Mika Ware - IR Wyman Roberts - CEO and President Joe Taylor - SVP and CFO

Nicole Miller-Regan - Piper Jaffray John Glass - Morgan Stanley Jeff Bernstein - Barclays Capital David Palmer - RBC Capital Markets Sara Senatore - Sanford Bernstein Gregory Francfort - BAS-Merrill Lynch Chris O'Cull - Stifel Bob Derrington - Telsey Advisory Group Stephen Anderson - Maxim Group Karen Holthouse - Goldman Sachs Andrew Strelzik - BMO Capital Markets Brian Vaccaro - Raymond James John Ivankoe - JP Morgan Hugh Gooding - Stephens

Good morning, ladies and gentlemen, and welcome to the Brinker International Q4 Earnings Call. At this time, all participants have been placed on a listen-only mode and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Mika Ware, Vice President of Finance and Investor Relations. Ma'am, the floor is yours.

Thank you, Kate. Again, this is Mika Ware, Vice President of Finance and Investor Relations. Welcome to the earnings call for Brinker International's fourth quarter of fiscal year 2018. Results for the quarter were released earlier this morning and are available on our Web-site at brinker.com. Wyman Roberts, Chief Executive Officer and President, and Joe Taylor, Chief Financial Officer, join me this morning here in Dallas. As is our practise, Wyman and Joe will first make prepared comments related to our operating performance and strategic initiatives. In addition, we will provide guidance for modeling fiscal year 2019 performance. We will then open the call for 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 subject 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. And of course, 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. And with that said, I will turn the call over to Wyman.

Thanks, Mika. Good morning, everyone. As you saw in this morning's press release, Brinker delivered solid fourth quarter results with earnings of $1.19, positive comp sales at 0.6, and positive comp traffic at 0.7. At Chili's, we are three quarters into our new strategy designed to drive sustainable sales and traffic growth, and I am pleased with the brand's ongoing momentum. Fourth quarter reflected Chili's best performance in more than three years. As you'll recall, the strategy is focused on four critical areas of the guest experience, food quality, operational consistency, convenience specifically around on-premise, and our value proposition. That's the journey we have been on, we remain committed to investing in, and improving these four areas, and we continue to deliver sequential improvements to both sales and traffic. Fourth quarter traffic outperformed the industry by more than 200 basis points and we are seeing that trend continue. The fourth quarter comp sales number reflects the significant investment, nearly 100 basis points, to grow the Chili's loyalty database. Joe will give you more details on the accounting, but during the quarter we actively incented guests to join My Chili's Rewards program, increasing our already substantial database by more than 25%. This gives us additional marketing leverage throughout the year to drive incremental visits with a sizable portion of our guest base. We saw a meaningful increase in the percentage of our guests who engaged with us through this platform and we'll continue to expand our direct marketing capability to optimize the efficiency of those channels. At Maggiano's, the brand delivered its third consecutive quarter of positive comp sales at plus 0.3, and our global partners drove positive results in Latin America, while the Middle East continues to battle macroeconomic challenges. Our global partners opened seven restaurants during the quarter for a total of 34 new restaurants in fiscal 2018, bringing our international presence to 383 restaurants. I'm proud of our performance during what was an important and pivotal year for our business, specifically at Chili's. We launched Chili's new strategy by simplifying operations to enable consistent execution. We reduced our menu by 40%, which enabled us to deliver hotter food faster and cut our longest ticket times in half. We coupled that with significant quality improvements and innovation around our burgers, ribs, fajitas, and margaritas, and we strengthened our value proposition with our $5 margaritas and our 3 for $10 offering. Finally, we improved convenience by elevating our technology platform and our execution of takeout, driving sequential improvement in our to-go business throughout the year, ending in double-digit growth in the fourth quarter. This strategy is working. Sales and traffic are both up, guests are telling us through their satisfaction scores that their experience is faster, the food is better, and the value is best in class. And our team appreciates this back-to-our-roots strategy and the commitment to simplify their experience. Engagement scores are at all-time highs and our employee turnover is significantly better than the industry. Now as we enter fiscal 2019, we'll keep working the Chili's strategy. Against a broad consumer base, we see a lot of opportunity to drive frequency with our guests. So we'll keep dialing in our effectiveness in these key areas as we look to grow the business. First, we'll continue to improve how we leverage our industry-leading technology platform. Second, we'll get even more aggressive with our direct marketing capabilities. Third, we'll optimize our value proposition. And finally, we'll continue to target multiple occasions inside and outside the restaurant. We'll also leverage our capital to continue investing in the guest experience. As we shared before, we are pressing forward with our reimage program. We completed our first market and we continue to be encouraged by the results. We are also investing in technology that enables speed and convenience and makes our team's jobs easier. And we are investing in our team to keep the operation simple and to help them focus on the most important person in the restaurant, our guest. At Maggiano's, we are so pleased to welcome Kelly Baltes as the brand's new President. Kelly is a veteran in our industry with a proven track record for growing brands while enhancing the guest experience. We've got a great brand and a talented team at Maggiano's with significant potential and Kelly is the right leader to help the team accelerate the brand's growth. Our global team will continue working to develop successful partners and further expand our presence. This fiscal year our focus is in Asia, especially in China and Vietnam where we'll open our first restaurants. We expect our partners to open another 30-plus restaurants in fiscal 2019, outpacing the category and marking the third consecutive year of more than 30 openings internationally. I'm excited about the ample opportunities we see in fiscal 2019 to accelerate momentum and grow the business. As you'll hear from Joe in a moment, our guidance has us returning to positive comp sales and traffic. In a tough environment, our commitment to leverage our scale and our cash flow to invest in critical aspects of our business will put increasing pressure on our competition and help us capture market share from both chains and independents. Our entire team is passionate about getting better every day, every shift, for every guest, and we are committed to giving them everything they need to do just that. Now I'll turn the call over to Joe to walk you through the numbers. Joe?

