Q3 2022 Brinker International Inc Earnings Call

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[music]. Thank you for holding we sincerely appreciate your patients stay on the line and we'll be back in a moment.

Yeah.

Good day, ladies and gentlemen, and welcome to the Brinker International Q3 F 'twenty.

This conference.

At this time, all participants have been placed on 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 Paul and good morning, everyone.

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

For the quarter were released earlier this morning and are available on our website at Brinker Dot com.

Wyman and Joe will first make prepared comments related to our operating performance and strategic initiatives. Then we will open the call for your questions before beginning our comments it's my.

The 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.

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. Thank you Mike and thank you all for joining US. This morning last time, we talked with you at the beginning of February we were just emerging from the omicron wave, which while thankfully with a short live stream had a whipsaw effect on January staffing and sales.

We got back on track quickly and generated positive progression in February and March Brinker ended the third quarter in a good position with an adjusted EPS of <unk> 92, which is up significantly from last year's <unk> 78.

Considering all the noise in the results and comparisons we believe average weekly sales, maybe a clearer guide to the growth of the business Chili's average weekly sales accelerated throughout the quarter with February and March reaching four year highs.

Now as consumers navigate the economic challenges that are starting to play out we're cautious but optimistic about where our top line.

At Chili's, we're encouraged by the shift we're seeing back into the dining rooms, which is driving higher check averages.

Premise remains at more than 200% over pre pandemic levels as we continue to grow the delivery business.

The same is true for <unk>, we feel really good about the changes we've made to the business model specifically the restructured value proposition for both dine in and off premise. The brand's off premise business is up 180% versus pre pandemic and data shows the brand's delivery businesses, attracting a highly incremental guest so as banquets.

Back <unk> is poised for some really good growth.

On the cost side, we're seeing labor pressure start to stabilize now that we've addressed our most critical staffing needs. We don't foresee as much inflationary pressure on wages going forward like we experienced in the last year.

Now we're focused on managing that piece of the business as effectively as we can as we work through training our new team members to run our operational systems and deliver a great guest experience.

It will come as no surprise there looking ahead, our biggest challenge as commodity inflation, we do believe the elevated costs, we're dealing with today won't stay at these levels permanently. So we'll continue to leverage our pricing strategy that isn't passive but isn't reckless either we've taken six pricing actions already this year to ensure consumer acceptance and protect our <unk>.

Long term traffic growth.

We've put a stake in the ground as an industry leader in value, which has been key to driving our avs and our guest frequency and as we move into a slower economic cycle. This becomes an increasingly important competitive advantage for us.

So to further mitigate the inflationary pressure, we're also actively pursuing ways to run a more efficient operation and.

In a few weeks, we'll rollout a new menu that reduces operational complexity restructured our value proposition for better margins as well as future pricing flexibility and takes additional price, which will get us close to 6%.

We're also achieving efficiency gains with our now fully implemented service model that leverages, both handheld and food runners with this model we're already seeing in front of the house labor hours at near record lows.

And servers are making more money than they've ever made which we know reduces turnover and the associated pressures on the P&L and those tenured team members deliver a better more consistent guest experience.

As we continue to manage these near term headwinds. We're also playing offense on a lot of fronts.

Really excited about how we're investing in the business and accelerating our timelines to aggressively grow the business longer term.

We're investing in our restaurant pipeline.

All the hard work, we've done to build the pipeline has come to fruition and now we start opening new chili's on a consistent basis and their response to the brand has been tremendous.

For example, our most recent opening just outside San Antonio did more than $100000 in sales during the first week, beating expectations.

All of our most recent new locations have.

Our operators are doing a great job, creating loyal guests in these communities by delivering great experiences from the very first visit.

As we move into next fiscal year, we have plans to open two to three new restaurants on average every month.

We're investing in our virtual brand business on two fronts first we're expanding our delivery business and existing markets with additional third party partners, which drives business across the whole portfolio and.

And second as I mentioned last quarter, we're taking our brands to previously untapped markets and expanding points of distribution around the country through ghost kitchens and smaller footprint locations.

We've seen our global partners embrace this as well so we're optimistic about the potential both domestically and internationally.

Now that we fully implemented our new technology based front of the House service model and take out systems. We're pivoting our innovation efforts to upgrade our kitchens for the first time in close to 10 years.

We're testing some exciting new equipment that makes our heart of the house team members' jobs easier delivers a better product is more efficient and more effectively support high volumes, we're moving quickly down that path so more on that to come.

And finally, we're taking the robotics technology, we've been experimenting with at the host stand for nearly three years now and incorporating it into our new service model. Our robot reader has been promoted to food runner.

Does a fantastic job and our guests lever we've expanded to an additional 50 restaurants, which is yet. Another example of how we're bringing our technology expertise to scale and better.

It's been nearly 40 years since Norman Brinker founded this company and remains today, a strong innovative organization with exciting growth potential and competitive advantages.

From our leading edge technology stack in the systems that enable us to run higher volume restaurants, the exceptional quality of this team.

Our operators are doing a great job managing through headwinds in our leadership team continues to navigate the most challenging business cycles.

Ever seen.

We have a clear grasp on what will grow this business in the near and longer term and I couldnt be prouder of the work the team is doing now.

Now I'll turn the call over to Joe to give you details on the quarter and update guidance for the year Joe.

Thank you Wyman and good morning, everyone.

The results reported this morning represented another quarter of top line progress for Brinker, but also one that is representative of the challenges still facing our industry for.

For the third quarter of fiscal 2022, Brinker reported total revenues of $980 million with consolidated one year comp sales are positive 13, 5%.

Our adjusted diluted EPS for the quarter was <unk> 92.

As mentioned during our last analyst call January was a particularly difficult month due to the omicron spike in meaningful weather events, both brands experienced a short term pullback in guest demand during the spike as well as staffing challenges during the month.

We estimate our consolidated EPS for the quarter was negatively impacted from these January issues by approximately 35.

Guest traffic and labor availability bounced back nicely with a positive progression in our performance as we move through the rest of the quarter.

For the quarter Chili's recorded positive one year comp sales of 10, 3%, which included two 1% of positive traffic.

John is one year comp sales were positive, 55% with 28, 9% positive traffic.

As we move through the two year lap at the beginning of the pandemic average weekly sales is a useful lens to the growth of the business.

Average weekly sales per restaurant at the consolidated <unk> level were $63000 for the third quarter.

Both brands average weekly sales accelerated throughout the quarter with chili's, averaging 62 $63000 in March.

John has also gained strength throughout the quarter as dining rooms further recovered and off premise sales remained strong the brand reached average weekly sales of $157000 for March.

For the third quarter Brinker recorded a year over year price increase of four 3%.

Both brands took pricing actions during the quarter with chili's exiting the quarter carrying four 6% of increased menu price. All marciano is exited with five 1% of additional menu price.

We anticipate further pricing actions in the fourth quarter with chili's approaching 6% year over year pricing in June .

Actions continue to be determined in the context of maintaining our sector leadership and guest value perception and our traffic focused strategy.

Now turning to margins.

Third quarter consolidated restaurant operating margin was 12, 2% and adjusted operating margin was five 7%.

Inflationary pressures throughout the P&L continued in the third quarter with incremental impact beyond our original expectation and numerate numerous areas.

In the quarter food and beverage costs were 180 basis points higher year over year, driven by commodity inflation of 11%, partially offset by menu price.

You have heard throughout this earnings season commodity markets are being incrementally impacted by world events of <unk>.

<unk> will maintain inflationary pressures longer than originally expected.

We continue to believe the commodity markets will eventually moderate as the environment changes likely as we move into calendar 'twenty three.

Labor expense again as a percent of company sales was unfavorable 100 basis points compared to prior year, primarily driven by wage rate increases of 10% and the lapping of onetime favorability in the prior year due to closed dining rooms and high wage rates states.

We also incurred elevated training and overtime costs of 60 to 70 basis points, which we expect to work out of the model that's turnover normalizes.

Restaurant expenses were favorable year over year by 110 basis points as we continue to leverage our fixed cost with an improved top line.

That being said this area was also impacted by inflationary pressures in particular areas, such as utilities and maintenance reducing year over year favorability by approximately 90 basis points.

Our cash flow for the third quarter remained strong.

<unk> has generated year to date operating cash flow of $212 million and year to date EBITDA of $255 million.

As Wyman mentioned, we continue to invest in the growth of our brands at an increasing level.

Capital expenditures year to date totaled $109 million driven by investments in new restaurant development technology and re images.

