Kevin Kalicak - IR Gene Lee - CEO Rick Cardenas - CFO

David Tarantino - Baird Brett Levy - Deutsche Bank Anna Papp - Bernstein Brian Bittner - Oppenheimer Will Slabaugh - Stephens John Glass - Morgan Stanley Jeff Farmer - Wells Fargo Matt DiFrisco - Guggenheim Securities Gregory Francfort - Bank of America Fred Wightman - Citigroup Howard Penney - Hedgeye Chris O’Cull - Stifel Andrew Strelzik - BMO Capital Markets John Ivankoe - JP Morgan Stephen Anderson - Maxim Group Jeremy Scott - Mizuho Brian Vaccaro - Raymond James

Welcome to Darden Fiscal Year 2018 Third Quarter Earnings Call. Your lines have been placed on listen-only until the question-and-answer session. [Operator Instructions] This conference is being recorded. If you have any objections, please disconnect at this time. I will now turn the call over to Mr. Kevin Kalicak. You may begin.

Good morning everyone and thank you for participating on today’s call. Joining me on the call today are Gene Lee, Darden’s CEO, and Rick Cardenas, CFO. As a reminder, comments made during this call will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Those risks are described in the Company’s press release which was distributed this morning and in its filings with the Securities and Exchange Commission. We are simultaneously broadcasting a presentation during this call, which is posted on the Investor Relations section of our website at www.darden.com. Today’s discussion and presentation include certain non-GAAP measurements, and reconciliations of these measurements are included in the presentation. We plan to release fiscal 2018 fourth quarter earnings on June 21st before the market opens, followed by a conference call. This morning, Gene will share some brief remarks about our quarterly performance and business highlights and Rick will provide an update on our financial results and outlook for the year. During today’s call and for the remainder of this fiscal year, all references to Darden’s same-restaurant sales will only include Darden’s legacy brands since Cheddar’s Scratch Kitchen restaurants are new to Darden. Now, I’ll turn the call over to Gene.

Thanks, Kevin. Good morning, everyone. As you see from our press release this morning, we had another good quarter. Total sales from continuing operations were $2.13 billion, an increase of 13.3%. Same-restaurant sales grew 2%, despite the negative weather impact, which Rick will address in his remarks. And adjusted diluted net earnings per share were $1.71, an increase of 29.5% from last year. I am proud the ways our teams have executed against our strategy we rolled out three years ago, our operating teams remain focused on foods, service and atmosphere and at the Darden level, we continue to concentrate on our four competitive advantages. Leveraging our significant scale to create cost advantages, using extensive data and insights to improve operating fundamentals and to better understand our guests and communicate with them more effectively, ensuring our brands systematically go through our rigorous strategic planning process, and cultivating our results-oriented people culture to enable growth. Olive Garden had another solid quarter. In fact, December was the highest total sales month in the history of the brand. Overall, same-restaurant sales grew 2.2%, the 14th consecutive quarter of growth, outperforming the industry benchmarks excluding Darden by 310 basis points. Same-restaurant guest counts outperformed the industry benchmarks excluding Darden by 440 basis points. During the quarter, Dan Kiernan was appointed President of Olive Garden. I am excited to have an outstanding operator like Dan leading the team. His passion for our team members and guests coupled with his deep understanding of the brand makes him the perfect leader for Olive Garden. Olive Garden continues to consistently deliver strong results, which I attribute to the brand’s strategic focus on driving frequency among our most royal guests. This begins with flawless execution of the guest experience, and we will continue to focus on simplification to improve execution of our standards. We were also able to drive more frequency by introducing craveable menu items that create excitement among our core guests. We introduced the new appetizer loaded pasta chips, and a new lunch entrée, the Meatball Pizza Bowl, during the quarter and both were supported with successful integrated marketing campaigns that drove overwhelming PR buzz. Additionally, our focus on off-premise sales is doing more than just meeting our guest needs for convenience. It’s also enabling us to capture dining experiences that guests would not have previously considered for us. During the quarter, off-premise sales grew 13% and were approximately 15% of total sales for the quarter. Building loyalty also means that we need to continue to deliver meaningful value to our guests, every day. During the quarter, we launched our new advertising campaign to build awareness for everyday value, highlighting our Lunch Duo starting at $6.99, Early Dinner Duos starting at $8.99 and [indiscernible] pasta starting at $9.99. The work we are doing is resonating, as industry data shows that Olive Garden has seen the largest improvement in our value ratings versus key competitors over the last year. Our focus on everyday value and simplification has also allowed us to reduce the number of promotional offers we’ll run this year. As a result, during the fourth quarter, we will not offer our one of our most popular promotions, Buy One Take One that we ran during the fourth quarter last year. Buy One Take One is a strong promotional platform for us. And to assure its long-term effectiveness, we don’t not want to risk over exposure. However, not running this promotion may have a short-term impact on our traffic in Q4. I am encouraged by Olive Garden’s momentum and we’ll remain focused on making decisions that ensure our guests win. LongHorn Steakhouse’s same-restaurant sales grew 2%, the 20th consecutive quarter of growth, outperforming the industry benchmarks, excluding Darden by 290 basis points. Same-restaurant guest counts outperformed the industry benchmarks excluding Darden by 420 basis points. The team at LongHorn continues to make solid progress against their long-term strategy of investing in the quality of the guest experience, simplifying operations to drive execution and leveraging LongHorn’s unique culture to increase team member engagement. We think about investing in the guest experience across all three guest touch points, food, service and atmosphere. While we’re making investments across all three areas, our primary focus has been on increasing the quality of our food. In fact, we’ve increased the size or improved the cut of nearly every one of our steaks over the last two years. Our focus on simplification by producing a number of new items needed to support our promotional offers is driving more consistency leading to higher levels of execution inside our restaurants. That’s evidenced by the fact that LongHorn ranked the top of its competitive set on food quality scores. And while LongHorn’s team member management retention levels lead the industry, we remain focused on team member engagement. During the quarter, we kicked off our third annual Steak Master’s competition. This program provides intense trading for our culinary team members, while creating excitement and increasing engagement with our entire team and each restaurant. And finally, our new LongHorn openings continue to exceed our expectations, and we’re building a strong pipeline for future growth. Now, I’ll update you on Cheddar’s Scratch Kitchen and our progress with the integration. Same-restaurant sales decline 2.2%, and that decline was driven by the 52 restaurants in the two franchise systems that have been acquired over the last 14 months. Same-restaurant sales at the 91 legacy Cheddar’s restaurants were essentially flat. Operations leadership is focused on strengthening the restaurant management teams and working to improve operational excellence with the concentration on the previously franchised locations. Cheddar’s is a strong brand that serves more than 6,000 guests per week. These high guest counts create some unique operational challenges that we will address, primarily through simplification. This will take time as we manage to the amount of change taking place across the system. Turning to the integration. It’s been less than a year since we acquired Cheddar’s, and I’m pleased with everything the integration team has accomplished in that amount of time. We are now in the final stages of our systems integration. All restaurants are utilizing our full distribution network. And we successfully transitioned Cheddar’s on to the Darden payroll platform in December. The last major milestone is the rollout of proprietary POS system, which we expect to complete by the end of the fiscal year. Our restaurant managers and teams are still familiarizing themselves with our systems and processes, and it will take time before they’re fully comfortable using them. But, we’re pleased with the insights and feedback we’re receiving from the restaurants that are fully integrated into the Darden infrastructure. As I’ve said previously, this is a complicated process. We know, we’re throwing a lot at the restaurant teams and we know it’s distractive. But we’re confident the long-term benefit will be worth the short-term impact is this having on the business. Now, let me provide a quick update on the restaurant we just open in Washington D.C., called The Capital Burger. This retardant is a brand extension of The Capital Grille in D.C., which is a very busy restaurant with limited capacity. The Capital Burger is a way for more of our guests to enjoy bar-centric Capital Grille with a limited menu featuring our signature burgers. The Capital Burger leverages The Capital Grille’s steak and wine expertise as well as their exceptional service to create an extraordinary burger experience. I am excited to see how our guests in that market will respond. Finally, I want to congratulate all the restaurant management teams at Olive Garden and the Capital Grille for winning the People Report’s 2018 Best Practices award. Being recognized as having the best workplace culture in the casual dining and fine dining, is a tremendous honor. We know it truly sets apart as our people and I am proud of the work each one of our eight brands does can ensure our results-oriented culture remains a competitive advantage for Darden. Now, I will turn it over to Rick.

