Kevin Kalicak - IR Gene Lee - President and CEO Rick Cardenas - SVP and CFO Ian Baines - President & CEO, Cheddar's Scratch Kitchen

Brett Levy - Deutsche Bank Nicole Miller - Piper Jaffray Brian Bittner - Oppenheimer & Co. Greg Francfort - Bank of America, Merrill Lynch Sam Beres - Robert W. Baird Stephanie Ng - Sanford C Bernstein Will Slabaugh - Stephens Matthew DiFrisco - Guggenheim Securities David Palmer - RBC Capital John Glass - Morgan Stanley Jeffrey Bernstein - Barclays Jason West - Credit Suisse Karen Holthouse - Goldman Sachs Howard Penney - Hedgeye Management Brian Vaccaro - Raymond James John Ivankoe - JPMorgan Todd Duvick - Wells Fargo Steve Anderson - Maxim Group Andrew Strelzik - BMO Capital Markets Chris O'Cull - KeyBanc Jake Bartlett - SunTrust Matthew DiFrisco - Guggenheim Securities

Welcome to the Darden Fiscal 2017 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, you may disconnect at this time. I will now turn the call over to Mr. Kevin Kalicak. Thank you. You may begin.

Thank you, Ray. Good morning, everyone and thank you for participating in today's call. Joining me on the call today are Gene Lee, Darden's CEO; Rick Cardenas, CFO and Ian Baines, CEO of Cheddar's Scratch Kitchen. 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 earlier today and in its filings with the Securities and Exchange Commission. We are simultaneously broadcasting a presentation during this call, which is posted in the Investor Relations section of our Website at www.darden.com. Today's discussion and presentation includes certain non-GAAP measurements and a reconciliations of these measurements is included in the presentation. This morning we will briefly review our results from the third quarter and discuss the Cheddar's transaction in more detail, both of which were announced last night via press release and filed with the SEC. After the prepared remarks, we'll open the call for your questions. Now, I'll turn the call over to Gene.

Thank you, Kevin and good morning, everyone. We appreciate you joining us today as we review our third quarter performance and share the exciting news of our acquisition of Cheddar's Scratch Kitchen. Let me begin by saying that I'm pleased with our performance during the quarter. Total sales from continuing operations were $1.88 billion an increase of 1.7%. Same restaurant sales grew 0.9%, outperforming the industry benchmarks, excluding Darden by 510 basis points and diluted net earnings per share were $1.32 an increase of 9.1% from last year's adjusted diluted net earnings per share. Olive Garden had another impressive quarter, achieving same restaurant sales growth of 1.4%, outperforming the industry benchmarks excluding Darden by 560 basis points. This was Olive Garden's 10th consecutive quarter same restaurant sales growth, driven by our focus on operational excellence, was drove all-time guest satisfaction scores, continue to meet our guest needs for convenience with OG To Go and providing compelling promotional and core menu offers such as Never-Ending Classics and our taste of the Mediterranean platform. LongHorn Steakhouse's same restaurant sales grew 0.2%, the 16th consecutive quarter of growth. I am pleased with their results as the team continues to implement their long-term strategy, focused on investing in quality and simplifying operations. Our success in our ability to continue fulfilling our mission is due to our competitive advantages, our back to basics operating philosophy and our portfolio of differentiated brands. We believe our four competitive advantages give our brands an edge in the marketplace by enabling us to drive sales growth and expanding margins and they are leveraging our significant scale to create cost advantages, using our extensive data and insights to better understand our guest and effectively communicate with them, ensuring our brand systematically go through our rigorous strategic planning process and cultivating our results-oriented people culture to create a team as a passion to serve and a desire to win. Our operating philosophy is the driving force behind the way our branch teams lead their restaurants. Though simple, this philosophy is powerful because it demands that we remain incredibly focused on driving strong operating fundamentals and that means we're laser focused on culinary innovation and execution inside each of our brands, delivering attentive service to every one of our guests and in creating an engaging atmosphere inside all of our restaurants and these priorities are supported by smart and relative integrated marketing programs that resonate with our guest. All of this, are competitive advantages, our operating philosophy and our portfolio brings me to the exciting announcement of our acquisition of Cheddar's Scratch Kitchen. When you look at all these things, you see why Cheddar's is strong brand on its own, is an excellent fit for our company. The addition of Cheddar's to the Darden portfolio further enhances our scale. Our significant skill provide meaningful synergies for Cheddar's, further strengthening an already robust business model. Additionally, being part of Darden provides Cheddar's the opportunity to leverage all of our competitive advantages to help increase sales and margins at existing restaurants and drive disciplined, profitable new restaurant growth. In addition to the mutual benefit realized through scale, we're also extremely confident about this acquisition because Cheddar's and Darden's are a cultural fit as well. We're focused on the same operating priorities. This focus on food, service and atmosphere has enabled Cheddar's to become one of the top brands in casual dining, one known for its high quality, made from scratch food at compelling prices in a polished yet warm atmosphere. We believe Cheddar's is a strategic fit for Darden for several of the reasons. First, it complements our portfolio and allows us to compete in the undisputed value leader in full-service varied menu category. This category remains sizable with evolving preferences that Cheddar's satisfies. Additionally, Ian has built an experienced management team that encourages and empowers service-minded team members to be passionate and to bring the distinctive personalities to their roles, so they can deliver a personalized experience that is authentic and attentive. Next, the restaurant level economics are very attractive. Cheddar's has average restaurant volumes of 4.4 million, average restaurant guest counts of approximately 6,300 guests per week and an average check of approximately $13.50, all of which helps provide a strong return on investment and with only 165 restaurants today, the significant runway for growth. And finally, Cheddar's is an incredibly strong brand. In fact, it is the undisputed leader on value perception and intent to recommend, which are both leading indicators of same restaurant sales growth. Now I'll turn it over to Rick, who will discuss the financial details of the quarter and this transaction.

