Q3 2022 Bloomin' Brands Inc Earnings Call

October 28, 2022

Greetings and welcome to Blue Man brands third quarter 2022 earnings call. At this time all participants are in a listen only mode. A brief question and answer session will follow management's prepared remarks. It is now my pleasure to introduce your host Mike Kraft Senior Vice President of Investor really.

Thank you Mr. Graff you may begin thank you and good morning, everyone with me on today's call are David Deno, Our Chief Executive Officer, and Chris Meyer Executive Vice President and Chief Financial Officer.

Now you should have access to our fiscal third quarter 2022 earnings release. It can also be found on our website at <unk> brand Dot com in the investors section.

This conference call, we will be presenting results on an adjusted basis, an explanation of our use of non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures appear in our earnings release on our website as previously described.

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

There are discussed in our SEC filings, which are available at SEC Gov. During today's call. We will provide a brief recap of our financial performance for the fiscal third quarter 2020 to an overview of company highlights and an update to 2020 guidance. Once we've completed these remarks, we'll open up the call for questions and with that I'd now like to turn the call over.

David Deno.

Well, thank you Mark and welcome to everyone listening today as noted in this morning's earnings release adjusted Q3 2022 diluted earnings per share was 35.

Which is more than triple our 2019 results. This compares to 57% in Q3 2021, as we lap exceptional earnings from stimulus checks and pent up consumer demand. This.

This quarter was among the highest inflationary quarters of the year, we made the conscious decision to preserve our value equation and not raise prices to fully offset inflation. While the consumer has remained resilient today. We believe the short term decision will have long term benefits for the business the confidence in our strategy, both domestically and internationally as reflected in our increased revenue.

Guidance. This was driven in large part by the momentum we saw in our sales initiatives during the quarter and the marketing investments, we are making the balance of the year during.

During the quarter, we saw comp trends improved sequentially. Every month. This was driven by stronger traffic across all U S concepts, particularly in in restaurant dining importantly, this represent over 300 basis points of outperformance in traffic versus the industry on a three year basis, we continue to execute against the comprehensive plan we have.

Tablets to build a stronger leaner operations centered company. This includes leveraging our leading off premises business growing digital capabilities and improved operational efficiencies to deliver on our key commitments.

These results would not have been possible without the talented and dedicated employees in our restaurants in the restaurant support center I'm, especially proud of the team's proactive response to aid and assist those impacted by hurricane and the storm hit the West Coast of Florida at the end of September , causing significant disruption to residents our employees and restaurants among their efforts the team.

Said more than 11001st responders volunteers and families in southwest, Florida. This is a testament to the passion of our employees to take care of our people and communities. During this time of need.

As we look ahead to the balance of the year. The focus remains on achieving our full year objectives. Despite a more challenging economic environment. The plans in place set us up well to achieve our objectives strengthen the business and provide momentum for 2023 and beyond.

As we've said in past calls the key elements of our plan include first grow in restaurant sales by improving our service levels and food offerings. We have made investments over the past several years to elevate the customer experience, which is showing up in improved social in customer scores, especially at outback as part of this effort. We continue to look for ways to simplify the <unk>.

Business to improve execution and consistency we are rolling out several innovations such as new cooking technology, including advanced thrills and ovens to improve food quality and productivity. We are also installing kitchen display system for meal pacing and handheld technology for our service, we expect to complete the rollout of the handheld technology by the end of the year.

The new cooking technology by the middle of next year.

As technology Rolls out these innovations should reduce operational complexity in our restaurants and further improve customer service.

Also deploying more targeted marketing to build awareness and drive frequency. These initiatives are aimed at highlighting a great menu in the everyday value that we offer to guests importantly, this was accomplished without sacrificing product quality or the guest experience. In addition to these programs offer high returns that do not rely on deep discounting to drive traffic.

Expand our leading off premises business, we continue to capitalize on our strong carryout and delivery capabilities retention levels held steady with Q2 and are contributing to sales outperformance importantly profit margins in this channel are comparable to the margins of the in restaurant business third party delivery continues to grow.

So even as people have returned to in restaurant dining. We're also pursuing catering opportunities as people are returning to offices hearing will also be an important lever for growth over the upcoming holiday season, we offer significant value through our bundled platforms, we expect off premises be a large and growing part of the business.

Third leverage operating margin gains by growing sales and reducing cost. This starts by growing healthy traffic across the in restaurants and off premise channels. We also reduced reliance on discounting or promotional <unk> and pivoted advertising spend towards more targeted higher returns digital channels. In addition, we remained disciplined in managing mill.

P&L and are aggressively pursuing efficiencies at food labor and overhead as Chris will discuss despite the large increase in cost we are able to achieve our margin objectives, where we more than doubled our operating margins versus 2019, and lastly is becoming even more digitally savvy company in Q3 approximately seven.

7% of total U S off premises sales were through digital channels in the past year, we implemented a new online ordering system and mobile app to support our digital business both have outperformed expectations in the new App has over 2 million downloads you can expect to see more activity as we improve the functionality and features of our App in digital offers.

Yes.

These priorities will guide us for the remainder of 2022 and beyond because of the momentum we have seen in so many areas, including a much stronger balance sheet. We are focused on growing our restaurant base in a meaningful way, we continue to make progress executing against our development plans and are building a strong pipeline of new units and we expect to accelerate new unit growth in <unk>.

23, our growth priorities are first ignite new unit growth at Outback, we are continuing to open a smaller and less expensive prototypes that will enable more meaningful growth with healthy returns. This includes pursuing new trade areas in rapidly growing markets as well as fill in opportunities in major metro areas to date, we have.

Opened five new smaller locations with strong sales and positive guest feedback. In addition, we are also upgrading a temporary thing or asset base investments in Remodels are offering good returns and recent relocations at Outback are providing outsized sales lift with volumes exceeding $4 7 million.

Well above the system average.

Open more fleming's the business is performing extremely well and has a proven category leader in fine dining. The average unit volumes are the best in the portfolio. We are building first class facilities on great real estate, largely and stronghold markets of Florida, California, and Texas, we are opening our newest.

Fleming's in Fort Lauderdale in December .

Third Brazil continues to be a category leader and is seeing a strong recovery in both sales and profits new restaurants are opening above expectations. We opened 15, new opex. This year and have a robust pipeline for growth at the end of the quarter. There were 137 locations. We believe we can grow this <unk>.

<unk> to approximately 240 restaurants overtime in this underpenetrated market and finally expand the problems business in key markets problems has been among our top performers in the company over the last three years. They have built a terrific off premises business has opened up a number of possibilities for the brand. The most recent opening in <unk>.

<unk> is performing extremely well and provides optimism about the future growth potential of the brand in summary, Q3 was another solid quarter. We are focused on achieving our 2022 goals while building a great business that will thrive in 2023 and beyond and with that I'll turn the call over to Chris who will provide more detail on Q3 and the <unk>.

Balance of the year.

Thanks, Dave and good morning, everyone I would like to start by providing a recap of our financial performance for the fiscal third quarter of 2022 total revenues in Q3 were $1.06 billion.

Which was up four 5% from 2021, driven by a $36 million increase in international revenue, primarily in Brazil, as well as a one 4% increase in U S comparable restaurant sales.

In our U S concepts, we saw year over year traffic trends improve steadily throughout the quarter. The slower start to Q3 was driven in large part by lapping the height of the 2021 stimulus benefits, particularly in July as the quarter progressed trends improved as we began to lap the impact of the Delta variant from last August .

This improvement continued into September importantly, Q3 sales were up 11% relative to 2019 and maintained a relatively consistent double digit comps throughout the quarter of note in Q3, we achieved an approximate 300 basis point outperformance relative to the industry in traffic on a three year basis.

Our performance versus 2019 continues to be bolstered by our significant growth in off premise dining.

At 25% of U S sales Q3 off premises was in line with Q2. Additionally, the highly incremental third party delivery business continues to grow and was 12, 4% of U S revenues in Q3 versus 12% in Q2.

In terms of concept performance Outback total off premise mix was 27% of sales and Carrabba's was 33% of sales off premises remained sticky and is a large part of our ongoing success. It will be a key part of our growth strategy moving forward.

Average check was up eight 6% in Q3 versus 2021. This consisted of seven 3% menu pricing and a one 3% increase in menu mix. This level of pricing is one 5% higher than the five 8% that we had in the previous quarter the increase in Q3.

Was driven by a 3% price increase taken in late August in the face of more persistent inflation.

Looking ahead to Q4 in October we have taken some additional pricing to replace a portion of the 2021 pricing actions that will fall off in late November as a result, we would expect our Q4 2022 average check benefit to be in the 9% to 10% range, primarily driven by price.

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And a final note on Q3 sales, Brazil, Q3 comps were up 31% versus 2021, Brazil's third quarter reflected the lapping of Covid related operating restrictions from last year importantly comp sales were up 25, 2% versus 2019 levels.

As it relates to other aspects of our Q3 financial performance GAAP diluted earnings per share for the quarter was 34 versus <unk> of diluted earnings per share in 2021. The large increase in GAAP earnings was primarily driven by the lapping of our 2021 purchase of the Carrabba's royalty stream from the brand's founders.

Adjusted diluted earnings per share was 35 <unk>.

Versus 57 of adjusted diluted earnings per share in 2021. It is worth noting that our Q3 result was significantly higher than our 2019 adjusted EPS of <unk> 10.

