Darden Restaurants (DRI) Earnings Report: Q4 2016 ... · PDF fileCompany Name: Darden...

CompanyName:DardenRestaurantsIncCompanyTicker:DRISector:ServicesIndustry:Leisure

EventDescription:Q42016EarningsCallMarketCapasofEventDate:8.36BPriceasofEventDate:63.24

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DardenRestaurants(DRI)EarningsReport:Q42016ConferenceCallTranscriptThefollowingDardenRestaurantsconferencecalltookplaceonJune30,2016,08:30AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

KevinKalicak;DardenRestaurantsInc;InvestorRelationsGeneLee;DardenRestaurantsInc;CEORickCardenas;DardenRestaurantsInc;CFO

OtherPart icipants

BrettLevy;DeutscheBank;AnalystBrianBittner;Oppenheimer&Co.;AnalystUnidentifiedParticipant;stephensInc.;AnalystMattDiFrisco;GuggenheimSecuritiesLLC;AnalystDavidPalmer;RBCCapitalMarkets;AnalystDavidTarantino;RobertW.Baird&Company,Inc.;AnalystJohnGlass;MorganStanley;AnalystJasonWest;CreditSuisse;AnalystJeffFarmer;WellsFargoSecurities,LLC;AnalystChrisO 'Cull;KeyBancCapitalMarkets;AnalystJeffBernstein;BarclaysCapital;AnalystKarenHolthouse;GoldmanSachs;AnalystAndyBarish;JefferiesLLC;AnalystSaraSenatore;SanfordC.Bernstein&Co.;AnalystAndrewStrelzik;BMOCapitalMarkets;AnalystSteveAnderson;MaximGroup;AnalystJoshuaLong;PiperJaffray;AnalystJakeBartlett;SunTrustRobinsonHumphrey;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

WelcometotheDardenFY16fourth-quarterearningscall.

(OperatorInstructions)

Thisconferenceisbeingrecorded.Ifyouhaveanyobjections,pleasedisconnectatthistime.

IwillnowturnthecallovertoMr.KevinKalicak.Thankyou.Youmaybegin.

KevinKalicak(InvestorRelations):

Thankyou,Operator.Goodmorningandwelcome,everyone.

WithmetodayisGeneLee,Darden'sCEO,andRickCardenas,CFO.




Asareminder,commentsmadeduringthiscallwillincludeforward-lookingstatementsasdefinedinthePrivateSecuritiesLitigationReformActof1995.Thesestatementsaresubjecttorisksanduncertaintiesthatcouldcauseactualresultstodiffermateriallyfromourexpectationsandprojections.Thoserisksaredescribedinthecompanypressrelease,whichwasdistributedearliertodayandinitsfilingswiththeSecuritiesandExchangeCommission.

Wearesimultaneouslybroadcastingapresentationduringthiscallwhichispostedintheinvestorrelationssectionofourwebsiteatwww.darden.com.

Today'sdiscussionandpresentationincludecertainnon-GAAPmeasurements.Andareconciliationofthesemeasurementsisincludedinthepresentation.

WeplantoreleaseFY17first-quarterearningsonOctober4,beforethemarketopens,followedbyaconferencecall.

Thismorning,Genewillsharebriefremarksyouaboutquarterlyperformanceandbrandhighlights.RickwillthenprovidemoredetailonourfinancialresultsfromthefourthquarterandshareouroutlookforFY17.ThenGenewillhavesomeclosingremarksbeforeweopenthecallforyourquestions.

Beforewebegin,Iwanttopointoutthat,justaswedidlastquarter,wereportedsame-restaurantsalesonbothafiscalandcomparablecalendarbasis.

Thismorning,wewillrefertothecomparablecalendarcompsduringourremarksunlessotherwisenoted.Additionally,salesandearningscomparisonsversuslastyearwillexcludetheimpactofthe53rdweekinthefourthquarterofFY15,unlessotherwisenoted.

Now,I'llturnthecallovertoGene.

