Q4 2021 Brinker International Inc Earnings Call

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Good day, ladies and gentlemen, and welcome to the Brinker International Q4, 2021 earnings call. At this time, all participants have been placed on a listen only mode and the floor will be opened for questions and comments. After the presentation. It is now.

My pleasure to turn the floor over to your host Michael Ware, Ma'am the floor is yours.

Thank you Kate and good morning, everyone.

Welcome to the earnings call for Brinker International's fourth quarter of fiscal 2021.

With me on today's call are Wyman, Roberts, Chief Executive Officer, and President and Joe Taylor, Our Chief Financial Officer.

Results for the quarter were released earlier this morning and are available on our website at Brinker Dot com as usual Wyman and Joe will first make prepared comments related to our operating performance and strategic initiatives. Then we will open the call for 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 subject to risks and uncertainties, which could cause actual results to differ from those anticipated such risks and uncertainties include factors more completely described in this morning's press release and the company's filings with the SEC.

And of course 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 and with that said I will turn the call over to alignment thanks, Michael and thanks to everyone for joining US this morning Brinker.

<unk> fourth quarter was one of our more profitable quarters in recent history.

A solid finish to a successful, albeit unusual year.

Underpinning our fiscal 'twenty, one results as a consistent strategy that differentiates us in the marketplace.

Exceptional team that executes every day in our restaurants.

We were already growing sales and taking share before the pandemic hit and we made the decision to lean further into our strategy of providing convenience value and a great guest experience by doubling down on third party delivery and improving our takeout systems.

In a year of social distancing our teams came together safely to lead the industry on traffic and regained positive sales momentum and.

In a year of closures and shutdowns, we opened our first virtual brand in over 1000 restaurants by leveraging our technological infrastructure.

It's just wing surpassed our $150 million target in our company owned restaurants, and along with the support of our franchise partners. It's this wings became more than a $170 million business in the U S. With many of our international franchisees also now operating the brand.

In a year that started with unemployment near record highs, we kept all our management teams employed and paid them solid bonuses, we put a retention plan.

In place for our strongest team members to encourage them to stay with us as the staffing environment continued to change through the spring and summer.

In a year, where gatherings and special occasions that margin as we're restricted Steve and the team restructured the value proposition to takeout proposition and re engineered the heart of house.

The brand is already delivering much more profitable sales as volumes come back and guests have responded very positively to the changes.

In year, we thought we might have to borrow money more to survive the pandemic, we paid down our debt by over $300 million and.

And we're committed to continuing that trend this year.

And in a year, where we worried we wouldn't be able to support our charitable partners at levels. We're used to our team set a record raising more than $10 million for St. Jude during an exceptionally critical time for their patients and families. Our teams have raised nearly $90 million for St Jude's patients during our partnership.

Thanks to the strength of our operations team, we've emerged an even stronger business than before in fact, we're positioned ourselves to invest aggressively to grow this business during fiscal 'twenty, two and beyond and to keep our balance sheet strong.

The ability to make these kinds of investments starts with owning our restaurants, having the opportunity to leverage our fleet and realize the full potential the full profitability of our efforts.

<unk> solidified our commitment to corporate ownership, despite the challenges of owning restaurants.

Dealing with labor issues and commodity cycles.

Ownership gives us the scale to effectively manage the issues. It allows us to steward our brands consistently and have control over the investments we make to grow the business. This year, our investments will target more ways to offer convenience value and a great guest experience.

By doubling our pipeline of new restaurant openings.

The gene to keep our assets strong and vibrant accelerating our technology advantages and expanding our portfolio of brands.

Currently we're in the middle of Rolling out our second virtual brand Marciano Italian classics.

It's now in over 250 restaurants today and doing very well.

This one will be a slower roll for a couple of reasons, it's a little more complex and since we're back to fully operational dining rooms, we're being very intentional about the experience for our operators and our guests we're.

We're excited about it we're getting great guest feedback and we're anticipating being in 900 restaurants by the end of the fiscal year.

We're also investing in both takeout and delivery by pursuing opportunities to increase visibility and drive awareness of these channels across all four of our brands.

We recently implemented technology enhancements to our curbside takeout system, which is already simplifying the operational side of the business and improving guest metrics.

It's just wings has gone live with a website that offers online ordering for takeout as well as delivery and we're excited about the growth potential for the brand.

These technology investments are helping us do a better job handling the increased mix of off premise business from pre pandemic mid teens to what's now more than 30%.

As well as leveraging of the full capacity of our assets with very little incremental capital.

It isn't every day more than double your off premise business and add a couple of brands to your base. It only happens well with best in class systems to enable it and a strong team to execute it.

Our team is critical to our success and we take the current staffing environment very seriously we've executed a full court press to hire train and retain our talent while the challenges came fast and furious for all of US in March I am pleased with the progress. We've made there are still opportunities, but isolated to specific trade area.

And we are confident we will get these staffing challenges resolved in the near future.

To further support our operators, we're rolling out a new service system with handheld devices that we've worked on for three years to perfect. It.

It isn't as easy as some might claim to implement a system that operators can execute during high volume that saves labor and still deliver a great guest experience.

Ours is also putting more money in our team members pockets. So they are staying with us longer which is crucial in this environment.

It's been more than 250 restaurants, now and we anticipate full implementation by November.

And finally, because we chose not to take price at Chili's during fiscal 'twenty. One we have room to take some price this year as consumers return to work and income levels return to normal we are evaluating how we'll address those opportunities, especially in channels like delivery, while all all while protecting our industry leading value proposition.

We spent last year learning to run a much more efficient and robust revenue generating model. We're spending this year and beyond capitalizing on the opportunities for growth that are not just available but achievable for brinker.

There is nobody who is doing this better than this team and I'm honored to be part of their story now.

Now I'll turn the call over to Joe Joe Hey, Thanks, Wyman and good morning, everyone. Let me continue our prepared comments by providing some additional insight to the fourth quarter results released this morning.

And then share some limited thoughts on our current expectations of certain aspects of the overall fiscal year plan.

As Wyman indicated the fourth quarter was a strong finish to our fiscal year 2021.

