Brinker International, Inc. Earnings Call Nuggets: Industry Environment, Margins

On Monday, Brinker International, Inc. (NYSE:EAT) reported its third quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite revealed.

Industry Environment

Bryan Elliott – Raymond James: I guess I’d like to get your thoughts on the industry environment we just saw Knapp numbers released this morning for March, just so nominal demand has clearly slowed some here in March and just wanted to get your thoughts on your perspective on what you think might be going on?

Wyman T. Roberts – President, Chili’s Grill & Bar: Bryan, as you said, you’ve seen the numbers and we all know the category has slowed somewhat over the past four to six weeks, but when we look at Chili’s for Q3 not only that we outperformed the category for the quarter as a whole, but we got sequentially as we moved through the quarter. So, given our Q3 trends and given that we’ve seen so far in April, there’s no reason for us to believe that Chili’s momentum continues to outperform the category kind of significantly. Where the category goes, we’re not exactly sure, the softness has showed up, looks like it’s leveled off, but we’re not exactly sure where it’s going from here.

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Bryan Elliott – Raymond James: I didn’t mean that to be a defensive question, you guys were kind of back in the saddle and clearly gaining share, doing a great job and re-establishing Chili’s as a important, relevant and successful brand in the space. So given that position of strength, I was more interested in what anecdotally you might be seeing or thinking about or hearing, are we looking at for example maybe the lower ticket spenders reducing their spending a little more check pressure at the bottom end of the range of checks for example or maybe fewer checks at the bottom end of the bell curve or is it more kind of across the board just any kind of help and understanding where the deltas might be from a consumer behavior standpoint based on your broad position out there geographically and et cetera?

Guy Constant – EVP and CFO: So, Bryan this is Guy. It’s hard to the look and see any real pockets of weakness across the entire business. So, we look regionally and really almost all the regions are performing really well, maybe a little bit not quite as well in the North East, but California has picked up really well for us and Texas continues to be extremely strong for us. So, really we saw consistent strong performance across all regions. When we looked at dayparts, still strengthen all dayparts weekday, weekend, dinner and lunch have all done well for us maybe lunch, not quite as good as the rest of the business, but still very good even considering the fact that we lapped the introduction of lunch combos a while ago. Wyman mentioned our alcohol percentage was up and if we look at add-ons appetizers, desserts have all been strong for us as well. So, we don’t see any pockets in our business, I mean I guess we can speculate like everyone else about why the softness. Typically I have discussed many times gas prices are not a long-term impact on the casual dining space in our opinion, although you have seen historically sometimes when the price move very quickly, you see a little bit of a wobble for a four to six week period, so perhaps that’s what we’ve gone through here and now that gas prices have leveled off over the last couple of weeks, maybe things return to the normal somewhat weak, but positive trajectory that we’ve seen in the casual dining space for the past year and a half or so but other than that we don’t have a lot of color in our business we can lend to you that would tell you either softness elsewhere in the space.

Margins

Jeffrey Bernstein – Barclays Capital: Guy, just one clarification and then I have a separate question. The clarification kind of on Europe for the fiscal ’12 guidance with only one quarter to go and I believe your fiscal ’12 guidance that $1.80 to $1.95 was your non-GAAP kind of ex special items which would, I guess, relate to the $0.60 this quarter. It does to seem to imply the fairly wide fourth quarter, what looks like $0.43 to $0.58. Just wondering if you can give any kind of color? I mean I know, Wyman mentioned thus far in April not noting any major weakness or whatnot, but any help in terms of narrowing that range? I think you had previously said stable through the year, which kind of would imply that high-end, but we would have thought we would have seen some tightening with only a quarter to go and then I had a follow-up?

Douglas H. Brooks – Chairman, President and CEO: As you know Jeff, historically, we haven’t gone out and changed that guidance unless we think there is a material change to what we’re seeing going on, but I think it’s fair to assume that any sort of reasonable look at the fourth quarter would tell you we’re likely to be at the top end of that range.

Jeffrey Bernstein – Barclays Capital: Just talk about the margin side of things, it seems like you’ll get the first 200 basis points over the next couple of months or at least achieved that level. Just wondering if you can just talk kind of bigger picture. We hear a lot of people talk about the first 200 basis points was low hanging fruit and the next 200 is going to be a whole lot more challenging. We always kind of view that next 200 basis points not necessarily harder to achieve, but just likely to take longer, because it’s more technology and equipment rollout, rather than just removal of labor. But just wondering if you could talk kind of theoretically about the 400 basis points, and whether the 200 you would view as a greater challenge or kind of timing wise, or how you kind of think about that?

Douglas H. Brooks – Chairman, President and CEO: Well I think it’s fair to say Jeff, it has all been challenging. We have asked our operators to do a lot, in order to deliver on these results, at the same time, that they are seeing higher traffic numbers in their restaurants and lots of momentum on the top line. So I don’t view these as necessarily any harder than the original ones, where I think they’ve all been hard. What we can say though is with 360 kitchens today with the new line equipment, with 150 or so restaurants with the new point-of-sale equipment, we are getting the results that we need, in order to achieve the 400 basis points in restaurants today. So building off Wyman’s commentary earlier, we are in rollout phase now. We are done testing it. We know the results have proven themselves. We have a significant majority of our restaurants that have that equipment today; they are delivering on the productivity goals that we need to get the 400 basis points of margin. So while never easy to complete the rollout of those types of things, we know we are delivering it today in restaurants. So it’s just a matter locking it down and delivering it throughout the whole system, by the time we rollout the equipment in late December.

Jeffrey Bernstein – Barclays Capital: I think you guys had previously said that once you start achieving that, is it possible to maybe reaccelerate the refranchising and what not? I am just wondering whether that kind of, is that a consideration as these trends continue to improve?

Douglas H. Brooks – Chairman, President and CEO: I think what we said Jeff is that, if we were going to do any refranchising, we would wait until we had the margin improvements delivered, why sell now, when we can sell later at a higher price. What we are seeing now, is with these kinds of results that you are seeing today, and the kind of returns we are getting in our restaurants, if we can deliver this kind of top line growth going forward is, the need to do refranchising is significantly reduced if we can deliver these kinds of results on a consistent basis.

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