Adjusted operating income margin was four 9% in Q3 versus eight 2% in 2021, although the level of commodity and labor inflation eased some sequentially from Q2 to Q3, we saw a much larger increase in restaurant operating expense inflation inflate.

<unk> ran about 13% driven by utilities.

As has been the case throughout the year in Q3, or seven 3% menu pricing was not enough to offset the inflationary pressures. We faced this did have a significant impact on operating margins in the quarter compared to last year. We are comfortable with the decision not to raise prices to fully offset inflation. However, given the importance of.

Maintaining relative value to both restaurant competitors as well as food at home options, even with these pressures our Q3 margins of four 9% or 260 basis points above 2019 levels. We continue to benefit from simplified menus and operations growth in our international business.

Efficiencies and overhead as well as increased average check.

Q3, adjusted tax rate was 14, 4% tax rate is trending a little lower than expected given some discrete benefits. We have received and we are lowering our full year adjusted tax guidance to be between 16% and 17%. This implies a step up in tax rate in Q4, when income is seasonally higher.

In Q3 full.

Full year weighted average share count is still expected to be approximately 93 million shares on an adjusted basis.

Turning to our capital structure total debt was approximately $825 million and our liquidity position remains strong. We are pleased with the progress we have made to improve our balance sheet.

In terms of share repurchases, we have repurchased $95 million of stock through October 27th and have $30 million remaining on our existing authorization. The board also declared a cash dividend of 2014.

We remain committed to a balanced capital allocation strategy.

Turning to our 2022 guidance.

We are increasing our 2022 guidance for total revenues to be between $4 $43 6 billion and $4 466 billion. This is up from our prior guidance of $4 $4 billion to 445 billion. This increase was driven by a couple of factors first.

We had higher than expected revenues in the third quarter, both domestically and in Brazil, aided by incremental marketing spend and second our recent pricing actions were larger than our original plan and we have not seen significant consumer resistance from these increases in terms of traffic or mix degradation, our absolute level of price.

<unk> is in line with the broader peer group and remains well below grocery price increases.

This full year revenue guidance implies a Q4 revenue range of between 1115 and $1 $104 5 billion.

We are reaffirming our total year guidance for adjusted EPS. As a reminder, we expect adjusted EPS to be between $2 45, and $2 55.

This implies a Q4 adjusted EPS range of between 63% to 73.

We.

The profit benefits from increased revenues to be offset by higher than expected operating expense inflation. This guidance also includes an estimated <unk> <unk> impact from hurricane and despite these headwinds we expect our Q4 adjusted EPS to be significantly higher than 2019 for perspective, our adjusted.

At EPS in Q4 of 2019 was 32.

GAAP diluted EPS is now expected to be between $1 <unk> and $1 15. This is down from prior guidance of $1 11 to $1 22. We also expect Q4 GAAP EPS to be between 61 and 71.

Aside from the change in tax rate previously mentioned all other aspects of our guidance remain unchanged on our February call. We will provide more details regarding our full year expectations for 2023 at that time, we will have contracted a large portion of our commodity needs for the year and we will have additional visibility into.

The macro landscape. This will further inform our 2023 thoughts on sales capital allocation and cost inputs, such as labor and utilities also as a reminder, 2023 will include a 50 <unk> week, which will run from December 2005 through December 31.

In summary, this was another successful quarter for Bloom and brands and we are well on our way to becoming a better stronger operations focused company and with that we will open up the call for questions.

Thank you Steve I would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question. Kim You May Press Star two if he would like to remove your question from thank you.

For participants using speaker equipment may be necessary to pick up your handset before pressing the star keys. Please ask one question and one follow up question one moment, while we poll for questions.

Our first question is from Jeffrey Bernstein with Barclays. Please proceed.

Great. Thank you very much.

First question was just on the broader consumer Dave you mentioned that it sounds like comps improved sequentially through the third quarter.

I'm just wondering if you think theres any impact from a slowing macro in there when you parse through the data on a two and three year basis.

Whether you're willing to share anything on October just because it does seem like.

Industry is holding up pretty well so I'm just wondering if you can give your thoughts on the impact from a slowing macro at all and what initiatives would you implement if trends were to slow in coming months and then I had one follow up.

Sure Good morning, Jeff.

Yes, we see <unk> doing well.

We have provided fourth quarter guidance.

We've seen the sequential improvement in Q3, we provided guidance, which implies a comp of 3% to 6% October was.

Right Smack in that range was good for us.

And we see that coming together in the quarter quite well and Thats why we raised our revenue guidance.

If you look at the.

<unk>.

What we're offering we've tried to make sure that we've taken price increases below inflation to maintain our value equation and offer very good different types of things.

Things for our customers and our various brands. So we want to make sure we maintain the value equation and Thats, what we would be doing in case, there was a macro slowdown and I'm not here to predict the macro slowdown or recession, but I'm, just saying if that were to come to pass I think we are well positioned with some of our marketing offerings and what we understand with our.

Our business and our value offerings to address that finally, I think the company is in really good shape given the improvements we've made in margins and cash flow and our balance sheet.

To go forward.

Understood and then the follow up on the.

The restaurant margins.

Specific to <unk> and I think more importantly, as we look to 'twenty three I know, you're not giving formal guidance, but it does seem like investors have been excited that sales are holding up menu pricing is outsized or at least to start the year and let's hope that inflation is easing, which if those things were all happened.

Together you'd see some significant potential margin recapture on earnings growth and 23, I'm just wondering whether you would agree with that assessment, especially around the inflation easing or maybe we are underestimating the potential headwinds that you look at the 23, just trying to get a sense for that scenario of potential big margin expansion. If those factors would it come true.

Thank you.

Sure.

Good morning, Jeff will start with Q4, I think as it relates to Q4. The one thing that we have going for us in Q4 that we haven't had for the balance of the year is as Dave mentioned, we've been pretty diligent about underpricing inflation for the entire year. There is sort of an inflection given the timing of some of our price increases where we will have more pricing relative to <unk>.

<unk> than we've had in any quarter throughout the year. So that gives us a little bit of optimism at least in the fourth quarter that we can do better in op margin on a year over year basis than maybe we have certainly in Q3 now look I think as you look forward to 2023.

The reality is if you look at this year and you look at where our margins are.

We have a pretty strong operating margin and restaurant margin. Despite the record inflation that we've seen the midpoint of my guidance. This year is for that seven 5% or so range and look we're not we didn't provide fulsome guidance on 2023 op margin at this point I think it's still a little early I think we have a long way to go to understand consumer demand.

And the inflation demand environment, but look I would say this I think we feel good about getting back to our operating margin commitment of 8% when the environment is normalized right and I think that you would look at the technology enhancements that we're putting in place at outback that should be a real tailwind to helping offset cost pressures, but again.

In a normalized environment. So I think that it's a little too early to say on margin. We can we can talk a little bit about commodities and things like that but for the most part we're just not going to get into 'twenty three at this point.

Understood, but as you mentioned have you locked in a lot of people are talking about beef easing, but then there's a supply heard concern in the back half of next year. So I'm just trying to get a sense for what your approach has been on inflation, specifically around beef as we look to 'twenty three whether you want to look at now or whether you are not contracting because you expect prices to ease any color on that front.

Yes, So 2022 is pretty much in the books, we're 97% or so locked on our past it for this year.

I think that it's too early to give definitive thoughts on 'twenty three but look we are optimistic it's going to be a less inflationary environment than it was in 2022.

Categories like dairy seafood chicken should be much improved next year, but look you're right I mean, when it comes to beef there are indications of the beef market is still going to be inflationary next year, mostly driven by the potential supply constraints that you've heard all about <unk>.

Even that beef represents close to 40% of our basket. This could drive the entire commodity basket to be inflationary next year, but we're also seeing pressure in categories like oil.

If I were to place a number on it the best estimate I could give you at this point is probably mid to high single digit inflation next year, but the reality is is that a lot is going to change in the next few months if demand is stronger or less than expected. It is going to have a big impact on the outcome now we begin our locking conversations in earnest on 2023.

Over the next several weeks and we will be able to give you a more fulsome guidance in February but yes look we always go into each year, intending to lock up a significant portion of our overall commodity needs, particularly in beef because that level of supply assurance gives us a great deal of comfort as the year progresses.

Thank you.

Our next question is from Alan Siegel with Jefferies. Please proceed.

Okay. Thanks.

<unk> on the international operating margins it seems like we're finally.

<unk> seen more of the operating margin expansion really materialize this business.

With the relative overhead impact seemingly narrowing so I'm just wondering how much of this is due to sustainable efficiencies and leverage in the business that you can continue as we get further.

Into the future.

Yes.

We're really pleased with what we're seeing in international, especially Brazil now talk broadly about that first I'll turn it over to Chris for some more financial details but.

As we've talked about for a long time that business is uniquely positioned as the number one restaurant brand not only its category, but the number one restaurant brand in the country and we've got a terrific team down there that runs the business.

Topline sales are extremely strong new unit development is very very strong we're at 137 restaurants on our way to the mid two hundreds.

We've got.

Our off premises business as a new layer for us it did not exist prior to the pandemic, they're doing a great job managing margins in what Theyre doing there. So all of that has come together to produce the performance that they have and I think before I turn over to Chris I just wanted to add that the growth that they are doing is funded internally, it's not like we're sending.