Thank you, Gene, and good morning, everyone. We had another strong quarter with total sales growth of 13.3%, driven by 11.3% growth from the addition of 154 Cheddar’s and 34 other net new restaurants, and same-restaurant sales growth of 2%. Adverse winter weather negatively impacted same-restaurant sales this quarter by 70 basis points. The negative impact was experienced in January and February. Weather for the quarter was in line with the average over the last five years. However, we were wrapping on unseasonably mild winter weather in the third quarter last year. Second quarter adjusted diluted net earnings per share from continuing operations were a $1.71, an increase of 29.5% from last year’s earnings per share. We paid $78 million in dividends and repurchased $19 million in shares, returning approximately $97 million of capital to our shareholders this quarter and over $440 million fiscal year-to-date. Additionally, during the quarter, we further strengthened our financial position by issuing $300 million of new 30-year debt at 4.55%, replacing $311 million of our outstanding notes tendered that had a higher interest coupon rate of 6.8% and 6.0%. We funded the approximately $100 million of premium and fees, associated with the tender, with cash on hand and commercial paper. Looking at the margin analysis, I am going to focus on food and beverage, restaurant labor, G&A and tax, as variances for all other lines on the P&L were relatively small on a year-over-year basis. Food and beverage expense was 50 basis points favorable to last year as pricing leverage, cost savings, and synergies more than offset commodities inflation of below 1%. Restaurant labor was 130 basis points unfavorable last year due to several factors. First, we continue to see elevated wage inflation of approximately 4% that was only partially offset by the favorability we picked from pricing leverage and productivity improvement. Second, we are still experiencing negative brand mix from Cheddar’s. Next, there were headwinds related to mark-to-market expenses for General Manager and Managing Partner equity awards, which I’ll explain in further detail in a moment. Last, in January, we announced the $20 million investment in our workforce this fiscal year and we incurred approximately $9 million of that amount this quarter, most of which impacted the restaurant labor line. General and administrative expense was elevated this quarter, driven by mark-to-market expenses related to significant appreciation in the equity markets this quarter. The mark-to-market of our deferred compensation liability and other equity based programs, increased expenses, primarily in G&A, consequently reducing our EBIT. However, due to the way we hedged this expense to reduce the volatility of earnings after tax, it is almost entirely offset in the tax line. In the quarterly presentation that is posted on our website, we show the third quarter details of this hedge. Market-based compensation increased general and administrative expense by $5.5 million. Including the impact in restaurant labor I previously mentioned, total mark-to-market expenses reduced EBIT by $7 million and EBIT margin by 30 basis points this quarter. Our hedge reduced income tax expense by approximately $6 million, resulting in a net earnings after-tax impact of $900,000. In quarters in which the overall equity market and/or our stock price declines, the inverse relationship would be true, EBIT would have a positive benefit, while the tax line would be unfavorable. But, overall, earnings after-tax should be relatively flat. Turning to income tax expense. We had an abnormally low performance-adjusted effective tax rate of 4.4% this quarter due to several factors. First, the application of the new lower tax rate in Q1 and Q2 earnings reduced our rate by 7 percentage points in the quarter. Next, the resolution of other tax matters reduced our quarterly rate by 4 percentage points. Both of these favorable impacts were contemplated in the updated guidance we provided in January. Finally, the impact from the deferred compensation hedge I just explained lowered the tax rate by approximately 4 percentage points. This was not contemplated in our January guidance. After adjusting for these three factors, our normalized tax rate for the quarter would have been approximately 19%. Now to our segment performance. Olive Garden, LongHorn and the Fine Dining segment all grew sales in the quarter, driven by positive same-restaurant sales and net new restaurants. Segment profit margin increased in each of these segments, even at the incremental workforce investments by leveraging the same-restaurant sales growth and managing cost effectively. Sales grew 71.4% at the other business segment, primarily due to the addition of Cheddar’s and new restaurant growth at the other brands as well as same-restaurant sales growth at Yard House and Bahama Breeze. Similar to last year, segment profit margin was 250 basis points lower than last year -- last quarter, I’m sorry, similar to last quarter. Segment profit margin was 250 basis points lower than last year due to the brand mix of impacting of adding Cheddar’s and for moving consumer packaged goods out of this segment, primarily the Oliver Garden. Additionally, with this morning’s announcement, we increased our fiscal 2018 adjusted earnings per share outlook to between $4.75 and $4.80 from the previous $4.70 to $4.78. This assumes approximately 126 million average shares adjusting for the year and is driven by same-restaurant sales growth of approximately 2%. New restaurant growth of approximately 40, not including the 11 Cheddar’s franchise restaurants we acquired into Q2 and total sales growth of approximately 13%. We also updated our effective tax rate to be between 16% and 16.5%, down from approximately 18%. Finally, we brought our annual CapEx guide to the bottom end of the previous range at approximately $400 million. Looking ahead, we wanted to provide some preliminary guidance for fiscal 2019. We currently anticipate total capital spending of between $425 million and $475 million, of which $225 million to $260 million is related to gross new restaurant openings of between 45 and 50, and $200 million to $215 million is related to ongoing restaurant maintenance, additional Olive Garden remodels, technology and other spending. In addition to the CapEx and new unit guidance we typically give during our third quarter announcement, we are providing a few additional items for fiscal 2019, given tax reform and other unique modeling challenges. First, we anticipate our annual effective tax rate to range between 12% and 13%. We also expect to make an additional $15 million of investments related to the savings from the Tax Act. This is in addition to the $200 million of workforce investments we are making -- $20 million -- to the $20 million of additional workforce investments we are making in fiscal 2018, for a total annual run rate of $35 million in P&L investments. Finally, we expect diluted average common shares outstanding for fiscal 2019 to be approximately 125 million. And with that, we’ll take your questions.

