Q2 2022 Brinker International Inc Earnings Call

February 2, 2022

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Good day, ladies and gentlemen, and welcome to the Brinker International Q2 F. 'twenty two 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 VP of finance.

And Investor Relations Ma'am the floor is yours.

Thank you Kate and good morning, everyone welcome to the earnings call for Brinker International's second quarter of fiscal year 2022.

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

We released full results for the quarter earlier, this morning, which are available on our website at Brinker Dot com.

As usual Wyman and Joe will make prepared comments related to our operating performance and then we will open the call and jump straight to your questions.

Before beginning our comments it is my job to 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 1095, 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 London, Alright, Thanks, Mike and thank you all for joining US. This morning, I am pleased with Brinker second quarter performance and the progression throughout the quarter.

It was great to see the effects of the Delta spike dissipate or momentum comeback and flow through improve takeout and delivery remains strong in the mid thirty's or dining room demand was on the rise all our brands had impressive holiday results as guests got more comfortable coming together in groups, which helped us deliver a better than expected quarter with Pos.

<unk> sales of 17, 7% and adjusted EPS of <unk> 71.

These results demonstrate that with diminished COVID-19 interference our business model continues to perform well, particularly at volume.

Now, we along with the restaurant the rest of the restaurant industry are not without our headwinds obviously, there are cost pressures with inflation at the highest levels. We've seen in years we've responded.

With appropriate pricing actions and with our most recent price increase our menu prices now up over 4%.

We've been deliberate about taking incremental price increases throughout the year to ensure that with every step we protect our traffic advantage and we've done exactly that chili's continued its trend of beating the industry, marking the 16th consecutive quarter of traffic outperformance. This trend has continued into January despite beyond the current spike.

Our fundamental belief is that the key to a healthy sustainable growth is to have an increasing number of guests choosing us. So we will maintain a disciplined approach to determining the timing and amount of future pricing actions.

To ensure we deliver a great guest experience and continue to grow the base business. We're focused on making sure chili's is staffed with stable well trained teams and smooth operational systems. The staffing situation across the country has been the most unique I've seen in my career, but we're pleased with the hiring progress we've made.

We have more team members on a per restaurant basis today than we did pre COVID-19 .

Just last week when I was out in restaurants managers were saying that they where they used to see only two or three applicants for a job and now getting 10 or more.

So we're devoting increased time and attention on providing high quality training and improving retention for our new hourly team members and managers.

And with the added pressure that Covid has put on our operations team retention today is more is about more than just a paycheck. It's also about improving quality of life and creating a sense of belonging.

We found new ways to leverage our technology to accomplish these goals.

We're implementing a virtual learning platform that allows us to train both hourly team members and managers from the restaurant support center.

This is a live interactive experience that improves the speed quality and consistency of our training, while reducing costs and the burden on our restaurant managers.

With this system, we are experiencing a 20% retention improvement for new hourly team members.

For managers, we're also focused on increasing career progression and diversity. That's so important to our business, we're doubling down on leadership development programs for both new and tenured managers like our highly successful women take the lead program, we see much higher retention levels. Among those who are engaged in these programs.

Our rehire rates also demonstrate further evidence of the positive impact of these efforts historically the <unk> rate for managers, who for whatever reason chose to leave Chili's and then come back to US has been in the low to mid single digit range.

Today that rate is more than doubled and it's even higher at the hourly level, which speaks to the power of our culture and the strength of our business.

We know how crucial it is to support our teams with efficient effective systems that enable smooth operational execution improve the guest experience and strengthen our base business.

This is another area, where our technology expertise gives us a big advantage at Chili's. We recently completed the implementation of two major technology systems.

The first is our handheld system, which redefines, how we serve our guests with this system our servers cover more tables and earn more money. There are we're already seeing an average of 15% higher server earnings and significant improvements in guest metrics. We've been testing. This in restaurants for years now so we know the potential once it's fully up and running.

We're also capitalizing on the consumers increased demand to dine off premise with a new curbside system that provides a more seamless guest experience. The operators are getting comfortable with it now and restaurants that have fully adopted our generating 15% to 20 point improvements and guest metrics.

These efforts to strengthen our base set us up to accelerate additional growth vehicles, we've ramped up Chili's development plan and currently have in excess of 20, new full sized restaurants in the pipeline.

We're also testing small footprint off premise centric designs for densely populated markets that don't make sense for full size prototype.

We've opened our first urban kitchen in Manhattan, and offering both chili's and its just wings and I never thought I'd see the day when I would see at Chili's in Manhattan, but its been up and running for a month and we're encouraged by its early performance.

We plan to open two small footprint locations in trade areas adjacent to college campuses in the near future.

And virtual brands continue to be an important growth vehicle for us we remain fully committed to this strategy our size and scale are uniquely suited to grow through this vehicle.

<unk> continues to perform well and as of this week Marciano is Italian classics is up and running and over 700 restaurants, we're actively working to expand sales channels build brand awareness and accelerate to this part of our business.

Second quarter proved that when our business operates with minimal Covid impact guest demand is high and the model is strong we generated solid cash flow and good earnings.

As we continue to navigate the inflationary pressures and respond prudently for the long term health of our business.

You didn't know we're committed to keeping our business model strong and we still have growth ahead of us.

We see a lot of opportunity to leverage our scale, our ownership model to grow the brands in our portfolio and move the business forward and deliver a great return for our shareholders.

And this is only possible because of our amazing teams working tirelessly in the restaurants and in the support center.

I, thank each of them for their passion and commitment and now I'll turn the call over to Joe to give you more details on the quarter Joe.

Hey, Thanks, Wyman and good morning, everyone let.

Let me continue the overview of our second quarter by providing additional insight into our operating results as well as briefly touching on the initial post holiday operating environment as we move into the back half of our fiscal year.

For the second quarter of fiscal 2022, Brinker reported 71 of adjusted diluted earnings per share up from 35 in last year's second quarter Brinker.

<unk> total revenues were $926 million for the quarter and our comparable restaurant sales were positive 17, 7%.

For some context around this performance our sales trends improved steadily as we move through the quarter as guests resumed their routines with the waning of the Delta wave of Covid.

Restaurant staffing improved through the quarter and by the holidays, we experienced some of the highest level of dining room capacity recovery since the beginning of the fiscal year in July .

We ended the quarter on a high note with a strong December driven by the several weeks leading up to Christmas.

Utility is comparable restaurant sales were 12, 1% for the second quarter comp sales were negatively impacted approximately one 5% by Christmas shifting back into the quarter from Q3 prior year and close to half a percent from closing early on Christmas Eve.

We chose this year to invest back into the wellbeing of our teammates in the restaurants and sent them home at four o'clock to spend time with family and friends. This reaction reduced company sales by approximately $4 million.

Marciano reported net comp sales for the quarter of a positive 78, 1% a much improved performance resulted from a higher pace of dining room recovery and importantly improved banquet sales.

The team has also done a nice job maintaining their elevated carryout business, which appears to have stickiness in the mid 20% range, even as the other business channels improve.

Still recovery to go but the top line performance, coupled with an improved business model allowed <unk> to deliver an above expectations quarter, a nice step forward for the brand.

During the quarter Chili's inclusive of the virtual brands took several incremental price increases and exited the quarter carrying approximately 3% menu price compared to the prior year.

In addition, as Wyman mentioned, we've taken further pricing actions in January resulting in Chile is now carrying price of over 4% and <unk> is adding 5% price with their latest menu rollout.

We do anticipate maintaining price at these historically higher levels for the foreseeable future.

Brinker increased its consolidated restaurant operating margin to 11% in the second quarter versus 10, 7% a year ago.

We continue to be very encouraged in periods of low COVID-19 impact as it allows us to realize the power of the business model and the ability to leverage margins with more normalized top line performance.

Food and beverage costs were unfavorable 120 basis points, driven by commodity inflation parcel, partially offset by price.

Seeing stabilization in our supply chain and have a good line of sight into the balance of the fiscal year with a large majority of our contracts locked for the next six months, we're expecting high single digit inflation for the third and fourth quarter.

Labor for the quarter was favorable 60 basis points versus prior year.

Recruiting and training efforts saw good progress throughout the quarter and the higher sales volumes in the later part of the quarter worked to effectively leverage the fixed components of these costs.

Wage rates at the manager and hourly level remained elevated in the high single digits and we expect to see this trend continue as we work through the remainder of the fiscal year.

As the teams continue to stabilize outside of Covid spikes, we should make incremental progress in reducing costs, such as training and overtime utilization the crept into the system during times of higher turnover and lack of labor availability.

Restaurant expense was favorable 210 basis points year over year as the improved sales performance effectively leverage the fixed cost included in this category.

As we work to further build our sales channels, we should see this leverage dynamic continue and how balanced the inflationary aspects in other parts of ROM.

Our cash flow for the second quarter remains strong with cash from operating activities of $67 million and.

And EBITDA of $88 million.

Our total funded debt leverage was two six times and our lease adjusted leverage was three six times, both down slightly from the first quarter, but down significantly from prior year.

Let me finish my prepared comments with some perspective related to our January periods operating performance the closes today.

As has been widely reported the omicron variance spiked rapidly just after the Christmas holiday and played havoc throughout the industry with staffing and sales capacity, particularly with dining rooms, we have not been immune to that impact. After a challenging first couple of weeks, we have seen the spike dissipate in many markets and are seeing improvements.

And our sales week to week as team member exclusions come down almost as fast as they rose.

While it is good to see what appears to be a much quicker resolution of this COVID-19 wave. The January period will be a setback to our overall operating results. It's important that we quickly move back to a more normalized operating environment in order to meet our expectations for the fiscal year.

Taking a step back from the volatility in the current environment and looking past the veil of Covid, we remain confident in our ability to drive improved business results across our brands.

See good growth ahead, as we invest in our strategic initiatives open an increasing number of restaurants and leverage our technological advantages. We also remain very appreciative of our restaurant leaders and teams and the efforts they are making each and every day to deliver the results we simply report.

Now that my remarks are complete let's open the call for your questions Kate I'll turn it back over to you to moderate.

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 to join the queue. If you wish to leave the queue. You May press Star Q, We do ask that if you are listening via speakerphone. Please pick up your handset for opt on sound quality.

Again, if you have any questions today. Please press star one on your phone now.

Our first question today is coming from Dennis Geiger UBS. Your line is live you may begin.

Great Wyman and Joe Thanks for the insights really helpful. Just wondering Joe I guess following up on some of the comments you just made if you could speak a bit more to the full year. It sounds like youre talking about assuming the environment starts to normalize pretty quickly you can come to meet prior expectations for the full year, but I'm wondering.

If you could kind of unpack that and just speak a bit more to that in some of the moving pieces. There. Please.

Yes, Dennis good morning, Yeah, I think one of the keys that you just mentioned is normalized operating environment of course, our expectations for the year Dunning anticipate operating environment similar to the first.

So it really January the first part of January in particular with those kinds of spikes. So.

Let's assume that we're working our way through that.

I think again as we look at the various factors kind of driving the business.

Demand is there I mean and again our expectations around the willingness of the guests to interact with our brands in a variety of ways is playing out as we would expect the inflationary factors are also there to again I think we're comfortable.

With the perspective, we've given you on inflation.

We had anticipated a little bit higher inflation on the commodity side in the second half of the year and that line of sight still exists, which will kind of level us into that.

Mid upper mid single digit range by for the year. So I think generally speaking.

On the tracks that we were anticipated as we go.

Very helpful. Just a quick follow up Joe if I could just on the staffing it sounds like managing it.

