Q4 2019 Earnings Call

Greetings and welcome to the Bloomin brands fiscal fourth quarter 2019 earnings conference call. At this time, all participants trying to listen only mode. A brief question answer session. Following management's prepared remarks.

My pleasure to introduce your host Mark graph group Vice President of Investor Relations. Thank you Mr. graph you may begin. Thank you and good morning, everyone with me on todays call or David you know, our Chief Executive Officer, and Chris Meyer Executive Vice President and Chief Financial Officer by now you should have access to our fiscal fourth quarter 2019 earnings release.

It can also be found on our website at Bloomin brands Dotcom and the Investor section throughout this conference call, we'll be presenting results on an adjusted basis, an explanation of our use of non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures appear in our earnings release on our website as previously described.

Before we begin formal remarks, I'd like to remind everyone that part of our discussion today will include forward looking statements, including a discussion of growth strategies and financial guidance. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from our forward looking statements. Some of these risks are mentioned in our earnings release.

Others are discussed in our SEC filings, which are available at DC Dot Gov. During today's call will provide a recap of our financial performance for the fiscal fourth quarter 2019, an overview of company highlights a discussion regarding progress on key strategic objective and update on a review of strategic alternatives and 2020.

Financial guidance once we've completed these remarks, we'll look up the call for questions with that I'd now like to turn the call ever to date Dino.

Well, thank you Mark and welcome to everyone listening today.

We have two objectives for the call first Christian I will cover Q4 2019 results in 2020 priorities.

Once that is finished will provide an update on the exploration of our strategic alternatives.

As noted in this morning to earnings release, adjusted Q4 2019 diluted earnings per share was 32 cents, representing a 19% increase on a comparable adjusted basis versus last year.

Bind U.S. comp sales were up 1.9% with positive comp sales across all concepts.

Portly traffic was up 90 basis point and significantly outperformed the industry.

We've intentionally tempered our average check increases to further strengthen value relative to competition.

As a result, Q4 traffic outperformed the industry by 380 basis points with a modest average guest check increase.

We will continue this strategy a prudent menu pricing into 2020.

That's combined with traffic momentum from our strategic investments in areas, such as digital loyalty and off premise gives us confidence about maintaining topline momentum entering the new year.

Well the toll you're all U.S. concepts finished with positive comp sales, including another strong year, it outback, where comps were up 2%.

We combined good top line performance was solid productivity and cost management to grow adjusted operating margins by 60 basis points for the year in Q4 represents the fifth consecutive quarter of comparable operating margin expansion.

In addition, adjusted 2019 EPS grew 10% on a comparable basis, which was in line with our initial guidance expectations for the year.

Overall this was a very good year for our company, we built on the platform and investments that were implemented over the last several years to improve execution in our restaurant and unlock new growth opportunities across the portfolio.

None of this would be possible without the dedication and commitment of our over 90000 team members exemplify our principles and beliefs everyday and bring to life at hospitality service an experience that make a restaurant so successful.

Thanks to all of you for your hard work.

As you look forward, we will further capitalize on the success of 2019, specifically our focus will be on executing against the following key priority to deliver sustainable topline growth.

First driving healthy profitable sales across the portfolio remains our top priority.

Actually it out back.

Over the past three years, we've invested over $50 million into food quality Importunate Hazmat service in labor investments and efforts to reduce complexity in the restaurant.

Always explore ways to further enhance experience for our guests, but the large upfront investments is behind US. In addition, we continue to upgrade our asset base investments and Remodels are offering good returns and relocation that out back of providing outside sales lifts. Our second priority is to offer compelling and brand appropriate marketing activities that resin.

That's what consumers remain very focused on product innovation and modernizing how we communicate with customers.

We are investing in new marketing channels and technologies that will allow us to more efficiently and effectively reach our new and existing high value customers.

Addition to die rewards loyalty program now has over 10.2 million members.

Third we have made the decision to pivot towards a more tempered pricing approach overtime as reducing reliance on pricing will further enhance our value equation relative to peers.

We remain focused on building healthy quality traffic, while also reducing unprofitable discounts.

Fourth we continue to capitalize on the rapidly growing off premise business in the fourth quarter, we saw a 20% growth it out back and 32% of crop the door to ask partnership which launched in September continues to perform well and highlights to incremental nature of this channel.

Excited about the continued potential as a complement our existing in house delivery platform.

And fifth we will continue to accelerate growth in our rapidly expanding international business. This includes leveraging the success in Brazil without back and Abbraccio.

Underlying fundamentals of the Brazil business remains strong our new units continue to open well above expectations. The market remained underpenetrated and the future growth potential of this business is tremendous. In addition, we will pursue franchise opportunities the Latin America, the middle East in Asia with a portfolio of brands.

In parallel to ensuring sustainable comp growth, we will continue to look at all other levers to maximize returns we remain committed to reviewing all potential opportunity and we will evaluate them through the lens of maximizing shareholder value, we continue to be thoughtful and our allocation of free cash and expect 2020 to represent another strong year returning cash to shareholders.

In summary, 2019 was a very good year.

I'll now turn the call for Chris ill be back with details about some of the major changes, we're making in twentytwenty and beyond.

Thanks, Dave and good morning, everyone I'll kick off with discussion around our sales and profit performance for the quarter I'd like to remind everyone that when I speak to results I will be referring to adjusted numbers that excludes certain costs and benefits. Please see the earnings release for reconciliations between non-GAAP metrics and their most directly comparable U.S. GAAP measures. We also.

If I did a discussion of the nature of each adjustment.

With that in mind, our fourth quarter financial results versus the prior year were as follows GAAP diluted earnings per share for the quarter was 32 cents versus 12 cents in 2018.