Thank you, speakers. [Operator instructions] Our first question comes from David Tarantino from Baird. Your line is now open.

Hi. Good morning. Gene, I just wanted to ask about your views on the current environment within casual dining and how you’re viewing the underlying momentum in the business in light of sort of factoring out some of the weather issues as you noted. And then more, specifically, on Q4, you do have what looks like a tougher comparison, especially for Olive Garden. And you mentioned that you’re not going to repeat the Buy One Take One promotion. So, just wondering about your thoughts on how we should expect the fourth quarter to play out and your ability to sustain positive momentum despite the tough comparison in eliminating that promotion?

Yes. Good morning, David. Let’s start with the industry. We are seeing a little bit of momentum there, little bit uptick in traffic. But, the real change that we’re seeing, as we analyze the benchmarks is that the check average appears to be growing and has picked up some steam. And as we look at that, we’re trying to analyze whether that is the industry taking more pricing, is it a pullback on some discounting, is it change in promotional strategy. At this point, we really don’t have a good feel, but we do see that check average is up over 3% and it’s been that way for almost the last 90 days. So, that’s a significant move up. And we’ve seen a tick up in traffic but not at the same rate as overall sales. As far as the fourth quarter, I mean, we gave our guidance -- we think that we’re comfortable in that range. We do have some tough laps. But, we think that we’ve made -- we’re making good long-term decisions. We think there’s value in the menu. We think we’re operating and executing at a high level. So, I think we’re -- obviously, we’re very comfortable with the guidance that we just put forth. You know you did make the comments to introduce the fourth quarter weather issue. We have -- we’ve been -- in this quarter and every week, we had a major snow impact for at least one day. I will add and I think added this during the hurricanes is that weather impacts today are greater than they were 5 or 10 years ago, because of the media hype around the situation. And so, kind of tough for us to -- and this would be the only common I’ll make about fourth quarter. It’s been tough for us to get any type of read around fourth quarter, because of the weather impacts in March.

Just a follow-up, Gene. On the elimination of the Buy One Take One promotion, are you planning to run something else in place of that or is it a situation where you’re not going to have a major promotion like that in the fourth quarter. And any way to gauge what the level impact from that factor alone would be…

No. I think we believe that we -- actually, we’re going to run promotion. I mean, we have taken the promotional calendar; we’ve gone from 9 to 6 promotions this year. We think that’s a huge operational benefit. So, our promotional timing is not lining up exactly with last year. We do have great promotions at the start in two weeks. So, we think that will be really strong. As we change the promotional cadence or we also change on media cadence, which makes our ability to analyze our business week-to-week a little bit more difficult. But, we’re confident that we’ve got a group promotion for the back half of the fourth quarter. And we think we’ve got the right media plan. And so, that’s all but incorporating the guidance we gave you.