Quite well considering the difficult environment any more color kind of on impact to sales in the quarter. I think you guys have touched on that in recent quarters, how that has been trending recently and kind of how much more staffing from from here. If you could kind of speak to that within those company stores. Thank you very much.

Hey, James It's Wyman so yes.

In the quarter second our second quarter.

We're still.

Kind of working through some of these staffing challenges both.

Finding team members and managers given some of the activity that we saw early in our fiscal year in the summer.

And then.

Late in the quarter. This omnicom spike really dealing with callouts and exclusions right. There were a lot of people that had gotten sick late in December the <unk>.

Good news, though is that on the hiring front as I mentioned in my remarks, we're seeing much better.

And we have more risk more team members in our restaurants today on an average than we had pre COVID-19 . So we're getting back to being fully staffed.

Now there are a couple of hotspots here and there.

PW team here, our HR group has done an amazing job supporting our restaurants in hotspots to really be aggressive in recruiting and hiring and that's turned out very well so we.

As Joe said as we look at the back half, we don't see as much.

Headwinds.

Due to staffing.

We're feeling pretty good about our ability to keep our restaurants up and running and open.

Full hours.

Keeping the dining rooms full so the big question really now is just what's what's COVID-19 going to do as we work through it and again, we're encouraged by how we've seen on the chrome kind of come.

Come down.

But we need that to continue.

But we're ready to do the business and the consumer seems very comfortable.

Coming to the restaurants, and if I could just tag on just a little bit to that why it's that staffing in particular.

The ability to bring dining rooms back up at higher capacity, because when we see our highest operating periods like a December .

It's when you are getting as I mentioned as dining rooms functioning back up to closer to normalized capacity. It's that's the opportunity that staffing brings that you don't have to throttle that important channel.

Our most important channel down as much.

Thanks, very much guys. Thanks James.

Thank you. Our next question today is coming from David Palmer at Evercore ISI. Your line is live.

Thanks.

And thanks, Joe for the commentary on the guidance or the fact that you didn't redo that now but perhaps.

Great things happen with Omicron in January that Youre, perhaps E E.

Into that guidance, a little bit I wonder if.

If you could talk about how much January was a setback.

Terms of sales and EBITDA for the year, it's almost like a onetime thing if we are getting past the worst of Covid.

We'll look at January is its own thing.

Could you talk about that and I have a follow up.

David I mean, the period is actually closing today, so I'm not going to get any to any details on a period that we really havent.

Closed the books on yet.

There was a meaningful impact, particularly.

And.

And those first couple of weeks. So one of the interesting things I will say too on that that quarter is.

We expanded our gap to the industry in that environment. So we started seeing that expansion grow.

The expanding of the gap really back in the latter part of the second quarter and we continue to maintain that growth in the gap as we worked through the last several weeks. So those are kinds of the lines of sight, we see.

But yes, it is not an environment.

It is an environment health is episodic and that December environment is going to be the one that is more analogous to the rest of the year. So that's.

That's part of.

Wanting to understand a little bit better where we go between those two two variations of a theme.

And the only thing I.

I would point to David you see the industry numbers. So you kind of know what's happened in the industry and as Joe said, we've outperformed the industry.

So omicron was definitely.

It had an impact on the industry through the back half of December and into January .

We fared better than the industry, but we were impacted.

Impacted as well and as Joe said, though we're very encouraged by how it's working its way out of the system in.

As you look kind of through the month.

And as you look at the second half of this fiscal year.

It looks like Youre going to have pricing, maybe a point and a half more pricing maybe you could give a sense of your food cost resets and maybe youre feeling of labor just things that are a little bit more permanent versus the January stuff, but things that are more permanent feeling things about the second half margin trend versus the first half.

And I'll stop there thanks.

Again from a from a margin perspective in this fiscal year again, we expect both of those components to to continue to run in that high single digit rate and again, we're seeing particularly inflationary environments and the cost of sales side of the equation pretty much lineup with our expectation we have good line.

A side of that through our contracting.

On the supply chain side of the equation so.

We understand what it is we have taken incremental pricing actions to help mitigate against that but I think that is again the area that there is a belief.

We'll have a downward cycle at some point not calling timeframe on that but we do still believe commodities are cyclical and whether or not it's the back half of this calendar or calendar year or getting into next fiscal year Theres, probably some relief on the absolutes of those.

The labor side of the equation is more structural and we and we.

We do anticipate that those inflationary rates.

That high single digits will moderate over time, but we're still working our way through the structural uptick that we've seen in labor again, the labor environment itself as we've seen more activity coming back into that market I think will help.

Stabilize that over time also.

Thank you.

Thanks, David.

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

Thank you.

Hey, Jeff.

It sounds like he got cut off there.

Jeff Your line is still live.

Okay, you might have to move on and we'll bring that back making what I hand, the call I'll keep going and we will get that Jeff back in.

No problem.

Our next question is coming from Jeffrey Bernstein at Barclays. Your line is live.

One just to go to another it's not.

Jeff it's another.

Sure.

Couple of questions. One just wondering if you can talk specifically about the restaurant margins.

For the second half of the fiscal year, obviously much improved this quarter versus lift do you think about the line items with the greatest volatility. It sounds like you have a pretty good line of sight into commodities and labor. So I'm just wondering.

Especially with the pricing now at north of 4% at Chili's.

What your outlook is specifically the second half and whether that price increase is seeing any consumer pushback or whether you see any elasticity issues. It sounds like you're really not seeing any but just trying to figure out how you would gauge that.

Hey, Jeff Yeah, Joe will talk to you about the specific margins, but I do want to talk a little bit about.

What I think is probably.

Not as clear and Thats the impact of these COVID-19 .

Episodes and spikes as we're calling them have on our mix and so the good news is we continue to drive traffic and beat the industry by not a small margin, but by double digit numbers on traffic, but it does shift from from more dine in to take out and Thats, a pretty significant check hit.

Obviously, the alcohol sales and the other things that don't happen as much when people dine out now we're happy to have the guests still engaged with us, but what we see and we saw in December we saw in July when Covid started get back these dining room numbers and the impact is significantly more than I think people understand.

And probably much more than other brands or companies you may follow in and so the margin story and the our ability to cover costs.

Get much better because of the check average goes significantly much more than the pricing impact that we tend to focus a lot on whether it's going to be a four 5% the bigger impact for us is when we shift out of dining room into to go because of Covid, we lose a lot of average check and Thats just out of our control when we start to see them come back.

<unk>.

All of our checks by channel so take out delivering are up over pre COVID-19 by double digits.

We're just not seeing all of that impact because of the mix shifts and as the mix kind of shift back we start to feel that in the margin pressure becomes a lot less now.

Wanted to share that because I do think sometimes that gets lost in the conversation about or you're taking 2% or 3% with much more of an impact on shift out of dining room to take out and then one another point in price is going to get us.

Yes, Jeff again, as we continue to move through the second half of the fiscal year, while January gives us a little bit of a.

Stefan the tow from from a performance standpoint, it to overcome I would expect to moving out of this environment that youll.

See the typical margin growth that you would in the back half of our fiscal years, we tend to obviously see progression in market and margins at the at the ROM level as we move through some of our higher volumes in Q3, and Q4 and I think that environment is very much still in place.

Obviously, the dynamics that impact ROM were actively evaluating an ongoing basis and as we think both said in our comments.

We will take further action, if we think it's necessary to continue to support.

That margin growth.

And just to your point.

The pricing we've taken so far it doesn't seem to have.

<unk> gotten a lot of pushback or do we think in this environment, that's pretty consistent but we also don't think that this environment is necessarily the environment, that's going to hold forever.

And we want to be very cautious about when consumer perceptions and the economy, maybe shift a little bit more that we have the value propositions in the in the quality of the brands from a value perspective.

Drive consumers or appeal to consumers in maybe a different and consumer environment.

May or may not come but typically they cycled back.

Understood and my follow up was just to clarify I know there was no mention of formal fiscal 'twenty two guidance in your prepared remarks.

But the fact that you gave very specific guidance last quarter for the full fiscal year I just wanted to clarify it sounds like labor and commodities are in line with what you were thinking but.

Is it otherwise the reiteration of the total revenue total EBITDA in total EPS for the full year, Similarly, second quarter, a little bit better and then.

January like you said stub your toe, but all in all those key line item metrics are still reiterated for full year fiscal 'twenty two.

Yes, Jeff again, we didnt speak to guidance.

Any updates or further information as it relates to what we gave you the last quarter or so as per our guidance as per our policy is that guidance is still there.

Great. Thanks very much.

Hi, Jeff.

Thank you. Our next question today is coming from James Rutherford At Stephens, Inc. Your line is <unk> you may begin.

Hey, Thank you and congrats on the quarter here I wanted to just circle back to the discussion of menu prices and consumer demand running over 4% menu pricing to date Chili's and clearly prices are going up across all of food service and food at home and I think you said, you're not seeing an impact on demand yet, but wyman what risk do you see that the low income consumer.

<unk> potentially gets incrementally pressured through the year and consumers simply simply shift at the margin from casual dining to either quick service or more at home consumption, just how would you respond.

If that occurs.

We control, we can control and what we can control is our value propositions and the quality of our brands and we we have one of the strongest value propositions in the industry in casual dining in and so we're more.

We've seen during Covid interestingly, the consumer kind of shift up in casual dining.

And so we think that probably the first thing they'll do is probably come back down a little bit.

So if you just think about.

The amount of state consumers of Eaton.

And Covid, it's kind of interesting and thats, usually a higher priced item, it's a higher check average concepts and we imagine there may be under pressure some drift back to maybe some of the lower end.

Check average concepts before they jump right and we do know that in tough times, it's not like.

Consumers they want to dine out during every recession recessionary periods, we've looked at it.

Always confirmed that consumers continue to want to dine out they want to they don't know how to cook that it's not like they've learned how to cook and Covid Theyre still wanting to go out or have their food brought to them and we just want to make sure that if things get a little tighter we have a really strong value proposition and that's why we're very cautious about how we price.

And making sure that our pricing actions don't.

Do damage to the overall value propositions that we offer for consumers, which is why we think we've been able to again beat the category for 16 consecutive quarters on traffic.

That's helpful perspective.

Second question is around unit growth and kind of the urban areas you mentioned.

Your efforts there, but some of the industry have chosen to partner with companies such as reef across these urban areas. It sounds like you are taking an approach of kind of if I understood correctly building your own sort of to go and delivery focused kitchens I'm. Just curious what your view is on the pros and cons of the different go to market strategies, there and how big you think the total opportunity.

Would you have for these smaller footprint stores. Thank you very much.

Yes, I think the.

We're trying to keep all of our options open in that regard in fact, the Manhattan location is a third party kitchen location that we have have space and so that's an option.

In certain circumstances in really dense urban markets that might make the most sense.

The options. We're looking right now that are there. The two units that were looking at that are <unk>.

College campuses, one here in Dallas and one in Columbus.

We are going to be in line, a little bit larger kind of more in that <unk>.

<unk> thousand 500 square foot.

That we would lease and manage so.

They all are kind of off premise centric in their approach, but I think theres different ways to approach different incremental markets and so we're making sure we understand all of those options. So.

It's not going to put a specific.

Metric out there yet as a target, but it's meaningful enough to spend a lot of time on it we think there is.

A number of different markets be they urban density they college campuses and respond extremely well to off premise.

Both to go and delivery there could be some fill in markets and other places that we have penetrated significantly on the suburban rings that we may go into so again, it's just opening up a fairly large addressable market by thinking a little bit differently and leaning into really that's one of the COVID-19 .

<unk> is that off premise is a bigger component of.

