Highlights from Brinker Int'l's (EAT) Q2 Conference Call; EPS of $0.29 Beats Estimates by 7c

Brinker Internationa(NYSE: EAT) reports Q2 adjusted EPS of $0.29, 7 cents better than the analyst estimate of $0.22. Revenue for the quarter was $781.9 million, which compares to the estimate of $774.40 million. Shares are up 11.14% today.

Highlights From EAT's Q2 Conference Call:

• Wyman T. Roberts - President: Chili's Grill & Bar and On The Border Mexican Grill & Cantina:
  • Traffic, while still negative, is much improved as compared to the trends of last year and better than casual dining restaurant space as a whole.
    
    
  • Chili's sales for the second quarter outperformed the industry as measured by KNAPP-TRACK on a one and two-year basis, and our gap to KNAPP has sequentially increased from the first quarter. And On The Border continued its steady sales performance punctuated by December period that featured flat traffic and over a 300 basis points sequential sales improvement versus October and November.
    
    
  • On The Border, in particular, continues to make great strides in improving the business model with second quarter operating margin improving 580 basis points on a year-over-year basis, driven by substantial improvements in cost to sales, labor and management expense that are directly linked to the impact of our food and hospitality initiatives.
• Charles M. Sonsteby - Executive Vice President and Chief Financial Officer:
  • Earnings per share for the quarter excluding the impact of special items in Mac Grill increased 7.4%, in part due to the sales momentum gained through the quarter.
    
    
  • Strong cash flows in Q2 and the expectation of the strong cash flows for the foreseeable future, enabled Brinker to pay down $140 million of our long-term debt, reducing our term loan balance to the capacity of our $250 million revolving credit facility, again delivering on our promise of paying down debt and strengthening our balance sheet.
    
    
  • In the second quarter, revenues decreased $47.2 million or 5.7% to $781.9 million. This was comprised of same restaurant sales decline of 3.1%, as well as a capacity decrease of nearly 4.6% from having 63 fewer restaurants versus last year, misses negative due in part to promotional activities at each of our brands.
    
    
  • Traffic while down 2.6% represents continued sequential improvement from down 9.5% in the fourth quarter of fiscal 2009 and down 5.3% in the first quarter of fiscal 2010 and that's an encouraging sign.
    
    
  • Franchise royalties and fees were $17.3 million for the quarter, an increase of $1.1 million compared to the prior year, primarily due to an increase in royalties from our growing franchise system both domestically and internationally.
    
    
  • Cost to sales increased 80 basis points, 28.9% in the second quarter, primarily due to the margin impact of three course and Maggiano's today and tomorrow promotion. However, these costs were partially mitigated by improved kitchen operations, which were implemented in late fiscal 2009 and menu pricing.
    
    
  • Many of our commodity contracts run on a calendar year basis, and with the recent contract renewals, approximately 80% of our commodities are under contract through June of 2010 and that percentage slightly decreases to just below 70% by December 2010.
    
    
  • The improved traffic from our promotions helped restaurant expense, which decreased 90 basis points to 56%, thus offsetting our cost of sales increase. Included is a $0.04 of EPS benefit resulting from a $3.3 million credit card fee settlement and some reduced insurance expenses. These decreases were partially offset by sale deleverage and a decrease in labor productivity due to the three-course promotion, the initial rollout of new kitchen procedures for the upgraded menu and one-time investment cost for training and smallwares.
    
    
  • Depreciation and amortization expense, as a percent of revenues, was flat for the quarter but decreased in total by $2.4 million.
    
    
  • General and administrative expenses for the second quarter decreased $4.6 million on a year-over-year basis to $33.1 million or 4.2.
    
    
  • After adjustments for special items, the tax rate increased to 27.6% versus 22.4% last year, primarily due to increased income and lower tax credits. We're on track to generate substantial free cash flow in the range of 190 to $200 million during the fiscal year.
    
    
  • Additionally, the dissolution of our captive insurance company freed up previously restricted cash. The dissolution is substantially complete allowing us to access $75 million of cash this quarter. However, it will require total cash payments in fiscal fourth quarter and first quarter of 2011 of approximately $22 million in aggregate. The result, as promised, we paid down $140 million of debt, lowering our outstanding term loan balance to $250 million, equal to the capacity of our revolving credit facility.
• Douglas H. Brooks - Chairman, President and Chief Executive Officer:
  • During the quarter, Brinker opened 10 new restaurants in international markets including a Maggiano's and On The Border in Saudi Arabia, as well as several Chili's restaurants in locations such as Mexico, India and Egypt.
• Q&A Session:
  • (Q)Beyond the credit card settlement piece, there seem to be some other things like lower utilities, and I'm just curious what the sustainability of those is. Have you contracted natural gas or what's the visibility look like on the restaurant expense line if you back out some of those one-time benefits? (A)Well, Destin, its Chuck. We do feel pretty good about where restaurant expense is. In terms of contracting on utilities, we do contract wherever we can -- can do so. Some states are deregulated we're allowed to do contracts, other aren't. And so, in that case, we're not covered. So we got pretty good visibility into utilities for the rest of the fiscal year and feel pretty good about where restaurant expense is.
    