<unk> dollars down there to invest they they are they're just growing and growing and growing as a result that can fund their own internal growth, which is a very positive story.

Yes look I think it is sometimes an underappreciated aspect of our ability to maintain margin. If you look at the restaurant margin line in Q3. It was 18, 5% in what is seasonally somewhat slower time of the year I think we said at the beginning of the year that Brazil's recovery would be a pretty significant part of our overall.

<unk> profitability picture this year and it's playing out exactly like we thought I mean this business is just phenomenal. The 18, 5% operating margin is 300 basis points or so better than it was a year ago.

We're really on track to put together, a really fantastic year after a challenging year last year amidst all the COVID-19 restrictions.

Great and on the other restaurant expense line can you talk about any temporary expenses in there or is it just really the build up of all the higher energy costs that you talked about her.

Anything else.

Well look yes operating expense, it's really primarily just the utilities inflation I mean like if you look at the overall category just sequentially restaurant operating expense in Q2, we were up kind of like 8% year over year and inflation in restaurant operating expense and any fast.

Forward to Q3, and it was up 13% right now.

It's hard to say, how long that utilities pressure less but.

Certainly I would expect it to continue into the fourth quarter I think that you would start to get relief again to be honest. When you start lapping these accelerated increases sometime in the middle of next year unless there is any fundamental changes in energy pricing sort of in the macro environment, but thats kind of how we see it at this point.

Got it thank you.

Our next question is from Lauren Silberman with credit Suisse. Please proceed.

Thank you so I'll start with customer behavior as you look across your brands are you seeing any signs of changes in customer behavior trade down Tech management and to the extent possible any sense of differences amongst your lower income versus hiring cohort.

Yes, we get with our good morning with our.

Our portfolio, we've got a broad look at the consumer and so if you look at it we've got some interesting combo offers at Outback are doing really well, we've got some prefixed menu items that at bonefish that are doing really well and then we've got the high end consumer and so far we have not seen in may.

Change in trend among the various consumer basis.

And if I would say one thing fine dining continues to do extremely well and fleming's within fine dining does really well so we're seeing.

The dynamics, there still do well across our entire portfolio.

One area that is also really interesting before I turn over to Chris for any other comments.

So interesting is our third party delivery also is very vibrant so that consumer is doing well as well.

One thing I would add is Lauren good morning. It is that we're not seeing any negative mixed trends right Q2 was still positive 1% or so I think that mitigate some in Q4, but we don't expect it to turn negative and I think that if youre using mix in terms of what am I choosing when I come into the restaurant on menu.

We're not seeing negative mix trends at this point, which is an encouraging sign that the consumer is hanging in there.

Great. That's really helpful. And then just on marketing how are you thinking about advertising from here.

Third quarter wireless advertising compared to historical levels, just trying to understand broadly what you're seeing in that promotional xyrem.

Thank you.

One thing we learned during the pandemic was we really have an outstanding understanding of our marketing and we're thrilled that the world is going more and more digital which gives us flexibility.

Have a great understanding of a return on investments and so theres been when we've seen some really good returns on our marketing spend so it's been a bit of a step up in marketing spend and Chris will talk about that in just a minute, but youre going to see us in a more digital environment talking about the value. We offer everyday you won't see blood of discounting from us.

We think we've got our menu prices in line. We think we've got some great offers in line, we understand the digital marketing.

Piece, we can flex up and down and we're really pleased with the returns that we're seeing on our marketing.

And in terms of the overall spend trend and where we've been it really depends on the comparison that you are looking at certainly if you go back to 2019, we were spending three 5% of our sales on marketing but.

But if you look at last year. It was closer to one to one 5% of sales on marketing right. So this year, we're in that to the last couple of quarters. We've been in that two to two 5% range on overall marketing spend I think the one thing in terms of the financials that we've committed to is look we're not we're not going back to spending three 5% of sales on marketing long term.

I think that somewhere in the twos is probably where we settle in long term, but we're obviously going to reserve the right to flex that within that two to two 5% to 3% range based on what we're seeing from a return standpoint.

Great. Thank you very much.

Our next question is from John <unk> with J P. Morgan. Please proceed.

Hi, I wanted to ask about just the relationship between pricing and traffic I mean many of us.

And there are kind of talking about pricing to cover costs, but I'm just wondering what you kind of see as the consumer sensitivity.

Looking at your table for example, I mean, there was almost a perfect an inverse correlation between the increases in average ticket and the decreases in traffic at least on a one year basis. So.

The question is does that mean do you think that youre actually our pricing at least a certain percentage of your customer base in other words your pricing as the industry pricing.

Responsible for some of the traffic declines or would those traffic declines in your opinion be the same even with a much less degree of pricing than you and your competitors are taking.

Yes, I think it's important John that we've seen a sequential improvement in traffic during the quarter and we're guiding to that in Q Q4.

And we have specifically not <unk>.

Priced up to level some of our competition and interestingly, we have not priced up to the level of food and grocery stores. So I think it's what we do as a company can continue to make progress and we've talked we've talked about some of the things that we are doing which is some of our menu offerings and innovation some of the <unk>.

<unk> meals that we've done some of the pre fix.

Menus at Bonefish and also some things at Carrabba's is doing.

Our operating scores our consumer scores are improving every day. These are the things that we're going to do to build on traffic and I'd also say John as you know 2021 as far as the lapsed standpoint.

During the quarter, we were lapping some pretty heavy stimulus spending still so we saw sequential improvement in traffic during the quarter. We will continue to see some hopefully some improvement and I think we have the actions in place to make it work and the only thing I would add John is I know your question isn't really a bloom and specific question its more of a broader theme.

But I do think it's really important perspective for our company that if you look back at 2021, we only took one five or so percent menu pricing in 2021 relative to where we were in 19. So when you look at our decisions. Our total fiscal year 2022, we're only going to be around 8%.

<unk> eight 5% pricing benefit on a three year stacked basis, which is really relatively low in this environment. So we are being very thoughtful about menu pricing for.

For the reasons that you talked about.

Okay Alright.

A separate question if I can Dave in your prepared remarks, you talked about pursuing food labor and overhead efficiencies is that related to handhelds kgs.

Okay.

The changes in the cooking technology, specifically at Outback, where are there other big buckets that after all these years I mean, we've been talking about it now for 10 years, but are there other big buckets that still remain that.

Yeah that that you can pursue that are going to benefit the customer and employee experience.

Yes.

Big buckets, John and we're always looking at our organization to invest where we need to invest in and pull back and we need to pull back and I think I think you have mentioned over the years that <unk> been impressed with our efforts on overhead and things and I think the company is in really good shape, there, but we'll continue always to look at.

Things.

But most importantly, we have two big big buckets of opportunity and productivity to both improve customer service and to reduce costs and that is the oven rollout of outback, which will be done in the middle of next year and then the tablet rollout at Outback, which will be done at the end of this year and in February .

We will provide for our investors what we think the financial implications are for that on a productivity side, but we also see a large sales opportunity from the standpoint of faster click throughs and table turns better accuracy and this is we are seeing this in the restaurants, where they are in place were up to 35.

5% of our restaurants have ovens down a lot of high volume restaurants, So we're seeing that.

And then secondly.

We're going to task our supply chain organization to continue to.

Provide productivity opportunities for the companies, while improving quality of the food and.

A food availability to our restaurants, where they've done a great job. So supply chain productivity is a big part of what we have planned for next year as well. So those are the two big buckets John .

Thank you.

Yeah.

Our next question is from Jared Garber with Goldman Sachs. Please proceed.

Jared please check and see if your line is muted.

Hi can you hear me, yes go ahead.

Great. Thanks.

Thanks for the question, Dave I think in the opening remarks, you talked about catering being a big opportunity not only going forward, but I think maybe more specifically in the fourth quarter. Just if we think about the near term can you talk a little bit more about that and maybe where you've been in terms of penetration in years past.

Maybe where that where that can go in and how that how you see that impacting the fourth quarter. This year. Thanks.

Yeah, a real shut off the Carrabba's Italian grill and the team they've done a fantastic job on catering.

Obviously, the food travels well, but they transform that business for us and show us the way and with the holiday season coming up and people return to offices and stuff. This is going to be even a bigger opportunity for carrabba's. So hats off to the team for doing that now when we got to do with the rest of the company needs to come along like Carrabba's and perform like Carrabba's.

Talk to our various brands about that and Carrabba's has showed us what we need to do we put the resources in place to do the sales and catering so with the Carrabba's example, we think that certainly bonefish and outback, especially can come along and do a great job in catering and we expect to see even more progress within our brand but also.

Travelers to continue to lead the way lastly, Fleming's has done a really great job.

With catering and private dining we see a tailwind with people coming back to work and having office parties and holidays, we see a tailwind from Fleming's Prime Steakhouse.

This holiday season.

Thanks, that's great color.

I guess your commentary on Carrabba's certainly is.

To be encouraging as do the results.

Sort of begs the question and maybe I've asked this before so apologies but.

In your remarks on unit growth I think carrabba's, maybe with the third.

Third priority after Outback and Flemings.

Why not lean in more on unit growth at Carrabba's and maybe you are but can you maybe frame for us the longer term opportunity that you see there and only 200 units right now it would seem like the opportunity is certainly there for the picking thank you.

Yes. This is an important point <unk> earned the right to expand.

And Mark Graf, who runs development is working with our team there to identify those opportunities.