What we will do going forward. So we want to make sure we're taking full advantage of that consumer shift.

I will just add you know now having a portfolio with a couple of virtual brands in there allows us to leverage these spaces and.

When you read and study what's happening in this space a lot of times. It's just they're just not able to get enough velocity right, they're just not able to generate enough sales to cover it and this is where our portfolio has helped us and our ability to understand how to run this portfolio in a very tight kitchen environment, even in a chili's.

It translates very well into this into this world and so the team's working hard we will have a lot more information as we continue to get a couple of these things in the ground and up and running but we're encouraged.

It could be a meaningful growth vehicle for us in the future. Thanks.

Thanks very much.

Thank you.

Thank you. Our next question today is coming from Jeff Farmer at Gordon Haskett areas that he gave.

Great. Thank you hopefully you guys can hear me this time.

You got to Jeff Okay Awesome.

So touched on a little bit but in terms of I'm curious, how do exclusions work at Chili's, and what I mean by that.

That is.

When those employees are held out for protocols or for whatever reason.

Do they get paid and then you guys bring in a secondary employee to make up that shift.

How does that work when you actually do have exclusions with your employees.

Yes, Jeff well first.

<unk>.

Managers and hourly team members, getting COVID-19 and or being exposed to COVID-19 .

Been a very interesting process right over the last two years.

The exclusions of managers obviously.

Manager.

Get sick their salaries for the most part they're paid they are covered.

But it's very difficult if you have a manager or two of four managers come down with Covid. We don't have like managers laying around that we can just go in and replace them. So oftentimes that's when the restaurant.

Is without the leadership it needs to stay open.

Our full hours right. So we ended up having to throttle the business, what we call struggled the business down to adjust for the ability we have a leadership to run the restaurant.

With team members it's different.

Oftentimes, we don't know because their hourly and they may or may not.

Coming out of the schedule. They may just call out it's not as clear oftentimes, what what's going on with with hourly team members, but we are committed to supporting all of our team members through the Covid experience and we do everything we can and I think we do a great job.

Keeping them safe in the first place and then supporting them through this environment, but but it puts a lot of pressure on the restaurant both from a manager in an hourly perspective, because it happens.

Without any warning right you just get calling that says hey, I'm not coming in today and while you want to try and replace those.

Those shifts with other team members, it's not always easy to do.

Especially in the environment, we've been running it.

That's helpful. And then just one more unrelated some of your peers have discussed this over the last week, which is that.

Greater than expected supply chain pressures have added to some of their commodity inflation pressure.

Sounds like a lot of these supply chain.

<unk> seen some of the same staffing issues.

Production issues as well. So my question to you is and I apologize again, if you've already discussed this but.

On your supply chain.

Any headwinds there materialized to make your commodity.

Situation, a little bit more challenging than it already is.

Well I mean.

Again everyone's been impacted by Omnicom and.

I think the significant impact it had on the country in terms of people contracting COVID-19 in the late December January time period impacted anyone that was producing product.

Just like what we were just talking about our restaurant managers and our team members.

Getting <unk>.

And not being able to come in while that was happening in plants and production area. So there was some.

I'll call it wobble in the supply chain system.

But we managed it and the team again after almost two years of figuring out how to work through a COVID-19 environment I'm really proud of the work we've done and it hasn't had a dramatic.

Impact on our restaurants to this point, we've been very flexible in terms of being able to ship product and move it around we've got a good line of sight into how to keep our restaurants staffed or stocked up and supplied.

It doesn't mean, we don't have.

Issues that we're dealing with on a daily basis with all of our supplier partners throughout the country.

Whether they have delivery issues or getting supply to the to the centers, but a good job overall and I'll, let Joe talk to yes.

I think Jeff it, particularly as you think about where it is cost of sales go from here and we start thinking about particularly moving into next fiscal year and what the cyclicality and May look like.

The underlying inflation that all of us have been dealing with really for more than a year. Now there is a component of that and probably a fairly meaningful component that is coming out of those disruptions that you talk about.

Production cutbacks.

Staffing issues that you see within production within distribution all the different components.

Of the supply chain that is has fed fairly meaningfully that inflationary cycle.

So as that stabilizes, which again I think similar to we see stabilization continuing to work its way in and grow within the.

Our side of the equation I think we will see that on the supply chain side of the equation. So I think it's not.

Too far fetched to believe that that those inflationary drivers may start to dissipate again, I think its still several quarters out, but I don't anticipate still having that level.

Of underlying issues that they face.

As we move into the next fiscal year in particular, alright. Thank you for the thoughts. Thank you.

Jeff.

Thank you. Our next question today is coming from Andrew Johnson at BMO. Your line is live.

Great. Thank you and good morning, actually I wanted to start by following up on that point you were just making about.

Food inflation in food costs for next year, not looking for guidance certainly, but I'm just curious as you either starting to have those conversations or are going to start having those conversations.

What is your philosophy around locking in food costs for next year, our prices at a level that you're comfortable to do that would you want to see things change I'm, just curious where that figure.

Philosophy, and your willingness to do that at these levels.

Yes.

Andrew.

As soon as I started and I know that as soon as I start talking about next year that happened, but I think again philosophy is we don't our supply chain doesn't function on fiscal years and how they think about accessing markets.

And building contracts. So we already have contracting that is working out into next fiscal year chicken and in particular, so we're always evaluating the different flows or the market is getting a lot of input as to where the.

The folks that follow the commodity industry very actively think things are going.

There is a balance there it's almost almost sound like I'm going to talk about the fed, but theres a theres a dual responsibility we have with the supply chain to manage and provide price stability, but also make sure product is there.

And frankly over the course of the last year and I think for foreseeable.

Period of time that responsibility of product availability is is very critical and so again, you kind of balance those two as you go and thinking through your contracting.

But we're always layering on contracts in different pieces of the equation and in building forward said.

It's not contracts aren't run fiscal year to fiscal year, they're there.

On an ongoing basis, so hopefully that gives you a little more insight there.

Yeah, absolutely Andrew.

I would add is.

Again.

I'll just say my belief is.

Having been through a couple of these cycles with product specifically that there are some products that are.

That are at all time highs and they will come down and so.

Where we have typically been.

Looking to contract for a longer period of time.

We will not do that as much will play the market a little more.

There is some risk associated with that obviously more volatility, but but we don't think its prudent necessarily to lock in on these prices. There is really no historic support for them.

And we have a belief on a couple of specific products that we're going to right. We're going to ride the market a little probably more than we typically do and Thats just kind of what the market is giving to us.

Got it that's extremely helpful.

My other question I was hoping that you could dig in a little bit more on some of the December performance. It was really strong dining room demand weeks before the holidays that you talked about.

Presumably you're hopefully might look like what maybe a normal environment could look like at some point I guess I'm curious what the.

Chili's kind of off premise premise sales looked like at that point reasonably was there any was it pretty broad based or were there are there markets or regions that didn't participate as much any kind of learnings or insights from that period that informed your thinking going forward.

I think the best story.

Share with you and without getting too detailed into all of our performances is really the marciano stores.

What happened during the holidays it was very very encouraging so as.

The delta kind of.

Spike kind of dissipated what we saw.

<unk> was a real.

Willingness for.

Tumors and our guests to come back in large groups and the banquet business performed much better than we had anticipated.

Both.

The social side of that as well as the business side did better than we had thought and <unk> had a great December .

Really.

It kind of showed us that hey.

That's a brand that is even more impacted by COVID-19 because of the large party nature of the banquet side of that business.

So has that started to go away, we were very encouraged and it was pretty much across the country and so that's probably the best example, I mean again, we saw we've talked about the importance of getting dining rooms.

The dining room mix back open at Chili's, and we saw that as well, but the real bright spot in December .

From a future perspective, and a consumer.

Insight was kind of what we saw with marciano.

And I would just add that December .

Isn't an outlier again, if you go back and look at other it's really going back into last fiscal year. So if I go back into the.

To the spring and summer and looking through some of those periods. So you look at July and look at the periods that really have been nominal COVID-19 .

We see the exact same thing happening as the dining room, you don't have to throttle is about so dining room capacity comes back online. The demand is there you can meet that demand more aggressively.

And those dining rooms are the channel that's the engine that drives the entire.

An entire machine here so.

You really see the positive results coming from those kinds of environment. So it's very encouraging.

It's something we have a lot of confidence in going forward.

Great. Thank you very much.

Thanks, Dan Thank you.

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

Thanks, and good morning, I, just had a couple of questions on the quarter itself.

Some clarifications on the labor side Joe.

Joe on the last call you provided some good detail on the what you viewed as sort of transitory costs in that labor line I think it was over 100 basis points just to make sure we understand what in your labor line from that perspective could you give a little bit of a more color on those components over time training et cetera.

Yes, and again as I mentioned in our ability to improve within specifically within labor those are two areas that continue.

To be elevated.

I think youre looking at the opportunity probably to be in that.

75 basis point range between the two of them without having to get overly aggressive not just normalizing back to levels of typical training and levels of OTT again turnover rates are coming down. So you would expect over time that that's going to it's going to help on the training side of the equation, but it is still important.

<unk> debt.

Do we lean into making sure that we have the muscle memory and the capabilities in the restaurants, so we're not going to be bashful about.

Training.

Particularly to the effectiveness of our system. So I think that will overtime dissipate and I think again having.

More team members coming back into this into the system and having availability across all the different day parts and shifts will improve overtime.

They're still there.

Negatively impacting more than we'd like to see but we.

We have pretty good line of sight to how to how to work those off over time.

Alright, Thats helpful and just looking at that labor line in.

If you look at our cost per week basis, and I think we're up 4% on our math maybe versus pre COVID-19 trend in thinking about high single digit wage inflation. It would seem that hours per store might be down 4% to 5% is that generally in the ballpark.

And if so do you think thats sustainable or could you frame, where you think where current staffing levels. Currently are versus some target that you might have in mind for a post COVID-19 environment.

Hey, Brian It's Mike Hey, part of that element was even though wages were elevated with all the staffing issues. We had throughout the quarter. Sometimes you were probably more understaffing you want it to be so that dynamic is what is making it look lower but it will all kind of normalize over time and then we'll start work productivity.

We will stabilize and we will work out over time training.

Numbers back out so there's a lot of moving pieces in labor, yes, but okay.

It is the dynamic Brian that we've seen.

Experience that we've seen a lot of our competitors, where the peanuts look pretty good because they are not fully youre not running fully staff full operating restaurants.

And all of that margin stuff is good but there is nothing better than a restaurant and running at full capacity full volume and doing it with the sales and so.

So I know, it's hard sometimes to see the line of sight because it gets it gets a little blurry.

Because of these constraints, which are unique to this to this environment, we've never dealt with.

This in my <unk>.

Decades industry.

Youre throttling restaurants, I mean, you've always held the door, a little bit, but never where you're ceding half your dining room or are you're shutting off your <unk> system. Because you don't have the people in the again. The good news is those are becoming less and less of an issue as we get fully staffed and trained.

Alright Thats helpful color. Thanks, Brian one more for me just on G&A Joe.

Quite a bit lower than we would've expected here in the second quarter just color on the underlying dynamics. There is it timing or has there been a change to your annual guidance. I think you were looking for up $8 million to $12 million year on year is that still an expectation or has there been a change there.

Yes, I think we're still.

Running in that ballpark or investing in the G&A side, where we need to from an it perspective.

Obviously the percentage.

Has leverage ability in it and we saw a little bit of that this last quarter I think overall incentive comp is probably down a little bit relative to where it was.

In prior year.