    
  • (Q)Chuck, if you could maybe just consolidate or bottom-line the restaurant margin expectations in the back half, assuming kind of a constant comp, at one time I think you had thought that food cost could decline by about 100 basis points in the back half. Is that still your view given the promotional mix? And then, last year it looks like your restaurant expenses went down significantly as a percentage of revenue versus the first half and versus prior. Is that something you can match or with those sort of temporary cost controls that probably, maybe your back half of this year looks more like your second quarter for the restaurant expense perspective. (A)Well let me start off the cost of sales John, we did give guidance to that line item somewhere around 27.5%. And if you look at where we are right now, we are higher than that. But I still feel like some of the contracting that we've done will low our commodity costs partially in the third quarter and particularly in the fourth quarter. So I don't think that 27.5 low, maybe a shade low is still well within, well within reachability, and did have a little bit of a freeze that effected tomatoes in this quarter. So we will expect to see about a penny hit on that. But still feel like that 27.5, while maybe a little bit low from the -- due to the promotional activity we've been doing that number is offsetting restaurant expense by better traffic. So all in all, the trade off between cost of sales and restaurant expense, there is no material difference from what we originally stated. As we go forward, last year there were some one time items, and we sat down and talked a lot about John [ph] those cost of discontinuing growth and we did see some real benefits in the third and fourth quarter last year. The thing that's going - that's make that tough is we will see better restaurant expense on a year-over-year basis, because we have a 53rd week in our fourth quarter. So that will help us in terms of restaurant expense as well.
    
    
  • (Q)First I wanted to know, during the December quarter, how did Texas and other regions performed against the country as a whole, and then second, I wanted to know what you've learnt from the three-course offering and promoting to the consumer an individual item at a price point or multiple items at a price point, and then thoughts on the use of multi-course promotions in the future? (A)Well, Tom, Texas has been weakened and Texas - I think you've heard that from some of our competition and you know Texas has been weak now for about a year. It had been one of the best performing markets out there and is now sold in [ph] to be average to - to slightly worse than average. But again, as you know, we've got a big footprint in Texas, and we've done very well considering we've had that headwind. I appreciate your question about asking what we've learnt, but honestly we know there is a lot of our competition on the - on the call listening and so, we hesitate to really give you all of the learning's that we've seen over the last seven months. It's - it's been a lot of work, lot of effort by our teams and we would hate to - to just drop that out there for somebody to get just for listening. So, I think we would rather pass on answering that question, Tom. Is there something else we can help you with, or some other way we could approach your - your question.
    
    
  • (Q)And Chuck, maybe a question for you on CapEx, debt and free cash in the balance sheet, you've made the comment that your term loan is now at 250, which is what your undrawn revolver is, which is great. So, one, I mean is there a need for refinancing, are you anticipating a refinancing of that term loan or would you draw down your revolver at this point in time? And then, related to that, I mean clearly you have plans in 2011 for development or lack of development, remodels or lack of remodels, I mean what should we expect for 2011 CapEx relative to 2010 and what would be the most likely use of that free cash flow? (A)Well, John, a lot of questions there. First of all, let me go backwards I think. We expect our CapEx for this fiscal year to still be somewhere in the neighborhood of 80 to $85 million for CapEx. As we go forward, honestly, we're seeing [indiscernible] look at that, we'll have a long discussion with our Board next week about plans for what do we do with our cash, what do we do with our balance sheet, what do I do -- what do we do with financial policy? That's really one of the underlying stories that we'll have to tell at the end of March, I think. We are in a great shape from a cash perspective. We will not go out and refinance the term loan today just because we've got a great interest rate, its 95 basis points over LIBOR. To put it on our revolver, it would actually increase our interest expense. So you will see that in the Q that gets filed that that would be listed somewhat as -- in current, some in long term. But again, we don't feel like there is a need to go refinance it today because it would be more expensive -- give more money to the banks than we feel like we need to do.
    
    
  • (Q)I wanted to start with -- since you freed up that 75 million in restricted cash and paid down some additional debt, what is the cash balance at the end of the second quarter and is there any restricted cash in that balance? (A)Hi. This is Marie. As of the end of the second quarter, we ended with 110 million of cash. And as Chuck mentioned, since we unwound the captive insurance, the majority of that cash is now completely unrestricted. There is just a minimal amount we're still trying to unwind. It's less than $4 million. But really, when you look at that, $110 million, a lot of that money is -- can be used for any purpose.
    
    
  • (Q)And then, just lastly, in terms of gift card sales during the holiday season, just wondering how that went pre and now redemption rates relative to on a year ago period? (A)Jeff, we're at 5.3% versus last year, so good success, particularly at Maggiano's. Lot of our third-party partners had double-digit growing sales in some of those locations. So, overall, despite what some of the gloomy predictions were, we sold more.

You May Also Be Interested In

• Northcoast Downgrades Brinker Int'l (EAT) to Neutral
• Movano (MOVE) Misses Q2 EPS by 195c
• Silexion Therapeutics (SLXN) Tops Q2 EPS by 793c