Thanks, Wyman, and good morning to everyone. Before we move to your questions, let me continue our prepared comments by covering a couple of topics. First, some additional insights related to our recent quarterly performance and a summary of our sale-leaseback financing, and finally some context for our fiscal year 2019 guidance detailed in this morning's press release. Our fourth quarter ended fiscal year 2018 in a positive fashion, with the Company reporting both top line and EPS growth, most importantly driven my Chili's return to positive comp sales from continuing traffic improvements. This improvement in comp sales to positive 0.6% for the quarter underlined an increasing quarterly Company sales to $791 million. For the quarter, our adjusted earnings per share excluding special items increased by 9.2% to $1.19. For the fiscal year, we've reported adjusted earnings per share at the high end of our guidance range of $3.50, a 9.4% increase over the prior year. As it relates to Chili's quarterly comp sales performance, let me note a couple of items. Importantly, traffic continued its steady improvement and is now in positive year-over-year territory, reporting close to a 1% gain for the quarter. As we had noted earlier in the year, we intended to be less dependent on price to drive comp sales improvement and more focused on incremental traffic. This approach to driving improved top line performance will continue this fiscal year. You likely noticed our comp sales for the quarter included a negative price impact of 1%. This reflects a year-over-year comp expense increase for our promotional direct marketing and loyalty efforts, which are accounted for as a reduction in price. Reiterating Wyman's earlier comment, reactivation of our loyalty program following the transition from Plenti heightened the level of this marketing activity in the quarter and we believe reduced net comp sales for the quarter by approximately 1%. Our restaurant operating margin as a percent of Company's sales decreased in the quarter to 15.9%. While investing in areas impacting cost of sales, such as food and value propositions, contributed to this reduction, the primary driver of the margin decrease was higher restaurant bonus compensation and ongoing headwinds from hourly labor, much of which are related to increased guest traffic. Our cash flow for the fiscal year remained strong, with EBITDA $412 million and free cash flow of a little more than $183 million, which was utilized to fund dividend and share repurchases. We also utilized our borrowing capacity during the quarter to increase the number of shares repurchased, buying over 3.1 million shares in total during the quarter. This brought our shares repurchased for the year to almost 7.9 million shares or approximately 16% of the shares outstanding at the beginning of the year. This repurchase activity did result in our lease-adjusted leverage increasing to 4.16x EBITDAR at year-end. However, the successful completion of our recently announced sale-leaseback transactions allowed us to use the proceeds to repay a meaningful portion of our revolving credit borrowings. We expect our adjusted leverage this year to be in the 3.7x to 4x range. Speaking of our sale-leaseback financing, let me provide a quick summary. Over the course of the last several weeks, we entered into three separate purchase agreements for the sale of 143 restaurant properties to be leased back to us for 15 year terms with extension options. We have subsequently closed on all but a small number of the properties and anticipate wrapping up the additional few closings in the near future. The combined transactions have generated approximately $443 million of gross proceeds. We are pleased with the structure of the transactions, the ability to close the offerings in a timely manner, and believe we unlocked significant value from these real estate holdings. The transaction will impact several expense items going forward, mainly increased rent expense, partially offset by lower depreciation expense, both of which are incorporated into our guidance for the current fiscal year. Now with respect to guidance, underlying our fiscal year 2019 guidance is the continuation of the strategy to drive traffic at our brands, to invest in improving the guest experience, the look and feel of our restaurants, and the value we offer our guests. We are looking to improve our bottom line earnings through a better balance of organic growth and our capital allocation programs. Our full guidance along with our guidance policy can be found in this morning's press release in the Investor Relations area of our Web-site, brinker.com. Here are several highlights. For the fiscal year, we are currently forecasting comp sales growth of positive 0.75% to 1.75% and revenue growth of 1% to 2.25%. I would note that included in our revenue growth for this fiscal year are franchisee marketing contributions due to the adoption of the new revenue recognition rules. Without the inclusion of these marketing contributions, our range of revenue growth, not comp growth, revenue growth would be approximately 50 basis points lower. We do expect a step-down in our restaurant operating margin for the fiscal year, primarily driven by the SLB rent and the previously mentioned change in franchise marketing contribution recognition which was previously recognized as a credit to marketing expenses in the restaurant expense line. For the year, we are expecting restaurant operating margin to be down 1.6% to 1.8%. Without the sale-leaseback financing impact and change in revenue recognition standards, our restaurant operating margin for the year would have been forecasted to be flat to slightly positive. We are increasing our capital investment into our existing restaurant fleet and expect capital expenditures for the year of $140 million to $150 million. As Wyman mentioned earlier, we are now fully into our restaurant reimage program, which is the driver of increased CapEx spend for the year. The average reimage spend per restaurant is estimated between $210,000 and $230,000 and we are scheduled to complete approximately 250 restaurants by the end of this fiscal year. The overall project will take most of the next three fiscal years. Free cash flow is estimated between $165 million and $175 million, leading to a forecasted weighted average shares outstanding for the year between 38 million and 40 million shares. Finally, our adjusted earnings per share guidance for fiscal year 2019 is a range of $3.70 to $3.90. My comments are now complete. Let's open the call for your questions. Kate, I will turn it back to you to facilitate.

