Q2 2023 Brinker International Inc Earnings Call

February 1, 2023

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[music].

Good day and welcome to the Brinker International Q2 F. 'twenty three earnings call. At this time, all participants have been placed on a listen only mode. The floor will be opened for questions and comments. Following the presentation. It is now my pleasure to turn the floor over to your host Michael Ware.

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

Thank you Holly and good morning, everyone and thank you for participating on today's call.

Joining me today are Kevin Hoffman, our Chief Executive Officer, and President and Joe Taylor, Our Chief Financial Officer.

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

As we always do Kevin and Joe will first make prepared comments related to our strategic initiatives and operating performance.

Then we will open the call for your questions.

Before beginning our comments I would like to remind everyone of our safe Harbor regarding forward looking statements. During our call management may discuss certain items, which are not based entirely on historical facts any such items should be considered forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.

All such statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated such risks and uncertainties include factors more completely described in this morning's press release and the company's filings with the SEC and of course on the call. We may refer to certain non-GAAP financial measures that management uses in its review of the business and believes will provide.

Insight into the company's ongoing operations and with that said I will turn the call over to Kevin.

Thanks, Mike and good morning, everyone and thank you for joining us as we share insights on the momentum we're seeing in the business progress against our strategy and plans to maintain that momentum.

I'll start with <unk>, which delivered a very strong second quarter sales and margin growth.

As some of the business model changes that have accelerated its recovery.

We expected marciano performance to exceed pre COVID-19 levels during the quarter.

And the team delivered comp sales were up 21% year over year and margins improved significantly.

One of the big drivers of growth during the quarter was the off premise business, which delivered an 82% increase.

Versus pre pandemic levels.

<unk> is off premise sales are highly incremental customer insights are telling us that off premise sales, which are meals consumed at home or a different occasions in the dining get togethers and celebrations that <unk> is known for.

Mcdonald's guests, who visit us for everyday homely replacement visit more often than the dining guests.

Our premise for marquee analyst drives two things that we really like <unk> and frequency.

The solid recovery of the core business plus the incrementals of the SaaS growing off premise channel coupled with an improved business model makes us very excited about the future of Montana.

Now for Chili's, Chili's, we made solid progress strengthening the core business and generating momentum in our results.

Second quarter same store sales were up 8%, we returned to profitability and we're steadily improving the guest and team member experience.

As you recall during our last call last quarter I shared we were starting to implement our longer term strategy to sustainably grow the core business by focusing on the key areas that will differentiate and best position chili's in the marketplace.

While there is still a lot of work ahead of us I am encouraged by the progress our team has made across four pillars of our strategy.

The first pillar as team members with the goal of making their job easier more fun and more rewarding, which we believe will lower turnover increase engagement and ultimately lead to better team member and guest experience at Chili's.

We continue to make meaningful progress simplifying both our menu and operational procedures in our heart of house as.

As I mentioned last quarter simplification is not a onetime event, but an ongoing commitment to our team our leadership team and I continue to host listening towards all around the country and as managers and team members see changes happening. They are feeling heard and understand that they have a direct site in the future of their operation These too.

<unk> believes are now resulting in both significantly improved employee engagement scores and lower turnover, especially at the manager level, which is now below pre pandemic levels. We still have work to do on the hourly front as the claw back from staffing challenges.

Hourly turnover numbers are now also trending in the right direction.

Fatality is our second pillar.

We're in the process of evolving our service model to provide better service for both dine in and off premise guests.

Service now have more support as we staff key positions to make sure shifts are more manageable and guests feel welcome and cared for.

As a result of these changes our restaurant teams are telling us they feel more supportive than ever in fact, a few weeks ago I was in our Florida market and all of the managers told me. This was the first holiday season in years that the restaurant book completely manageable with a lot less stress on their team.

These first two pillars are working together to improve team member engagement and turnover as well as driving significant improvements to our guest satisfaction metrics when.

When you see team member engagement turnover and guest satisfaction all trending in the right direction. It's typically a good sign for the business.

Im excited to see this happening because confirmation that we are making inroads in the things that really matter.

The third pillar is atmosphere.

We're ensuring our buildings and our equipment are well maintained and we're bringing more energy and vibrancy back to our restaurants, it's a big focus for us this year to ensure that all of our equipment is in working order and that the restaurants look great. In addition to the labor changes should improve both the team member and guest experience.

We're encouraged by the progress here too, but given the levels of deferred maintenance during COVID-19, we still have work ahead of us.

And our final pillar is food and drink and we're committed to winning on the four core equities that chili's apart burgers, CRISPR fajitas and margaritas.

Our raise the bar program and happy hour offering a new bar menu will be launched in the first quarter delivered impressive increases to alcohol sales PPA and mix during the second quarter and now we're building on our success with an updated bar menu that features more premium drink offerings to delight, our guests and grow the business.

This menu highlights our breath of the classic Margarita along with some new products, including the sangria Rita and maintaining Rita. This ingredient is taking a very popular southwestern favorite a frozen margarita thrilled with sangria and bringing it to our customers nationwide and the Haynesville is a re imagine utilities favorite the last time, we launched a Margaret.

Amid with Hennessy it was wildly popular popular as we promoted as the Margarita of the month now we've re imagine this is a higher quality premium margarita that price reflected premium positioning.

This is just the first wave of robust bar innovation pipeline. The team has developed will launch. These updated bar offerings. Later this month and types of the NCAA basketball tournament. The final months of the NBA regular season, and the start of our internal Margarita Madness program, which is a fund check driving content. We know is a huge engagement driver for our team members.

And translates to a more vibrant atmosphere increased sales.

We have significantly more margarita innovation coming to the permanent menu later this year as well as an all new CRISPR platform, that's running through our new innovations DPA process and is currently in test market that we're very encouraged by it.

We look forward to sharing more details of both platform upgrade during the June Investor Day meeting.

Now, let's talk about traffic at Chili's.

During the first half of the fiscal year, we reset pricing strategy and we do see amount of checks on deal as well as the frequency and depth of couponing in order to work some less profitable traffic out of our system now.

Now with a stronger foundation driving our improved performance, we're able to manage our investments more effectively to build incremental traffic into the business.

This quarter, we will start reinvesting some of our dollars, we said from less discounting to get back on TV with a three for me value platform.

We're excited about being on air which will be the first time in over three years that will be on television.

At a time when consumers are seeing record restaurant prices and smaller portions were coming in with industry, leading abundant and complete meal at a sharp price point. The three for me platform also includes more variety than many other bundles in the marketplace and for just 10 99, the guests get the full sized entre with a limited ship unlimited salt.

And the bottleneck soft drink.

For the business the platform encourage as trade up to more premium and margin accretive offerings at 13, 99% and 50, 99, which will merchandising restaurant in fact, the majority of three for me volume moves at the $30 99, and a <unk> 99 price point and now with the addition of added restaurant advertising three for me we will.

Play the role of traffic driver in our business.

We believe providing this platform through national media as well as the opportunity to reboot. Our loyalty offers will help us drive incremental traffic and win market share regardless of the macroeconomic condition.

Lastly, I want to spend a little time talking about additions to our chili's executive team that will strengthen the leadership of our organization.

I'm excited to share that Jesse jobs in a senior leader at the World Class advertising agency widening Kennedy has joined our marketing team as VP of marketing working for our Chief Marketing Officer George Felix.

<unk> accomplished marketing and advertising leader, who has worked with some of the world's most iconic brands, creating news and excitement to everything he touches.

And most importantly, he brings an energy and a passion for our Chili's brand.

He has already embraced us.

<unk> been embraced by the team as they work to develop a robust strategy to drive traffic in the near term and strengthen the brand over time.

I'm also excited to welcome James Butler, as our new senior Vice President of supply chain.

<unk> is a well respected highly strategic supply chain leader, who recently served as SVP, leading supply chain co op of a very large multi unit restaurant concepts.

<unk> worked with James and the path I know he will bring a high level of fresh thinking and leadership to our business that will not only help make progress in our supply chain, but will help accelerate the advancement of our strategy.

We believe with a world class leadership team stronger marketing analyst visits and executing on Chili's four strategic pillars, we're making the right choices for our business improving the experience for our guests and team members and driving our four wall economics will help our business regardless of the macro environment with this focus on the core business <unk> will unlock.

Its growth potential and chili's will be a stronger more competitive brand and Thats why I'm encouraged about our future at Brinker now I'm going to hand over the call to you Joe to walk you through the numbers.

Hey, Thanks, Kevin and good morning, everyone.

The fiscal second quarter operating results reported this morning represent a nice move forward for the business sales.

Sales benefited from continued consumer demand our ability to price more appropriately and strong mixed results.

In restaurant economics started to recover.

Proving commodity environment became more evident and importantly guests feedback improved in response to our initiatives.

For the second quarter of fiscal year 'twenty, three Brinker reported total revenues of $1 billion $19 million a restaurant operating margin of 11, 6% and adjusted earnings of <unk> 76 per share an increase of <unk> <unk> from prior year.

At the brand level Chili's comp store sales increased 8%.

We executed incremental pricing actions in the quarter, both on the menu and in third party delivery channels, resulting in year over year pricing of 10%.

Even with this more elevated price structure, we feel comfortable with our overall price and value positioning relative to the competition.

As we mentioned last quarter and important part of our sales strategy is our concerted effort to move away from higher unnecessary levels of discounting.

This coupled with our October menu restructure of the three for me platform resulted in positive quarterly mix of five 6% for the brand.

Negative traffic at Chili's, seven 6% was in line with our expectations and was clearly more than offset with the ability to incrementally price and drive mix.

Marciano has had an outstanding quarter fueled by a great holiday season.

<unk> reported positive comp sales of 21, 2% driven by traffic of eight 4% price of seven 7% and favorable mix.

Digging deeper marciano is realized improved perhaps it can all revenue channels dine in banquet and off premise with our overall business now exceeding pre pandemic levels.

Our restaurant operating margin for the second quarter was 11, 6%, representing a decent beginning to establishing stronger double digit margins on a consolidated basis.

Let me make some specific comments as to the components of our ROM.

Food and beverage cost were unfavorable 110 basis points year over year with commodity inflation coming in around 19%.

Down from 24% in the first quarter.

Cost increases for the quarter were largely driven by inflation in poultry and beef and recent spikes in produce related to weather and yields.

While we anticipate inflationary pressure for the balance of this fiscal year. We expect these pressures to moderate each quarter moving below 10% in Q3 and further down to the mid single digit range by Q4.

Labor costs were 130 basis points favorable versus prior year benefiting from sales leverage partially offset by increased hourly wage rates and a higher quarterly manager bonus payout due to the improved performance.

Wage rate inflation for the quarter was approximately 5%.

As Kevin mentioned, we are in the process of updating our labor model to improve the work environment for our team members and the dining experience for our guests.

Changes to the model started late in the second quarter and will more broadly worked their way into the system over the course of the fiscal year.

We are working to fine tune the number of labor hours needed to deliver the improved experiences for our team members and guests.

Early results have driven positive guest metrics and better sales flow through during peak hours as well as contributing to improving turnover rates at both the hourly and managerial levels.

Importantly, we now believe we can generate the desired improvements while investing a bit less in the model than originally anticipated.