Thanks Gene. We delivered another strong quarter with diluted net earnings per share from continuing operations of $1.32, an increase of 9.1% from last year's adjusted diluted net earnings per share. Looking at the P&L for this quarter as a percentage of sales, food and beverage was favorable to last year related to commodities deflation of approximately 0.8% and continued cost savings. Restaurant labor was favorable, driven by lower manager incentive pay, given last year's strong performance in the third quarter. This was partially offset by continued hourly wage rate inflation pressure. Restaurant expenses were unfavorable due to higher than anticipated utilities inflation, particularly natural gas, increased preopening related to more second ever openings this year than last, increased credit card fees and Worker's Compensation and public liability claims. Marketing was unfavorable due to year-over-year timing and is flat on year-to-date basis through the third quarter. G&A was favorable due to lower management incentives than last year, as we wrap on a strong Q3 in fiscal 2016. And finally, taxes were favorable due to year-over-year tax timing. Specifically, we had some tax favorability move into the third quarter this year that we had in the fourth quarter of last year. Second profit is not comparable to last year and the impacts of the real estate transactions are now in both year's results. This quarter, Olive Garden segment profit was below last year -- profit margin was below last year, driven by marketing expense timing, utilities inflation and higher preopening expenses related to Q3 and Q4 openings this year versus none in the second half of last year. LongHorn segment profit margin was below last year, driven by higher restaurant expenses, primarily the Workers Compensation expenses I mentioned. All other segments showed growth in segment profit this quarter. Turning to our outlook in fiscal 2017, we increased our expectations for diluted net earnings per share from continuing operations to be between $3.95 and $4 a share. This assumes total sales growth of approximately 2.3% for the full fiscal year, same restaurant sales of approximately 1.5%, commodity deflation for the full year, although we expect the fourth quarter to show slight inflation. Overall inflation of approximately 1.5% driven by wage inflation for the year of approximately 3.5% to 4% and finally an effective tax rate between 25% and 26% for the year. So, this implies fourth quarter results of same restaurant sales between 2% and 3%, an effective tax rate of between 25% and 26% compared to approximately 21% in last year's fourth quarter and earnings per share between $1.11 and $1.16. Looking ahead to fiscal 2018, I want to inform you that we will discontinue disclosing our monthly same restaurant sales results in our quarterly releases beginning with the first quarter of fiscal 2018. This change is due to the significant variability in month-to-month sales results, due to weather, promotional calendar shifts and holiday shifts, among other things that generally resolve throughout the quarter. In 2018, we anticipate total capital spending of between $360 million and $400 million of which $150 million to $175 million is related to growth new restaurant openings of between 30 and 35 and the remainder being related to approximately 100 Olive Garden remodels, ongoing restaurant upkeep, technology and other spending. The outlook for fiscal 2017 and the ranges for fiscal 2018, CapEx and new restaurant estimates, exclude any impact from the acquisition of Cheddar's. Additional guidance for fiscal 2018 will be shared in next quarter's release and call towards the end of June and will include the impact of Cheddar's. Regarding the acquisition of Cheddar's, we have signed a definitive agreement to purchase the company for $780 million in an all-cash transaction from private equity firms L Catterton and Oak Investment Partners. Net of approximately $30 million of certain cash tax benefits of deductible goodwill from Cheddar's purchase of a franchisees assets in January 2017, this represents a multiple of 10.4 times Cheddar's trailing 12-month adjusted EBITDA. We will also pay the seller $10 million for certain tax attributes related to their deductible transaction expenses. In addition, we will reimburse the sellers for capital expenditures they have made on new restaurants expected to open over the next 12 to 18 months. We expect to close the transaction before the end of fiscal 2017. This addition to our portfolio will enable significant synergies due to the scale advantage Gene mentioned. We have a track record of achieving significant synergies with other transactions with annualized run rate synergies on average of over 5% of revenues in prior acquisitions. This anticipated annualized run rate synergies with this transaction total $20 million to $25 million, representing approximately 4% of Cheddar's trailing 12 month revenues. We believe the $20 million to $25 million is both achievable and meaningful and we expect to achieve this annualized run rate by the end of fiscal 2019, primarily through administrative and supply chain savings. Given Cheddar's strong business model and meaningful EBITDA, we expect that this transaction will be accretive to our earnings per share by approximately $0.12 in fiscal 2018 and $0.20 to $0.25 in fiscal 2019, excluding acquisition and integrated related expenses of between $25 million and $35 million. We'll fund this transaction with the proceeds of a new debt issuance and with cash on hand. This issuance is expected to be completed by the transaction closing date. Once the deal closes, our initial focus will be on integrating Cheddar's with minimal disruption of our operations and achieving the synergy estimates we've outlined. We have experience integrating brands from prior acquisitions and we'll apply learnings from those in this transaction. As I mentioned earlier, we will provide greater detail on our outlook for fiscal 2018 in our earnings conference call in June. However, I want to wrap up by saying that the addition of Cheddar's to our portfolio gives us even more confidence in our ability to achieve our long-term value creation framework we have discussed previously. We also intend to maintain our investment-grade credit profile. In addition, the terms and structure of this transaction will put us more in line with our targeted leverage range of 2 to 2.5 times adjusted debt to adjusted EBITDA. And with that, I want to welcome Ian and turn it over to him for a few comments.

Thanks Rick. Well today is a really exciting day for the Cheddar's team as this acquisition is the right next step for us as a brand. Being part of Darden, benefiting from the support structure and expertise in developing brands will enable us to reach our growth potential by opening up new opportunities that were previously out of our reach. Additionally, it became evident during my interactions with Gene, Rick and the team and at Darden, throughout this process that there are incredible amounts of similarities on how we run our restaurants and lead our teams. The cultural fit between both parties that Gene discussed will ensure a smooth transition for us and help us to stay focused on delivering exceptional experiences to our guests. We will be stronger because of Darden and I'm confident that we will make a meaningful contribution as part of the company. Now I'll turn it over to Gene.

Thanks Ian. I just want to close by mentioning that this is the fourth acquisition that I've been a part of at Darden and I've been on both sides of the table. The process can be complex, but we have a seasoned team with a terrific system in place to ensure a smooth integration. I want to thank Ian and his team for the partnership they have given us through this process and I want to welcome all our new team members from Cheddar's to the Darden family. We're committed to delivering against our mission and I'm extremely excited to continue this journey with the Cheddar's team who will strengthen what is already a very talented team at Darden And with that, we'll take your questions.

