Darden Q3'16 Earnings Conference Call: Full Transcript

Operator:

Welcome to the Darden Fiscal 2016 Third Quarter Earnings Call. Your lines have been placed on a listen-only until the question-and-answer session. To ask a question, you may press star, one on your touch tone phone. This conference is being recorded. If you have any objections, please disconnect at this time.

I will now turn the call over to Mr. Kevin Kalicak. Thank you. You may begin.

Kevin Kalicak: Investor Relations:

Thank you, Hans. Good morning and welcome everyone. With me today is Gene Lee, Darden's CEO; and Rick Cardenas, CFO.

As a reminder, comments made during this call will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Those risks are described in the Company's press release which was distributed earlier today and in its filings with the Securities and Exchange Commission. We are simultaneously broadcasting a presentation during this call which is posted in the Investor Relations section of our website at www.darden.com. Today's discussion and presentation include certain non-GAAP measurements and a reconciliation of these measurements is included in the presentation. We plan to release fiscal 2016 fourth quarter and yearend earnings on Thursday, June 30, before the market opens, followed by a conference call.

This morning Gene will share some brief remarks about quarterly performance and brand highlights, Rick will then provide more detail on our financial results from the third quarter as well as an update on our expectations for fiscal 2016 and then we'll open the call for your questions.

Now I'll turn the call over to Gene.

Gene Lee: President & Chief Executive Officer:

Thank you, Kevin and good morning everyone.

Let me start by saying how exciting I am to have Rick with me this morning as our new Chief Financial Officer. Rick's extensive experience and proven track record of results leading finance, operations, IT, and strategy during a 25 plus year career at Darden, in addition to his consulting experience with Bain & Company and the Parthenon Group, make him uniquely qualified for this role.

Also I want to point out that just as we did last quarter, we reported same restaurant sales on both the fiscal and a comparable calendar basis. This morning I will refer to the comparable calendar comps during my remarks.

We had another solid quarter with great same restaurant sales and significant operating margin improvements. Our operation-focused philosophy continues to drive strong performance across our brands and we are gaining significant shares as a result.

Total sales from continuing operations were $1.85 billion, a 6.7% increase from the third quarter last year. Each of our brands delivered strong same restaurant sales growth during the quarter and we added seven net new restaurants.

Olive Garden's positive sales and earnings momentum continued during the quarter. Same restaurant sales grew a 4.9%, outperforming industry excluding Darden by more than 600 basis points. This was our sixth consecutive quarter of same restaurant sales growth at Olive Garden. In addition, same restaurant traffic was up 3% for the quarter. Key drivers of this performance include; an improved guest experience delivered through proper staffing and the simplification of processes and procedures, culinary innovation that builds on brand equities, and flavor profiles that our royal guests enjoy most, I have seen with our successful flavor filled pastas and create your own Tour of Italy promotions, and continuing to meet our guests' needs for convenience with the national launch of large party catering delivery. This is an enhancement of our successful OG-to-go platform which has experienced a two-year growth rate of 40%. Year-to-date, OG-to-go sales represent 10.5% of our total sales.

We are confident that our overarching strategy continues to be effective. Our focus on food, service and atmosphere, has improved to perceive value of the Olive Garden dining experience. We have anchored our lunch and dinner menus with compelling price points, $6.99 at lunch and $9.99 at dinner which provides everyday affordability. This enables us to deliver promotional value with a wide range of price points. Olive Garden's relentless focus on delivering great guest experiences will allow us to further enhance our perceived value. This will continue to be the key to our ongoing strategy as we build a momentum we are experiencing.

LongHorn Steakhouse's sales momentum continued throughout the quarter. Same restaurant sales grew 2.7%, the 12 consecutive quarter of growth, outperforming the industry excluding Darden by over 400 basis points. Same restaurant traffic was slightly negative. However our performance is well above the industry average. We pulled back on our price pointing activity and optimized our media spend to be more effective which contributed to LongHorn's 29% increase in segment profit and helped to offset the incremental expenses associated with the recently completed real estate transactions. Additionally, we will continue to invest in menu enhancements and reallocating labor as we further simplify operations and optimize our media spending. Finally LongHorn continues to deliver communication that resonates with our guests through its ‘You Can't Fake Steak' advertising campaign which was recognized in December when Asymmetrics named LongHorn the Brand of the Year for casual dining for the second year in a row.

Turning to our specialty restaurants. We saw positive same restaurant sales growth across all five brands led by Bahama Breeze at 6.3 % and Seasons 52 at 5.3%. Bahama Breeze continues to significantly outperform the casual dining industry as consumers are reacting favorably to operational improvements and culinary innovation. I am impressed with the progress the leadership team continues to make. Additionally, Seasons 52 had another strong quarter making meaningful improvements to the business as we've temporarily slowed new restaurant growth enabling us to improve our operational execution and evolve our menu. We are encouraged by the positive reaction our guests are showing to the changes we're making. We're excited about the momentum we've gained and we've started to rebuild our pipeline for new restaurants.

Yard House to Capital Grille and Eddie V's also had strong quarters, although Eddie V's same restaurant sales were impacted by significant slowdown in fine dining within Texas.

Overall I am pleased with our performance this quarter. Our strategy is working and we continue to grow market share, improve margins and return capital to shareholders.

And with that, I will turn it over to Rick.

Rick Cardenas: Senior Vice President, Chief Financial Officer:

Thank you, Gene and good morning everyone. It's great to discuss our business results with you today.

Darden's third quarter adjusted diluted net earnings per share from continuing operations were $1.21, an increase of $0.22 or 22% higher than last year. Year-to-date, adjusted EPS growth is over 50%. While Gene referred to the comparable calendar same restaurant sales to better highlight our quarterly sales trends, it was our strong fiscal same restaurant sales up 6.2% and the continued improvement in core operating performance that drove our earnings growth and more than offset the incremental ongoing real-estate expenses this quarter.

