Kevin Kalicak - Director, IR Gene Lee - President and CEO Rick Cardenas - SVP and CFO

Brett Levy - Deutsche Bank David Palmer - RBC Capital Markets John Glass - Morgan Stanley Nicole Miller - Piper Jaffray Will Slabaugh - Stephens Brian Bittner - Oppenheimer David Tarantino - Baird Peter Saleh - BTIG Matt DiFrisco - Guggenheim Securities Sara Senatore - Bernstein Chris O'Cull - Stifel Jason West - Credit Suisse Greg Francfort - Bank of America Jeff Farmer - Wells Fargo Andy Barish - Jefferies Karen Holthouse - Goldman Sachs Howard Penney - Hedgeye Risk Management Alex Mergard - JPMorgan Andrew Strelzik - BMO Steve Anderson - Maxim Group

Welcome to the Darden fiscal year 2018 second 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’ll now turn the call over to Mr. Kevin Kalicak. Thank you, you may begin.

Thank you, Gene. Good morning everyone and thank you for participating on today’s call. Joining me 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 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 includes certain non-GAAP measurements, and reconciliations of these measurements are included in the presentation. We plan to release fiscal 2018 third quarter earnings on March 22nd before the market opens, followed by a conference call. This morning, Gene will share some brief remarks about our quarterly performance and business highlights, Rick will provide more detail on our financial results from the first quarter, and then Gene will have some closing remarks before we open the call for your questions. During today’s call and for the remainder of this fiscal year, all references to Darden’s same restaurant sales 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 and good morning everyone. Let me start by saying I’m very pleased of our performance during the quarter. Our teams did a great job managing through some difficult circumstances recovering from the hurricanes. Total sales from continued operations were 1.88 billion, an increase of 14.6%. Same restaurant sales grew 3.1% and adjusted net earnings per share were $0.73, an increase of 14.1% from last year’s diluted net earnings per share. Given our consistent positive results, I’m more convinced than ever that our success has been driven by the strategy we implemented three years ago. Our intense focus on improving the food, service and atmosphere in our restaurants combined with relevant integrated marketing remains a winning strategy for our brands. The long-term investments we have made and will continue to make and these areas are paying-off and we will work hard every day to better execute in these critical areas. This back-to-basics operating philosophy is coupled with Darden’s four competitive advantages; one, leveraging our significant scale to create a cost advantage, two, using extensive data 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 four, cultivating our results oriented people culture to enable growth. Together our operating philosophy and competitive advantages give me confidence in our ability to continue to deliver our long-term framework overtime. Turning to Olive Garden. Same-restaurant sales grew 3% outperforming the industry benchmarks excluding Darden by 400 basis points. This was Olive Garden’s 13th consecutive quarter same-restaurant sales growth driven by our focus on simplification and flawless execution, which continues to result in high guest satisfaction scores. Our promotional strategies and core menu are working together to create everyday value, and drive increased frequency for our most loyal guests and our strong-to-go performance which grew 12%. During the quarter, we ran our two most popular value promotions, Buy One Take One, which appeals to our guest need for convenience and Never Ending Pasta Bowl which highlights our brand pillar of never ending abundance. Both promotions leveraged brand equities and were supported by strong integrated marketing campaigns highlighted by Olive Garden’s most anticipated event of the year The Pasta Pass. This year in addition to making 22,000 pasta passes available we introduced the first of its kind Pasta Passport which included all the benefits of the Pasta Pass plus a trip of a lifetime to Italy. Once again, all pasta passes were claimed online immediately. The volume of social media and PR buzz surrounding this event illustrates the strong emotional connection our fans have with the Olive Garden. LongHorn Steakhouse had strong quarter as the investments we have been making for last two years are significantly improving consumer perceptions and motivating guests to visit more frequently. Same restaurant sales grew 3.8%, outperforming the industry benchmarks, excluding Darden, by 480 points. This was LongHorn’s 19th consecutive quarter of same restaurant sales growth. The emphasis LongHorn’s leadership has placed on simplification like reducing their menu items by nearly 30% has led to higher levels of execution. At the same time, they continue to enhance the quality of guest experience with strategic investments in food, service and atmosphere. As I mentioned last quarter same restaurant sales at LongHorn’s new markets continue to grow at a higher rate than in the established markets. Consumers in these new markets are discovering what makes LongHorn special, while at the same time fully realizing the value proposition that inherently exists in the brand. This performance trend is not new to LongHorn. We have seen it play out over the past 20 years as I have been associated with the brand. Now I will update you on the Cheddar's integration. The Cheddar's team is doing a great job managing the complexity of this integration which also includes integrating the two largest franchisees which were recently acquired. Merging three different operating systems into the Darden network isn’t easy but is going exactly as planned. We are at an important point in the integration progress as we transition from planning to execution. Integration related activity is peaking as we transition distribution networks including our main line distributor, produce suppliers and smallware suppliers, convert point of sales systems in 10 restaurants per week which also includes two weeks of training for restaurant prior to conversion, fully transition Cheddar's payroll system on to the Darden payroll platform and finally, we just completed open enrollment and Cheddar’s team members will be transition to Darden benefits at the beginning of the calendar year. It is our intent to integrate Cheddar’s and the two acquired franchise systems as fast as possible in order to position the brand to take advantage of the scale, synergies another benefits of Darden infrastructure. We realize this is having a short-term negative impact on sales momentum, but we believe the long-term benefit will far outweigh the short-term impact. Rick will provide an update on synergies in his remarks in just a moment. I want to thank the integration team for this outstanding work on this project. They have developed a comprehensive plan and are executing that plan at high levels. The more we learn about Cheddar’s the more excited we become of the long-term growth prospects. They are the undisputed value leader in casual dining with a large loyal guest base and average approximately 6,300 guests per week, per restaurant. Let me close by saying the holidays are the busiest time of the year for our restaurant teams as they help our guests celebrate with co-workers family and friends. On behalf of our management team and the Board of Directors, I want to thank our 175,000 team members for all due to create memorable guest experiences during the special time of the year. We remain focused on getting better every day and I look forward to making even more progress in the new year ahead. And now I’ll turn it over to Rick.