We expect our pace of investment to increase as we move more fully into the construction phase of our expanding development pipeline.

From a balance sheet perspective, our quarter ending total funded debt leverage was 241 times and our lease adjusted leverage was 348 times.

In addition, we've repurchased $26 million worth of shares during the quarter.

This morning's press release also updated certain aspects of our fiscal year guidance we.

We do expect both Chili's and <unk> is to continue their solid topline performance, assuming no further COVID-19 spikes or softening of consumer demand due to macro economic pressure.

Some specific updates we continue to expect annual total revenues to be in our previously guided range of $3 75 to $3 85 billion.

Due to the omicron Spike and continued elevated inflationary pressures our annual adjusted EPS is now expected to be in the range of $3 <unk> to $3 30.

Fiscal 'twenty, two capex should be in the $160 million to $165 million range.

Yes.

We welcomed the appearance that most of the U S is moving beyond the last two years, a pandemic driven environment. This next phase of recovery still has inflationary driven challenges to work through in the short run.

However, we remain confident that our strength with our guests the perception of good value from our brands and our ability to invest actively in improving operations will bring us through in a strong form.

And with our prepared comments complete let's open the call for questions until just about the top of the hour.

Paul I'm going to 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 at this time, we asked a lot of posing your question. Please pickup your handset of listing on speaker phone to provide optimum sound quality. Once again. Please press star one if you have a question at this time.

Please hold while we poll for questions.

And we did have a few questions come in the first question is coming from Alex Slagle. Alex. Your line is live please announce your affiliation and pose your question.

Hey, Thank you good morning, Jefferies just wanted to start on cost of goods, obviously lots of inflation in Colombia.

Will it be smart on pricing curious if you could discuss the opportunity to drive the dine in volumes back to.

Towards the 19 levels and what impact that has on cost of goods, just with the improved profitability dynamics and additional.

Beverages, and food attach and kind of wondering how material that is and then I guess, if you could expand on the other opportunities at the menu that you brought up in the prepared remarks.

Yes, I'll talk a little bit about.

The opportunity.

Alex and then.

Joe can fill in on some of the details on commodities I think well first off the margin differential between.

The various channels, both dine in and takeout from a margin perspective are pretty similar so we don't see.

We've made sure that in pricing like takeout.

And delivery that we maintained solid margins you are absolutely right, though when we get guests in the dining room and there are things like alcoholic check average really helps build a stronger check and we're seeing that business come back it will come back organically as I think more and more people feel more and more comfortable that.

The Covid situation is really behind US will we continue to see that we see opportunities from our perspective through some efficiency plays that we mentioned to help the throughput to create more opportunities to bring people in faster more efficiently both through our certain new service model as well as from some of the <unk>.

We're excited about testing here and on the kitchen side of the equation. So we're going to see both just the natural move back into the dining room, and then we're going to continue to Incent.

And change the business to encourage people to come in at a greater rate and that's an important part of the model, but we're comfortable with kind of how it's moving right now Joe you got anything to add to that Alex I would just say right now we're getting our dining rooms back into that mid 80% area, obviously, they've moved down meaningfully in January .

So for the quarter really for again that front and the impact of January it can't be overstated and I think there's definitely continue to see upside as again, just generally speaking I would say the country moving farther and farther past kind of that.

Significant pandemic.

Environment, there's about an eight a.

A little over $8 difference and your incremental guest in the dining room as opposed to the to go side of equation. So the leverage ability of that.

Guest is pretty important because it's not just about.

The cost of goods and there is there can be a little variance between the channels and what that mix looks like.

But the ability to leverage off that incremental check and as you said build that check from add ons alcohol sales and things of that nature that I think everybody is pretty familiar with.

Got it on the the average weekly sales metrics that you provided how much of those impacted by the recent franchise acquisitions I'm not sure.

Pat.

That's a good point the difference it makes.

It's a little different as Alex that's a good question.

Just basically the nature of the restaurants and some of the markets that we're in things of that nature. They come in at a slightly lower average volume so I think roughly.

Roughly.

1000.

Dollar impact between.

Those restaurants in the current fleet and again I think that we view that from a rationale of the acquisition is a great opportunity because I think the closer we can bring those those restaurants to average is going to be incremental to the to the performance.

The margins to I guess, yes without a doubt.

Got it thank you.

Thanks, Dave.

Thank you and the next question is coming from Jared Garber Jared. Your line is live please announce your affiliation and pose your question.

Alright, Thanks for the question Goldman Sachs.

Joe if I could just dig into the sort of the full year guide and what's implied for the fourth quarter. Obviously the top line. It seems like it remains pretty healthy and Thats kind of in line with what we've heard from others, but obviously the margins being pressured bye bye.

By some cost increase and can you just frame, maybe how youre thinking about that 6% price is that the guide for the fourth quarter here and then how are we thinking about sort of inflation metrics I think last time it was the.

The last time, we spoke maybe to the high single digit number in the second half but.

Third quarter actualized above that are you thinking or seeing that commodity inflation will be greater than that high single digit fourth quarter I'm, just trying to figure out kind of the puts and takes on the.

On the EPS line.

Yes, if you think about the construct of the re guidance. Obviously you have the impact of January and embedded in that and then and then frankly the rest of the Delta is related to the inflationary pressures, we're seeing because youre right at the top line.

Is really performing pretty much at the levels, we anticipated they would would perform so.

We do expect inflation and I think you were referencing the Cogs inflation in particular, but we do expect that to continue at that low mid 11% range. So we kind of gave you I think is very operative for the foreseeable future. So that is definitely factoring into the equation.

Great. Thanks, that's helpful. And then just one follow up on the pricing the 6% that you noticed.

Yes.

Thats the exit pricing so not to say again that that move as Wyman indicated it takes place in a couple of weeks. So it will have some impact in the.

But it's really the back end of the current quarter. So it is really going to be more.

Indicative of the price they will be carried heading into next fiscal year.

Okay, Great. That's really helpful. Thanks, so much thanks.

Thanks, Doug.

Yes.

Thank you and the next question is coming from Joshua long Joshua Your line is live please announce your affiliation and pose your question.

Great. Thank you Piper Sandler.

To follow up on the menu price piece as well.

And you can fix windows, thus far incremental.

Actions, thus far just curious what you've learned in terms of the gaps and where they're at I mean, the narrative. We're hearing is that.

In line with what Youre seeing to more frequent but smaller price increases there doesn't seem to be too much pushback, but just curious what you've experienced in.

How you think about reworking that value proposition as you mentioned in some of your prepared comments, obviously, you want to keep things balanced and you want to.

Provide some optionality for the guests, but just curious what you can share there.

It doesn't tip your hand too much before those new menu items come out.

Sure.

Well just like we said we know we understand the challenges with the inflationary pressure, we're seeing but we also understand the importance of getting your pricing strategy right and so we have chosen to be probably more thoughtful in terms of timing wise through this year about our pricing action we've tested them all.

Before we've taken them across the system.

To make sure that we were understanding the guest reaction and we've taken them across different channels, whether they be base business virtual brands delivery.

To make sure that the impact.

To the demand side of the equation.

Wasn't.

Two owners that we werent.

Jason way too many guests with these price increases and as you've said and as most people have said so far the consumer has been fairly receptive to these pricing actions, we do see in the.

<unk>.

Broader.

Industry data some concerns about consumers value ratings and how they are kind of reacting to we want to be cautious to that and always be looking at kind of their expectations and their perceptions of value as we think about our value propositions. We are restructuring those as we talked about that menu will come out here. Shortly it's been in test we feel good about the way we.

We've restructured our platforms.

Liver better margins, but also to deliver us more pricing flexibility across geographies and across the various menu items, especially as we're starting to see.

Commodity prices Cigna.

<unk> significantly different in various categories right and that's been one of the benefits of Chili's is we've got a very varied menu, we've been able to in the past kind of move around some of the cost issues that have affected product because they've been more.

Unique to whether its beef or chicken or.

And now.

It's a little harder to move around when everything is kind of moving up but we anticipate we'll see more of that going forward kind of more of the typical hey. This is the product thats going to be the most challenged and how do we move the mix around that and get our guests to kind of maybe shop, a little bit differently in our restaurants at a more favorable.

<unk> costs are.

Area of the menu. So that's where we're at we're excited about it but again, we're very cautious about how we move forward with price to make sure that our long term value proposition, especially at Chili's is.

Is intact, and especially as we look at the kind of a little bit of an uncertain future with regard to where the inflationary pressures are going to take the consumer we want to make sure we have that real strong value proposition for them to lean into.