Our next question comes from Brett Levy from Deutsche Bank. Your line is now open.

Is there a number where you look at your same-store sales gap and outperformance where you start to get concerned? If you look at what we’ve done -- if we look at what we’ve seen for Olive Garden, it seems to be back to the beginning of your run about 10 quarters ago. And I’m just -- when you think about labor, what can you do aside from just trying to drive greater retention? What can you do to offset the creep, either incremental training, incremental technology to try to help us get a better sense of what the leveragability is on that line? Thank you.

As far as the gap would, I would point you back to our long-term framework and say that we’re focused on trying to deliver between 1% and 3% same-restaurant sales on a consistent basis. And I know, there is a lot of attention and a lot of concern about our GAAP. I would point -- I’d go back and look at a two-year stack, we didn’t lose that much momentum on a two-year stack, also we lost a lot less momentum on the guest count. We appear to have a lot less price in our menu compared to our competitors, which we think is a really great thing and will play out over the long-term. As far as labor goes, I think the key to labor is simplification. And we’ll continue to try to simplify our menu, simplify our processes. And we’ve done a good job. I thought the graph that Rick showed in his prepared remarks, shows that we are getting some productivity improvement to offset some of the wage rate increase. It’s a line that I don’t think that we’re going to leverage here in the near-term. But, we’re trying to keep it as flat as we possibly we can. And I look at our businesses. I’m not so sure that there is a piece of equipment out there that’s going to help us improve, or any technology is going to help us improve our efficiencies back there. My belief and my belief always be that it starts with your menu and it starts with all your processes and procedures as your products come in your back door. And that’s what we’re going to focus on.

Our next question comes from Sara Senatore from Bernstein. Your line is now open.

Good morning. This is actually Anna Papp, representing Sara. So, I’m surprised that how modest food inflation has been across the industry despite what appears to more significant increases in commodity prices. Can you remind us about how contracting plays into this and how we should think about the type of lag there might be between the commodity markets and your inputs? Because it seems like the industry is taking checkouts aggressively, as you say, and typically we’d expect that to happen if costs [ph] are up.

Yes. Anna, thanks for the question. On the commodity front, we contract at different times of the year. We’ve got a great supply chain team that decides when the right time is to buy, looking at forward rates et cetera. We haven’t seen a lot of commodity inflation. As we’ve said, we were slightly below 1% in the quarter. What I would say is more of the pricing you’re seeing from some competitors is probably to cover the labor, not necessarily the commodities. What we also know is that as demand has picked up, supply has picked up. So, it’s helped keep the commodities from inflating dramatically. And we also in our presentation show that we’ve got inflation expected in the back -- in the last quarter in the low single digits. We’ve got an appendix back there. The one place we are seeing a little bit of inflation in the food is on the distribution side. It’s getting a little bit tougher and tougher to find people to drive trucks. So, we’re seeing a little bit of distribution expense, but that’s driven by labor, not necessarily the food cost.

Thank you. Our next question comes from Brian Bittner from Oppenheimer. Your line is now open.

Thanks. Good morning, guys. Rick, I appreciate the initial look into 2019 on several line items. You highlighted the incremental investments of $15 million from the tax savings redeployment. But as we put all the pieces together for 2019, you didn’t say anything regarding the Cheddar’s synergies. What’s the year-over-year benefit now expected related to that for 2019? And I have a follow-up.

Yes. Brian, thanks for the question. In relation to Cheddar’s synergies next year, what we said last quarter was we expect to be close to the run-rate by the fourth quarter of this year and we expect to have $22 million to $27 million of total synergies. So, doing the math, we’re going to be a little below $15 million next year in incremental synergies. But we also now expect to be closer to the high end of our synergy range of the $22 million to $27 million. Hopefully that answers your question.

Yes. And just on the labor line, when you back out the investments in the mark-to-market stuff, the deleverage was close to like 90 basis points. That’s more deleverage than we’ve seen recently on that line. Is there something changing there, is inflation picking up relative to past quarters or anything else you can point to, just kind of changing the trend in that labor line?

No, Brian, nothing is changing in the inflation. We’re still seeing in the 4% to 5% wage inflation. And we did have a little bit of Cheddar’s mix in there, more than we might have seen in the past, as we as we bring in more franchisees or we brought in the franchisees in Q2. But, other than that, there’s really nothing dramatically different. We did have a little bit lower check growth and pricing in the quarter than we had in the past.

Our next question comes from Will Slabaugh from Stephens. Your line is now open.

A question on Olive Garden. Did you more recent advertising campaigns around $8.99 dinners impact the mix of Kachina Me [ph] at all or even the rate of what you’d call overall value mix? And if so, just curious on your thoughts, if you’re okay with that and is that’s the direction you want to go here?

Yes. I don’t think it’s had a lot of impact on Kachina Me [ph]. It’s only rolling offering from 3 to 5. I mean, we see that -- Early Dinner Duos is just an opportunity to attract the clientele that is looking for value during really the only time when Olive Garden has some capacity. So, we see it as. Obviously, there is some people trading and they were coming in at 5.30, they’re now coming at 4.45. But we think this is -- over the next couple of years, we think this is a real growth opportunity for us just to build this value visit for people who aren’t really time-sensitivity around when they’re eating. And we hope that over time, we’ll just backfill anybody that we shift down into an earlier time zone. So, we think, this is a great way to offer value to our consumers in a period of time when our restaurants aren’t very full.