The strong cash generation inherent in our business model enabled significant return of capital to our shareholders. We paid $64 million in dividends this quarter. We also repurchased approximately $140 million of Darden stock. This leaves $360 million remaining under the share repurchase authorization that we announced in December.

Third quarter reported earnings per share were adjusted by; $0.34 of costs associated with the early retirement of debt this quarter and $0.03 of implementation costs associated with our strategic real-estate plan. Separately, the ongoing impacts of the real-estate transactions are now reflected in the financial results for the entire quarter, reducing pretax earnings by $6 million and earnings per share by $0.03.

Looking at the specific impacts; we incurred incremental rent and other tax expenses of approximately $32 million. Depreciation and amortization was lower by $15 million and interest expense was $111 million lower due to debt reduction of over $1 billion. As a result of this debt reduction, we now have $450 million of outstanding funded debt with maturities due in 2035 and 2037.

The company's adjusted EBIT margins increased by 200 basis points this quarter as a result of leveraging positive same restaurant sales, continued progress on our cost reduction initiatives, and seafood, beef and natural gas deflation, all of which helped to more than offset the ongoing incremental real-estate expenses I detailed a moment ago, most of which is included in restaurant expenses.

Before discussing our performance by segment, I want to remind you that the fiscal 2016 segment profit now includes the incremental rent and other tax expense associated with the real-estate transactions whereas fiscal 2015 did not include these costs. Additionally, the benefits of lower depreciation and interest savings are not recognized in segment profit.

Olive Garden's segment profit of $220.1 million was $18.7 million higher than last year and continued their strong segment profit margins of 21.6%. In addition to Olive Garden, all of our segments significantly improved quarterly profit led by LongHorn Steakhouse's segment profit growth of $19.1 million versus last year which as Gene mentioned, is 29% higher than last year and segment profit margin increased almost 400 basis points to 20%.

Turning to our outlook for fiscal 2016, we are increasing our range for same restaurant sales to 2% to 3%, to 3.5%. We are also increasing our range for adjusted diluted net earnings per share from continuing operations to $3.48 to $3.52.

Given the strong performance this year, our annual effective tax rate is expected to be at the high end of our previously communicated range of between 23% and 25%.

Looking ahead to fiscal 2017, we have begun to ramp up the development pipeline for future sites and we anticipate 24 to 28 new restaurant openings. We expect to complete at least 60 Olive Garden remodels with an investment of between $250,000 and $450,000 each. And, we'll continue our bar refresh program completing up to 150 next year. The bar refresh investment of approximately $20,000 per restaurant significantly improves the utilization of our older Olive Garden cafe and bar areas and is a component of our larger remodel package. We have seen a solid return on the remodel and bar refresh investments to-date. Additionally to ensure all of our restaurants are well maintained, we invest roughly $60,000 per year per restaurant in annual capital spending.

Total capital spending for 2017 fiscal is estimated between $310 million and $350 million of which $110 million to $130 million is related to new unit openings and the remainder related to remodels, the bar refresh program, maintenance, technology and other spending. Additional guidance for our 2017 performance will be shared in next quarter's release and conference call in June. However I would like to take this time to remind you of the long term framework we have for value creation. Overtime, we believe our business can deliver total annual shareholder returns of 10% to 15% which is composed of earnings after tax growth of 7% to 10% driven by same restaurant sales growth of 1% to 3%, new restaurant growth of 2% to 3%, and EBIT margin expansion of 10 to 40 basis points by leveraging sales growth and our significant scale.

Additionally, given the strong cash generation of our business and the earnings growth expectations, we anticipate a return of cash to our shareholders in the 3% to 5% range annually consisting of a dividend payout ratio of 50% to 60% and share repurchases of $100 million to $200 million. We believe that 10% to 20% total shareholder return represents a healthy and attractive investment.

Finally, I am excited to be speaking with you this morning. Darden has been a huge part of my life for over 25 years and I am humbled by the opportunity to serve as the CFO of this dynamic organization. I also want to share with you how I am approaching this role. First and foremost, my diverse experiences working within the brands including my time in operations, gives me a deep understanding of our restaurants and the ability to partner with the leaders in the business. Also, my experiences away from Darden as the management consultant helped me maintain a strategic and external focus to ensure that we are not overly insular. In this role, I'll be focused on ensuring we leverage our significant scale, extensive data and insights, rigorous strategic planning, and a disciplined capital allocation approach ensuring that every dollar we spend will be a dollar worth spending to deliver on the long term value creation framework I just reviewed with you. This role comes with the pleasure of developing strong relationships with our analysts and investors and I look forward to strengthening that relationship.

And with that, I will turn it over to Gene

Gene Lee:

Thank you, Rick. As you saw this morning, Jeff Smith informed the Board of Directors last night that he was stepping down as Chairman and resigning as an Independent Director. I want to take this moment to thank Jeff on behalf of the Board and the Darden Management Team for his leadership and partnership. From the moment he walked in to the Board Room, Jeff has been focused on helping Darden regain its leadership position in full-service dining and we're all grateful for this perspective he has brought to our business. We've accomplished a number of extraordinary feats under his leadership including improved operational excellence, disciplined strategic planning, and the spin-off of Four Corners Property Trust. On a personal note, I've appreciated and valued Jeff's vision, constructive attitude and counsel during the past 18 months. He has been a wonderful partner for me and I wish him well in all his personal and professional endeavors.

We also announced that Darden Board of Directors unanimously elected Chuck Sonsteby us chairman. Chuck is a proven leader with extensive industry experience and I am looking forward to working with him in his new capacity as Chair.

