Joe Taylor - Vice President, Investor Relations Wyman Roberts - Chief Executive Officer and President, Chili's Tom Edwards - Chief Financial Officer

Joseph Buckley - Bank of America, Merrill Lynch Nicole Miller - Piper Jaffray Jeffrey Bernstein - Barclays John Glass - Morgan Stanley Chris O’Cull - KeyBanc Jeff Farmer - Wells Fargo David Palmer - RBC John Ivankoe - JPMorgan Howard Penny - Hedgeye Risk Management Sara Senatore - Bernstein Karen Holthouse - Goldman Sachs

Good morning, ladies and gentlemen. And welcome to the Brinker International First Quarter Fiscal 2016 Conference Call. At this time, all participants have been placed on a listen-only mode. The floor will be opened for your questions and comments following the presentation. Now I’d like to turn the floor over to your host, Joe Taylor. Sir, the floor is yours.

Thank you, Dave. Good morning, everyone. And welcome to Brinker International's first quarter fiscal 2016 earnings call. I'm Joe Taylor, Vice President of Investor Relations. Joining me on the call are Wyman Roberts, Chief Executive Officer and President of Chili's; and Tom Edwards, Chief Financial Officer. On today’s call, Wyman will discuss operating results for the quarter and review a variety of initiatives underway at our brands. Tom, will then provide a detailed review of our quarterly numbers, as well as update components of our guidance for fiscal year 2016. Following closing comments, we will open the call to your questions. Before beginning our comments, please let me remind everyone of our Safe Harbor regarding forward-looking statements. During our call, management may discuss certain items, which are not based entirely on historical facts. Any such items should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such statements are subjects to risks and uncertainties, which could cause actual results to differ from those anticipated. Such risks and uncertainties include factors more completely described in this morning's press release and the company's filings with the SEC. On the call, we may refer to certain non-GAAP financial measures that management uses in its review of the business and believes will provide insight into the company's ongoing operations. With that said, I will turn the call over to Wyman.

All right. Thank you, Joe, and good morning, everyone. Thanks for joining us on the call today. As you saw in our press release this morning, Brinker reported earnings per share of $0.56, an increase of 12% over prior year. Comp sales were down 1.6% for the quarter and while we delivered earnings growth in line with our expectation, we know we need to improve our sales results. As mentioned last quarter, we anticipated some sales softness through the transition to -- our My Chili's Rewards program. The shift from our direct marketing program to loyalty hasn't performed as strongly as expected, and we are now adjusting the mix of loyalty and direct marketing to optimize the investment. Additionally, during the quarter, we were challenged with a couple of macro factors, both within our industry and in the broader economy. From an economic perspective with persistently low oil prices and the appreciation of the dollar, we experienced even greater challenges within our oil markets in border towns. While we have been seeing pockets of softness within those regions for awhile, the topline challenges expanded during the quarter across Texas, Oklahoma, Arkansas, Louisiana, home to about 30% of our restaurants and it is usually for us to see that much regional variability. And across the industry, the battle for market share continues to intensify. We signed increasingly aggressive discounting and deal rates still at five-year highs. This intense level of promotional activity resulted in some competitors taking share during the quarter. We take this competitive activity and the impact on our results very seriously. Over the last six months we stayed consistently focused on our long-term strategies and have refrained from engaging in heavy promotional activity. We’ve build a solid foundation with our strategic work on food, service and atmosphere, as well as the digital guest experience. And the good news is, we achieved the margin strength to enable us now to take a much more aggressive approach to turn the tide on sales and traffic in the near-term, while we maintain the health and sustainability of our brands over the long-term. We’ve developed a comprehensive plan for immediate action that targets each day part by addressing opportunities and leveraging our technology investments to help regain share and drive topline. First, we are reigniting our lunch business with the same intensity we had five years ago when we reinvented at day part. We are introducing new products with more compelling price points and linking that new value proposition to technology like Ziosk, NoWait and our mobile app. So guest can now set their own pace to meet their needs at lunch. At dinner, we are messaging both value and new news with the launch of our Prime Rib Fajitas and introduction of bottomless chips and salsa with any Fajitas purchase, and we are testing big ideas that lean into value and further differentiate Chili's as a Fresh Tex Fresh Mex brand. We are also reinvigorating our Happy Hour business, with the launch of a national program that offers more aggressive, appetizer pricing and drink specials, like a $5 Presidente Margaritas. And finally, we are ramping up support with local and regional marketing efforts to strengthen our competitive position and drive traffic in our oil and border town regions. So we are taking a holistic approach by addressing opportunities at lunch, dinner, Happy Hour and our regional challenges to turns sales and traffic trajectory around over the next few quarters. We are also optimizing our technology investment to drive topline in the near-term. As I mentioned, the My Chili's Rewards program isn’t generating the incremental traffic that we need the program to deliver, but there is tremendous acceptance and engagement from our guests in the program, which are critical as we work to drive the incrementality. We’ve signed up over 3.7 million members so far. More than 16% of our checks include loyalty transactions and we know from the data that our rewards program members rate the brand even higher in terms of experience and they are much more likely return the average Chili’s guest. So now that the foundation is built, we are focused on balancing the cost structure and optimizing the program to drive incremental traffic. This rewards program is part of our overall digital guest experience, a crucial strategy to help us learn from and communicate more effectively with our guests. For example, as we launch our National Happy Hour program where we use all of our technology tools, digital social media, our e-mail database and the rewards program, and Ziosk to drive awareness and excitement around the program. And we continue to add the list of digital options for our guests. As announced earlier this month, we are proud to be among the first restaurant companies to integrate Apple Pay into our tabletop devices later this fiscal year, which will further enhance Chili's brand relevance in the eyes of new school consumers. Globally, our business delivered comp sales of positive 4.8% during the quarter, driven by effective marketing platforms and regional marketing co-ops and aided by a favorable Ramadan shift. We opened six additional restaurants during the quarter, including a new market entry into Tunisia, which marks our 31st country for the Chili's brand and demonstrate the strength and relevance of Chili's across the globe. At Maggiano’s the brand experienced some unexpected softness in their Banquet business, resulting in negative sales for the quarter. But as we approach the busy holiday season, we are confident Maggiano’s sales will rebound. The brand is leveraging their Italian culinary expertise with a new upgraded Chef Specials program, which is currently running 12% of sales and we also plan to open two more Maggiano's locations during the second quarter. So despite our recent topline challenges, our operations teams continue to do a great job, strengthen our business model in delivering best-in-class experiences to our guest and our team members. They also continue to make progress improving check averages. Both brands achieved year-over-year increases during the first quarter and they are already seeing even more progress at Chili’s in quarter two from our increased focus on menu and beverage innovation, marketing and merchandising and greater team member engagement through contest and incentives. We’re running our business as efficiently as we ever have, growing margins and generating strong free cash flow. We believe this aggressive plan will increase our ability to grow sales and profits and to continue to generate shareholder value over the long-term. And with that, I'll turn the call over to Tom to walk you through the financials. Tom?