Thank you, Gene, and good morning everyone. We had another strong quarter with total sales grew of 14.6% driven by 11.5% growth from the addition of 153 Cheddar’s and 28 other new restaurants and same restaurant sales growth of 3.1%. Second quarter adjusted diluted net earnings per share from continuing operations were $0.73, an increase of 14.1% from last year’s earnings per share. We paid $78 million in dividends and repurchase $89 million in shares. In total, we returned approximately $167 million of capital to our shareholders this quarter and 346 million fiscal year-to-date. Turning to this quarter’s P&L. Restaurant level EBITDA margin was 20 basis points higher than last year as cost savings and leverage from same restaurant sales growth more than offset overall inflation pressure and the addition of Cheddar’s, which I will refer to as brand mix. Adjusted EBIT margin was flat as G&A expense as a percent of sales was 20 basis points higher than last year due to an unfavorable outcome in a legal matter this quarter. Excluding this matter, G&A would have been favorable by 10 basis points. This unfavorability in G&A was completely offset in income taxes due to the resolution of certain prior year matters. So, for the quarter, our adjusted EBIT margin increased 10 basis points versus last year. Looking more closely at the details. Food and beverage costs were favorable by 20 basis points as pricing of approximately 1.5% and costs savings more than offset commodity cost inflation of just under 1% and our continued investments in food quality. Restaurant labor was unfavorable by 30 basis points compared to last year due to Cheddar’s brand mix. Restaurant labor in our legacy Darden brands was in line with last year due to continued productivity gains and sales leverage despite inflation of about 4%. We opened more restaurants this quarter than the same period last year, which increased our pre-opening expenses. As a result, restaurant expense as a percent of sales was unfavorable 10 basis points versus last year. Marketing expense was favorable by 40 basis points due to sales leverage and favorable brand mix from Cheddar. Finally, G&A expense was unfavorable by 20 basis points due to the legal outcome I mentioned previously. Olive Garden, Longhorn and Fine Dining segment all grew sales in the quarter driven primarily by strong same restaurant sales. Segment profit margin increased in each of these segments by leveraging the same restaurant sales growth and managing cost effectively while still investing in a great guest experience. Looking at the other business segment, sales grew 71.7% mainly due to the addition of Cheddar’s as well as same restaurant sales growth at Yardhouse and Bahama Breeze. Similar to last quarter, segment profit margin was 200 basis points lower than last year due to the brand mix impact of adding Cheddar’s and for moving consumer packaged goods out of this segment primarily to Oliver Garden. Turning to the Cheddar synergy update. We continue to expect total run-rate synergies of between $22 million and $27 million. Based on the speed of integration and the great job our teams are doing to realize these synergies, we expect to achieve them a little faster than we originally anticipated. We now project to realize just under $10 million in synergies in the current fiscal year and achieve our targeted run-rate no later than the middle of fiscal 2019 instead of the end of fiscal 2019. And finally, this morning we increased our full year fiscal 2018 outlook. We now anticipate same restaurant sales growth of approximately 2%, new restaurant growth of approximately 40% and total sales growth of approximately 13%, each of these are at the high end of our original annual outlook. Our full year adjusted diluted net earnings per share from continuing operations are now anticipated to between $4.45 and $4.53. This is an increase from our previous outlook of $4.38 to $4.50. We are anticipating an effective tax rate of approximately 25% and a diluted average share count of approximately 126 million shares outstanding for the year. Please note, this outlook does not contemplate any potential impacts from the pending tax legislation. Based on the information we know today, we anticipate that the tax legislation will have a benefit to us in terms of our effect tax rate going forward. Also, in the quarter the bill is enacted we are required to revalue our deferred taxes. Since the bill has not received final approval there are still many details to be analyze and we will reserve comment on the specific impacts to our tax rate overall. Given the complexity of the pending legislation, we will not be providing any other detail in the Q&A session. Again, neither the expected reduction to our effective tax rate nor the onetime differed tax adjustments are included in the outlook we have updated today. We plan to update our fiscal 2018 outlook in early January to reflect the impact of tax legislation. In closing I want to wish you all a great holiday season. And hope you will celebrate with family and friends in one of our restaurants. And with that we’ll take your questions.

Thank you. We will now begin the question-and-answer session of today’s conference. [Operator Instructions]. Our first question comes from Brett Levy from Deutsche Bank. Your line is now open.

Good morning and thank you. Can you share a little bit of color on what you’re seeing across the competitive landscape? Obviously, you’re still generating significant market share gains but the rate of growth seems to have slowed a little. Where are you seeing pockets of -- I’d have to use the word weakness and also just one quick question on tax. I know you said you won’t say much but are you under the impression that there will be no change to tip credit and how it would impact casual diners? Thank you.

Brett as Rick said, we are making no further comments on the pending tax legislation. We will update our guidance in January once the bill is passed. So, for everybody else who wants to ask as a question on it, we’re not going to answer them. As far as the consumer landscape, I think you were referring to that our GAP to NAV or our GAAP to benchmarks may have shrunk a little bit and we’ve been pretty clear and we said we preferred to operate in an environment with a stronger industry and if our GAAP shrinks a little bit, that’s okay with us. As I said in my prepared remarks, I think we had a great quarter considering everything that transpired, we saw strength in all our businesses, we started in a pretty big hole in September. I think it feels pretty good out there. I would say when I look at the benchmarks, I’m seeing about 3% growth in what the consumer is paying. So, I don’t feel it’s still the environment all that promotional right now. I know they could be getting that in a couple of different ways where they’re getting it through price or mix. But I feel like it’s fairly positive out there right now and I just feel good. I think the consumer is using the whole menu, they’re not all that reactive to what people are doing from an incentive standpoint. So, it feels good.

And then just one follow-up, your guidance rates on both the topline and the comp, is that implying just to what we’ve achieved in the first half of the year or is there something that you are seeing in the second half that’s giving you greater confidence? Thank you.

Hey Brett its Rick. The guidance implies what we know in this in for the first half of the year and just some estimates of the economy or the industry is not going to get much better. We don’t assume that it’s going to just get better until it’s gets better. So, the guidance we’ve given is prudent based on where we are today.