Darden has regained momentum and I am excited about the opportunities ahead for our brands and for our team members as we continue to focus on delivering exceptional guest experiences. We have an engaged Board, a strong Leadership Team, and great team members across to our company focused on the right priorities, providing strong value propositions for our guests leading to increased frequency and enhanced loyalty.

And with that, we'll open it up for questions.

Question & Answer

Operator:

Thank you, sir. Our first question is from Brett Levy of Deutsche Bank. Sir, your line is now open.

Brett Levy: Deutsche Bank:

Good morning, gentlemen. If you could do me a favor and talk a little bit about the competitive landscape which we're seeing by the brands, where you are seeing the biggest impact either economically or from a competitive standpoint and then just a quick question on what do you think the possible peak margins are for Olive Garden and Longhorn and how do you get there? Thank you.

Gene Lee:

Good morning, Brett. There's a lot in that question. Let me start off by just talking about the overall environment. I think that's what you'd really like to hear us talk about this morning. The environment does remain competitive. We believe that the consumer is behaving very well on our restaurants. They continue to use the whole menu. We continue to see people buying, purchasing add-ons, both as appetizers, alcoholic beverages, and desserts. We see people buying a little bit less on deal than they have in the past. However, we have done a good job as I mentioned in our prepared comments about anchoring our lunch and dinner menus with a very attractive price points.

The overall environment does feel a little bit promotional at this point in time and we're watching what everyone's doing. However we think we're positioned well to continue to take market share. I just think that the biggest move that we made in Olive Garden was putting that everyday value back on the menu. We went a long time with our $9.99 price point at dinner and I believe that anchoring that menu with that price point has allowed us to use a lot of our promotional activity to deliver value in a different way. And value can be delivered with the higher price points and the consumer has been very accepting of that. And I believe in Olive Garden the overall experience has improved dramatically.

As far as our overall peak margins, I really don't want to talk about a number that we want to put out there as what our peak margins are going to be. I mean I think there are so many variables that our inputs into that, what's the commodity environment, what's the pricing environment. We're going to continue to invest into the guest experience and do the things that we need to do to maintain and grow our market share and we will continue to focus on the moving non-consumer facing cost from our business and that's something we have been focused for the last 18 months and we will continue to be focused on.

Brett Levy:

Thank you, gentlemen.

Operator:

Thank you and our next question is from David Tarantino of Robert W. Baird. Sir, your line is now open.

David Tarantino: Robert W. Baird:

Hi. Good morning. Gene my question's really on the outlook or the implied outlook for the fourth quarter. If I look at the comps guidance for the year, it does imply at least at the midpoint that your Q4 comp would be slightly below what you have been running in the past several quarters and my question is, is that just conservatism on your part or is it related to the comparisons or are you starting to see some signs of softness I guess in the overall environment?

Gene Lee:

Good morning, David. Our guidance is based on what we know to date and what we believe the environment will provide us in the back half of the year. We believe it's the appropriate guidance with what we know today. The environment I would say continues to remain choppy, week to week as you look at NAP track and Black Box continues to move around, trying to focus more on longer term trends than on what's happening week to week. We got a shift in the Easter holiday that is I think going to make some of the week to week comparisons in the fourth quarter a little bit difficult to read and I think you know when I think about our guidance, I think as we finished the year in a 3 to 3.5 range, I think that's a great year for Darden and I think it's some we should be incredibly proud of.

David Tarantino:

Agreed and then one second question here. Gene could you maybe talk a little bit about what the initial reception to the catering effort has been and what you're seeing so far there and what do you think the opportunity would be to look out over the next year or two?

Gene Lee:

Yes. We believe catering is a big opportunity. The reception's been fantastic. Again it's been designed around this whole needs' state of convenience. We are able to bring this experience to you. We benefit significantly Olive Garden because the food travels so well especially when we put it in these bulk containers. We know we are measuring, closely intend to reorder an overall satisfaction, and the scores are really, really strong. The consumer's very, very happy with the product. It's unique and we believe that this is a huge opportunity overtime as we continue to build awareness. As we think about this, our consumer today has very, very low awareness of us doing this catering delivery. We have run some limited television advertising in some small markets to see how consumers react to that and the reactions been very positive and so we will continue--our goal is to continue to find ways to build awareness of what we're doing.

David Tarantino:

Great. Thank you very much.

Operator:

Thank you and we also have a question coming from the line of Brian Bittner of Oppenheimer. Sir, your line is now open.

Brian Bittner: Oppenheimer:

Thanks. Thank you. Good morning, Gene, Rick, Kevin. A question about the Olive Garden momentum that we saw in the quarter, we saw a pretty meaningful acceleration in the third quarter despite few of the industry remaining stuck in the same gear. The go moment obviously very strong, but mathematically I don't think it could have driven that large of an acceleration. So what's really going on in the third quarter to drive that large of an acceleration in the business? I know you guys tap within the assets before the quarter begin, does that have an impact or any other color you can provide.

Rick Cardenas:

Brian I want to start at the level we are just running better restaurants today and I don't want to, I don't think we should discount the importance of ensuring that we are properly staffed, our teams are properly motivated. Dave and his team have done an exceptional job of simplifying the operation reducing the size of the menu in the processes and the procedures. I think the overall experience inside an Olive Garden today is significantly better than it was 12 or 24 months ago. I think we are getting a lot of momentum from that. The tablets obviously are helping as I said in the last quarter, we are closing our checks seven minutes quicker than we have in the past and so we're excited about some of the basic operations and one of the things that we're focused on now is trying to keep things simple and we talk a lot about simple is hard and doing simple things every single day is really, really hard but that's what's given us to build the lift in Olive Garden. Our teams are doing a great job creating great dining experiences and we are not having to rely on promotional activity to drive the business. We are winning every single day at the nine square feet and I believe that's why we gained some momentum throughout the third quarter.