Thank you. We'll now begin the question-and-answer session. [Operator instructions] Our first question is from Brett Levy of Deutsche Bank. Sir your line is open.

Good morning, team. Can you provide us a little bit more color on the Cheddar's P&L what type of seasonality? How you're thinking about growth in terms of company or franchise restaurant level margins and also any thoughts on the near-term with a long-term -- near-term growth targets or the long-term unit potential?

Hey Brett, it's Rick. The restaurant P&L we mentioned is about a 17% restaurant EBITDA, which is strong in the industry. $4.4 million AUV and they’ve got 25 franchises now. The revenues are fairly immaterial to the overall revenues Cheddar's. And as we mentioned, we have a pipeline -- they've already got a pipeline of about three restaurants in this fiscal year and another eight or so in the next fiscal year. I'd like to just close by saying they’ve grown about 12%, 15% over the last 10 years and we feel really confident in their continued growth.

Can you share anything about the comp cadence or what they're running, what they generally run in terms of on an annual basis and the comp waterfall for new units as they come out?

Hey Brett, it's Gene. What I was going to comment on the comp performance historically, I will say that they're outperforming the industry at this time and we'll give you some more insight in June once we get this deal closed.

Thank you.

Thank you. Next, we have Nicole Miller of Piper Jaffray.

Thank you. Good morning and congratulations. Maybe just bigger picture from Cheddar's, what might you deploy into your system in terms of their value proposition or positioning? Also, maybe anything they're doing in technology human capital or otherwise, thanks?

Yes, we think there's a lot to learn from the value proposition. They're obviously the value leader. You saw the chart that we had in the presentation. They’ve had a long history of underpricing the industry, developing products from scratch, which enable them just to really deliver a high-quality product at a little bit lower price point. So, I think there's a lot that we can learn from them about value and as far as technology and human capital, I think there's a lot that we can share with them. We're excited to be able to help them with some of their back of the house technology and some of the process oriented things that we've developed here at Darden that over the years, they’ve haven’t had the opportunity to implement. And we think there's upside plugging them into our human resource systems and we think we can help improve their team member turnover and retention.

And just so everybody does have it, what is the approximate average check at Cheddar's?

It's about $13.50.

Thanks again.

Thank you. Next, we have Brian Bittner of Oppenheimer. Your line is open.

Thanks, congrats guys on the quarter and the acquisition. Just a big picture, financial creasing question on the deal, you said the transaction will be EPS accretive in year one by about $0.12 and then expanding to $0.20 to $0.25 in your two or 2019. Is the difference in the accretion projections, simply you're not assuming much synergies in the 18 number and you're assuming all the synergies in the 19 number, or is there some type of growth that you're assuming out of Cheddar's?

Yes Brian, thanks. We have more of the synergies coming in, in '19 than in '18, although we do expect some growth in Cheddar's in '19.

Okay. And then as far as the 2.3 EBITDAR, should we be assuming in our models that you're taking out around $500 million out of your credit facility that you currently have untapped to fund this or should we be assuming more?

Well, what I'd start with if you look at our balance sheet right now, we've got about $390 million in cash. We're not going to talk about the way we're going to fund the debt other than to say we'll use some debt whether it's credit facility or other things to fund this transaction. We expect to close that before the deal closes.

Okay. Thanks.

Sure.

Thank you. Next, we have Gregory Francfort of Bank of America. Sir, your line is open.

Hey guys, just one question on the EBITDA multiple, I know Cheddar's had a 44-store transaction happen earlier this year, you including those stores in the multiple in the EBITDA they're using for the multiple.

Yes Greg. We're including them for a pro forma for the full, for the full 12 months.

Got it. Got it. And then just, I think you guys have been testing loyalty in some markets and is the strategy going forward to potentially acquire more brands and build out sort of a broader loyalty network? I guess how do you think about how Cheddar's fits into plans you're doing and what you're testing on the loyalty front?

Yes, you're correct. We have a small loyalty test out there right now and as we've said in the past, we're going continue to go slow with that test. And how does Cheddar's fit into that, I think we keep coming back to our four competitive advantages and one of our what we believe is a competitive advantage is our data and insights. And so, having Cheddar's being able to plug into the resources that -- and capabilities that we've developed with data and insights should be a big advantage for them. It's going to take us some time to be able to get them into our systems, but that we think about the Darden platform and plugging brands into it, we think that gives -- that enables these brands to have a significant advantage in the marketplace. As far as a strategy to continue to do this, no, let's focus on completing this transaction and grading this brand really, really well and then we'll move on and look at it when that time comes, but that's a long time from today.

Got it. Thank you.

Thank you. Next, it's Sam Beres of Robert W. Baird. Your line is open.

Good morning, Gene, I was just hoping maybe in terms of the broader industry, hoping you could maybe share some thoughts on just how you're viewing kind of the underlying demand fundamentals from that industry perspective right now, just given the large amount of noise we're seeing within trends in recent months whether that's from weather, calendar shifts or maybe timing of tax refunds?

Yeah, I think all those, the things which you just mentioned have played a big impact in the quarter and I continue to urge people to take a little bit longer term approach to this and not getting hung up week-to-week, quarter-to-quarter. I would say if you look at our industry benchmarks, for the first couple weeks of March, the delay in the tax refunds was an impact in February and we've seen a few, a little bit better trends in the beginning of March. We're also in March dealing with a much later Easter this year than we had last year. So just a lot of noise. When I think about the consumer, I think the consumer has been pretty steady. We know the consumer is looking for everyday value. The consumer is not reacting to promotional value constructs, the way they did a few years ago and I think that when you give the consumer what it is that they want, they're visiting restaurants. And I think if you look at our industry, the brands that are performing and executing at a high level that are well-positioned, continue to do fairly well.