Our next question comes from David Palmer from RBC Capital Markets. Your line is now open.

Thanks, and good morning. I’m thinking ahead to calendar ’18, I’m struggling a bit to create an outlook for what the casual dining industry same store sales would look like for that year and obviously given the fact you have an empire that slices across various concepts and you can see how the consumer is behaving across the menu. This is an easier comparison quarter for the industry than what will have perhaps coming up. Do you feel like this is a sustainable improvement that’s going on lately and is there any key leaves that you can see in terms of behavior that gives you confidence that there is an improvement going on even before tax reform? Thanks.

Hey good morning David. I continue to see -- when I look over the landscape the brands that are well positioned have strong value equations are continuing to take share. This is approximately $100 billion category that has been growing approximately 2%. And for those that are well positioned, I feel like they are going to continuing to do well. If your value propositions are little off and your offering is not resonating with the consumer, it could be a struggle. I think focusing on the overall industry benchmarks is somewhat dangerous because it’s been such deviation in the performance of the people that are doing well compared to the people who aren’t. So, I can’t comment and give you guidance on what we think calendar ‘18 might look like. We’ve given you what we think guidance is for the back half of our fiscal year, we always get a little nervous in December, January, February and March because weather is out of our control. We can’t control that. And if we have a bad winter, that could put pressure short-term on our same restaurant sales. But we don’t think that has any impact on the overall momentum of the business. So, as I said earlier to Brett’s question, we feel pretty good about how the consumer is reacting to our brands right now.

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

Thanks very much. Rick, may be first, can you just may be split the guidance to your previous expectations, you raised sales expectations for both units and for comps and you raised earnings but it would seem like tax and share count were responsible for that but you’re also observing some hurricane impacts. So, what -- are those the right puts and takes or how do you -- is there anything else that moves for example in G&A or something that is not explained by that?

Yes, John a couple of things. One, as I said earlier we did have a little bit of a legal settlement that we had this quarter, not settlement but an outcome that we had this quarter that we didn’t anticipate. We also -- as we talk about the G&A -- no I am sorry -- G&A cost of sales in food and beverage, we are still saying that our cost inflation in total is going to about 2% when you include labor. But every tenth of that move is about $0.03 a share. So, we’re still saying approximately 2%, it’s just closer to the 2%, right at the 2% than may be a little bit lower than the 2%. And also, we are going to continue invest in our consumer and invest in value. So, as we have said before if we do get some incremental revenues, we may have some of that that we hold back and invest in our consumer for the long-term. So that’s why we still believe that the high end of our range at $4.53 is the right place to be, even though we did increase our sales and we did have a little bit of benefit in tax which was offset in legal.

And you last quarter talked about being conservative in pricing in the middle of the 1% to 2% range, you’ve been a little bit higher than that at Olive Garden may be at but may be slightly above it, a little lower in LongHorn’s. So, can you may be just update what your thoughts on pricing are, if the industry has bettered, do you feel like that gives you a little more license to be little higher in that range or do you still want to maintain that lower than competitors’ value proposition?

Yes, a couple of things. One is, our long-term framework and algorithm, as always said -- in our strategy of leveraging Darden’s cost advantage, we’ve always said that we want to price below our competition which generally prices that inflation. Even if inflation goes up and competitors start to price, we believe that somewhere in that middle of between the 1% and 2% is the right place to be. And Olive Garden you mentioned, I think it was a 1.7 [ph] this quarter, Longhorn is below 1% this quarter. Even though, our commodity cost inflation was 1%. Olive Garden had much more inflation than Longhorn, because of Dairy [ph]. So, as we think about Olive Garden over the year, it’s also a timing thing. We still think Olive Garden will be about 1.5 for the year and Longhorn will be below that.

Our next question comes from Nicole Miller from Piper Jaffray. Your line is now open.

First question. Could the industry be benefiting from a sale and could that be a permanent benefit as we enter the calendar year? And then specific on that point to Darden. When you look at what you’re doing in test [ph] how do you look at the price point breaks and what should be out-source and in-source. For example, if you get over $100 or maybe $200 or $300. Is that something you’re still in sourcing and when you outsource there is a lot of delivery test place, a lot of marketplaces you are testing. So how you’re starting, who’d go to and when? Thanks.

A lot in there Nicole. Let me start with the off-price sales. I take back to where, we identified a couple of years ago that the consumer needs data of convenience. The consumers are still looking at that for convenience. We’ve got some brands that really can satisfy that express the Olive Garden. We’ve done a great job with that. I think that’s probably, a more permanent part of our equation today. I don’t see that need state going away, I see that need state increasing. And I think we’ll continue to come up with innovative way to meet that need. As far as, we start thinking about delivery and as we’ve said before, we’ve got multiple tests going on in the marketplace, we are trying to learn. We believe that someone is going to rise up and create some scale in the space and we’ll watch those third-party delivers. We’re also watching competitors that are doing it themselves. We have a small test, we’re doing ourselves. And we’ll watches whole space kind of develop. And we’ll decide, how we’re going to participate in that. We are still very attracted to the large party delivery catering in Olive Garden where average order is over $300. That makes a lot more sense for us to market and pursue than running around delivering $10 entrees at this point in time. So, for us, it’s a wait and see. We’re very engaged in the process, where all the third-party delivery companies and we’re very engaged with our own activity around that. So, to us, so what see how these things develops.

And just a quick follow-up on a separate topic. I believe, I saw Olive Garden recently showed up as one of Glassdoor's ranked best employers. And what I want to understand, is that a function of the return to basic strategy, there are topics that you have in place now or is there even more to come? Thanks.

We have a filter that we run every decision through. And the first question we ask is how does our team member win if we make a decision. The second is how does our guest win if we make a decision and we believe one of our four competitive advantages is our culture even as the employee market has tightened, our retention rates have not moved it all, they actually improved a little bit. We’ll continue to invest in our team members, we believe we have great training programs, 50% of our management comes from our team member ranks which we believe are offering growth opportunities to our team members. And I think we’re doing the right thing, we’re not trying to manage to when these awards were – we’re just doing the right thing for our team members every single day and then if we then get an award that’s great. But I think you can see it in our results, we’re doing a good job taken care of our guests and we take care of our guests, we win.