[Operator Instructions] Our first question today is coming from Nicole Miller. Please announce your affiliation and then pose your question. Nicole Miller-Regan: Two quick questions. I just want to understand, if you have it yet on the remodels, the difference in guest satisfaction scores between your core base, because I believe you had a remodel market done I think last month, what can you tease out and tell us that customers are saying now?

The feedback from the guests has been positive. Obviously they really appreciate and we see the biggest movement as you would expect in the atmosphere scores, the relevance, the cleanliness, and that's the piece of the project that gets the most playback. But we are also excited about the opportunity to give guests a better guest experience when they come into the restaurants and we are working very hard with all the operators to make sure when we make the investment in the market that the other aspects of the experience are also stepped up. So, right now the feedback, and more importantly, what they are doing with their visitation and their frequency is very encouraging. And while we said we just finished our first market that had been previously reimaged seven years ago and we are encouraged by how that market is playing out, as well as what we have seen in the market I think you are referencing which is up in the Northeast that we had done, but had never had the prior reimage. Nicole Miller-Regan: And I just want to say hi to Kelly and I want to understand a little bit more about Maggiano's. Can you talk about why you are accelerating development now? Is this going to be the same box or a different level economic model? Maybe a little bit about what the total adjustable future of the brand is, and again, just why now for the acceleration? Thank you so much.

I think, first, we are excited to have Kelly onboard, and the answer to your question is really we want to give Kelly that opportunity. So there isn't a specific prototype or development plan that we want to share with you right now. Kelly just got his feet on the ground, he's getting to know the team and the brand and very quickly will work towards putting his plan together for how to grow and develop Maggiano's, first to strengthen it in the footprint that it has and then ideas for other substantial growth. So, that's where we are going.

Our next question today is coming from John Glass. Please announce your affiliation and then pose your question.

It's Morgan Stanley. First Joe, just on the comments on the pricing being negative and as it relates to building up back to your direct marketing program, is that something that continues, do you forecast that throughout 2019, or was that really just an upstart cost, if you will, and it doesn't persist?

John, the answer to the question is really both. Again, embedded in our guidance to particularly as it relates to comp sales is an expectation of the marketing spend, which it really is, that it's a reduction to price. But as I mentioned, we really had heightened the activity as we reinvigorated that program in the fourth quarter. So, the incremental drag coming from that is kind of that 1%-ish range that we mentioned to you.

Just to be clear, does it stay at that level or is this sort of the peak and it sort of tails off as the spending tails off, if you will?

I think we will parse it in and out. I mean, again, it's a marketing tool we have to use, but I think the level was higher than you would normally expect to see it on an ongoing basis in the fourth quarter.

Okay. And then just on your restaurant margin guidance, so can you maybe just talk about why flat to up a little bit is feasible? Is that driven by the positive comps, is there another element of it, particularly as you highlighted labor still a headwind and then presumably if you are planning on positive traffic that would continue to be the case? And can you also just quantify specifically what the cost of the incremental lease expense is for 2019?

A couple of things there. First on the flat to slightly positive without the adjustments, much of that would be emanating from the top line growth and some of the leverage you get out of that environment. Obviously we continue to look at opportunities for efficiencies at other places within the restaurant operating segment. We do look at a fairly benign still cost of sales environment, maybe a touch slight inflationary if you look across the broader basket there, but top line is the contributor in the biggest way. As far as the impact as it relates to the two items I gave you, which were the SLB rent expense and the shift in the revenue recognition for franchisee marketing contributions, on a combined basis it's between $50 million and $55 million impact to that restaurant operating margin, and actually roughly split relatively close between the two of them. It's a little bit more on the rent expense. And then you had a depreciation question?