Restaurant expense for the quarter was elevated 70 basis points versus prior year due to overall inflationary costs in several expense areas and an increase in investment for repair and maintenance.

The R&M expense increase reflects our work to improve the overall condition and cleanliness of our restaurants and to catch up on deferred maintenance and supply chain issues and labor normalize.

Additional momentum for Chili's as evidenced in the performance of the brands New restaurant development.

Through Q2 for new restaurants were added to the fleet and three more came online in January .

All are opening at very strong levels, some above a $100000 a week as communities such as San Juan, Texas, Inverness, Florida, and Owensboro, Kentucky embraced the brand.

We have seven more openings planned for the back half of this fiscal year and look forward to sharing those incremental results on future calls.

At the halfway point in our fiscal year, we are taking the opportunity to update our annual guidance. This updated incorporates various investments we are making into operations and assumes a continuation of the current economic environment with no material downturn.

We are raising our fiscal 2023% full year guidance to include the following.

Revenue is now anticipated in the range of 4.05 to $4, one 5 billion.

<unk> is anticipated in the range of $2 62.

To $2 90.

And Capex is expected to be between 170 and $180 million for the fiscal year.

In closing, we believe our strategic initiatives operational investments and heightened team member focus is moving our business in the right direction.

We're excited to now Reengage key traffic driving opportunities to build further momentum in our performance while understanding the short term potential impacts from macroeconomic conditions.

The heightened engagement of our restaurant teams around the direction. We are taking is exciting to see and we're highly appreciative of their efforts every day to bring the chili's and module on his experience to life for our guests.

Through them, we will see our success.

Now with our comments complete let's open the call for questions and Holly I'll turn it back over to you to moderate the Q&A.

At this time, we will be conducting a question and answer session. If you have any questions or comments. Please press star one on your phone at this time, we ask that while posing your question you. Please pickup your handset if listening on speaker phone to provide optimum sound quality. Please.

Hold while we poll for questions.

Your first question for today is coming from Andrew <unk> at BMO.

Hi, Thanks for taking the question.

My first one.

Just curious on the traffic cadence through the quarter, if you could speak to that in the last quarter. You said you had some.

Early softness with a menu change so I'm just curious how that evolved since that time.

The industry data in January has been quite strong so so.

Anything you can say about whether or not that's continued or or any color would be great.

Yeah, Andrew good morning.

The traffic cadence throughout the quarter was actually relatively consistent.

Not a huge variation as we move through the second quarter.

<unk>.

Actually we were strengthening as you're kind of headed through December December was a good month until you got to right. There at the end, where you had an impact of whether they really hit the kind of tail end of December I think you probably saw that in some of the industry numbers you looked at it we were not immune but very consistent too.

The quarter results that you saw and I think the dynamics of traffic are definitely carrying forward into January as you might expect with the Covid lap we have seen a acceleration on the comp side of the equation very similar to what Youre.

Youre seeing from the industry trends, but I think the underlying dynamics.

That had been driving the business.

Still in place as we move into the first part of the calendar year January .

January is going to be unique with its COVID-19 lap.

Also you are seeing as I said looking at my window at the frozen tundra, Dallas Youre seeing.

Youre seeing some weather moves as you kind of worked throughout January so I look forward to thawing out to keep moving forward.

Got it Okay. That's helpful and then just.

Wanted to ask you about the investments that you've made you referenced late in the quarter on the labor model, what exactly have you done so far.

You referenced some improvements in metrics that you could speak to those a little bit and how are you thinking about maybe the next round of labor investments and the timing of that.

Yes.

This is Kevin just so you understand how we designed the program so Mike.

There has been leading a team.

Both field leadership as well as folks and our restaurant support center at our home office.

Just understand if we were going to put labor investment back into the business or would it make the biggest impact and so the first round of those changes from that team we rolled out towards the tail end of December it's not an on off switch. So it takes some time to.

Get the hours and the bodies back into the building.

But the.

The focus areas, where one on giving servers more time.

To focus on fewer table, so that they can better serve those tables to adding an additional runners flash busser position.

To try to keep tables cleaner during service more frequently.

In.

Restaurants with high bar traffic we added.

We have the option to add a second bar tender.

To manage that traffic not just at the bar, but obviously the tables that was in the bar area and then we added expediter position.

Who is managing the heart of the house.

And that really frees up the manager of the stop doing team member test and actually do leadership things in coaching and all the things that you want.

A highly paid manager to do.

So that's kind of the changes that we put in round. One round two is still being worked on and tested. So I don't have the details to give you that until we're ready to go.

Metrics that we've seen improved so guests experiencing a problem, which is like our number one guest metric that we look at daily has improved pretty significantly throughout the quarter. So we feel really good about that.

I shared in our last call our our team member engagement had significant bumps increases both in the field.

Well Ed at RSV. So we're seeing the changes in the field and having a meaningful impact on manager turnover. We were pleased to reported our prepared comments that manager turnover is now.

Where it was pre pandemic. So we feel like we've made huge strides there and we're starting to see hourly turnover now improved too.

Obviously, there's some more work to do to get to pre pandemic levels on that so.

When we talk about metrics, we're talking about team member engagement manager engagement.

And then obviously, whether the guest is having a better experience and we're seeing all of those things improve the other thing that we're seeing is our food grade scores. We had some of the best food great scores that we've had in a long long time and so as you think about.

The team members, having a better experience having more labor in the restaurant they can make better food and then if they make better food and provide better service.

<unk> has a better experience and so we're seeing all of those things trend in the right direction I don't want to say that victory has accomplished and theres not a lot more work to do but as I said in previous calls as long as we continue to make progress every quarter, we know that we're making the right moves and were headed the right direction.

Great and I appreciate all the color.

Your next question is coming from Dennis Geiger with UBS.

Great. Thank you first I wanted to ask about pricing levels, and what youre seeing with respect to any pushback from the customer it sounds like the customer satisfaction levels are improving and traffic was largely consistent with your expectations, which is encouraging but any additional commentary on what youre seeing as it relates to pricing levels and how the <unk>.

Estimates digesting that.

Yeah, I'll start and then I'll see if Joe has anything to add so.

So we have seen a low end customer tail up that we saw that before we took incremental pricing.

Low end customer.

What's coming less frequently before we even started the new strategy.

And that has continued we haven't seen a change in that trend one way or the other.

For the guests that are coming.

Are willing to spend considerably more.

So were seeing mix shifts pretty significant so we had a 10% price increase effectively.

On a.

The stack rate and we had a 5% mix increase.

Result at the end of the quarter and so what's happening is the folks that are.

Not by re for me then moving to Ala Carte items that are priced higher but they're also buying.

More appetizers and more nonalcoholic soft drink because they are not included in the Ala Carte right.

So just some of the data.

We have 24% last three for me.

That are being purchased per day.

Our per check average.

Honestly for me purchase is up $1 38, and as I said in my prepared comments.

Over more than half of the three for me menu is actually moving at higher price points to 13, 99, and the 15 99 price points in fact over two thirds are moving at that so.

Net what we're seeing is the customers that continue to come are accepting that are accepting the price increases and the good news is our value scores this quarter actually tick up which would be surprising given the price increases and we think thats because of the service levels have improved right.

The idea of value is not just price point, but it's also what you get and how consistent it so.

That's how we've been seeing the guest the guest that continue to come are willing to spend more and both the service levels have improved as well as our value scores.

Okay appreciate that and that's the only thing I would.

The only thing I would add to that Dennis would be a little insight as to what the menu price increase youre looking at obviously year over year numbers at that 10% range. The actual menu increase that we took in October was about four and a quarter. So again, it's a sequencing.

And frankly, I'm not sure that a lot of guests look back a year.

A lot of them are looking to what did I see.

Prior experience and.

I think that four in a quarter is probably more actionable. If you wanted to think about how they might react.

So far the reaction has all been pretty favorable.

So that's very helpful. Thanks, Joe.

Just one more Kevin you spoke to driving focus on driving traffic share gains with three for me in the advertising coming up just curious if you could speak to what you've seen maybe what you saw in the quarter or even in January .

A market share perspective, I don't know also if you're kind of able to frame up the importance of driving market share relative to profitability and perhaps you can you can get both but just any commentary there would be great. Thank you.

I can speak at a very high level.

I don't have like switching data in front of me, but from a high level. We grew during the quarter. We believe we grew dollar share so the amount of dollars versus the market based on what we see.

And black box to map.

We believe we lost a little bit of.

Traffic share.

And as we said in our prepared comments and we've talked about this is the shedding of some of that unprofitable traffic and we're going to continue to monitor and it's obviously, we don't want to lose traffic, but it.

It is something that we expected to happen, especially as we got out of some of the deep discounting.

Coupon that we mail.

E Mail, we know those customers were getting.

Getting freebies and addition to layering on our lowest price point on three for me.

As we've said that those customers are some of those customers.

Drag a little bit behind the industry on traffic, but from a dollar Sharepoint standpoint, we believe we are growing versus the industry right now.

Great, Kevin I would say relative relative to the competition.

Our positioning improved as we went through.

Quarter, and discussing our relative position with the folks to kind of monitor the overall industry. Both brands really performed in December at the top of the heap.

Two of the highest performing brands in the competitive.

For that period, so nice.

Relative performance as we move through the quarter.

Great. Thanks, guys.

Your next question for today is coming from John <unk> with J P. Morgan.

Hi, Thank you so much I wanted to talk about capital allocation priorities I mean, this is a business.

Historically, this obviously generated a lot of cash and obviously COVID-19 and then a number of different things kind of.

Got it.

Maybe gave that some interruptions there may be some changes in the priorities, but how are you guys thinking about.

Maybe medium term capex, obviously this year at $1 70 to 180 was kind of at the higher end maybe of where we thought that was going to be so what's the direction of that going.

Going forward might that go up because of new units might that go up because you really want to do.

More remodels and resets at the store level that benefit your customer and employees.

If I can Joe I apologize for the way Im asking this question is im asking it but as we think about debt to EBITDA and other things.

Should we get there through paying down debt or are.

Are you just going to basically let those ratios improve as your EBITDA growth, obviously I'm trying to catch the inflection point here to where decent decent chunk of money can go back to shareholders. Thanks.

Yes, let me, let me kind of take them in reverse I think we will continue to absolutely pay down debt. The ratio will also we anticipate improved from EBITDA growth as we move forward. So we'll go at it from both of those ends.

Again, as we've talked we would like to get the overall ratio down below two five times. So, let's just say two to two and a half times on it on a debt to EBITDA basis, and we see ourselves moving nicely in that direction as we kind of go through the rest of this fiscal year.

The.

As far as deploying incremental capital expenditures I think yes, there is theres going to be those opportunities and we'll look at that whether it's new restaurant development, we want to make sure again, we're effectively.

Caught up as we kind of move forward with R&M.

In investment so I think as Kevin indicated still work to do there. So we.

We spent about 25% more than the R&M space.

This last.

Corner quarter is if you look at the restaurant expense side of the equation, we'll invest there and Theres also some.

Capital opportunities as we kind of move forward, so there'll be a pacing of that.

But also we'll look at some new opportunities there is some.