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

Yeah. Thanks, guys. Want to ask about Cheddar's and other lot of moving pieces there as you integrate to business, but can you talk a bit about positioning with such a valued end to concept probably a little bit more than the rest of your concepts. Does that leave it more vulnerable to improve quality and/or better value messaging from QSR or fast casual? Or do you think we are simply just seeing the pure dislocation of integration that you mentioned earlier?

No, I don’t think, I think the exact opposite. I think this is a way for people to trade in the casual dining and having an experience for under $14 -- under a $14 check average was made from scratch food that is at a higher quality than most comparable operations they are competing against. We look at the data and the research, we’re just really impressed with the loyalty, we’ve been out doing what we call dine arounds, where our team goes out and dine with guest. And we continue to learn more and more about the admiration they have for our brand. And the accessibility the brand provides for people who probably couldn’t go out to eat in a full service casual dining environment except they can go to Cheddars and make it work inside their budget. This is a very strong brand, when I think about -- I know there is a little bit of concern about where the comps are and this doesn’t surprise us at all, it happened at Yardhouse, it happened at Longhorn and I believe the only -- Longhorn only ever had one negative full year of same restaurant sales decline and that was during the integration in its 30 some year history. The other thing I would add is that, we’ve acquired two large franchise operations inside of Cheddar's that make up approximately 35% of the system. Those restaurants, there are 54 of them I believe or approximately 54 are a significant drag on the base Cheddar restaurants that were the real base of the company owned operations that we bought. Those restaurants are dragging it down, well over percent. As we standardize the menus, because the menus were somewhat different and their pricing philosophies were somewhat different, as we’ve standardize the menus we are getting some negative check, that’s drag and it sound to. These are decisions we have to make for a long-term. And lastly as I mentioned in my remarks, integration is hard and we believe, when we look back on our couple of our last acquisitions, we didn’t go fast enough, we let integration drag on too long. And so, we made the determination during this fund that we’re going push hard and get to the other side quicker and that’s what we’re doing and we actually integrated the two franchise systems first, so they’ve actually had the most activity because their systems were so weak. And I will close up by just saying the most important thing for us to do is to get our POS systems in these restaurants so that we can start getting the data that we get to analyze our other businesses to help us make the right strategic choices as we move forward to drive this brand. Let’s not get hung up on short term quarter-to-quarter comps, this business does 6,300 guests a week, has incredible loyalty and is the undisputed value leader. Once we get to the other side of this which will be another 6, 9, 12 months, this business will be a good growth driver for Darden.

Got it. And one quick follow up if I could on the off-premise question from earlier, did you give what Olive Darden growth was in the quarter?

12%.

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

Hey guys thanks and happy holidays to you. As you start to think about 2019 just the synergies from the accretion are significant and they are accretive. What’s going to be the strategy with that extra money as you think about it today? Is there something that you’re going to let flow through the P&L and be accretive or is this something where you’re looking to possibly reinvest it back in the price or value?

Yeah, I think Brian, every year we start off with a detailed plan for each of our business. The first thing that we look at it is what investments do we even make into the business, either through employee, experience into the guest and already be able to grow our market share and compete more effectively. We look at our advantages and we’ve always come back to that and how do we make scale work for us and that’s really, really important and so we’re not really talking about next year or next fiscal year but we’re constantly looking at how do we make our experience better?

Thanks for that Gene and just following up with a lot of the other questions, I mean you have always said throughout the last couple of years and at least conversations with me for sure that when industry trends do pick up that we should all expect your outperformance gap to narrow, but it didn’t narrow much and you’re clearly participating in this improvement that the industry is seeing. So, I mean I’m just trying to -- I just like to kind of get your thoughts on that because on one side it does appear you’re benefitting with the rest of the industry with the Olive Garden brand but on the other token I feel like you kind of want to, kind of expect the gap to narrow versus the industry as the trend remains the sustainably healthy. So, can you just maybe talk a little more to that, I appreciate it?

I mean you’re really asking me to look into a crystal ball and try to project what’s happening, I mean what’s going to happen. We think our advantages and if we continue to make the right investments, whether it’s underpricing and inflation, whether that’s improving the food quality, whether that’s improving the employee experience. The way we look at it how do we increase our share of the $100 billion category, both through same restaurant sales growth and new restaurant growth. And we look at the value equation for each of our businesses and we look at Cheddar's and Olive garden. The price value relationship is really important, as we move up the continuing [ph] the we experience becomes more important. So, I am not sure -- if the overall industry does continue to improve, I’m telling you right now, we’re working as hard as we possibly can to get as much of that share as possible. And however, it plays out, it plays out. But we are not all that -- we look at the benchmarks, we report them out to you guys, but we are not sure that’s always the total opportunity because we look at the top five or six players in the industry and say if they’re doing something that we ought to try to be able to beat them not just the benchmark.

The next question comes from David Tarantino from Baird. Your line is now open.

Hi, good morning. Gene, may be a high level philosophical question about the tax reform. I know you don’t want to give specifics on the impact. But it does look pretty likely that you are going to see a meaningful benefit from that. So how do you think about reinvestments when it comes to the potential benefit you might get from tax reform? You talked about a lot of reinvestment so far. But is there -- are there big opportunities or being chunks of investments you think are out there that you might pursue if you get a big windfall from factors?

Well, I think the biggest thing that we constantly think about is the employee experience and how do we ensure that we have the best team members out there to bring our brands alive. Great brand management is much more difficult in the restaurant space than it is in consumer-packaged goods where you just put your brand up on a shelf and you do some advertising. We have employees that -- team members that bring our brands to life every single day. So, when I think about the investment -- if we think about investments in general, they have nothing to do with what’s going on with legislation. We think about how do we improve the overall experience? And the competition for team members I think is going to be the most important element moving forward. How do we get great team members to bring our brands to life?

I guess -- just so I can you clarify, if you do get a benefit or a windfall from the tax reform, do you think there are meaningful offsets to that or -- in this investment cycle or can you embed those investments in what you’re already doing? I just want to understand kind of philosophically how you look at savings?