For the fourth quarter Brinker reported total revenues of $1 billion $9 million with a consolidated comp sales of 65%.

In keeping with our ongoing strategy. The majority of these sales were driven by traffic up 53% for the quarter of 10% beat versus the industry on a two year basis.

These sales translated into solid EPS with fourth quarter adjusted earnings of $1.68.

As noted in this morning's press release, the fourth quarter included an extra operating week or 50, <unk> week, which contributed approximately $70 million to total revenues.

90 basis points to restaurant operating margin and 34 to earnings per share.

At the brand level Chili's comparable restaurant sales were positive eight 5% versus the fourth quarter of fiscal year 19, which we believe is the more appropriate comparison for the quarter.

Additionally, on an absolute dollar basis, the fourth quarter with Chiles largest sales quarter on record topping $900 million in total revenue.

Marciano swipe, while down 18% compared to fourth quarter of fiscal 19 made very solid progress with its recovery curve and built positive momentum to carry into the current fiscal year.

Moving down the P&L, our fourth quarter restaurant operating margin was 16, 9%.

Adjusting this performance for the impact of the 50 <unk> week, the resulting 16% operating margin still represents a material year over year improvement and more importantly was a 110 basis point margin improvement versus the pre COVID-19 fourth quarter of fiscal 19.

Food and beverage expense for the fourth quarter as a percent of company sales was 20 basis points unfavorable as compared to prior year.

This was driven primarily driven by increased commodity costs, particularly for chicken and pork products.

Labor expense for the quarter again as a percent of company sales with favorable 240 basis points versus prior year, primarily driven by the extra week sales leverage versus fixed labor expenses and the slower reopening pace in a couple of high wage states such as California.

During the quarter, our managers focus considerable efforts towards staffing our restaurants to support the solid demand for our brands.

Scale clearly matters in this area.

We're effectively supported by our experienced HR teams, who helped deploy hiring tools and events to assist in the process.

Given the more challenging hiring environment, the dynamic of hiring training and retaining team members resulted in an increase in labor inflation in the mid single digit range a dynamic we expect to continue in the near term.

To reward our operators strong performance throughout the fiscal year. We also chose to further invest in our hourly team members and managers through a variety of incremental bonus structures totaling approximately $4 million for the quarter beyond our normal payout formulas.

This incremental investment impacted quarterly EPS by approximately <unk> <unk>.

And increased labor expense margin by roughly 40 basis points, well worth the benefits that will accrue.

Restaurant expense was 830 basis points favorable year over year as we fully leveraged many of our fixed costs, particularly from the benefit of the additional week in the quarter.

The continued positive operating performance did result in a meaningful increase in our quarterly tax rate, 15% for the quarter, which includes a catch up adjustment to increase the annual income tax accrual. This increase negatively impacted fourth quarter EPS approximately <unk> <unk>.

Our operating cash flow for the fourth quarter and fiscal year remains strong with $101 million and $370 million for those timeframes respectively.

EBITDA for the quarter totaled $144 million.

Bringing the fiscal year EBITDA total to $368 million.

During the fourth quarter, we continue to use a significant portion of our cash flow to further reduce revolver borrowings by year end, our revolver balance was reduced to $171 million. This decreased our total funded debt leverage to two five times and our lease adjusted leverage to three six times at year.

Our end.

Speaking of the revolver, we have reached agreement on terms and conditions for a new revolving credit facility with our bank group.

The new $800 million five year revolver includes improved pricing allows the return of restricted payments and provides ample liquidity and flexibility to support our growth strategies.

Our board of Directors has also reinstated the share repurchase authorization that was suspended in the early days of the pandemic with an authorization amount of $300 million.

Now turning to our outlook for fiscal year 'twenty two.

At this point with the volatility and unknowns of the current operating environment, we can only share some high level thoughts for certain annual metrics.

For example, we expect commodity and labor inflation percentages each in the mid single digits with commodity inflation towards the lower end of the range.

Capex of $155 million to $165 million.

And annual effective tax rate of 14% to 15%.

Weighted annual share count of 45% to 47 million shares.

As we now move ahead with fiscal 2022, the reality of the pandemic with all its uncertainties is still part of our everyday operations that being said all now four of our brands are well prepared and positioned to perform in whatever environment. They face throughout the year.

We're very proud of their efforts during the past fiscal year and are confident the experiences the growth and the strength of their business models will continue to deliver quality results as we move forward from here.

With my comments now complete let's turn it back to Kate and move on to questions Kate.

Thank you.

Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time.

If your question has been answered and you no longer wish to ask it. Please press star two to leave the Q, we do ask that while posing your question you. Please pick up your handset if listening on speaker phone to provide optimum sound quality.

While we poll for questions.

Once again, if you have any questions or comments. Please press star one at this time.

Our first question today is coming from David Palmer at Evercore ISI. Your line is live you may begin.

Thanks, I guess I'll get one out of the way you are quarter to date.

<unk> it looks pretty good and I would think that would give you confidence I'm wondering if you're seeing some.

Weekly sales data or perhaps some regions that are giving you.

More pause with regard to the Delta variant.

Have a quick follow up on the labor line.

Hey, David Wyman, Yeah, I mean, obviously you saw the numbers, we had a really good quarter.

Especially at Marciano, and we started the fiscal year in July.

Really pleased with how <unk> is kind of moving forward and starting to see some of those pieces of the business come back that were most impacted by the pandemic banquets.

In catering so some good progress through but as the Delta Varian has kind of picked up some steam here in the last few weeks, we have seen some softening we're still above the EF 19 kind of base, but just with the uncertainty of the pandemic.

We were just unsure right.

From my perspective, I was probably a little optimistic last fall.

Sure.

And was surprised by what happened in November and December while I don't think that's where we're headed we're just going to be a little more cautious as we work through this this this variant.

With Delta and see where it is that there has been a little it tends to be a little more regional again. The overall numbers are still positive and were comfortable our strategies are all working.

External factors, primarily I mean this the pandemic that were just still not quite sure what.

What the timeline is going to be before this thing gets put back into.