No, but you can answer if you want.

Actually there was the offset to that too, remember as we do have a decrease in depreciation related to the sale of those assets and that offsets just under a quarter of the rent expense.

Okay. Thank you very much.

Our next question today is coming from Jeffrey Bernstein. Please announce your affiliation and then pose your question.

Coming from Barclays. Couple of questions. One, maybe as you think about the guidance for fiscal 2019 on comps, which was quite specific at 0.75 to 1.75, I'm just wondering if you can give some insight into how you arrived at that, and I think you mentioned that assumes positive traffic, but in terms of the components that adds up to that and maybe how you think about that relative to the casual dining industry for fiscal 2019? And then I had a follow-up.

I think obviously we build our plans from the base and we make an assumption about the industry. We don't see it changing dramatically from where it's at given everything we know today, so kind of in that probably low 1% positive comp sales too. So, we see ourselves gaining share specifically on traffic, like we have kind of been doing the last few quarters, and we continue to see that throughout 2019, and then from a sales perspective taking share but significantly driving share gains from traffic.

Got it. And then you mentioned the off-premise, I think you said the fourth quarter had double-digit growth. I'm just wondering if you can maybe provide some updates. Seems like you and all of your peers are aggressively pursuing it. So maybe what percentage of your mix is the to-go, how much of that maybe is delivery, average check, the margin, any kind of components around that to-go and delivery opportunity and where you are today?

This is Joe. From a to-go standpoint, we're continuing to see our mix to-go between 11.5% and 12%. Interestingly enough, one of the things I would point out is the mix isn't moving as much because we are growing the whole pie. We see year-over-year mid teens to upper teens growth on a very consistent basis in our to-go business, but we are growing both to-go and in-dining room operations which gives a little less impact to the overall mix. We're real pleased with the direction there. Delivery continues to be a very small component of that but we are going to be leaning more aggressively into delivery as we move throughout the fiscal year, and I would anticipate it having some impact on our ability to move the business forward, particularly in the second half of the fiscal year.

Got it. And just lastly a factual clarification maybe on the leverage side of things, the long-term debt after the paydown, I know you gave us I think what you thought your leverage level would be, but how much absolute long-term debt are you thinking and maybe what's the interest expense that you are expecting within guidance of fiscal 2019?

So again, I gave you the quarter ending is that 3.7x to 4x is what we would expect to see as we move throughout the year. We obviously will be investing into the business to things like our reimage program. So that will probably have a little bit of a delta as we move throughout the fiscal year, but we are comfortable at that. From an interest perspective, we are anticipating an increase in interest. It's going to be probably up in the $3.5 million to $4 million range depending on interest rate increases and things of that nature. But we're comfortable in our ability to manage at that level.

I mean at the $4 million above your fiscal 2018 actual?

Correct. We should be in that $4 million range above.

Our next question today is coming from David Palmer. Please announce your affiliation and then pose your question.

RBC. Just a question about what works marketing-wise and how will that shape your marketing into fiscal 2019, and more specifically about that 3 for $10, you introduced it, you pulled it only to return it lately, was that in restaurant margin sacrifice in the quarter and is that something that you're going to stick with in fiscal 2019 and find some other ways to offset to keep those restaurant, that underlying restaurant margin performance flat this fiscal year?

I think a couple of things. One, we are going to be a little less specific on specific marketing tactics and their effectiveness and our thinking about them just from a competitive perspective. What I'll say is, in general with regard to our marketing mix and our promotional strategy, the importance of non-traditional mediums is rising. So, digital, social, direct, including our CRM and loyalty, are areas that we can measure, feel that we have a competitive advantage on and are things that the marketing team here is doing a really great job kind of leaning more into. And so, from a tactical perspective, those are some of the areas that the marketing team is again getting more focused on and how we are changing the mix a little bit. With regard to the specific offers and how we are going to dial-in our value proposition, we are going to keep that a little closer to the vest. 3 for $10 has been a strong offering out there for us. We are excited about what it does for the business, in both dayparts and how hard it works for us, and it's within our margin structure to make it work and you've seen that in kind of the forecast we've laid out here for you.

And David, I would add to that. Specific to the restaurant operating margin, when you look at some of those opportunities, and you mentioned one, we understand some of them will have an impact, particularly if you think about cost of sales to the extent that they are impacting the mix dynamics, but obviously we are looking at the overall comp opportunity and the traffic driving opportunities to come out of that activity. So that's typically where we would look at impact on costs, but positive benefit and offsets driving top line.

Our next question today is coming from Sara Senatore. Please announce your affiliation and then pose your question.

Bernstein. Just really two follow-up questions. One is on the impact of the [indiscernible] In your last conference call you had implied [indiscernible]

Sara, we are having some trouble. We missed the first part of your question.

You're breaking up, Sara.

Yes, you are breaking up.

Can you hear me now?

That's better.