We are working on the.

Much like at Outback working on the box, we're working on the economics.

Working on a business that has 35% 40% off premises, which is just amazing and.

And we think we have expansion opportunity here.

Here, that's really great, but we're just talking with our board about that last week.

I'll look for Carrabba's now what are we going to do besides work on the box, we're going to expand in our stronghold markets first and foremost.

Florida, Texas, Tennessee, Georgia, those are the areas that we're really looking at and the other interesting thing we have opportunities with our restaurants, but the other interesting thing about Carrabba's is is there a delivery carry out type business that we can build as well.

There but.

But kudos to the brand and the team between sales and profits and everything else in and leading the way Lastly, we did open our first <unk>.

Obviously quite some time and Tampa.

No, it's our home market, but.

<unk> have just been off the charts, so high hopes for the brand.

Thanks, Dave.

Our next question is from Jon Tower with Citigroup. Please proceed.

Great. Thanks.

Follow up first and then a question first on the pricing side can you talk about where you're running in the <unk> and then perhaps what carries over into 2023, assuming that there's no other price taken.

Yes, sure. So let me, let me unpack that a little bit for you. So as we said in the prepared remarks, I'd expect check average benefit to be between 9% and 10% in Q4 and as I said most of that is pricing. So we'll be in the 9% to nine 5% pricing range in Q4.

Some of that higher Q4 number is just a byproduct of when we took the pricing actions. So we basically moved up our normal late November pricing action to late Q3 to cover the higher restaurant operating expense inflation, we're seeing so to start.

If you go back to Q2, we had almost 6% pricing then we added 3% pricing in late August mostly at Outback now in early October I'm, adding another 2% pricing action, mostly at our other brands.

In late November 3% pricing falls off so.

Exit the year at about 8% pricing than in Q1, you have another 1% thats going to fall off so I would expect to be in the 7% or so range exiting Q1, but again just to reinforce its really important to remind everybody that we only had one 4% pricing in 2021. So again this year if you look.

At the total year pricing coming in around 7% or three year pricing is going to be like eight eight to eight 5%. So thats relatively low in this environment.

Awesome, Thanks for that color I appreciate it.

Just kind of pivoting a little bit on the off premise specifically delivery business I think it was mentioned earlier in the transcript.

12, 5% of your sales.

In the third quarter coming from delivery channel I'm, just curious how you're planning for.

It does seem like we're getting signals that the economy is going to rollover and soften and it appears that the delivery channel is probably the most discretionary occasion within the restaurant.

Industry, So I'm curious.

To hear how youre planning for potentially softer.

Demand environment.

In the delivery channel specifically.

Yes first of all.

Have a good involved in the delivery business for many many years.

With Yum brands and then now here to.

The delivery business is really strong and the customer has a habit.

And I mentioned in the <unk>.

An earlier question on my prepared remarks, I can't remember, but our third party delivery sales continue to be really great and I think people get John get in the habit of.

Of ordering now.

We can't rest on our laurels, we have to be ready, we've got tremendous bundles family bundle offers that if you get them you get a large amount of food from bonefish and from Carrabba's and Outback that we will play up in a big way number one number two is we have a terrific partnership.

With our third party delivery providers.

There are each of them.

Really like working with us and we have a great relationship with each of them and we've leveraged that over the years. So that will continue to be an opportunity for us. So so in summary, we're finding that the delivery customers pretty sticky, but we can't rest on our laurels, we've got wonderful value propositions with high quality high quality food.

And strong relationship with our third party partners.

Got it thank you.

Our next question is from Brian Vaccaro with Raymond James. Please proceed.

Thanks, and good morning, just circling back on certain cost a little bit of Chris.

Q3 commodity inflation land for the quarter and what have you embedded in terms of year on year inflation in the fourth quarter on food cost.

Yes, it's probably around 13% to 13, 5% in Q3, and then it'll be around the 12% inflation in Q4 for overall commodities.

Okay, great. Thank you for that and I guess the other question I had was on labor.

The recovery in dine in that Youre experiencing I'm curious to what degree you've added hours back into the box. Maybe you can level set where current staffing levels are versus where you need them to be to deliver.

The dine in experience, maybe you can just touch on that a bit.

Yes first of all.

Like I mentioned earlier, Brian I'm going to start here, our customer measures at outback versus the industry and competition are really strong we've made big improvements in many different ways and very very pleased about that which will help us over time grow comp sales and take share.

Our staffing levels the market is much better than it was say 18 months ago still.

Still pockets of challenges, but the thing that we've seen Brian with our productivity efforts and our good services, we're not back to staffing hours and levels of say 2019, and we believe that our restaurants are we have pockets of opportunity obviously, but our restaurants are in really good shape from a staffing staff.

Point.

And as we mentioned earlier with the handhelds and the oven technology, they will give us opportunity to further manage labor hours in the restaurants.

And offer opportunity for us to improve service as well. So I don't think Youll see us go back to labor hours of prior years.

As we go forward, while importantly, importantly, while we are improving customer service and we're seeing that in our external metrics that people provides us.

Okay and.

As the labor market has has loosened and I think we're lapping.

Sort of the outsized inflation rates that we saw as everybody was scrambling to hire people in the second half of last year I'm, just curious on wage inflation.

Where's wage inflation in the third quarter and are you starting to see year on year inflation Kress.

It's not sort of disinflate moving into the fourth quarter.

Yeah. So the solid carrier so first of all to answer your first question. Your total wage inflation is about 9% hourly.

Little higher than that management is a bit lower but total wage inflation was 9% in Q3, it probably steps down by a percent and a half or so in Q4, just given what you're lapping from last year I would say the way I would characterize sort of that hourly wage inflation is that obviously, it's still inflationary or year over year, but from a.

<unk> standpoint, the rate of increase has slowed down so we have seen some normalization, it's still going up every quarter, but its normalized versus the pretty steep levels that we were seeing sequentially each quarter certainly earlier in the year.

Okay, and then last one for me just on capital allocation I'm curious how does the higher rate environment impact your appetite for share repurchases versus paying down the revolver and can you just remind us sort of on the other dynamics on the remaining convertible note is there a potential to remove that overhang and the near term that does.

Hey, Thank you.

Yeah sure. So look I don't think our capital allocation strategy or thought has changed excuse me has changed too much it's going to be balanced.

I guess, the best way I can characterize it as you think about it we used to make back in 2019 $400 million of EBITDA and now we are a company that sustainably is generating $500 million of EBITDA for the past couple of years and that that gives us a lot of optionality with respect to use of cash and so we're going to we're going to prioritize it this way we're going to allocate sufficient.

<unk> funds to fund our growth areas that Dave has talked about via capital expenditures.

Second we're going to look at the peer so we admire in this space and look they have very little debt and their capital structure and that gives them a ton of flexibility. So we're always going to be conscious of our debt ratio when we make those decisions, particularly in a more uncertain consumer environment and and we do believe also that our healthy dividend is an important sign of confidence.

In the health of our business and it provides longer term investors with a stickier return.

Look I think we do think that our stock is undervalued and we're going to make share repurchases are part of that strategy and we're making good progress on our $125 million authorization. So.

I think that rather than look at it like in an uncertain environment. The shift I'm going to say look we still feel like we have adequate flexibility to do a lot of different things with our free cash flow, which is really really good in terms of the convert that's another thing that we can consider it right I mean, we continue to monitor the environment.

We'll continue to moderate next year to see if it makes sense to take out either all or a portion of the remaining convert I think the thing to keep in mind with the convert though is that it is you are going to have to pay a bit of a premium to retire. It early and that is a use of cash that potentially could use for something else like debt pay down dividend or share repurchase. So we're just going.

You have to weigh that.

Optionality next year as part of the calculus, when we're allocating our free cash flow.

Alright very helpful. Thank you.

Our next question is from Brian Mullan with Deutsche Bank. Please proceed.

Hey, Thank you just a question on Outback.

Average weekly sales are running nicely above 2019, but it does seem like perhaps the dining room traffic is down a decent amount relative to three years ago. You are spending less on marketing dollars. It seems like it was a very smart thing to do for the business.

My question is just spending less in marketing is there anything going on with the Outback consumer of the industry that you might call out contributor.

And do you see a path to fully recapturing that.

Daniel room traffic over time.

Yes, no. We will will will continue to improve on dining in traffic as we go forward I've talked about some of the initiatives we have in place.

The work we're doing on marketing the work we're doing on some of our product innovation. The work we're doing in our ovens and handheld as we improve table turns and things so that will continue to move.

Move forward for us at Outback, we don't as we mentioned earlier, we don't see anything particular to consumer dynamics that concern us.

A matter of what we're doing in our business to continue to grow that traffic now what we'd have to also do at the same time as grow our delivery and off.

And carry out business in which we will also be doing but from a specific in restaurant dining standpoint, those are the three or four things. We're concentrating on two to improve our performance and we had to unpack a lot of this last Q3, when we talked about Opex performance relative to 2019, the lack of the promotional and the <unk> and the discount.

<unk> activity from 2019 is a very very steep number in fact, we're right now in the middle of lapping the steak and lobster promotion from 2019 that we talked about at some length last year. So look I think that that is going to have an outsized impact on traffic, but I think that that's a trade we're willing to make and I think that now the key for us is to build back.

Using the levers that Dave discussed to healthy and restaurant traffic moving forward.