Brian Bittner:

And just a follow-up question on so far in the first quarter, I think it's no secret that the industry is pretty soft in March. What you think is going on? What do you really attribute that to based on the thing that you said in what's going over the consumer?

Gene Lee:

Yes. I contribute the month the week-to-week noise in March really is--as I look at the industry, it has more to do with Easter coming forward a couple weeks than anything else.

Brian Bittner:

Okay. Thanks guys.

Operator:

Thank you and the next question is from Matthew DiFrisco of Guggenheim Securities. Sir, your lines now open.

Matthew DiFrisco: Guggenheim Securities:

Thank you. I had a question but I have a follow up on the previous question to a go about the catering. I guess if you could talk about and look at some of the stores that do the best in either catering or OG to go, so I guess the ones that indexed higher than that 10.5% or so, how do they do on the other business, the in-store business? Have they been out comping? I am curious if there is a halo effect as far as someone uses you on the go and does that strengthen the brand equity? Are you seeing incremental sales or is it cannibalistic to that existing business that was done in the store traditionally?

Gene Lee:

Matt, one of things that we're looking at is as I think I said in the past. We are tokenizing credit cards and so we are able to see at this consumer that's using us for take-out is using us for in-restaurant too and we're seeing a lot of crossover and so we are seeing people use both to go and in-restaurant which is exciting for us. We are also seeing consumers that just uses from a techno standpoint, when a restaurant has momentum, it's having–it's usually demonstrating momentum in all categories., so both take-out and in-restaurant. And so I think the root of your question is, there is a halo and one of the things that we think and we're trying to bear out in some research is take-out and OG to go is exposing Olive Garden to maybe some lapsed consumers. We are using it and then to say hey that was pretty good I am going to come back in and try the restaurant, and so I think basically what are you trying to get across in your question is true that we are getting some halo for the whole restaurant because of the because to-go experience.

Matthew DiFrisco:

Right. And then I just want to clarify your detail of Texas. I think you called it out for how it's affected Eddie V's. So I am curious that was the higher end but have you seen any other distinguishing trends in Texas or weaker trends in Texas below sort of the Eddie V's price point in the fine dining category. Is it impaired or have you seen it the economy down there way over something like a LongHorn or an Olive Garden?

Gene Lee:

No, we have seen nothing in casual dining that says, it's still-- Texas is still performing fairly well, and Houston's performing fairly well. I called it out on EDDIE V's because when you look at that footprint, I think Texas is about 40% of the total footprint and so it's a little bit--it's really easy to see there, especially Houston we have two restaurants in Houston that have been significantly impacted.

Matthew DiFrisco:

So it's just the read then I guess on the higher ends as far as it's related to the energy, business is getting curtailed.

Rick Cardenas:

Yes. I think it's consistent

Gene Lee:

It's a large party, it's a salvatory. We need to work hard in luxury dine to make sure that we find other people or other businesses that are doing well and make sure that we invite them in and use our facilities.

Matthew DiFrisco:

Understood. Appreciate the detail. Thanks.

Operator:

Thank you and we also have a question coming from the line of Will Slabaugh from Stephens Incorporated. You may begin.

Will Slabaugh: Stephens Incorporated:

Hey, thanks guys. Congrats on a good quarter and thank you for taking my question. So last quarter you guys touched on the tightening labor market conditions you're seeing and I was hoping to get a little more visibility and how you guys are navigating the environment? I guess particularly with respect to demands or turnover and whether or not you are having to I guess plan to take any additional steps to retain some of that talent.

Gene Lee:

Yes. The wage environment is definitely continuing to evolve. I would say that turnover in the industry is up. Our gap to the industry continues to improve but our turnover is up and I talked about that as--I think the restaurant employees are a bit more mobile today. I think that there is people who are working in our industry because there are other alternatives weren't available to them and I think those other alternatives today have starting to become available. It's going to put a little bit of pressure on wage rate as we can--as the industry competes for the best talent to run their businesses.

I think at Darden we have a compelling plan of proposition and I think that we're, when I think about it, we're in an advantage here. The other thing to point out is when you look at Darden's footprint, we have a great footprint and operate a lot of restaurants and markets where we still have federal minimum wage in those states and that really offsets some of the other mandated wage increases that are happening in some of the other states and I'll conclude by just saying that at Darden we have industry leading retention. We have some of the best retention and low turnover rates in Olive full service dining. So again we are positioned well to deal with this. I like to say that historically operating in an environment where you have a little bit of wage inflation with your staff has been good for sales long-term and I much rather operate in this environment than an environment where the industry was maybe struggling a little bit more from a top-line standpoint and we had plenty of help.

Will Slabaugh:

Great. That's helpful and just one quick follow up if I could. I believe you also said that last quarter you would thought you might have trouble pushing more price in the near term given the current environment. So I was wondering, assuming that there is not any more additional pricing implied for the last quarter of the year but do you have an idea of when you will be able to push more price at particularly Olive Garden?

Gene Lee:

Well I think we will continue to look at what pricing's available to us and Olive Garden we are trying to hold back our pricing to improve the value proposition for the consumer. And so we are looking for other ways to improve margins other than food pricing so that we can continue to create a compelling value. This is where I think it's important that we focus on using our scale to our advantage. If we can use our scale to our advantage, price less than our competitive set, our value, perceived value with the consumer, should go up. And that's what our strategic plan is right now, use our scale, don't rely on pricing to create value and thus win market share.

Will Slabaugh:

Thanks. That's very helpful and congrats again guys.

Operator:

Thank you and we have a question coming from the line of Joseph Buckley of Bank of America. Sir, your line's now open.

Joseph Buckley: Bank of America:

Thank you. First, just another question on sales. Can you say what the need to go catering influence was on the third quarter same store sales and then is there a difference in pricing between ones you realized in the third quarter and the price effect you are assuming in the fourth quarter and your full year guidance?