Thanks, Wyman and good morning everyone. I’d like to walk through details of our first quarter operating performance and capital allocation. And then I’ll update our full-year guidance components, including some high level color related to quarterly expectations. As announced earlier this morning, our first quarter earnings per share before special items was $0.56, representing a 12% increase over prior year. First quarter revenues were $763 million, an increase of 7.2% over prior year, driven primarily by the inclusion of 103 Pepper Dining restaurants acquired at the beginning of the fiscal year. Excluding the acquisition, the restaurant capacity increased approximately 0.5%. Total company-owned comp restaurant sales decreased 1.6%, driven by 2.1% decline in traffic and a negative 1.4% change in mix partially offset by 1.9% increase in price. As Wyman indicated, we’re taking more aggressive steps to drive revenue growth and are confident our topline initiatives will improve mix and increase traffic as we move through the rest of the fiscal year. Now turning to margins, our restaurant management teams continue to operate the business effectively with overall restaurant operating margin improving 10 basis points to 14.6%. This performance reflects solid margin expansion in our base business, partially offset by the mix impact to the Pepper Dining restaurants. Excluding Pepper Dining, our restaurant operating margin improved 50 basis points, driven by a 40 basis point decrease in cost of sales and a 10 basis point decrease in restaurant expense. Restaurant labor expense was flat for the quarter. First quarter cost of sales improved 40 basis points, reflecting 40 basis points of favorable menu pricing and 20 basis points of favorable commodity pricing, partially offset by 20 basis points negative mix. Commodity pricing primarily benefited from lower avocado, cheese and seafood cost, partially offset by higher state fajita beef and poultry costs when compared to prior year. Restaurant expense improved 10 basis points mainly driven by a shift in advertising to My Chili's rewards support, partially offset by deleverage and the timing of repair and maintenance expenses and other costs. While the restaurant labor expense line was flat to prior year and included the impact of increased wage rates of approximately 2%. Depreciation expense increased $3.6 million to $39 million in Q1. This reflects our investment in key capital initiatives such as the nearly completed reimage program and the acquired restaurants. In addition, general and administrative expenses were $33 million, $0.5 million increase versus prior year, primarily due to the loss of transition services income previously received from franchise Pepper Dining. This level of spend is below our plan rate of expense and reflect cost management efforts to offset topline challenges. Now I’d like to review our capital allocation for the quarter. Capital expenditures for the quarter were $24 million. During the quarter, we repurchased 900,000 shares for $51 million and we ended the quarter with $66 million of cash on our balance sheet. Since the end of the first quarter, we purchased an additional 328,000 shares for $17 million, leaving an outstanding authorization of about $550 million. This includes the additional authorization of $250 million approved by our board in August. We also raised our quarterly dividend of $0.32 per share, representing a 14% increase over prior year. Now I’d like to turn to our fiscal ‘16 annual guidance. We are reaffirming our full year earnings per diluted share guidance range of $3.55 to $3.65, representing a year-over-year increase of 15% to 18%. We are reducing our guidance for revenues and company-owned comp sales. We now expect revenue growth for the fiscal year to increase 10% to 12% compared to prior guidance range of 12% to 14%. Comp sales guidance for company-owned restaurants is now expected to be in the range of down 0.5% to down 1.5% compared to the prior range of up 1.5% to 2%. We're able to offset the changing comp sales with improvements in several areas led by commodity favorability, margin management and cost control. To give you some quarterly color, we expect second quarter comp sales to be below first quarter levels. Third quarter closed at flat and we expect positive growth in the fourth quarter. This progression reflects the impact of ongoing competitive market conditions and the expected benefits of our revenue driving initiatives in the back half of the year. Reported operating margin is unchanged from our original guidance of flat to down 25 basis points. Excluding the impact of Pepper Dining, our restaurant operating margin is also unchanged from our original guidance of up 25 to 50 basis points. We now expect overall commodity inflation of less than 1% for the current fiscal year versus prior expectations of up approximately 2%. This reflects favorability from beef partially offset by higher produce cost. Currently, 97% of our commodities are contracted through the end of calendar 2015, 86% through the end of fiscal Q3 and 71% are contracted through the end of fiscal 2016. Also, supporting margins are several operations initiatives, including our gold standard execution program which extends best practices across all the restaurants to help us manage food usage, labor and restaurant expenses. In addition, we are rolling out new technology in Q2 that improves monitoring and control of restaurant level expenses. Depreciation expense is now forecast to increase $10 million to $12 million year-over-year, a reduction from our prior guidance of $12 million to $15 million increase, reflecting final adjustments to the Pepper Dining asset valuation and timing of capital expenditures. Our anticipated increase in G&A expense in fiscal year ‘16 is now expected to be $3 million to $6 million, down from prior guidance of $10 million to $12 million. This decrease reflects lower incentive compensation and cost savings across multiple areas. We are reconfirming our guidance with respect to capital expenditures, interest expense, tax rate and free cash flow. We expect weighted average share count to be between $59 million and $61 million due to a lower average share price for buybacks compared to prior guidance of $60 million to $62 million. Before I hand the call back to Wyman, I want to reiterate that we're maintaining our full-year EPS and free cash flow guidance, which enables us to continue to aggressively pursue our capital allocation strategy. With that, I'll turn the call back over to Wyman to share final comments before we open the line for questions.

