continued into the beginning of Q1, and we're working on addressing all the opportunities there..

Okay. And then just a final one.

Can you give us a little color on Maggiano's in the fourth quarter and what the opportunity still is to comp there?.

Yeah, I think, Nicole, the opportunity with Maggiano's, they continue to really see a lot of potential as we build out these new restaurants. So we've got three more new restaurants scheduled for this year.

And so we're aggressively moving forward with our development plan with the brand and at the same time, reevaluating, if you will, the marketing approach and how we go to market with Maggiano's. Obviously, it's a different approach than Chili's just given the scale and the way they go about connecting with their guests.

But we think both those areas, how they're going to market as well as the future development opportunities, paint for a bright picture for Maggiano's going forward..

Thank you..

Thank you..

And your next question is coming from David McGonigle..

Good morning, guys. Thanks for taking my call. So the one thing I notice that nobody's talked about was the coming quarter will be the fifth quarter at the current dividend rate.

It seems like you've been pretty consistently raising on that fifth quarter, and I'm just wondering if you could comment on the decision not to raise on a calendar year basis like you have for the last couple years here, and what that might mean for cash flow allocation going forward or anything that I should read into that..

Next call..

Hey, David. We're going to look at that as a normal course of business in the next quarter. And there's been no change to our dividend policy or direction. So we'll have to just work with the boards and come back to you on that one..

And one quick follow up, if you'll allow me. So I think maybe it was last year in the spring at your Analyst Day you had outlined the idea of getting to sort of 40% payout ratio and the guidance works out to kind of $4 or so.

Is that still basically what you're ball-parking at this point, no change to that thought process on the longer term?.

Our policy is the same, yes. That would be correct..

Okay. Thank you very much..

Thanks..

Thank you. And there appears to be no more questions in the queue..

All right. Thank you. We look forward to talking to you on the next call..

Thank you, everybody..

Thank you. 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..