Nice kitchen equipment improvements, we think that we'll be bringing into the equation as we move through the.

Next couple of years, so that could sequence.

We'll determine that isn't obviously lay them out once we get what the actual numbers are going to be but it won't surprise me at all to see.

A period of time, where capex ticks up above where it moves up above where it is right now, but we'll give you a great line of sight as to the wise and where that money is going to go.

As you indicate.

The business can generate a lot of cash and as we improve the base operations.

And again lots of rationale on why to do that but one of the clear opportunities to generate that incremental cash flow.

And then we have the optionality of looking at it is that going back into the business directly from a return standpoint or is there an opportunity to return some to shareholders.

And I think it's just going to be ongoing evolution John over probably the next.

Six to 12 months as we think through all those different pieces of the equation.

That's perfect. Thank you for unpacking the question good job. Thanks, Joe.

Your next question is coming from Eric Gonzales with Citibank capital markets.

But I think it's keybanc, but.

Hi, Good morning, My question about labor.

During the quarter the labor cost was pretty low at about 30, low, 33%, which is a big step down.

And I believe the lowest in several years that period.

Just wondering about that reclassification revenue, maybe you can quantify if that was the driver there, but also talk about some of the drivers of that margin.

Operational perspective did you maybe understand do the staffing environment and then just related to that on the investments is there any way you can quantify that I know you said it would be less than you previously expected like what sort of impact should we see in the current quarter and what type of run rate should we expect before those investments pay off.

Yes.

And good to see you are still a part of your either but.

No I think yes labor labor really benefited from the sales leverage side of the equation and as we indicated.

Some of the quote investment back the incremental hours.

We're putting back into the system than it have as much of an impact in the second quarter because they were late David when we really started that piece of the equation. So youll see more of that as we kind of move through the rest of the fiscal year.

We also were able to pay a very hefty manager bonus. So it's good to see the ability to make those team member related payments for the performance that they delivered and still deliver as a percentage of sales.

Nice labor positioning there is all kinds of puts and takes as you go through the labor model, we had some benefit in there year over year on things like.

Team member related insurance.

It was a good guy and you do have a labor model that remember drives off of traffic. So there was a little benefit from the lower traffic generating less labor hours necessary relative to those volumes, but as you kind of move forward.

Spect.

As we move through the next couple of quarters Youll see <unk>.

Labor as a percentage of.

Sales tick up something somewhat I think you'll probably see something in the let's say, 40% to 60 basis points increase from where we were in the.

Second.

In the second quarter, obviously, a lot of that is predicated on what you do on the top line. There is a nice leverage ability piece of the labor stories, our ability to top drive topline again can create some sales leverage as you think about labor, but again I don't think the Delta when you think about labor as a percentage of.

Company sales.

There's going to be.

Very out of line I think youll see it kind of in that.

3% to 60 basis points range.

Did you mean sequentially 40 to 60 basis.

That's clear.

<unk> from the second quarter.

Okay and then on the.

Just on the to go mix, maybe you could talk about what that was in the quarter I apologize if I missed that but but also you know you took some price in the delivery channel.

If you can quantify that but I was wondering if youre seeing any pushback on that channel, particularly as it is very expensive relative to carryout and to the extent that the delivery mix has held up why do you think thats. The case, given the huge price differential seemingly a deteriorating macro environment.

And I'm wondering how much of that is just the aggregators being aggressive customer acquisition or if there's any sustainability to that channel.

Yes.

One I think that is Levered channel is again it is improving.

To have resiliency in it as it relates to people I think the need state related to that consumer.

It's a little different.

I think the demographics using that as probably skews towards the higher economic side of the equation, but right now the resiliency and the willingness to continue to.

Use the delivery channel.

Still in place.

Overall.

We are pretty similar percentages you are really seeing to go off premise and can remain in that 30% to 35% range.

For the quarter I think it seems to have a steady state and the nice thing on Marciano is again, they've introduced a whole another level of guest to their off premise capabilities that <unk> seen very meaningful low over 80%.

Year over year improvement in their off premise side of the equation.

So.

That's a nice new.

<unk> channel for them to continue to grow which you kind of move forward.

Okay. Thank you for that.

Your next question for today is coming from Chris <unk> with Stifel.

Hi, good morning, guys.

I had a follow up question, Kevin related to Chile's pricing and discounts I'm just wondering how the company has determined what the impact of the pricing and discount removals will be on traffic because I would think the company would need to conduct either a test or at least evaluate the impact over several months just given the frequency of chili's guests.

Yes, so that's a great question and someone asked you that in the last call and.

Candidly I didn't think we could wait to do a pricing tests, we typically would do something like that in order to understand the impact I think we were so far behind on pricing versus the balance of the industry I felt we needed to lean forward. So that we can start investing in the things that are going to improve the experience of the of the restaurant.

I will say, we are adamant about protecting an opening price point for the guests that would otherwise not be able to afford tilly's or casual dining and this is why we protected to 99.

And that's why we're going to be advertising that.

Later, this quarter and really shall be abundant value as well as.

The quality of the food that you get when you think about $2 99 price point for a complete meal with the unlimited chips and salsa the full size entree, and a bottomless drink and compare that to even fast food or <unk>.

Thats pretty unbeatable so.

I think as long as we make sure that we're honest about protecting the price points for that guest that really needs. It in order to come in.

We're generally going to be okay, and I think that's why we've seen.

The mix and three for me.

That were coming in.

There have gravitated back to the Ala Carte menu when we remove the favorites out of that.

That menu.

Or they've gone ahead and trade it up based on the variety that's available there if they want to stay because they want shrimp that can still get it within three for me. So we will continue to monitor obviously the big question Mark that everybody has.

And we're not immune to it either right is what's going to happen with the economy and.

Maybe we relate to pricing, but we still have a pretty big delta between.

Where our competitors are and where we are so we feel pretty good position.

In the context of casual dining pricing and then as long as we maintain those opening price points.

We feel really really aggressive regardless of the dining channels that you're in we feel confident that we will stay close within that 1% to two point delta versus the industry on traffic and we can do that will continue to grow dollar share.

You mentioned chili's returning to TBA.

Oh I'm sorry.

So I was just going to add to remember that this is not this has not been a one time event and rolling out some of these changes we actually started a lot of the discount.

<unk> back in the first quarter.

That's really starting to come into two.

Together and kind of the August timeframe and we also then reintroduced shortly after that at the beginning of September the new bar menu, which also took discounting out of that piece of the equation. So this has been kind of a rolling effort over the course of really the first half of the fiscal year. So many of those moves have actually been in place.

And we've been watching very closely over the course of.

Three or four months and we can we can see the impact, particularly in when you look at something like the bar and the discounting that came out of that.

Youre seeing a really nice response and improvement on the on the bar side of the equation that is exceeding our.

Planned expectations there so.

Youre exactly right you have to continue to watch for the lag effect of that but I think a lot of these moves.

<unk> to H themselves very well and we're not seeing any of that.

Concerning dislocation that you might otherwise be worried about.

Could you help level set of expectations for what impact does it return to television advertising could have on traffic I'm, just wondering if with fiscal <unk>.

<unk> to be do you expect it to be the worst in terms of traffic performance and then sequentially improve from there.

Well I don't think we want to give you guidance on.

On what we expect from the advertising what I can share with you is it'll be about abundant value at a sharp price point.

We're going to have sufficient weights that we believe it will meaningfully move the business.

But I cant share with you how long that advertising will be on in and when will it start for competitive reasons, but I hope either at the next earnings call or the June investors meeting this year all of that detail with you.

Fair enough thanks, guys.

Your next question for today is coming from David Palmer with Evercore ISI.

Hi, Thanks question on dining room traffic could you talk about what your dining room traffic trend was year over year, and how those traffic levels compared to 2019 and just generally speaking.

How you think dining room traffic will trend the rest of the year.

Okay.

Yes, we have actually.

Are you seeing the dining room business, obviously, you continue to grow and that's thinking through the entire comp dynamic traffic is down a little bit relative to that pre pandemic.

Dining room, obviously, when you eliminate some of the discounting that that impacts obviously your largest.

A piece of the equation, which will be the dining rooms, and particularly when you think about some of the stuff we've done on bar.

But it's not.

The business is in totality is moving in the right direction. So I think again similar to what we talk about it in the overall business the trade within the dining room standpoint has been very favorable Kevin kind of walk through some of the things we see.

On the three for me platform a lot of that takes place obviously within within the dining rooms.

Reinvigoration of the Margarita program those kinds of things, obviously youre going to.

Skew more to the dining room side so.

Similar give us some traffic, but gain more than <unk>.

Adequate offset on the price and.

<unk> side of the equation.

Alright.

Got you.

Your traffic in the dining room was down double digits versus pre COVID-19 something like that.

I mean, assuming.

Is that right and I also wanted to ask about your labor hour growth, you've talked about dialing that up a bit.

Where do you think you are now versus pre Covid in terms of labor hours, and where do you think you'll end up I'm, just really curious about the proportions of.

Of labor versus sort of that in dining room traffic.

Yeah.

Yeah again, we're starting the process of dialing that up.

And later in December So we will continue to fine tune that.

As we go forward.

Focused on pre pandemic versus current I think again, we're focused on how do we drive better guest experiences and the metrics.

That show that the guest is responding to.

Better service better food better App in the App and share. So we're going to keep I think some of that analysis more in the in the current environment as opposed to looking back three years in that regard.

Yes, I think your traffic.

At a low point in the dining room is.

And the range that Youre thinking I think thats, not an inappropriate way to think about it but again.

Well.

Offsetting by all the other moves we're making.

And kind of struck out on that question, but if I could just ask was the traffic decline, 775% or so for Chili's decline was that roughly what you would have expected in terms of the tradeoffs, you're the natural tradeoffs, you're making the business, including the pricing and I'm wondering.

Obviously, the january's weird month, but down the road Summertime for example, maybe the comparisons become more normal is there.

Traffic Trey.

Tradeoff that becomes not acceptable is there a level where you.

Do you feel like maybe you have to make some adjustments like what how should we think about how you're thinking about traffic from here.

Thanks.

So how we're thinking about it is.

As long as we're as long as we're moving in the right direction on the toll business. Both in terms of sales and profitability, we feel pretty good about the mood now obviously, if things start to get closer to where that's not true we're not going to wait for that to not be true we're going to make some interventions right. So we're going to look at it very closely.

Our belief is that as long as we keep a barbell strategy, where we protect opening price points.

But then allow.

Price points to flow through on some other items and then be able to reinvest back into the experience, we think that will allow us to.

Continued to grow the business if that if those believes are untrue, especially with.

Macro headed in the wrong direction, and we've got to revisit that we will and we might have to go a little bit back to a little bit more discounting or we might decide to protect some pricing, but at this point, we haven't seen anything that would lead us to believe we've got to change that strategy.

One will be run in a couple of points away from the industry on traffic.

The equation looks really good for our business and then allows us to plow back investment that we hope will then grow traffic over time, whether it's advertising improved service levels are better food. So.

That's our belief will continue to monitor it we reserve the right to.

We look at that strategy, if the things that the data that we're seeing changes significantly, but we haven't seen it so far.

Thank you.

Yeah.