Into a into a place where we're not seeing consumers having to react and potentially more.

More regulation put on restaurants right now there's there's no distance senior but we're back in masks in some towns and so we're just we're just being cautious.

Makes sense and I just wanted to ask on labor costs.

You have two parts you have hours and wage inflation on any modeling I'm trying to think about the way that we can perhaps model. This for fiscal 'twenty two based on how you gave of mid single digit type inflation.

Labor costs were up mid single digits in the quarter, you say that that's going to be roughly the case in fiscal 'twenty two.

That's from a just a wage inflation standpoint, the labor cost per restaurant was up 3% versus the pre pandemic fiscal <unk> 2019 per restaurant on a week adjusted basis and I'm wondering can we think about that can we think about sort of how much your labor cost per restaurant would be.

Versus pre pandemic as a way to perhaps model this into 'twenty two assuming that sales are roughly equal on a multiyear basis to the type of momentum you had in that quarter any help on that would be would be great.

Yes, David I think that is.

As a decent proxy.

The top line piece of the equation does matter when we look at the overall labor so.

As you commented keeping that consistent I think I would expect to kind of the labor dynamics to remain relatively consistent as we move.

Forward from here.

You could get some some variance if you'd get a top line.

Change, that's not quite expected and the numbers, depending on where the consumer.

We're seeing a little bit of what I would consider to be transitory costs in that too I mentioned, we made a decision in the fourth quarter, which I think was well deserved to create.

Create some incremental bonus structures that was about a 40 basis points.

Increased to that labor margin expense as I mentioned in my script, but if I also look at some of the what I consider to be a little more transitory costs like.

There is some incremental overhead thats being used in the system over time excuse me up for it over time, there's a little bit there is some incremental training I mean, one of the things that goes with the cycle. We're in right now is a lot of new team members and with some training costs.

Do you want to have that to improve your productivity as you move forward both of those two.

Incremental pieces of roughly about a combined 60 basis points to that margin too. So I think those probably remain in place for some period of time, but I think as we get more balance back into the labor system as you improve the productivity through the training you'll start to see.

Some of those incremental pieces come out of the system I would I would expect in the second half of the year.

So with that additional detail I think fourth quarter is not a bad proxy for the environment that we're going to be in here for the short run.

Thank you.

Thanks, Ed.

Thank you. Our next question today is coming from Chris <unk> at Stifel. Your line is live you may begin.

Thanks.

Good morning, Wyman can you give some more details about what you've seen in the stores with the margin on his Italian classics I'm, just curious if you're seeing maybe sales lift similar to its just wings or is the margin structure similar and maybe what makes it more complex for the restaurants to execute.

Sure Chris I'll give you some you know I'm going to be a little bit.

Guarded just for competitive reasons, but.

So what's got US excited about <unk> classics is first the quality of the product before we put the margin on this brand on a virtual brand.

We wanted to make sure that we can deliver against the standards and we've done that the team has done a great job developing a really great lineup.

It is a little bit more complicated.

Then just.

Our wings product because its got a little more breadth to the offering and so we're making sure that as we bring it to the restaurants, we're training, we're setting up that that part of the.

The line if you will to.

Support this business.

And not be there.

Tetra mental to what we're doing in our dining rooms in Chile's everyday. So so that's what's got us excited it's.

It's also it's a higher check average product and so we love. The fact that you know we're this isn't.

It's just wings.

It's more of a value brand.

Killer wings at stupid prices at our tagline, so with margin on as we get a nice a much nicer and.

A much bigger check average so that's encouraging to us we like the way the consumers are accepting the product the demand looks good and we're executing at a high level. So all those things are positive for us.

The thing that we love about these two virtual brands in conjunction.

Is that they do work against different targets. So.

The wings guests is not.

The same as the margin on his tank classics guests for the most part there is and so that allows US also to see when the push comes for wings. It comes at a different day part it tends to come on the weekends it tends to come with game nights.

It sounds classics, one of its busiest day parts as Sunday to more of a family offering and so those.

Those are the things that have us excited about about rolling This second virtual brand we were not looking to have a huge portfolio of virtual brands very limited. These two were probably going to be focus for a while we think <unk> got we always said we weren't going to.

Put a brand out there that didn't have at least $100 million worth of sales potential and we'll build from there and we think both of these brands. Obviously wings has proven that and we think margins classics will will build through the year as we roll this thing out over the next few quarters.

Okay. That's helpful and Joe just one other question could you give a little bit more color on what's driving the higher Capex next year and is that range a good run rate going forward or are there some nonrecurring investments planned for 'twenty two.

No actually it kind of go in reverse order that is.

Good proxy I think for how we will look at Capex going forward, we're first and foremost again from that strong cash generation going to invest aggressively back into the business I think we've talked.

Previous calls that we really like about the transformation of this strategy is the organic growth story that is starting to develop.

As we kind of move forward one of the bigger Delta as you see going into this next year is that.

Pipeline of new restaurant development that is starting to take place.

We obviously had a pause during the pandemic from a real estate standpoint, that's now back online.

On a fully in very aggressively in fact, we're moving.

Our pipeline now north of 20 restaurants, that's not for fiscal year 'twenty two those will start to.

Really fall into place back half of this year and into.

The next year.

The rest of the we're going to continue to re image.

There's a little bit more spend on the re image side of the equation again. Some of this is pause versus run rate. So you're really getting that back to a level that we had seen.

Pre pandemic, but you also have the typical investment back into the.

R&M side of the equation and technology again, we talked about.

The benefits, we're going to continue to accrue from technology TSV with one Wyman talked about so we're going to be a pretty robust in continuing to vest invest at those levels.

So those are the primary areas.

Yes.

I think it is going to accrue to the organic growth story quite well as we move farther into this year and clearly as we move into 'twenty three.

Thanks, guys.

Thanks, guys. Thank you. Our next question today is coming from Josh long at Piper Sandler. Your line is live you may begin.

Mr. Long your line is live want to handle that one.

No Nicole know, Josh NOLA from Piper Sandler.

Moving on.