Adjusted diluted earnings per share was 32 cents versus 27 cents last year on a comparable basis after adjusting for the new lease accounting standard.

Total revenues increased 0.9% to $1 billion in the fourth quarter total revenue increases were primarily due to higher comp sales and the net impact of restaurant openings and closures.

These increases were partially offset by lower revenues from the Refranchising of 18, Caracas locations earlier, this year and foreign currency translation.

You asked comp sales were up 1.9%. This was driven by 0.9% increase in traffic and a 1% increase in average check.

Q4 traffic growth was our best result, since Q4, 2017 and was 380 basis points ahead of the industry as we discussed on our last call. We benefited from a strong start to the quarter driven by a promotional lineup, which included our popular steak and lobster promotion at Outback, our traffic slowed some over the holiday.

But was still well in excess of the industry. Importantly, 2020 has started with strong traffic growth that is ahead of competitive benchmarks.

Our Q4 average check benefit of 1% was similar to Q3 and as we have indicated on prior calls we are comfortable maintaining a lower level of menu price increases on our results. We're confident that this will provide more value to our customers and unlock healthier traffic.

It is also worth noting that Q4 discounting was relatively flat from Q4 2018 for the full year. However, we were down 7% for the portfolio and 14% for Outback as we opportunistically reduced discounting in the portfolio.

Overall, we're pleased with our comp sales performance and we continue to meaningfully outperformed the industry and have started out 2020 with good momentum we believe the investments in food and service relatively low menu price increases and growth in our delivery platform will allow us to continue to outperform the industry on traffic.

Onto our concepts opex comp sales were up 2.7% and they posted their 12 consecutive quarter of comp sales growth and outperformance versus the industry. Additionally, outback traffic exceeded the industry by 350 basis points Opex Q4 results were driven by a few things first.

Our third party delivery partnership with door Dash rolled out in September door Dash is now in 574 locations and this helped bring off premise sales to 15% of Q4 revenues that Outback total off premise sales were up 20% year over year delivery is proving to be a highly incremental occasion and.

Third party delivery has had little cannibalization to our own delivery network.

Economics are compelling and this business offers attractive margins, we expect third party delivery to be a strong contributor to 2020 results.

Second the steak and lobster promotion performed well over the first half of Q4 lifting both traffic and average check and third the impact of our growth investments continue to strengthen the guest experience and we are building momentum in our dinner business.

Drop as comp sales were up 1.4% Kroboth made the decision to utilize multiple third party delivery partners to complement our own delivery network like Outback. This rollout was completed in October overall crop is off premise was 21% of sales in Q4, this was up 32% versus Q.

For 2018, the crop as team has embraced the off premise occasion and in addition to delivery is seeing traffic growth in both catering and our bring homemade home program.

Bonefish Grill comps were up 0.5%. This was a significant improvement from Q3, and we saw momentum in our dinner business from platforms, such as our three course dinners.

Comp sales at Fleming's were up 0.9%, representing the eighth quarter of positive comp sales over the last nine quarters, our new locations continue to perform well and provide optimism for additional unit New unit opportunities. This includes a new site in Anaheim in his opening in September.

On the international front, Brazil comp sales were up 4.9% with traffic up 8.2% traffic growth was driven by a successful promotion called all stars that featured Outback favorites at an accessible price point.

Brazil finished the year up 5.8% in comp sales and now has posted five consecutive quarters of comp sales growth. Following the trucker strike in 2018, we're pleased with how this business is performing led for our strong management team.

Adjusted operating income margin was 4.2% in Q4. This was up 20 basis points. After adjusting 2018 for the impact of the lease accounting change. This favorability was driven by improvements in DNA and was partially offset by increases in operating expenses operating expense was higher due to operating supply costs.

As we grow or off premise business as well as increases in our an m. and general liability expense importantly, Q4 represented the fifth consecutive quarter of margin growth and we finished 2019 with 60 basis points of adjusted operating margin expansion for the year on a comparable basis, we remain committed to.

Closing the margin gap to our peers.

Moving to tax our 2019 adjusted tax rate finished at 6%. This was the result was modestly better than our expectations heading into the year.

In summary, we feel good about both the fourth quarter results and where we finished 2019 the domestic businesses on strong footing and our Brazil businesses performing at an extremely high level before I give 2020 guidance I will now turn the call back over to Dave to provide an update on strategic alternatives.

Well. Thank you Chris back in November we announced the exploration of alternatives to maximize value for shareholders, including a possible sale. The company. Since then management has been actively working with the board and our financial legal advisors to evaluate various alternatives, including analyzing all aspects of how we operate in go to market with our business and.

Putting our view of our cost structure.

Evaluating portfolio composition, including our business in Brazil and use concepts.

And capital allocation use of free cash flow as well sale the entire company at this point in time, nothing compelling hasn't materialized in terms of an outright sale of the company.

However, one area within our portfolio. The has received significant interest is our business in Brazil, Although we under no obligation to sell this business discussions with interested parties are ongoing. One fact remains clear. This is a great business with an outstanding management team that has significant runway for future growth we will provide.

Updates on Brazil as he does for.

Independent of the strategic review and potential outcomes. The company developed the plan that accelerates growth and transformed us into an operation centered company that can thrive the public marketplace.

We believe this plan coupled with investments in off premise remodels and improving the guest experience will provide an attractive return for shareholders. The following major initiatives represent the key tenets of this plan and are included in the guidance that Chris will be presenting shortly.

First we align leadership resources and structured to prioritize growth efficiency and scale specifically the casual dining brands will now report directly to Greg Scarlet, our new Chief operating officer of casual dining organizing outback bonefish in crop was under our casual dining portfolio will allow us to improve operations.

Leverage expertise between these three brands, while still providing a differentiate guest experience within each concept.