Great. That's helpful and I guess maybe just one follow-up on the implied outlook for Q4 comps of 2% to 3% does assume a nice pickup from the level your just reported. So, I guess, in terms of the puts and takes on that, what gives you the confidence in delivering that acceleration? Is it just that better trend line that you've seen here recently at the start of March?

Well, I think it has more to do with the late Easter. Last year we were sitting around the table and talking about why trends slow down with Easter coming forward and this year we'll get the benefits of a later Easter and later Easter helps restaurants and retail.

Okay. Thanks.

Thank you. Next, is Sara Senatore of Sanford Bernstein. Your line is open.

Good morning. This is actually Stephanie Ng representing Sara Senatore. Thanks for taking my question. I had a broader question. I just wanted to understand your perspective on the bar and grill category in relation to the acquisition. This category has been one of the weaker casual dining categories over the last couple of years, warranting to deflationary pressures and competition from limited service. Why expand your portfolio to this category and why now and also if you could talk about your longer-term view on the bar and grill category, that would be great. Thanks.

Yes, first, we don't consider Cheddar's as a traditionally ubiquitous bar and grill concept. We see this as a differentiated varied menu concept with a totally different footprint and much larger buildings, 300 seat restaurants, much more broadly appealing and we see Cheddar's in a segment that we've defined as the place where brands are winning and we see Cheddar's competing against Cracker Barrel, Texas Roadhouse and to some degree Olive Garden in a segment that has got a very broad audience and is very appealing to lots and lots of people. And so, we don't think of this as bar and grill. Sometimes it gets segmented that way, but we see this as a varied menu restaurant and almost the antithesis of bar and grill. When we got scrap -- making all our products from scratch, it's a very broad appealing menu. So, a lot of ribs and stakes and chicken fingers. This is a full dinner house menu that's competing very, very effectively and if you look at the value ratings on this compared to bar and grill, they're not even in the same quadrant. And so, we think this is the right brand at the right time with a great consumer base to be able to continue to grow this business and its significantly underpenetrated.

Okay. Thank you. And a follow-up, how should we think about implications on the buybacks for the balance of the year and if acquisition would likely to divert some cash?

Yes, on the terms of buyback, what I would just lead you to is our long-term framework, which is $100 million to $200 million a year and in this fiscal year, we've already bought $200 million. We didn't buy any shares in Q3 because we were in the middle of this acquisition. So, we couldn't be in the marketplace. But I would just say, this does not preclude us from staying in the $100 million to $200 million range next year, which is our long-term framework.

Okay. Thank you.

Thank you. Next, we have Will Slabaugh of Stephens. Your line is open.

Thanks guys. Just a question on Olive Garden, you further widened that gap as you mentioned between you and peers and didn't show that volatility that we've been seeing in the industry. So, I'm curious where you would attribute that success? Where the growth has to go, spending stepped up a little bit this quarter or if you think the promotions there seem to gain more traction on a relative basis. And I'm curious as well if you might comment on LongHorn too.

Yes, I think there is a couple things going on. I think I'll make a couple comments, I think are both true for Olive Garden and LongHorn and it's a boring comment, but we are maniacally focused on improving how we run our restaurants every single day and our operations teams in both those businesses continue to make significant progress, driven by our goal of simplifying the operation. My overarching message to all our teams this year is that these businesses have gotten way too complex. We need to continue to simplify and through that simplification, we should execute at a higher level. Now I think both businesses are making some really good decisions and they continue to invest in value. They continue to invest in menu innovation that continues to resonate with the consumer. Olive Garden is still benefiting from strong to-go presence. That business continues to grow and we're benefiting from that. And LongHorn I think we're starting to see the payback from all the investments that we're making in food as we start to increase the size of our stakes, improve our house salad and some other decisions that we made along the way to improve the overall operation and it's going to take time for those to continue to show themselves, but our consumer research right now in LongHorn has never been better. We're moving Northeast in our in everything that we do there and I'm really, really excited. So, I think the brands are well-positioned. They're focused on the right things. They're making good -- the leadership is making good long-term decisions in both of those brands and they should continue to win because of those decisions.

And as a quick follow-up, would you mind giving their To Go gross at Olive Garden for the quarter?

Yes, To Go, grew 17%, so we got a three-year stack of approximately 60% in takeout.

Great. Thank you.

Thank you. Next, we have Matthew DiFrisco of Guggenheim Securities. Your line is open.

Thank you. I had a couple of questions with respect to trying to better understand the growth potential of Cheddar's in your portfolio. I guess I've been following it a little bit the last couple of years and as far as the overall system growth, I don't think it was at the 15% pay. So, did I hear you right that you think that this is a 15% growth brand? Is that something that you've seen in the past or is that something that within your portfolio you think you can get to those levels?

Hey Matt, this is Rick. The 15%ish growth rate was over the last 10 years. So, the last few years, they've had a little bit of slowdown in growth. We expect this brand to continue to grow in the category and to grow faster than Olive Garden would grow. So, we feel really good about their potential. They're at a 140 company-owned restaurants right now with the potential to well exceed that.

When it comes into your -- what is the current growth rate now in your perspective, when you bought this, are you looking at this as a you say a strong, obviously faster than Olive Garden, but that's a wide range. Is this better than a better than 5% to 10% growth or even faster?

What I would say is still little early to tell, let us get through acquisition integration and we know that we're going to have a little bit of a slowdown in growth because of the integration and ask what they've got in their unit count and then we'll come back to you later on in this fiscal year to tell you what the growth potential is or the growth rates are.

I guess just to better understand what's going to go through that analysis, can you talk about the portfolio? Is it today growth -- is it a diversified, does it diversify your portfolio of real estate? Is this a different location where you would find a Cheddar's in your opinion for the next 140 stores and maybe where a LongHorn or an Olive Garden would go, or is this going to compete for those same type of sites?

Well it's a two-acre site, so it's very similar to what Olive Garden needs. It's a much bigger site than a LongHorn. So, they probably won't be competing for LongHorn sites and I think we got 835 or so Olive Gardens today. There are a lot of places that Cheddar's can go. We're already established from an Olive Garden standpoint. So, I don't see any competition for sites. I think what it does from a portfolio standpoint, is it allow us to secure the best real estate in a market and then let us decide which one of our brands that we're going to use to take advantage of that site and that's what's exciting to our real estate team.