That's very helpful. Thank you when we think about trend by day part or geography anything worth calling out there I know you've mentioned that as dining rooms would come back in the off premise has been holding in there as well, but just curious if we kind of.

Expand that conversation now to you the day of the week day part Regionalisation anything Thats worth.

Going out or that you sound interesting.

Well Theres a lot of things going on that are very interesting, Josh without giving too much away I will say there are some there are some geographical.

Not everyone's reacting the same as we kind of come out of a post COVID-19 environment.

You are still seeing more regional.

Variability than we typically had seen prior right.

In the past two to three point difference in sales trends was probably what you would you still seen some high single low teen numbers with regard to various geographical areas and their response to them to this now kind of what we'll call maybe a little bit of a post COVID-19 world. So we anticipate those things kind of settling out and we see upside to that because.

We are in some of those areas.

In fairly large numbers. So that's that's where we see some upside as those areas get a little.

Get a little more on their feet. If you will post go it has taken some of those a little bit longer.

Beyond that I think that's.

We like the portfolio for that reason, we're everywhere and.

And for the most part we balance off.

And balance out some of these kind of.

More challenged areas with the ones that are doing better.

Yes, Josh from a day part standpoint still staying pretty.

Pretty typical to what we've seen it's a two third one third dinner to launch I would note that.

You are probably seeing a little increased favorability on your weekend lunch side of the equation, which again I think it's reflective of more normal activities.

At a higher rate than we've seen a little bit lower early day lunch part, which probably is indicative of reopening.

Extend so.

Really kind of optic back to what we've typically seen in a pre COVID-19 <unk>.

Sure.

Very helpful and if I could squeeze one more in on the Cogs.

Visibility that you have running about 11% for the basket now I'm just curious.

Your commentary Wyman I mean is that.

Everything going up higher I mean, largely protein driven any sort of commentary you can provide there and then what type of visibility do you have or are we still in that environment. We're locking in pieces of the basket.

Necessarily it makes sense for the premiums you have to pay.

Yeah, I mean, Josh again, the big the big.

Drivers of our basket or really the proteins right. So.

Chicken beef.

And you're seeing more broad kind of movements in the whole chicken complex as well right. So what has historically been kind of our wings environment with volatility is now kind of move more into other more traditionally stable chicken products like breast meat and so thats just kind of out there right now.

Well again, we don't when we look at.

The commodities environment and you just do kind of some of the math on the costs that are going into the input side of this it doesn't really add up to these prices. So there's got to be inefficiencies as we all know in the distribution and the supply chain side that are being taken it into consideration. They are taking these prices higher than they would normally go up and.

And then frankly, just some opportunistic pricing going on and both of those things, we think will settle themselves out and bring us back to a more reasonable level in the not too distant future, although nobody knows exactly what that looks like.

So it is a little broader.

Cross those proteins and that's why it's a little harder to kind of move people around and we're a little more cautious about just pricing right for it because we do believe it will come back to a more reasonable level here in the not too distant future.

Great. Thank you.

Alright.

Thank you and the next question is coming from John <unk>. John Your line is live please announce your affiliation and pose your question.

Hey, John John There.

Your line is <unk>. Please go ahead, yeah sorry.

Sorry about that guys.

<unk> is on.

Capex New store development, I guess overall capital return and obviously, maybe not obviously I mean I asked this in the context of the stock price and the stock price declined today, I mean, I guess, how much does senior management and does the board.

Think about previous periods, where brinker has added a lot of value to shareholders.

Go back and I think about maybe it was kind of the 2008 and 2009 timeframe, where there was a significant reduction in capex, where capex was less in DNA.

We saw this enormous free cash flow yield capital return to shareholders and you basically focus all of your attention on improving returns at existing units are basically not.

Really growing new units at all so it's a philosophical question, but.

You've got you guys know how I think.

And I know, how you'd kind of responded in the past I mean, how do we kind of consider this current environment and again.

Stock is kind of an indication of hey, listen here. The type of returns that you can get in buying back your own equity.

Why doesn't significantly slowing down that capex and new unit.

Construction make more sense in the strategy in what is obviously still not great consumer environment, and a very bad cost environment and thank you for allowing me that long question.

Sure sure John I think it is.

It probably has more to do with your timelines John I think if we were talking about what would you do today.

Investing back in our stock at these prices, we think it's a great investment because we absolutely believe that these prices are too low.

Kind of understand what the markets reacting too in terms of this inflationary environment.

But when you think back.

You referenced back to 2008, we were opening 125 restaurants, a year in that timeframe. So when we talk about growing the portfolio.

From a traditional standpoint to 20 to 30, it's significantly lower capital spend that was going on prior to the time, you reference and we're doing both frankly and when we talk about the opportunity. We had back in 2010 through 2012 were really got much better at the operating.

Level and strengthen the business model, we see those opportunities now with the new handhelds and bringing technology to.

To bear with our new service model upfront and what we're excited about doing with our kitchens again, which is what we did 10 years ago that youre referencing investing those dollars into being more efficient.

In the in the heart of the house, helping our margin situation as well, there and helping us build sales and so I would just say as we think about how to help our investors.

Realized gains we believe it's a balanced approach.

But organic growth is key to that story and you've got to have an organic growth model.

That's what we're focused on is how do we balance that organic growth might we generate a lot of cash, but we want to have an organic growth story as well and so when we think about virtual brands and different distribution points to grow the business organically as well as all of the things we just talked about.

That's why we are trying to find that sweet spot there too.

To bring great cash returns.

Deliver back to the to the shareholder that way, but also find a good organic growth story. The one piece I'd add that to John as is.

When the period of time, you've referenced before we did it at a more leveraged basis too so again.

Balance is going to be important as we think about this going forward, but we want to do it at and we want to be able to invest in the business to grow organically and also return capital to shareholders, but at a lower leverage positions.

Position. So part of this is the transition Covid, obviously got it in a way and slowed that down.

Period of time, but.

Once we have rebalanced.

The debt levels back to.

Our targets.

That's really the tradeoff that.

Then you can start.

Directing more of those dollars back towards.

<unk> returned to shareholder standpoint, while still growing at a.

At a decent clip and investing in the business.

Yes, and certainly and I guess, maybe the question was whether whether it's the debt holders to equity holders, but there'll be not.

Not a new unit construction. So let me ask this question just as a.

Memory, maybe it's changed how much is the fiscal 'twenty three.

Capex guided how much of that Capex is would you consider to be fully non discretionary or network necessary. If you will.

So basically maintain or grow the cash flow in the business how much flexibility do you have that can't get that conversation were to happen in the future.

You do maintain a lot of good flexibility there John because when I think about maintenance expense and ongoing investment.

They're going to be in that $70 million to $80 million range and there is probably even a little variability in those numbers, but that's kind of what I consider to be that.

Keep the engine running and moving forward kind of capital spend.

That's great. Thanks for the patience guys.

Talking to John I Havent Coke.

Yes.

Thank you and the next question is coming from David Palmer.

David Your line is live please announce your affiliation and pose your question.

Thanks Evercore ISI.

I would imagine it might be too early to talk about fiscal 'twenty three restaurant margins in total, but youre going to be making some changes here in the near term in terms of the menu simplification. The price increases I would imagine also you got pretty good visibility on your costs.

Through the rest of this calendar year. So I'm wondering if you could talk about how youre thinking about restaurant margins sort of exiting fiscal 'twenty two into the first half of 'twenty three.

I guess im specifically.

Thinking you might be.

On pack path to doing 12% plus restaurant margins in the first half which might set the table for something closer to 13 for that next year, but.

I don't want to put numbers in your mouth here how are you thinking about margins.

Yes.

David I don't want to get into 'twenty three.

Discussion or forecast at that point, we will have a very robust discussion about that on the next call, but I think.

Again as you heard us comment on some of the drivers impacting current margins I think there's opportunity there we do believe commodity prices will moderate.

That can have a.

A meaningful impact to margins and I think we gave you kind of see that moderation starting in calendar 'twenty, three which again would be the back half of our next fiscal year or so.

But we also.

Again, as we continue to.

<unk> turnover and improved training.

Yes, there are dollars that are impacting in those areas.

60 to 70.

Basis points, a transitory costs I talked about.

We think we can start to win that out of.

The system, so again theres opportunities to continue to improve margins and I think.

I think we will do that over time I'm not going to put any specific number on the table today, but.

I think the progression of <unk>.

Topline growth too is going to help too I would expect you will see.