Okay. Let's go to the next your next question is coming from Jon Tower at Wells Fargo. Your line is live.

Great. Thanks for taking the question just curious John.

John.

Yeah.

So first on the pricing side.

Equation Wyman it did sound like earlier in the call you were alluding to more pricing at Chili's in 'twenty two.

Any chance you can give us some sort of degree of magnitude perhaps across the different channels. It sounded as if you are leaning a little bit more on the delivery side, taking a bit of pricing there and then a question for Joe specifically on the labor side or how we should think about these handhelds that I believe Wyman you mentioned, we're going to be in stores fully.

November House.

Thats going to impact the P&L in terms of perhaps seeing better productivity.

And therefore labor hours, moving a bit lower per store or perhaps an improvement in food waste and I'm just curious to hear your thoughts on how.

Those handhelds might impact and store ops.

Sure Let me, let me I'll hit them, a little bit probably at a higher level and Joe can give you more of the detail with regard to P&L impact. So I think from a pricing standpoint, obviously, we chose to take a different tack than many during the pandemic and we kind of held prices and we wanted to just make sure that we were supporting consumers.

Fully in that.

That contributed greatly to our traffic improvement relative to the category of double digits throughout the whole pandemic and we're maintaining that solid traffic positioned as we kind of sit today and and thats important to us, but we also realized with what we're seeing obviously with the.

The inflation numbers that Joe shared with you.

We're going to need to take some price and we're probably going to have to price a little more than historically, we've said, 1% to 2% we're going to probably go over that number. This year. We are currently sitting in what you had one and a half.

And we're targeting probably to be over two here.

For the second quarter.

No.

No how much more we will need in the back half, but we do feel comfortable that we've got room to take it.

To that.

Mid to low two range in the near term in the near term and then we will evaluate kind of how these again. It's the question everybody has got right is it is it is.

Is it structural or is it transitory and we just want to be cautious about how we deal with <unk>.

Transitory costs, both with labor and with the commodities in building in pricing and wage.

Does making pricing and wages decisions that you can't really back off so so that's how we're doing and some of that shows up in some of these programs Joe talked about where we're more open to running maybe higher overtime or or <unk>.

<unk>.

Incentives to stay versus jumping on wage rates. So those are just some examples with regard to the handheld devices TSA as we call it.

I'll just say it what it does is it allows the front of the house servers to be more efficient and then we run a server runner model.

So right now we just run straight server model and so this allows us to get servers.

To be more efficient they can take more tables and then they use the technology to bring food out of the back and run the drinks with the runners and that just it's a more efficient model is also a better model from a guest perspective, we get better guest satisfaction scores. So.

That's why we have been working on it so diligently for three years, it's technology, though so it has to be working on a Friday night under high volumes.

When you are counting on Wi Fi in all of this technology to interface.

And that's what we've just perfect it really over the last year.

Year, and we're excited to finally get this thing rolled out companywide by November.

John I'll, just add to that that yes. There is there are benefits that will accrue.

From a productivity from a labor management side of the question I do think you may see some other things again, we expect to see benefits to <unk>. I think you mentioned some things of that nature, you can see that accrue at different points now what we haven't done in any of the limited thoughts that I provided you at this.

On 22 is I'm not assuming a big Delta based on TSA as we get that out there and that in November.

By November timeframe and started to utilize it and develop it in.

I think we'll give you more insight at that point as to how we're seeing those numbers, but I am not making the upfront assumption that I'm going to get X amount of great benefit in.

In my current environment from a labor perspective.

Great. Thank you for your time.

Yes.

Thank you. Our next question today is coming from Brett Levy at MK M partners.

Is live you may begin great. Thanks for taking the question I guess just.

<unk> on the on the labor side.

One of the strength you've had as it has been your refined operations.

The last few years and the implementation of technology, but it sounds like Youre reintroducing more items, whether it's.

For brands across the system now.

Bringing this technology onboard just the bond in the off premise balance.

How should we think about where you are in terms of your staffing levels, what you still need to do to be able to add back either the labor hours or re.

We acquire additional bodies.

And what do you think all of this could translate into from a longer term on your overall restaurant level margin. Thanks.

Well, let me just talk a little bit about staffing Brett so the staffing issue.

<unk>.

It's a serious issue right I mean, it's an issue that we're all over because at the end of the day, it's about getting our teams the resources they need to deliver a great sales and a great guest experience without putting too much pressure on them in the current environment.

While things have gotten much better from where they were in March there are still pockets out there.

There, we don't have restaurants fully staffed and so what that means is it puts a lot of pressure on the management. It also is limiting some of our sales potential and so our first priority right now is to just get everybody staffed.

Staffed up get our management team stabilized in staffing and get that foundation strong it's kind of a unique situation have been in the business for a long time have never quite experienced a situation, where we've got so many people unemployed and still such a challenge to find people to come and take really good jobs.

We provide for the industry. So we're seeing progress we're making.

Headway, but we still have some pockets where that's a challenge.

And so with that kind.

Kind of leave it to Joe to answer the kind of deals.

Brett I think again.

Sure.

Im not seeing anything that is changing any of our thought processes around the long term.

Strategies and long term opportunities from us from a margin that those are all very much still intact.

Again, as we've talked in the past and we'll continue to talk going forward.

We think margin opportunity first and foremost is going to emanate from our ability to drive top line sales.

In the very short term.

We're just trying to get a better feel for what that short term dynamic is before I talk more specifically about things, but I still I'm very comfortable and confident in our ability to to move margins wider as we kind of move forward with the strategy of the virtual brands.

Honestly contribute meaningfully to that but we're going to continue to grow the base of Chili's and we've already talked about the great improvements that marciano is making.

And they're in their business model, so that will accrue to the benefit of margins as we go forward.

Again I think the.

So the short term dynamics of what labor.

And the commodity markets.

Once we can deal with on an ongoing basis, we did not price last year, we're now bringing that lever level back into.

Into play and when I think about the typical one 5% to 2%.

Pricing dynamic that we've talked about is kind of our strategic bench.

Benchmark, so I think that is.

At a level that allows us to manage both of those issues as we move forward.