Your next question is coming from Brian Vaccaro with Raymond James.

Hi, Thanks and.

Thanks for taking my questions and good morning, Kevin you mentioned, the low end consumer not coming as much and I think you said that was the case, even before the changes on pricing and <unk> for me and perhaps somewhat due to the macro but I'm curious how much of that you think could be due to reduced awareness since you were off air.

During the pandemic and do you have any data or studies on that that you could share as they try to think about the potential benefit that you can bring advertising back online.

Yes.

The only data that we have on it we haven't done any specific studies the data that we have at the top of mind awareness and.

Marketing term top of mind awareness, especially in the restaurant industry is really important because youre always in the market for food like Youre always you always got to eat right and then in this new world, where a third of our business is transacted digitally you're literally always in the market. We could you can always buy chilis, whether you're at home or you're out shopping or at a restaurant.

Right. So top of mind awareness in other words, when I'm hungry and I think about the restaurants that I am going to dine at it's critically important that chili's as a part of that consideration set because if you're not then you have no chance of actually closing that gap right.

Top of mind awareness is what we're going to be driving for when we think about the advertising that we're going to put on TV and that's why we're focused on we think is a relevant message of abundant great value at a great price point.

Addition to making sure that that advertising is unmistakably chili's using some of the things from our path as well as the things that are unmistakable utilities lifting our logo and some of the jingles and things like that right. So.

So what I would tell you is we have seen dramatic declines in <unk>.

Top of mind awareness throughout the pandemic as we went dark we would expect those trends to start moving in the right direction. It takes some time for the advertising to take hold and you just start seeing a move in those in that data point as far as like using that data to give you an estimate of the traffic lift it would be very difficult to do that right now just because we've been out there for <unk>.

Once we have more data on what the TRP has been in terms of incremental traffic will have a better idea of the impact of putting advertising background.

Is it.

Fair to assume that that Chile top of mind awareness has dropped relative to peers more than others.

A lot of brands have come off air except for one large one that I'm aware of in terms of national chains.

Has it as chili's underperformed or come down more on that metric can you tell us versus 2019 anything along those lines.

Yes.

We are top of mind awareness. This is publicly accessible data with the right research companies.

Mine awareness has declined versus pre pandemic.

And we will share some of that detail with you at the June Investor Day, we'll talk about our marketing and advertising strategy, but it is clearly the biggest opportunity for this business and from an advertising standpoint is just to get back into the consideration set and top of mind for customers. So that we're part of their consideration set of where theyre going to use.

Got it. Thank you Joe I wanted to just circle back on your labor comment a couple of questions ago. I think you said in that up 40 to 60 bps versus what you just saw in the second quarter and just a quick scan the.

Historical pre COVID-19 it would seem that your second half labor cost ratio is typically a little lower.

Then Q2 or even the first half.

On higher seasonal sales volumes. So I just wanted to clarify is that 40 to 60 kind of trying to hone in on the actual investment that we need to think about other dynamics around seasonality or perhaps.

Thats, an all in expectation call it that youll be kind of in the mid 30 threes.

Embedded in your second half guide I, just wanted to clarify that.

Yes, Brian I would put it in the latter piece of the equation, that's kind of the all in obviously, yes, you would expect to see some sales leverage benefiting.

That area, if you had a normalized.

Set of hours going into the system, obviously, we're going to be putting some more hours and.

Go to the rest of the fiscal year, we're also anticipating.

Probably some higher.

Opportunities too on the manager bonus side of the equation and things of those nature. There is all kinds of puts and takes.

In that line.

But.

The guidance I kind of gave you.

Relates to the all in effect of what else would expect what's happening on the labor side.

Okay. Thank you for that and then also Joe while I have you can we just drill down on the other Opex line for a second I know Theres a lot of moving pieces are of that utilities are now thinking about bringing advertising back just to name a few.

And are there certain categories, you talked about advertising going up in the second half of the fiscal year, but are there certain categories that are expected to decline and help offset those dollar increases or should we expect that other opex dollar line to be moving higher than the high 200, <unk>, it's been in recent quarters.

I think as we as you kind of move forward Im talking absolute dollars I would expect it to two.

To move up again, you cited one of the.

The key drivers will be the advertising piece of the equation as you build that advertising accrual that goes through the <unk>.

Opex lines.

That's where that's where you'll see that I think generally speaking.

R&M expense and expect to be at a little more elevated level than you might have typically seen it as we continue to move forward.

Improving the condition and cleanliness of the restaurants or some of the investments you make back end such as janitorial costs flow through that line as opposed to labor. So.

Where you might have thought that something might be going into labor, it's actually going into opex as it relates to more hours for the janitorial side of the equation and again you just have a number of things in there that are still kind of in an inflationary environment I think most of those will.

Start to normalize and mitigate as we move through the year, but you have to build some expectation.

Continued inflation when you think about things year over year. So, yes, so I think youll see the absolute dollars tick up.

Over what you just.

Decided.

There's also a very good chance of that's where sales leverage also starts to hit some of those items too so.

On a percentage basis.

I think.

It should be a fairly stable.

Possibly slightly improving on a percentage basis.

Of sales, but.

We will make the right calls as it relates to some of the.

Expenses that are kind of running through.

That as it relates to advertising in R&M as we kind of move forward.

Okay, Okay, Great and then just two quick housekeeping items.

As the percent of sales that was off premise for each brand in the second quarter.

Mike do you have I don't have that sitting right in front of me right now.

Yes.

Go ahead Mike.

Chili's was just over 30%.

And.

Jan one.

Alright, I'm looking at my numbers didn't have it memorized right here.

On March.

'twenty, yes.

They were they were about 27.

'twenty seven Okay and last one for me sorry to keep going so on the tax rate Joe embedded in your guidance.

Yeah.

Again, we expect that that Lowe's.

Low single digits to mid single digit tax rate on the annual annual basis.

Okay, great. Thank you very much.

Thats effective tax rate.

Your next question for today is coming from Jeffrey Bernstein at Barclays.

Yes.

Great. Thank you very much two questions just the first one.

Looking to the broader macro.

One of the largest <unk> players yesterday spoke about an assumption for a mild U S recession.

Presumably a downturn from here. Thank you mentioned not assuming a downturn. So I'm just wondering what what impact do you think would come from a mild recession on your business and how would you respond in terms of maybe a change in strategy if need be and then I had one follow up.

Yes, let me start with just how we think about where we're positioned and then I'll talk to you about what I think how the customer is going to change based on if the macros.

So number one I like where we're positioned on value.

Even with the recent price increases that we've taken we're playing catch up versus the industry and so there's still a pretty large gap versus where our pricing is versus our competitors.

Good about that.

Scores have actually improved since we took the pricing.

In October on the everyday menu and I think thats a function of improved service levels.

The other thing that we have that we didn't have in the.

The recession back in 2008.

Several others have too, but we had 12 million loyalty members and we have a direct way to talk to them and so we can target value a little bit sharper than we could back then so I think it's a huge opportunity for us. Because then you can go a little sharper if you need to go sharper with the guests that would need a better value than the one that doesn't right versus.

Before before you have that capability you have to advertise it to everyone.

So you could be more laser laser focused on value and then lastly, the fact that we're getting back on air with advertising.

What I think is unbeatable.

In the restaurant industry at 10 99.

I think we'll have a nice impact on traffic from a customer standpoint.

That recession.

The macro has continued to get worse.

What you see then do is they can't afford to have a bad experience.

And so because dollars are tighter and so what will happen is they're going to they're going to gravitate to the places that they think they can get consistent value not necessarily the lowest price but.

Things that they can count on and trust and so regardless of whether the recession or not the idea of the strategy of improving service levels improving food.

And being a more consistent concept, that's going to help us weather.

The macro is get worse or not and so.

My direction to the team as we've got we've got to stay focused on that that might that might slow down our investments because we cant be as aggressive, but we don't have a tailwind on the macros.

But the things that we're doing the fixed the labor model and to provide better service levels and to make sure that the restaurants look right and that our food is consistently.

Perfect. Those are all really important things that we need to do regardless of what happens with the macro as far as like the changes that we would make if things did get worse I think one would get a lot sharper with some of our CRM value in our loyalty value.

Against the guests that we know need it because we will be able to see if they pulled back on their trip. So instead of just having.

Shifting out a value to everybody.

I think the second thing is that we're going to continue to accelerate our simplification and <unk>.

Get to a place where we're making a fewer items, we're making them a whole lot better and thats going to improve margins as well as allow us to invest some of that back into the business.

And then I think the third thing is I think we got to try to stay.

On advertising on a hot price point, because that's going to that's going to obviously mitigate the traffic headwinds that you're going to get from a macro.

I think those are the things that we would then tweak, but I don't I don't see a major reverse course of our strategy I do think you'd see the pendulum swing back a little bit more to the center in terms of balancing the long term investments with some of the short term traffic drivers.

Yeah.

Understood and then just a follow up.

Full year fiscal 'twenty three it looks like at the mid point, you raised EPS guidance by <unk> 10 cents.

It looks like at least versus consensus that you beat the second quarter by 25. So I'm just wondering if you can.

Maybe prioritize whether or not you think your guidance is still conservatism or perhaps the second quarter beat relative to internal expectation was more modest than maybe consensus or perhaps.

Perhaps as you mentioned earlier, maybe youre factoring in the incremental labor and advertising in R&M and whatnot, just trying to prioritize what led the.

It's a pretty significant second quarter beat relative to the more modest increase in our full year EPS. Thank you.

Yes, Jeff.

Dan as it relates to the.

Beat relative to the consensus I mean that.

I'm not going to get too caught up in what the consensus.

And how they might have arrived at some of those numbers.

The.

It was a quarter that exceeded our expectations internally too, but there might have been a differential between.

Between those two numbers and again youre thinking about what are the what.

Whats the prudent level to get to.

As we kind of see momentum in the business, but I understand some of the macros that are sitting out there also and it does incorporate.

The investments we're talking about so we really have the opportunity in some cases as we move into the second half of the year or two.

Moving a little quicker on some of those investments.

Again, assuming the macro stays up.

We want to be able to make the moves as quickly as we can so we're thinking through all those different pieces.

Piece of the equation.

With the wariness of the macro.

But you see everybody talking about it and we don't need to get out over our skis on that piece of equation either.

Understood. Thank you.

Your final question for today is coming from Brian <unk> with Morgan Stanley .

Yes. Good morning. Thank you maybe I'll just ask about the mix piece of.

Your comps.

Is that something that you actually expect to kind of pick up from here because obviously the reduction of discounting was kind of the most immediate impact, but what are you starting to see so far from the bar initiative or some of the product changes.

Yes, I mean, a big part of our strategy on what we call core for which is Chris Bruce Martin our readers.

Burgers and fajitas the idea as to how do we bring some innovation to the properties and platforms in order to drive both pricing and mix and so like the Christmas tests that we have currently.

So for example, so you can understand how we're thinking about mix.

So today, we sell.

We have three different offers on Christopher announced too because we reduced one but they're all the same size right. So there's no there's no opportunity to buy a bigger piece count and so that's not really the way the guest wants to buy chicken tenders. If you see competitive concepts. They have multiple sizes people, one bigger and not everybody one.

The smallest size and so we're testing.