Okay. Thank you and just a follow up question on G&A just at a high level. You know I'm wondering is there a path to getting that G&A down below 5% of sales over time.

And if so does that have to come from sales growth or are there maybe some still some opportunities on the corporate side to reduce the G&A dollars on an absolute basis, David you might have alluded to this a fragrance for I'm. Just wondering if you could provide additional color on how youre thinking about this topic.

Yes. The good news is we've made some really tough calls on G&A over the years and we're in great shape.

The good news is as G&A as a percent of sales you can do it by growing revenue and you can do by managing costs, we will always be prudent managing our costs, but I don't anticipate any major massive restructurings or anything like that to achieve these targets.

So we will invest where we need to invest and we will pull back where we need to pull back but.

I think if we can keep our overhead.

Growing slowly and then have revenue exceed that we can get to that 5% range and I think 5% range is a good base camp for our company, 5% of revenue. So that's what we're shooting for and we've taken a lot of tough actions already.

Okay.

Thank you.

Our next question is from Andrew <unk> with BMO capital markets. Please proceed.

Hey, good morning, Thanks for taking my questions. My first one I just wanted to go back to the.

Commodity inflation outlook that you provided.

We understand that is not a formal guidance, but mid to high single digits for next year potentially as a first look.

I would've thought that you were above the market on beef just just given your aggressive blocks there.

What you said about <unk>. So is there anything else in the basket just so we should be aware of as we kind of evaluate what that might look like for next year.

Yes, I think that there is some like I said there are some good guys. In there is some bad guys I think as it relates to sort of how we're thinking about next year playing out beef again being inflationary makes sense oil is the other one right I think that oil is being diverted to other uses theres. Some pressure in the marketplace more oil will tend to be pretty inflationary next year.

And then things like French fries, there's just other categories, where we just aren't seeing some of the relief that you.

Have expected from a commodity standpoint, that's not to say that theres not things that are going to break our way or things that are going to be more benign from an inflation standpoint.

Certainly if things like I called out like chicken dairy seafood areas like that should be more benign next year, but look I mean, <unk>, 40% of our Baskin and thats going to really drive a lot of our outcomes as it relates to our overall commodity outlook for the year.

Got it okay that makes sense and then the other one is just on your value scores with a couple of price increases here over the last couple of weeks understanding.

That you're lagging kind of appears lagging the food at home are you seeing that show up incrementally in your value scores as you're kind of evaluating.

Additional price increases going forward or the magnitude to which you are taking prices here in these last couple.

The really great news is not only our operating scores improving but our value scores are improving and that's not our own internal report card.

Third party data so while we feel great about where we're going.

Okay, great. Thank you.

And our next question is from.

Dennis Geiger with USB. Please proceed.

Great. Thank you wondering if you guys could speak a bit more about the development opportunity across the portfolio recognizing you will provide more color on the on.

On the next call regarding twenty-three, but anything going on at a higher level that you can share about the strength of the new unit pipeline. The returns currently on where the key opportunities our supply chain, perhaps all kind of within the context of the work that mark and the team are doing and within the context of kind of that longer term, 2% to 3% target just curious if there is.

Anything. Additionally, you can you can share there at this point thank you.

Yes.

I am very pleased with where we're going.

The smaller box, what we referred to as the Joy box at Outback.

Opening very well, providing excellent returns at lower cost.

And we're building in our stronghold markets.

We're seeing really great performance in Florida for instance.

In other places so that for US is a massive opportunity to grow this business and build a pipeline that make some sense at outback. So that's number one.

And then secondly at Outback relocation program for Us.

I talked about prepared remarks, we opened those things up we're doing $4 $7 million. So.

Way above the system average so when we know that we have a site with our brand at Outback, We've got significant sales increases so that's.

Number two for us.

Number three I talked about Carrabba's, Italian grill, and they earn the right to expand.

And so we'll talk to that.

More in the future, but we're very excited about building out that brand.

Number four flemings Prime steakhouse, you've seen their numbers the profitability is very strong.

Some wonderful sites are opening up a new one in Fort Lauderdale, and December Youll see more in California, Texas, and Florida, So fundings will be opportunity for us to continue to grow that business and we're very excited about that so that's the third one and then lastly, I'd be remiss if I didn't talk to.

Our success in Brazil, Opex Steakhouse is is expanding there if we talked about we're at 137 restaurants, where think runaway to 240.

They are opening up.

<unk>, which is their version of Carrabba's. So that's an opportunity for us. They are funding all of this with their own free cash flow.

And then finally I want to call out our franchise partners in Korea, but they've done a great job opening up restaurants and building that business. So.

Very pleased with the work that they're doing so those are the development opportunities. We have it's our it's our business presidents and the task of our real estate team to get that pipeline more vibrant and moving and I'm very optimistic that we're going to be able to do that.

And do it within the construct of the balanced capital strategy that Chris talked about <unk>.

Lastly, we have a very.

Robust post completion process. So we can adjust things as they see fit and so you can count on our utilization of capital to be very prudent and good for the shareholders.

Yes.

Great I appreciate that incremental color just one more then if you could speak to the rewards program at all and sort of what's the latest with respect to engagement benefits youre seeing with the customer with the program and kind of on the look ahead, but the potential for the program as you think about it as sort of a.

Our marketing efficiency tools, CRM tools and it really just the broader opportunity for the program if there's much incremental to highlight there. Thanks guys.

We've got $13 million.

Dine rewards members.

Is.

Underutilized.

We have very loyal people there we love the program that we have we want to continue to use it with various.

Marketing programs and really reward and recognize those customers im not for competitive reasons I'm not going to get into some of the things that we're thinking in the future. We would love to think through some partnerships, but it's something that we've been talking about internally.

Strongly being to bring that program to life because it is something that is well established in our system.

Okay.

Great. Thanks, Dave.

That concludes our question and answer session I would like to turn the conference back over to management for closing comments.

Well. Thank you everybody. We appreciate you for joining us today.

We look forward to updating you about our company in February on our next earnings call. Thank you.

Thank you. This concludes today's conference you may disconnect your lines at this time and thank you for your participation.

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Greetings and welcome to <unk> brands third quarter 2022 earnings call. At this time, all participants are in a listen only mode.

A question and answer session will follow management's prepared remarks. It is now my pleasure to introduce your host Mark Graff Senior Vice President of Investor Relations. Thank you. Mr. <unk> you may begin.

And good morning, everyone with me on today's call are David Deno, Our Chief Executive Officer, and Chris Meyer Executive Vice President and Chief Financial Officer by now you should have access to our fiscal third quarter 2022 earnings release. It can also be found on our website at <unk> dot com in the investors section.

Throughout this conference call, we will be presenting results on an adjusted basis, an explanation of our use of non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures appear in our earnings release on our website as previously described.

Some of these risks are mentioned in our earnings release, others are discussed in our SEC filings, which are available at SEC Gov. During today's call. We'll provide a brief recap of our financial performance for the fiscal third quarter 2020 to an overview of company highlights and an update to 2020 guidance. Once we've completed these remarks, we'll open up the call.

For questions and with that I'd now like to turn the call over to David Deno.

Well, thank you Mark and welcome to everyone listening today as noted in this morning's earnings release adjusted Q3 2022 diluted earnings per share was 35.

Which is more than triple our 2019 results. This compares to 57 in Q3 2021, as we lap exceptional earnings from stimulus checks and pent up consumer demand. This quarter was among the highest inflationary quarters of the year. We made the conscious decision to preserve our value equation and not raise prices to fully offset inflation.

While the consumer has remained resilient to date, we believe the short term decision will have long term benefits for the business the confidence in our strategy, both domestically and internationally as reflected in our increased revenue guidance. This was driven in large part by the momentum we saw in our sales initiatives during the quarter and the marketing investments, we are making the balance of the year during the.

The quarter, we saw comp trends improved sequentially every month. This was driven by stronger traffic across all U S concepts, particularly in in restaurant dining importantly, this represent over 300 basis points of outperformance in traffic versus the industry on a three year basis, we continue to execute against the comprehensive plan we.

To build a stronger leaner operations centered company. This includes leveraging our leading off premises business growing digital capabilities and improved operational efficiencies to deliver on our key commitments.

These results would not have been possible without the talented and dedicated employees in our restaurants in the restaurant support center I'm, especially proud of the team's proactive response to aid and assist those impacted by hurricane in the storm hit the West Coast of Florida at the end of September , causing significant disruption to residents our employees and restaurants among their efforts the team.

Third more than 11001st responders volunteers and families in southwest, Florida. This is a testament to the passion of our employees to take care of our people and communities. During this time of need.

As we've said in past calls the key elements of our plan include first growth in restaurant sales by improving our service levels and food offerings. We have made investments over the past several years to elevate the customer experience, which is showing up in improved social in customer scores, especially at outback as part of this effort. We continue to look for ways to simplify the <unk>.

The new cooking technology by the middle of next year.

As technology Rolls out these innovations should reduce operational complexity in our restaurants and further improve customer service.

Second expand our leading off premises business, we continue to capitalize on our strong carry out delivery capabilities retention levels held steady with Q2 and are contributing to sales outperformance.

Accordingly profit margins in this channel are comparable to the margins of the in restaurant business third party delivery continues to grow even as people have returned to in restaurant dining. We're also pursuing catering opportunities as people are returning to offices hearing will also be an important lever for growth over the upcoming holiday season, we offer.