Mixing matches were being very diligent and I think one of the things that comes with waves as you get less travel less meetings all of those kinds of things that flow into that G&A side of the equation, but I think.

I think that that growth in G&A is is still in line probably towards the lower end of it.

Okay.

Okay, Alright, and sorry, one last one in that other revenue line that franchise and other revenue line in this current quarter I noticed that jumped up pretty meaningfully and I. Just wanted to could you provide color on how much of that was related to the higher margin banquet fees or was there any impact of gift card breakage or some other one time.

Dynamic we should be aware of thank you.

It was really it was across a number of different areas and you hit on several.

The banquet revenue does flow into there so as we talked about banquet revenues coming back gift card revenues also up but but all of the things that you would expect to see us as dining rooms, reopen tabletop revenue the franchise revenue itself as you've seen particularly the international franchise.

Markets improve and put more sales on so it was across a number of those areas.

And the only very very few negative.

<unk> flowing through that that piece of the equation.

Alright, Thanks, I'll pass it along.

Okay.

Thank you.

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

Good morning can you please share with US average weekly sales for October and November .

In December and then validate I look back in the model and it looks like January and the current quarter would be a lesser.

Average weekly sales compare to that in March and so to the degree you're off in average weekly sales in January you have a whole lot of sales opportunity to make up in February and March is that right.

Well again, we don't typically get into the specifics, but yes.

Again, youre actually sales are going to get impacted meaningfully and spikes such as you saw so we would intend one February and March tend to be higher volume months in January anyways in a normalized environment.

On an average weekly side of the equation.

And I would expect.

Not only bounce back from from Covid, but to see that continue to play out as we kind of go forward.

Alright can you talk a little bit about the fleet from a suburban versus urban footprint like what percent is suburban what percent is urban and how did those areas compare to one another.

From a chili's perspective.

Yes, we have very nominal what I would consider urban.

Penetration is.

So you have some <unk> as it fit within more urban environments for downtown environments, and again <unk> had a nice quarter.

The chill.

Chile is really is a suburban ex urban smaller market.

Footprint. So again, when we think about the new initiatives, we may be looking to try and penetrate some of those markets, but generally speaking very little that I would consider to be true urban.

Nicole and I think if youre looking for some kind of regional play or for.

For us it's what we've talked about in the past I mean, it really is more COVID-19 , driven so, whereas COVID-19 , having a bigger impact so the Midwest.

More heavily impacted in and California is a little more heavily impacted and those are really the variations you are seeing in the business are much more COVID-19 driven and those are areas that are are more impacting now there are individual markets in all of our.

Every state that May have a restaurant that's in a trade area, that's maybe having staffing challenges where COVID-19 spike, but overall thats the big story there.

And the good news again is getting better across the board.

Yes, let me clarify.

That's a really good point I think that's helpful. I was also thinking like high level Tech Curbside systems, maybe help us understand like where are you in a mall where are your freestanding I'm not sure. If that's the right application, but where are you going to get your Bang for your Buck essentially on and some of the investments you're making on that side.

Does that even matter does it does it Matt does the format matter I guess you know it does thats a good point, but again I think to Joe's point. The two technology systems will just use the two we talked about today.

The handheld server model, obviously that works everywhere.

And then our to go system works in 90, I'd say, 99% of Chili's.

I was in a restaurant in Miami that happened to be in a mall in it it's not as easy in a mall parking lot because you don't have the dedicated spaces in some of the technology doesn't work as easily but that's a that's a rare rare instance.

Most of our restaurants are freestanding they have the structure.

And the curbside.

Take out system works perfectly well in all of them.

Thank you appreciate the feedback.

Thank you.

Thank you. Our next question today is coming from Jared Garber at Goldman Sachs. Your line is live.

Hi, Thanks for the thanks for the time and all the.

Good color. This morning, I wanted to ask on the unit growth side, we noticed that the company owned unit guide.

And now on the gross openings basis is now at four so just wanted to get a sense of maybe what's driving that is it is it is it timing related and maybe some of those those development plans just get pushed out into the first part of next year or just any color on that development cycle would be great.

Yes, Jared really excited about what the development team is doing there to developing a pipeline pipeline has now moved well north of.

20 units there is some timing when you look at that chart that does the fiscal year timing deal.

We've seen a few that were right at the end of fiscal year slip into the next fiscal year construction.

Construction.

It's taking a little bit longer in some respects, we're seeing some impact there nothing nothing material or something that gives me any pause but.

Im expecting 23 numbers to be very exciting I think will be definitely.

<unk> over 'twenty.

Units in the fiscal year, but continuing to maintain I'm more focused on maintaining a pipeline as we kind of move forward that is in that mid twenty's and they're delivering exactly along that line I am also.

Real excited about what we're seeing is we do open these new restaurants.

Not not huge numbers, so far this year, but the ones that are coming online.

With the prototypes are pretty exciting to see.

What can happen there and again they also have the ability now to more to incorporate more fully the technological advantages.

Moving and particularly the curbside to go side of the equation and really trying to make a few little adjustments here and there to more fully accommodate that what is now going to be.

That mid 30% of the business going out to the side doors, so lot of great things in.

Again, the development team and the design teams and and all the work that goes into that are doing a great job.

Starting to deliver what's going to be a good growth pipeline.

Thanks, That's really helpful. And then just one quick follow up on that you talked a little bit earlier about some of these newer concepts. So thats Your New York City location.

Some of these college campus.

Test that youre running.

The development plans I mean is there something we should be thinking about in terms of average weekly sales like a delta there versus as those as those units maybe sort of come into the fold and how those would play versus the base business that theyre coming in again.

Yes, what we've talked about so far from a pipeline standpoint really is the traditional corporate on Chile. So again, we have an updated.

As we as we understand more of these opportunities then we will get to that kind of kind of information, but everything right now is based on.

Current prototype chili's openings.

And we will test these other ones to be able to give you that type of perspective.

Great. Thanks for that I'll pass it along.

Thank you. Our next question today is coming from Chris <unk> at RBC capital markets. Your line is live.

Thanks, Good morning, Wyman you noted the consumer trading up during the pandemic and just following up on this from a value perspective can you share any further thoughts on guest utilization of your platforms like three for $10 99, and the meal for two and to what extent do you see any potential for incremental pricing actions.

On those platforms specifically.

Hey, Chris.

Well first with the first part I mean again it has been interesting to watch the dynamics in casual dining and throughout the industry both in fast food.

We study at all.

And.

I've been intrigued.

Why and I think sometimes with so much.

When when somebody is paying for your meal and with so much government support out there I think you tend to maybe buy up when it's not your dollars as much and so I think we've seen.

A consumer that's had a lot of cash and has decided that maybe they treat themselves a little more and so they bought up in the category.

It's going to be interesting to see what happens with some of this.

Moves out of the <unk>.

The system, a little bit and our expectation is we'll see some of this shift back into.

And the concepts that have a little lower check average and maybe a better value proposition like ours, and so we think thats upside going forward.

Throughout this whole pandemic and again hit a couple of times, but I'm really proud of what the team has done to grow traffic through this time period better than the category. So with that we know.

Reising puts pressure on traffic, we have been really strong with our traffic. So yeah, we probably have some additional pricing.

Power if you will in the in the in the menu, we're going to we can be very cautious about how we take.

<unk> actions as we move forward, we have priced our value platforms.

This year and so were watching them closely the mix to your point is holding solid we haven't seen a lot of shifting there and so we're still kind of.

And the guest comments and ratings on those platforms is held solid and so we continue to lean into those but we're also looking at new ways.

Two two.

To position our brand specifically chili's on value, but also marciano both.

<unk> specific day parts specific we're always looking at alternative ways to give the consumer a great value, but also maybe.

Pass price along.

With that.

Great.

Thanks for all that detail and then I guess just following up on Labor I think Joe you noted turnover rates are coming down.

But curious if you could expand on just turnover levels a bit more particularly in the first few months following hiring.

How does that turnover rate today compare to more recent levels and perhaps pre COVID-19 levels. Thanks again.

Yes, so it's been it's been a journey right. So pre COVID-19 levels from an hourly perspective.

Spiked dramatically into the spring and summer with everything Youre aware of they have come down fairly dramatically not back to pre COVID-19 levels.

We've seen this.

This higher level of turnover, both an hourly and manager early on in the process and that's why we talked about our new training platform, where we trained virtually.

This increase in turnover it put a lot of pressure on the managers to train a lot more new team members and so we're taking some of that off of them and what we've seen with turnover.

If theyre trained well and they're on board if you will into the brand well then they stay longer and they are actually stickier and they get through that first 30 60 days and so we're we're really focused on that retention, both with both groups and Thats why at the hourly level its about training.

And at the management level, it's about engaging them in and other activities like our women take the lead program that get some kind of bought into the brand and understanding.

What's great about this company.

If they stick around for a couple of months they get it and we have much better 10 year experience with our team members. So I hope that helps.

Yes. It does thanks, so much thanks, Chris Thank you.

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

A couple if I may 1st on the handhelds are they being used in 100%.

The store is 100% of the time I know you mentioned that.

So I think you mentioned the waitstaff was getting tips up 15% to 20% and there is increased customer satisfaction, but I just wanted to get an understanding of the current usage across the system and are you realizing or could you realize any margin benefit from that system going forward not just satisfaction.

Yeah, Hey, John So yes, the system after years of getting the technology, right and actually having to rebuild it and using our technology expertise to make sure. It is.

100% dependable in high volumes.

It's rolled out nationally in every restaurant has it every chili's has it and is now going through what I'll call. The learning curve, just getting used to how to run a different model, where your server stay out on the floor and you've got a runner component and the technology is communicating back and forth.

But it's out it's running and we're just getting proficient at it I'll say now we've had it in some restaurants for years, but that was.

10% or less of the system and now it's 100% of the system. There is some efficiency with it.

With that investment in capital and the level of efficiency and the payback. There is really kind of linked to the cost of those hourly team members, so in California, where youre paying a much higher wage rate, it's a significant number and in some other places it's not as much but it's just a better program and again one thing we know is.

When our team members are making more money, which we focus on that.

Extensively they stay longer so time back to the other question retention goes up when server earnings go up and.

Both of those things are happening.

Okay Alright.

So.

I guess to some extent, yes, you answered the question so getting proficient with it means in some cases that system is being used in some cases. The legacy system is being used in terms of taking orders or where would you kind of put us on the timeline I think Jonathan again, you've got service. We have service that have been working for us I actually.

When recognized the server that's been working for Chili's for 40 years.

So theres some muscle memory with how she takes it works right and we've given her a new piece of technology and so yes. They are just getting them up the curve and getting them trained on how to pad works and not not going back to the Pos terminal like they've done for in some cases decades.

Got to get that muscle memory locked in you got to get them to rely on runners in the technology to have the food come out so they stay on the floor.

Just a couple of things, but it's.

It is it is it is critically important for us to.

Get the system, we have great metrics by server by runner as to how they are using the system. So we know.

What usage rate each server.

Has.

And so were the operators are all over this and we're very excited about how quickly they've gotten to where they are today and we don't think it's going to be much longer than then will be kind of pretty much fully up to speed.

Okay. Thank you and the second question is on delivery could you talk about what that is as a percentage of sales this year versus last year, maybe growth or decline this year versus last year and whether you think you are.

Potentially reaching all addressable business based on your current relationships.

If that might change yeah, John I don't have the numbers in front of me I mean, what we know is as Mike it might happen, but what we know is when the when we get these.

Covid spikes, we see.

People shift from the dining room to take out and delivery and so in the second quarter, we saw some of that occur again.

But.

Is it is still very strong.