Dark fiber testing of 456 count.

Testing additional sources that were taken from the virtual brands, we're testing upgraded size and.

We expect to see as a result of that test would be significant moves in mix within crisper and more.

<unk> overall, PPA and check gains.

From making that move because obviously if people are trading down in the christopher's, even if it's a bigger mix, it's not going to help US right. So that's why we tested versus just rolling.

And so far the test, we're really encouraged about what we see.

Clear that guests.

For their whatever their needs are and do it in a meaningful and valuable way theyre going to be willing to spend more with you and so I think youre going to see that show up in the bar I think youre going to see that show up in fajitas overtime.

Challenge for US is we just can't do everything at once right the restaurants into RFP can only handle so much change and do it in a quality high fashion sooner right and so we literally just gone through this exercise with our leadership team of like as we think about evolving the menu and driving mix through innovation, how do we pace and sequence of that book.

Restaurant support team as well as the field teams can handle all of that change right. So.

That's why you are not seeing at all at once within a 12 month period.

But that's how we're thinking about mix, we think that could be a meaningful source of growth for us as we think about not just having the lowest price point.

But how do we create the best value for the guests.

Okay, great. Thank you and then just on menu pricing you said you said what the number was in <unk> and I think you had previously expected it to roll down kind of closer to 7% as we ended the year is that still the case like as your cost outlook still kind of supportive of that pricing level or do you think.

Add some more as the year ends.

Okay, well, we'll continue to take a look at different.

Anticipate necessarily adding any incremental price on the menu this fiscal year.

I do think there is some as we think about our next menu and Kevin just outlines some of the mix opportunities. There. We may look at some off menu.

Pricing opportunities.

The lower level.

Based on where we're currently at and how we expect things.

To work through.

'twenty three I would expect to exit.

<unk>.

Kind of in the 8% range.

As we get to that kind of that June period.

You will start to see that.

10% move down now as we kind of move forward with.

The rest of the year and lap some of the prior year.

Moves.

And again.

Probably on an exit rate somewhere around 8%.

Thank you.

Alright.

Our call for today.

Thank you everyone for joining us.

On our third quarter results in April Thank you everyone.

Thank you everyone.

Thank you. This concludes today's conference call you may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.

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<unk> and Investor Relations ma'am the floor is yours.

Thank you Holly and good morning, everyone and thank you for participating on today's call joined.

Joining me today are Kevin Hoffman, our Chief Executive Officer, and President and Joe Taylor, Our Chief Financial Officer.

<unk> for the quarter were released earlier this morning and are available on our website at <unk> Dot com.

As we always do Kevin and Joe will first make prepared comments related to our strategic initiatives and operating performance. Then we will open the call for your questions.

Any such items should be considered forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095.

All such statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated.

Such risks and uncertainties include factors more completely described in this morning's press release and the company's filing with the SEC and of course on the call. We may refer to certain non-GAAP financial measures that management uses in its review of the business and believes will provide insight into the company's ongoing operations.

And with that said I will turn the call over to Kevin.

I'll start with Marciano, which delivered a very strong second quarter sales and margin growth.

Some of the business model changes that have accelerated its recovery.

We expected marciano performance to exceed pre COVID-19 levels during the quarter and the team delivered comp sales were up 21% year over year and margins improved significantly.

One of the big drivers of growth during the quarter was the off premise business, which delivered 82% increase.

Versus pre pandemic levels.

Off premise sales are highly incremental customer insights are telling us that off premise sales, which are meals consumed at home or a different occasion in the dining get togethers and celebrations that <unk> is known for Mcdonald's guests, who visit us for everyday homely replacement visit more often than the dining guests.

Off premise for <unk> drives two things that we really like <unk> and frequency.

The solid recovery of the core business plus the incrementals of the SaaS growing off premise channel coupled with an improved business model makes us very excited about the future of marciano.

Now for Chili's Chili's, we made solid progress strengthening the core business and generating momentum in our results second quarter same store sales were up 8%, we returned to profitability and we're steadily improving the guest and team member experience.

While there is still a lot of work ahead of us I am encouraged by the progress our team has made across four pillars of our strategy.

We continue to make meaningful progress simplifying both our menu and operational procedures in our heart of house as I mentioned last quarter simplification is not a onetime event, but an ongoing commitment to our team our leadership team and I continue to host listening toward all around the country and as managers and team members see changes happening.

They are feeling heard and understand that they have a direct say in the future of their operation.

These changing beliefs are now, resulting in both significantly improved employee engagement scores and lower turnover, especially at the manager level, which is now below pre pandemic levels. We still have work to do on the hourly front as we can.

Call back from staffing challenges.

Hourly turnover numbers are now also trending in the right direction.

Hospitality is our second pillar.

We're in the process of evolving our service model to provide better service for both dine in and off premise guests.

Servers now have more support as we staff key positions to make sure shifts are more manageable and guests feel welcome and cared for.

These first two pillars are working together to improve team member engagement and turnover as well as driving significant improvements to our guest satisfaction metrics when.

When you see team member engagement turnover and guest satisfaction all trending in the right direction is typically a good sign for the business.

I'm excited to see this happening because a confirmation that we are making inroads in the things that really matter.

Third pillar is atmosphere, we're ensuring our buildings and our equipment are well maintained and we're bringing more energy and vibrancy back to our restaurants, it's a big focus for us this year to ensure that all of our equipment is in working order and that the restaurants look great. In addition to the labor changes should improve both the team member and guest experience.

We're encouraged by the progress here too, but given the levels of deferred maintenance during COVID-19, we still have work ahead of us.

Our final pillar is food and drink and we're committed to winning on the four core equities.

These apart burgers CRISPR fajitas and margaritas are.

Our raise the bar program and happy hour offering a new bar menu will be launched in the first quarter delivered impressive increases to alcohol sales PPA and mixed during the second quarter and now we're building on our success with an updated bar menu that features more premium drink offerings to delight, our guests and grow the business.

This menu highlights our breath of classic Margarita along with some new products, including the sangria, Rita and maintaining reader. The sangria Rita is taking a very popular southwestern favorite a frozen Margarita swarmed with sangria and bringing it to our customers nationwide and the Hayward is a re imagined tilly's favorite the last time, we launched a margarita.

Bid with Hennessy it was wildly popular popular as we promoted as the Margarita of the month now we re imagine this is a higher quality premium Margarita that we priced to reflect this premium positioning.

This is just the first wave of robust bar innovation pipeline. The team has developed will launch. These updated bar offerings. Later this month in time for the NCAA basketball tournament. The final months of the NBA regular season, and the start of our internal Margarita Madness program, which is a fun check driving content. We know is a huge engagement driver for our team members.

And translates to a more vibrant atmosphere increased sales.

Have significantly more Margarita innovation coming to the permanent menu later this year as more of an all new CRISPR platform, that's running through our new innovations DPA process and is currently in test market that we're very encouraged by.

We look forward to sharing more details of both platform upgrade during the June Investor Day meeting.

Now, let's talk about traffic at Chili's.

During the first half of the fiscal year, we reset pricing strategy and reduce the amount of checks on deal as well as the frequency and depth of couponing in order to work some less profitable traffic out of our system now with a stronger foundation driving our improved performance, we're able to manage our investments more effectively to build incremental traffic into the <unk>.

Business.

This quarter, we will start reinvesting some of our dollars, we said from less discounting to get back on TV with a three for me value platform. We're excited about being on air which will be the first time in over three years that will be on TV at a time when consumers are seeing record restaurant prices and smaller portions were coming in with industry leading.

Abundant and complete meal at a sharp price point the.

Three for me platform also includes more variety than many other bundles in the marketplace and for just 10 99, the guests get the full size entree with a limited ship unlimited salt and Debottleneck soft drink for.

So the business the platform encourage as trade up to more premium and margin accretive offering at $39 950, 99, which will merchandising restaurant in fact, the majority of three for me volume moves at the <unk> 99, and a 59 million nine price point and now with the addition of added restaurant advertising three for me will play.

The role of traffic driver in our business.

We believe promoting this platform through national media as well as the opportunity to reboot. Our royalty offers will help us drive incremental traffic and win market share regardless of the macroeconomic condition.

Lastly, I want to spend a little time talking about additions to our chili's executive team that will strengthen the leadership of our organization our.

Im excited to share that Jesse Jonathan a senior leader at the World Class advertising agency widening Kennedy has joined our marketing team as VP of marketing working for our Chief Marketing Officer, George Keyless, Jeff.

Yes. He is an accomplished marketing and advertising leader, who has worked with some of the world's most iconic brands, creating news and excitement to everything he touches.

And most importantly, he brings an energy and a passion for our Chili's brand.

He has already embraced us.

<unk> been embraced by the team as they work to develop a robust strategy to drive traffic in the near term and strengthen the brand over time.

I'm also excited to welcome James Butler, as our new senior Vice President of supply chain.

This is a well respected highly strategic supply chain leader, who recently served as SVP, leading supply chain co op of a very large multi unit restaurant concepts.

We believe with a world class leadership team stronger marginal business and executing on Chili's four strategic pillars, we're making the right choices for our business improving the experience.

Hearings for our guests and team members and driving our four wall economics will help our business regardless of the macro environment with this focus on the core business <unk> will unlock its growth potential and chili's will be a stronger more competitive brand and thats why I'm encouraged about our future at Brinker now im going to hand over the call to you Joe to walk you through the <unk>.

<unk>.

Hey, Thanks, Kevin and good morning, everyone.

Our fiscal second quarter operating results reported this morning represent a nice move forward for the business.

Sales benefited from continued consumer demand our ability to price more appropriately and strong mixed results our in restaurant economics started to recover.

Proving commodity environment became more evident and importantly guests feedback improved in response to our initiatives.

At the brand level Chili's comp store sales increased 8%.

We executed incremental pricing actions in the quarter, both on the menu and in third party delivery channels, resulting in year over year pricing of 10%.

Even with this more elevated price structure, we feel comfortable with our overall price and value positioning relative to the competition.

As we mentioned last quarter and important part of our sales strategy is our concerted efforts to move away from higher unnecessary levels of discounting.

This coupled with our October menu restructure of the three for me platform resulted in positive quarterly mix of five 6% for the brand.

Negative traffic at Chili's of seven 6% was in line with our expectations and was clearly more than offset with the ability to incrementally price and drive mix.

Marciano has had an outstanding quarter fueled by a great holiday season, the brand reported positive comp sales of 21, 2% driven by traffic of eight 4% price of seven 7% and favorable mix.

Digging deeper marciano is realized improved perhaps it can all revenue channels dine in banquet and off premise with our overall business now exceeding pre pandemic levels.

Our restaurant operating margin for the second quarter was 11, 6%, representing a decent beginning to establishing stronger double digit margins on a consolidated basis.

Let me make some specific comments as to the components of our ROM.

Food and beverage costs were unfavorable 110 basis points year over year with commodity inflation coming in around 19%.

Down from 24% in the first quarter.

Cost increases for the corner were largely driven by inflation in poultry and beef and recent spikes in proteus related to weather and yields.

Wage rate inflation for the quarter was approximately 5%.

As Kevin mentioned, we are in the process of updating our labor model to improve the work environment for our team members and the dining experience for our guests.