Okay, sorry. I was just asking about the comp's trajectory in the last quarter and just the fact that if I back out the 1% negative pricing, you are kind of in line with the low single digits that you have been guiding to on the last conference call. Was this more investment than you had expected or are you just sort of at that point kind of looking at the organic underlying? I'm just trying to understand how you are thinking about the returns on this pricing, is there any color you can give on the loyalty numbers and the kinds of return you would expect to see? And then I'll have another question, please.

Sara, I think it was a decision we made to be more aggressive in the quarter than we had maybe originally planned. We are excited about the opportunity with the restart of the My Chili's after the kind of sunsetting of the Plenti program to get our loyalty and our CRM program back in the 100% control and to grow it. And so that's what he did. It's an investment in a marketing strategy, if you think about it, that pays out over a longer period of time. So, that investment will leverage those names and those relationships for months, if not years. So, that's what that investment in the quarter did for us. It was one we wanted to make quickly with the reestablishment of My Chili's Rewards. And again, as we've mentioned before, probably a little more aggressive than we will do in the future but it's a strategy and a tactic that we will continue to lean into, and we think we bring a competitive advantage to the category with our team and our insights.

So as it relates to the return piece of the equation, from a marketing channel perspective, we do feel that direct marketing piece, particularly as we learn how to enhance it and perfect it, has some of the higher returning attributes compared to other marketing channels. So, it is going to be well worth the investment and one that you can drive over an extended period of time.

Okay, great. Thank you. That's helpful. And then just on the sale-leaseback, I guess my rough math is, the cap rates are perhaps higher than what you pay on funded debt. I wonder first of all if I'm thinking about that right, and second of all, then what was the sort of underlying rationale for doing this sale-leaseback if the rates are – if you could arguably get a better rate in terms of funded debt?

One, Sara, we are very pleased with the structure of the transaction. The cap rates came in below our targets. When we looked at the transaction, we found our offerings to be very compelling in the market. So, we are pleased with that. I mean it is a long-term financing, sort of relative to the long-term financing market. So I think it's very compelling. It's also the ability to unlock the amount of value that we did, that the impact on our leverage when you do the adjusted 6x is significantly below the amount of value we unlocked in that transaction. So, I think the rates we paid are right in line and pleased with the transaction.

Our next question today is coming from Gregory Francfort. Please announce your affiliation and then pose your question.

I have two questions. The first is just on margin. Can you maybe help me understand the bridge from 2018 to 2019? I'm getting like 50 to 70 basis points on the rev rec and then like another 100 basis points on the incremental rent, and so I guess I'm just trying to get a sense of that right. And then the other question I had was on kind of the leverage use of proceeds. You guys bought back a lot of stock with the revolver ahead of this deal. Why not just sort of delever the Company from here? What was the reason to keep leverage at kind of 3.7x to 4x?

Greg, I think as you look at, and then I'm assuming you're talking about restaurant operating margin bridge is what you are referring to, you are right in the context of the bigger impacts are those higher rent and franchise marketing. There's obviously a number of different things that come into play, the manager bonus, re-accrual, as we re-accrue back, the target comes into play, you have offsets impacting, the biggest offset being what we think we're going to do from a top line flow-through. So there's a number of other puts and takes throughout that restaurant operating margin but top line benefits offset by the areas I just talked about are the really largest pieces of the equation. And again, down 1.6% to 1.8% is the guide. Without those changes, that would get you back to flat to slightly positive. So, I think you can get the relative feel for those puts and takes. You are thinking about it in the right way. As it relates to the leverage position, we are very comfortable at that leverage position that I guided you to. The cash flow dynamics of the Company remain strong and more than capable of managing that level of leverage. If for some reason from some unforeseen issue or market dynamics we wanted it to delever, we have the ability to do that in a fairly consistent manner. We also have cash flows that are improving from ongoing operations improvement and from the tax reform adjustment. So, a number of dynamics that continue to keep us very comfortable at that leverage level.

Thank you for the color. And maybe just one follow-up, is there a margin benefit from sort of losing the Plenti payments and is that expected at all in next year's numbers?

I mean it's incorporated, the change in loyalty definitely is incorporated into the numbers for next year. It's a shift in marketing expense if you want to think about it from a restaurant expense where Plenti was accounted for into the offset to price that we talked about earlier.

Understood. So it was basically a margin to sale sort of flip?

Correct.

Our next question today is coming from Chris O'Cull. Please announce your affiliation and then pose your question. Chris O'Cull: It's Stifel. Joe, the comp growth you are targeting for fiscal 2019 would seem to equate to maybe 40 basis points of leverage, but the impact of the promotional activities, impact on cost of sales, the labor cost pressures, you guys have seen it being greater than that, so I'm just wondering if you can maybe give us a little bit more color as to how you maintain flat to slightly positive margin excluding the sale-leaseback and accounting changes?