Gene Lee:

As far as take out, take out was 35% of the overall comp. Of that, delivery was 25% of that growth. So takeout's playing a big part but in this quarter it wasn't the whole thing. So, very, very good growth in restaurant takeout and then we should look for catering and delivery to continue to ramp up over time as we build awareness. We think about the fourth quarter, we don't have any additional pricing scheduled to go in. We're going to continue to try to create value by not pricing or pricing a lot less than we historically would have.

Joseph Buckley:

Can I ask one on the expansion also, Rick you gave us the range of potential openings for 2017. Can you update us what you are thinking the full year numbers will look for ‘16 and for the ‘17 numbers, what brands will get the lion's share of that and is that a gross number also?

Rick Cardenas:

Hey, Joe. Yes for ‘16 we still expect to open around 18 to 22 new units. That is not a net number, that's gross number. And for ‘17, the numbers I talked to you about 24 to 28 is also gross and we will give you more insight on to what brands are going to have some of that growth next year in our June call.

Joseph Buckley:

Okay. Thank you.

Operator:

Thank you and our next our question from Jeff Farmer of Wells Fargo. Sir, your line is now open.

Jeff Farmer: Wells Fargo Securities:

Great. Thank you. Just wanted to follow up on the table turn topic, I think a seven minute or 10% reduction in average table turn time in Olive Garden, that's the pretty big number. So if the concept is capacity constraint for a 15% even 20% of transactions that 10% reduction in the table turn time would be a pretty sizeable traffic driver. So is it a fair way to think about it like that?

Gene Lee:

Jeff I think it's--I think your logic is correct. However what we are measuring is the time a check opens to the time a check closes. That doesn't mean the consumer leaves just because they have the ability to close that check out quicker. Internally, we are making the assumption that the guest after they close out their check with a credit card and doing it in historical way on average was hanging around the same amount of time after they paid the check, the consumer who is closing out is hanging around, and so if we make those two assumptions, than that seven minutes is meaningful. But if, we have no way of knowing if the guest is closing out the check with the Ziosk and then staying around a few extra minutes and we are not really get in that full seven minutes.

Jeff Farmer:

Okay. So let me ask you the question just a little different way. I think your Olive Garden's year-to-date traffic up about 1.5%, big number, it's actually relative to the peers. What would some of the key drivers of that to be?

Gene Lee:

Our key drivers is I am go to back to, we are running better restaurants today. We are better staffed. Our processes and procedures are simpler, our restaurant managers are more focused and feel an ownership of having the responsibility to drive sales. Their compensation aligns with them driving same restaurant sales and so I think those are key drivers. I do think there is other things that we've done along the way. Ziosk is one of them that's helped out and so on and so forth. So I want to keep going back to we are running better restaurants today. We're winning at the 9 square feet and we're creating loyalty these people we're exceeding the guest expectation. We are focused and we are executing and we still have room to improve.

Jeff Farmer:

Okay. Thank you.

Operator:

Thank you and we have a question coming from the line of David Palmer of RBC Capital Markets. Sir, your line is now open.

David Palmer: RBC Capital Markets:

Thanks, good morning. Gene I think investors are referring with the fact that Darden participates in casual dining and the segment over the long term and I guess it's got worse lately. It's showing same store sales or in particular same store traffic declines. Are industry in particular out there not executing like Darden? Perhaps they are not reinvesting in food and labor like you and perhaps they are not even representing the segment versus fast food which is doing much better than casual dine. Will we see some other segment relevant issues and perhaps tying into that, you get customer satisfaction survey data that we don't see, perhaps that gives you, that signals to what's going on in terms of the competitive differentiation. Thanks.

Gene Lee:

Yes. Good morning, David. I don't want to get--comment on what our competitors are doing and I will say there are others in casual dining that are winning that continue to outperform the industry and significantly outperform the industry with strong value equations and relevant brands. We continue to believe that if we invest in the guest and we provide an experience and we provide value to the guest on multiple dimensions, we'll continue to grow our market share. We do have access to research, we like the trends that we're seeing with our brands and it tells us the consumer is seeing what we are doing but it does start with the basics of having a great host or hostess at the front door inviting guests in, it starts with having service staff has the appropriate size section, that have the right small wares and the tools that do their jobs and we have a simplified process in a kitchen where our chefs and cooks can prepare the food properly and I believe all the little details that we are doing, is allowing us to steal market share at this point in time.

David Palmer:

The food, the labor scores I mean what are the major if you had a 10 point to scores that people who really are if they are getting the joke about your brands and such as Olive Garden, you are outperforming with others too is it mostly the food mostly the labor, what is it?

Gene Lee:

It's all when we talk about food service and atmosphere as our key operating philosophy here, we're winning on food, we are winning on service, we are winning on atmosphere and that all equals value and value I think value today in our industry is much more than just the price point and so we talk with management teams and the presidents here about what they're doing, we're trying to deliver value on multiple dimensions. Now, you have to have value on where the price point for certain guest but other guests on that dimension are looking for value to be delivered in different ways and I think we're doing a really good job of doing that but we can't rest. We have to continue to evolve and continue to look for different ways to deliver value. Because everything we can do in this industry can be replicated except for the operational part. The operational part is really hard and I'll go back to something I said earlier in a response to a question is, we're focused on doing simple things and doing simple things is really hard.

David Palmer:

Thank you.

Operator:

Thank you. The next question is from Jason West of Credit Suisse. Sir, your line's now open.

Jason West: Credit Suisse:

Yes. Thanks guys. Just a couple of questions. One Gene, if you could talk about sort of your boarder philosophy here around advertising, I know we've tried to go dial back some of the monthly promotions that the brand used to rely on. But also just a boarder TV spending Darden and Olive Garden have always been very heavy in that category. Do you see that type of spend winding down or not winding down but sort of moderating overtime as you run better restaurants and you need to rely less on that type of spending and then I had a follow up on CapEx. Thanks.