I mean we are not going to talk about anything that has -- you tie this to meaningful benefits of tax reform, we’re not talking about anything I am sorry David, about tax reform. We will talk about general investments and how we think about it but I think I’ve already answered that question.

Our next question comes from Peter Saleh from BTIG. Your line is now open.

Great, thanks. Just wanted to ask, on wage inflation it sounds like your wage or labor inflation is running around 4%, yet you only have some modest deleverage on the labor line. Can you talk a little bit about the productivity gains that you are seeing, what brands are you seeing these productivity gains and what kind of gains are they -- are they going to be going or should we expect those to lessen as we get through the end of the year?

Yes, it’s Rick. We are seeing productivity gains across the Darden system. I’m not going to tell you by brand how much productivity, we’re getting. Although, if you think about what we’ve been doing over the last few years, we continue to simplify our operations and the brands that are simplifying are getting the most productivity gains. And also, as I mentioned earlier, we did have some same restaurant sales leverage that helped. And finally, our turnover really hasn’t moved much. As you think about turnover what happens when you have turnovers, you have to train a lot more. What we’re doing with our training dollars is we’re investing in training and getting our team members better at their job to become more productive than just learning their job, which is what happens when you’re hiring new folks. So, when you think about all of that, we feel really great about the productivity gains we’ve made over the last few years. There are some brands that still have more To Go. Some brands that actually have actually been further along in the cycle. So, they might have a little less. But they’re not stopping looking for productivity in the future. And you did mention, we did say that we had about 4% wage inflation, which is a pretty high inflation, but we were able to offset that with these productivity gains and with the moderate pricing we took.

And then just on the go [ph] side of the business. I think historically, you had a lot of, I guess phone-in orders for To Go. What do we stand say, I guess on phone-in versus online orders coming in. Are How you seeing more of that growth coming from online orders?

Yes. We’re approximately 30% online now and it continues to grow. And we do incentivize people to do that. Because we get a lot of data when they we get via online. And so, that’s an important part of the process, it just helps to simplify the operation and we’ll continue to try to migrate as much of that business over as possible. At the end of the day, we got a lot of people calling in orders, when they are driving home. That’s hard to do those online, while you’re driving. But we’ll continue with more people over the best we can.

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

Just had a couple of follow-up questions here. I just want to be clear. Did you say them at the negative two at Cheddar’s was of the full based including the franchise stores and was negative check, more than negative check, so traffic was positive?

No. Let me clarify. Those negative two is inclusive of the two franchise systems that we -- what they call the Grier restaurants that were purchased by Cheddar’s right before we bought them. And then we purchased their next largest franchisee, which we refer to as a CMP shortly thereafter. They make up 35% of the overall system. So, in essence, we’re doing 3 integrations at once and their system has grown dramatically. Now what I said and maybe I wasn’t clear, was that, the 35% of the restaurants that were franchised and now company owned are dragging same restaurant sales down by 100 basis points. And…

Were they in 1Q as well?

Yes. CMP wasn’t just a Grier restaurant. And we have negative check in the approximately 45 Grier restaurants that we brought, because we had to standardize the menu. So that negative check is part of the drag. And this franchise -- these are great restaurants, great people but our franchise system that was run a little bit independently of the core company owned restaurants. So, there is going to some effort and energy to get them up to the operating standards of the company restaurants.

Completely understand. So, it wouldn’t be correct to compare it down 1.4 to down 2 and you had a little bit of a different composite of the base?

Yes, that would be correct. You could do that.

Okay.

Because the CMP restaurants are a drag.

And then you mentioned that the middle of FY 2019, is now the target -- ahead of schedule for the integration correct?

Yes. Yeah, it is fiscal 2019. Sorry, Matt it’s for the synergies not the integration. So, the integration, we expect to have most of the integration work done on the system side by the end of this fiscal year, but we do expect them to have to continue to learn how those systems works and then take those systems and use the data that we have to help improve the performance in fiscal 2019 that’s fair. That’s where I think we were saying the integration is going to take 18 months, it’s the integration, the system is going to take less time than that, it’s just the learning and the understanding the data is going to take a little longer. But we do expect that the synergies on a run-rate basis, we will get by the middle of fiscal 2019 versus the run-rate basis we thought will be at the end of fiscal 2019. So, sorry messed up the question there.

So, I guess if everything is moving forward, would it be correct to assume that potentially you could be looking to reaccelerate growth of the Cheddar’s brand or bring it back to a little bit more meaningful growth perhaps sooner than maybe what you would have thought say six months ago?

Yeah. Matt, just because the integration is going a little bit faster, it’s still takes time to find sites and other things and when you’ve got a site pipeline that could be 18 months, it will take us a little longer just to rebuild that pipeline. We do expect to open restaurants in FY 2019, and we’ll talk about the number of openings et cetera when we give you the fiscal 2019 outlook. But it’s just going to take us a little while to build up that pipeline. Again, using the data that we use to help find the greater site. So, I would still expect us to open restaurants at least at the pace that we’re opening them today in fiscal 2019, but we’ll tell you more about that when we talk in 2019.

Understood. And then last question, is there anything that you wanted tell us about the hurricanes as far as on the cost structure, did they impair, did you have any waste of food in the quarter that should be noted or called out that was meaningful to the margins or disparity in same store sales as far as recovering happening a little maybe regionally seeing a little bit of stronger strength in pockets. Or is it pretty much a -- or everything that you reported is sort of national trends?

Yeah. Matt, thanks for that. What happened for the quarter, when we originally talked about the quarter we thought it would be down 60 basis points in the same restaurant sales and down $0.035 in - or $0.03 I’m sorry in EPS. What it turned out was the restaurants that we had in Florida, impacted and they were closed for quite a while so that impacted us in total by about 50 basis points in close days. And those are higher volume restaurants in the system average. But then we did get some bounce back in Florida. And so, each brand was impacted differently, but for the company for Darden it was slightly negative in comps for the entire quarter. So, it wasn’t negative 60 basis points, it’s was just slightly negative. On an EPS basis, it turned out to be about $0.02 unfavorable instead of $0.03, because the comp impact wasn't as bad. Now, the $0.02 is primarily proactive things that we did to make sure that the restaurants were boarded up and so they were -- they didn’t have any as much damage. We did have some food inventory write-off, we had some restaurants that were closed maybe a week and so that food has to be written-off. But we’re also very proactive before the hurricanes come to help mitigate any food write-off. So again, it was about $0.02 for the quarter instead of three and it was about slightly negative in comp instead of 0.6.