Given the success it out back there is no one better than Greg to lead these brands moving forward.

Second we simplified corporate support functions to enable a more agile and operations focused organization, we made significant investment in infrastructure over the last few years, particularly in the areas of technology and digital marketing with these critical building blocks now in place and working we're able to streamline these functions while concurrently monetizing.

The benefits.

Third the financial benefits of these changes will further enhance our already strong free cash flow over the last five years, we returned over $1 billion to shareholders in the form of dividends and share repurchases, while modestly paying down debt going forward, you'll have a more balanced approach to allocate to free cash flow, which will include continued share repurchases paying down debt.

In a meaningful increasing our dividend.

We are doubling the annual dividend from 40 cents to 80 cents per share. This represents an approximately 4% yield at current prices. This is an attractive return of cash to shareholders and reflects our commitment to long term investors over.

Over the past few years, we have limited ourselves to mandatory debt paydown requirements moving forward, we expect to make additional level of discretionary debt paydowns as part of a more balanced capital allocation strategy. Finally, we will continue to opportunistically buy back shares depending on the relative valuation and to offset dilution we.

We're confident these actions coupled with our ongoing focus on driving sustainable healthy sales growth in our restaurants will allow us to deliver outsized total return in 2020 and beyond.

Tremendous amount of work is already completed our board of directors continues to focus on reviewing strategic alternatives that will benefit our shareholders regardless of the outcome of the strategic review one thing is clear Bloomin brands will be a transformed the company and now I'll turn it back to call back over to Chris to provide more details.

Expect for the coming year.

Thanks, Dave would that context, I will now take you through our thoughts on 2020 guidance, starting with S., We expect GAAP diluted earnings per share to be between one dollar and 63 cents and one dollar and 68 cents. We expect adjusted diluted earnings per share to be between one dollar an 85 cents and $1.90 cents.

This is a growth rate of 20% to 23% over 2019.

For additional context. This guidance includes the first $20 million of additional cost savings related to our restructuring efforts. The benefits of these savings will increase profitability, while also improving efficiencies and decision making in our organization. These cost savings will benefit S. Hi, 17 cents in 2020 and will.

Be largely split across Q2 through Q4 with little benefit occurring in the first quarter.

Most of the impact from these savings will be in the DNA line, which we expect will be significantly below 2019, our GAAP EPS will be impacted by onetime costs related to this restructuring.

We expect you must comp sales growth to be between 1% and 1.5%, we expect comp sales to be driven by a modest level of check average increase throughout the year of approximately 1%.

Continued momentum from our investments to improve the guest experience and ongoing benefits from the growth in our off premise business.

We recognize the importance of maintaining healthy sales growth, particularly at out back and we'll utilize our many levers to continue to take share.

On the cost of sales line commodities are expected to be approximately 2% in 2020.

Beef inflation is expected to be inline with 2019 seafood, which represents approximately 20% of our food basket is going to experience higher inflation, particularly in lobster and is the primary reason, we expect our 2020 guidance to be higher than 2019.

Persistent labor pressures have been a reality in the industry for several years and we are expecting hourly wage inflation to be approximately 3.5% in 2020.

Restaurant operating expenses will be a bit higher this year driven by increased operating supplies as we grow our off premise business.

Consistent with prior years productivity savings will be an important part of our 2020 financial model, we continue to find opportunities in the areas of food waste labor management and menu simplification. We expect these savings will help offset some of our inflationary pressures.

As I indicated we intend to make significant progress on reducing our gionee costs in 2020 after removing the impact of any adjustments that might impact DNA. We would expect gionee expense to be between 240 and $245 million in 2020, this would be a reader.

Auction of approximately $20 million to $27 million versus 2019. This includes the impact of our $20 million of cost savings, we discussed plus some additional upsides, we expect in 2020.

When you combine our sales growth productivity efforts and cost savings initiatives, we do anticipate meaningful operating margin expansion in 2020, we expect adjusted operating income margin to be between 5.5% and 5.6%, which is an increase of 70 to 80 basis points from 2009.

Team keep in mind that similar to 2019 this level of margin expansion will be realized without the benefit of significant menu pricing actions.

We expect the 2019 GAAP effective income tax rate to be between 9% and 10% and the adjusted effective income tax rate to be between 11% and 12%.

As our operating income grows.

Year over year, we expect our tax rate to continue to increase as well.

Turning to cash flow capital spending is expected to be between 175 billion and $190 million. This will include approximately 25, new locations with the majority of those being in Brazil.

Other discretionary capital will primarily be focused on outback, we will be more aggressive and accelerating outback new restaurant growth.

In addition, we expect to relocate nine restaurants and continue to see sales lifts in excess of our 30% target, which is a strong endorsement of the health of this brand.

These efforts will be complemented by investment in a new round of interior remodels at Outback.

In terms of the remaining allocation of free cash flow as Dave discussed we are targeting a dividend payout ratio of 50%, which equates to an approximately 4% dividend yield at our current valuation.

When combined with our adjusted EPS growth guidance of 20% to 23%. This implies a total shareholder return in 2020 of between 24% and 27%.

It is also important to note that before the inclusion of our $20 million of cost savings or the increasing the dividend. Our 2020 total shareholder return is within our long term framework of 10% to 15%.

In the future there will be a more concerted effort to reduce leverage with discretionary cash share repurchases will also continue to be a part of free cash flow usage, but not at the level seen over the past several years.

I also wanted to provide some context for the quarterly cadence of our earnings given the following moving pieces within the year.

First the $20 million of cost savings will be largely realized over the last three quarters of the year.

Second our higher expectations for operating income in 2020 will lead to significant increase in tax rate in each quarter of the year. This will have an outsized negative impact on first quarter earnings growth.