Gene Lee:

Jason. TV for Olive Garden is still the best medium for us to spend our money. We can see sales move week to week based on how many TRPs we're spending. And so we are transitioning some dollars from TV over to digital and other and social and some other things. But TV is always going to play a big part of the Olive Garden story until something dramatic changes with the consumer. Our target audience is still fairly easy to reach through television and one of the things that we have done a lot better in the last 24 months is really hone in on that target and spend against that target appropriately, and so Dave and the team have done a great job of ensuring every dollar we invest is moving forward. Where we are making meaningful progress on advertising spending is in LongHorn where I believe we became very inefficient over time and trying to act like a bigger brand than we are really were. And so have been able to save significant dollars in that budget as we move to spot television and supporting our restaurants that aren't media efficient with other means of support and that's been very effective for us and we'll continue to do that.

Jason West:

Thank you and on the CapEx, Rick can you talk a bit about the plan in Olive Garden. I think you're talking about 60 remodels there for fiscal ‘17. I think you guys have done some test around 30 units this year. Is that sort of the type of run rate that you're looking at for the next few years or you expect that number to ramp more aggressively overtime and how many of the Olive Garden units do you think need a full remodel? Is it still that sort of the half the pace sort of number that we're thinking about?

Rick Cardenas:

Yes, Jason in regards to remodels for next year, the 60 number is what we expect to be doing next year. We're getting great returns on those remodels. We also anticipate continuing to invest in our restaurants including remodels in future years. But as I mentioned in my prepared remarks, we also invest around $60,000 a year per restaurant to make sure that our restaurants continue to look fresh. The 35 that we've done as I said have done great for us. We expect to continue that result and we will continue to remodel as we find the right restaurants to remodel. But one thing I would say is in the past remodels were a one size fits all, and we believe that we need to look at every restaurant individually to ensure that we spent the right amount of money in each restaurant and think of the remodel as more than evolution versus a revolution. So we don't think we have to do all 200 to 300 of them at one time.

Jason West:

Got it. Thanks a lot.

Operator:

Thank you and our next question's from Jeffrey Bernstein of Barclays. Sir, your line's now open.

Jeff Bernstein: Barclays Capital:

Great. Thank you very much. Looking back over the past 18 months, obviously there's been an impressive turn of fundamentals I think we agree on both the comp and the cost saving side as we now think it's kind of the next 18 months. Just getting a lot of question on the sustainability of that performance obviously it's hard for you to forecast the comp side, may be you can offer some more color on the cost side which I know you've been saying how that long term run rate was now and the 150 million plus range, and whether you now start to consider some of the other big suggestions that came out 18 months ago. Whether, there is any thought of now separating and monetizing some of the specialty restaurant group and or more potential around any kind of franchising or what not, just shows the fund was potential opportunities and I had one follow up.

Gene Lee:

Hey, good morning Jeff. We are proud the work we've done over the past 18 months. We have really made some great improvement. We have done that through focusing on some basics as I talked about. Management and the Board will continue to evaluate early alternatives for the business over the time. We've laid our long term strategic framework, we believe the portfolio. We have today, is a great portfolio to achieve that.

We have also laid out our strategic initiatives which revolve a lot around scale and we've laid and we laded out in the presentation, in our investor presentation. How that's scales really benefiting us from a G&A standpoint, and so as we look at what we are doing with the portfolio right now in our strategy.

We believe moving forward with what we are doing in the past right path. As far as sustainability the path that we're on. I will go back to a couple things, I'll go back to continuing new scale, we are in the () of really taking advantage of our data and insights. I that we are, we are doing a lot with that today.

I can't talk too much about it because it is a comparative advantage for us and I also think that we're doing some really great things from a strategic planning standpoint they're giving us an advantage in the marketplace. We'll continue to stay focused on running great restaurant so I believe that's the key differentiator at the end of the day. This is going to be a $100 billion category, but we would like to see it grow faster than it's grown there is still a lot of market share available to be taken if we continue to outperform and on execute the competitive step and that's what we're focused on and again as far as momentum we've kind of led out with the long-term strategic framework what we think this business is capable of and we believe providing our shareholders with 10% to 15% total of shareholders return is a compelling investment in today's environment.

Jeff Bernstein:

Agreed and then just to your point you mentioned earlier about the category is heading towards a $100 billion, obviously it's like to be a little healthier, but I am just wondering when you get ask why maybe you're not seeing stronger trends across all of casual dining at the consumer conference and -- positive and gas prices are favorable I'm just when you sized up what do you think the greatest industry headwinds are we have concerns is it capacity or is it I guess I just lowest value or maybe its casual infusion just what's holding back to the category from what we would have expected to be further improvement in trend based on the historical correlations to some of those key metrics.

Gene Lee:

Yes. I think there is two thinks I will say I think there is capacity there is a lot of capacity out there, two I think there is a lack of really good innovative new ideas that get consumers excited about what we're doing. I think that's the biggest headwind.

Jeff Bernstein:

Thank you.

Operator:

Thank you and we have a question coming from the line of Keith Siegner of UBS. Sir your line is now open.

Denise Geige: UBS:

Hi this is Denise Geige on for Keith and thanks for the question. So just a bit of little bit more on the competitive environment theme anything that you would call out as it relates to where you're seeing the most impact from competition whether it's the dinner or the lunch day part and then for Olive Garden are the 629 and 999 lunch and dinner price per offerings in your view the key drivers that's that are helping you to win on value or is it much more a combination of things and if the former can we see the continued evolution of similar value offerings going forward.

Gene Lee:

Let me start with the second question first. I do you think anchoring your menus with everyday value is important so the consumers knows that thing can be a restaurant you not have to rely on not have to rely on being totaled what they have be from a promotional standpoint to get that value or user coupon to get that value and Olive Garden is always been the value leader and so I think that's some really important for them. What was the can you can you just what the first question was again.