Our numbers on off premise, both takeout and delivery as I mentioned in my comments or still in the solid 30% range, even as we moved into December .

No.

We're happy with kind of our position if you will in.

In takeout and delivery and the but we do see opportunities to expand.

Kind of.

Where we are and we've already talked about the fact that we're no longer.

Exclusive we're going to be exclusive to just one third party distributor and so we're expanding channels and thats going to be.

That's going to be I think another growth vehicle for us and John at delivery continues to be in that mid teens. So again, some good stability there.

Anticipated kind of staying in that 15%, 16% is as we kind of move forward, yes. Most of the ship back into the dining room will probably come from takeout.

Because those are the guests that are more familiar with the location and don't have the delivery piece David.

And Marciano is the delivery piece has grown dramatically it continues to be a real real strong driver for them.

Got it thank you.

Thank you John .

Thank you. Our final question today is coming from Eric Gonzalez Keybanc. Your line is live you may begin.

Hey, Thanks for squeezing me in I'll, just ask one question.

Sounds virtual brands I was wondering how incremental the carryout channels. These concepts.

Maybe if you could touch on the overall contribution.

Comp growth from these brands, whether they are commenting about the system are generally holding constant mix of sales.

Hi, Eric.

With regard to the Incrementals of the brands I'm, sorry, I was just wondering if the virtual rins increments to the <unk>.

Overall, yeah, it's very highly incremental.

We know.

The virtual brands or Cigna.

Significantly incremental.

To the our sales story and again offer some really unique opportunities to two.

Explore some of these ideas that Joe was talking about with the urban and kind of smaller.

Takeout delivery centric prototypes.

And then year over year, we're going to work.

We're rolling out Marciano is attending class because there is no year over year, there were very happy with where we're at with its wings that business that continues to be strong and we will.

We'll keep you posted as we kind of get to the next level once we get the classics rolled out we start to expand some some.

Some channels of distribution kind of where we see this business moving and theyre maintaining.

Maintaining a pretty consistent.

Percent mix of total sales similar to what we've talked about in the past.

Again, the whole concept of throttling when you throttle a restaurant, which typically includes throttling your off premise system too.

Impacts not only the base brand, but also impacts virtual brands. So again getting out of that throttling environment is.

It is important across across all of the brands. So.

But again very.

Very positive encouraged on.

What these brands can contribute as we continue to move forward.

Has the Carryout channel been incremental or is it still too early to talk about.

It's incremental it's just small still we're still building trying to build that awareness levels.

And again the bulk of the business is still delivery and so we continue to.

Trying to drive awareness of takeout.

The bulk of the business is still.

Okay.

Okay, alright, well thank.

Thank you for the time, everyone, but I appreciate your questions and look forward to reconnecting with everyone. After our third quarter.

Great. Thank you everybody.

Bye bye.

Thank you ladies and gentlemen. This does concludes today's event you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation.

[music].

Finance and Investor Relations Ma'am the floor is yours.

Thank you Kate and good morning, everyone welcome to the earnings call for Brinker International's second quarter of fiscal year 2022 .

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

We released full results for the quarter earlier, this morning, which are available on our website at Brinker Dot com.

As usual Wyman and Joe will make prepared comments related to our operating performance and then we will open the call and jump straight to your questions.

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 Wyman alright, Thanks, Mike and thank you all for joining US. This morning, I am pleased with Brinker second quarter performance and the progression throughout the quarter.

It was great to see the effects of the Delta spike dissipate or momentum come back and flow through improve.

On delivery remained strong in the mid <unk> for dining room demand was on the rise all of our brands had impressive holiday results as guests got more comfortable coming together in groups, which helped us deliver a better than expected quarter with positive sales of 17, 7% and adjusted EPS of <unk> 71 cents. These.

<unk> demonstrated that with diminished COVID-19 interference our business model continues to perform well, particularly at volume now.

With appropriate pricing actions and with our most recent price increase our menu prices now up over 4%, we've been deliberate about taking incremental price increases throughout the year to ensure that with every step we protect our traffic advantage and we've done exactly that chili's continued its trend of beating the industry, marking the 16th.

<unk> consecutive quarter of traffic outperformance. This trend has continued into January despite beyond the current spike.

To ensure we deliver a great guest experience and continue to grow the base business. We're focused on making sure chili's is staffed with stable well trained teams and smooth operational systems.

Staffing situations across the country has been the most unique I've seen in my career, but we're pleased with the hiring progress we've made.

We have more team members on a per restaurant basis today than we did pre COVID-19 .

Just last week when I was out in restaurants managers were saying that where they used to see only two or three applicants for a job and now getting 10 or more.

So we're devoting increased time and attention on providing high quality training and improving retention for our new hourly team members and managers.

We found new ways to leverage our technology to accomplish these goals. We are implementing a virtual learning platform that allows us to train both hourly team members and managers from the restaurant support center.

This is a live interactive experience that improves the speed quality and consistency of our training, while reducing costs and the burden on our restaurant managers.

With this system, we're experiencing a 20% retention improvement for new hourly team members.

Our re higher rates also demonstrate further evidence of the positive impact of these efforts historically the <unk> rate for managers, who for whatever reason chose to leave Chili's and then come back to US has been in the low to mid single digit range.

Today that rate is more than doubled and it's even higher at the hourly level, which speaks to the power of our culture and the strength of our business.

We know how crucial it is to support our teams with efficient effective systems that enable smooth operational execution improve the guest experience and strengthen our base business.

This is another area, where our technology expertise gives us a big advantage at Chili's. We recently completed the implementation of two major technology systems.

The first is our handheld system, which redefines, how we serve our guests with this system our servers cover more tables and earn more money. There are we're already seen an average of 15% higher server earnings and significant improvements in guest metrics. We've been testing. This in restaurants for years now so we know the potential once it's fully up and running.

These efforts to strengthen our base set us up to accelerate additional growth vehicles, we've ramped up Chili's development plans and currently have in excess of 20, new full sized restaurants in the pipeline.

We're also testing small footprint off premise centric designs for densely populated markets that don't make sense for full sized prototypes.

And virtual brands continue to be an important growth vehicle for us we remain fully committed to this strategy our size and scale are uniquely suited to and it will grow through this vehicle. Its wings continues to perform well and as of this week Marciano Italian classics is up and running and over 700 restaurants.

We're actively working to expand sales channels build brand awareness and accelerate to this part of our business.

Second quarter prove that when our business operates with minimal Covid impact guest demand is high and the model is strong we generated solid cash flow and good earnings as.

As we continue to navigate the inflationary pressures and respond prudently for the long term health of our business.

Want you to know we're committed to keeping our business model strong and we still have growth ahead of us we see a lot of opportunity to leverage our scale our ownership model to grow the brands in our portfolio and move the business forward and deliver a great return for our shareholders.

And this is only possible because of our amazing teams working tirelessly in the restaurants and in the support center and I want to thank each of them for their passion and commitment and now I'll turn the call over to Joe to give you more details on the quarter Joe.

Hey, Thanks, Wyman and good morning, everyone let.

Let me continue the overview of our second quarter, while providing additional insight into our operating results as well as briefly touching on the initial post holiday operating environment as we move into the back half of our fiscal year.

In the second quarter of fiscal 2022, Brinker reported 71 of adjusted diluted earnings per share up from 35 in last year's second quarter Brinker.

<unk> total revenues were $926 million for the quarter and our comparable restaurant sales were positive 17, 7%.

For some context around this performance our sales trends improved steadily as we move through the quarter as guests resumed their routines with the waning of the Delta wave of Covid.

Restaurant staffing improved through the quarter and by the holidays, we experienced some of the highest level of dining room capacity recovery since the beginning of the fiscal year in July .

We ended the quarter on a high note with a strong December driven by the several weeks leading up to Christmas.

Chile is comparable restaurant sales were 12, 1% for the second quarter comp sales were negatively impacted approximately one 5% by Christmas shifting back into the quarter from Q3 prior year and close to half a percent from closing early on Christmas Eve.

Marciano is reported net comp sales for the quarter of a positive 78, 1% a much improved performance resulted from a higher pace of dining room recovery and importantly improved banquet sales.

The team has also done a nice job maintaining their elevated carryout business, which appears to have stickiness in the mid 20% range, even as the other business channels improve.

Still recovery to go but the top line performance, coupled with an improved business model allowed <unk> to deliver an above expectations quarter, a nice step forward for the brand.

During the quarter Chili's inclusive of the virtual brands took several incremental price increases and exited the quarter carrying approximately 3% menu price compared to the prior year.

In addition, as Wyman mentioned, we've taken further pricing actions in January resulting in Chile is now carrying price of over 4% and <unk> is adding 5% price with their latest menu rollout.

We do anticipate maintaining price at these historically higher levels for the foreseeable future.

Breaker increased its consolidated restaurant operating margin to 11% in the second quarter versus 10, 7% a year ago.

Food and beverage costs were unfavorable 120 basis points, driven by commodity inflation parcel it partially offset by price.

We're seeing stabilization in our supply chain and have a good line of sight into the balance of the fiscal year with a large majority of our contracts locked for the next six months, we're expecting high single digit inflation for the third and fourth quarter.

Labor for the quarter was unfavorable 60 basis points versus prior year.

Our recruiting and training efforts saw good progress throughout the quarter and the higher sales volumes in the later part of the quarter worked to effectively leverage the fixed components of these costs wage.

Wage rates at the manager and hourly level remained elevated in the high single digits and we expect to see this trend continue as we work through the remainder of the fiscal year.

As the teams continue to stabilize outside of Covid spikes, we should make incremental progress in reducing costs, such as training and overtime utilization that crept into the system during times of higher turnover and lack of labor availability.

Restaurant expense was favorable 210 basis points year over year as the improved sales performance effectively leverage the fixed cost included in this category.

As we work to further build our sales channels, we should see this leverage dynamic continue and how balanced the inflationary aspects in other parts of ROM.

Our cash flow for the second quarter remained strong with cash from operating activities of $67 million and EBITDA of $88 million. Our total funded debt leverage was two six times and our lease adjusted leverage was three six times, both down slightly from the first quarter, but down significantly.

From prior year.

Let me finish my prepared comments with some perspective related to our January periods operating performance the closest today.

As has been widely reported the omicron variance spiked to rapidly just after the Christmas holiday and played havoc throughout the industry with staffing and sales capacity, particularly with dining rooms, we have not been immune to that impact.

After a challenging first couple of weeks, we have seen the spike dissipate in many markets and are seeing improvements in our sales week to week as team member exclusions come down almost as fast as they rose.

While it is good to see what appears to be a much quicker resolution of this COVID-19 wave. The January period will be a setback to our overall operating results.

Accordingly, we quickly move back to a more normalized operating environment in order to meet our expectations for the fiscal year.

Taking a step back from the volatility in the current environment and looking past avail of Covid, we remain confident in our ability to drive improved business results across our brands. We see good growth ahead as we invest in our strategic initiatives opened an increasing number of restaurants and leverage our technological advantages.

We also remain very appreciative of our restaurant leaders and teams and the efforts they are making each and every day to deliver the results we simply report.

Now that my remarks are complete let's open the call for your questions Kate I'll turn it back over to you to moderate.

You asked that if you are listening via speakerphone. Please pick up your handset for opt on sound quality. Once again, if you have any questions. Today. Please press star one on your phone now.

Our first question today is coming from Dennis Geiger at UBS. Your line is live you may begin.

You could kind of unpack that and just speak a bit more to that in some of the moving pieces. There. Please.

Yes, Dennis and good morning, Yeah, I think one of the keys that you just mentioned is normalized operating environment of course, our expectations for the year don't anticipate operating environment similar to the first.