Okay. Thanks Tom. In closing, our sense of urgency is high and we are focused on executing our plans to address the sales and traffic challenges we’re currently facing. We are confident in the plans we’ve laid out over the next few quarters. And we remain committed to our long-term strategy, continuing to deliver a better guest experience in strengthening the relevance and differentiation of the Chili's brand, which gives me confidence that we’ll deliver on our long-term earnings-per-share goals. So now let’s turn the call -- let's open the line up for questions.

Dave, we’re ready for questions.

Thank you very much. [Operator Instructions] Okay. We will take our first question from Joseph Buckley. Please announce your affiliation and then pose your question.

Hi. Thank you. Bank of America, Merrill Lynch. Two questions. So, can I ask you to elaborate a little bit on the marketing plan going forward? It sounded at the beginning of the fiscal year that there was a big shift to My Chili's Rewards. It sounds like you are moving down the learning curve on that, but it's not as effective as you thought it was going to be. So, will you shift back for more traditional TV advertising, is that the mix shift we should expect? And maybe if you could talk about TV advertising year-over-year in the quarter, you just reported and what it might look like going forward for the balance of the year?

Sure. Hey, Joe, Wyman. Yeah. Basically the shift to My Chili's Reward was really a transition from what we call a more direct, our more direct marketing avenues. So using our e-mail database to kind of present offers and drive traffic through that medium and we shifted over pretty much 100% to the loyalty program. And in doing so, we knew there would be this transition period as the loyalty database got built and then people started accumulate points and then we started to drive the incrementality there. And we are just learning now the level of incrementality that we can generate out of loyalty is at a little bit of a different pace than what we were experiencing from the direct program. And so, we are just fine tuning the balance if you will, getting more direct back into the mix, adjusting the loyalty components to be as effective and as efficient as possible. The good news about loyalty, as I mentioned, with 3.7 million loyalty guests onboard, we obviously have something that resonates with the guest, with 16% of our transactions including a loyalty component, we know they're engaged in it. So it's now just about fine tuning that and then augmenting it with some direct marketing because they just -- it just didn't make as much sense as we had anticipated to totally abandon that approach for marketing. With regard to media, the media plan hasn't really changed that much. This was -- again, it was more of a switch between direct and loyalty versus traditional on-air advertising and so that plan in the first quarter is pretty comparable to prior year. So most of the challenge we've had really are in the relationship between loyalty and direct.

Okay. And then just a question on the comment about the loyal markets and the border towns, is Texas in total showing softer than average performance, or is it isolated to oil, well markets within Texas?

The whole state is soft and it’s soft, when you look at it from an industry perspective as well. I mean, this isn’t something we are experiencing in isolation. So if you were to look at the map and the black box data, regionally you would see that the whole industry is a little more challenged than in Texas than in other parts of the country right now.

Okay. Okay. That’s helpful. Thank you.

Yeah. Thanks, Joe.

Thank you. We'll take our next question from Nicole Miller. Please announce your affiliation and pose your question.

Thank you. Hi. It’s Nicole Miller from Piper Jaffray. Can you go back and walk us through the test loyalty markets that you talked about last quarter? I believe it was a few dozen stores across three markets, something of that nature. But it sounded like they had gone into positive comp territory in fairly short order. So why you don’t go back to and make sure it’s documented correctly, how long do you run the tests and how long the comp positive, just so we can maybe understand? It’s got to be part of this comp shift to positive towards the end of the year like what kind of role that’s playing in tests versus the realities of rollout?

Yeah, Nicole. So, we actually tested in three midsized markets in a pretty good number of restaurants, more than you had mentioned there. The results were obviously a little more positive than we are experiencing with the national rollout. So there was -- we always knew there would be an initial ramp up, as I said as you kind of build your database. And you get loyalty members engaged and their points accumulated. And then as is the case with our program, if there isn’t revisitation in 120 days then you lose points. And so as people came through that expiration date, we anticipate and we've seen increased frequency and incremental visits. But it just hasn't been as robust, if you will on the national rollout as we saw in the test. And so, we always try and eliminate as much risk as possible by testing and we tested this program fairly robustly. But the implication or the results we've got on national rollout haven’t near to quite as well as we would have hoped and so we are now making those adjustments. And that’s again back to the positive nature of this program. It is very flexible. We have huge participation in it. So, we're just now trying to fine tune it and augment it with this direct marketing approach because we have a lot of history with and that we can now even use our direct, our loyalty database to talk to those consumers from a direct perspective as well. So, we have a bigger database, if you will of direct customers that we can market to than we had going in. And so that's really where we are at.

When was the original kind of launch for those head stores, please?

Was it or when was it?

When was it?

Yeah. About a year ago almost. So, November, December of last year. So, we ran it in tests for over a quarter, probably about four, five months before we did national rollout.

And then just one last quick one. It seem like around the Texas or/oil market conversation that things really got soft just as of late. Is that a fair assessment understanding of your commentary? If why, is it just the duration of the lower gas prices and it’s just took time to see it or is it something else impacting that? Thank you.

No, I think what we had seen -- really, you guys have been asking us the question for quite a few calls actually, as we've been seeing softness. And while there have been some pockets, it’s been fairly isolated into really kind of those very specific smaller oil towns. And what we are seeing now is a broader kind of impact, if you will to the large geography and it’s moving -- it moved into some bigger locales.

Thank you.

Thank you.

Thank you. We will take our question from Jeffrey Bernstein. Please announce your affiliation and pose your question.

Great. Thank you. Barclays. Just couple of questions. One, Wyman, in your prepared remarks you talked about both the macro impacts in casual dining and then the oil specific commentary. I’m just wondering from a macro perspective, maybe you can give a little bit color on the discount you were seeing, whether it’s national or local because it would seem like the broader industry was relatively stable in terms of comp through the quarter? So, I’m just wondering maybe what you were seeing from that market share competitive landscape? And then when you talk about the oil specific markets, is there any way to quantify on absolute basis, or the differential between those markets on the rest of the region or the rest of the country or how it impacted the total comp? And then I had a follow-up.