Okay. And then just a last follow-up question, the outperformance I just want to understand as far as at both LongHorn and Olive Garden, is any of that explained by the later? Are you benefiting more and seeing a seasonality because of the later timing of Easter or something else with the calendar, or is that just pure momentum, the widening of the gap at peer group.

I am going back to I think where we've been for two and half years focused on running better restaurants and I know it's not sexy. It's not something that people like me to talk about. That's what we're focused on. It's one guest at a time and I would truly believe that we need to focus -- continue to focus on that. We're winning because our retention rates are great. Our people are excited about what we're doing. They're rewarded appropriately and we're taking care of our guests. When they come in, we're delivering on that promise and when we don't deliver on that promise, we are recovering with our guests both socially and in other ways.

Excellent. That clarity is very appreciated. Thanks.

Thank you. Next, we have David Palmer of RBC Capital. Your line is open.

All right. Good morning. First, just a housekeeping on Cheddar's, the restaurant level margins and overhead as a percent of sales, did you discuss that?

Yes, we said that restaurant level margin is about 17% of sales. We haven't talked about their overhead, but we'll talk more about that in the June.

Okay. Great. And if you could maybe just a strategic question, what was the institutional learnings do you think from past acquisitions at Darden like Yard House and just a broader point about why Darden is ready for a portfolio approach today when that's been difficult for Darden in the past in certain areas and certainly other companies as well this portfolio approach has proving to be a distraction at some critical point, thanks?

Well David, I think we've always been a portfolio company. We've had more brands, less brands, more brands. I think that the way we're organized today, we're fairly decentralized on each brand as an operating company present and they have their own team. Unless it's non-consumer facing and we can get some significant synergy out of it. It's in the brand and it is non-consumer facing. We bring it in and we try to get as much synergy as we possibly can out of it. And I know I pivot back to what we think we do really well at Darden and what we do really well at Darden is enable our brands through a couple ways to succeed in the marketplace. We think we give them a great scale advantage. We think the data and insights work that we're doing, we think we help them with their strategic planning and we've got an umbrella that enables them to have unique operating cultures inside the brands and yet have these industry-leading retention numbers. And so as long as we're organized appropriately and we stay decentralized and have great presidents run their businesses, managing the portfolio is really just a management challenge and we got to keep the center small and so that we don't burden the brands but we help the brands compete more effectively in the marketplace and I believe every one of our brands goes to market today with a significant advantage. As far as what we've learned on past integration, I think we've learned a lot from 10 years ago when we did the rare acquisition through the Eddie V's and Yard House, I think that we'll understand the appropriate speed in which to implement things. We'll be able to prioritize better this time than we did the last time or the time before that. We know where the potholes are. We're going to use an outside consulting agency to do -- to lead the PMO so that there is less distraction with our internal resources so we can stay focused on the existing businesses. No one from any other brand will have any involvement in the integration at all, so that every brand president we be fully engaged running their business. And I'll just have a cursory overview of the integration, but I'll be focused on running our businesses day in and day out. So, we have learned things. We'll get better and we'll continue to get better, but we're excited about it and we think we can do this fairly quickly and fairly well.

Thank you.

Thank you. Next, we have John Glass of Morgan Stanley. Your line is open.

Okay. Thanks very much. Just going back to Olive Garden margin performance this quarter, it wasn’t clear to me, are these timing shifts you think that impacted margins or is there a step up in marketing for samplers as pre-opening is going to be a greater pressure. So is that another way, do you expect these to go away in the fourth quarter in 2018 or is there some of these pressures here to stay.

Hey John, this is Rick. Yes, the marketing pressure you talked about specifically was timing. Year-to-date we're flat on the marking as a percent of sales and we just had a very strong quarter last year which leveraged our sales in the marketing side. The other things that we've talked about are generally -- yes, again preopening is one of the big one. So, if you think about what we've had, last year Olive Garden didn't open any restaurants in the back half of the year and we're opening a lot more restaurants in the back half of this year. So, for Darden, we are opening more -- we expect to open more restaurants in the fourth quarter this year than we open all of last year. So, in Q3 and Q4, a lot of it was preopening differences.

Okay. But said another way, some of that would say then right, if you're going to, if you see to open more restaurants.

Yes, some of the preopening, we expect preopening to increase a little bit going forward, but we don't expect our margins to decline year-over-year as we go forward, but we'll talk more about next year in June.

Okay. And then just on Cheddar's and the overlap, you mentioned Olive Garden as a competitor that values space. So, what do you know about how you currently trade customers, Olive Garden with Cheddar's and when you look at the physical footprint of the two brands, how much of an overlap now when you study those stores how do you see the impact of a Cheddar's opening for example on Olive Garden.

Well, we don't see it impacting. This is a variety of seeking category. Obviously, we trade guests with Cheddar's, but we trade with every competitor and so we think that there are two different occasions even though they're both value occasions, we don't see them as a major threat. Whether we what we own them or not, they're going to open restaurants. So, they're just like any other competitor and that's part of how we have to deal with it internally as our brands have to compete against each other effectively.

Thank you.

Thank you. Next, we have Jeffrey Bernstein of Barclays. Sir, your line is open.

Great. Thank you very much. Just two quick questions on the broader industry. First one, Gene in terms of the challenges we're seeing for the broader industry, I think you mentioned in your remarks earlier, that you don't think the consumer is reacting to the promotional activity as perhaps they have in the past. I am just wondering how you frame that versus or how does that differ maybe from Olive Garden's LTOs? I am just wondering how you bucket those two things and whether you're seeing a change in the competitive landscape from those competitors and then I had one follow-up?

I think where I am trying to go with that is that when you look at every day value, you look at our Cucina Mia offering and Olive Garden, that's grown from 1.5% preference to 10% preference over the last two years and so we're still out there with some promotional messages, but we're not seeing preference on promotional items increase year-over-year. Now we have some very broadly appealing promotions that we run every single year that our consumer look forward to. They look forward to buy one take. When they look forward to Never Ending Pasta. Never-Ending Classics was a big hit. People look forward to that. So, we think our promotional cadence is broader than what some other of our competitors are doing where they're forcing you into buying through a construct to get that value, yet their check average continues to increase through mix and pricing.