<unk> value through our bundled platforms, we expect off premises be a large and growing part of the business.

Third leverage operating margin gains by growing sales and reducing cost. This starts by growing healthy traffic across the in restaurant and off premise channels. We also reduced reliance on discounting or promotional <unk> and pivoted advertising spend towards more targeted high return digital channels. In addition, we remained disciplined in managing mill.

<unk> and are aggressively pursuing efficiencies of food labor and overhead as Chris will discuss despite the large increase in costs were able to achieve our margin objectives, where we more than doubled our operating margins versus 2019, and lastly is becoming even more digitally savvy company in Q3 approximately seven.

87% of total U S off premises sales were through digital channels in the past year, we implemented a new online ordering system and mobile app to support our digital business both have outperformed expectations in the new App has over 2 million downloads you can expect to see more activity as we improve the functionality and features of our app in digital offer.

Earnings.

We continue to make progress executing against our development plans and are building a strong pipeline of new units and we expect to accelerate new unit growth in 2023, our growth priorities are first ignite new unit growth at Outback, we are continuing to open a smaller and less expensive prototypes that will enable more meaningful growth with <unk>.

We returned this includes pursuing new trade areas in rapidly growing markets as well as fill in opportunities in major metro areas to date, we have opened five new smaller locations with strong sales and positive guest feedback. In addition, we are also upgrading a temporary thing or asset base investments in Remodels are offering good return.

And recent relocations at Outback, providing outsized sales lift with volumes exceeding $4 7 million.

Well above the system average second open more fleming's the business is performing extremely well and has a proven category leader in fine dining. The average unit volumes are the best in the portfolio. We are building first class facilities on great real estate, largely and stronghold markets of Florida.

California, and Texas, we are opening our newest Flemington Fort Lauderdale in December .

Brands are approximately 240 restaurants overtime in this underpenetrated market and finally expand the Carrabba's business in key markets problems has been among our top performers in the company over the last three years. They have built a terrific off premises business has opened up a number of possibilities for the brand. The most recent opening in <unk>.

Balance of the year.

Thanks, Dave and good morning, everyone I would like to start by providing a recap of our financial performance for the fiscal third quarter of 2022 <unk>.

Total revenues in Q3 were 1.06 billion.

Which was up four 5% from 2021, driven by a $36 million increase in international revenue, primarily in Brazil, as well as a one 4% increase in U S comparable restaurant sales.

Our performance versus 2019 continues to be bolstered by our significant growth in off premise dining.

At 25% of U S sales Q3 off premises was in line with Q2. Additionally, the highly incremental third party delivery business continues to grow and was 12, 4% of U S revenues in Q3 versus 12% in Q2.

Was driven by a 3% price increase taken in late August in the face of more persistent inflation looking ahead to Q4 in October we have taken some additional pricing to replace a portion of the 2021 pricing actions that will fall off in late November as a result, we would expect our Q4 dollars.

2022 average check benefit to be in the 9% to 10% range, primarily driven by pricing.

On a final note on Q3 sales, Brazil, Q3 comps were up 31% versus 2021, Brazil's third quarter reflected the lapping of Covid related operating restrictions from last year importantly comp sales were up 25, 2% versus 2019 levels.

As it relates to other aspects of our Q3 financial performance GAAP diluted earnings per share for the quarter was 30 <unk> versus <unk> of diluted earnings per share in 2021. The large increase in GAAP earnings was primarily driven by the lapping of our 2021 purchase of the Carrabba's royalty stream from the brand's founders.

Adjusted diluted earnings per share was 35 <unk>.

Versus 57 of adjusted diluted earnings per share in 2021. It is worth noting that our Q3 result was significantly higher than our 2019 adjusted EPS of <unk> 10.

<unk> ran about 13% driven by utilities.

Efficiencies and overhead as well as increased average check.

In Q3 full.

Full year weighted average share count is still expected to be approximately 93 million shares on an adjusted basis.

Turning to our capital structure total debt was approximately $825 million and our liquidity position remains strong. We are pleased with the progress we have made to improve our balance sheet.

We remain committed to a balanced capital allocation strategy.

Turning to our 2022 guidance.

We are increasing our 2022 guidance for total revenues to be between $4 $43 6 billion and $4 466 billion. This.

This is up from our prior guidance of $4 $4 billion to 445 billion. This increase was driven by a couple of factors first we had higher than expected revenues in the third quarter, both domestically and in Brazil, aided by incremental marketing spend and second our recent pricing actions where law.

Larger than our original plan and we have not seen significant consumer resistance from these increases in terms of traffic or mix degradation. Our absolute level of pricing is in line with the broader peer group and remains well below grocery price increases.

This full year revenue guidance implies a Q4 revenue range of between 1115 and $1 $145 billion.

We are reaffirming our total year guidance for adjusted EPS. As a reminder, we expect adjusted EPS to be between $2 45, and $2 55.

This implies a Q4 adjusted EPS range of between 63% to 73.

We expect the profit benefits from increased revenues to be offset by higher than expected operating expense inflation. This guidance also includes an estimated <unk> <unk> impact from hurricane and despite these headwinds we expect our Q4 adjusted EPS to be significantly higher than 2019.

For perspective, our adjusted EPS in Q4 of 2019 was 32.

GAAP diluted EPS is now expected to be between $1 <unk> and $1 15. This is down from prior guidance of $1 11 to $1 22. We also expect Q4 GAAP EPS to be between 61 71.

Thank you Steve I would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment may be necessary to pick up your handset before pressing the star keys.

Please ask one question and one follow up question, one moment, while we poll for questions.

Our first question is from Jeffrey Bernstein with Barclays. Please proceed.

Great. Thank you very much.

First question was just on the broader consumer Dave you mentioned that it sounds like comps improved sequentially through the third quarter.

Just wondering if you think theres any impact from a slowing macro in there when you parse through the data on a two and three year basis.

Whether you're willing to share anything on October just because it does seem like.

Sure Good morning, Jeff.

Yes, we see trends doing well.

We have provided fourth quarter guidance.

We've seen the sequential improvement in Q3, we provided guidance, which implies a comp of 3% to 6% October was right smack in that range was good for us and we see that coming together in the quarter quite well and Thats why we raised our revenue guidance.

If you look at the <unk>.

We're offering we've tried to make sure that we've taken price increases below inflation to maintain our value equation and offer very good different types of.

Our business and our value offerings to address that finally, I think the company is in really good shape given the improvements we've made in margins and cash flow and our balance sheet.

Two to go forward.

Understood and then the follow up on the.

The restaurant margins.

Together you'd see some significant potential margin recapture on earnings growth and 23, I'm just wondering whether you would agree with that assessment.

Sure around the inflation easing or maybe we are underestimating the potential headwinds that you look at the 23, just trying to get a sense for that scenario of potential big margin expansion. If those factors would've come true. Thank you.

Hey, Good morning, Jeff will start with Q4, I think as it relates to Q4. The one thing that we have going for us in Q4 that we haven't had for the balance of the year is as Dave mentioned, we've been pretty diligent about underpricing inflation for the entire year. There is sort of an inflection given the timing of some of our price increases where we will have more price.

<unk> relative to inflation that we've had in any quarter throughout the year. So that gives us a little bit of optimism at least in the fourth quarter that we can do better in op margin on a year over year basis than maybe we have certainly in Q3 now look I think as you look forward to 2023.

The reality is if you look at this year and you look at where our margins are.

Understood as you mentioned have you locked in a lot of people are talking about beef easing, but then there's a supply heard concern in the back half of next year. So I'm just trying to get a sense for what your approach has been on inflation, specifically around beef as we look to 'twenty three whether you want to look at now or whether you are not contracting because you expect prices to ease any color on that front.

Yes, So 2022 is pretty much in the books, we're 97% or so locked on our past it for this year.

I think that it's too early to give definitive thoughts on 'twenty three but look we are optimistic it's going to be a less inflationary environment than it was in 2022.

Even that beef represents close to 40% of our basket. This could drive the entire commodity basket to be inflationary next year, but we're also seeing pressure in categories like oil.

Thank you.

Our next question is from Alan Siegel with Jefferies. Please proceed.

Okay. Thanks.

<unk> on the international operating margins it seems like we're finally.

<unk> seen more of the operating margin expansion really materialize this business.

With the relative overhead impact seemingly narrowing so I'm just wondering how much of this is due to sustainable efficiencies and leverage in the business that you can continue as we get further into.

Into the future.

Yes.

We're really pleased with what we're seeing in international, especially Brazil now talk broadly about that first I'll turn over to Chris for some more financial details, but as.

Topline sales are extremely strong new unit development is very very strong we're at 137 restaurants on our way to the mid two hundreds.

We've got.

<unk> dollars down there to invest there or they are just growing and growing and growing as a result that can fund their own internal growth, which is a very positive story.

All profitability picture this year and it's playing out exactly like we thought I mean this business is just phenomenal. The 18, 5% operating margin is 300 basis points or so better than it was a year ago.

They are really on track to put together a really fantastic year after a challenging year last year amidst all the COVID-19 restrictions.

Great and on the other restaurant expense line could you talk about any temporary expenses in there or is it just really the build up of all the higher energy costs that you talked about her.

Anything else.

Forward to Q3, and it was up 13% right now.

It's hard to say, how long that utilities pressure lasse.