Third we are cautious about the impact into 2020 election could have on casual dining although it is impossible to predict consumer sentiment around the time of the election. It is important to remember that over the last four years Q4, 2016 was the low point for comp sales in our industry. We are hopeful that Q4 2020 will.

Be better, but we have built our plan anticipating a tougher fourth quarter sales environment.

Finally, we will be lapping the rollout of our third party delivery partnership with door to ask this upcoming September and although we expect this business to continue to grow the level of year over year growth should moderate some with that context, we would expect adjusted EPS of between 79 cents and 81 cents.

In Q1, this will be our lowest growth quarter of the year, given less benefit from cost savings coupled with a higher tax rate. In addition, unfavorable foreign exchange translation will likely cost us two sets of EPS versus last year.

Q2, and Q3 should be very strong in terms of year over year EPS growth.

Q4, EPS should be higher than last year, given our cost savings opportunities, but our sales outlook for the quarter prudently builds in some conservatism based on what we experienced in Q4 of 2016.

We recognize there a lot of moving pieces related to our quarterly earnings flow and we will provide updates as the year progresses.

I also want to provide some context for our business beyond 2020, as we have discussed in prior calls our operating margins lag our peer set by approximately 200 basis points are 2020 guidance will close that gap considerably, but there's still more work to be done.

Looking ahead to 2021, we have identified an additional 20 million of savings to facilitate further profit and margin growth. This combined $40 million of cost savings in 2020, and 2021 will enable us to make significant progress on increasing margins over the next two years.

In summary, we remain focused on growing same store sales, while making the necessary changes to our cost structure to achieve outsized profit growth in 2020 and 2021, we hope that our call today has provided context for how we plan to achieve those goals not just in 2020, but by building a sustainable level up.

Performance that will allow us to succeed over the long term, we have a strong company that we intend to make even stronger through a more focused agile approach that emphasizes TSR growth and with that I'll open up the call for questions.

Thank you at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

Hey, confirmation Tom would indicate your line is and the question Q you May press star to if he would like to remove your question from the Q for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.

In the interest of time, we ask you. Please limit yourself to one question and one follow up.

Once again that is star once you register questions at this time.

First question is coming from Jeffrey Bernstein of Barclays. Please go ahead.

Great. Thank you very much.

Yes. So one question one follow up the question on.

First question just on comps just wondering as we think about 2020.

I think you said one to one they have percent with a 1% check Im just wondering how you're thinking about that relative to the industry.

And I know you mentioned that there have a strong start and good momentum in the year I'm just wondering directionally, how that compares to the ones who want to ask percent that you are assuming the expecting for full year 20, and then add one follow up your good morning, Jeff we're off to a good start we've seen it.

Trends move up with the industry and as Chris mentioned in his prepared remarks or traffic trends really really look great.

We're just calling a 1% to 1.5% we feel that's where the industry is going if things improve and continue to be strong obviously, our guidance will change up importantly.

We have a 1% PPH change in our guidance and we talked about the importance of being very careful about value as we go forward and then obviously will be prudent on Q4 to see what impact the election has and will provide update during the year yeah, Jeff That's certainly would imply positive traffic for the year for us.

Got to be you're assuming the industry relatively similar yourselves, a one to one of the half or would the industry be below that.

Our hope is to beat the industry, but we'll see.

Yeah like I said before the industry is off to a good start so far this quarter.

Got it and then my follow up please just on.

Yes usage.

And I'm just wondering if you can give any color on the board's thought process seems like you're leaning heavily on the dividend versus.

Repo and on the pass you've talked about your view that your shares up meaningfully undervalued. So I'm just wondering how the board.

Thinks about that and if there's any.

Separate color on.

On the commentary around Brazil, I know in the past you talked about maybe selling it for collecting royalties and maintaining ownership, but I'm. Just wondering now if it sounds like maybe you're considering full separation. Thank you.

Hi, Jeff again, I think on the cash usage, what we want to do with to provide some terrific returns for our long term shareholders. We looked at carefully had long discussions with our board and felt that a doubling of the dividends to a 4% yield at today's prices was a really smart thing to do obviously, we have with our free cash flow power we have opportunity.

We continue to buy back shares and continue to believe our company is is undervalued.

And so we'll continue to look at that as we go forward and we also want to pay down some debt as well as part of a little overall balanced approach to our business.

On Brazil more to follow one thing we know for sure we've got a fantastic business down there comps for the two were terrific. We had margin expansion for the year.

There is a lot of interest in the business I don't have any more updates on it but as things transpire, we'll be happy to provide more more color yen, Jeff the only thing I'd add in terms of the cash flow usage, we do expect our EBITDA to continue to grow as well and that provides us even more flexibility on the bottom line is that free cash flow as a strength of this company and our shift reflects that.

[music].

Great. Thank you.

Thank you. Our next question is coming from Jeff Farmer of Cordon Haskett. Please go ahead.

Great. Thanks. Good morning can you guys just provide a little bit more color on the interaction between door dash.

For internal delivery infrastructure, and then what you've been doing was to go sales how all of those three methods are working together.

Yes, Jeff.

We've been very pleased.

With that we've seen incrementality in each channel.

We have our own networks, we set up which we worked so hard to set up we've seen the third party come together and provide incrementality in our sales we see margins on the third party that's favorable to us. So when you look at what our to go business. Overall is looking like for both crop as an opex, it's very very strong and were.

Very pleased with the.

Where our parties, where our third party partnerships are going.

That's helpful and just one unrelated follow up over the last several months, obviously, we've been getting a lot of inbound questions on the.