And just a quick clarification on the guidance, if I could. So, on the tax rate, I just wanted to clarify what you’re implying for the fourth quarter. It looks like it’d be closer to 20% and curious what the reason would be if it did climb that high?

Well, if you hear the prepared remarks, we talked about what our normalized rate would have been in the third quarter. It was about 19. So, if you’re doing the math to get to the 16 to 16.5 and you’re getting to around 20, it’s not really that different from what our rate would have been in Q3.

The next question comes from John Glass from Morgan Stanley. Your line is now open.

I wanted to just go back to the change in the promotional cadence in Olive Garden. I guess, one, specifically, if you can talk about what you think that promotion or change in the promotion specifically might do to impact sales and you called that out. And maybe just more broadly, as you move from 9 to 6 promotions. Does that create -- is that the right number now as you think about 2019? And does that change for example the first half of 2019 as you think about lapping or uneven laps around promotional activity?

I’ll answer the last part of the question first. I mean, we’ll not change the first part of next year. We’ll have completely lapped this. We’ve been working this all year. We haven’t talked too much about it primarily for competitive reasons. We did want to call it out this time, because Buy One Take One is one of our most successful promotions. And we’re not sure how we’re going to be able to really -- how well we’re going to be able to offset that. As far as giving some guidance into the fourth quarter, all I’d point you back to is our guidance. We’ve taken into account what we think the headwinds will be from removing that promotion, and it’s in our full guidance. I’m not going to give any more color on that.

And Rick, just two modeling questions, if you will. One is this mark-to-market program. Is this new? I haven’t heard about it coming to be bear to before and there hasn’t been market volatility before. So, is there a new program, we should just anticipate this from time-to-time or is this just the first time that surfaced as a call out? And then, I just want to make sure I understand the workforce reinvestment this year. You said $9 million this quarter, so an anticipated $11 million next quarter, the fourth quarter and then $15 million in 2019? I just want to make sure that is correct.

Yes. The workforce investment was $9 million this quarter and it would be about $11 million in Q4. As far as the mark-to-market, it’s not new -- it was just with the with the run up in the equity markets for our quarter was pretty significant on a one quarter basis and our stock price at the same time caused a lot more impact than mark to market that we’ve seen before. We’ve had this program going on for years but this was just a significant impact for us in this quarter.

Our next question comes from Jeff Farmer from Wells Fargo. Your line is now open.

Thank you. Did you guys comment on the potential refi impact on interest expense as you head into FY19? Was that lower interest rates? Just trying to figure out; I think you gave us some interest rates, but what that might mean to actual interest expenses as you move into 2019 versus 2018?

Yes. We didn’t call it out, but if you do the math, it’s about a $5 million net reduction in interest expense for next year when you include the fact that we had to take on a little bit of commercial paper.

Okay. And then, just one unrelated question. Turn appetites or philosophy toward pursuing acquisition of additional concepts in coming years. Any updated thinking on that?

Yes. I think right now, we’re just -- we’re really focused on continuing the integration. And Cheddar’s building the solid foundation for that brand and ensuring we get it on the right growth path before we consider doing anything else.

Our next question comes from Matt DiFrisco from Guggenheim Securities. Your line is now open.

Thank you. I just have a follow-up and then a question. With respect to the fourth quarter change in the promotion also, I guess, it sounds like for lack -- for simplifying it you’re losing a customer that was probably overly discounted in the first place. So, would that have a favorable affect to your labor margin? So, if you go back to Brian’s question about the 90 basis points of deleverage, would the fourth quarter be set up to in theory have less deleverage because you’re getting less promotional activity?

No, that’s exactly the opposite. Buy One Take One is a very, very profitable platform and it’s not heavily discounted, because it is a prepared meal that’s going home with the consumer and it goes home without soup, salad and breadsticks. So, the overall package -- it’s very additive actually. So, it’s a powerful driver -- guest driver and it’s also on average, I believe it’s an average type promotional construct.

Glad I asked the question. With respect to the $15 million in 2019. Can you give us a little bit of detail on where that will be deployed? Is that just purely higher wages or in what -- or is it more hours in essence or more service for the customer? I’m wondering what type of customer facing things are sales driving benefits they could have with that $15 million investment.

Yes. We’re not -- as last quarter, we’re not going to talk about the specifics of where those investment dollars are going to go. They’re going to go to improve our overall experience for our guests or our team members. And for competitive reasons, we’re not going to talk in a whole lot of detail about that.

Our next question comes from Gregory Francfort from Bank of America. Your line is now open.

I had two questions. One is just on the -- I think, you gave a labor bridge in the presentation. And one of the components was just the productivity of new restaurants. Are your new stores, I guess mixing significantly lower on labor and maybe what are they doing differently than your existing stores are doing? And maybe can you apply some of those learnings to the existing stores?

Hey, Greg. This is Rick. The productivity is net of new restaurant. So, productivity was higher. We continue to add new restaurants into the mix. And when they come on board, they are not as efficient as they normally will be, as they move forward. So, productivity without new restaurants would have been higher than the 0.3 that we showed.

And then, maybe Gene a question for you. Just on the Cheddar’s comps, I remember you’re saying at ICR, the Cheddar’s comps would probably be negative for a while. But, it seems like this is mostly driven by franchise stores coming on the books and you guys maybe taking the average check down. Can you help me understand how you’re thinking about how the Cheddar’s business plays out in terms of comps? And maybe when this drag goes away from the franchise stores that have come on? Is that sort of early ‘19 sort of a dynamic or is that kind of an ongoing process?