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

Thank you. Just a couple of follow-ups if I could. First on the 12% growth instead of same as that quarter. I was wondering if that’s signaled the outcome of what the steady state pace of growth might be or if you have any sense of where you think To Go mix might max out overtime. That’s the first question. And then I wanted to ask about LongHorn and the SKU reduction that you were talking about, I guess I hadn’t recognized that it was 30% reduction in menu items. You know sometimes we see that at club [ph] restaurants and it has a negative impact on comps that doesn’t seem like that’s been the case. So maybe you can talk about where those menus came out and what do you think the key is to sort of reducing the menu size without impacting traffic? Thanks.

Alright. So, let’s start with Olive Garden, the 12% quarter I thought was I think is a really strong To Go quarter. We think about the future; the consumer need state is going to continue -- is going to need to continue to increase for the convenience for us to continue to growth that. We’re doing well over $0.5 million on average inside an Olive Garden box and To Go we’ve got restaurants that are doing well over $1 million To Go. So, as we think about going in into the future, you know we need consumer needs state to continue to grow. We’ll continue to innovative. I think one of the biggest things we can do on Olive Garden to Go is improve our operations as the business has improved, Dave and Dan and the team continue to work on coming up with better systems to handle the volume. It's actually an interesting business because I do a lot of pickups like at 11:15 and 11:30. And so they can use the [indiscernible] before it fills up to handle the volume. So, I think there is some operational improvements that we can make. We can continue to improve the offering to stay relevant to the guest and continue to remind the guest that its available. We have said -- we’re publicly on the record saying that we think overtime if the consumer need state continues to grow that this can be 20% of our business. Primarily because the type of food travels so well and we can do it more so than just entrees that we can do bulk and bulk is where we want to be. Let me move to LongHorn, we’ve been making great investments in LongHorn for the last two years, Todd and his team has done a great job of -- we’ve increased the size of the stakes, we’ve removed complexity in the kitchen and as we’ve mentioned we’ve taken the SKUs down, some of that through the menu, some of that through the promotional activity that we’ve done, reducing the number of new items that we introduced on a quarterly basis. And what we’re finding is we had a lot of stuff on menu items on our menu that really were duplicative and what the feeling -- the need they were feeling for the consumer, and we removed them and it just helps us operate much more efficiently. I believe all our businesses, all our brands, our menus are too complicated, too complex, we have items that continue to work and do the same thing over and over and over again versus having one great fried appetizer instead of having three great fried appetizers. And the more we can simplify the operation, the better the execution gets, the quality increases and the overall value the consumer is having an impact. And LongHorn historically has been a high food cost low labor cost operation. And we have simplified that operation to be able to bring the labor cost down and increase the productivity while improving the overall quality of the food product. And even as much as we’ve reduced it already, I think there’s still further reduction to be done in the LongHorn menu to improve the -- to simplify the operation. Those are very small kitchens that have to stay simple in order to cook the great steaks in a timely manner.

The next question comes from Chris O'Cull from Stifel. Your line is now open. Chris O'Cull: Thanks. Good morning guys. Gene, how do you ensure that all the changes that are occurring at Cheddar's do not create a difficult work environment for employees and it could eventually impact the guest experience?

That’s fairly easy. The systems having been invested in, in those restaurants, they are working on very old POS systems and so big difference in this integration than some of the others where the Cheddar's team is actually pulling from us to get this information in restaurant where some of our past integrations, there’s been a little push back because they had good systems and we are just the changing systems to change the systems. Here our systems are superior. They want the systems as soon as they can get them and they have just been -- they have been great to work with. We believe overall the benefits package is going to be much stronger for those team members. We think there’s a huge upside in Cheddar's in increasing their retention. Right now, their employee retentions are above the average of the industry and we believe that if we can take them from 120% team member turnover down to our norm of 70% it's going to have a huge impact on the overall operation. So, we believe and all indications are that they like the systems that we’re bringing. Ian has done a great job working with his teams and talking about the systems that we are implementing and getting feedback. So, I think this is going to really enhance their performance overtime. Chris O'Cull: So, you have not seen any changes to the guest satisfaction scores at Cheddar's with this process?

No. Chris O'Cull: Okay. And then just one last question clarifying the menu changes at LongHorn. You mentioned the reduction in SKUs. But in terms of consumer facing menu items or what the consumer would experience, what is the percent reduction that you’ve taken on the menu or through promotional items?

Yes, it's almost 30% and we’ve got different tests out there and we’ve got different products in different market. So, it’s somewhere, it’s approximately 25% to 30%. We’ve done a really good job; the management is done a really good job there of getting back on our pathway. Delivering that brand in the consumer differently than how Olive Garden delivers their brand to the consumer. And it has a lot to do with the promotional cadence and new product introductions. Chris O'Cull: And my question was, has that going through enough purchase cycles, so you can see whether there has been a change to frequency of those guests at many reductions?

Yes. We were definitely seeing an increase in frequency in LongHorn. We measured that every quarter with our tokens.

Next question comes from Jason West from Credit Suisse. Your line is now open.

Just one given the upcoming holiday shift. Can you guys quantify how that impacted you last year or how you think it impacted the current quarter with the movement in holidays and any other shifts like [indiscernible]?

Yes, Jason, the holiday impact is minimal versus last year. The holiday shift moving Christmas basically from a Sunday to a Monday, it’s really not going to be much different than it was last year.

Let me just add though. There are key days in our fiscal third quarter that cannot be weather impacted or also have a major impact, could have an impact on the quarter. I mean, so we got New Year’s leave and Valentine’s Day, which are big, big days in our quarter and a major weather event that covers a large geographic area could have impact.