A discussion of continued top line growth for the brand as we move into next year and with that comes leverage ability opportunities.

And I guess optimistic on the on the direction, David Yes, No I hear that I guess I'm curious also about two.

Two things.

Service the customer experience today and service levels, you talked about labor hours in front of house being near all time lows, but we all heard stories about not just chili's, but everybody.

In this industry as kind of had some bad service scores from the consumer.

For obvious reasons, but I wonder how youre thinking about that.

Where you are versus pre COVID-19 and getting that serve that customer experience up and then and then I'm also curious if you've got $13 seven to $14 two margin that you've talked about as an intermediate target is that still a pretty good working intermediate target for margins and I'll pass it on.

Yes, so two questions. So let me just give you the service.

David as we see it so two components right. So first as we mentioned it was getting staff back up and so a lot of new team members in the system and in the industry right. I mean, we just had a big turnover. The good news is we have more team members in our restaurants today than we had pre pandemic. So we've got we've got the team.

We need to run the restaurants, but they are newer and they're not a trained as well and we've changed our system. Our service model and so we need to what we know is when that when that model is running well and running as it's as it's.

Kind of program to run service scores are outstanding.

Outstanding team members make a lot of money more money than they were making pre and experience is better it's faster. It's more personal so we're focused on getting to that state with all of our restaurants as quick as possible and we're just in that curve of training everybody up getting all of the leadership to understand the model right.

Now and get comfortable with it because it's a new service model for most of the system and then moving it to.

Throughout every team member that runs it so that's that additionally, as we talked about we will.

We see opportunities with the kitchen to get the kitchen side of it much more efficient and that that will speed service up that'll get one of the biggest challenges that you have in the restaurant industry, rather than hey, Where's my food and so as we can speed up the process in the kitchen, while delivering a better more consistent.

In product, we see another real win for the guests there as well as well as helping us put more.

Push more people through the dining room get them into the in and out of the restaurants in the timely fashion that they are looking for so so we see it.

Real nice bright future for both our team members and our guests with regard to the systems and the technology. We've got in play to kind of move toward first we've got to train and then we've got a rollout some kitchen stuff to even take it to the next level.

Hey, David in the second half of your question.

Getting into any specifics obviously a lot has changed since we talked about those numbers originally but again I remain optimistic in our ability to improve margins over time again these initiatives.

A line of sight to how that can happen I think again, we will continue to leverage our top line as we go forward. So.

I noticed you used the term intermediate.

<unk>.

Anybody can have a perception perspective on what that that means that.

I do envision as we kind of move out of this inflationary cycle on the Cogs side of the equation whenever that happens that you will see margin improvement out of the business.

Thank you.

Thanks, Dave.

Thank you once again, ladies and gentlemen, you can still enter the Q&A queue by pressing star one on your phone at any time the.

The next question is coming from Brett Levy Brent Your line is <unk>. Please announce your affiliation and pose your question. Thank you Brett Levy <unk> partners just.

Just building a little bit more often so for that question on the labor side as you think about your labor expectations. I know you said you don't expect much pressure on wages and you did talk about the 50 to 75 basis points of transitory.

Can you parse out a little bit more given everything thats going on competition for labor, how we should think about it from a cost perspective.

You said you had stable <unk>.

A solid head count, but how should we think about where you need to supplement that.

And just from a broader brush strokes what do you think you can do specifically to drive those gains and then just secondarily.

Secondarily you.

You talked about a 35% hit from January in your estimates was that already implied in the guidance from last quarter or is that new to this morning's guidance. Thanks.

I'll comment first on the 35 was not imply we didn't make any.

Guidance commentary really on on the last call. So.

And obviously, we have not even closed January at that time, So 30 fives.

<unk> and this guidance level.

We didn't count on it.

Not getting too into the model.

What we're seeing out in the marketplace is that obviously with the with all of the movement in the industry net.

A negatively last summer.

Spring and summer.

<unk>.

There was a lot of pressure on re staffing and with that.

Increase in demand.

A little bit of a challenging supply you saw people having to raise raise rates wage rates to recruit and we were in that situation as well.

As well as having to spend quite a bit of money just recruiting so advertising expense for recruitment is up significantly just getting these folks into the restaurants and the good news is especially over the last three months I mean, you've seen the employment numbers.

That just came out today that I saw showed almost 500000 jobs added in margin I think almost 100000 of those came from it.

We came into the hospitality area. So we're continuing as an industry to be staffed up and that takes the demand.

The supply and demand equation.

It balances that out a little more so we're not seeing as much pressure to have to.

Raise rates to just get folks in.

There is always going to be ledger.

Legislated pressured right so minimum wage increases are going to happen.

On their calendar.

But it looks like everything we can see that the demand supply pressures are easing and we're not going to see as much of that.

In the coming months as we have seen in the last 12, so thats really kind of how we see that.

Market place going forward.

Thank you.

Alright, Thanks, Brett.

Thank you and the next question is coming from Dennis Geiger Dennis Your line is live please announce your affiliation and pose your question.

Thank you it's UBS.

Just wondering if you could speak at all a little bit more to what Youre seeing very recently from a sales perspective, maybe in the quarter to date period at a high level just given the relatively dynamic environment that we're in right now and then I guess more importantly, Wyman you gave some helpful comments on the consumer broadly.

How youre thinking about the consumer relative to pricing et cetera, but just curious if you could comment on anything that you've seen to date from from your customers any changes in how they are using the menu.

That weakness from the lower income consumer.

Specific to your brand anything on virtual brands, where behaviors are changing just anything along those lines that you've observed to date. Thank you.

Hey, Dennis without getting too granular and into the quarter I mean, I would say in general we're seeing stability in the.

In the sales.

Experience through from the third quarter.

Back in February March we already talked about what happened in January omnicom, driven but since we've kind of been post COVID-19 major impact.

The trends have been holding and that's encouraging.

Solid.

Sales levels above pre pandemic.

At.

At both brands now.

And the.

The virtual brands are now Comping positive.

So we feel good about kind of that top line.

Situations, especially given we've taken a lot more pricing.

Taken in the last 20 years in a period of time shortens. This so we're.

We're watching it closely the trends seem to be holding its more about okay, where is the consumer going to go as you know.

As the economy tightens up and maybe with all of the strength on the balance sheets of consumers have and the continued great labor market.

They will work through this and there will be more opportunity to to price. If we have to price, but also as we see commodities.

Mitigate and move themselves down to more moderate levels will be where we need to be without having to price a whole lot more but we're very cautious about watching that I'd say anything on the menu side that we've seen with regard to shifts and behaviors have been more driven by us than by consumers we've pushed people.

In and out of the menu or move them shifted them more from a marketing perspective than they've kind of gone on their own and we do that we.

We do that quite often just to make sure that we've got them, where we think is the.

Best place for them to sit relative to the variety of our menu and the costs that we're dealing with.

I appreciate that and then one quick follow up on that if I may just as far as the look ahead.

If the consumer becomes particularly pressure that you're going that you've spoken to this some but just thinking about how you're positioned from a value perspective, you haven't taken much price in Reis.

Years, you've got some some really compelling.

Promotional offers.

As a staple to the menu of course, just anything more there on how resilient the brand will be on a relative basis may be where you take share from the category.

If the consumer comes under incremental pressure, if all that's fair and if you have anything else to add to that.

So I'm glad you asked the question I don't think it gets brought up enough in terms of market share of traffic.

So our firm belief is that.

That's probably the most critical measure of brand strength and success and we've taken market share of traffic in casual dining and continue to take even in this environment for the last four years and so when we think about the positioning of the brand, especially chili's.

It's it's a it's a beloved brand it's a ubiquitous brand.

And it just needs to be available for folks and obviously the business model has to work, but the business model works. So much better when there is more bodies in the restaurant and so we do trade off in the short term.

Maybe some potential sales that would come from pricing to ensure that we have the traffic that we know is critical to the success of running a busy restaurant.

Very difficult to run our restaurants successfully if you don't have a lot of bodies in it and so that's that's our positioning it holds up well against our value propositions and against the balance of both price and.

And other elements that come into building our value proposition, we think we're well positioned in a tougher economic environment for the consumer to embrace us and so were were.

We're making sure that that doesn't.

Get damaged as we kind of work our way into what could be.

Or difficult consumer environment.

Thanks Wyman.

Thanks.

Thank you ladies and gentlemen, this does.

Does conclude today's conference.

You may disconnect your lines at this time and have a wonderful day.

Thank you for your participation.

Thank you everybody.

[music].

[music].