I think, it’s a great question. It’s an ongoing process. And when I look at the overall system, I think there is -- and I tried to allude to this in my prepared comments. This is a complex business; it’s doing a lot of guests. And we believe after being involve now for almost the year, simplification is the key. We’ve got to simplify the processes. In the restaurants that we’ve recently acquired, I think we’re really focused on the fundamentals. We’re focused on getting -- continuing to develop great general managers in these businesses. We have some staffing challenges in the restaurants that we’ve acquired recently. So, I think about getting back to basics and making sure we have the right management team in place, we have the right number of employees scheduled at the right time. I think one of the things that we’ve learned in this is when you buy a small franchisee where their owners aren’t financiers, but they’re really the operating owners and they operate the business and there is a lot of a motion is a heart and soul of these businesses. And when you remove them, you might have a little bit more turnover than you thought. You have a little bit -- you have some cultural issues. And it’s going to take time to rebuild out and integrate those restaurants into a traditional corporate system. And I think that’s what we’re really going through. These restaurants that we bought, I think there is 10 or 11 of them in Georgia. These are really high volume restaurants. And even with the significant decline, they’re still at the system average after this. So, we’re really excited about the opportunity to get in there. We have excess to resources in Atlanta, because of our huge base in our other businesses. So, it’s going to take a little bit of time. But, I would say that when we look at it, we’re more optimistic today than were we bought the business about the opportunity. So, we believe we can have a significant impact on basic restaurant operations and improve the overall delivery and get the experience to the consumer. I can’t put a time table on it for you. You just need to know that we’re working really hard doing these basic things. As I say, we’re almost through the integration. Next year, we won’t be talking about the integration. The management won’t be even referring to integration of the restaurants. They’ll be going to systems they know. So, I think we’ve got a lot of work to do. But, we’re really excited about where we’re at and what the opportunities are.

The next question comes from Greg Badishkanian from Citigroup. Your line is now open.

Hey, guys. It’s actually Fred Wightman on for Greg. In the past, you’d taken sort of a wait and see approach to any consumer benefits from the tax reform. Now that we’re starting to see some increases in paychecks and take home pay and you’ve talked about sort of that higher check average across the industry, do you think it’s safe to say we’re seeing a tax benefit at the consumer level?

I think, it’s way too early to say that. And I would, again, based on the fact, the last three weeks we haven’t had a week where we haven’t had a significant interruption into our business because of weather. And so, I think it’s my belief it’ll take time for this extra incentive to get into -- get into our overall system, into our economy. But it’s got to be good news as how much of it flows to us. And I’ll go back to the well-positioned brands with great value equations are going to benefit. And I think that when I look at our portfolio, I think we have the opportunity to benefit from this.

Great. And then for that $15 million of investment next year, what’s the cadence going to be like? Should that all hit in 1Q or should we see a 50-50 split, sort of like we saw this year?

Fred, it’s Rick. It should be spread pretty consistently throughout the year.

Thank you. Our next question comes from Howard Penney from Hedge. Your line is now open.

Thank you for the question. My question is also in the Olive Garden promotional change. In the past, when you’ve changed promotion for previous -- the other brands and I’m thinking about LongHorn, you may have compromised traffic trends in a certain quarter, but it significantly improved profitability because of the change in the promotional cadence, would you expect that too for Olive Garden?

No. I think, we’ve seen some of that throughout the year as we’ve changed the cadence. I wouldn’t expect at this point in time anything dramatically to change. LongHorn was a little bit different. We were coming off a deep value platform and going to a different type of offer. This is -- we’re still in the same value range, it’s just a different type of promotion. And we’re -- we know that Buy One Take One was very, very successful. We believe that we are overexposing it. And just like Neverending Pasta, we only run that once a year. We need to run Buy One Take One once a year. So, I wouldn’t expect the big swing in profitability because of this change. Now where the profitability does come into play, as we move from 9 to 6 is from a labor standpoint. A0nd we’re moving less product around. We’re having less all team meetings to roll out new product. So that’s been embedded in our P&L throughout the year.

Our next question comes from Chris O’Cull from Stifel. Your line is now open. Chris O’Cull: Thanks. Good morning, guys. I had a follow-up to that last question. Gene, what have you seen in the data that causes you to be concerned that the Buy One Take One could be at risk of being overexposed? And I believe we are lapping that promotion right now. So, is that true and are there any other comparison issues we should think about for the quarter?

No, we are -- you are correct. We’re lapping that promotion from last year. I think it was more just our intuition that told us that long-term you’ve got to protect the integrity of these promotions over time. And this is a great promotion. And we wanted to have its traffic drivability to continue on. And if you -- we know if we run it 16 weeks a year, it’s going to lose some of its effectiveness. So, to me it’s -- when you think about Neverending Pasta Bowl, it’s a great promotion, but you got to run it once a year and you’ve got to enjoy it once going on. And then, you’ve got to take it away. To make it powerful, it’s got to -- it can’t be there all the time. Chris O’Cull: And then, Rick, thanks for the explanation on the G&A increase year-over-year. But, it looks like it’s still -- you’re running higher than the trend would suggest. Any other explanations for the G&A increase in the quarter and how much of the G&A increase do you expect to reoccur in the fourth?

Yes, Chris. As we said, mark-to-market was about $5.5 million. And the workforce investment didn’t just impact the restaurant labor line, it also impacted G&A $2 million to $3 million. So, if you take those things out, we’re pretty -- we weren’t that off where we were in Q2. So, we can’t predict the stock market. So, we can’t predict what’s going to happen in the fourth quarter on mark-to-market. But the workforce investment in the fourth quarter should be similar to what it was in the third quarter in the G&A line.

Our next question comes from Andrew Strelzik from BMO Capital Markets. Your line is now open.