We have a really January the first part of January in particular with those kind of spike so, let's let's assume that we're working our way through that.

I think again as we look at the various factors kind of driving the business.

The demand is there I mean and again our expectations around the willingness of the guests to interact with the brands in a variety of ways is playing out as we would expect the inflationary factors are also there to again I think we're comfortable with.

With the perspective, we've given you on inflation.

We had anticipated a little bit higher inflation on the commodity side in the second half of the year and in that line of sight still exists, which will kind of level us into that.

Mid upper mid single digit range by for the year. So I think generally speaking.

On the tracks that we were anticipated as we go.

Very helpful. Just a quick follow up Joe if I could just on the staffing and it sounds like managing it.

Quite well considering the difficult environment any more color kind of on impact to sales in the quarter. I think you guys have touched on that in recent quarters. How that has has been trending recently and kind of how much more staffing from from here. If you could kind of speak to that within those company stores. Thank you very much.

Hey, Jeff Wyman so yes.

In the quarter second our second quarter, we were still kind.

Kind of working through some of these staffing challenges both.

Finding team members and managers given some of the activity that we saw early in our fiscal year in the summer.

And then.

Late in the quarter. This omnicom spike really dealing with call out some exclusions right. There are a lot of people that had gotten sick late in December the good news, though is that on the hiring front as I mentioned in my remarks, we're seeing much better pickup and we have more risk more team members in our restaurants today.

On an average than we had pre COVID-19 , so we're getting back to being fully staffed.

Now there are a couple of hotspots here and there.

PW team here, our HR group has done an amazing job supporting our restaurants in hotspots to really be aggressive in recruiting and hiring and that's turned out very well. So we as Joe said as we look at our back half we don't see as much.

Headwinds.

Due to staffing.

We're feeling pretty good about our ability to keep our restaurants up and running and open.

Full hours.

Keeping the dining rooms full so the big question really now is just you know, what's what's COVID-19 going to do as we work through it and again, we're encouraged by how we've seen on a trump kind of come down.

But we need that to continue.

But we're ready to do the business and the consumer seems very comfortable.

Coming to the restaurants, and if I could just tag on this a little bit to that why it's that staffing in particular.

The ability to bring dining rooms back up at higher capacity, because when we see our highest operating periods like a December .

When you are getting as I mentioned, there's dining rooms functioning back up to closer to a normalized capacity. It's that's the opportunity that staffing breakfast you don't have to throttle that important channel.

Our most important channel down as much.

Thanks, very much guys. Thanks James.

Thank you. Our next question today is coming from David Palmer at Evercore ISI. Your line is live.

Thanks.

And thanks, Joe for the commentary on the guidance or the fact that you didn't redo that now but perhaps.

Things happen with Omicron in January that you're perhaps eat.

Into that guidance, a little bit I wonder if.

If you could talk about how much January was a setback.

A sales and EBITDA for the year, it's almost like a onetime thing if we are getting past the worst of Covid. We will look at january's a is its own thing.

Could you talk about that and I have a follow up.

David I mean, the period is actually closing today, so I'm not going to get any to any details on a period that we really havent yet.

Close the books on yet so I mean it was.

There was a meaningful impact, particularly.

And.

And those first couple of weeks. So you know one of the interesting things I will say too on that that quarter is.

We expanded our gap to the industry in that environment. So we started seeing that expansion grow as the gap the expanding of the gap really back in the latter part of the second quarter and we continue to maintain that growth in the gap as we worked through the last several weeks. So those are kinds of the lines of sight, we see.

<unk>.

But yes, it is not an environment.

It is an environment health is episodic and that December environment is going to be the one that is more analogous to the rest of the year. So that's.

That's part of wanting to understand a little bit better where we go between those two two variations of a theme.

And the only thing I would point to David you see the industry numbers. So you kind of know what's happened in the industry and as Joe said, we've outperformed industry. So Amazon was definitely.

It had an impact on the industry through the back half of December and into January .

We fared better than the industry, but we were <unk>.

Impacted as well and as Joe said, though we're very encouraged by how it's working its way out of the system in.

As you look kind of through the month.

And as you look at the second half of this fiscal year.

It looks like Youre going to have pricing, maybe a point and a half more pricing maybe you could give a sense of your food cost resets and maybe you have to feel of labor just things that are a little bit more permanent versus the January stuff, but things that are more permanent feeling things about the second half margin trend versus the first half.

And I'll stop there thanks.

Pretty much lineup with our expectation we have good line of sight of that through our contracting.

And on the supply chain side of the equation so.

We understand what it is we have taken incremental pricing actions to help mitigate against that but I think that is again the area that there is a belief.

I'll have a downward cycle at some point not calling timeframe on that but we do still believe commodities are cyclical and whether or not it's the back half of this calendar or calendar year or getting into next fiscal year Theres, probably some relief on the absolutes of those.

The labor side of the equation is more structural and we and we.

We do anticipate that those inflationary rates.

That high single digits will moderate over time, but we're still working our way through the structural upticks that we've seen in labor again, the labor environment itself as we've seen more activity coming back into that market I think will help.

Stabilize that over time also.

Thank you.

Thanks, David.

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

Thank you.

Hey, Jeff.

We lose you it sounds like he got cut off there.

Jeff Your line is still live.

Okay, you might have to move on and we'll bring that back making what I had.

On our call I'll keep going and we'll get that back in <unk>.

No problem.

Our next question is coming from Jeffrey Bernstein at Barclays. Your line is live.

Jeff.

It's not one Geoff it's another.

Couple of questions. One just wondering if you can talk specifically about the restaurant margins.

For the second half of the fiscal year, obviously much improved this quarter versus lift when you think about the line items with the greatest volatility. It sounds like you have a pretty good line of sight into commodities and labor. So I'm just wondering.

Especially with the pricing now at north of 4% at Chili's.

Outlook is specifically the second half and whether that price increase is seeing any consumer pushback or whether you see any elasticity issues. It sounds like you are you really not seeing any but just trying to figure out how you would gauge that.

Hey, Jeff Yeah, Joe will talk to you about the specific margins, but I do want to talk a little bit about.

What I think is probably not.

Not as clear and Thats the impact of these COVID-19 .

<unk> had some spikes as we're calling them have on our mix and so the good news is we continue to drive traffic and beat the industry by not a small margin, but by double digit numbers on traffic, but it does shift from for more dine in to take out and Thats, a pretty significant check hit.

Probably much more than other brands or companies you may follow in and so the margin story and the our ability to cover costs.

Come back.

All of our checks by channel so take out delivering are up over pre COVID-19 .

Double digits.

We're just not seeing all of that impact because of the mix shifts and as the mix kind of shift back we start to feel that in the margin pressure becomes a lot less now, but I just wanted to share that because I do think sometimes that gets lost in the conversation about or you're taking 2% or 3% with much more of an impact on shift out of dining room into takeout and then one another point and.

Price is going to get us yes.

Yes, Jeff again, as we continue to move through the second half of the fiscal year, while January gives us a little bit of a.

Stefan the tow from from a performance standpoint to overcome I would expect to moving out of this environment that youll.

See the typical margin growth that you would in the back half of our fiscal year as we tend to obviously see progression in market and margins at the at the ROM level as we move through some of our higher volumes in Q3, and Q4 and I think that environment is very much still in place obviously the dynamics that <unk>.

Impact ROM were actively evaluating an ongoing basis and as we think both said in our comments.

We will take further action, if we think it's necessary to continue to support.

That margin growth.

And just to your point.

The pricing we've taken so far doesn't seem to have.

<unk> gotten a lot of pushback or do we think in this environment, that's pretty consistent but we also don't think that this environment is necessarily the environment, that's going to hold forever.

And we want to be very cautious about when consumer perceptions in the economy, maybe shift a little bit more that we have the value propositions in the in the quality of the brands from a value perspective.

Drive consumers or appeal to consumers in maybe a different and consumer environment.

May or may not come but typically they cycled back.

Understood and my follow up was just to clarify I know there was no mention of formal fiscal 'twenty two guidance in your prepared remarks.

But the fact that you gave very specific guidance.

Last quarter for the full fiscal year I, just wanted to clarify it sounds like labor and commodities are in line with what you were thinking but.

Is it otherwise the reiteration of the total revenue total EBITDA in total EPS for the full year, Similarly, second quarter, a little bit better and then.

January like you said stub your toe, but all in all those key line item metrics are still reiterated for full year fiscal 'twenty two.

Yes, Jeff again, we didnt speak to guidance.

Any updates or further information as it relates to what we gave you the last quarter so as per our guidance as per our policy here that that guidance is still there.

Great. Thanks very much.

Hi, Jeff.

Thank you. Our next question today is coming from James Rutherford At Stephens, Inc. Your line is <unk> you may begin.

If that occurs.

We control, we can control right and what we can control is our value propositions and the quality of our brands and we we have one of the strongest value propositions in the industry in casual dining in and so we're more than we've seen during COVID-19 .

Interestingly, the consumer kind of shift up in casual dining and so we think that probably the first thing they'll do is probably come back down a little bit and so if you just think about.

The amount of state consumers of Eaton.

Check average concepts before they jump right and we do know that in tough time does not like.

Consumers they want to dine out during every recession recessionary period, who looked at it.

And making sure that our pricing actions don't.

Do damage to the overall value propositions that we offer for consumers, which is why we think we've been able to again beat the category for 16 consecutive quarters on traffic.

That's a helpful perspective.

Second question is around unit growth and kind of the urban areas you mentioned.

Your efforts there, but some in the industry have chosen to partner with companies such as reef across these urban areas. It sounds like you are taking an approach of kind of if I understood correctly building your own sort of to go and delivery focused kitchens I'm. Just curious what your view is on the pros and cons of the different go to market strategies, there and how big you think the total opportunity.

Would you have for these smaller footprint stores. Thank you very much.

Yes, I think the.

We're trying to keep all of our options open in that regard in fact, the Manhattan location is a third party kitchen location that we have have space and so that's an option.

In certain circumstances in really dense urban market that might make the most sense.

The options. We're looking right now that are there. The two units that were looking at that are <unk>.

College campuses, one here in Dallas and one in Columbus.

We're going to be in line, a little bit larger kind of more in that <unk>.

<unk> thousand 500 square foot.

That we would lease.

Lease and manage so.

They all are kind of off premise centric in their approach, but I think theres different ways to approach different incremental markets and so we're making sure we understand all of those options.

It's not going to put a specific.

Metric out there yet as a target, but it's meaningful enough to spend a lot of time on it we think there is.

A number of different markets be they urban density they college campuses respond extremely well to off premise.

Both to go and delivery there could be some fill in markets and other places that we have penetrated significantly on the suburban rings that we may go into so again, it's just opening up a fairly large addressable market, but thinking a little bit differently and leaning into really that's one of the COVID-19 .

A ways is that off premise is a bigger component.

What we will do going forward. So we want to make sure we're taking full advantage of that consumer shift.

And I'll just add you know now having a portfolio with a couple of virtual brands in there allows us to leverage these spaces and when you when you read and study what's happening in this space a lot of times, it's just.

Not able to get enough velocity right, they're just not able to generate enough sales to cover it and this is where our portfolio has helped us and our ability to understand how to run this portfolio in a very tight kitchen environment, even in a chili's.

It could be a meaningful growth vehicle for us in the future.

Thanks very much.

<unk>.

Thank you. Our next question today is coming from Jeff Farmer at Gordon Haskett areas.

Great. Thank you hopefully you guys can hear me this time.

But you got to Jeff Okay Awesome.