Good day, ladies and gentlemen, and welcome to the Brinker International Q3 F 'twenty.

<unk> contract.

At this time, all participants have been placed on 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 Mika Ware VP of finance and Investor Relations Ma'am the floor is yours.

Thank you Paul and good morning, everyone.

With me on today's call are Wyman Roberts, Chief Chief Executive Officer, and President and Joe Taylor, Our Chief Financial Officer results for the quarter were released earlier. This morning and are available on our website at Brinker dotcom.

Wyman and Joe will first make prepared comments related to our operating performance and strategic initiatives. Then we will open the call for your questions before beginning our comments, it's 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 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. Thank you Mike and thank you all for joining US. This morning last time, we talked with you at the beginning of February we were just emerging from the omicron wave, which while thankfully with a short lived strain <unk>.

Whipsaw effect on January staffing and sales.

We got back on track quickly and generated positive progression in February and March Brinker ended the third quarter in a good position with an adjusted EPS of <unk> 92, which is up significantly from last year's <unk> 78.

Considering all of the noise in the results and comparisons we believe average weekly sales, maybe a clearer guide to the growth of the business Chili's average weekly sales accelerated throughout the quarter with February and March reaching four year highs.

Now as consumers navigate the economic challenges that are starting to play out we're cautious but optimistic about where our top line sales at Chili's. We are encouraged by the shift we're seeing back into the dining rooms, which is driving higher check averages off premise remains at more than 200% over pre pandemic levels as we continue to grow the delivery business and.

And the same is true for <unk>, we feel really good about the changes we've made to the business model specifically the restructured value proposition for both dine in and off premise. The brand's off premise business is up 180% versus pre pandemic and data shows the brand's delivery business is attracting a highly incremental guest so as banquets.

Come back Marciano is poised for some really good growth.

On the cost side, we're seeing labor pressures start to stabilize now that we've addressed our most critical staffing needs. We don't foresee as much inflationary pressure on wages going forward like we experienced in the last year.

Now we're focused on managing that piece of the business as effectively as we can as we work through training our new team members to run our operational systems and deliver a great guest experience.

It will come as no surprise there looking ahead, our biggest challenge as commodity inflation, we do believe the elevated costs, we're dealing with today won't stay at these levels permanently. So we will continue to leverage our pricing strategy that isn't passive but isn't reckless either we've taken six pricing actions already this year to ensure consumer acceptance and protect our long term.

Traffic growth.

We've put a stake in the ground as an industry leader in value, which has been key to driving our avs and our guest frequency and as we move into a slower economic cycle. This becomes an increasingly important competitive advantage for us.

So to further mitigate the inflationary pressure, we're also actively pursuing ways to run a more efficient operation.

In a few weeks, we'll rollout a new menu that reduces operational complexity restructured our value propositions for better margins as well as future pricing flexibility and takes additional price, which will get us close to 6%.

We're also achieving efficiency gains with our now fully implemented service model that leverages, both handheld and food runners with this model we're already seeing in front of the house labor hours at near record lows and servers are making more money than they've ever made which we know reduces turnover and the associated pressures on the P&L and those 10 year.

Team members deliver a better more consistent guest experience.

As we continue to manage these near term headwinds. We're also playing offense on a lot of fronts I'm really excited about how we're investing in the business and accelerating our timelines to aggressively grow the business longer term.

We're investing in our restaurant pipeline.

All the hard work, we've done to build the pipeline has come to fruition and now we start opening new chili's on a consistent basis and the response to the brand has been tremendous.

For example, our most recent opening just outside San Antonio did more than $100000 in sales during the first week, beating expectations.

All of our most recent new locations have.

Our operators are doing a great job, creating loyal guests in these communities by delivering great experiences from the very first visit.

As we move into next fiscal year, we have plans to open two to three new restaurants on average every month.

We're investing in our virtual brand business on two fronts first we're expanding our delivery business and existing markets with additional third party partners, which drives business across the whole portfolio and.

And second as I mentioned last quarter, we're taking our brands to previously untapped markets and expanding points of distribution around the country through ghost kitchens and smaller footprint locations.

We've seen our global partners embrace this as well so we're optimistic about the potential both domestically and internationally.

Now that we fully implemented our new technology based front of the House service model and take out systems. We're pivoting our innovation efforts to upgrade our kitchens for the first time in close to 10 years.

We're testing some exciting new equipment that makes our heart of the house team members' jobs easier delivers a better product is more efficient and more effectively support high volumes, we're moving quickly down that path so more on that to come.

And finally, we're taking the robotics technology, we've been experimenting with at the host stand for nearly three years now and incorporate it into our new service model. Our robot reader has been promoted to food runner.

Does a fantastic job and our guests lever we've expanded to an additional 50 restaurants, which is yet. Another example of how we're bringing our technology expertise to scale and Baird.

It's been nearly 40 years since Norman Brinker founded this company and remains today, a strong innovative organization with exciting growth potential and competitive advantages from our leading edge technology stack in the systems that enable us to run higher volume restaurants, the exceptional quality of this team.

Our operators are doing a great job managing through headwinds in our leadership team continues to navigate the most challenging business cycles, many of us have ever seen.

We have a clear grasp on what will grow this business in the near and longer term and I couldnt be prouder of the work the team is doing.

Now I'll turn the call over to Joe to give you details on the quarter and update guidance for the year Joe. Thank.

Thank you Wyman and good morning, everyone.

The results reported this morning represented another quarter of top line progress for Brinker, but also one that is representative of the challenges still facing our industry.

For the third quarter of fiscal 2022, Brinker reported total revenues of $980 million with consolidated one year comp sales are positive 13, 5%.

Our adjusted diluted EPS for the quarter was 92.

As mentioned during our last analyst call January was a particularly difficult month due to the omicron spike in meaningful weather events, both brands experienced a short term pullback in guest demand during the spike as well as staffing challenges during the month.

We estimate our consolidated EPS for the quarter was negatively impacted from these January issues by approximately 35.

Guest traffic and labor availability bounced back nicely with a positive progression in our performance as we move through the rest of the quarter.

For the quarter Chili's recorded positive one year comp sales of 10, 3%, which included two 1% of positive traffic.

John is one year comp sales were positive, 55% with 28, 9% positive traffic.

As we move through the two year lap at the beginning of the pandemic average weekly sales as a useful lens to the growth of the business.

Average weekly sales per restaurant at the consolidated breaker level were $63000 for the third quarter.

Both brands average weekly sales accelerated throughout the quarter with chili's, averaging 60 to $63000 in March.

John has also gained strength throughout the quarter as dining rooms further recovered and off premise sales remained strong the brand reached average weekly sales of $157000 for March.

For the third quarter Brinker recorded a year over year price increase of four 3%.

Both brands took pricing actions during the quarter with chili's exiting the quarter carrying four 6% of increased menu price. All marciano is exited with five 1% of additional menu price.

We anticipate further pricing actions in the fourth quarter with chili's approaching 6% year over year pricing in June or.

Our price actions continue to be determined in the context of maintaining our sector leadership and guest value perception and our traffic focused strategy.

Now turning to margins.

Third quarter consolidated restaurant operating margin was 12, 2% and adjusted operating margin was five 7% inflationary pressures throughout the P&L continued in the third quarter with incremental impact beyond our original expectation and numerate numerous areas.

In the quarter food and beverage costs were 180 basis points higher year over year, driven by commodity inflation of 11%, partially offset by menu price.

You have heard throughout this earnings season commodity markets are being incrementally impacted by world events.

Uhm that will maintain inflationary pressures longer than originally expected. We continue to believe the commodity markets will eventually moderate as the environment changes likely as we move into calendar 'twenty three.

Labor expense again as a percent of company sales was unfavorable 100 basis points compared to prior year, primarily driven by wage rate increases of 10% and the lapping of onetime favorability in the prior year due to closed dining rooms and high wage rates states.

We also incurred elevated training and overtime costs of 60 to 70 basis points, which we expect to work out of the model is turnover normalizes.

Restaurant expenses were favorable year over year by 110 basis points as we continue to leverage our fixed cost with an improved topline.

That being said this area was also impacted by inflationary pressures in particular areas, such as utilities and maintenance reducing year over year favorability by approximately 90 basis points.

Our cash flow for the third quarter remained strong.

<unk> has generated year to date operating cash flow of $212 million and year to date EBITDA of $255 million.

As Wyman mentioned, we continue to invest in the growth of our brands at an increasing level.

Capital expenditures year to date totaled $109 million driven by investments in new restaurant development technology and re images.