Sure, Jeff. Well, with regard to -- well, let me just take you oil because that’s where we’re on in all these to continue that conversation. So with regard to the differential between kind of what we’re talking about as oil markets and non, it’s about somewhere between 2.5 and 3 points, which is more variability. Obviously, there is always variability in the markets, but so more than we had traditionally seen and it's kind of isolated there. Another example of it is, if you look at our franchise performance in the quarter and really now for the last couple of quarters, you will see obviously a very significant gap and that gap also is kind of driven by the two things we’ve been talking about regionality, and there are not in those oil influence regions as well as they have -- they haven't transitioned over to the loyalty program due to some technology challenges that we have in some of our franchise markets where we’re delaying their role to loyalty. So that's another indication of kind of where the impact is and it’s probably split. If you would have split that 2 to 3 points, it's probably split fairly evenly between the regionality and the loyalty opportunity.

Right. And then the industry side of things, can you talk a little bit about what you’re seeing from a competitive standpoint?

Yeah. I mean, I think when we talk about the industry and you talk about stability, I think the comp sales are actually I think a little softer than we had experienced as an industry like prior year. This seems to be running a little bit lower than what we had experienced and lower than you would expect. Again we kind of at that same story about what the employment rate being, more it’s add and kind of some things and tailwind in the category that we see better than very low single-digit comps. And I think in the face of that, you've got a lot of guys out there now just more aggressive and some of that’s happening on national advertising, some of that's happening more locally and regionally, some of it’s happening through direct channels, but the number of very specific either price pointed or I will call them abundance oriented offers, whether it's to near or bottom of this or continuing to be fairly common out there. And I think that's resonating with consumers that are looking for value, especially these millennial consumers who are based on all the data that we get out of NPD more prone to look for deals and more pressured right now given their economic circumstances, especially given when you compared where they were economically prerecession. That demo was obviously very important demo to everybody and they are not nearly as financially sound as they were prerecession.

And then my other question was around the fiscal '16 guidance, I don’t if maybe Tom you can help out here. But in terms of the -- or just two things, one, the comp sensitivity, just wondering if you can quantify what you think a point of annual comp is worth to earnings because, I mean, you’re now reducing your full year comp guidance by close to 300 basis points, so I would have thought that the earnings guidance would have needed to have come down. So I was wondering if you can talk about that dynamic and which buckets are the greatest in terms of helping to offset that the guidance really doesn’t need to be change at all?

Sure. I’m happy to help with that. So on the comp sensitivity, 100 basis points would be around $0.10 to $0.12. And what we’re able to do to offset that is first maintain margins and that's due to commodity favorability that we’re able to pass through and we have a lot more visibility to that through the full year as well as other operational things that we’re putting in place to help manage margins in the next quarters and a little lower comp sales environment, like the gold standard execution and the other technology that we’re putting in place. On the other side, it’s just management across the whole P&L, frankly I guess we’re taking a look at everything and we have reduced our G&A forecast and really made sure that we’re tight on all that. Well continuing to invest in critical items, like technology and IT for projects that will be critical for our digital guest experience, so those are really the components.

And should we assume pricing is still running in that 2% range within this comp, somewhat what you ran in this quarter or is the discounting and what not impact that?

We are still targeting pricing in that 1.5% to 2% range.

All right. Thank you.

Thanks, Jeff.

Thank you. We will take our next question from John Glass. Please announce your affiliation, then pose your question.

It’s Morgan Stanley. Just I guess two follow-ups. First, I mean, what are the adjustments you’re making to loyalty program? I think you said before you get a certain number of points that expires so people aren’t sent to come in. So do you lengthen the expiry or do you treat the offer? What changes have you specifically made that you think will help drive sales?

Well, some we’ve made and some we’re going to make and we’re considering. So the first one is, we’re just putting more direct marketing back into the mix. So again, we pretty much abandoned direct marketing, walked away from it and went to full loyalty plate. And again, we’re learning. There is -- first of all, they are not the same, always the same customer and so we were kind of not talking to some folks we had talked to before. So we get them back into the mix. And then even with our loyalty customers, they depreciate generating the points and the value that brings, but sometimes they need even more urgencies than the 120 days. And so we will start to give them some reasons to come back and do the rest within a more immediate timeframe if you will that they appreciate. And then we have the options then look at the investments that are -- that we’re making to that loyalty program and determine whether or not it's too rich given the results we’re getting. And so we can increase point values, we can reduce the number of the -- the length of time before points expire. We have to be very carefully, we can’t be doing that on a daily basis. Obviously, we have 3.7 million people engage in this program, they are liking the program a lot, they intend to revisit it very high. So you just can’t be making changes without some very thoughtful work done on with the implications, but we are analyzing that and looking at all those variables and we will -- we had made a few changes and we will continue to fine tune that program while not alienating that very important customer base of ours.

If you mentioned some, I think you said some more targeted offers to those areas that are more adversely impacted the oil-patch states and areas. So is that the case and what offers or how aggressive do you think you could be in that area? And if I can just wrap that into, therefore have you baked in your forecast a higher amount of advertising or discounting require to drive sales that part of the new forecast or has that not been contemplated?

Well, first, yeah, I mean, everything is in the forecast. So we obviously contemplate what is going to cost us to make these changes to the marketing strategy in the plan. When we talk about the overlay if you will to support the oil and border town markets, we’re really right now talking about for example a radio overlay, that’s spot market-oriented, that really takes our Happy Hour program and puts additional weight behind it in those markets because we think that’s something that will resonate well in those markets and it can use the additional support that radio buy can give them. So it’s those kind of things without getting too specific and way too many of our working kind of strategies, but it’s the overlay as well as we may come up with some special ideas or offers that are just appropriate for those markets, but for the most parts it’s probably more about additional marketing way to counter balance the softness in the markets.

Got it. Great. Thank you.

All right. Thanks, John.

Thank you very much. We’ll take our next question from Chris O’Cull. Please announce your affiliation and pose your question. Chris O’Cull: KeyBanc. Thanks. Good morning, guys.