At any given period of time, you may see us delta off of those two but but clearly price will be a big piece of the equation as we move back into I think that more normalized.

Post pandemic operations.

And then just one quick follow up on the pricing how are you thinking about that from a qualitative and quantitative basis, how much of that is going to be internal just based on what you see in your model and what you need versus.

Analytics across the landscape and what Youre seeing from the competitive set.

I think first and foremost we look at the need state side of the equation.

<unk> positioning.

Both of our brands is an important dynamic and we want to want to continue to maintain that we're very aware of what's going on.

And the industry and you're seeing some fairly aggressive moves on pricing but.

But I always go back to the strategy drives traffic and this is a particularly a sector that has seen net.

Negative traffic trends really for a long period of time now.

And that's not something that we want to fall into so so we're going to be very focused on our ability to continue to drive traffic and how price may or may not intersect with that thought process.

We've kept pricing power.

Intact, and we will use pricing power, particularly as we go through this this fiscal year I think there is an ability to price in a permission in the short term to price, but you got to be careful about.

Over time getting out ahead of the consumer and changing the value dynamics.

Of your brands so we're.

So if we lean very heavily in that equation, you decided to the internal value perception and how we think about the need need state of the longer term strategy.

Thanks, Brad.

Okay. Thank you.

Our next question today is coming from Brian Mullan at Deutsche Bank. Your line is live you may begin.

Hey, Thank you just a question on just wings, you've spoken before about the takeout opportunity related to that you've spoken about needs to generate awareness outside of delivery channels. So can you just talk about how you plan to do that going forward and specifically should we be thinking about any increased advertising budget here and is this initiatives.

And we needed to in fiscal 'twenty, two or is it a little bit further out on that Sean.

Hey, Brian Wyman, Yeah, no. We're it's taken us frankly, a little longer than I would've thought to to just get the infrastructure up and running to support.

This aspect of that virtual brand.

But it's up now it's just recently been put up as I mentioned the websites up you can go to W. Dot Com and you can order wings to go or you can order them through delivery.

Delivery also on our website. So now it's just about how do we get some awareness of that brand and so we will spend behind it but again, it's a very efficient spend very targeted spend we know that this target is there is a lot of online opportunities there's a lot of.

So its not like Youre going to see national television advertising around the W brand, but we will we will spend some time and energy here in the next quarter or two really seen how much awareness.

Awareness, we can create and how much business, we can drive so you've got two ways now between Google.

And the website to find the brand for a takeout opportunity and so now we're going to continue to build that.

More on that probably in the next couple of calls we will keep you posted on how how we're seeing that that initiative kind of build.

Thanks, and then just as a follow up.

Board reinstated the share repurchase program, it's encouraging to see Joe could you just speak to your philosophy, there opportunistic repurchase versus perhaps more programmatic repurchase in the.

Share count range, you provided with the guidance somewhat wide can you just confirm does that just has to do with the pace of buybacks, which is which may be unknown at this point.

Yes, I think thats, an accurate way to think about it again.

We appreciate.

The support and the bullish statement I think the.

The board is making on how they're viewing the business with the.

The reinstatement of that program again, we're going to first and foremost use our cash to invest in the business. You are seeing that that heightened level of capex, which I think will will be maintained and we're going to continue to delever.

On a metric basis, I would anticipate getting down into the lower threes. We finished at three six we're going to continue to pay that down and grow the business that will allow that metric to continue to to.

Move lower as we go forward, but we generated a lot of cash and at that point. There is still cash that we now have.

The ability to return to shareholders.

I would like to be both opportunistic in and.

And programmatic at the same time, so we do generate cash on an ongoing basis and.

Depending on where we are in any of those other given programs we will deploy it.

I would expect that to be over the course of the fiscal year.

We have not been into the market obviously yet.

But that will that will be coming down the road that wazz guidance does incorporate some thinking about what might go on in this fiscal year.

Great. Thank you.

Thanks, Brian Thank you.

Our next question today is coming from Nicole Miller Regan at Piper Sandler. Your line is live you may begin.

Thank you were here I promise I'm, sorry by Nicole.

Let's go back.

Great update two quick ones on our side from us.

The first is on the store level margin, where the commentary so far it's very helpful. I was very curious on it it's just swing impact on the P&L, specifically RBC store level margin.

I'm thinking there this contribution there or is it something you can call out and then wing prices have been sky high I think moderating a bit. So maybe you could net out the transitory nature of that too and we could start to understand that for modeling purposes for next year as well. Thanks.

Yeah, Nicole I'm going to defer on several of those we haven't broken out a lot of the dynamics.

And a specific level is definitely.

A positive contribution to that store level margin.

Again, we look at it and allocated.

P&L for the virtual brands and I think we've talked about before that it generally is north of 30% and a lot depends on what youre doing in any given time period from a marketing standpoint, because again I want to fully allocate.

The cost as we can but they did lever.

The store P&L, which is again that that nice pieces as the volume increases that you see coming out of.

The virtual side of the equation.

We've noticed a little elevated price on the drilling side of the equation.

And we've had to make some adjustments in our our cost dynamics on wings, but we've obviously maintained supply and ability to.

To keep that product in front of the consumer just a great job by our supply chain team and a very.

Unique in that times trying.

Environment for them. So they are elevated I think at some point you will see that dynamic shift.

And that will accrue to the benefit of that brand and I would anticipate.

<unk> Nicole.

A fairly robust discussion.

Around virtual brands at the.

Analyst day in the not too so hopefully.

I'm going to defer some of those specifics to them but.

More insights to come.

Yes, the only thing I'd add Nicole is obviously because of the incremental at either the high instrumentality of those sales to our business.

The flow through and the profitability or are impressive and important.

And then just on Mandujano, I mean, you're kind of crude or sand.

You know realistic if not cautious, but I would be curious just.

What kind of behavior, you expect for the upcoming holiday season, and do you have any indications yet of request for private dining our parties are taking or anything of that nature.

Well as you can see in the information we've shared in the release the movement from just fourth quarter to July was impressive at <unk> and so.

As we were working.