We expect our pace of investment to increase as we move more fully into the construction phase of our expanding development pipeline.

From a balance sheet perspective, our quarter ending total funded debt leverage was 2.41 times and our lease adjusted leverage was 348 times.

In addition, we repurchased $26 million worth of shares during the quarter.

This morning's press release also updated certain aspects of our fiscal year guidance we.

We do expect both Chili's and <unk> is to continue their solid topline performance, assuming no further COVID-19 spikes or softening of consumer demand due to macroeconomic pressure.

Some specific updates we continue to expect annual total revenues to be in our previously guided range of $3 75 to $3 85 billion due.

Due to the omicron Spike and continued elevated inflationary pressures our annual adjusted EPS is now expected to be in the range of $3 <unk> to $3 30.

Fiscal 'twenty, two capex should be in the $160 million to $165 million range.

We welcome the apparent that most of the U S is moving beyond the last two years, a pandemic driven environment. This next phase of recovery still has inflationary driven challenges to work through in the short run however.

However, we remain confident that our strength with our guests the perception of good value from our brands and our ability to invest actively in improving operations will bring us through in a strong form.

And with our prepared comments complete let's open the call for questions until just about the top of the hour.

Paul I'm going to 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 at this time, we asked a lot of posing your question you. Please pick up your handset if listing on speaker phone to provide optimum sound quality. Once again. Please press star one if you have a question at this time.

Please hold while we poll for questions.

And we did have a few questions come in the first question is coming from Alex Slagle. Alex. Your line is live please announce your affiliation and pose your question.

Hey, Thank you good morning, Jefferies just wanted to add to start on cost of goods, obviously lots of inflation in Colombia.

Will it be smart on pricing curious if you could discuss the opportunity to drive the dine in volumes back to.

Towards the 19 levels and what impact that has on cost of goods just with the improved profitability dynamics in additional.

Average is in food attach and just kind of wondering how material that is and then I guess, if you could expand on the other opportunities with the menu that you brought up in the prepared remarks.

Yeah, I'll talk a little bit about.

The opportunity.

Alex and then.

And Joe can fill in on some of the details on commodities I think well first off the margin differential between.

The various channels, both dine in and takeout from a margin perspective are pretty similar so we don't see.

We've made sure that in pricing like takeout.

And delivery that we maintained solid margins youre, absolutely right, though when we get guests in the dining room and there are things like alcoholic check average really helps build a stronger check and we're seeing that business come back it will come back organically as I think more and more people feel more and more comfortable that.

The Covid situation is really behind US we will we continue to see that we see opportunities from our perspective through some efficiency plays that we mentioned to help the throughput to create more opportunities to bring people in faster more efficiently both through our certain new service model as well as from some of the <unk>.

We're excited about testing here and on the kitchen side of the equation. So we're going to see both just the natural move back into the dining room, and then we're going to continue to Incent.

And change the business to encourage people to come in at a greater rate and that's an important part of the model, but we're comfortable with kind of how it's moving right now Joe you got anything to add to that Alex I would just say right now we're getting our dining rooms back into that mid 80% area. Obviously, they move down meaningfully in January .

So for the quarter really for again that front and the impact of January it can't be overstated and I think there's definitely continue to see upside as again, just generally speaking I would say the country moving farther and farther past kind of that.

Significant pandemic.

Environment, there's about an eight.

A little over $8 difference and your incremental guest in the dining room as opposed to the to go side of the equation. So the leverage ability of that.

That guest is pretty important because it's not just about.

The cost of goods and there is there can be a little variance between the channels and what that mix looks like.

But the ability to leverage off that incremental check and as you said build that check from add ons alcohol sales and things of that nature that I think everybody is pretty familiar with.

Got it on the the average weekly sales metrics that you provided how much of those impacted by the recent franchise acquisitions I'm not sure.

That.

It's a good point of difference.

It's a little different so Alex that's a good question.

Just basically that nature of the restaurants and some of the markets that we're in things of that nature. They come in at a slightly lower average volumes. So I think roughly probably 1000.

And dollar impact between.

Those restaurants in the current fleet and again I think that we view that from a rationale of the acquisition is a great opportunity because I think the closer we can bring those those restaurants to average is going to be incremental to the to the performance.

The margins to I guess, yes without a doubt.

Got it thank you.

Thanks, Adam.

Thank you. The next question is coming from Jared Garber Jared Your line is <unk>. Please announce your affiliation and pose your question.

Alright, Thanks for the question Goldman Sachs Joe.

If I could just dig into the sort of the full year guide and what's implied for the fourth quarter. Obviously the top line. It seems like it remains pretty healthy and Thats kind of in line with what we've heard from others, but obviously the margins being pressured by.

By some cost increase and can you just frame, maybe how youre thinking about that 6% price is that the guide for the fourth quarter here and then how are we thinking about sort of the inflation metrics I think last time. It was the last time, we spoke maybe to the high single digit number in the second half but.

Third quarter actualized, the bump that are you thinking or seeing that commodity inflation will be greater than that high single digit in the fourth quarter I'm just trying to figure out kind of the puts and takes on.

On the EPS line.

If you think about the construct of the re guidance. Obviously you have the impact of January and embedded in that and then and then frankly the rest of the Delta is related to the inflationary pressures, we're seeing because youre right at the top line.

<unk> is really performing pretty much at the levels, we anticipated they would would perform so.

We do expect inflation and I think you were referencing the Cogs inflation in particular, but we do expect that to continue at that low.

That 11% range. So we kind of gave you I think is very operative for the foreseeable future. So that is definitely factoring into the equation.

Great. Thanks, that's helpful. And then just one follow up on the pricing the 6% that you noticed.

Yes.

Thats, the exit pricing and I'd say again that that move as Wyman indicated it takes place in a couple of weeks. So it will have some impact in the.

But it's really the back end of the current quarter. So it's really going to be more in.

Indicative of the price they will be carried heading into next fiscal year.

Okay, Great. That's really helpful. Thanks, so much thanks.

Thanks, Ed.

Thank you and the next question is coming from Joshua long Joshua Your line is <unk>. Please announce your affiliation and pose your question.

Great. Thank you Piper Sandler wanted to follow up on the menu price piece as well I think you'd mentioned that you can fix windows.

As far as incremental pricing.

Pricing actions, thus far just curious what you've learned in terms of the gaps and where they're at I mean, the narrative. We're hearing is that.

In line with what Youre seeing to your more frequent but smaller price increases there doesn't seem to be too much pushback, but just curious what you've experienced and how you think about reworking that value proposition as you mentioned in some of your prepared comments, obviously, you want to keep things balanced and you want to.

Provide some optionality for the guests, but just curious what you can share there.

Yeah, It doesn't tip your hand too much before those new menu items come out.

Sure sure.

Well just like we said we know we understand the challenges with the inflationary pressure, we're seeing but we also understand the importance of getting your pricing strategy right and so we have chosen to be probably more thoughtful in terms of timing wise through this year about our pricing action, we've tested them all before.

We've taken them across the system.

To make sure that we were understanding the guest reaction and we've taken them across different channels, whether they'd be base business virtual brands delivery.

To make sure that the impact.

To the demand side of the equation.

Wasn't.

Two owners that we werent.

Jason and way too many guests with these price increases and as <unk> said and as most people have said so far the consumer has been fairly receptive to these pricing actions, we do see in the.

Broader.

Industry data you know some concerns about consumers value ratings, and how they're kind of reacting. So we want to be cautious to that and always be looking at kind of their expectations and their perceptions of value as we think about our value propositions. We are restructuring those as we talked about that that menu will come out here. Shortly it's been in tests, we feel good about the way.

We've restructured our platforms to deliver better margins, but also to deliver us more pricing flexibility.

Cross geographies and across the various menu items, especially as we're starting to see commodity.

Prices significantly.

Significantly different in various categories right and Thats been one of the benefits of Chili's is we've got a very varied menu, we've been able to in the past kind of move around some of the cost issues that have affected product because they have been more.

Unique to whether its beef or chicken or.

And now.

It's a little harder to move around when everything is kind of moving up but we anticipate we'll see more of that going forward kind of more of the typical this is the product thats going to be the most challenged and how do we move the mix around that and get our guests to kind of maybe shop, a little bit differently in our restaurants that are at a more favorable.

<unk> costs are.

Area of the menu. So that's where we're at we're excited about it but again, we're very cautious about how we move forward with price to make sure that our long term value proposition, especially at Chili's is.