Hey, Chris. Chris O’Cull: Wyman, are you concern the negative menu mix shift is a reaction maybe to pricing that’s been taken?

We’ve looked a lot at it. It really isn’t so much that I don’t think. I think it’s a combination of things. First, we’ve been pushing the Fresh Mex platform, which we like a lot. But it tends to have some lower price point options in there and so we’ve been selling, which are fine because as you can see by our margins, the margins are good and so part of that is just what we’ve been pushing. And then the other part is, we made some changes to our menu back in the end of fiscal ’15 to try and simplify things. It’s always this challenge in every restaurant industry. I don’t know, McDonald is dealing with there right now in terms of how do you innovate and then simplify at the same time. So we’ve gone through a phase of a lot of innovation and then our last menu change late last year, we really probably were as aggressive as we've been in quite awhile as simplifying. And we took some things off the menu that didn't sell as well, but actually in hindsight now, we’re driving some incremental check. And so, we've identified that where we put some of those items back on the menu or we will be putting some of those items back on the menu. We’re also looking at the merchandising of our add-ons. And we've reengaged our operations team to really focusing on and in sense, their salesmanship. I think as that was another real opportunity area for us. So it’s a combination of what we've done to the menu? How we merchandise? How the operations team is engaging in the selling propositions that have been probably more responsible for kind of the softness we've seen in the check in the fourth and first quarter. But as we mentioned in the scripted notes the trajectory is looking much better in terms of our ability to get our check average backup and above prior year, and get our price increase to pass through. Chris O’Cull: Do you expect the check to show more improvement in the traffic, given the type of the initiatives you've planned for the back half?

Yeah. No. Again, I think, what we’re talking about is, getting that traffic number to turn. What we’ve been fairly -- if you look at our performance over the last, we’re in our fifth year of this. We’ve outperformed the industry every year in sales and traffic. And now that hasn’t come without some bumps along the way and I won’t remind you of them, but we’re obviously very aware of where we’ve run into some headwinds in the past. But through this whole journey, we’ve always been driven by growing the business primarily through traffic, we believe that’s the fundamental strength and so as we look at our situation right now, we’ve given up too much traffic. We need to get the traffic patterns changed and that’s what we’re going to -- that’s what we’re focused on and that’s what those initiatives we’ve talked about are really all kind of gear for. We think there's opportunity to take some check where it’s possible and to continue to grow it. But for the most part we’re focused on turning the traffic pattern around. Chris O’Cull: Okay. And then, Tom, I think, you mentioned, deferring some investments, which allow you to reduce your G&A and D&A expense, what were those investments?

I was talking about the IT, some non-critical projects, but we are not deferring anything that's critical related to delivering sales. We’re building on the digital guest experience. So it could be some initiatives like looking at third parties and how we work and partner with them for our infrastructure that we may be looking at in different timeframe. And then just to build on your prior question, I do think that you will see and we expect to see improvements in PPA and check as we move through the rest of the year just traffic as the larger item that we will be moving. Chris O’Cull: And just, I mean, I’m trying to understand the decision not to reduce the earnings guidance and instead defer some of these investments. I mean, were these investments more defensive in nature or they're not designed to really improve the margin structure or the -- I mean, I’m assuming these investments had some level of return expected on them and you deferring that investment. I mean, is this -- trying to understand why defer investments with positive returns?

Yeah. Well, Chris, it’s Wyman. So a lot of the investments Tom just mentioned, they really were in the IT area. And so there's two things driving this. One is, as you know, almost every projection you have around an IT program is probably optimistic with regard to just being able to hit the timeframes. And so it’s a combination of -- we had a very aggressive digital investment strategy. And we know, we are committed to this technology position. We think it’s critical. We think we lead the industry in it. We’re leveraging Ziosk, NoWait all those things. And so we have re-up and double-down if you will on that and we had that in our plan. And the reality is we're probably more aggressive than we could have kind of realized. And so we’re just rationalizing the reality to that. And then as we wrestled with things like loyalty and okay, how do we fine tune it, what does that take, that’s part of the digital strategy. So we’re having to kind of push something off a little bit as we understand clearly what are the implications for this and what are the implications for the next phase of the digital strategy. Not walking away from it but just making sure we’re aligned and moving in the proper direction. So that's really the biggest piece of it.

And then I just want to provide a little extra perspective. So we significantly reduced the G&A guidance. The vast majority of that was not IT or project related. The project piece small portion, other areas, we’re able to focus on that are more G&A and non-project non-return base.

And we’re talking capital and just began to put in the perspective. The capital spend on IT this year will be significantly higher than even with these adjustments than we've had in prior years. I mean, it’s a significant investment. It's just not quite as significant as we had originally planned. Chris O’Cull: Fair enough. Thanks, guys.

All right. Thank you.

Thank you very much. We’ll take our next question from Jeff Farmer. Please announce your affiliation and pose your question.

Thank you. Wells Fargo. Just a bigger picture question to begin, really it’s on the increasingly aggressive deal and price point activity from the peer group that you guys called out. Looking forward over the next couple of quarters, especially with the real challenging comparisons, I think through February, any reason to believe that you’re going to see a shift and not aggressive behavior or I’d say a downshift in that aggressive behavior in coming quarters?

From the competition, Jeff.

Yes, from the competition.

No. I don't think so. I think again, as people kind of buy into this, they buy into it. And I think there are some interesting dynamics. There is -- they can place in with some key players over the last year or 18 months. We’re either changing structure or cost structure and ownership structures have, I think, kind of allowed or encouraged some key competitors to step it up, if you will, with regard to this kind of activity. And so I don't see that changing in the short term. So we’re kind of thinking, okay, this is kind of where the industry is going for right now and so we will compete in that arena.

Okay. And then one more, you touched on this in almost every single question, but just a real bigger picture to understand as relates to FY ‘16 same-store sales guidance obviously went down. But if you go and look at traffic mix menu pricing and you just disaggregate, what do you think happened, what continues over the next three quarters, a little bit more color there across those three metric in traffic, mix and menu pricing for your business?