Denise Geige:

Yes. So just as it relates to value if you could called out where you're seeing it I am sorry competition where you're seeing it more whether it's a lunch or the dinner day parts any kind of commentary there?

Gene Lee:

Yes. I mean all of day parts we're seeing incredible competitive pressure I will say that I think the lunch day part for casual dining has a lot more competition, because I think fast casuals are much more bigger option that launch and I also think in our good great quick serve restaurant provide competitive pricing competitive competition at launch and so when cooks serve gets stronger and gets in the value become as much better that puts little bit more pressure on lunch.

Denise Geige:

Great. Thank you.

Operator:

Thank you and our next question is from John Glass of Morgan Stanley. Sir your line is now open.

John Glass: Morgan Stanley:

Thanks very much. On LongHorn you talked little bit about pulling back and price promotion and maybe that was the reason traffic was softer than prior quarters is this part of evolution that you are doing a brand somewhere Olive Garden where you are going to focus more in these anchor price points are you doing that risk or () of since the commodity is down your competitors maybe price promotion on stake maybe can you talk about if you have actually seen that and if that's a real risk there.

Rick Cardenas:

John we think about positioning for LongHorn we seen that the target consumers there is a lot different in the target consumer at Olive Garden, and I think -- in the last couple of years we have drifted the target and LongHorn down to a consumer that is more trying to more Olive Garden consumer, and I think we've done lot of price points 2 for 29.

12 dollars stake I believe LongHorn is a bit of more of a premium offer and we need focus on that. So right now we are out there doing our 18 ounce () and we are promoting at 10 ounce per way which is the first time and six seven years we have out there with a 10 ounce per way, and consumer satisfaction is improving dramatically.

At the end of the day what we are doing LongHorn today, is we are removing some consumers some guest from the guest stage that we are confident that we are making a money on, and there were consumers that was spending buying a low end stack coming in with the $5 coupon and that was all happening while we had a 45 minute wait outside the restaurant, people waiting to get any faithful price for a price for more of higher end experience in casual dining stage. So, we believe that we're transitioning the positioning slightly, and we believe this is the right place to be as it on, I am foreseeing a lot more comfortable with LongHorn and where LongHorn should be.

We are going to investing in quality, we are going to investing in staffing and most importantly, and we are going to continue a simplify the LongHorn operation has become two complex overtime.

John Glass:

Great, and Rick if I could just follow up on your comments on ‘17. First, just with respect to CapEx, is this kind of a study stage and going up on the 30%, 40% next year. But does is this kind of the new steady state in terms of you did opening should expect for the next couple of years and can you comment about it remodel.

But is this the way to think about capital spending the business in aggregate, and then in 2017 also an opportunity to look at the balance sheet how active of conversation is looking at the balance now that you got real-estate behind you in the business as much stronger footing is that potentially 2000 event or de leverage event.

Rick Cardenas:

Thanks John. The 2017 CapEx that we mentioned in the new units. I would refer you to the long term frame work that we have for new units of 2% to 3%. The amount that we gave you there are slightly below the long term frame work under unit. But we expected to be at the long term framework overtime, and can you give the remind me the second part of the question?

John Glass:

Your balance sheet…

Rick Cardenas:

The balance sheet affect. We continually work with our Board to regularly evaluate the alternatives that we have with cash on hand. To achieve our financial goals, and priority is to maintain the investment credit profile.

John Glass:

Okay, thank you.

Operator:

Thank you and we have a question coming from the line of Karen Holthouse of Goldman Sachs. Ma'am, your line is now open.

Karen Holthouse: Goldman Sachs:

Yes, another on catering. I am curious if you have any idea of the breakdown for how much of that is B2B versus going toward a consumer and then within let's say take a pretty fragmented sort of large order catering market do you have sense of who you might be taking share from. Thanks

Rick Cardenas:

Yes, Karen it's primarily B2B at this point in time. However we are seeing some growth in residential, we have done waiting's we're head into graduation season, and so again I get back the point I made earlier this is about building awareness. Because every time we do an events we are for the intent of reorders extremely high and the satisfaction is extremely high. Right now it is a natural for B2B. But we do believe we can grow into more of a residential large home we have replacement opportunity.

Karen Holthouse:

Great. Thank you, and then one quick housekeeping if I can squeezing in. Last year the fourth quarter ended a week after memorial day and this year look like it ends on memorial day weekend is there any sort of would you to the sort of the first week of summer day index to higher lower sales we should be thinking about.

Rick Cardenas:

Yes I would say for the fourth quarter you probably expect the first week to be a little lower. Because of the memorial day we can.

Karen Holthouse:

Great. Thank you.

Rick Cardenas:

Last week, I am sorry the last week.

Operator:

Thank you and we have question coming from line of Andrew Barish of Jefferies. Sir, your line is now open

Andrew Barish: Jefferies:

Thanks guys. The LongHorn margins step up significantly in the quarter to 20% and I know you talked about some promotional changes we added on sort of the new level here. I mean there was a pretty rapid step up or may be how much of it was beef versus you know some timing or marketing chefs just trying that trying to engage what went on with the margins at LongHorn.

Gene Lee:

Yes part of, first of all third quarter in LongHorn is by far the best quarter, and so that, that model really starts to work when you get in to $67,000 to $68,000 a week for average weekly sales. Beef was very little of it, we haven't we haven't started to see that really flow through some of it was as I've talked about was the marketing we are we've got every single line item continue to improved, and it was it was a lot of individual 10 basis points here 20 basis points there they added up to the 400 basis points with, with the big savings coming in labor, and so and again it's gets the whole idea of when we get LongHorn to $67,000 to $68,000 a week this model really works.

Andrew Barish:

Thank you.