The country out of Covid and people were starting to feel comfortable again about socializing. We saw that the part of the business that was really been curtailed the most which was there their banquet business in there.

On their catering business start to come back and it's ahead of schedule from our perspective, it's mostly social.

So the business side of the equation hasnt come back as much yet but.

But obviously you can see they're running again above the 19 numbers in July. So so those are those are all very positive things what that portends for the holiday season, I mean, I wish I could could tell you in the call. We are optimistic, but we're also being cautious.

Both because again the pandemic isn't quite totally put to bed with this whole delta variant and we're not exactly sure what thats what the status will be I think if we get some clear.

Some clear road prior to the holiday season from a pandemic standpoint, we'll see a pretty robust.

Banquet business in the holiday season, we know consumers want to gather we know they are ready to celebrate together and eat together.

If theres permission to do that in a comfortable level of comfort around that.

Then I think we're going to see a good season, but but we're all just kind of kind of waiting to see.

Thank you.

Yes. Thanks.

Thank you. Our next question today is coming from Andrew <unk> at BMO. Your line is live you may begin.

Hey, good morning, Thanks for taking the questions.

I was hoping first you could do a little bit more comparing and contrasting.

What youre seeing or expecting at Marciano is Italian classics and Thats just wings, you mentioned the check the occasion and anything else that we should be mindful of as we think about that rollout and if you could comment on the margins of the flow through compared to its just something that would be helpful as well.

I mean, we're not going to get too specific Andrew I mean, I think I've given you most of the color I'll, probably give you on how the brand.

Plays.

The big the biggest difference I think is just what we've talked about in terms of rollout.

We were comfortable enough to role because of what was happening primarily in the dining rooms with a lot of constraints. We felt we could focus on.

Rolling out the wings brand overnight to 1000 restaurants will obviously, our dining rooms are busy again, and we've got a lot of things going on in the restaurants with some initiatives like TSMC that we've talked about that are alive that are requiring us to support our restaurants on a more.

Kind of moderated basis as we roll this brand so it's not going to hit like wings hit it's going to be rolled out throughout the year.

But rx our energy and our excitement about the brand or our are comparable I would say, we like we like both of these brands allow or we think there are many.

It's manageable first of all within our system to really leverage these assets and drive.

<unk> growth within the.

The assets that we have and deliver a great guest experience the return rate on.

It's just wings is exceptional.

Just on the information we get from door dash. So once we get trial, we get really good repeat and I think we'll see the same thing with the margin on those classic. So so again, we're just focused on getting it into the restaurants in a way that our operators can execute it and then.

And then building these brands over the next really years to come.

Okay. That's helpful.

I wanted to also ask on the food cost side and I apologize if I missed this but how much visibility do you have from contracting.

Two the inflation outlook that you gave on the food cost side is there anything that we should be mindful of from a cadence perspective.

Yes, just from suppliers or conversations with suppliers whats kind of the tone and kind of the expectation about.

Sustainability I know, it's a tough one to call, but just any insight you could provide there would be really helpful. Thank you.

Yes.

We have a good contract positioning is really must've contracting running the rest of this calendar year. Some of it runs into the first quarter of next calendar year. So the back half of our fiscal year.

We see a heightened a higher level and actually a significantly higher level of our <unk> inflation.

Inflation beliefs is built into the back half of this of our fiscal year due to that contract and so.

Again.

Good contracts in place we've had at times during the last.

Order discussions with some of our our partners on where contract levels are in volumes price and things of that nature. We've adjusted a couple in conjunction with them on the chicken side of the equation I think thats gotten the higher highest level of dialogue around the industry in that.

Those issues have been real we've managed through them.

Through those kinds of adjustments, but.

Again, we're comfortable with the inflation that we have built into our thought process here that I talked about.

And it is a more back half of the year thought process.

Great. Thank you very much.

Thanks, Andrew.

Thank you. Our next question today is coming from Jeff Farmer at Gordon Haskett. Your line is live you may begin.

We've discussed a lot of P&L lines. This morning, and I was just hoping to get a little bit more context color on the G&A line. So specifically will 2020 to be an incentive compensation reset year and will there be any other factors that could potentially push that G&A number.

Well above or just above the 2021 number.

No Jeff I think it's going to be a relatively consistent year in that regard again, we build our beliefs around G&A.

Based on.

Hitting targets and things of that nature. So I think we are we.

To accommodate the incentive compensation.

Pretty well I always like to have.

And upside to G&A from an incentive standpoint at that works I think you'll see from a dollar basis.

Probably up in the <unk>.

$8 million to $12 million range I think.

In that range, but as a percent of sales I wanted I would assume you could model relatively close to 4% low fours, let's say, Florida for two.

And be right in line with our thinking on that specific line item.

And most of that Jeff is really to work our way down the P&L as we go on our.

And on the G&A front some of that the bulk of that is really.

Instituting some programs that we had to.

Restrict as we got into Covid right and so it's putting those thats getting a little more travel now as people are getting back out and moving around so.

Pretty much in line with our history in terms of how we run a very.

A very efficient restaurant company.

That's helpful and just one more unrelated on the off premise mix I believe you said Chili's was I think the quote was more than 30%. So question is what the more precise percentages for chili's off premise and then.

Your updated thoughts on where you think that that chili's off premise mix will settle as we get further.

Of course, Covid or we moved house Covid.

Yes, Jeff.

It is staying very consistently and let's say that 33% to 35% range.

Throughout the quarter and I think so we've seen more and more and more evidence as we've kind of gone through the last year.

Based on our recovery curves that.

Let's say that.

Let's say the 32% to 35% range is going to be.

The sweet spot going forward, yes, the only thing that's still out there Jeff.

We'll keep you posted as we learn but.

There's still a lot of concern about COVID-19.

With with consumers and I think there are still some consumers that are preferring takeout to dine in is still in and is because our takeout business is really the thing that surprised us the strength of takeout has been the biggest surprises dining rooms have opened we thought maybe more people would move back into the dining room, and we haven't seen quite as much. So.

That could take a little while for for everybody to get kind of back to here I'm not going to restrict my preferred choice.