Okay. I’ll get better. I mean, I don’t know Jeff without, I mean, giving you specifics, obviously we’ve talked about, the key is getting the traffic number to move forward. We are seeing, and we think we can flow through more of our pricing increase than we have in the past, and we are seeing some of that already. So we think the mix and the traffic numbers get better. And that obviously drives the topline. We are not changing our pricing strategy, so that stays intact. So as we move forward now, that doesn’t happen without some investments. So as we’re ready to invest back into some areas, that’s probably going to be in the cost of sales area which as Tom mentioned. We’ve got some good tailwind there. And we also have the ability, the beauty of Chili's is with our varied menu we have the opportunity to build menu items and promotional items around products that are showing us the most favorability if you will and where we can get the best value if you will. So whether it's chicken or beef or hamburger or cheese, our guests enjoy items that we prepare leveraging either in any of those specific proteins if you will in the case of cheese. And so we’ve got more flexibility than some as to how we can create value proposition without necessarily significantly damaging our business model, and that's really the key. We built over 400 basis points of margin improvement over the last few years. The good news is we now have a really strong business model. It generates great cash flow and we’re using that cash flow widely. We can also put some of that money back into the guests that we need to create the value proposition that's more competitive and that's what we're looking at now.

All right. Thank you.

Yes. Thank you.

Thank you. We will take our next question from David Palmer. Please announce your affiliation and pose your question.

Thanks. RBC. Good morning.

Hey, David.

Question on the loyalty program -- good morning, the loyalty program, it looks -- it sounds like the 3.8 million people on board is a pretty big number. How is that versus your expectation is where you would be this time?

Significantly higher. Again, so the test markets didn't necessarily give us the read that we’re hoping they'd give us on the flipside. We signed up a lot more guests than we had anticipated based on the test market results and on the downside, we’re not seeing quite the level of incrementality and overall impact. So we are having to fine-tune as we’ve been talking about, but now the acceptance level is really phenomenal and something that we actually want to leverage going forward.

I would have thought just as a consumer with the 120-day exploding points and the fact you get the consumers 60 points just for signing up that when you got going by this time literally the fall, you would've had a lot of those points exploding and rewards literally sitting there right around now, such that that enforcement of the frequency that you were shooting for would be becoming true. Were you looking for an inflection point kind of coming into this period and you’re not just seeing it to some degree, you’re judging this program more harshly right now?

Yes, absolutely. That's exactly kind of the challenge with the program as we didn't see the inflection point as people start to roll off. And so we’re having to get understand that better, understand how we communicate with the guests more effectively about the expiration of points to understand how they evaluate those points. And then putting to the mix as we've talked about a more urgent message around direct, which can also link to their point. So, it’s just learning frankly. And again one of the things over this journey as we’ve kind of been working to transform the Chili's brand and get ourselves into a stronger position, we’ve taken some chances, we’ve taken chances on kitchen of the future, we’ve taken chances on menu level, on the menu evolution of Chili's. And sometimes, we don't quite get it right at the introduction, but we quickly learn and we evolve and we have got a great team here both in marketing and in operations. And we adjust and we figure it out and I think that’s what gives us confidence that we will take this really strong broad based loyalty program and working harder for us than it is right now. But it’s going to take a little more effort than we had initially thought.

And David, this is Tom. Just to add on, we are getting great engagement as Wyman mentioned in the earlier comments. 16% of guests are logging in with loyalty, when they dine. So the challenge here is to turn that engagement into the incrementality going forward. But not only we have a lot of people who have signed up ahead of our expectations, we are also getting great in-restaurant usage.

Yes. The structure of the program is fantastic. Leveraging Ziosk, getting everybody engaged and signed on. It is just working on that consumer mindset in terms of -- okay, how do we create more urgency.

I feel like just the NoWait program. If that’s everywhere I arguably, do you think the awareness of that might not be where you would like it to be?

It’s nowhere near where it need to be, David. But it is again, it’s one of these programs that is out everywhere now. We know it works really well. So we’ve rolled it, we've got in place and it’s just a diamond waiting to be uncovered frankly. And we just -- it’s another marketing opportunity for us to just really make sure people understand. And that’s why when we talked about lunch and we talk about wedding guests know that they can get to NoWait, they can look online and understand is there a wait or not, which is critical. And if there is a wait, they can get online before they leave the office, so that when they get to the restaurant, they don't have to wait, they get sat, they get their order taken and then they control their departure time with Ziosk if they want to. There is no risk that you're not going to be able to checkout, when you want to checkout and leave the restaurant and those are huge barriers. We know from our lunch day part that we have solutions for, but their awareness levels, Ziosk awareness levels are moving up, but no way sort of or literally single-digit.

Thank you very much.

Yeah. Thank you.

Thank you. We’ll take our next question from John Ivankoe. Please announce your affiliation and pose your question.

Hi. Great. Thank you. Obviously, fiscal ‘16 is kind of a big year of cost controls, both at the store level and on the G&A side. So, I want to go a couple places with this. One, could you discuss the labor market broadly, cost to labor, quality of labor, turnover of labor, what kind of forecast that you have with the cost of labor for 2016 specifically? And then secondly, G&A was really tightly managed relative to expectations both in fiscal ‘15 and in fiscal ‘16. I know you haven't -- I guess, to sum it that you have given fiscal ‘17 guidance where I think used to be $4. So you can comment whether you still think that. Are we setting ourselves up for like and by definition, a snapback in costs from fiscal ‘16 to fiscal ’17, as you do need to make that G&A spend that you’ve been controlling over the last two years?

Sure, John. It’s Tom here, happy to touch on all those. So, first on the cost to labor, wage rates were up 2% in the quarter. We expect them to be up for the year 3%. And that hasn’t change from our prior expectations that's driven just by normal wage pressures, as well as changes in minimum wages in certain states, which is all build into the forecast and most of that at minimum wage impact is California and New York State, the vast majority about 75% of it. So we feel we have the right numbers built in to the base and the forecast. What we are seeing in turnovers, a little higher turnover, but it’s not so much an issue of availability of labor, we do you think with the slightly higher labor market and an opportunity, people are moving around a little bit more. We haven't had issues in backfilling and bring in new hires to keep the restaurants in operating shape. So feel like that that's in good thought for the year is baked into the forecast. On the G&A, tightly managed, no, you shouldn’t expect the snapback in the next year. Our base for this year will become our base for next year and we will manage it accordingly. So I would not expect that at all. And regarding fiscal ’17, we have not changed our direction or guidance of $4 a share and so thanks for bringing that up. I appreciate it. We've been focused on ‘16 and updating that guidance and discussing that on this call, but I appreciate you are bringing up ‘17 as well.