Got it. And then just more broadly when you think about maybe adding another brand, but just in general, in terms of the supply-demand, do you see any change or shift in the dynamic and that's kind of bigger structural headwind that the category is facing, whether you're seeing easing headwinds closing of units or maybe shifting of chambers in industry. Just how you see the industry from a supply-demand standpoint over the next couple of years?

Yes, there is definitely there has been an over supply for 10 years in our industry and then when you look at their shared takers and the share givers and I think the brands that are really focused on their positioning, understand what they're trying to deliver to their consumer or taking share. We opened a Yard House today and we traded $8 million in sales. We didn't create $8 million of sales in that marketplace. We took that $8 million from other competitors. And so, the way I think about is do we have share takers or share givers in all of our brands today are our share takers. And so, I think there is structural headwinds as there are lot of seats our there, but I think that our brands because of our scale and our advantages really have a strong advantage in the marketplace and we're utilizing that once we continue to aggressively manage non-consumer facing costs and put less pressure on pricing, I think we'll continue to take market share.

Great. Thank you.

Thank you. Next, we have Jason West of Credit Suisse. Your line is open.

Yes thanks. Just a couple housekeeping items I guess on Cheddar's. What is the investment cost per store there and the actual square footage that you guys are targeting on those boxes?

Yes, Jason, this is Rick. The average investment cost is similar to an Olive Garden. So, I'll just go with that. I'm not too different than Olive Garden and not too different than in Olive Garden size. Again, we'll get into more detail on everything about Cheddar's in the June call, but that should give you a good idea.

Okay. And then in terms of the cash flow going forward, you mentioned that you do still see room for some buybacks here, but we're obviously adding quite a bit of debt to the balance sheet. So is the plan then not going to be to pay down the debt once the deal is funded and you're cash flowing or you're going to maintain that level of debt going forward unless the EBITDA kind of catch up.

Yes, Jason, when we finish this transaction, whatever debt we take on, we expect to be well within our 2% to 2.5% adjusted debt to adjusted EBITDAR. So, we don't think that we have to go down and pay down debt as we continue to grow, but we do expect the EBITDA to continue to help with that, but day one, we would be right smack in the middle of our adjusted debt to adjusted EBITDA range of 2% to 2.5% times.

Okay. It makes sense. Thanks a lot.

Thank you. Next, we have Karen Holthouse of Goldman Sachs. Your line is open.

Hi. Another quick question on Cheddar's, outside of the unit growth outlook, what's just the state of the system in terms of remodels? Is it one that you would expect any increase in near term spending on maintenance or remodels, thanks?

Hello, this is Ian. One of the great attributes of the brand is that the buildings are built to be timeless. So, they never really have to remodeled. We refurbish to make sure that they're kept in pristine fashion, but because there is no branding etcetera, the building is timeless.

Great. Thank you.

Thank you. Next, we have Howard Penney of Hedgeye Management. Your line is open.

Hi. Thank you very much. Hi, thank you. I think just by putting all the pieces of the puzzle together today is it opening up at Olive Garden gets a better return on capital than Cheddar's, is that correct based on what you said today? And then Gene, can you maybe go into little more detail in the pivot to buying brands? I know you went through the rationalization, but I was just curious as to why the acquisition strategy again?

Okay. Good morning, Howard. It's Gene. Yes, obviously, investment in an Olive Garden would yield you a higher return today than at Cheddar's. However, the opportunity to open Olive Garden is not as plentiful as the opportunity to open Cheddar's and we've got -- we're not fully penetrated with Olive Garden, but we're getting closer and closer and it's getting harder and harder to find locations where it would be -- we could get that return because of cannibalization and other factors. As far as the rationale and why we think this was the right time to do an acquisition, I think there is a couple things. I think we are really confident in the platform that we have built here in our four advantages and especially the first two around making scale work for us and second, what we're going to -- what we're able to do and going to be able to do with data and insights, as we get all -- get a broader portfolio. And so, we think that that was one of the reasons that we could plug something into our portfolio and given the advantage in the marketplace. This is a mature industry and we believe that some consolidation makes sense and that's what we're trying to do. We think that if we get a little bit more scale, we can continue to improve our supply chain, we can improve our use of the data and insights and hope -- and our plan if I plugged into a Darden platform, our brands have an advantage in the marketplace and we can underprice our competitors and we can continue to take market share.

Thank you for that. I don't mean to compare it to the previous regime, but I think some of -- the platform is there before, but it didn't work. I know this question was asked, but I think it's an important one. The platform has always been there to run multiple brands. So, your tenure, what's changed or what is different for it to work this time for me not have not been successful last time?

I think we're much more decentralized today than when we were -- when we were purchased by Darden 10 years ago and I think during that time, there were decisions made right, wrong or indifferent, that they were going to build more capabilities in the center and they made investments in G&A that they believe they needed to make to grow the business. We're just doing the exact opposite. We're letting the presidents run their businesses and we're focused on where we can get synergies in the middle on these non-consumer facing areas and we're trying to manage and drive down cost. G&A is 4.8 and we're committed to get making further south and we think we can continue to push that forward. And so, I think that's one of the big differences is just how we're operating. The other thing I would add Howard is that dad is more valuable today and we think that if we can use this data to understand our consumer better, we're actually focusing on a couple other things from a data standpoint that's worked in real well for us from an operational effectiveness. We think it's going to give us a huge advantage and for us to have all that data, and I think the other big difference organizationally is we're just very operational focused today and we're focused on the day-to-day execution and cost management. We understand that cost management is going to be extremely important, so that we can continue to put value on the plate for the consumer.

And then just lastly, is there To Go opportunity with Cheddar's or delivery or take out?