But certainly I would expect it to continue into the fourth quarter I think that you would start to get relief again to be honest. When you start lapping these accelerated increases sometime in the middle of next year unless there is any fundamental changes in energy pricing sort of in the macro environment, but thats kind of how we see it at this point.

Got it thank you.

Our next question is from Lauren Silberman with credit Suisse. Please proceed.

Thank you so I'll start with customer behavior as you look across your brands are you seeing any signs of changes in customer behavior trade down check management and to the extent possible any sense of differences amongst your lower income versus high powered.

Yes, we get with our good morning with our.

Portfolio, we get a broad look at the consumer and so.

You look at it we've got some interesting combo offers at Outback are doing really well, we've got some prefixed menu items that at bonefish that are doing really well and then we've got the high end consumer and so far we have not seen a major change in trend among the various consumer basis.

And if I would say one thing fine dining continues to do extremely well and fleming's within fine dining does really well so we're seeing.

The dynamics, there still do well across our entire portfolio. The one area that is also really interesting before I turn over to Chris for any other comments.

Also interesting is our third party delivery also is very vibrant so that consumer is doing well as well.

Only thing I would add is Lauren good morning. It is that we're not seeing any negative mixed trends right Q2 was still positive 1% or so I think that mitigate some in Q4, but we don't expect it to turn negative and I think that if youre using mix in terms of what am I choosing when I come into the restaurant on menu.

We're not seeing negative mix trends at this point, which is an encouraging sign that the consumer is hanging in there.

Great. That's really helpful. And then just on marketing how are you thinking about advertising from here.

Third quarter wherewith advertising compared to historical levels, just trying to understand broadly what youre seeing in that promotional environment. Thank you.

One thing we learned during the pandemic was.

Really have an outstanding understanding of our marketing and we're thrilled that the world is going more and more digital which gives us flexibility.

Discounting from US we think we've got our menu prices in line. We think we've got some great offers in line, we understand the digital marketing.

Piece, we can flex up and down and we're really pleased with the returns that we're seeing on our marketing.

Great. Thank you very much.

Our next question is from John <unk> with J P. Morgan. Please proceed.

Hi, I wanted to ask about just the relationship between pricing and traffic I mean many of us.

And there are kind of talking about pricing to cover costs, but I'm just wondering what you kind of see as the consumer sensitivity.

Looking at your table for example, I mean, there was almost a perfect inverse correlation between the increases in average ticket and the decreases in traffic at least on a one year basis. So.

The question is does that mean do you think that youre actually our pricing at least a certain percentage of your customer base in other words your pricing as the industry pricing.

Responsible for some of the traffic declines or would those traffic declines in your opinion be the same even with a much less degree of pricing than you and your competitors are taking.

Yes, I think it's important John that we've seen a sequential improvement in traffic during the quarter and we're guiding to that in Q4.

And we have specifically not <unk>.

<unk> meals that we've done some of the prefix.

Menus at Bonefish and also some things at Carrabba's is doing.

Our operating scores our consumer scores are improving every day. These are the things that we're going to do to build on traffic and I'd also say John as you know 2021 as far as the lap standpoint.

During the quarter, we were lapping some pretty heavy stimulus spending still so we saw sequential improvement in traffic during the quarter. We will continue to see some hopefully some improvement and I think we have the actions in place to make it work and the only thing I would add John is and I know your question isn't really a bloom and specific question its more of a broader theme.

<unk> eight 5% pricing benefit on a three year stacked basis, which is really relatively low in this environment. So we are being very thoughtful about menu pricing for.

For the reasons that you talked about.

Okay Alright.

A separate question if I can Dave in your prepared remarks, you talked about pursuing food labor and overhead efficiencies is that related to handhelds kgs.

Okay.

Yeah that that you can pursue that are going to benefit the customer and employee experience.

Yes.

Big buckets, John and we're always looking at our organization to invest where we need to invest in and pull back where we need to pull back and I think I think you have mentioned over the years that <unk> been impressed with our efforts on overhead and things and I think the company is in really good shape, there, but we'll continue always to look at things.

We will provide for our investors what we think the financial implications are for that on a productivity side, but we also see a large sales opportunity from the standpoint of faster click throughs at table turns better accuracy and this is we are seeing this in the restaurants, where they are in place were up to 30.

5% of our restaurants have ovens now and a lot of high volume restaurants, So we're seeing that.

And then secondly.

We're going to task our supply chain organization to continue to.

Provide productivity opportunities for the companies, while improving quality of the food and.

Our food availability to our restaurants, where they've done a great job. So supply chain productivity is a big part of what we have planned for next year as well. So those are the two big buckets John .

Thank you.

Yeah.

Our next question is from Jared Garber with Goldman Sachs. Please proceed.

Jared please check and see if your line is muted.

Hi can you hear me, yes go ahead.

Great. Thanks.

<unk> this year thanks.

Yeah, a real shout out to Carrabba's, Italian grill, and the team they've done a fantastic job on catering.

Obviously, the food travels well, but they transform that business for us and showed us away and with the holiday season coming up and people return to offices and stuff. This is going to be even a bigger opportunity for carrabba's. So hats off to the team for doing that now when we got to do as the rest of the company needs to come along like Carrabba's had performed like Carrabba's.

Travelers to continue to lead the way lastly, Fleming's has done a really great job.

With catering and private dining we see a tailwind with people coming back to work and having office parties and holidays, we see a tailwind from Fleming's Prime Steakhouse.

This holiday season.

Thanks, that's great color.

I guess your commentary on Carrabba's certainly is.

To be encouraging as do the results.

Sort of begs the question and maybe I have asked this before so apologies but.

In your remarks on unit growth I think Carrabba's, maybe was the third.

Third priority after Outback and Flemings.

Why not lean in more on unit growth at Carrabba's and maybe you are but can you maybe frame for us the longer term opportunity that you see there at only 200 units right now it would seem like the opportunity is certainly there for the picking thank you.

Yes. This is an important point <unk> earned the right to expand.

And Mark Graf runs development is working with our team there to identify those opportunities.

We are working on the.

Much like at Outback working on the box, we're working on the economics.

Working on a business that has 35% 40% off premises, which is just amazing and.

And we think we have expansion opportunity here.

Here, that's really great that we were just talking with our board about that last week.

I'll look for Carrabba's now what are we going to do besides work on the box, we're going to expand in our stronghold markets first and foremost.

Florida, Texas, Tennessee, Georgia those are.

The areas that we're really looking at and the other interesting thing we have opportunities with our restaurants, but the other interesting thing about <unk> is there a delivery carry out type business that we can build as well.

There, but kudos to the brand and the team between sales and profits and everything else and leading the way lastly, we did open our first.

Crops in quite some time and Tampa.

It's our home market, but the sales have just been off the charts. So high hopes for the brand.

Thanks, Dave.

Our next question is from Jon Tower with Citigroup. Please proceed.

Great. Thanks, just to follow up first and then a question first on the pricing side can you talk about where you are running in the <unk> and then perhaps what carries over into 2023, assuming that there's no other price taken.

Now in early October I'm, adding another 2% pricing action, mostly at our other brands.

Then in late November 3% pricing falls off so.

<unk> the year at about 8% pricing than in Q1, you have another 1% thats going to fall off so I would expect to be in the 7% or so range exiting Q1, but again just to reinforce its really important to remind everybody that we only had one 4% pricing in 2021. So again this year if you.

Look at the total year pricing coming in around 7% or three year pricing is going to be like eight eight to eight 5%. So thats relatively low in this environment.

Awesome, Thanks for that color I appreciate it.

Kind of pivoting a little bit on the off premise specifically delivery business I think it was mentioned earlier in the transcript.

12, 5% of your sales in.

In the third quarter coming from delivery channel I'm, just curious how you're planning for.

It does seem like we're getting signals that the economy is going to rollover and soften and it appears that the delivery channel is probably the most discretionary occasion within the restaurant.

Industry, So I'm curious.

To hear how youre planning for potentially softer.

Demand environment.

In the delivery channel specifically.

Yes first of all.

Having been involved in the delivery business for many many years.

With Yum brands and then now here to.

The delivery business is really strong and the customer has a habit.

And I mentioned in.

An earlier question on my prepared remarks, I can't remember, but our third party delivery sales continue to be really great and I think people get John get in the habit of ordering now.

With our third party delivery providers.

There are each of them.

And strong relationship with our third party partners.

Got it thank you.

Our next question is from Brian Vaccaro with Raymond James. Please proceed.

Thanks, and good morning, just circling back on food costs, a little bit of CRISPR.

Q3 commodity inflation land for the quarter and what have you embedded in terms of year on year inflation in the fourth quarter on food costs.

Yes, it's probably around 13% to 13, 5% in Q3, and then it'll be around the 12% inflation in Q4 for overall commodities.

Okay, great. Thank you for that and I guess the other question I had was on labor.

The recovery in dine in that you're experiencing I'm curious to what degree you've added hours back into the box. Maybe you can level set where current staffing levels are versus where you need them to be to deliver.

The dine in experience, maybe you can just touch on that a bit.

Yes first of all.

Like I mentioned earlier, Brian I'm all set.

Here, our customer measured at outback versus the industry and competition are really strong we've made big improvements in many different ways and very very pleased about that which will help us over time grow comp sales and take share.

Our staffing levels the market is much better than it was say 18 months ago still pockets of challenges, but the thing that we've seen Brian with our productivity efforts and our good services were not.