Again, I think the biggest opportunity is that top line growth. When I look at the different puts and takes, it's a significant opportunity to leverage the fixed expenses that are throughout that piece of the margin. There is a little bit of benefit. It's a relatively smaller one compared to the other ones I talked about in that shift of where the marketing expense is coming out from and into sales. We're going to be efficient, as we have talked about, in how we look at the other pieces of equation like cost of sales and how we run the restaurants. So again, we think efficiency combined with the ability to lever this fixed cost as we move throughout the year is going to be an effective piece of that equation. Chris O'Cull: What kind of margin impact do you expect from – I mean a leverage impact do you expect from a 1% increase in comps? Is it greater than a 40% pull-through?

It has the potential of being right in that range really, Chris, when you think about it. There's obviously a lot of puts and takes that come into play there, but…

And there is some price in there as well.

A little bit of price.

So obviously that will flow through it at a better than your typical. So when you factor in that into the mix, you are able to get that net neutrality kind of position that we're looking for. Chris O'Cull: Can you help us understand, Wyman, what is the effective price increase excluding all the accounting machinations? I mean from the consumer's perspective, what kind of pricing are you expecting?

And we talked about this I think fairly extensively last call. We got a little aggressive in 2017 and 2018. We kind of backed ourselves back into where we want to be, which is in that 1% to 2%. So really that 1.5% is kind of the sweet spot for us. We feel like based on everything we have seen that that gives consumers enough leeway to kind of absorb the price without having to make significant changes in their visitations. Chris O'Cull: Okay. And then Joe, I apologize if I misheard you, but did you say the interest expense would be up year-over-year in fiscal 2019, because I thought the Company used the proceeds from the sale-leaseback to repay debt?

We did use the proceeds from the sale-leaseback to repay debt. Obviously we are anticipating floating rate increases, if you think through the rate curves, so we embed that thinking into our forecast. Obviously we'll continue to make investments into the business, such is the reimage that could have some ramifications on the debt levels as we move forward. But I think that interest cost is very consistent with the 3.7x to 4.0x I gave you. Chris O'Cull: Okay. And just one last one, are you including the amortization of gain from the sale-leaseback transaction as a net in your rent expense?

From a GAAP perspective, it will be amortized over the life of those deals, but we intend to dial that out so that it will not have an impact to adjusted earnings on a go forward basis.

Our next question today is coming from Robert Derrington. Please announce your affiliation and then pose your question.

Telsey Advisory. Wyman, I am curious, I think most of us know that the Supreme Court recently changed the rules of the land as it relates to gaming, I'm just curious from your view, and you all have been typically pretty protective of the family environment within Chili's but you're also spending $250,000 to update and renovate your bars, which quite frankly may offer you an opportunity. Have you given any consideration to that, ultimately trying to figure out is there some way that Chili's could participate within that?

Bob, not in a major way, not in a way that would reposition the Chili's brand. We're a family oriented kind of varied menu Bar & Grill kind of mix and there is not I think a positioning that would allow us to heavily lean into some gaming options. Obviously, there is others that are looking at that now. There are opportunities and we will continue to explore on a smaller basis opportunities within the building that may allow us to take advantage of it or our franchisees to take advantage of some state and local opportunities that don't reposition the brand in a way that's significant but offer maybe some alternative revenue sources for them. So, we are kind of exploring some of those, but nothing from a major brand positioning perspective that would embrace gaming at Chili's.

Okay. And then as a follow-up, on your delivery program and your to-go, certainly there is a big opportunity there and I think the technology, the improvement in your app, you've probably got one of the easiest to use apps within the industry, ultimately do you foresee the ability to place a delivery order through your app, or how do you see ultimately Chili's taking advantage of delivery, whether it's third-party or through your own means?

I think again this is where we can bring our technology and our scale to bear. I think the idea that we can take the benefit, the consumer benefit that we see in our app, which is significant, we're seeing amazing growth in the use and the adoption of the app, the team has done a great job building that app and making the Chili's takeout experience with that as seamless and convenient as it can be, and we'd like to use as much of that infrastructure with partners in the delivery idea, primarily so we keep it simple for the operators. When you walk into some restaurants and you see multiple tablets from multiple delivery people, you just have to really wonder about how easy it is and how consistent the operators are able to manage that information flow. And we are talking with partners and with suppliers to see how we can integrate delivery into the same technology platform, so that we keep it simple for the operators, so that we make sure that everything we do supports their ability to deliver consistent guest experience, whether it's in the restaurant, picked up, or delivery.

Terrific. Thanks for that update.

Our next question today is coming from Stephen Anderson. Please announce your affiliation and then pose your question.

From Maxim Group. A couple of questions. First, within your guidance of 0.75 to 1.25, can you look at something that's a little bit your quarterly cadence, keeping in mind that the first half of the fiscal year you are lapping the effects of hurricanes Harvey and Irma? And I have a follow-up.

Yes, Steve, obviously those events are coming up here fairly quickly and we'll lap of those and we anticipate getting some boost from that wrap and from [indiscernible] let's hope that the hurricane season stays fairly benign. We're three quarters into the strategy at Chili's and obviously we have seen sequential growth throughout 2018, and as we would expect that to continue and maybe be a little tougher lap as we get to the back end of 2019, but we see consistent growth through the year.