Operator:

Thank you and the other question from David Carlson of Key Bank Capital Markets. Sir, your lines now open.

David Carlson: Key Bank Capital Markets:

Thank you guys for taking my call. Gene has we increased to go long volume created in the operational issues for the restaurants and do you believe the restaurants are well positioned to handle greater volume following the received advertising supports, and I have a follow-up.

Rick Cardenas:

Yes, David. You know one of the things is that the Olive Garden team did was before we really start to push take out that they want back in it looked every process and procedure and sure that they were able to handle the increase in volume and therefore this is been really, really well side out the beauty of the catering delivery is as its we ask for 24 hours advanced notice and we are actually able to increase our productivity because we are able to plan ahead and we are able to use some of our downside downtime in our cycles to prepare for the catering delivery so that's really been a real enhancement from productivity standpoint. We believe that we can continue to handle the increase in volume especially if it comes catering delivery because that usually goes out our door before lunch or before dinner which is ideal. So growth in that business really, really increases our product overall productivity.

David Carlson:

That make sense and then my follow up was how you that guys have the -- to go have you noticed much of a much larger ticket from online orders versus the older from this ordering system.

Gene Lee:

Yes. The online ordering still 20 tickets still 20% higher than calling on the phone and we are incentive wise in people to switch over to online ordering just the overall process when you think about it when you are on the phone we are trying to do best job we can the restaurants but sometimes that person taken the order behind the counter or behind the bar is got a guest in front of them and so they're one of the things they're trying to do is get the orders fast they can and get him off the phone were if you online. We can push you through the process and do a much better job selling to you and we find the consumer online is much more have to buy up and we are trying to incentive wise as much business that switch over to online to ordering and we also just put out the -- just put out its new apps this week so hopefully that will continue to help to help migrate people over to online ordering.

David Carlson:

Perfect. Thank you very much.

Operator:

Thank you and we have a question from Steve Anderson of Maxim Group. Sir your line is now open.

Stephen Anderson: Maxim Group:

So I will have the couple of questions on your costs reduction dollars as well as on food cost. First on the cost reduction side I know you gave guidance back in December on the food arrival on the your cost reduction goals. It assumes maybe I missed this as you usually provide an update on this call as well as any update on your food cost I look on food cost is that changed?

Gene Lee:

Sure, Steve. We still expect our total cumulative savings to be between $145 million to $165 million over the fiscal ‘15 to fiscal ‘17. That's what I'll remind you that we're leveraging our scale and simplifying our business in ways that don't impact the consumer. We expect $80 million to $90 million of those cost savings to come in this year and answer to your question about inflation and commodities we expect and what we have in our web presentation and in the appendix as we expect low single-digit deflation in commodities in the fourth quarter, but overall inflation for the year is still expected to be 1% to 1.5%. That's slightly favorable to the amounts that we gave you in the second quarter. So again overall inflation 1% to 1.5% that low single-digit deflation in food and beverage in the fourth quarter.

Stephen Anderson:

Thank you.

Operator:

Thank you and we have the Andrew Strelzik for the question from BMO Capital Markets. Sir, your line is now open.

Andrew Strelzik: BMO Capital Markets:

Hi good morning. Thanks for taking the question. Two things first, clearly the comps momentum is strong, but if you look at our and two year basis in February the traffic its feel a little bit is there anything may be onetime in nature that might have impacted that or not looking at that way and secondarily, just looking at capital allocation for 2017 obviously the step up in CapEx I am wondering if the long term 100 million to 200 million share repurchase is imply for 2017 or should we expect something maybe lower than that with the step up in the CapEx.

Rick Cardenas:

Yes. Let me answer first the CapEx question and I'll go back to the same restaurant sales. The $100 million to $200 million that we have in a long-term framework is that it's out long-term framework we'll tell you a little bit more about ‘17. In ‘17 but I would expect it to be somewhere in there. But it shouldn't be impacted by the increase in CapEx. So I can tell that on the same restaurant sales our two year same restaurant sales in February trying to get that number for quick is about 5.7%. So still a strong two your stock it might it wasn't as a big as January I believe but still 5.7% of our two years of strong performance and we feel good about that.

Andrew Strelzik:

So certainly the overall comp I wouldn't disagree with your with comment I was looking more at the traffic but maybe take the question off line. Thanks a lot.

Gene Lee:

That will be great. Thanks.

Operator:

Thank you and we have a question from John Ivankoe of JP Morgan. Sir, your line is now open.

John Ivankoe: JP Morgan:

Short one from me. When you guys look at where the deep spot market side and where it to be futures markets are on the term of and Peter -- and maybe the price of core and how does that gives you feeling about in terms of what you think your commodity basket to potentially be for ‘17 in others words relative to what you paid in ‘16 how good of an environment could we potentially been in.

Gene Lee:

John we will comment on the full commodities brought basket on in the call on June for ‘17. But let me just I just give you my thoughts on the beef market as I am pretty close to it. I on the futures market it looks very positive as we move forward. We at Darden have been short to this last cycle and we expect we expected to be a tailwind as we move into next year. I will say and I think it's important to -- on their notices is that the middle needs continue to be strong and we've seen a lot of releasing ground beef but we've not seeing a lot of released in the middle meats your tenderloins, your short lines and your ribs and so I believe that beef in ‘17 will be less than it was in ‘16 but I also believe beef is still going to be historically expensive.

John Ivankoe:

Thank you.

Operator:

Thank you and at this time we don't have any question on the queue.

Gene Lee:

All right. Thank you. That concludes our call. I want to remind you all that we expect to release our fiscal 2016 fourth quarter and full year results on Thursday June, 30th before the market opens the conference call to follow. Thank you all for your participation in today's call and have a great day.

Operator:

Thank you and that concludes today's conference. Thank you for all participating. You may now disconnect.