Brazil business or is there anything you can share interim specifics as it relates to DNA from Brazil, DNA in Brazil, the Capex summer in Brazil, anything like that that helps investors better understand the cash inflows and outflows of that business.

Well, we provide we provide segment information we haven't provided detailed guide on international but I think a couple of things that I just investors need to take a look at.

Number one we've had very strong sales growth both.

PHH and traffic number two we had margin expansion during the year number three our new unit openings continued to be well ahead of our expectations and there's a lot of opportunity for growth there number for its a free cash flow positive business. So they fund all of their spending so when you taken together.

And with a really strong management team led by Pierre you taken together, we've got a real very attractive business down there ever be very thoughtful about how we go forward with that business.

Thank you.

Thank you. Our next question is coming from John Glass of Morgan Stanley. Please go ahead.

Thanks, and good morning, first Steve could you just.

Clarifier, where you are in the strategic review process, holding Brazil, Brazil, Aside, which I think you are clear on does the fact that you've changed your capital allocation strategy and even out some of these restructurings does that mean, you've completed the review of the rest of the business or is there still rest of the business review ongoing.

We are we are we are ongoing John I'm, not going to put a timeline on a per se, but we continue to examine our alternatives like I mentioned in my prepared remarks, we haven't seen a compelling offers come our way, but we have really taken a.

Deep look at our business as you can tell we've been very very very busy since we talked everybody in November and you've seen some really strong actions as part of it but we made the action independent of the strategic review because we want to create a stronger company to go forward if something comes our way, we'll obviously update.

Everybody, but we aren't to complete shall we say.

Okay and my follow up is.

First where do you think restaurant margins land, specifically I know you gave pieces of it although he didnt maybe address the specific restaurant margin in 2020, and where does the incremental cost cuts in the DNA beyond the 20 million that you've identified where did those come from and where do you think the $20 million in 21 comes from.

Specifically, thanks, Yeah, a couple of things so ill turn over to Chris for some of the details.

Restaurant margin I think one thing that I want to make sure everybody is aware up we were like due to looking at a 1% change NPPA. So one of our margin expansion to accompany cost outside the restaurant.

And importantly regarding those costs outside the restaurant decisions have already been taken past tense. So we are having a very very clear runway for those cost reductions are coming so I'll throw, but Chris does talk little bit more but some of the details yes. So as it relates the restaurant margins you're right John we don't provide specific guy.

Once on that line, but I can give you some perspective by bucket in terms of how we're thinking about it for 2020 on Cogs I would say, we expect some favorability year over year as we make progress on our waste initiatives.

Labor will likely be a tad unfavorable due to wage inflation and then a restaurant operating expense would likely be a little unfavorable due to higher operating supplies from the rollout of our delivery business and probably some insurance as well.

But I think it's important to remind everybody that all of this includes the assumption of a 1% benefit of average check versus closer to a 2% in 2019, and that's going to put some pressure on restaurant margins, but that's why the cost savings are so important in our ability to prove that improve our overall operating margins of the business and again I guess.

Only thing on restaurant margins, let's say the good news is as we have another year productivity to help us with our margins in 2020.

On the cost saves themselves, it's mainly in our infrastructure costs here in the restaurant support center.

And how we.

Address that and we were able to do that because we.

We made a lot of really smart significant investments in our company over the last few years and as a result, now we've been able to monetize that and those of you that have been following our company last few quarters, we've talked about that at conferences and stuff the ability to to monetize.

These cost savings now.

Some of that sell them go into 2021, because of some timing and pay as we pace in sequence. Some of these things, but most importantly, John the decisions have been made and the runway for cost reduction is there.

Thank you.

Thank you. Our next question is coming from Alex Slagle of Jefferies. Please go ahead.

Hey, Thanks, you talked about some of the drivers banks same store sales outlook for 2020, but in terms of the brand performance do you still expect out back to dominate or should we expect some of the other brands to see an improvement in coming quarters. If there's any specific initiatives you want to call out that might help drive the inflection income.

Yes, sure we expect all of our brands to do well in during the year, but we know that OPEC is our largest Brandon and most important brand the portfolio and so we've talked about some of the customer facing initiatives. We've done the investments in food our remodel programs are relocation program and just tremendous operate.

Ones.

That we expect to continue to improve under our leadership of our new President Brent Patterson and with Greg Scott being our COO of casual dining so I think it out back again to see more of the same and also I want to stress that if we are prudent in our change in PA, we think over the long term will continue to see our traffic.

Get better and we're seeing that as we talk time and time again about our traffic trends in our in our company, they're very good versus the industry.

Kratos has continues to pursue gains in restaurant traffic, but the customer clearly as voting that off premise a crop is really important and we are.

Really pursuing that with our third party initiative our to go overall in our own independent delivery platform across both fish as long had.

Strong product offering they'll continue to innovate around their menu. The three course dinners and things like that continued wallet bonefish and fleming's they hit eight or nine positive same store sales growth. They do very well know a fine dining area new restaurant openings are happening in their above expectations and best Gartner team continue to.

To upgrade the look of their restaurants, and we're finding that bar dining is in a more and more important part of fine dining. So that's a real quick look at some initiatives in our brands obviously in Brazil, We've got the number one position by far they'll continue to offer great product at a great price point with terms.

This operations and we are well ahead of our opening plan there and the new restaurants like you mentioned earlier continue to open well above expectations.

Thats, Great and then on development I missed it if you could just provide some of the details on how many you expected in Brazil and at each brand.

Yes. It was it was 25 overall for the company I'd say the majority of those will end up being in Brazil, there'll be a handful of Outback steakhouse locations and then a much much smaller number at a at the other brands, we and we know for sure they'll be a couple of plumbing wanted to too I think what are the thanks to that weve.