Okay. And my other follow-up question is, I noticed like on your dividends the first time I've seen in quite some time that you haven't increased the quarterly dividend. Usually it's done at the end of the fiscal year. Are you signaling in some way some shift in how you view your use of cash or is that you are still committed to dividend?

Honestly, the Board approved a dividend payout as part of this quarterly announcement, so that commitment continues. We are comfortable with the dividend payout ratio and the yield that it had been generating. So I think the dividend speaks for itself from that commitment level. I don't think it is signaling anything of any significance in that regard, Steve.

Our next question today is coming from Karen Holthouse. Please announce your affiliation and then pose your question.

Goldman Sachs. One quick one, did I miss in prepared remarks, did you give what commodity inflation was in the quarter?

We didn't say it, Karen, in the prepared remarks. But for the fourth quarter, is that your ask?

Yes.

We haven't disclosed that. There isn't a major delta as it relates – it's a fairly benign flattish kind of market year-over-year. And frankly, going forward I think I mentioned, we anticipate that environment is going to stay there, maybe slightly inflationary as you look over the broad reach of the supply chain.

Okay. And then one other quick modelling one, on [indiscernible] margins you mentioned the manager bonus re-accruals headwind next year. How should we think about that cadence of that through the year, particularly given the improving cost trajectory through the year?

It will impact throughout the year, particularly on the manager bonus side of the equation. The end of the performance this last year had higher manager bonus, as I mentioned, in the fourth quarter. So the impact of that cadence is probably greater in the front half and a little bit as we move into the third quarter. I can tell you that from a dollar perspective, if you look across the scope of all of our incentive compensation programs, both within the restaurant and the RSC, the real accruals as it relates to all of those programs is right about $18 million year-over-year.

Our next question today is coming from Andrew Strelzik. Please announce your affiliation and then pose your question.

BMO. So my question is about the same-store sales guidance. So, over the last 12 months or so casual dining industry has been a bit stronger than it had been prior to that, and you have talked about kind of your rates of outperformance over the last couple of quarters. And as you are looking for an acceleration now in 2019, are you anticipating that the industry stays at those better levels or do you think that you can accelerate the comp trajectory even if the industry were to kind of return to where we've been?

Yes, Andrew, we see it kind of staying in that same range. I mean, again, it's plus or minus a point, right, I mean it's not been tremendously dramatic, although sometimes response is, but we look at being in that range.

Okay. And my other question was on the CapEx trajectory. You've said previously with respect to the remodels that you wouldn't return to kind of the prior peaks of CapEx. So is this kind of the high point from CapEx and we see it holds here for the next couple of quarters as that program foes forward or does it ramp? I'm just wondering about the trajectory over the next couple of years from a CapEx perspective.

The reimage program obviously is driving the delta of that and it is designed to be pretty consistent over those three years. The pacing is going to be relatively similar year-over-year.

Our next question today is coming from Brian Vaccaro. Please announce your affiliation and then pose your question.

Raymond James. Just back to the menu pricing, if you exclude the 100 bps impact of the loyalty impact [indiscernible] in the quarter, it looks like pricing was flat. Is that the right way to be thinking about pricing currently in the menu? And Wyman, you spoke to the target getting back into sort of the mid-1s. When do you expect to get back to that level?

Brian, let me answer the first piece and then Wyman can talk it to the second. So, it was about – the menu pricing in the fourth quarter was about 90 basis points. So, it was there but significantly lower than we had seen in previous quarters as we again try to maintain that price discipline.

And we should be close to that going forward. We are targeting that 1.5 range and I think give or take some fluctuations and just timing of menu rollouts, we should be there pretty much first quarter on.

Okay. And sorry if I missed it but what was wage inflation in the fiscal fourth quarter and what's your expectation around wage inflation into fiscal 2019?

Brian, no, you didn't miss it, but I will tell you. It was about 3% in the quarter. We expect wage price inflation to be in that 3% to 3.5% range as we kind of move through this year.

Okay, great. And then just one last one, back to delivery at Chili's, can you remind us how many of the system units are currently covered by delivery and how many might be covered by the end of fiscal 2019?

No, we don't have that level of details for you, Brian. I'll just say, we are actively testing in many restaurants with most of the major players, and then we support a lot of the major and minor players in restaurants as well, but we are actively learning from tests with the big players to understand, first, guest issues and acceptance, and then business impacts, and we anticipate having a much better understanding for, okay, what is this, that does delivery really mean, especially for Chili's, and we're talking about Chili's. Again, the Maggiano's delivery story is much more developed. It's a bigger part of the business. And we just need to get that level of understanding both from a guest and a business perspective, and we are working very aggressively to understand that in the next quarter or two.

Our next question today is coming from John Ivankoe. Please announce your affiliation and then pose your question.