By an outside influence like like a COVID-19.

Hi, Thank you.

Yep.

Yes.

Okay.

Thank you. Our next question today is coming from Brian Vaccaro at Raymond James Your line is live you may begin.

Thanks, and good morning, I just wanted to start with clarifying two items on your comments during the Q&A. So first on commodities just make sure I heard correctly, you would expect the second half to be significantly higher than the first half. So we might be only talking about slightly inflationary in the first half and then maybe <unk>.

Singles in the second half that did I hear that correctly Joe.

I didn't give you a specific high singles or that I think we have more inflation built in.

To the second half of the year, that's based on the contract structures, we have out there.

Obviously, some inflation that will work its way into the first half of the year. There are a lot of those are spot market driven.

Items do you think about produce.

<unk> things of that nature, you'll probably see some inflation in there.

With regard you may see some inflation on the ground beef side.

<unk> equation, but.

Our beliefs around inflation based on current markets that we're looking at and the timing of contracts.

Lead us down a path of more inflation in second half of the year now more growth.

Markets can change and we'll update you as we kind of move through.

And get closer to some of those timeframes.

Okay. That's helpful and then on the off premise sales mix you are talking about kind of the 33, 35% range. So that's the do you have the tight number for the fiscal fourth quarter and where it was quarter to date is that also in that 32 to 33 range.

Chili's.

At Chili's for the fourth quarter you were <unk>.

<unk>, 36% to 37% range, a little bit above that fourth quarter.

We don't have a year I don't have a quarter to date, it's probably.

I am pretty comfortable its going to be consistent with that youre not going to have.

Maybe it's Mike.

Slight downward variance from that.

And within that thinking about third party delivery versus takeout, what kind of changed.

Changes are you seeing within the mix of your off premise mix as you've moved through.

Has it shifted I think it was $6.40 prior have you seen much shift in the two channels.

Yeah.

No I think again I think we're seeing a pretty consistent flow of those channels.

In the business right now.

Okay, Great Great and then I guess my question I wanted to just circle back on labor. If we could could you just give a little more color on the re staffing progress that you've made in recent months, perhaps secret level set where I know, it's isolated but maybe level set just where current staffing levels are on average versus 19 or perhaps.

Haps versus some targeted level at recent sales volumes that you are working towards.

Yes, I mean in general when you look at the overall number of team members we have.

Brian we're at it.

At staffing levels that are equivalent to pre pandemic.

Now.

That every restaurant, probably could use another body or two but thats not unusual for the restaurant industry you could always use another cook or another server and most restaurants on any given day. So that's not a real issue. The real issue is more of where youre down.

Several.

Primarily especially in the heart of the house so what we've seen is.

Especially in the one thing we have seen is some of the stimulus has kind of abated, we've seen in front of the house.

So servers become more available or not as big an issue for us with front of the house part of the house is still a little bit more challenge in those areas again this isn't a nationwide issue, but in those pockets where were more challenged with staffing those are the bigger issues, it's getting the kitchen staffed.

The biggest challenge and again, we're making good progress, but we've still got a little ways to go and again I would add to that Brian I think it's important from our perspective is that opportunity for us again as we bring.

More stability to those pocketed areas youre going to see some capacity opportunities too so.

We look at it as upside from where we go from here our sales were absolutely.

Impacted in the quarter, because we werent at full staffing capacity or capabilities and so as we get fully staff, which we anticipate doing soon.

That's opportunity as Joe said.

Okay.

Thanks, Brian Kate.

Thank you. Our next question today is coming from John Glass at Morgan Stanley. Your line is live you may begin thanks.

Thanks, and good morning can you just talk a little bit about where you stand on the re imaging for Chili's I know probably last year's past fiscal year it slowed down.

Are you in your state and if you think about re modeling going forward is the public plans change you've got virtual brands now versus 10 years ago you didn't.

Got a bigger off premise business or you're talking about how and how much and how you spend on remodeling differently now.

Yes.

Good morning, John.

We will backfill.

Full bore on <unk>.

Ray image size equation right now, we're actually focused very heavily in the Midwest, which was the acquisition we did.

Two years, that's probably are.

In most cases getting fuller re images because they had not necessarily then re imaged at the same level and pace that we had done the brand so a little more.

A higher spend in intensity there on those for images and you get a nice incremental lift out of that too when you. When you do a full re image.

We probably still have a couple of years to go two and a half years or so on the re image.

Program over time, when I think about the base re images so that side of those acquired restaurants that spend has come down.

As we've kind of perfected our thinking and understood.

The bank for the pipe really was is that you've seen.

A decrease in the in the individual spend on any given restaurants, but we're also looking.

Very specifically a lot of opportunities within the restaurant base, where can I do.

A more fulsome bar re image for instance, and things of that nature that.

It can really help to increase volumes with any one given restaurants that we have the general program and approach, but we're also trying to be very systematic and looking at great opportunities on individual restaurant basis, it's too, but that's a program that's going to continue for the next couple of years as we kind of move through that.

That process one thing we have done John this is wyman.

I think we've gotten really good at it as we remodel.

<unk>.

Thinking about future arm M expense and.

How do we how do we take these these re image investment dollars and help offset future.

R&M costs that we experienced so two examples one is the new offerings that we're putting on at Chili's.

They're they're metal that we're not going to be dealing with faded painting dawning that.

Become a challenge on a cycle and show up in your R&M expense. We are also excited about our <unk> re image program that will kick off here pretty soon and a lot of the dollars that go into that re image are going to make the building.

And the experience much better, but they're also going to take out some of the things.

That really drive up the cost to maintain that restaurant.

Changing finishes out changing some of the products out there that need to be changed out, but changing them out with a product that's a lot easier to maintain and and so those are some of the things we're doing as we kind of keep moving through and refreshing and keeping the brand relevant through time John.

John from an off premise standpoint, we haven't had to change our thinking too much within the re image.

Process based on that dynamic.

Broad as we've talked on previous calls before a new off premise system on how we move actually the food from line out to the cars into play.

It's production.

Capabilities and shelving and the technology that we're now using to manage the parking lot.