Yes. And last year's holiday shift was about 20 basis points unfavorable. So, it shouldn’t be much different than this year. So pretty much flat this year.

And I know Gene, it’s hard to get, what’s going on with the consumer from month-to-month. But we have seen a decent pick-up in the industry in the last couple of months and I don’t know if you had any thoughts what’s driving that and overlapping some of the election cycle stuff from last year but I don’t know if there is anything else that you have seen or do you see in your regional data that a lot it is driven by the hurricane bounce backs or is it look broader based? Thanks.

The industry is fighting for consumers, their consumers discretionary dollars. And I’ve said on this call before, we’re not just fighting amongst ourselves, we’re fighting for those dollars that have been spent in other places. I do think that overall, the industry is being a little more rationale. I think there has been some okay innovation and I think we’re attracting consumers again. I don’t think there is a macro trend out there that says that we’re pushing people and I think the industry is doing a better job.

The next question comes from Greg Francfort from Bank of America. Your line is now open.

I have two super quick questions. One is just on the 2% comp guide. Is that for the legacy brand, or is ex-Cheddar’s or does that include Cheddar’s. And my other one is for Gene. It seems like the high-end category specifically has had a pretty big improvement in the last couple of months and I think you definitely saw it in your businesses. What do you think is driving that and what is the reason for the improvement, particularly at the high-end steakhouse and also Eddie V's?

The 2% comp is for the legacy Darden brands, as Kevin mentioned on the beginning of our call, anytime we talk about comps for this fiscal year it will exclude the Cheddar’s restaurants.

Good observation on the high-end category because our high-end brands with the hurricanes travel really came to a halt and they were disproportionately impacted and they had -- they really came back strong both Cap Grille and Eddie V's. I would also say that Texas has not stopped being a drag. That business was for 18 months, we had pretty good presence in our high-end restaurants in Texas and that had really been a constant drag and that’s kind of flipped for us now. And the Texas restaurants are doing better and not dragging so, on a high end the consumer, it feels really good out there, the consumers out there people are celebrating, I think our brands are very well positioned, Sean Martin is doing an incredible job leading Eddie Vs, and really maximizing those restaurants and put up a great number, very, very excited about that. And we’re opening a few restaurants in Eddie Vs, which is really good growth for us.

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

Thank you. I did hear you guys loud and clear on your reluctance to discuss tax reform, but just having quickly said that, should reform become a reality by the end of this week, by the end of this year. When would you guys expect to be able to share any form of assessment of what reform might means to your business. And specifically pointing to either ICR in January. Or is this the situation where we might have to wait till late March when your next reports to get some more details to what tax reforms could mean to your P&L and cash flow?

Hi, Jeff. Yeah, we expect to analyze the bill when it’s signed. We’re beginning to analyze it now, but we expect to have the impact of tax reform in early January ahead of ICR.

Next question comes from Andy Barish from Jefferies. Your line is now open.

Hi, guys. You are bumping up pretty close to your $200 million buyback here in the first half. Just any thoughts or further comments on cash to shareholders, free cash usage?

Yeah. Andy, we are as you said bumping up close to our high end of our long-term framework. And it's just that, as we’ve said there are years that we could be above it, years where we can be below it. Right now, we have given you our share count for the year, which is 126 million shares. So, you could probably see that we don’t anticipate buying a whole a lot right now. But we did last year go over our $200 million. So, as we think about our return of capital, we’ll see what other uses we have for that capital and whether we’re going to go ahead and buyback shares. But right now, we’ve given you I guess the best indication of what our share count will be for the end of the year. Well, actually for the average for the year.

The next question comes from Karen Holthouse from Goldman Sachs. Your line is now open.

Hi. We’ve had a couple of quarters now of more positive commentary on comp trends in Longhorn outside of core markets. Also, you’ve pretty strong profit growth there. How should we think about that tying into plans for unit growth? And you are sort of two years or 2.5 years out from a pretty proactive decision to pull back on unit growth. How far would you want to be in this process and maybe tying in simplification and what not before you would potentially really reaccelerate.

Hey Karen its Rick. In relation to LongHorn unit growth, a couple of years out, what we have talked about over the last few years is that our long-term framework for Darden is about you know 2 to 3%-unit growth, sales from the unit. I mean, some of that will come from LongHorn. We’re very reluctant to talk about accelerating rapidly any one brand because we know that speed kills and we opened 40 LongHorns two years in a row and we’re you know kind of catching up to that right now. So, as we think about LongHorn in the future, I think we’ve talked this year is going to be in the teens, the high teens, numbers of openings. I wouldn’t anticipate that getting way out of line from there, but we’ll give you a little bit more about FY’19 in a few months or actually by the end of the June. But right now, we’re looking at pipeline, we’re looking at filling in sites and markets that we already have restaurants in. We think that’s a really good strategy for LongHorn and then continuing to find new markets where we can generate a beachhead and grow from there.

And then a question on guidance, if you look at the midpoint of EPS growth and then account for that legal settlement you saw this quarter. It would seem that pretax profit growth is decelerating from sort of high teens in the first half towards something that’s more mid-teens in the second half despite what I would think would be more of a benefit from Cheddar synergies into the back half. What are the other drivers of that? Are there individual line items of inflation we should be focused on or just to think about that cadence?

Couple of things, one is we’re ramping on a really strong last half of last year as you think about growth and inflation as we said for the year is going to be 2%, around 2 and it's just slightly higher than where we had anticipated. It's still around 2 but slightly higher on to be around 2 range and before. But we still have you’ve done the math, somewhere in the double-digit growth rates in the back half of the year. So, we don’t -- while we consider that a deceleration, it's still above our long-term framework growth rate if you think about earnings after tax and our long-term framework we say 7 to 10% and that would still be above that.

Next question comes from Howard Penney from Hedgeye Risk Management. Your line is now open.

Hi and thank you so much for the questions, I have two if you don’t mind. First one, you attributed your success at LongHorn through the smaller menu, increased execution and increased frequency. One of your largest competitors in the casual dining space Chili's is also deploying a similar strategy. I was wondering how you view that competitive dynamic as they go from down 7 to a plus 2% or 3% as a fairly good market share shift in casual dining. Thanks.