Scene and Chris mentioned in his prepared remarks is there's more room opportunity for Opex Takeouts new units and we're pursuing that we think we can we can take share and expand that business, even more and then relocations as just flat out a function of finding great sites. The returns are terrific well above 30% in sales gains and.

It really testament to the power that brands, so you'll see.

A step up in Opex, new units in the coming years as well.

Thank you.

Thank you. Our next question is coming from Catherine focus <unk> of Goldman Sachs. Please go ahead.

Hi.

Jared on for Katie.

Can you guys just talking about some of the quarter to date trends you've seen maybe in January we know January was pretty strong.

Whether it was weather or our customers trading up so just what are you, saying in the industry and kind of how you're thinking about that playing out the rest of the quarter. Thanks.

The industry was.

As has shown a rebound in January we participate in that rebound and our traffic trends.

Continue to outpace the industry, which we're very pleased with where it goes from here, we'll see but.

We participate in the in the increases in the industry. Yeah, I think as other folks have noted in out there wet weather was certainly more mild up north in the Midwest and we think that benefited in this results.

Given our footprint in the south.

A little less of a benefit from that but.

We really didn't start off the quarter pretty strong.

Great and if I could just one quick follow up you guys talked a little bit about some of the capital allocation strategy are you guys targeting specific leverage ratio with what the debt pay downs and.

And also if you were to sell but Brazil business as you've noted is sort of.

Being discussed how are you thinking about uses of cash there. Thanks.

Yeah on Brazil, we still need to come to a final decision as to what we're going to be doing there like I said, there's a bunch of interest in that business and we're working on working through that.

How we allocate the proceeds between debt Paydown and share repurchases is yet to come but there'll be some sort of mix, but let's let's focus on what were a fantastic business. We have there Chris I'll turn it over to you for the other piece yeah. So three times net debt to EBITDA. Our is the metric that we've we've targeted and we've talked about getting.

Down to three times as a goal here and you know, it's it's a multiyear process, but certainly a healthy combination of EBITDA growth and more focus as we noted in the prepared remarks on debt reduction will allow us to make progress more rapidly than perhaps we have over the last several years.

And one of the thank them onto is just.

With our growth in operating earnings last year 19 in our forecast for 20 and 21, Chris mentioned this I mean, just gives us more and more free cash flow to provide to shareholders and to debt holders. So that's that's the reason why we're looking at things as we are.

Thanks appreciate the time.

Thank you. Our next question is coming from John Ivankoe of Jpmorgan. Please go ahead.

Hi, Thank you I wanted to talk about some of the cost savings a little bit more obviously, we saw the changes.

But the leadership level at crop as in Bonefish, but we really are talking about very big numbers for relative to your overall Gionee base. So I was hoping we could talk more specifically about what you are cutting how how a smaller organization actually becomes a better organization. How these 20 cuts.

On a rolling at 21 refund another $20 million of cuts and your data I'll ask the question directly mean, there is a point where cuts can go too far.

As we know you're actually not very high on a per store basis. So how do we look at this business I paid there really is that in the business you can be kind of a leaner meaner.

Company, that's more effective versus you actually putting the organization at risk and Dave digging to deepen as some of the muscle and though and that is necessary for all organizations.

Our first of all John as you know and you and I've been working together on various things for over 20 years I've got 30 years, plus the restaurant business and a very good sense of what the support needs to look like where opportunities are flat. That's number one number two as I mentioned, we made some pretty significant investments in infrastructure over time, we're reaping the benefits of that through.

Through digitization through automation through all the things I mean, just a shout out to fill pace. Our controlled department has just done a great job managing costs working through it and we're seeing that it's the automated some of those functions under control area and then Michael starts has come in and over the last year and done a really great job.

And he runs our digital and IP organization and he's helped us identify opportunities in the company. So I think John are back to the house infrastructure is the very first place that we're going and I think we haven't made significant progress in that area.

Secondly, we took a really careful look.

At the management of some of our smaller brands, we think leveraging Greg Starlink and all of his experience in casual dining will help with reap some efficiencies and training HR, how we go to market et cetera in some of our overhead costs.

Three the reason why you're seeing some lack the one to.

2021 is pacing and sequencing here right as you put a new systems and infrastructure from you guys you got pacing and sequencing of stuff. So I think John we've taken a really really really hard look at our infrastructure costs and you know from our time together last fall, we talked about the cost cuts that were coming in a mindset.

Station of that and I think our guide for 2020 and 2021.

Reflects that.

GNS put a set of sales was high versus competition and we needed to address that and we've done that.

Okay, specifically on the tech and the data side I mean, I think most companies are finding whether in capex or an opex is actually more than what they thought a couple of years ago end.

Yes, it's there's kind of a different ways to define efficiency, it's like they're finding more opportunities to spend money not last can you could you focus on cost efficiency, specifically on the tech side of why you're actually able to reduce your netspend and you don't find it necessary to maintain it.

Yeah, well first of all were invested behind consumer facing technology. So that continues but John its infrastructure the systems that networks et cetera that we had in our company and the people managing them that we've been able to address and we've done that and so its back of the house infrastructure costs.

It doesn't see we will continue to invest in digital consumer facing things, whether it's a new Pos device whatever we're going to continue to invest to that but when you looked at what we were spending and where it was being spent an infrastructure behind it and the investments that we made over the years in the enhancements we made to our systems I talked earlier about the enhanced as we made our account.

Patrol function for instance that all paying dividends now and we're monetizing that in 2020 and 2021, that's what's happening.

Thank you.

Thank you. Our next question is coming from Gregory Francfort of Bank of America. Please go ahead.

Hey, Thanks for the question.

Can you maybe timing they gave the detail of where you're expecting the debt levels to go but maybe the change in philosophy, there kind of what drove.