So you touched on a little bit but in terms of I'm curious, how do exclusions work at Chili's and what I mean by.

That is.

When those employees are held out for protocols or for whatever reason.

Do they get paid and then you guys bring in a secondary employee to make up that shift.

How does that work when you actually do have exclusions with your employees.

Yes, Jeff well first.

Managers and hourly team members getting COVID-19 and or being exposed to COVID-19 has been a very interesting process right over the last two years.

The exclusions of managers, obviously, we you know when a manager.

Get sick their salaries for the most part they're paid they are covered.

But it's very difficult if you have a manager or two of four managers come down with Covid. We don't have like managers laying around that we can just go and replace them. So oftentimes that's when the restaurant.

Is without the leadership it needs to stay open.

All full hours right. So we end up having to throttle the business, what we call through all of the business down to adjust for the ability we have a leadership to run the restaurant.

With team members it's different.

Oftentimes, we don't know because their hourly and they may or may not.

Coming on the schedule. They may just call out it's not as clear oftentimes, what what's going on with with hourly team members, but we are committed to supporting all of our team members through the Covid experience and we do everything we can and I think we do a great job.

Without any warning right you just get calling that says hey.

I'm not coming in today, and while you want to try and replace those.

Those shifts with other team members, it's not always easy to do.

Especially in the environment, we've been running it.

That's helpful. And then just one more unrelated some of your peers have discussed this.

Over the last week, which is that.

Greater than expected.

Supply chain pressures have I've added to some of their commodity inflation pressure.

Sounds like a lot of these supply chain.

<unk> seen some of the same staffing issues.

Production issues as well. So my question to you is and I apologize again, if you've already discussed this but.

On your supply chain.

Any headwinds there materialized to make your commodity.

Situation, a little bit more challenging than it already is.

Well I mean.

Again everyone's been impacted by Omnicom and.

I think the significant impact it had on the country in terms of people contracting COVID-19 in the late December January time period impacted anyone that was producing product.

Just like what we were just talking about our restaurant managers and our team members.

Getting.

Covid and not being able to come in while that was happening in plants and production area. So there was some.

I'll call it wobble in the supply chain system.

But we've managed it and the team again after almost two years of figuring out how to work through a COVID-19 environment I'm really proud of the work we've done and it hasn't had a dramatic impact on our restaurants to this point, we've been very flexible in terms of being able to ship product and move it around we've got a good line of sight into how to keep our restaurants staff.

<unk> or stocked up and supplied.

Doesn't mean, we don't have.

Issues that we're dealing with on a daily basis with all of our supplier partners throughout the country.

Whether they have delivery issues or getting supply to that to the centers, but a good job overall.

Joe talked to.

Yes, I think Jeff it, particularly as you think about where does the cost of sales go from here and we start thinking about particularly moving into next fiscal year and what the cyclicality and May look like.

Production cutbacks.

Staffing issues that you see within production within distribution all the different components.

The supply chain that is has fed fairly meaningfully that inflationary cycle.

So as that stabilizes, which again I think similar to we see stabilization continuing to work its way in and grow within the.

Our side of the equation I think we'll see that on the supply chain side of the equation. So I think it is not.

Too far fetched to believe that that those inflationary drivers may start to dissipate again, I think its still several quarters out, but I don't anticipate still having that level.

Of underlying issues that they face.

As we move into the next fiscal year in particular, alright. Thank you for the thoughts. Thank you.

Yes.

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

Great. Thank you and good morning, actually I wanted to start by following up on that point you were just making about.

Food inflation in food costs for next year I'm not looking for guidance certainly, but I'm. Just curious as you either are starting to have those conversations or are going to start having those conversations.

What is your philosophy around locking in food costs for next year, our prices at a level that youre comfortable to do that would you want to see things change I'm just curious with it.

Our philosophy and your willingness to do that at these levels.

Yes.

Andrew.

As soon as I started and I know that as soon as I start talking about next year I'll have them, but I think again philosophy is we don't or some.

Apply chain doesn't function on fiscal years, and how they think about accessing markets.

There's a balance there it's almost almost sound like I'm going to talk about the fed, but theres a theres a dual responsibility we have with the supply chain to manage and provide price stability, but also make sure product is there and frankly over the course of the last year and I think for a foreseeable peer.

Period of time that responsibility of product availability is is very critical and so again, you kind of balance those two as you go and thinking through your contracting.

But we're always layering on contracts in different pieces of the equation and in building forward said, it's not contracts don't run fiscal year to fiscal year, they're there.

On an ongoing basis, so hopefully that gives you a little more insight there.

Yeah, absolutely Andrew.

One thing I would add is.

Again.

I'll just say my belief is having.

Having been through a couple of these cycles with products specifically that there are some products that are.

That are at all time highs and they will come down and so we.

Where we have typically been.

Looking to contract for a longer period of time.

We will not do that as much will play the market a little more.

And there is some risk associated with that obviously more volatility, but but we don't think its prudent necessarily to lock in on these prices. There is really no historic support for them.

Got it that's extremely helpful.

My other question I was hoping that you could dig in a little bit more on some of the December performance. It was really strong dining room demand weeks before the holidays that you talked about.

Presumably you are hopefully might look like what maybe a normal environment could look like at some point I guess I'm curious what the chili's kind of off premise premise sales looked like at that point regionally was there any was it pretty broad based or were there are there markets or regions that didn't participate as much any kind of learnings or insights from that period that inform that.

Youre thinking going forward.

I think the best story I think.

Share with you and without getting too detailed into all of our performances is really the marciano stores.

Or what happened during the holidays. It was very very encouraging so as.

The delta kind of <unk>.

<unk> kind of dissipated what we saw.

<unk> was a real.

Willingness for.

<unk> and our guests to come back in large groups and the banquet business performed much better than we had anticipated.

Both.

The social side of that as well as the business side did better than we had thought and Magellan has had a great December .

Really.

Kind of showed us that hey.

That's a brand that is even more impacted by COVID-19 because of the large party nature of the banquet side of that business.

And.

The dining room mix back open at Chili's, and we saw that as well, but the real bright spot in December .

From a future perspective, and a consumer.

Insight was kind of what we saw with marciano.

And I would just add that December .

Isn't an outlier again, if you go back and look at other it's really going back into last fiscal year. So if I go back into the.

To the spring and summer and looking through some of those periods. So you look at July and look at the periods and really have been nominal COVID-19 .

We see the exact same thing happening in the dining room, you don't have to throttle is about so dining room capacity comes back online. The demand is there you can meet that demand more aggressively.

And those dining rooms are the channel that's the engine that drives the entire.

And some time machine here so.

You really see the positive results coming from those kinds of environment, So very encouraging.

It's something we have a lot of confidence in going forward.

Great. Thank you very much.

Thanks, Andrew Thank you.

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

Thanks, and good morning, I, just had a couple of questions on the quarter itself.

Some clarifications on the labor side Joe.

Joe on the last call you provided some good detail on what you viewed as sort of transitory costs in that labor line I think it was over 100 basis points just to make sure we understand what's in your labor line from that perspective could you give a little bit of a more color on those components over time training et cetera.

Yes, and again as I mentioned in our ability to improve within specifically within labor those are two areas that continue.

And to be elevated.

I think youre looking at the opportunity probably to be in that.

75 basis point range between the two of them.

Without having to get overly aggressive and thats, just normalizing back to levels of typical training and levels of Ot again turnover rates are coming down. So you would expect over time that that's going to kind of help on the training side of the equation, but it is still important debt.

Do we lean into making sure that we have the muscle memory and the capabilities in the restaurants, so we're not going to be bashful about.

Training.

To the effectiveness of our systems. So I think that will overtime dissipate and I think again having.

More team members coming back into this into the system and having availability across all the different day parts and shifts will improve overtime.

They're still there.

Negatively impacting more than we'd like to see but we have pretty good line of sight to how to how to work those off over time.

Alright, that's helpful and just looking at that labor line in.

Hey, Brian It's Mike Hey, part of that element was even though wages were elevated with all the staffing issues. We had throughout the quarter. Sometimes you were probably more understaffing you wanted to be so that dynamic is what is making it look lower but it will all kind of normalize over time and then we'll start work productivity.

We will stabilize and we will work out the overtime training.

Members back out so there's a lot of moving pieces in labor, yes, but okay.

It is the dynamic Brian that we've seen we've experienced and we've seen a lot of our competitors, where the peanuts look pretty good because they are not fully youre not running fully staff full operating restaurants, and all of that margin stuff is good but there is nothing better than a restaurant and running at full capacity.

Full volume and doing it with the sales and.

So I know, it's hard sometimes to see the line of sight because it gets it gets a little blurry.

Because of these constraints, which are unique to this to this environment, we've never dealt with.

This in my <unk>.

Decades, Europe industry, where youre throttling restaurants, I mean, you've always held the door, a little bit, but never where you're ceding half your dining room or are you're shutting off your your to go system. Because you don't have the people in the again. The good news is those are becoming less and less of an issue as we get fully staffed and trained.

Alright Thats helpful color. Thanks behind it on one more from me just on G&A, Joe It was quite a bit lower than we would've expected here in the second quarter just color on the underlying dynamics. There is it timing or has there been a change to your annual guidance. I think you were looking for up $8 million to $12 million year on year is that still.

An expectation or has there been a change there.

No I think were still.

Running in that ballpark or investing in the G&A side, where we need to from an it perspective.

<unk> obviously.

Obviously the percentage.

Has leverage ability in it and we saw a little bit of that this last quarter I think overall incentive comp is probably down a little bit relative to where it was.

Prior year Thats, a lot of it mix and matches were being very diligent and I think one of the things that comes with waves as you get less travel less meetings all of those kinds of things that flow into that G&A side of the equation, but I think.

I think that that growth in G&A is is still in line probably towards the lower end of it.

Okay.

We should be aware of thank you.

It was really it was across a number of different areas and you hit on several.

The banquet revenue does flow into there so as we talked about banquet revenues coming back gift card revenues also up but but all of the things that you would expect to see us as dining rooms are open tabletop revenue the franchise revenue itself as you've seen particularly the international franchise.

Markets improve and put more sales on so it was across a number of those areas.

And the only very very few negative numbers flowing through that that piece of the equation.

Alright, Thanks, I'll pass it along.

Thank you.

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

Thank you. Good morning can you please share with US average weekly sales for October November and December and then validate I look back in the model and it looks like January and the current quarter would be a lesser average weekly sales compare to that in March and so to the degree you're off in average weekly sales in January .

You have a whole lot of sales opportunity to make up in February and March is that right.

Well again, we don't typically get into the specifics, but yes.

Again, your actual weekly sales are going to get impacted meaningfully and spikes such as you saw so we would intend one February and March tend to be higher volume months in January anyways in a normalized environment.

On an average weekly side of the equation.

And I would expect.

Not only bounce back from from Covid, but to see that continuing to play out as we kind of go forward.

Alright can you talk a little bit about the fleet from a suburban versus urban footprint like what percent of suburban what percent is urban and how did those areas compare to one another.

From a chili's perspective.

Yes, we have very nominal what I would consider urban.

Penetration is.

You have some <unk> as it sit within more urban environments more downtown environments, and again much out et cetera.

Nice quarter.

The <unk>.

Chile is really is a suburban ex urban smaller market.

Footprint. So again, when we think about the new initiatives, we may be looking to try and penetrate some of those markets, but generally speaking very little that I would consider to be true urban yeah, Nicole and I think if youre looking for some kind of region Ality play are for.

For us it's what we've talked about in the past I mean, it really is more COVID-19 , driven so, whereas COVID-19 , having a bigger impact so the Midwest.