Yeah, I think one thing about LongHorn, we’re finetuning the menu as we pull it back. I think it’s a little bit different than the competitor that you mentioned. You know we had a lot of menu items that really weren’t working that hard for us and we’re introducing a lot of new products on a quarterly or every six weeks basis that weren’t working hard. And you’re very familiar with LongHorn Howard and a great LongHorn experience is a forceful way in a hot baked potato with sour cream and real butter. So, as we simplify our operation, we’re executing it at a higher level. We need to get the stakes cooked correctly, we need to get the food out faster and that’s what simplification has done for us. And I am really not going to comment on our competitors’ strategy.

I just wish you had a LongHorn closer to where I live. My second -- and I am just trying to understand your hesitation towards delivery and some of the work that we’ve seen on delivery suggest that the biggest opportunity of what consumers are seeing, they are using delivery for is a replacement from a meal at home. So that would obviously be very incremental to the casual dining industry. So, I detected a hesitation if I am wrong about that, you can correct me, but is it that you don’t know who to go with delivery or you want to do it yourself or maybe you just don’t see the opportunity as being that big? Thank you.

Well I think the answer -- there’s two parts to your answer, we don’t know who we are going to partner with yet and number, I don’t like the current economics of the partnership. And so, I am trying to understand -- we are trying to understand their profit model and we are trying to understand our profit model doing internally. And once we get a pretty good understanding of both those models and they are well developed I think I will have some leverage in negotiating this with a third-party or doing it ourselves. So, I am not hesitant on the business. I think the business is a good business. I am just not going to live with that current economics. We will do ourselves before we live with their economics.

Got it. So sorry to keep coming over to you. So, it’s not that you don’t see the growth in delivery as taking share from other categories, you just don’t understand the economics?

I understand them. They are not favorable enough for me. And I am not going to give them their discount and there’s too much profit in there because they don’t have scale yet. And so, we are trying to understand what that model looks like and what it looks like for us from a profitability standpoint, and we can pinpoint what their profit is and got to get to a better resolution if they want to do it for us. If not, we will do ourselves.

The next question comes from Alex Mergard from JPMorgan. Your line is now open.

I have a follow-up on how the pipeline is shaping up, and I heard your comments on LongHorn. Would you consider exceeding your long-term guidance for 2%, 3% new restaurant growth? I mean, do you consider that more of a self-imposed cap in order to execute on that growth? Any colour there would be helpful.

Yes, Alex. The 2% to 3% is the long-term framework we have for a couple of reasons. One is people. We have to make sure we have enough people to open these restaurants and open them strongly and doing a great job with it. We think if we get too high above the 3% across Darden, it puts a strain on the people that we have in knowing the brand. There are some brands that are going to be above the 3% range and some brands are going to be below the 2% range but across Darden we think 2% to 3% is the right investment. And we do know that all of these restaurants on average are creating significant amount of value. But we also have other ways to return capital and to spend our capital, whether it’s in dividends or share buyback. So, we want to balance all of our capital spending including new restaurants, we think 2% to 3% is the right amount.

All right. I appreciate that. And then one final follow-up. And that is on the strength of independent restaurants versus chain restaurants. It's a trend that we've been seeing for some time now. Are you seeing any changes to that dynamic? And how it may or may not be impacting your business?

Yes. I think the independent growth is happening in more of the big cities. And we see that, more of a real issue for our upscale brands. In Yard House and Seasons 52 and Bahama Breeze whether they’re located more in these upscale suburban areas or urban areas. We’re not seeing an influx of casual dining restaurants in suburbia that are privately owned. This is an urban phenomenon and not really impacting LongHorn and Olive Garden.

The next question comes from Andrew Strelzik from BMO. Your line is now open.

I just have one quick one here. These outlets that you provided through is a pretty attractive low-single-digit deflation. But we’re seeing in some of the stake that you’re seeing some inflation now. So, I guess, I’m wondering in terms of the outlet. Is that due to the coverage that you have currently or is there something that you see in the beef market or what’s you’re hearing that, that makes you more optimistic going forward?

Yes. We’re fairly long right now in beef. So, we’re covered and our teams are making good decisions along the way.

Okay. I guess, so when I think about, when I look at the LongHorn margins you’ve talk a lot about some of the initiatives and things that are going on there. But we did see a nice sequential step-up in the face of margin expansion. Is it reasonable to assume then that we might start to see that moderate or do you think you reached a point in terms of the initiatives that this is a more sustainable type of margin growth at LongHorn? Thank you.

Andrew, we’ve had a lot of work at LongHorn and Simplification to improve labor productivity. And again, they’ve also had some deep deflation over the last few years that help margins. We still think there is margin improvement for LongHorn going forward. Maybe not to the level that we’ve seen over the last couple of years, because eventually the beef deflation is going to become beef inflation and we’re going to continue invest in quality at LongHorn. And we’re just not ready to talk more about individual brand margins going forward. Although, if you look across Garden compared to our competitors we are the only ones drawing margins to really overtime, over last few years or actually the last six months. So, we feel good about where our margin is. We don’t want to go too high on our margin, because we think value is important and that getting too far out of line with what the consumer is willing to pay. But we still have costs that we can go after, we saw our productivity gains that we can do to continue to expand our margins across Garden 10 to 40 basis points, which is what’s in our long-term framework.

The next question comes from Steve Anderson from Maxim Group. Your line is now open.

Most of my questions have been answered. But just from modeling purposes. Just want to ask, when your next 53-week of fiscal year will take place?

Give us a second to find that out. It’s probably in a couple of years, but it’s not next fiscal year, I’m pretty sure. 53-week, I think it’s. We’ll get back to you on that.

We show no further questions in queue at this time. [Operator Instructions].

Thanks. And I think we’re ready to conclude the call. I want to remind everyone that we plan to release third quarter results on Thursday March 22, before the market opens with the conference call to follow. Thanks everyone for participating in today’s call. And have a happy holiday season.

And that concludes today’s conference. Thank you all for your participation. You may disconnect at this time.