The reason that maybe step down the part the targeted leverage and then at the second question. Thanks.

Yeah, we've had a 3.0 ratio target in place for quite some time.

We will continue now that are especially now that our operating income of growing and we're going to be able to overtime as Chris said over a period of years achieve that target. So I don't really see abroad change in philosophy.

Of the thing that is happening is we did lead have more heavily into our dividend and doubled that that was sort of change that was made and we'll still have money over left over to do some share repurchases that has to do all of that has to do with the free cash flow coming out of the company as we grow earnings.

Hey, guys. Thanks, and then the smaller brands this quarter had kind of better performance than they've been having for little while.

Any reason for maybe by both crowd isn't bonefish, all over the inflection and kind of your expectation on that continuing thanks.

Yeah, we like I mentioned, we expect the small Brad to continue Fleming's as well.

You know best got her team to a great job in fine dining. So I. We expect we expect the fine dining back grant to grow we are focused across those on growing our dinner traffic, but you also have to go where the customers going in crop is all over off premise doing a fantastic job and Bonefish I think if we continue to offer.

Were they offer such a unique and terrific set of products and continue to offer that an attractive price points not discounts, but just be really care, but menu price increases and stuff and continue our operations focused I think we'll continue to see same store sales gains that brand as well.

Thank you very much.

Thank you. Our next question is coming from Brett Levy MKM partners. Please go ahead.

Great. Good morning. Thank you I guess, we could start just one clarification you've talked about on the strategic side that you are continuing to.

Evaluate is there anything that is off the table.

No I will always since we've started as a public company, we look at all the alternative than our company.

We certainly know where the value drivers are and we've talked about some of those today.

But we don't take anything off the table, we try to look at things across our company.

Very carefully and aggressively.

And then just one one.

Radical strategic kind of question.

Given that you've gotten to north of 10 million on your loyalty and and you're growing your off premise, but you're also now starting to go outside of your.

Original customer cohort what are you seeing and learning about how you're.

Most loyal customers are using your product are you seeing like.

Are you seeing cross permutations with how they are.

Inside your box off premise and also any cross usage of the third party aggregated.

Thank you.

Yes loyalty is a big weapon for us really glad we invested behind that we've got the database. It was really smart to do.

We will continue to look at it and work at we're seeing are very loyal customers use us in all channels.

And we're seeing are very loyal customers use us for all of our brands.

And it's something that we're very pleased with that we need to continue to.

Look at how we optimize it and modernize and moving forward and Michael Sutton team, we talked earlier about some of the investments, we're making in consumer facing technology as things Theyre team will be working on that as we go forward.

Thank you. Our next question is coming from Matt Difrisco of Guggenheim Securities. Please go ahead.

Thank you most of my questions were answered asked but I just had a.

Couple of follow ups regarding relocations I think you guys had nine for 2020.

How many did you do when I was at 11, you Didnt 2019, if I can confirm that.

That sounds right well, we'll confirm for either.

And then also when I look at B. I think you said something about interior remodels.

How many will be sort of what is this what inning are we in that as far as.

How many left to be done.

And how many will be sort of at that same level of the most contemporary interiors.

Yes, it's early days on Henri our next we've remodeled it out back we find that every seven or eight years, you need to refresh inside the restaurant and less than we did it was 78 years ago. So it's early days Matt.

We'll be rolling forward over the next couple of years or so on a remodel program and we're still.

Analyzing the scope and stuff I imagine will have a high medium low scope is how we work it based on that on the restaurants, but that's something could see from OPEC steak house over the next couple of years and 11 is that correct.

For Relos got it and then my last my last question with respect to off premise has obviously been a large part of your business and I think when you think back over to your your your history of the bring on most casual diners really didn't give off premise that much of a consideration when they model. There same store sales have you changed at all I know like brands like Cracker barrel type adjusted how they count.

For traffic and check has there been anything there were no that off premise is so much more of your sales you, but have you changed the methodology switched from maybe ticket to entre has there been any difference there as far as how you're calculating traffic first truck. When you look at your comp yes, no real change we've always used entre counts.

At our and most of our casual brands for for counting traffic. So there's been no change there as it relates to our off premise business.

Excellent. Thank you.

Thank you. Our next question is coming from Sharon Sexier of William Blair. Please go ahead.

Hi, good morning.

Clarification on the 2021 cost savings should we assume that others are flowing through to the bottom line or will there be reinvestments and then secondarily I'm Brazil's margins in the quarter well, we're a little softer than we had expected and where were down quite a bit year over year. If you could give any color on on what happened there.

Yeah sure they opt Brazil ran a.

A a very successful value promotion call all star, which features some of our.

Great products and a couple of menu of tensions there we saw a 8% increase in traffic, 8.9% increase in traffic with a 3.3% dropping PA and so we had some commensurate commensurate margin pressures, but clearly it was part of our overall strategy is part of overall, our performance and for the year.

Year, Brazil margins were up 80 basis points. So we're talking about the international segment, there, but Brazil is a large part of that but.

So great comp performance, great traffic performance and I think you'll see.

Continued comp in margin expansion from Brazil, and earn an actual segment in 2020.

Yes, I'd say on the cost savings.

We're not going to provide 2021 guidance or thoughts on that at this point, but I guess the thought I believe you with as the savings are real and we do expect to benefit from those savings that aren't PNM and 2021.

Thank you. Our next question is coming from Andrew Strelzik of BMO capital markets. Please go ahead.

Hey, good morning, two questions for me I believe you noted the discounting was flat in the quarter and I guess it seems from my your PVA comments for 2020 that that there isn't expected to be a big Delta. There are this year. It either I just wanted to confirm that that was the case or is there more room to kind of moves out lower.