Yeah, so there is a huge opportunity for To Go and Cheddar's and I think that the management team is just starting to size that opportunity understand what they have to do operationally to be able to deliver on that. These are extremely busy restaurants with 6300 guests and then adding the To Go component of it, really takes a little bit operational change in their operation and I know management and my initial discussions early on have identified that and they're putting and developing the processes to implement now.

Thank you for the questions.

Thank you. Next, we have Brian Vaccaro of Raymond James. Your line is open.

Good morning. Just wanted to circle back on the state of the Cheddar's fleet today. I believe the brand underwent a repositioning that reemphasize scratch kitchen's versus a casual café positioning in the past, but just curious, was there a meaningful remodeling program associated with that shift?

No, I think that as Ian just said, these buildings are built in a timeless manner, very well thought out. I think the management over the years has done a great job. I think the repositioning under Ian's leadership has really more to highlight and it bring to the forefront all the wonderful things they've done with food over the years. And I think he's brought a fresh approach to it, and went out did some research, found out what consumers thought of the brand and what did he need to bring to the forefront to highlight all the attributes that the consumer, some consumers were given credit for and some weren’t and I think the teams has done a masterful job with this. I love the positioning and it's on trend, scratch cooking.

All right. That's helpful. And Gene, you mentioned that Cheddar's has or is outperforming from a comp perspective. Was that sort of last 12 months? Was that the last few years? Can you give any historical perspective there on what you were referencing there?

No, the only comment, I must stick to my comments. It's been outperforming the industry benchmarks in most recent times and we'll give you a little bit more color once we own this business.

Okay. All right. Fair enough and then just shifting gears to Olive Garden if I could, I wanted to ask about average check, I noted that mix flattened out a bit or maybe some color on what's driving that? Is that an incremental shift towards value maybe some outperformance at lunch? And then also, what's your latest thinking around menu pricing at Olive Garden. I noticed that picked up a bit late in the quarter, was that pricing or a change in thinking? Thank you.

No, it was just, the pick-up in February was driven primarily by some adjustments in To Go pricing. We thought we were a little bit too far on the market with that. So, we ticked up there and especially in the catering piece, we also took some a little bit of pricing on the West Coast in February to offset minimum wage increases. But our philosophy going forward is we're going to try to drive that down a little bit lower than what it has been historically. I don't want to say too much more about it from a competitive standpoint, but we believe long-term if we can continue to underprice the marketplace, we're going to wake up a few years from now and have a real value gap. And the only way we can do that is to take advantage of our scale and find cost efficiencies in the rest of the operation.

Okay. And then on the mix dynamic specifically, was that shift towards value or maybe lunch or something else driving that?

No. One of them is if you think about our To Go sales aren’t growing nearly as fast as they were before, we're well above '20 we're down to '17. Catering is still driving some of that growth, but a little bit less of it because of To Go and we had some promotional timing shifts. So, it's not anything other than that.

Okay. Thank you.

Thank you. Next, we have John Ivankoe of JPMorgan.

Hi. Thank you. Just a couple of follow-ups if I may, Gene, you mentioned we've been oversupplied in the category for 10 years. I wanted to get a sense in the trade areas that you care about whether that's effect of supply growth is slowing down or if it's maintaining the same pace as it was before?

No. There is definitely less supply growth especially in the mature trade areas just because there is not a whole lot of more room to develop. And so, the dynamic that's going on now is I think the trade areas are getting smaller and people are willing to drive less than they used to. And so, I think more of us are thinking about how do we bring restaurants closer to the consumer and how do we develop with that mindset, but overall the real mature trade areas today, there is just not a lot of room for development.

And one of the ways that some companies are trying to do that is by developing fast casual as opposed to casual dining that is you say needs two acres in some cases to develop. So, what was the thought of going casual dining versus fast casual and is fast casual ever an option for Darden as you foresee it?

No. I don't see any upside in fast casual. I think it's a very difficult business model and I think there's a lot of growth out there. I am not a believer there's a lot of profitability out there. I think the barriers to entry are really low and I think our goal is how we put the fullback into full service and by doing that making sure that we understand the consumer's need to respect their time and that we're able to provide an extra service experience that is within their time parameters. And if we can do that for at the same price or sometimes even less than fast casual, we're going to continue to win.

And I think you've talked before about having 2% to 3% supply growth in the U.S. for your own concepts. So, does Cheddar's allow you to be on top of that? Will you be within it? Does Cheddar's growth take over maybe some of the other businesses and I think you may have answered that a number of different questions, but…

I think it's absolutely within the framework. We don't think it gets us over the top of the framework. We think it helps us get solely in the framework.

Okay. And the last one, thanks for this speed round, in your prepared remarks, you mentioned commodities actually being up in the fourth quarter of '17, if I heard that correctly, is that the kind of the beginning of another cyclical trend in commodities? What are you currently seeing in the basket?

Hey John, it's Rick. Yes, we did say commodities are expected to be up, buy up ever so slightly in the fourth quarter. Eventually this is going to turn. So, we're not going to talk about '18 yet, but we do see commodities slight inflation this quarter and what we talk about in our presentation, we're about 80% covered. So, we're, pretty covered for the rest of the year and including 80% in beef. So, we feel pretty good about where our numbers for the rest of this year and we'll talk about '18 in '18.

Thank you.

Thank you. Next, we have Todd Duvick of Wells Fargo. Your line is open.

Yes. Good morning. Thanks for the question. Just a couple of quick ones. Could you tell us how many of the Cheddar's restaurants are owned and if there is a potential sale leaseback opportunity for these restaurants?

Yes, Todd, this is Rick. All the restaurants are leased. So, there is a potential for a sale-leaseback.

Okay. That's helpful. And with the remaining franchise restaurants, can you tell us if the franchisee, well if it's one or multiple franchisees and if they have development rights for future restaurant growth?

Hey Todd. This is quite a few franchisees not really any development rights other than maybe a couple of them for future growth.

Okay. Thank you very much.

Sure.

Thank you. Next, we have Steve Anderson of Maxim Group. Your line is open.

Yes. Good morning, Just a follow-up on the questions just asked before about the franchise units. Do you foresee any plans to buy back those franchise units given that Cheddar's already had bought back a large franchisee of 44 units, that deal closed back in January?