That house on that but we haven't had to make a lot of.

Structural physical changes to make that happen, our new restaurant design.

We have adjusted very slightly.

The increase.

The ability of the size and the ability to flow through through that side door.

Just open a brand new restaurant here in Dallas, just a week or so ago was in there last week.

And that dynamic really really works well and looks great.

You help off premise, so we're incorporating incorporating it where we can but the systems, we're putting in place to support that that line of business are probably more important in the physical space changes.

That chili's, we see a different level than in prior quarters dining rooms are open. So you probably got some higher alcohol sales is there anything else in mix. It's notable consumers are buying premium products. For example, should we think about this kind of mix dynamic playing out similarly over the next couple of quarters as you cycle the negative mix.

A year ago.

Yes, I think the biggest one John is just alcohol sales as dining rooms open. The biggest thing. We've seen is is just alcohol sales and we've been it's always been the case first you can't sell it in a lot of places.

And secondly beverage sales in general is what you pick up the biggest incremental mix benefit of getting dining rooms up and running.

And that's what helps to check average most.

Got it thank you.

John.

Thank you. Our next question today is coming from John <unk> at Jpmorgan.

Your line is live you may be.

Hey, guys. How are you happy national to heat a day I just got a notification.

There you go.

Literally it came during the conference call.

So.

That's on an <unk>.

Other opex normally.

A line item that has a lot of fixed cost including <unk>.

Marketing, which is I know, it's a percentage of sales, which is normally relatively steady but.

'twenty, one presumably was not a run rate year things like advertising and repair and maintenance, maybe insurance and some other cost items that came out.

Throughout at least the first half of the year. So the question is I mean, how do you think about that cost category as a percentage of sales, especially as your as.

As your comps improve then obviously I understand there is probably a lot of benefit in.

In the fourth quarter from the 14th week in that line as well. So just wanted to make sure that we're all on the same page.

For that cost category.

Yes, John.

Again, I think we will continue to.

Maintain the marketing strategy that we deployed really going on two years and a half years now so.

We're comfortable that we have enough marketing firepower built into the other opex.

As I think you know.

We really think about marketing in a different mine.

Mindset now where.

A lot of quote to your marketing expense is going to show up in your net comp line as we use that digital capability and that that one to one.

Contact with our loyalty guests.

Drive traffic also.

Continuous theres the leverage ability opportunity again.

When we think about margins and think about top line growth that that restaurant expense. Other opex as you referred to it is going to be a point of leverage because it does contain a lot of fixed costs within it. So I think there is a year over year opportunity to expand margins.

Generally, but specifically in that category too.

That's great. Thank you.

Thanks, Sean and add some fajitas John Thank you.

Our final question today is coming from Jeffrey Bernstein at Barclays. Your line is live you may begin.

Great. Thank you very much.

Two questions. The first one on the unit growth following up on the comments earlier.

Joe I think you mentioned opening 20 plus per year. Thank you.

Starting in the back half of this coming year. So just want to make sure I understand that correctly.

That is kind of your run rate assumption for the next few years would be 20 units plus and maybe if you can share any color in terms of whether by brand or U S versus international how we should think about this acceleration in unit growth to the north of 20 that you mentioned earlier.

Yes, and again the comments that relate to the chili's domestic side of the equation.

We have a pipeline already that starting taking to push north of 'twenty I would expect based on timing of <unk>.

Construction and actual opening that youll probably see.

Somewhere in the six to eight.

May be push towards nine in this fiscal year.

Cuz of the pause and in real estate and construction.

That's also probably going to be more of those in the back half of the year, so not as big of an impact.

22, but the pipeline then moves very quickly.

Towards that high teens, 20%.

Low twenty's, so youll start to see that in.

23 really come to realization.

And our intent is to continue to maintain and build that pipeline and that it is.

Say 20 to 25.

Range as we kind of go forward from here. So again, some nice organic growth and we will start flowing back into the into the system and it really was made possible just as we made the acquisition of the Midwest restaurants, and as we look at opportunities in these areas where franchisees just haven't developed as rapidly as is.

We have.

Just opens up.

Additional real estate opportunities for us that we're excited about getting into and as we've now started to open some of those restaurants in these markets.

Really pleasantly surprised by the reception of the brand is getting.

And we're excited and excited about getting more restaurants opened not only in Texas, where we have quite a few but.

But in other parts of the country.

Wyman.

Great Segue I felt like you were fading all of US in your prepared remarks, when you talked a couple of times about.

Much more convinced and sold on the company operated model.

Just wondering whether you could provide any color behind that I know you mentioned there are some scale benefits. When you go through issues like we've gone through is there any thought in terms of whether it means buying an existing U S. Franchisees I'm wondering whether there's a writer first refusal opportunities I know you currently have like a 15% plus mix of franchising.

Coupled with your commentary around maybe wanted to accelerate growth with franchisees might not want to I'm. Just wondering what your thoughts are in terms of that franchise mix U S or international.

Okay.

Jeff I think just looking at our history you can see obviously, we believe in the company owned model we've got.

The majority of our U S. Restaurants are company owned we have a couple of good franchise partner is still out there and we're obviously, having conversations with them in about what their future looks like.

And are they.

How excited are they about growing the brand and staying connected with all of the things we're doing.

My commentary on the ownership really has to do with this.

These investments we make in getting the scale leverage beyond just supply chain, because obviously can do that in a franchise system, but really across everything across technology across the positioning of the brand across the operating systems.

We're moving at a rapid pace you know you can start to do virtual brands and keeping everything in sync in a restaurant is hard to do even with good franchise partners I mean, theres a lot of moving parts to a casual dining restaurant and.

And so we do believe in that we're going to continue to look for opportunities.

And we will and we will have these conversations and we're excited about the potential.

Understood. Thank you very much.

Alright, Thanks, Jeff Good talking to you. Okay. I think we're all wrapped up Micah. Thank you everyone for joining us on the call have a wonderful day. Thanks, everyone.

Thank you ladies and gentlemen, this does conclude todays event you may.

Disconnect at this time and have a wonderful day. Thank you for your participation.