Is intact, and especially as we look at the kind of a little bit of an uncertain future with regard to where the inflationary pressures are going to take the consumer we want to make sure we have that real strong value proposition for them to lean into.

That's very helpful. Thank you when we think about trend by day part or geography anything worth calling out there I know you've mentioned that as dining rooms had come back in the off premise has been holding in there as well, but just curious if we kind of.

Expand that conversation on the day of the week day part Regionalisation anything Thats worth.

Blowing out or that you sound interesting.

Well there is a lot of things going on that are very interesting, Josh without giving too much away I will say there are some there are some geographical.

Not everyone's reacting the same as we kind of come out of a post COVID-19 environment.

You are still seeing more regional.

Variability than we typically had seen prior right.

In the past two years to three point difference in sales trends was probably what you are still seeing some high single low teen numbers with regard to various geographical areas and their response to in to this now kind of what we'll call maybe a little bit of a post COVID-19 world. So we anticipate those things kind of settling out and we see upside to that because.

We are in some of those areas.

In fairly large numbers. So that's that's where we see some upside as those areas get a little.

Get a little more on their feet. If you will post COVID-19 has taken some of those a little bit longer.

Beyond that I think that's.

We like the portfolio for that reason, we're everywhere and.

And for the most part we balance off.

And balance out some of these kind of more.

More challenged areas with the ones that are doing better.

Yes, Josh from a day part standpoint still staying.

Pretty typical I've always seen as a <unk>.

Two third one third dinner to launch I would note that.

You are probably seeing a little increase favorability on your weekend lunch side of the equation, which again I think is reflective of more normal activities.

At a higher rate than we've seen a little bit lower early day lunch part, which probably is indicative of reopening to a great extent.

Really kind of optic back to what we typically seen in our pre COVID-19.

That structure.

Very helpful and if I could squeeze one more in on the Cogs.

The ability that you have running about 11% for the basket now just curious.

Your commentary why is that.

Everything going up higher I mean, largely protein driven any sort of commentary you can provide there and then what type of visibility do you have or are we still in that environment. We're locking in pieces of the basket.

Necessarily it makes sense for the premiums you have to pay.

Yeah, I mean, Josh again the big.

Drivers of of our basket or really the proteins right. So.

Chicken beef.

And you're seeing more broad kind of movements in the whole chicken complex as well right. So what has historically been kind of our wings environment with volatility is now kind of move more into other more traditionally stable chicken products like breast meat and so that's just kind of out there right now.

Well again, we don't when we look at.

The commodities environment and you just do kind of some of the math on the costs that are going into the input side of this it doesn't really add up to these prices. So there's got to be inefficiencies as we all know in the distribution and the supply chain side that are being taken it into consideration. They are taking these prices higher than they would normally go up and.

Then there is frankly, just some opportunistic pricing going on and both of those things. We think we will settle themselves out and bring us back to a more reasonable level in the not too distant future, although nobody knows exactly what that looks like.

So it is a little broader.

Cross those proteins and that's why it's a little harder to kind of move people around and we're a little more cautious about just pricing right for it because we do believe it will come back to a more reasonable level here in the not too distant future.

Great. Thank you alright.

Alright.

Thank you and the next question is coming from John <unk>. John Your line is live please announce your affiliation and pose your question.

Hey, John John There John .

John Your line is Lyons. Please go ahead, yes, sorry about that guys.

The question is on <unk>.

Capex, New store development, I guess overall capital return and obviously.

Maybe not obviously I mean I asked this in the context of the stock price and the stock price declined today.

Yes.

The senior management and does the board.

Kind of think about previous periods, where brinker has added a lot of value to shareholders and when they go back and I think about maybe it was kind of the 2008 and 2009 timeframe, where there was a significant reduction in capex, where capex was less in DNA.

We saw this enormous free cash flow yield capital returned to shareholders and he basically focus all of your attention on improving returns at existing units and basically not really.

We're really growing new units at all so.

As a philosophical question, but.

You guys know, how I think and.

I know how you would kind of responded in the past I mean, how do we kind of consider this current environment and again.

<unk> is kind of an indication of hey, listen here. The type of returns that you can get them buying back your own equity.

Why doesn't significantly slowing down that capex and new unit.

Construction make more sense in the strategy in what is obviously still not great consumer environment, and a very bad cost environment and thank you for allowing me that long question.

Sure sure John I think it is.

It probably has more to do with your timelines John I think if we were talking about what would you do today.

<unk> back in our stock at these prices, we think it's a great investment because we absolutely believe that these prices are too low.

Kind of understand what the markets reacting too in terms of this inflationary environment.

But when you think back.

You reference back to 2008, we were opening a 125 restaurants, a year and that timeframe. So when we talk about growing the portfolio.

From a traditional standpoint to 20 to 30, it's significantly lower capital spend that was going on.

Prior to the time, you reference and we're doing both frankly and when we talk about the opportunity. We had back in 2010 through 2012 were really got much better at the operating level and strengthen the business model, we see those opportunities now with the new handhelds and bringing technology.

In the to bear with our new service model upfront and what we're excited about doing with our kitchens again, which is what we did 10 years ago that youre referencing investing those dollars into being more efficient.

In the in the heart of the house, helping our margin situation as well, there and helping us build sales and so I would just say as we think about how to help.

Our investors.

Realized gains we believe it's a balanced approach.

But organic growth is key to that story and you've got to have an organic growth model.

And that's what we're focused on is how do we balance that organic growth my we generate a lot of cash, but we want to have an organic growth story as well and so when we think about virtual brands and different distribution points to grow the business organically as well as all of the things we just talked about.

That's why we are trying to find that sweet spot there.

To bring great cash returns.

Deliver back to the to the shareholder that way, but also find a good organic growth story. The one piece I'd add that to John as is.

The period of time, you've referenced before we did it at a more leveraged basis too so again.

<unk> is going to be important as we think about this going forward, but we want to do it at and we want to be able to invest in the business to grow organically and also return capital to shareholders, but at a lower leverage position.

Position. So part of this is the transition Covid, obviously got it in a way and slowed that down for a period of time, but.

Once we have rebalanced.

The debt levels back to.

Our targets.

That's really the tradeoff that.

Then you can start it.

Directing more of those dollars back towards that.

Does it return to shareholder standpoint, while still growing at a.

A decent clip and investing in the business.

Yes.

And I guess, maybe the question was whether whether it's the debt holders or to equity holders, but there'll be.

Not not a new unit construction. So let me ask this question.

Memory, maybe it's changed how much is the fiscal 'twenty three cap.

Capex guided how much of that Capex is would you consider to be fully non discretionary or network necessary. If you will.

Basically maintained or grow the cash flow in the business how much flexibility do you have that.

Get that conversation were to happen in the future. Yes, you do maintain a lot of good flexibility there John because when I think about maintenance expense and ongoing investments youre really going to be in that $70 million to $80 million range and there is probably even a little variability in those numbers, but that's kind of what I consider to be that.

Keep the engine running and moving forward kind of capital spend.

That's great. Thanks for the patience guys.

Just talking to John I Havent.

[laughter].

Thank you and the next question is coming from David Palmer, David Your line is live please announce your affiliation and pose your question.

Thanks Evercore ISI.

I would imagine it might be too early to talk about fiscal 'twenty three restaurant margins in total but.

Youre going to be making some changes here in the near term in terms of the menu simplification the price increases and I would imagine also you got pretty good visibility on your costs.

Through the rest of this calendar year. So I'm wondering if you could talk about how youre thinking about restaurant margins sort of exiting fiscal 'twenty two into the first half of 'twenty three.

I guess im specifically.

Specifically thinking you might be.

On pack path to doing 12% plus restaurant margins in the first half which might set the table for something closer to 13 for that next year, but.

I don't want to put numbers in your mouth here how are you thinking about margins.

Yes.

David I don't want to get into in 'twenty three.

Discussion or forecast at that point, we will have a very robust discussion about that on the next call, but I think.

Again as you heard us comment on some of the drivers impacting current margins I think there is opportunity. There. We do believe commodity prices will moderate that can that can have a.

A meaningful impact to margins and I think we gave you kind of see that moderation starting in calendar 'twenty, three which again would be the back half of our next fiscal year or so.

But we also again as we continue to improve.

<unk> turnover and improved training.

There are dollars that are impacting in those areas.

60 to 70 basis points of transitory costs I talked about.

We think we can start to win that out of.

The system, so again theres opportunities to continue to improve margins and I think.

I think we will do that over time I'm not going to put any specific number on the table today, but.

I think the progression of topline growth too is going to help too I would expect you will see.