Hey Steve, it's Rick. That deal was part of right of first refusal that Cheddar's had to buy those franchisees back. It's still little early in the process. Again, we don't want to talk about integration. We're just getting throws of that and what we're going to do with the 25 other franchise restaurants. Suffice to say there have been some conversation that Ian had yesterday just letting them know that the acquisition is happening, but that's just as far as we're going to go.

All right. Thank you.

Thank you. Next, we have Andrew Strelzik of BMO Capital Markets. Your line is open.

Hey. Good morning. I just had two quick ones. On the synergies number, you mentioned 4% of revenues versus over 5% historically. Is there anything structural with respect to Cheddar's that limits that synergy opportunity relative to history, maybe the decentralization that you talked about? And secondarily, I know over the last 12 to 18 months, there were some Cheddar's unit closures, just wondering what went into that decision and maybe anything that you learnt from a market perspective or a growth perspective, development perspective going forward thanks?

Hey Andrew, the synergies we're seeing 4% of sales. We're just getting in the process of estimating the synergies. We wanted to give you an idea of what we think they could be with some solid numbers. So, we wanted to feel good about the synergies we told you. If we think there's more as we go through the integration process, we'll let you know, but right now using 4% versus our historical 5%, we think is a prudent thing to do. In regards to some of the closings, as we said, they did have a pretty good growth spur over the last 10 years around 15% growth rate in their company-owned restaurants including Greer. And they closed about five or six of them couple years ago as their process and that's normal, that's normal in any restaurant company. You have some closing. The good news for us is they already did that, night. So, they’ve gone through the process of looking at their portfolio and they made those closings a couple years ago including a couple of them I think were franchise units. So, we don't feel that the closings were an issue. We think that was a good thing for us.

Great. Thank you very much.

Thank you. Next, we have Chris O'Cull of KeyBanc. Your line is open. Chris O'Cull: Thanks. Gene, it looks like Cheddar's will represent just under 10% of the portfolio's EBITDA. How did its size factor into the consideration and do you expect it to become the third core primary brand in the Darden portfolio?

Good question, Chris. We wanted to make sure we added something that was going to make a difference for Darden and to help kind of hedge longer-term against Olive Garden and make sure we had a big enough opportunity there. We look at the opportunity for Cheddar's and we look at the consumer and we look at how it compares to an Olive Garden. We definitely think that Cheddar's long-term will be the number three brand. It could possibly be the number two brand inside the portfolio. This is a very broadly appealing brand that has a strong, strong reputation in the marketplace and so we wanted to make sure that we added something to the portfolio that was going to be -- give us a significant opportunity into the future. Chris O'Cull: Okay. And then just, answer this question in a different way, but how quickly could you accelerate development of Cheddar's? Do they have managers in training, opening teams or do you plan to use the other brands to help, build those spots? Maybe talk a little bit about that.

Chris, I think someone asked me earlier what have we learned in the past? We learned that integration is hard and so we're going to spend the first 12 months, 12 to 18 months integrating the existing units into our systems so that we can benefit from our advantages. They’ve got a strong pipeline, but like any business that we've owned, people will be the restrictor on how fast you can grow and so we'll figure out over time is there is a way for them to leverage resources, human resources from our other brands to help them grow, but if not, we will grow as fast as we have the human capital to grow. Sites won't be a problem, but we'll just to gauge our readiness from a human resource standpoint. We've got to -- the biggest challenge I see growing this brand is to maintain the culture and don't dilute the culture into the future and to do that, you've got to train people and give enough time in the brand so that they can understand what you're trying to do. These are high-volume, fairly difficult restaurants to operate. Chris O'Cull: Okay. Great. Thanks guys.

Thank you. Next, we have Jake Bartlett from SunTrust. Your line is open.

Great. Thanks for taking the question. Maybe first just a point of clarification just so we understand the growth at Cheddar's in the past, how many units did Cheddar's have at the end of 2015 and I asked looking at Technomic numbers, which show 168, so wanted to make sure that that's correct or not?

Yes Jeff, Jake, I am sorry. This is Rick. We don't know what the Technomic number was. I hear you say 168. I don't have the number that they had at the end of '15 in front of me, but we get back to you on a one-on-one call with that information.

Okay. And then also just in terms of your own unit growth you gave us 30 to 35 gross units in 2018, can you help us out with what that means for on a net basis?

Well, in a typical year, we may have some restaurants as leases are coming up, I would just keep -- we gave you the growth numbers, so you can understand the capital piece. We'll give you -- what I can tell you is in our long-term framework, we've got 2% to 3% total new unit growth, which includes closing. We think we'll be within that framework without Cheddar's.

Okay. Maybe could you help us year-to-date this year in 2017 how many have opened and how many have closed?

Yes, we have opened -- year-to-date, we've opened 15 and we've closed six. We have as I said 24 to 28 openings -- growth openings in the plan this year.

Okay. Thank you very much.

Sure.

Thank you. Next, we have Matthew DiFrisco of Guggenheim Securities. Your line is open.

Thank you. Just two number questions, the 17% in the Cheddar's margin, how much is marketing in that or how does that compare to what you pay or you spend on marketing for your brands? And then also I just, I don't know if you addressed this or not, I am sorry if I missed it regarding franchising. Obviously, this was the first brand that you've gotten in your portfolio now with franchise growth potential. What type of commitments are out there and is this something that's going to be consolidated longer term or is this now a new addition to your portfolio of franchise growth?

Hey Matt, marketing as a percent of sales is fairly low. It's less than 1% as a percent of sales. As it relates to the franchise growth, there aren't any commitments really from these franchisees to open any more restaurants and we will talk a little bit more about what our plans are as we get through the integration.

Thank you.

Thank you. No more questions at this time sir.

All right. Thank you, Ray. That concludes our call. I want to remind you that we plan to release fourth-quarter results on Tuesday, June 27, before the market opens with a conference call to follow. Thank you all for participating in today's call.

Thank you. That concludes today's conference. Thank you for participating. You may now disconnect.