I wanted to ask a question on the in-store business at Olive Garden. If I kind of back out the numbers you gave on off-premise, it seems like the in-store business was relatively flat, which is similar to the industry. Is that something that you’re okay with? It just seems like -- I know you’re taking less price but it seems like relative to the industry, the in-store business has been, the gap has been narrowing. And have you seen any change to the trade-off among in-store and off-premise as you saw -- continue to see the strong growth there?

I would say that -- obviously, we’re thrilled in-restaurant business is continuing. I think it actually grew, they’re holding up all sign across the table here saying our in-store restaurant actually did grow a little bit, which is fantastic. And I think the analysis that you made was compared to the industry -- were equal to the industry. Well, the industry has got a lot of takeout growth in it too. So that’s really not a fair comparison. However, we’re focused on it in its totality. And when we think about Olive Garden, our goal is to deliver Olive Garden experience to people when and where they want it. We understand convenience is a big need state today. And so, we look at it in its totality. So, I guess, I would go to a day like Valentine’s Day, when there is no room to dine in Olive Garden, because we’re so busy; it’s our busiest takeout day of the year. And so, we’re able to deliver an Olive Garden experience to the consumer in a way they want it. They can’t get into the restaurant; they’re going to take it home. So, I think trying to isolate the two different need states is I think on the stake. And we got to look at it in its totality. There is definitely a continued focus on off-premise. We’re trying to maximize our opportunity there. But, we are really focused on making sure we’re creating a great in-restaurant experience because that’s the biggest part of our business. And our research tells us, the consumer is still looking for a great in-restaurant experience; and those who provide it, will continue to win.

I appreciate the perspective on that. If I could squeeze one more in on LongHorn actually. You’ve seen price increases have been a bit lower the last couple of quarters, at the same time the mix has been ticking up. Is that a conscious decision on the pricing to manage the check growth and should we expect kind of a similar construct of check growth kind of as we progress...

We are definitely trying to continue to create value to increasing the quality of the product in LongHorn and also watching what we’re doing from a pricing standpoint. The mix is coming from a couple of components. It’s coming from our simplification and we’re actually selling more add-ons. But, the biggest part of it is a reduction in discounting. And as we reduce our discounting pressure, our menu mix goes positive, which is just another form of creating value for the guest. So, when I look at the LongHorn mix for the quarter, 2%, 0.7 [ph] price, flat guest counts and I’m doing -- we’re doing this with a lot less discounting, I feel really good.

Thank you. The next question comes from John Ivankoe from JP Morgan. Your line is now open.

Hi. Thank you. I was curious about that the chain versus independent share dynamic. What you guys are seeing? And I asked this question in the context of there being some significantly conflicting data that’s out there of whether -- who’s taking share versus who’s chains or independent. So, I wanted to get your thought on that. And also, if there’s somewhat of an outlook on 2018 and 2019 as you guys have been through many different cycles before which side the pendulum switches in your opinion, chains or independents?

Yes. I am been briefed recently on the recent CREST data. And again, CREST data is directional. But, what we’re seeing is large chains and independents picking up a little share and small chains actually donating that share. And so, that’s the most recent trend. Not a huge swing. I mean, we’re talking 10, 15, 20 basis points. There is not a lot of movement. But, it does seem like it’s coming on the small chains with large chains and independents growing. As far as -- as we look into the future, I mean, that’s hard -- I do think that the large players continue to have an advantage from a cost standpoint, from an advertising standpoint and will continue to -- should continue to take share, if we manage our businesses effectively.

And I asked this question also, Gene, just in the context of smaller, even one-off restaurants that have a better ability to market before and there is also a lot of discussion about there being some generational preferences for -- like the truly independent owner operator type of restaurants. So, but again, just relying on your experience in this case. Do you think that’s true in 2018 or 2019 or if there’s still a broadened swap of that population that appreciates a high level of consistency that just the overall industry, not necessarily Olive Garden and LongHorn can hold on to that share?

Yes. Two thoughts, first of all, the independent growth, there’s a coastal problem. It’s happening on the coast; it’s not really happening as much in Middle America. And secondly, I think that we’re also at the top end of cycle. I think we saw this in ‘05, ‘06 and ‘07 where there’s a lot of capital out there for people to open independent restaurants. And usually, independent growth slows down as that capital slows down. And a lot of these restaurants cannot withstand any type of shock. And as we saw in 2009 and 2010 and most a lot of them fell out. So, I think as we look forward, I think a lot is going to depend on the overall economic environment.

Our next question comes from Stephen Anderson from Maxim Group. Your line is now open.

Yes. Good morning. I wanted to discuss Cheddar’s. And I thought you gave guidance on fiscal ‘19 CapEx. Do you have any kind of estimate as with regard to what you would like to spend to renovate some of the older Cheddar’s that are out there? On the franchise side, there is still a lot older units that may not up to the current prototype? Thank you.

Yes. I think, one of the things that we’re most impressed with Cheddar’s is the durability of their buildings. They’ve got a great design that’s been able to stand the test of time. And I don’t think that -- there is not any type of remodel program that is needed. There is a little bit of refresh. We got to do some signage, changes. But for the most part, the buildings that we have bought are in great condition. We do have some transformational work in the kitchen with some new equipment that we’re reporting into some restaurants and there will be some capital there, but that’s minimal.

The next question comes from Jeremy Scott from Mizuho. Your line is now open.

Maybe just high level. I was wondering when we have a quarter like this with so many different weather events, how your takeout business performs and maybe you can -- I realize the 70 bps impact is across the board. But, just wondering, your comment that weather has in fact bigger impact today than it is five years ago, because of the media focus, some of that offset by the fact that you’ve now laid the pipes primarily at Olive Garden to reach the customer’s home. And then any changes in your thought process around delivery?