With JP Morgan. I wanted to try to piece together I think a couple of different things that were said on the call. Hopefully I have the context right here. Wyman, in your prepared remarks I think I have heard you say that trends were continuing into the current quarter and by that you meant traffic outperformance relative to peers.

Right.

Okay. And then looking at that first quarter, I mean your nominal comparison especially on the traffic basis look very, very easy and certainly hurricanes explain part of that, but it was before you had really put together all the brand work, major promotional changes, the loyalty changes, what have you, but did you say during another question that you expected same-store sales trends to be relatively consistent throughout the year, did I hear that correctly?

No, we said that obviously the first quarter we are lapping some very significant weather impacts. We've probably got a little bit of upside there, but then we do anticipate or project that we can continue to grow comp sales and traffic throughout the year.

Okay, so maybe first quarter above the annual range, I mean I know we haven't lapped the hurricanes yet, but I guess something has to be above average and presumably that would be the first quarter given that comparison. What is your insight of what's happening with Texas and the other oil states that are around it? I know [Malcolm] [ph] published that Texas number is now on a monthly basis considering they are so strong, but what is your insight into these markets in particular and are there laps beyond the hurricanes that we should be sensitive to of coming into some much more difficult numbers later in the year?

I think our experience with the oil markets is they have rebounded. Obviously we are very well represented in those markets and we are encouraged by the rebound that we are seeing in the markets and in our concepts in those markets. So, I think that they'll start to lap and settle in but we are also seeing some pretty broad strength throughout the country frankly. So, we are not concerned about what happens when the oil lapses. It's not the only thing carrying our momentum and we're excited about actually what we're seeing in other parts of the country as well.

And also in terms of the best performing restaurant markets, especially those without very high labor cost, are what's going to attract competition, well-branded, well-executed kind of small-chain independent type of competition. I can think some of your markets has several of those. But what is your view on the level of competitive activity as it relates to new restaurant construction year-over-year, the viability of independents in some of your core markets?

It's interesting, and I think John, as you guys try and decide for kind of the macro numbers from [Malcolm] [ph] and from [Blackbox] [ph] and then you evaluate the various earnings calls from the publicly traded large companies, I think you are seeing it the way I see it. It seems like on this the large national brands are doing better than the basic, than the industry as represented at least in those two major trackers in casual dining. So, I think the independents are, they are struggling a little more than some people would actually like to acknowledge, and there is always going to be the hot item and the hot concept in whatever town you are in. So there is a lot of pressure on a lot of the smaller independents and in the Bar & Grill category that continue to make up a big piece of the industry and they are not all the hot new sexy thing and they are struggling I think with a lot of the headwinds that the industry is facing and they don't have the leverage, the scale, the insight to deal with it, and I think we are putting a little bit of pressure on them.

Our next question today is coming from Will Slabaugh. Please announce your affiliation and then pose your question.

Stephens. This is actually Hugh on for Will this morning. And going off of that last question, first I was hoping you could give us some more color on the comp progression in 4Q, and then going back to that last question, just the insight on the quarter to date period. I know you said the traffic was outperforming versus peers early in the quarter, but realizing the broader industry looks to have slowed somewhat in the first month of the quarter to date period, it sounds like you really haven't seen this. So I was just wondering if you thought that was more of your exposure to stronger markets or just these initiatives gaining traction?

I'll just say in general, you are probably asking for a level of detail that we're just probably not going to give with inter-period stuff. I mean in general we felt good about the continued kind of sequential improvement in the plan throughout the year quarter by quarter, improved traffic, improved sales at Chili's, especially the traffic momentum, and as we walk into this quarter, we continue to feel good about the progress we are seeing in the brand and the progression we are seeing. So, the month to month, just not going to get into that level of detail.

Got it, thanks. And then just stepping back a little bit, when you look at the additional focus on value, the investments in food quality, kind of leveraging that, growing the loyalty base in your off-premise piece, what do you believe has been the earliest contributor to the same-store sales improvement at this point and where do you see kind of the largest opportunity over the course of 2019?

We have laid out kind of without giving you and anyone else who could be listening competitively too much insight, we are excited about the things that we have kind of put out there in terms of the base experience at Chili's, focusing on simplification, delivering a better guest experience, getting the food out hotter, faster, and then improving the recipes. We know that makes a difference in the quality of the experience and that's fundamental to anything we do moving forward. On top of that, we are very excited about the work that's been done and the momentum we are seeing in takeout and we anticipate that we can continue to grow that business. And as I mentioned, we ended that quarter in double digits. So, that and then the value proposition and how we are bringing that to the table and our ability to then market using all the different mediums are the things that we are excited about, with the teams working hard to continue to leverage and differentiate relative to some of the competitors that we are seeing on there.

We have no further questions in the queue.

All right, great. Thank you, Kate. We appreciate everyone joining us for the call today and we look forward to updating our view on our first quarter results in October. Have a wonderful day. Bye-bye.

Thank you. Ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.