A discussion of continued top line growth for the brand as we move into next year and with that comes leveraged ability opportunities.

And I guess optimistic on the on the direction, David Yes, No I hear that I guess I'm curious also about two.

Two things.

Service the customer experience today and service levels, you talked about labor hours in front of house being near all time lows, but we all heard stories about not just chili's, but everybody in this industry as kind of had some bad service scores from the consumer.

For obvious reasons, but I wonder how youre thinking about that.

Where you are versus pre COVID-19 and getting that serve that customer experience up and then and then I'm also curious if you've got $13 seven to $14 two margin that you've talked about as an intermediate target is that still a pretty good working intermediate target for margins and I'll pass it on.

Yes, so two questions. So let me just give you the service take David as we see it so two components right. So first as we mentioned it was getting staff back up and so a lot of new team members in the system and in the industry right. I mean, we just had a big turnover. The good news is we have more team.

Members in our restaurants today than we had pre pandemic. So we've got we've got the team members, we need to run the restaurants, but they are newer and they're not a trained as well and we've changed our system. Our service model and so we need to what we know is when that when that model is running well and.

Running as it is this kind of program to run service scores are.

Our outstanding team members make a lot of money more money than they were making pre and the experience is better it's faster. It's more personal so we're focused on getting to that state with all of our restaurants as quick as possible and we're just in that curve of training everybody up getting all of the leadership to understand the model right.

Now and get comfortable with it because it's a new service model for most of the system and then moving it to.

Throughout every team member that runs it so that's that additionally, as we talked about will we see opportunities with the kitchen to get the kitchen side of it much more.

<unk> and that that'll speed service up that'll get one of the biggest challenges that you have in the restaurant industry, rather than hey, Where's my food and so as we can speed up the process in the kitchen, while delivering a better more consistent product, we see another real win for the guests there as well as well as helping us.

Put more.

Push more people through the dining room get them into the in and out of the restaurants in the timely fashion that they are looking for so so we see it.

A real nice bright future for both our team members and our guests with regard to the systems and the technology. We've got in play to kind of moves forward first we got to train and then we've got a rollout some kitchen stuff to even take it to the next level.

Hey, David in the second half of your question.

Without getting into any specifics obviously a lot has changed since we talked about those numbers originally but I again I remain optimistic in our ability to improve margins over time again. These initiatives have a line of sight to how that can happen I think again, we will continue to leverage our top line as we go forward.

<unk>.

I noticed you used the term intermediate.

Yeah.

Anybody can have a perception perspective on what that means.

I do envision as we kind of move out of this inflationary cycle on the Cogs side of the equation whenever that happens that you will see.

Margin improvement out of the business.

Thank you.

Thanks, Dave.

Thank you once again, ladies and gentlemen, you can still enter the Q&A queue by pressing star one on your phone at any time.

The next question is coming from Brett Levy Bret Your line is <unk>. Please announce your affiliation and pose your question. Thank you Brett Levy <unk> partners just.

Just building a little bit more often both of that question on the labor side as you think about your labor expectations. I know you said you don't expect much pressure on wages and you did talk about that 50 to 75 basis points of transitory.

Can you parse out a little bit more given everything thats going on competition for labor, how we should think about it from a cost perspective.

You said you had stable <unk> had a solid head count, but how should we think about where you need to supplement that.

And just from a broader brush strokes what do you think you can do specifically to drive those gains and then just secondarily.

Secondarily you.

<unk> talked about a 35% hit from January in your estimates was that already implied in the guidance from last quarter or is that new to this morning's guidance. Thanks.

I'll comment first 35 was not imply we didn't make any.

Guidance commentary really on on the last call. So.

And obviously, we have not even closed January at that time, So 30 fives.

<unk> this guidance level.

We didn't count on it.

But without getting.

Two into the model.

Just what we're seeing out in the marketplace is that obviously with the with all of the movement in the industry.

Negatively last summer.

Spring and summer.

There was a lot of pressure on re staffing and with that.

Increase in demand.

A little bit of a challenge in supply you saw people having to raise raise rates wage wage rates to recruit and we were in that situation as well as as well as having to spend quite a bit of money just recruiting so advertising expense for recruitment is up significantly just getting these folks into the restaurants.

And the good news is especially over the last three months I mean, you've seen the employment numbers.

The ones that just came out today that I saw showed almost 500000 jobs added in margin I think almost 100000 of those came from it.

We came into the hospitality area. So we're continuing as an industry to to be staffed up and that takes the demand.

Or the supply and demand equation.

It balances that out a little more so we're not seen as much pressure to have to.

Raise rates to get folks in.

Theres always going to be ledger.

Legislated pressure right, so minimum wage increases are going to happen.

On their calendar.

But it looks like everything we can see that.

<unk> supply pressures are easing and we're not going to see as much of that.

In the coming months as we have seen in the last 12, so that's really kind of how we see that.

Marketplace going forward.

Thank you.

Alright, Thanks, Greg.

Thank you and the next question is coming from Dennis Geiger Dennis Your line is live please announce your affiliation and pose your question.

Thank you it's UBS.

Just wondering if you could speak at all it's a little bit more to what Youre seeing very recently from a sales perspective, maybe in the quarter to date period at a high level just given the.

The relatively dynamic environment that we're in right now and then I guess more importantly, Wyman you gave some helpful comments on the consumer broadly.

How youre thinking about the consumer relative to pricing et cetera, but I'm. Just curious if you could comment on on anything that you've seen to date from from your customers any changes in how they are using the menu.

That weakness from the lower income consumer.

Specific to your brand anything on virtual brands, where behaviors are changing just anything along those lines that you've observed to date. Thank you.

Hey, Dennis without getting too granular and into the quarter I mean, I would say in general we're seeing stability in the.

In the sales.

Experience through from the third quarter.

Back in February March we already talked about what happened in January omnicom, driven but since we've kind of been post COVID-19 major impacts.

The trends have been holding and thats encouraging.

The solid.

Sales levels above pre pandemic.

It.

At both brands now.

And the.

The virtual brands are now Comping positive.

So we feel good about kind of that top line.

Situation, especially given we've taken a lot more pricing we've taken in the last 20 years in a period of time as short as this so we're.

We're watching it closely the trends seem to be holding its more about okay, where is the consumer going to go as.

As the economy tightens up and maybe with all of the strength on the balance sheet that consumers have and the continued great labor market.

They will work through this and there will be more opportunity to to price. If we have to price, but also as we see commodities.

Mitigate and move themselves down to more moderate levels, we'll be where we need to be without having to price a whole lot more but we're very cautious about watching that I'd say anything on the menu side that we've seen with regard to shifts and behaviors had been more driven by us than by consumers we've pushed people.

In and out of the menu or move them shifted them more from a marketing perspective than they've kind of gone on their own and we do that.

We do that quite often just to make sure that we've got them, where we think is the best place for them to sit relative to the variety of our menu and the costs that we're dealing with.

I appreciate that and then one quick follow up on that if I may just as far as the look ahead.

If the consumer becomes particularly pressured.

You've spoken to this some but just thinking about how you're positioned from a value perspective, you haven't taken much price in recent years, you've got some some really compelling.

Promotional offers.

April to the menu of course.

Anything more there on how resilient the brand will be in on a relative basis may be where you take share from the category. If if the consumer comes under incremental pressure. If all that's fair and if you have anything else to add to that.

So I'm glad you asked the question I don't think it gets brought up enough in terms of market share of traffic. So our firm belief is that.

That's probably the most critical measure of brand strength and success and we've taken market share of traffic in casual dining and continue to take even in this environment for the last four years and so when we think about the positioning of the brand, especially chili's.

It's it's it's a beloved brand, it's a ubiquitous brand and it just needs to be available for folks and obviously the business model has to work, but the business model work. So much better when there is more bodies in the restaurant and so we do trade off in the short term.

Maybe some potential sales that would come from pricing to ensure that we have the traffic that we know is critical to the success of running a busy restaurant.

Very difficult to run a restaurant successfully if you don't have a lot of bodies in it and so that's that's our positioning it holds up well against our value propositions and against the balance of both price and other elements that come into building our value proposition, we think we're well positioned in a tougher economic.

Environment for the consumer to embrace us.

So, we're making sure that that doesn't.

Damaged as we kind of work our way into what could be.

Difficult consumer environment.

Thanks Wyman.

Yes.

Thank you ladies and gentlemen, this does conclude today's conference you.

You may disconnect your lines at this time and have a wonderful day.

Thank you for your participation.

Thank you everybody.