The changes to the model started late in the second quarter and will more broadly worked their way into the system over the course of the fiscal year.

We are working to fine tune the number of labor hours needed to deliver the improved experiences for our team members and guests.

Early results have driven positive guest metrics and better sales flow through during peak hours as well as contributing to improving turnover rates at both the hourly and managerial levels.

Importantly, we now believe we can generate the desired improvements while investing a bit less in the model than originally anticipated.

Restaurant expense for the quarter was elevated 70 basis points versus prior year due to overall inflationary costs in several expense areas and an increase in investment for repair and maintenance.

R&M expense increase reflects our work to improve the overall condition and cleanliness of our restaurants and to catch up on deferred maintenance and supply chain issues and labor normalize.

Additional momentum for Chili's as evidenced in the performance of the brands New restaurant development through.

Through Q2 for new restaurants were added to the fleet and three more came online in January .

All are opening at very strong levels, some above $100000 a week as communities such as San Juan, Texas, Inverness, Florida in Owensboro, Kentucky embraced the brand.

We have seven more openings planned for the back half of this fiscal year and look forward to sharing those incremental results on future calls.

At the halfway point in our fiscal year, we are taking the opportunity to update our annual guidance. This updated incorporates various investments we are making into operations and assumes the continuation of the current economic environment with no material downturn.

We are raising our fiscal 2023% full year guidance to include the following.

Revenue is now anticipated in the range of 4.05 to $4, one 5 billion.

<unk> is anticipated in the range of $2 62.

To $2 90.

And Capex is expected to be between 170 and $180 million for the fiscal year.

In closing, we believe our strategic initiatives operational investments and heightened team member focus is moving our business in the right direction.

We're excited to now Reengage key traffic driving opportunities to build further momentum in our performance while understanding the short term potential impacts from macroeconomic conditions.

And through them, we will see our success.

Now with our comments complete let's open the call for questions and Holly I'll turn it back over to you to moderate the Q&A.

At this time, we will be conducting a question and answer session. If you have any questions or comments. Please press star one on your phone at this time, we ask that while posing your question you. Please pickup your handset is listening on speaker phone to provide optimum sound quality. Please.

Hold while we poll for questions.

Your first question for today is coming from Andrew Strauss Zelnick at BMO.

Hi, Thanks for taking the question.

My first one.

Just curious on the traffic cadence through the quarter. If you could speak to that and then last quarter. You said you had some <unk>.

Early softness with the menu change so I'm just curious how that evolved since that time.

The industry data in January has been quite strong so so.

Anything you can say about whether or not that's continued or or any color would be great.

Yeah, Andrew good morning.

The traffic cadence throughout the quarter was actually relatively consistent.

Not a huge variation as we move through the second quarter.

<unk>.

Actually we were strengthening as you're kind of headed through December December was a good month until you got it right. There at the end, where you had an impact of whether they really hit the kind of tail end of December I think you probably saw that in some of the industry numbers you'd looked at it we were not immune but very consistent too.

That had been driving the business are still in place as we move into the first part of the calendar year.

January is going to be unique with its COVID-19 lap.

Also you are seeing as I said looking at my window at the frozen tundra, Dallas Youre seeing.

Youre seeing some weather moves as you kind of worked throughout January so I look forward to following out and keep moving forward.

Got it Okay. That's helpful and then just.

Wanted to ask you about the investments that you've made the reference late in the quarter on the labor model, what exactly have you done so far.

You referenced some improvements in metrics, if you could speak to those a little bit and how are you thinking about maybe the next round of labor investments and the timing of that.

Yes.

This is Kevin just so you understand how we designed the program so Mike.

There has been leading a team.

Both field leadership as well as folks and our restaurant support center at our home office. The best understand if we were going to put labor investments back into the business or would it make the biggest impact and so the first round of those changes from that team we rolled out towards the tail end of December it's not an on off switch.

So it takes some time to.

Get the hours and the bodies back into the building.

But the focus areas, where one on giving servers more time.

To focus on fewer table, so that they can better serve those tables to adding an additional runners slashed busser position.

To try to keep tables cleaner during service more frequently.

In.

In restaurants with high bar traffic we added.

When we had the option to add a second bar tender.

To manage that traffic not just at the bar, but obviously the tables that was in the bar area and then we added expediter position.

Who is managing the heart of the house that really frees up the manager of the stop doing that team member test and actually do leadership things and coaching and all the things that you want <unk>.

<unk> manager to do.

So thats kind of the changes that we put in round. One round two is still being worked on and tested so they don't have the details to give you that until we're ready to go.

I shared in our last call our our team member engagement had significant bumps increases both in the field as well as at our RSV. So we're seeing the changes in the field and having a meaningful impact on manager turnover. We were pleased to reported our prepared comments that manager turnover is now beneath.

Where it was pre pandemic. So we feel like we've made huge strides there and we're starting to see hourly turnover now improved too.

Obviously, there is some more work to do to get.

The pre pandemic levels on that so.

When we talk about metrics, we're talking about team member engagement manager engagement.

Then obviously, whether the guest is having a better experience and we're seeing all of those things improve the other thing that we're seeing is our food grade scores. We had some of the best with great scores that we've had in a long long time and so as you think about the the team members, having a better experience having more labor in the restaurants, they can make better food and then if they make better food and provide better.

Service.

Great and I appreciate all the color.

Your next question is coming from Dennis Geiger with UBS.

Great. Thank you.

I wanted to ask about pricing levels, and what youre seeing with respect to any pushback from the customer it sounds like the customer satisfaction levels are improving traffic was largely consistent with your expectations, which is encouraging but any additional commentary on what youre seeing as it relates to pricing levels and how the customers digesting that.

Yeah, I'll start and then I'll see if Joe has anything to add.

So we have seen a low end customer tail off and we saw that before we took incremental pricing at the low end customer.

Coming less frequently before we even started a new strategy.

And that has continued we haven't seen a change in that trend one way or the other.

For the guests that are coming.

Are willing to spend considerably more.

So were seeing mix shifts pretty significant so we had a 10% price increase effectively.

On the on the stack rate and we had a 5% mix increase as a result at the end of the quarter and so what's happening is the folks that are not.

Not by three for me then moving to Ala Carte items that are priced higher but they're also buying.

More appetizers and more nonalcoholic soft drink because they are not included in the Ala Carte right. So.

So just some of the data.

We have 24% last three for me.

Meals that are being purchased per day.

Our per check average.

Honestly for me purchase is up $1 38, and as I said in my prepared comments.

Over more than half of the three for me menu is actually moving at higher price points to 13 90 990.

<unk> 99 price point in fact over two thirds are moving at that so.

The idea of value is not just price point, but it's also what you get and how consistent it so that's.

That's how we've been seeing the guest the guest that continue to come are willing to spend more and both the service levels have improved as well as our value scores.

Appreciate that and that's the only thing I would the.

A year.

A lot of them are looking to what did I see.

Prior experience and.

I think that four in a quarter is probably more actionable. If you wanted to think about how they.

Microreactors.

So far the reaction has all been pretty favorable.

So that's very helpful. Thanks, Joe just one more Kevin you spoke to driving our focus on driving traffic share gains with three for me in the advertising coming up just curious if you could speak to what you've seen maybe what you saw in the quarter or even in January from a market share perspective, I don't know also if it.

If you kind of able to frame up the importance of driving market share relative to profitability and perhaps you can get both but just any comments there would be great. Thank you, yes, I can speak at a very high level.

I don't have like switching data in front of me, but from a high level. We grew during the quarter. We believe we grew dollar share so the amount of dollars versus the market based on what we see.

And black box to map.

We believe we lost a little bit of.

<unk> traffic share.

And as we said in the prepared comments and we've talked about this is the shedding of some of that unprofitable traffic and we're going to continue to monitor and it's obviously, we don't want to lose traffic but.

It is something that we expected to happen, especially as we got out of some of the deep discounting.

Coupons that we mail.

E Mail, we know those customers.

Getting freebies. In addition, the layering on our lowest price point on three for me.

And as we've said it those customers are some of those customers, we have drag a little bit behind the industry on traffic, but from a dollar standpoint, we believe we're growing versus the industry right now.

Great, Kevin I would say relative relative to the competition.

Our positioning improved as we went through.

The quarter and discussing our relative position with the folks to kind of monitor the <unk>.

Overall industry, both brands really performed in December at the top of the heap.

Sure.

Two of the highest performing brands in the competitive.

For that period, so nice.

And our relative performance as we move through the quarter.

Great. Thanks, guys.

Your next question for today is coming from John <unk> with J P. Morgan.

Hi, Thank you so much I wanted to talk about capital allocation priorities I mean, this is a business.

Historically, this obviously generated a lot of cash and obviously COVID-19 a number of different things kind of made that maybe gave that some interruptions or maybe some changes in the priorities, but how are you guys thinking about it.

Maybe medium term capex, obviously this year at $1 70 to $1 80 was kind of at the higher end maybe of where we thought that was going to be so what's the direction of that.

Going forward might that go up because of new units might that go up because you really want to do.

More remodels and resets at the store level that benefit your customer and employees.

If I can Joe I apologize for the way I'm asking this question is im asking it but as we think about debt to EBITDA and other things.

Should we get there through paying down debt or.

Yes, let me, let me kind of take them in reverse I think we will continue to absolutely pay down debt the ratio will also.

We anticipate improved from EBITDA growth as we move forward. So we'll we'll go at it from both of those ends.

Again, as we've talked we would like to get the overall ratio down below two five times. So, let's just say two to two and a half times on a debt to EBITDA basis, and we see ourselves moving nicely in that direction as we kind of go through the rest of this fiscal year.

The as.

As far as deploying incremental capital expenditures I think yes, there's going to be those opportunities and we will look at that whether it's new restaurant development, we want to make sure again, we're effectively.

Caught up as we kind of move forward with R&M.

The investments I think as Kevin indicated still work to do there. So we spent about 25% more than the R&M space.

This last.

Corner quarter is if you look at the restaurant expense side of the equation, we will invest there and Theres also some.

Capital opportunities as we kind of move forward, so there'll be a pacing of that.

But also we'll look at some new opportunities there is some.

Nice kitchen equipment improvements, we think they will be bringing into the equation as we move through the next couple of years, so that could sequence it will.

We will determine that it isn't obviously lay them out once we get what the actual numbers are going to be but it won't surprise me at all to see.

A period of time, where capex ticks up above where it moves up above where it is right now, but we will give you a great line of sight as to the wise and where that money is going to go.

You indicate.

The business can generate a lot of cash and as we improve the base operations and.

And again lots of rationale on why to do that but one of the clear opportunities to generate that incremental cash flow.

Then we have the optionality of looking at it.

Is that going back into the business directly from a return standpoint or is there an opportunity to return some to shareholders.

And I think it's just going to be ongoing evolution John over probably the next.

Six to 12 months as we think through all those different pieces of the equation.

That's perfect. Thank you for impacting the question good job. Thanks, Joe.

Your next question is coming from Eric Gonzales with Citibank capital markets.

But I think it's keybanc.

Hi, good morning.

One is about labor.

During the quarter the labor cost was pretty low at about 30, low, 33%, which is a big step down.