And just to, I am sorry.

John, I was just going to add, just from a turnover perspective, we have some of the best team member metrics in the industry. I mean, we run relative to the category in the industry very, very low turnover. I mean, it’s absolutely, higher than I ever want it to be, but relative to what happened in the industry. We’ve got a lot of the competition beat. So that that just goes to the quality of the operations and how important we take our team members.

And but it probably is fair to seeing that labor does, in guidance for fiscal ’16, that labor is one of the meaningful delever points, if there is going to be one, which show up in the labor line?

Well, Tom, was talking about 3% increase in wages and we are talking about 2% price increase. So, yeah, we are giving back a little bit on labor, because we are not pricing especially in those markets. We've chosen not to necessary go price for everything that’s happening to us in California with regard to wage rates with the expectation that they will mitigate over the next year or so, and we will make up some of that with a more consistent pricing strategy than trying to take it all up in one year in those regions.

And just one final housekeeping question, if I may, Tom, maybe this is for you. In the cash flow statement there was a changes in assets and liabilities around $30 million in the first quarter? Could you remind me what that was and what -- if that something that was recurring or just specific to the first quarter, whether we get that back later in the year?

Sure. We’ll get that back later in the year. It's a couple different things. One is, it’s an acquisition impact of PDI. Pepper Dining did have an impact. The other is a couple of timing items, in terms of timing of rent in the prior year, which was -- which year-over-year change -- the change look like a benefit and timing of incentive payout compensation this year. So it was in line with our forecast for the full year and changes in working capital. So it doesn’t affect on any kind of annual basis our free cash or cash flow guidance.

Thank you so much.

All right, John.

Thank you. We will take our next question from Howard Penny. Please announce your affiliation and post your questions.

Hedgeye Risk Management. Wyman.

Hey, Howard.

This -- how are you? This is one of those hindsight is 2020 questions and I think, you sort of alluded to it little bit in your commentary and response to other question. But last five years you have said earlier you have did a great job on improving the margins, structure of the company and company is very efficient today, and you might need to give back some of that margin to get the traffic back? One, obviously, you think you went too far and maybe, obviously, you did go too far that’s why it’s kind of the hindsight of 2020 question, but what would you do differently if you said, well, we are not get 400 bps sequential margin, we are going to take 300 basis points and 100 is going to go back into driving traffic? So I was just kind of curious is to knowing that you might have to give some back, what you might have done differently or thought about, what you’re going to do with margins to provide a sustainable increase in traffic and not just doing discounting of our, just -- it's kind of a difficult question to answer, because you have done a great job and stuff, but, so thank you…

Yeah. No. I think what I want to add though to that, Howard, as we did that 400 basis point improvement, we consistently beat the category on sales and traffic every year. So, we’re getting the margins and winning at sales and traffic. And so our challenge has been -- is to make sure that as we’re walking ourselves down that journey that we weren’t alienating guests and all our metrics, internal metrics continue to show that the guests satisfaction levels are getting better and our value ratings are getting better. So I think what’s happened is an external factor, right. So the competition has stepped up. So you got to step outside. It’s a little harder to -- you got more opportunity to be surprised by something that’s happened outside your four walls obviously and some things happening inside. So that’s what we’re -- if we’re to be -- if we’re to second guess ourselves on any I guess it’s okay, are we as tight to what’s going on within the competitive set and what we have to do to continue to be as competitive as we can be and that’s what I would look. So it really is really probably more putting things back on the plates and giving the guests value propositions and I think everything else though is still up for grabs and we continue to say, hey, we want to set the bar high on our surface standards and we’re not happy with any guest leaves unhappy. And so we continue to benchmark that. We’ve got data now that we can continue to set a higher standard on individual servers if you will and their performs rewarding them with a great job and also holding them accountable for delivering great service. So all aspects of the experience including the reimage program that we finished and so what’s the next thing we’re going to be doing to make sure that the atmosphere continues to stay fresh and relevant. So all of those going to the mix, but I guess to answer your specific question in the short term that we are dealing with this right now is probably putting more back on to plate. So that’s what I think the competition is doing more of that we’re not necessarily as competitive with.

Thank you for that. When you embarked on those five years ago, you came up with the competitive set at companies that were sort outside of the bar and grill segment that you wanted to compete against. So you thought were better set of things that where you’re going to take this. Has that changed? Has that group of companies changed? Or when you think about the competitive set that you’re competing against today, can you just tell us what those are or want to -- how has that changed and what are the new companies if there are new companies? Thanks.

Well, I think, I mean, I wouldn’t want to give specific names right now, Howard, but I want to say is all this fast casual is a major player in the dining out space and we really want to understand where those fast casual concepts are going, how they are resonating with consumers, how they are delivering on the value proposition. So we look at them closely. We really without talking about consumers what we’ve talked about probably more and more this new school -- without talking about competitor, we talk about new school consumers because we know those are the consumers that are going to dictate future brand success. And so we are very focused on really what we have to do to be relevant with new school consumers and that’s kind of how we know we will be competitive because we know those are the guys that are going to drive the success of categories, those are the consumers that are going to accept the stage for future success for concepts.

Perfect. Thank you.

All right. Good talking to you, Howard.

Thank you very much. We will take our next question from Sara Senatore. Please announce your affiliation and then pose your question.