Back to staffing hours and levels of say 2019, and we believe that our restaurants are we have pockets of opportunity obviously, but our restaurants are in really good shape from a staffing standpoint.

And as we mentioned earlier with the handhelds and the oven technology that will give us opportunity to further manage labor hours in the restaurants and offer opportunity for us to improve service as well. So I don't think you'll see us go back to labor hours of prior years.

As we go forward.

While importantly, importantly, while we are improving customer service and we're seeing that in our external metrics that people provides us.

Okay and as the labor market has has loosened and I think we're lapping.

Sort of the outsized inflation rates that we saw as everybody was scrambling to hire people in the second half of last year I'm, just curious on wage inflation.

Where's wage inflation in the third quarter and are you starting to see year on year inflation Chris.

If not.

And plate moving into the fourth quarter.

Yes, so solid carrier so first of all to answer your first question. Your total wage inflation is about 9% hourly.

Higher than that management is a bit lower but total wage inflation was 9% in Q3, it probably steps down by 1% and a half or so in Q4, just given what you're lapping from last year I would say the way I would characterize sort of that hourly wage inflation is that obviously, it's still inflationary or year over year, but from a.

Okay, and then last one for me just on capital allocation I'm curious how does the higher rate environment impact your appetite for share repurchases versus paying down the revolver and can you just remind us sort of on the dynamics on the remaining convertible note is there a potential to remove that overhang and the near term that Duluth.

Hey, Thank you.

Yeah sure. So look I don't think our capital allocation strategy or thought has changed excuse me has changed too much it's going to be balanced.

<unk> funds to fund our growth areas that Dave has talked about via capital expenditures.

And the health of our business and it provides longer term investors with a stickier return.

Look I think we do think that our stock is undervalued and we're going to make share repurchases are part of that strategy and we're making good progress on our $125 million authorization. So.

Continue to moderate next year to see if it makes sense to take out either all or a portion of the remaining convert I think the thing to keep in mind with the convert though is that it is you are going to have to pay a bit of a premium to retire. It early and that is a use of cash that potentially could use for something else like debt pay down dividend share repurchase. So we're just going to.

You have to weigh that.

Optionality next year as part of the calculus with when we're allocating our free cash flow.

Alright very helpful. Thank you.

Our next question is from Brian Mullan with Deutsche Bank. Please proceed.

Okay. Thank you just a question on Outback.

The average weekly sales are running nicely above 2019, but it does seem like perhaps the dining room traffic is down a decent amount relative to three years ago. You are spending less on marketing dollars. It seems like it was a very smart thing to do for the business.

My question is just besides spending less in marketing is there anything going on with the Outback consumer of the industry that you might call out contributor.

Do you see a path to fully recapturing that dining room traffic over time.

Yes, no we will.

<unk> will continue to improve on dining room traffic as we go forward I've talked about some of the initiatives we have in place.

Move forward for us at Outback, we don't as we mentioned earlier, we don't see anything particular consumer dynamics that concern us.

A matter of what we're doing in our business to continue to grow that traffic now what we'd have to also do at the same time as grow our delivery and off.

And carry out business in which we will also be doing but from a specific in restaurant dining standpoint, those are the three or four things that we're concentrating on two to improve our performance. Yes, we had to unpack a lot of this last Q3, when we talked about Opex performance relative to 2019, the lap of the promotional and the <unk> and the discount.

Activity from 2019 is a very very steep number in fact, we're right now in the middle of lapping the steak and lobster promotion from 2019 that we talked about at some length last year. So look I think that that is going to have an outsized impact on traffic, but I think that that's a trade we're willing to make and I think that now the key for us is to build back.

Using the levers that Dave discussed to healthy and restaurant traffic moving forward.

Okay. Thank you and just a follow up question on G&A just at a high level. You know I'm wondering is there a path to getting that G&A down below 5% of sales over time.

If so does that does that have to come from sales growth are there maybe some still some opportunities on the corporate side to reduce the G&A dollars on an absolute basis, Dave you might have alluded to this a fragrance, but I'm just wondering if you could provide additional color on how youre thinking about this topic.

Yes. The good news is we've made some really tough calls on G&A over the years and we're in great shape.

We will invest where we need to invest and we will pull back where we need to pull back but.

I think if we can keep our overhead.

Going slowly and then have revenue exceed that we could get to that 5% range and I think 5% range is a good base camp for our company 5% of revenue.

That's what we're shooting for and we've taken a lot of tough actions already.

Okay.

Thank you.

Our next question is from Andrew <unk> with.

With BMO capital markets. Please proceed.

Hey, good morning, Thanks for taking my questions. My first one I just wanted to go back to the.

Commodity inflation outlook that you provided.

Completely understand thats, not a formal guidance, but mid to high single digits for next year potentially as a first look.

I would have thought.

You were above the market on beef just given your aggressive blocks there.

What you said about <unk>. So is there anything else in the basket. So we should be aware of as we kind of evaluate what that might look like for next year.

Yes, I think that there is some like I said there are some good guys and Theres. Some bad guys I think as it relates to sort of how we're thinking about next year playing out.

Again being inflationary makes sense oil is the other one right I think that oil is being diverted to other uses theres. Some pressure in the marketplace more oil will tend to be pretty inflationary next year.

And then things like French Fries, I mean, there's just other categories, where we just aren't seeing some of the relief that you might've expected from a commodity standpoint, that's not to say that theres not things that are going to break our way or things that are going to be more benign from an inflation standpoint.

Certainly if things like I called out like chicken dairy seafood areas like that should be more benign next year, but look I mean beef 40% of our basket.

That's going to really drive a lot of our outcomes as it relates to our overall commodity outlook for the year.

Got it okay that makes sense and then the other one is just on your value scores with a couple of price increases here over the last couple of weeks understanding.

That you're lagging kind of appears lagging the food at home are you seeing that show up incrementally in your value scores as you're kind of evaluating additional.

Additional price increases going forward or the magnitude of what you are taking prices here in these last couple.

The really great news is not only our operating scores improving but our value scores are improving and that's not our own internal report card that's.

Third party data so while we feel great about where we're going.

Okay, great. Thank you.

And our next question is from.

Dennis Geiger with USB. Please proceed.

Great. Thank you wondering if you guys could speak a bit more about the development opportunity across the portfolio recognizing you'll provide more color on that.

On the next call regarding 'twenty, three but anything going on at a higher level that you can share about the strength of the new unit pipeline. The returns currently on where are the key opportunities our supply chain, perhaps all kind of within the context of the work that mark and the team are doing and within the context of kind of that longer term, 2% to 3% target just curious if there is.

Anything additional you can you can share there at this point thank you.

Yes.

Im very pleased with where we're going.

The smaller box, what we referred to as the Joy box at Outback is opening very well, providing excellent returns at lower cost.

And we're building in our stronghold markets.

We were seeing really great performance in Florida for instance.

In other places.

That for US is a massive opportunity to grow this business and build a pipeline that make some sense at outback. So that's number one.

And then secondly at Outback relocation program for Us.

I talked about prepared remarks, we opened those things up we're doing $4 $7 million. So.

Way above the system average so when we know that we have a site with our branded Outback, we got significant sales increases.

Number two for us.

Number three I talked about Carrabba's, Italian grill, and they've earned the right to expand.

And so we will talk to that.

More in the future, but we're very excited about building out that brand.

Number four flemings Prime steakhouse, you've seen their numbers the profitability is very strong we're getting some wonderful sites are opening up a new one in Fort Lauderdale, and December Youll see more in California, Texas, and Florida, So fundings will be opportunity for us to continue to.

To grow that business and we're very excited about that so that's the third one and then lastly, I'd be remiss if I didn't talk to.

Our success in Brazil, Opex Steakhouse as is expanding there if we talked about we're at 137 restaurants, we think runaway to 240.

They are opening up.

<unk>, which is their version of Carrabba's. So thats an opportunity for us are funding all of this with their own free cash flow.

And then finally I want to call out our franchise partners in Korea, they've done a great job opening up restaurants and building that business. So.

And do it within the construct of the balanced capital strategy that Chris talked about.

Lastly, we have a very.

<unk> robust post.

Post completion process. So we can adjust things as they see fit and so you can count on our utilization of capital to be very prudent and good for the shareholders.

Great I appreciate that incremental color just one more then if you could speak to the rewards program at all and sort of what's the latest with respect to engagement benefits youre seeing with the customer with the program and kind of on the look ahead the potential for the program as you think about it as sort of a.

<unk> marketing efficiency tools, CRM tool and it really just the broader opportunity for the program. If there's much incremental to highlight there. Thanks guys. Yes. There is we've got $13 million.

Dying rewards members.

Is <unk>.

Under utilized.

We have very loyal people there we love the program that we have we want to continue to use it with various.

Marketing programs and really reward and recognize those customers have not for competitive reasons im not going to get into some of the things that we're thinking in the future. We would love to think through some partnerships, but it's something that we've been talking about internally.

Strongly being to bring that program to life, because it is something thats well established in our system.

Great. Thanks, Dave.

That concludes our question and answer session I would like to turn the conference back over to management for closing comments.

Well. Thank you everybody. We appreciate you for joining us today.

We look forward to updating you about our company in February on our next earnings call. Thank you.

Thank you. This concludes today's conference you may disconnect your lines at this time and thank you for your participation.

Q3 2022 Bloomin' Brands Inc Earnings Call

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