And I believe the lowest in several years that period.

I'm just wondering about that reclassification revenue, maybe you can quantify if that was the driver there, but also talk about some of the drivers of that margin from an operational perspective did you maybe understand do the staffing environment and then just related to that on the investments is there any way you can quantify that I know you said it'd be less than you previously expected like what sort of impact should we see in the current quarter and what type of run rate should we expect for those <unk>.

<unk> pay off.

Yes.

And good to see you are still a part of your either but.

No I think yes labor did labor really benefited from the sales leverage side of the equation and as we indicated.

Some of the quote investment back the incremental hours, there will be putting back into the system than it have as much of an impact in the second quarter. Because they were late dated when we really started that piece of the equation. So youll see more of that as we kind of move through the rest of the fiscal year.

We also were able to pay a very hefty manager bonus. So it's good to see the ability to make those team member related payments.

The performance that they delivered and still deliver as a percentage of sales.

A nice label positioning there's all kinds of puts and takes as you go through the labor model.

Had some benefit in there year over year on.

Things like <unk>.

Team member related insurance.

It was a good guy and you do have a labor model that remember drives off of traffic. So there was a little benefit from the lower traffic generating less labor hour necessary relative to those volumes, but as you kind of move forward.

Expect.

As we move through the next couple of quarters, Youll see labor as a percentage of.

Sales tick up something somewhat I think you'll probably see something in the let's say 40 to 60 basis points increase from where we were in the second.

Second in.

In the second quarter, obviously, a lot of that is predicated on what you do on the top line. There is a nice leverage ability piece of the labor stories, our ability to top drive topline again can create some sales leverage as you think about labor, but again, so I don't think the Delta when you think about labor as a percentage of.

Company sales.

It's going to be.

Very out of line I think youll see it kind of in that <unk>.

3% to 60 basis points range.

Did you mean sequentially 40 to 60 basis points.

<unk> that's the key.

<unk> from the second quarter.

Okay and then on the.

Just on the to go mix, maybe you could talk about what that was in the quarter I apologize if I missed that but but also you know you took some price in the delivery channel. So maybe you can quantify that but I was wondering if youre seeing any pushback on that channel, particularly as it is very expensive relative to carryout and to the extent that the delivery mix has held up why do you think thats the case, given the huge price differential.

Seemingly a deteriorating macro environment.

And I'm wondering how much of that is just the aggregators being aggressive customer acquisition or if there's any sustainability to that channel.

Yes.

I think that the delivery channel is again it is proving.

To have resiliency in it as it relates to people I think the need state related to that consumer.

<unk> is a little different.

Think the demographics using that as probably skews towards the higher economic side of the equations that right now the resiliency and the willingness to continue to.

Use of the delivery channel.

Bill in place.

Overall.

Pretty similar percentages youre really saying to go off premise and can remain in that 30% to 35% range.

For the quarter I think it seems to have a steady state and the nice thing on Marciano is again, they've introduced a whole another level of gas to their off premise capabilities that you've seen very.

Very meaningful low over 80% year over year improvement in their off premise side of the equation.

So.

That's a nice new.

Robust channel for them to continue to grow which you kind of move forward.

Okay. Thank you for that.

Your next question for today is coming from Chris <unk> with Stifel.

Hi, good morning, guys.

Yes, so that's a great question and someone asked you that in the last call and.

Candidly I didn't think we could wait to do a pricing tests, we typically would do something like that in order to understand the impact I think we were so far behind on pricing versus the balance of the industry I thought we needed to lean forward. So that we could start investing in the things that are going to improve the experience of the of the restaurant.

I will say, we are adamant about protecting an opening price point for the guests that would otherwise not be able to afford chili's or casual dining and this is why we protected $2 99.

And that's why we're going to be advertising that.

Later, this quarter and really shall be abundant value as well as.

The quality of the food that you get and you think about $2 99 price point for a complete meal with the unlimited chips and salsa the full size entree, and a bottomless drink and compare that to even fast food or <unk>.

Thats pretty unbeatable so.

As I think as long as we make sure that we're honest about protecting the price points for that guest that really needs. It in order to come in.

We're generally going to be okay, and I think that's why we've seen the mix in three for me.

Folks that were coming in.

Either have gravitated back to the Ala Carte menu when we remove the favorites out of that out of that menu.

Or they've gone ahead and traded up based on the variety of Thats available there if they want to stay because they want shrimp that can still get it within three for me. So we'll continue to monitor obviously the big question Mark that everybody has.

And we're not immune to it either right is what's going to happen with the economy in.

Maybe we relate to pricing, but we still have a pretty big delta between.

Where our competitors are and where we are so we feel pretty good position.

In the context of casual dining pricing and then as long as we maintain those opening price points that we feel are really really aggressive regardless of the dining channel that you are in that we feel confident that we will stay close within that 1% to two point delta versus the industry on traffic and we can do that will continue to grow dollar share.

You mentioned chili's returning to TV.

Oh, sorry.

So I was just going to add to remember that this is not this is not been a one time event and rolling out some of these changes we actually started a lot of the discount.

Moving back in the first quarter.

That really started to come into two of them together and kind of the August timeframe and we also then reintroduced shortly after that at the beginning of September the new bar menu, which also took discounting out of that piece of the equation. So this has been kind of a rolling effort over the course of really the first half of the fiscal year.

So many of those moves have actually been in place and we've been watching very closely over the course of.

Three or four months and we can we can see the impact, particularly when you look at something like the bar and the discounting that came out of that.

Youre seeing a really nice response and improvement on the on the bar side of the equation that it's exceeding our.

Planned expectations there so.

Youre exactly right you have to continue to watch for the lag effect of that but I think a lot of these moves.

<unk> to H themselves.

Very well and we're not seeing any of the.

Concerning dislocation that you might otherwise be worried about.

Could you help level set of expectations for what impact does it return to television advertising could have on traffic.

Wondering if was fiscal <unk> expecting to be do you expect it to be the worst in terms of traffic performance and sequentially improve from there.

Well I don't think we want to give you a guidance on.

On what we expect from the advertising what I can share with you is it'll be about abundant value at a sharp price point.

We're going to have sufficient weights that we believe it will meaningfully move the business.

But I cant share with you how long that advertising will be on and when will it start for competitive reasons, but I hope either at the next earnings call or at the June Investor meeting to share all of that detail with you.

Fair enough thanks, guys.

Your next question for today is coming from David Palmer with Evercore ISI.

Hi, Thanks question on dining room traffic could you talk about what your dining room traffic trend was year over year, and how those traffic levels compared to 2019 and just generally speaking.

How you think dining room traffic will trend the rest of the year.

Okay.

Yes, we have actually.

Seeing the dining room business, obviously, you continue to grow and thinking.

Thinking through the entire comp dynamic traffic is down a little bit relative to that pre pandemic.

Any room, obviously when you eliminate some of the discounting that.

That impacts obviously your largest.

Piece of the equation, which would be the dining rooms, and particularly when you think about some of.

The stuff we've done on bar.

But it is not.

Again the business is.

Totality is moving in the right direction, So I think again.

Do we talk about it in the overall business the trade within the dining room standpoint has been very favorable Kevin kind of walk through some of the things we see on the three for me platform a lot of that takes place obviously within within the dining rooms.

Reinvigoration of the Margarita program those kinds of things, obviously youre going to.

Skew more to the dining room side, so similar give up some traffic but gain more than.

Adequate offset on the price and.

<unk> side of the equation.

Alright.

You are.

Your traffic in the dining room was down double digits versus pre COVID-19 something like that.

I mean, assuming.

Is that right and I also wanted to ask about your labor hour growth you talked about dialing that up a bit.

Where do you think you are now versus pre Covid in terms of labor hours, and where do you think you'll end up I'm, just really curious about the proportions of labor versus sort of that in dining room traffic.

Yeah.

Yes, again, we're starting the process of dialing that up that's really started in later December so we will continue to fine tune that.

As we go forward I'm not us.

<unk> focused on pre pandemic versus current I think again, we're focused on how do we drive better guest experiences and the metrics.

That show that the guest is responding to.

Better service better food better absent the atmosphere. So we're going to keep I think some of that analysis more in the in the current environment as opposed to looking back three years in that regard.

Yes, I think your traffic.

At a low point in the dining room is.

And the range that Youre thinking I think thats, not an inappropriate way to think about it but again.

Well.

Offsetting by all the other moves we're making.

And kind of struck adds on that question, but if I could just ask was the traffic decline, 7% seven 5% or so for Chili's decline was that roughly what you would have expected in terms of the tradeoffs, you're the natural trade offs, youre, making the business, including the pricing and I'm wondering.

Obviously, the january's weird month, but down the road Summertime for example, maybe the comparisons become more normal is there.

Traffic Trey.

Tradeoff that becomes not acceptable is there a level, where you feel like maybe you have to make some adjustments like what how should we think about how you're thinking about traffic from here. Thanks.

So how we're thinking about it is.

As long as we're as long as we're moving in the right direction on the total business. Both in terms of sales and profitability, we feel pretty good about the mood now obviously, if things start to get closer to where that's not true we're not going to wait for that to not be true we're going to make some interventions right. So we're going to look at it very closely.

Belief is that as long as we keep a barbell strategy, where we protect opening price points.

But then allow.

Price points the flow through on some other items and then be able to reinvest back into the experience. We think that will allow us to continue to grow the business. If that if those believes are untrue, especially with.

Macro headed in the wrong direction, and we've got to revisit that we will and we might have to go a little bit back to a little bit more discounting or we might decide to protect the pricing, but at this point, we haven't seen anything that would lead us to believe we got to change that strategy.

One is we run a couple of points away from the industry on traffic.

The equation looks really good for our business and then allows us to plow back investments that we hope will then grow traffic over time, whether it's advertising improved service levels are better food. So that's our belief will continue to monitor it we reserve the right to.

We look at that strategy, if the things that with the data that we're seeing changes significantly, but we haven't seen so far.

Thank you.

Okay.

Your next question is coming from Brian Vaccaro with Raymond James.

Alright, thanks, and take them. Thanks for taking my questions and good morning, Kevin You mentioned, the low end consumer not coming as much and I think you said that was the case, even before the changes on pricing and three for me and perhaps somewhat due to the macro but I'm curious how much of that you think could be due to reduced awareness.

Since you were off air during the pandemic and do you have any data or studies on that that you could share as we try to think about the potential benefit as we bring advertising back online.

Yes.

The only data that we have on it we haven't done any like specific studies the data that we have at the top of mind awareness, though.

In marketing terms top of mind awareness, especially in the restaurant industry is really important because youre always in the market for food like Youre always you always got to E rate and then in this new world, where a third of our business is transacted digitally you're literally always in the market. We could you could always be utilities, whether you're at home or you're out shopping or you're at a rest.

Right. So top of mind awareness in other words, when I'm hungry and I think about the restaurants that im going to dine at it's critically important that chili's as a part of that consideration set because if you're not then you have no chance of actually closing that guest right at the top of mind awareness is what we're going to be driving for when we think about the advertising we're going to put on TV and that's where we're focused.

We think as a relevant message of abundant great value at a great price point.