Thanks. From Bernstein. And I wanted to ask sort of a follow-up question on the approach loyalty versus direct marketing. If I think back to fiscal ’14, you had switched on more digital advertising, decided maybe you needed more traditional media. So, I guess in general, it feels like we’ve seen couple of bumps where maybe expectations of that, whether it’s new media or different or loyalty weren’t quite meet. So can you just talk about, is casual dining different from some of the other segments in terms of customer or how responsive they are to these different approaches to marketing? Is it, maybe your testing processes aren’t giving you quite as good a read as you need and I guess in that sense if you could kind of put it on company versus segment, kind of break it down that way, that will be helpful?

Yes. Sara, I can’t speak for other concepts but I think from an industry standpoint, the whole shift towards the digital, social, media platform is been embraced by the industry and by the consumers of the industry’s going after. Similar to what you are seeing in other categories and other industries, every industry is a little unique in terms of how the purchase process takes place and their use of media and marketing to influence that. But there is no doubt that the influence of social and digital in the marketing mix is powerful, effective and appropriate to be taking what has been the more traditional media mix share if you will. So that shift from traditional to digital and social is absolutely appropriate and I think effective. How this additional conversation around loyalty versus direct? That’s just something that as we get through the process are actually trying to better understand how to motivate consumers in short and longer term durations we are learning. And that’s just the process we are going through. The test market, as we’ve mentioned already before didn’t give us as good a read as we would have liked. Sometimes they work really well and sometimes they don’t work as well and this one was a little bit of a misread for us with regard to the specifics. But with regard to the general acceptance of a loyalty program in our concept, it’s huge. It was actually underestimating how many people would actually be encouraged and desired to play in this arena. So for us it’s not how well the people want to be engaged in your loyalty program. It’s just a matter of, okay, how do we get them to be, how do we get that loyalty program to work more effectively for us. So that’s kind of the journey we are on right now. I’d much rather be dealing with that issue. About, okay, we’ve got this huge population who wants to be engaged with the brand and we’ve got to figure out how to get it to be more effective versus we put an offer out there and nobody came, nobody wanted to play. So that’s kind of how we find. In the world of marketing, there is always -- it’s always fluid and you are always trying to determine how much of it is the medium versus the message and that’s part of the mix as well.

Okay. Thank you. And then just one other follow-up, which is on the commodities and the comp, which is I think it’s pretty much the case that we see whenever there is disinflation or deflation, which is industry margins look better and topline looks a little bit softe. Is there any difference, is that what we should probably attribute most of what’s going on, the discounting and maybe slightly lower than expected comps, just kind of the more deflation environment we are in, or is there some other dynamic that has kind of fundamentally shifted, which would make this more of a structural change rather than again, I think historically, those who have been observing industry note, this just seems to happen when commodity prices come down?

I think we are just -- this is Tom here, Sara. We are just seeing and having a vision or a view to future commodity prices. So, we saw some favorability in the quarter but the majority of it is build into the forecast for rest of year. So, we are seeing them begin to turn. But I don’t think it has much to change in what we’re seeing from an economy perspective linking a back up to the industry.

Yeah. I think so if you’re talking about when retail prices versus -- when restaurant prices versus grocery prices start to get to that inflection point where one higher than the other, you start to see a shift in traffic from consumers. I mean that like you said as you follow this industry for many years, you know that that tends to be a little bit of a truism. And so we’re probably getting to some of those inflection points and that’s creating some of the slower growth in sales and that also then provides with these lower commodity cost opportunities for restaurant companies to put more back out there to incent consumers to do more. I think you’re also seeing as I’m looking at the data correctly that the rolling price increase, if you will, that the industry is taking is starting to come back down. It was pushing over 3% a little while ago and now it’s running lower than that. Now we’ve always been on the conservative side of that which from the one standpoint that well we may be leaving money on the table but we’ve always been much more cognizant, I think than some about hey, we want to make sure that we’re keeping guest in for the long haul and that’s why that 2% or less pricing strategy for us is kind of where we like to benchmark.

Thank you.

Thanks Sara.

Dave, if we have anyone else in the queue, I think we have time for couple more questions.

Okay. We’ll take our next question from Karen Holthouse. Please announce your affiliation and pose your question.

Hi. Goldman Sachs. So looking through the app store for just reviews of the My Chili's app, it seems like there has been some technological problems with the app people complain of points being dropped and not being able to login. I’m just wondering what sort of the timeline for getting some fixes for that in place? And do you have any sense to the extent that it’s underperforming versus expectations and the tests are underperforming versus test market, how much of that could just be sort of execution on the actual back end of it. Isn’t that going well outside the larger sample size?

Yeah. Karen, that’s not our issue. I mean -- and I think a lot of -- again, we’re very much engaged with our guests and kind of what’s working. You know it’s a new program and it’s technology based. And so there can be some glitches. I think the biggest challenge we have is just timing. So again sometimes with credit cards you'll see -- you know in our industry sometimes they’ll put an extra charge on for a tip but then it comes off with people that are checking their statement every minute which they can, sometimes get confused and then they -- and that’s the same thing that happened in loyalty program just because you run loyalty program, this instant doesn’t mean it’s automatically -- it’s not an instantaneous update to your account. It takes -- we have to poll it and it takes some time and some times in that process, people think their points haven’t been loaded in. And so then they get nervous. So they get their concern. And so for the most part, that’s what we’re seeing. There may be some one-off examples but that’s not the case. But for the most part, it’s really just getting comfortable with how the process works. The system has been -- when we spent years developing the system and millions and millions of dollars. It’s a proprietary system. And it works very well relative to most technology I’ve experienced. And again we tested it for over five, six months. So we’re almost a year into it and now we’re really getting to be much smarter about how we can communicate in the data we can mind from it. We’re taking it to the next level, but overall it's been performing very well technologically.

Thank you.

Thank you.

Hey looks like we have one final follow-up question coming from Joseph Buckley. Please announce your affiliation and pose your question.

I’m good for now. Thank you.

All right Joe. Thank you.

Well, great. Well, thank you Dave for hosting today. And I’d like to thank everyone for participating in the call this morning. I would note that our next quarterly earnings call is scheduled for January 20, 2016. And with that, everyone have a very good day. Thank you.

Thank you.

Thank you very much ladies and gentlemen. This concludes today's presentation. You may disconnect your lines and have a wonderful day. Thank you for your participation.