Yes. First of all, I’ll -- a lot in that question. But, I always say that weather hasn’t helped us from a takeout standpoint either. I mean, it’s -- we get to a certain point with this weather pattern that we’re in where restaurants are close. We can’t do takeout of a close. We take the safety of our team members very, very seriously and we close our restaurants, so that the takeout is not there. The second part of the question around our attitude towards delivery. I would say that we have focused on Olive Garden on a large party catering. We see that as a huge opportunity. We’re in the beginning parts of really starting to develop that. We are, again, as I’ve said before, we’re focused on these. The average order side is $300. As we continue to grow that business, it has some impact. We’re still talking with a lot of third-party delivery companies trying to understand how this is all going to shake out. And we’re testing, doing our own delivery. So, we’ve got a lot of things happening right now. And we’ll continue to analyze it and we’ll make the right decision for our business. And we have the right -- we have enough information that leads us to a conclusion.

Have you seen takeout growth in any of your other brands? I think, LongHorn the last time you mentioned was half of Olive Garden. How is that trended in the last couple of quarters?

Yes. We’re obviously seeing good takeout growth in all of our brands, especially LongHorn as the consumer demands convenience. And so, it’s a significant part of the growth story in all of our businesses. But we’re focused -- we still believe, we’re focused on maximize the opportunity in Olive Garden, because the food travel is so well. And we have unique packaging. We have a unique product offering. And so, there is a lot more focus on really growing that. I would say in other businesses, we’re going with the demand of the consumer and we think that’s the place to be.

The next question comes from Brian Vaccaro from Raymond James. Your line is now open.

Thank you. Good morning. Gene, I wanted to follow up on John’s industry question and also get your perspective on industry supply growth. It seems to be some indications that we’re finally seeing some rationalization in recent quarters. And curious if that’s consistent with what you’re seeing and hearing from your teams in the field, and also your view on supply growth over the next couple of years.

On supply growth, I think what we’re seeing is we’re seeing some rationalization and we’re seeing some good growth. So, we’re -- the last CREST data, I saw and it was recent was that we’re basically a net -- no increase in restaurant growth year-over-year. But what we’re seeing is we’re seeing the weaker players start to close some restaurants; we’re seeing some independents fall out; then, we’re seeing new restaurants come back in. And the restaurant brands that are growing are strong and they are growing for a reason. So, the example I like to use is when you open a yard house and we do $8.5 million in sales, we didn’t create $8.5 million in sales in that marketplace, we stole that $8.5 million; it’s been redistributed. And so, as we see these stronger players continue to open, it does put some additional pressure on the business. I will tell you that the one thing I’ve noticed in the last 12 months or so which gives me confidence that the environment is somewhat improving is that our new restaurants are performing better. And it does feed into our belief that we’ve got to continue to build restaurants closer to where people live. They may be a little less likely to travel distances that they used to travel, especially to some of these malls, lose their drawing power. But, we’ve been pleasantly surprised to the upside how well our new restaurants are opening. And that tells me a little bit about where we are economically.

That’s helpful. And then, just two quick follow-ups, if I could. Rick, the cadence of the tax savings reinvestment, clearly we saw $9 million in the third quarter, $11 million expected in the fourth quarter. As we think about sort of the year on year impact, wouldn’t the $15 million be sort of front-end loaded in fiscal 2019 or I’m not thinking about that correctly?

The $15 million wouldn’t be front-end loaded in 2019, but we had no investments last year or this fiscal year in Q1 and Q2. So, we will see an increase. So, if you think about the $20 million that we made this year, just assume that’s going to flow naturally through next year and then the $15 million will also start flowing naturally through next year, so.

Got it. Okay, perfect. And then, last one for me, the weather that you’ve seen in March, if you assume to April and May sort of normalized year on year, obviously not knock on wood, but how much of a weather headwind for the fourth quarter would that equate to? Would it be…

That’s all incorporated in our guidance today. Again, we’re hoping that -- you all in New York saw your last storm yesterday. We said that last week too. Weather is out of our control and there’s nothing we can -- we don’t worry about it. We’re focused on running great restaurants; when we have a weather event, we’re focused on ensuring our people are safe. And I think, as Rick said in his statement -- his comments, we saw more of a normalized winter through the third quarter. I mean -- and when get to the end of February and we looked at it, this is a normal winter. We’ve got the benefit of a couple mild winters in the past couple of years. March may turn that upside down a little bit, but we’ll give you some color in that in the fourth quarter when March is done.

The last question comes from Matt DiFrisco from Guggenheim Securities. Your line is now open.

I just had a question with respect to the off-premise sales. I think you said it was about 13% or so. Is that got delivery in there? I’ve seen you guys pop up a little bit more on Grubhub with Olive Garden and Yard House and some other brands, just curious, if you can give some comments on that.

Yes, Matt. That’s inclusive of all off-premise. And, yes, you are seeing us pop up either via test or we don’t know that we’re participating with them. They have a way of just taking the menus and marketing products. So yes, that’s inclusive of anything, 13%. And I thought the number that’s impressive was 15% of our total sales for the quarter were from takeout.

So, you don’t have an agreement then with Olive Garden and Grubhub? They are just taking you and listening you on there?

Well, it depends. In some markets we do. And yes, I mean, there is a little Wild Wild West out there right now.

Thank you, speakers. We show no further questions at this time.

All right. Thank you. That concludes our call. I want to remind you that we plan to release fourth quarter results on Thursday, June 21st before the market opens with the conference call to follow. Thank you for participating in today’s call.

Thank you. And that concludes today’s conference. Thank you for your participation. You may now disconnect.