Every state that May have a restaurant that's in a trade area, that's maybe having staffing challenges where COVID-19 spike, but overall thats the big story there.

The good news again is getting better across the board.

Yeah, let me clarify that.

A really good point I think that's helpful. I was also thinking like high level Tech Curbside systems, maybe help us understand like where are you in a mall where are you freestanding I'm not sure if that's the right application.

Where are you going to get your Bang for your Buck essentially on.

Some of the investments you're making on that side.

Does that even matter does it does it Matt does the format matter I guess you know it does thats a good point, but again I think to Joes point.

<unk> technology systems will just use the two we talked about today the.

The handheld server model, obviously that works everywhere.

And then our to go system works in 90, I would say 99% of Chili's.

Our restaurant in Miami that happened to be in a mall in it it's not as easy in a mall parking lot because you don't have the dedicated spaces in some of the technology doesn't work as easily but that's a that's a rare rare instance.

Most of our restaurants are freestanding they have the structure.

The curbside.

Takeout system works perfectly well in all of them.

Thank you I appreciate the feedback.

Thank you.

Thank you. Our next question today is coming from Jared Garber at Goldman Sachs. Your line is live.

Hi, Thanks for the thanks for the time and all the good.

Good color. This morning, I wanted to ask on the unit growth side, we noticed that the company owned unit guide.

What was it eight and now on a gross openings basis is now at four so just wanted to get a sense of maybe what's driving that is it is it is it timing related and maybe some of those those development plans just get pushed out into the first part of next year.

Any color on that development cycle would be great.

Yes, Jared and really excited about what the development team is doing there to developing a pipeline pipeline has now moved well north of.

20 units there is some timing when you look at that chart that does the fiscal year timing deal.

We've seen a few that were right at the end of fiscal year slip into the next fiscal year.

Construction.

It's taking a little bit longer in some respects, we're seeing some impact there nothing nothing material or something that gives me any pause but.

Im expecting 23 numbers to be very exciting I think will be.

Definitely over 'twenty.

Units in the fiscal year, but continuing to maintain I'm more focused on maintaining a pipeline as we kind of move forward that is in that mid twenties.

Delivering.

Along that line I am also.

Real excited about what we're seeing is we do open these new restaurants.

Not not huge numbers, so far this year, but the ones that are coming online with.

With the prototypes are pretty exciting to see.

What can happen there and again they also have the ability now to more to incorporate more fully the technological advantages.

Moving and particularly the curbside to go side of the equation and really trying to make a few little adjustments here and there to more fully accommodate that what is now going to be.

That mid 30% of the business going out to the side doors, So a lot of great things and.

Again, the development team and the design teams and all the work that goes into that are doing a great job.

Starting to deliver what's going to be a good growth pipeline.

Thanks, That's really helpful. And then just one quick follow up on that you talked a little bit earlier about some of these newer concepts. So thats Your New York City location.

Some of these college campus.

Test that youre running.

Yeah, well, we've talked about so far from a pipeline standpoint really is the traditional corporate on chili's. So again, we haven't updated.

As we as we understand more of these opportunities then we will get to that kind of kind of information, but everything right. Now is is based on.

Current prototype chili's openings.

And we will test these other ones to be able to give you that type of perspective.

Great. Thanks for that I'll pass it along.

Thank you. Our next question today is coming from Chris <unk> at RBC capital markets. Your line is live.

On those platforms specifically.

Hey, Chris.

Well first with the first part I mean again it has been interesting to watch the dynamics in casual dining and throughout the industry both in fast food.

We study at all.

And.

I've been intrigued.

Why and I think sometimes with so much.

When when somebody is paying for your meal and with so much government support out there I think you tend to maybe buy up when it's not your dollars as much and so I think we've seen.

A consumer that's had a lot of cash and has decided that maybe they treat themselves a little more and so they bought up in the category.

It's going to be interesting to see what happens is some of this.

Moves out of the system, a little bit and our expectation is that we'll see some of this shift back into.

And the concepts that have a little lower check average and maybe a better value proposition like ours, and so we think thats upside going forward.

That said throughout this whole pandemic and again hit a couple of times, but I'm really proud of what the team has done to grow traffic through this time period better than the category. So with that we know.

Pricing puts pressure on traffic, we have been really strong with our traffic. So yeah, we probably have some additional pricing.

However, if you will in the in the in the menu.

We can be very cautious about how we take.

Pricing actions as we move forward, we have priced our value platforms.

This year and so were watching them closely the mix to your point is holding solid we haven't seen a lot of shifting there and so we're still kind of.

And the guest comments and ratings on those platforms is held solid and so we continue to lean into those but we're also looking at new ways.

Two two.

To position our brands, specifically chili's on value, but also marciano both.

<unk> specific day parts specific we're always looking at alternative ways to give the consumer a great value, but also maybe.

Pass price along.

With that.

Great.

For all that detail and then I guess just following up on Labor I think Joe you noted turnover rates are coming down.

But curious if you could expand on just turnover levels a bit more particularly in the first few months following hiring.

How does that turnover rate today compare to more recent levels and perhaps pre COVID-19 levels. Thanks again.

Yeah. So it's been a it's been a journey right. So pre COVID-19 levels from an hourly perspective.

Spiked dramatically into the spring and summer with everything Youre aware of they have come down fairly dramatically not back to pre COVID-19 levels.

We've seen this.

This higher level of turnover, both an hourly and manager early on in the process and that's why we talked about our new training platform, where where we trained virtually.

This increase in turnover it put a lot of pressure on the managers to train a lot more new team members and so we're taking some of that off of them and what we've seen with turnover.

If theyre trained well and they're onboard it if you will into the brand.

Well, then they stay longer and they are actually stickier and they get through that first 30 60 days and so we're we're really focused on that retention, both with both groups and Thats why at the hourly level its about training.

And at the management level, it's about engaging them in and other activities like our women take the lead program that gets some kind of bought into the brand and understanding.

Whats great about this company.

Which if they stick around for a couple of months they get it and we have a much better 10 year experience with our team members. So I hope that helps.

Yes. It does thanks, so much thanks, Chris Thank you.

Thank you. Our next question today is coming from John <unk> at Jpmorgan. Your line is live you may begin hi.

A couple if I may 1st of all on the handhelds are they being used in 100% of the store is 100% of the time I know you mentioned that Lisa I think you mentioned the waitstaff was getting tips up 15% to 20% and there is increased customer satisfaction, but I just wanted to get an understanding of the current usage across the system and <unk>.

Are you realizing or could you realize any margin benefit from that system going forward not just satisfaction.

Yeah, Hey, John So yes, the system after years of getting the technology, right and actually having to rebuild it and using our technology expertise to make sure. It's.

100% dependable in high volumes.

It's rolled out nationally in every restaurant has it every chili's has it.

And is now going through what I'll call. The learning curve, just getting used to how to run a different model, where your server stay out on the floor and you've got a runner component and the technology is communicating back and forth.

But it's out it's running and we're just getting proficient at it I'll say now we've had it in some restaurants from for years, but that was.

10% or less of the system and now it's 100% of the system. There is some efficiency with it.

With that investment in capital and the level of efficiency and the payback is really kind of linked to the cost of those hourly team members Southern California, where you are paying a much higher wage rate, it's a significant number and in some other places it's not as much but it's just a better program and again one thing we know.

When our team members are making more money, which we focus on that.

<unk> they stay longer so time back to the other question retention goes up when server earnings go up.

Both of those things are happening.

Okay Alright.

So.

I guess to some extent you answered the question so getting proficient with it means in some cases that system is being used in some cases. The legacy system is being used in terms of taking orders or where would you kind of put us on the timeline I think John again, you've got served we have service that had been working for us I actually.

<unk> recognized the server that's been working for Chili's 40 years.

So theres some muscle memory with how she takes it works right and.

And we've given her a new piece of technology and so yes. They are just getting them up the curve and getting them trained on how to pad works and not not going back to the Pos terminal like they've done for in some cases decades.

Got to get that muscle memory locked in you got to get them to rely on runners in the technology to have the food come out so they stay on the floor.

Just a couple of things, but it's.

It is it is it is critically important for us to.

Get the system, we have great metrics by server by runner as to how they are using the system. So we know.

What usage rate each server.

Has.

And so were the operators are all over this and we're very excited about how quickly they've gotten to where they are today and we don't think it's going to be much longer than then it will be kind of pretty much fully up to speed.

Potentially reaching all addressable business based on your current relationships and if that might change, yes, John I don't have the numbers in front of me I mean, what we know is as.

Mike It might happen, but what we know is when the when we get these.

Covid spikes, we see.

People shift from the dining room to take out and delivery and so in the second quarter, we saw some of that occur again.

But.

Is it is still very strong.

Our numbers on off premise, both takeout and delivery as I mentioned in my comments or still in the solid 30% range, even as we moved into December .

No.

We're happy with kind of our position if you will in.

In takeout and delivery and the but we do see opportunities to expand.

Kind of.

Where we are and we've already talked about the fact that we're no longer.

Exclusive we're going to be exclusive to just one third party distributor and so we're expanding channels and thats going to be.

That's going to be I think another growth vehicle for us and John at delivery continues to be in that mid teens. So again, some good stability there.

Anticipated kind of staying in that 15%, 16% is as we kind of move forward, yes. Most of the ship back into the dining room will probably come from takeout.

Because those are the guests that are more familiar with the location and don't have the delivery piece, Devon and Marciano is the delivery piece has grown dramatically. It continues to be a real real strong driver for them.

Got it thank you.

Thank you John .

Yes.

Thank you. Our final question today is coming from Eric Gonzalez Keybanc. Your line is live you may begin.

Hey, Thanks for squeezing me in I'll, just ask one question.

It sounds virtual brands I was wondering how incremental the carryout channels into these concepts and then maybe if you could touch on the overall contribution.

Comp growth from these brands.

Whether they are commenting about the system are generally holding constant mix of sales.

Hi, Eric.

<unk>.

With regard to the Incrementals of the brands.

Sorry, I was just wondering with the.

The virtual Rins increments to the overall, yeah, it's very highly incremental.

We know.

The virtual brands are.

Significantly incremental.

To the our sales story.

And again offer some really unique opportunities to two.

To explore some of these ideas that Joe was talking about with the urban and kind of smaller.

Takeout delivery centric prototypes.

And then year over year.

We're rolling out Marciano is tank classic Theres no year over year, there were very happy with where we're at with its wings with business that continues to be strong and we will.

We will keep you posted as we kind of get to the next level. Once we get the classics rolled out we start to expand some some.

Some channels of distribution kind of where we see this business moving.

And they are maintaining a pretty consistent.

<unk> mix of total sales similar to what we've talked about in the past.

The whole concept of throttling when you throttle a restaurant, which typically includes throttling your off premise system too.

Impacts not only the base that brand, but also impacts virtual brands. So again getting out of that throttling environment is.

It is important across across all of the brands. So.

But again very.

Very positively encouraged on.

What these brands who can contribute as we continue to move forward.

Has the Carryout channel been incremental or is it still too early to talk about.

It's incremental it's just small still we're still building trying to build that awareness levels.

And again the bulk of the business is still delivery and so we continue to.

Trying to drive awareness of takeout.

The bulk of the business is still.

Okay.

Okay, Alright, well. Thank you for the time, everyone, but I appreciate your questions and look forward to reconnecting with everyone. After our third quarter.

Great. Thank you everybody.

Bye bye.

Thank you ladies and gentlemen. This does concludes today's event you may disconnect. Your lines at this time and have a wonderful day.

You for your participation.

Q2 2022 Brinker International Inc Earnings Call

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