In addition to making sure that that advertising is unmistakably chili's using some of the things from our path as well as the things that are unmistakable utilities like <unk> logo and some of the jingles and things like that right. So.

So what I would tell you is we have seen dramatic declines in.

The traffic lift it would be very difficult to do that right now just because we've been out there for so long once we have more data on what the TRP has been in terms of incremental traffic, we will have a better idea of the impact of putting advertising background.

Is it.

Fair to assume that that Chile's top of mind awareness has dropped relative to peers more than others.

A lot of brands have come off air except for one large one that I'm aware of in terms of national chains.

Has it has chili's underperformed or come down more on that metric can you tell us versus 2019 anything along those lines.

Yes.

No.

Our top of mind awareness. This is publicly accessible data with the right research companies.

Mine awareness has declined versus pre pandemic.

And we will share some of that detail with you at the June Investor Day, We will talk about our marketing and advertising strategy, but it is clearly the biggest opportunity for this business and from an advertising standpoint is just to get back in the consideration set and top of mind for customers. So that we're part of their consideration set of where theyre going to use.

A little lower.

Then Q2 or even the first half just on higher seasonal sales volumes. So I just wanted to clarify is that 40 to 60 kind of trying to hone in on the actual investment that we need to think about other dynamics around seasonality or perhaps.

On an all in expectation call it that youll be kind of in the mid 30 threes.

Embedded in your second half guide I, just wanted to clarify that.

Yes, Brian I put it in the latter piece of the equation, it's kind of the all in obviously, yes, you would expect to see some sales leverage benefiting.

That area, if you had a normalized.

Set of hours going into the system, obviously, we're going to be putting some more hours and as we go through the rest of the fiscal year. We're also anticipating.

Probably some higher.

Opportunities too.

The manager bonus side of the equation things of those nature, there's all kinds of puts and takes.

That line.

But.

But the guidance I kind of gave you.

Lights to the all in effect of what else would expect what's happening on the labor side.

Okay. Thank you for that and then also Joe while I have you can we just drill down on the other Opex line for a second I know theres a lot of moving pieces R&M utilities are now thinking about bringing advertising back just to name a few.

I think as we as you kind of move forward and talking absolute dollars I would expect it to.

To move up again, you cited one of the.

Key drivers will be the advertising piece of the equation as you build that advertising accrual that goes through the Opex line. So.

Thats, what youll see that I think generally speaking.

R&M expense.

To be at a little more elevated level than you might have typically seen it as we continue to move forward.

Improving the condition and cleanliness of the restaurants or some of the investments you made back end such as janitorial costs flow through that line as opposed to labor. So.

Where you might have thought that something might be going to labor. It is actually going into opex as it relates to more hours for the janitorial side of the equation and again you just have a number of things in there that are still kind of in an inflationary environment I think most of those will.

Start to normalize and mitigate as we move through the year, but you have to build some expectation.

Yes.

Continued inflation when you think about things year over year. So, yes, I think youll see the absolute dollars tick up.

Over what you.

Decided.

There is also a very good chance of that's where sales leverage also starts to hit some of those items too so on a percentage basis.

I think.

It should be a fairly stable.

To possibly slightly improving on a percentage basis.

Of sales, but.

We'll make the right calls as it relates to some of the.

Expenses that are kind of run through that.

As it relates to advertising in R&M as we kind of move forward.

Okay. Okay, Great and then just two quick housekeeping items do you have the percentage of sales that was off premise for each brand in the second quarter.

Yeah.

Mike do you have I don't have that sitting right in front of me right now.

Yes.

Yes Julien.

Chili's was just over 30%.

And Jan as well.

Sure.

Alright, I'm looking at Mark didn't have it memorized.

Right here.

On March.

'twenty, yes.

They were they were about 27.

'twenty seven Okay and last one for me sorry to keep going so on the tax rate Joe embedded in your guidance.

Yeah.

Again, we expect that that Lowe's.

Low single digits to mid single digit tax rate on the annual an annual basis.

Okay, great. Thank you very much.

And that's effective tax rate.

Your next question for today is coming from Jeffrey Bernstein at Barclays.

Yeah.

Great. Thank you very much two questions just the first one.

Looking to the broader macro.

One of the largest <unk> players yesterday spoke about an assumption for a mild U S recession, Brazil.

Presumably a downturn from here. Thank you mentioned not assuming a downturn. So I'm just wondering what what impact do you think would come from a mild recession on your business.

How would you respond in terms of maybe a change in strategy if need be and then I had one follow up.

Yes, let me start with just how we think about where we're positioned and then I'll talk to you about what I think how the customer is going to change based on if the macros.

Worsen so number one I like where we're positioned on value.

Even with the recent price increases that we've taken we're playing catch up versus the industry and so there's still a pretty large gap versus where our pricing is versus our competitors.

Good about that.

<unk> have actually improved since we took the pricing.

In October on the everyday menu and I think thats a function of improved service levels.

The other thing that we have that we didn't have in the.

The recession back in 2008.

And several others have too, but we had 12 million loyalty members and we have a direct way to talk to them and so we can target value a little bit sharper than we could back then so I think it's a huge opportunity for us. Because then you can go a little sharper if you need to go sharper with the guests that would need a better value than the one that doesn't right versus.

Before before you had that capability you have to advertise it to everyone.

So you could be more laser laser focused on value and then lastly, the fact that we're getting back on air with advertising.

What I think is unbeatable.

In the restaurant industry at 10 99.

I think we'll have a nice impact on traffic from a customer standpoint.

That recession.

The macros continue to get worse.

What you see then do is they can't afford to have a bad experience.

And so because of tighter and so what will happen is they're going to they're going to gravitate to the places that they think they can get consistent value not necessarily the lowest price but.

That they can count on and trust and so regardless of whether the recession or not the idea of the strategy of improving service levels improving food.

And being a more consistent concept, that's going to help us weather.

The macro does get worse or not and so.

I direct you to the team as we've got we've got to stay focused on that that might that might slow down our investments because we cant be as aggressive, but we don't have a tailwind on the macros.

But the things that we're doing the fixed the labor model and to provide better service levels to make sure that the restaurants look right and that our food is consistently.

Against the guests that we know need it because we will be able to see if they pulled back on their trip. So instead of just having.

Blasting out.

Everybody I think.

The second thing is that we're going to continue to accelerate our simplification and <unk>.

To get to a place where we're making a fewer items, we're making them a whole lot better and thats going to improve margins as well as allow us to invest some of that back into the business.

And then I think the third thing is I think we've got to try to stay on advertising on a hot price point, because that's going to that's going to obviously mitigate the traffic headwinds that you can get from a macro.

I think those are the things that we would then tweak, but I don't see it.

The reverse course of our strategy I do think you'd see the pendulum swing back a little bit more to the center in terms of balancing the long term investments with some of the short term traffic drivers.

Understood and then just a follow up.

For full year fiscal 'twenty three it looks like at the mid point you raised your EPS guidance I guess 10 cents.

But it looks like at least versus consensus that you beat the second quarter by 25. So I'm just wondering if you can.

We prioritize whether or not you think your guidance is still conservatism or perhaps the second quarter beat relative to internal expectation was more modest than maybe consensus or perhaps as you mentioned earlier, maybe youre factoring in the incremental labor and advertising in R&M and whatnot, just trying to prioritize what led the.

It's a pretty significant second quarter beat relative to the more modest increase in our full year EPS. Thank you.

Okay.

Yes, Jeff.

Again as it relates to the.

Beat relative to the consensus I mean, I'm not going to get too caught up in what the consensus.

And how they might have arrived at some of those numbers.

It was a quarter that exceeded our expectations internally too, but there might have been a differential between.

Between those two numbers and again youre thinking about what are the.

Whats the prudent level to get to.

As we kind of see momentum in the business, but I understand some of the macros that are sitting out there also and it does incorporate.

The investments we're talking about so we really have the opportunity in some cases as we move into the second half of the year or two.

Move even a little quicker on some of those investments.

Again, assuming the macro stays up.

We want to be able to make the moves as quickly as we can so we're thinking through all those different pieces of that.

<unk>.

With the wariness of the macro.

But you see everybody talking about it we don't need to get out over our skis on that piece of equation either.

Understood. Thank you.

Your final question for today is coming from Brian <unk> with Morgan Stanley .

Yes. Good morning. Thank you maybe I'll just ask about the mix piece of it.

Your comps.

Yes, I mean, a big part of our strategy on what we call core for which is Chris Bruce Margarita is.

Burgers and fajitas and ideas.

How do we bring some innovation to the properties and platforms in order to drive both pricing and mix and so like the Christmas test that we have currently.

So for example, so you can understand how we're thinking about mix.

So today, we sell.

We have three different offers on Christopher announced too because we reduced one but they're all the same size right. So theres no theres no opportunity to buy a bigger piece count and so that's not really the way the guest wants to buy chicken tenders, we see competitive concepts. They have multiple sizes people one bigger he's not.

Everybody wants the small size and so we are testing 345, we're testing a 456 count.

Testing additional sources that were taken from the virtual brands, we're testing upgraded size and.

What we expect to see as a result of that test would be significant moves in mix within Christmas and then more importantly, overall PPA and check gains.

From making that move because obviously if people are trading down in the christopher's, even if it's a bigger mix, it's not going to help us right. So thats why we tested versus just rolling.

And so far the test we're really encouraged about what we see it's clear that guests.

Sulfur, they're whatever their needs are and do it in a meaningful and valuable way theyre going to be willing to spend more with you and so I think youre going to see that show up in the bar I think youre going to see that show up in fajitas overtime.

The challenge for US is we just can't do everything at once right the restaurants, and our RMC can only handle so much change and do it in a quality high fashion manner right and so we literally just gone through this exercise with our leadership team of like as we think about evolving the menu and driving mix through innovation, how do we pace and sequence of that.

Restaurant support team as well as the field teams can handle all of that change right. So.

Why you are not seeing at all at once within a 12 month period.

But that's how we're thinking about mix, we think that could be a meaningful source of growth for us as we think about not just having the lowest price point.

The industry, but how do we create the best value for the guests.

Okay, great. Thank you and then just on menu pricing you said that you said that the number was in <unk> and I think you had previously expected it to roll down kind of closer to 7% as we ended the year is that still the case like as your cost outlook still kind of supportive of that pricing level or do you think you might add some more.

<unk> is the Europe's.

Okay, well, we'll continue to take a look at different.

I don't anticipate necessarily adding any incremental price on the menu this fiscal year.

I do think there is some as we think about our next menu and Kevin just outlined some of the mix opportunities. There. We may look at some off menu.

Pricing opportunities.

Lower level.

Just on where we're currently at and how we expect things.

To work through.

23, I would expect to exit.

<unk>.

Kind of in the 8% range.

As we get to that kind of.

That June period.

You will start to see that.

10% move down now as we kind of move forward with the.

The rest of the year and lap some of the prior year.

That moves.

Ending again, probably.

On an exit rate somewhere around 8%.

Thank you.

Alright, that's great.

Our call for today, we appreciate everyone joining us for that.

On our third quarter results in April Thank you everyone.

Thank you everyone.

Thank you. This concludes today's conference call you may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.

Q2 2023 Brinker International Inc Earnings Call

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