Yes look I would say that you're correct. We don't go into the year 2020, with an assumption that we're going to have a a dramatic shift in the way, we think about discounting, but what I would say consistent with what we've always said is that we will be opportunistic if there was an opportunity to reduced discounting whether it's by a particular promotion we are doing or what have you.

We will keep we'll reserve the right to do that as the year progresses, but theres no stated strategy entering the year.

Okay and my second question is on the decision to consolidate the leadership of the casual dining brands. It's obviously a change from from the strategy that youve employed as well as somebody other a you know kind of multi brand portfolios from other companies in terms of the strategy. So my question is in making that change what gives you the confidence taking aside the costs.

Savings and clearly sound optimistic on the sales cycle. What gives you the confidence at that won't have some sort of adverse impact or create some disruption from a top line perspective.

Well, we've got well the best operations restaurant leaders and business running getting Greg Scarlett.

So I couldn't ask for a bit of partner and that gives me great deal confidence.

Number two is we have tremendous brand leaders.

Ed crop as and Bonefish the operation side.

Working through that.

And we'll provide continue to provide distinctive brand operations go to market experience number three is we have some terrific people that are supporting the crop as and bonefish brands and our Outback team has always been really really strong number four we've got breadth Patterson.

Running.

Opex those of you know breadth in the industry, He's got deep experience and he and Greg will be terrific partners. They work on the effect Brad.

The last piece is we will continue to reinvest in these brands pursue opportunities and and grow the sales as we've talked about.

So you can expect additional reinvestment in those brands, but most importantly, we've got the people the bench the talent to make this work and I'm really pleased with how this came together.

Great. Thank you very much.

Thank you. Our next question is coming from Brian to Carroll of Raymond James. Please go ahead.

Brian Please make sure your phone is not on mute sorry about that the morning private care Raymond James just on the cost saving side and the DNA lie.

The low to mid Fortys is that the right level that you see is at appropriate level of of infrastructure support for the business or is there some sort of targeted or percent of sales or other target that you are looking out over the next few years.

Yes, Brian they'll be more like first half talked about 20 to 21, and we want our overheads presenter revenue to be aligned with our competitors and.

Yet still provides a fantastic service to our customers and our partners in the field and everything and we're we have a runway to do that.

Okay, and the productivity savings or that you talked about at the store level I know, it's something that you've been focused on for awhile could you help frame the opportunity that's still there on the food waste and you said menu simplification anymore color, there and I guess, where are you on on on improving efficiency of the labor.

Model as you look at 2020 or even into 2021, leveraging technology and the like Yeah. I think you hit the nail and have the last comment I think that when we think about productivity. It has shifted to some degree we are more focused on the technologies now that can unlock.

Further productivity savings down the line, whether its simplification in the kitchen with kitchen equipment that can be utilized to better prepare and two more efficiently prepare the food those the types of things that I think are still ahead of us, Brian, but pivoting right really quickly back to the Cogs in the cost of goods sold line. We made we made really good progress as you guys saw in the cost.

Good sold line throughout the year on food waste in 2019, but there is more work to be dot. So I would say the opportunity for cost of goods sold and I mentioned this a little bit and as it relates to 2020, we still we still feel like cost of goods sold can come down as a percentage of sales in 2020, and it will be driven by some of these opportunities that we've talked about.

That's great and last one from me just on the commodity outlook, Chris the 10% I just wanted to make sure I heard correctly, you said beef costs are expected to be flat versus 19 did I hear that right. Yes at the same level of inflation as it was in 2019 sort of in the 1.5% to 2% range. Okay.

And how much are you contracted on before the overall a basket at this time before deeper in really good shape, we feel real confident I think for the overall basket, we're probably in the 80% range.

Typical things like Mike producer and some seafood baskets are not fully locked at this point, but we're in really good shape on 2020.

Great. Thank you.

Thank you were showing time for one final question today. Our final question will be coming from John Tower of Wells Fargo. Please go ahead.

Great. Thanks for me in there just quick clarification and then a question on believe your international Capex is about 17.5% of your total Capex and I just want to confirm the majority of that is coming from Brazil and that was referencing 2018 numbers and then the question.

Dave You mentioned earlier in your remarks, the idea that there's an opportunity to grow the outback unit based on the U.S. overtime, but but that's down about 30 stores over the past five years, and I know traffics improved but.

You're also going through a relocation program right now in some remodel program. So realistically looking at the store base of 724 stores.

Where do you think that can go overtime and when can we start thinking about you know that unit growth actually ticking higher.

We'd like to get our 15 months, we'll get our 50, we'll look at that doing some more.

The.

The brand has done extremely well OPEC, we think with the changing.

Improving demographics and some of the key markets that we participate in like in Florida. For instance, we have chance for infill new locations. It's a it's a brand that can expand more and we're going to do it and we're seeing the returns and we're going to do relocations as fast as great sites become available, we're not going to push it and they have bad openings, but when you have 30 per.

Plus percent sales increases it shows the power the brand so the performance about back overtime the relate with the relocation.

Gains that we've seen and the new units.

Performance for the few that we've done OPEC give us confidence we can get to at least 50 more yeah on the Capex question, Hi, right now international we're targeting cost close to $40 million I think of our total capex spend will be international now of course, that's subject to foreign currency fluctuations, but 40 million, which is about 18% if you're using the 190 on the high.

End of the range.

Great. Thank you.

Thank you at this time I'd like to turn the floor back over to Mr. Dino for closing comments.

Well. Thank you everyone for listening today, we are.

Look forward to talking to you in April and updating you on our progress or for 2020 M. beyond thanks again.

Ladies and gentlemen, thank you for your participation. This concludes today's conference you may disconnect. Your lines at this time and have a wonderful day.

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