GeneLee (CEO):

Thankyou,Kevin.Goodmorning,everyone.Thanksforjoiningus.Wehadastrongquarterwitheachofourbrandssignificantlyoutperformingtheindustrybenchmarksaswecontinuedtofocusonimprovingourexecution.same-restaurantsalesgrew2.6%,withpositivesame-restaurantsalesineachofourbrands.

Itwasavolatilequarterasaresultofmultipleholidayandcalendarshifts,includingEaster,MemorialDayandspringbreakvacations,whichwebelievenegativelyimpactedcompsacrosstheindustry.

OliveGardenhadanothergreatquarterandconcludedayearinwhichweservedmorethan220millionguests.TheOliveGardenbrandisextremelyrelevant.Thebusinessisstrong,andourstrategycontinuestodeliverresultsasevidencedbyourongoingmomentum.

InQ4,same-restaurantsalesgrew2.4%,outperformingtheindustrybenchmarks,excludingDarden,bymorethan440basispointsinbothsalesandtraffic.Thiswasourseventhconsecutivequartersame-restaurantsalesgrowthandfourthconsecutivequarterofpositivesamerestaurantguestcounts.

Threekeydriversofthisperformanceincludefirst,furthersimplificationofouroperationalprocessesandprocedures,leadingtoimprovedexecutioninourrestaurants.Second,culinaryinnovationthatbuildsonthebrandequitiesandflavorprofilesthatourloyalguestsenjoymostasseenwithoursuccessfulItalianpotpies,MediterraneanFreshandLasagnaLoverpromotions.Andfinally,continuedgrowthofoursuccessfulOGToGoplatform.

ToGosaleswereup19%year-over-year,withatwo-yeargrowthrateover40%.Fortheyear,OGToGosalesrepresented10.8%oftotalsales--anincreaseof140basispointsversuslastyear.




Additionally,wehadthebestMother'sDayinOliveGardenhistory,whichfurtherdemonstratesthebrand'srelevanceanditsbroadappealasadestinationforfamiliescelebratingtimetogether.

OliveGardenremainslaser-focusedondrivingfrequencyofourloyalguests,whiledeliveringgreatexperiences,andourguestsarerespondingpositively.Ourinnovationpipelineisstrongandwestillhavemeaningfuloperationsimprovementstocapture.

LongHornSteakhousemaintaineditssolidtop-linemomentumandonceagaindeliveredstrongprofitgrowth.same-restaurantsalesgrew2.2%,the13thconsecutivequarterofgrowth,outperformingtheindustrybenchmarks,excludingDarden,bymorethan400basispointsandsamerestauranttrafficwaswellabovetheindustryaverage.Wewillcontinuetoinvestinfoodqualitytoenhancetheoverallperceivedvalueofthediningexperienceandhavemultiplein-restauranttestsunderway.

Additionally,LongHorncontinuestosimplifyoperationstostrengthenin-restaurantexecutionanddelivergreatguestexperiences.Thisfocusonoperationalexcellenceisaugmentedbycompellingnon-pricepointedpromotionslikeourbigboldsteaksandLongHornfavoritesthatreinforceoursteakexpertise.

Lookingatourspecialtyrestaurants.Allfivebusinessescontinuedtodeliversolidresultsthatincludedpositivesame-restaurantsalesgrowthateach,ledbySeasons52at5%andBahamaBreezeat4.7%.Seasons52hadanotherstrongquarter.WecontinuetoexecuteourstrategyataveryhighlevelandI'mimpressedwithwhattheteamhasbeenabletoachievethroughouttheyear.

Seasons52isanon-trendconcept,givinggueststheopportunitytoenjoyhandcraftedcuisinethatishealthful,withoutsacrificingthetasteorstyle.Welookforwardtobuildingonthemomentumwe'vecreatedaswerebuildthepipelineforvaluecreatingnewrestaurants.

YardHouserepresentsasignificantgrowthopportunityforus.Andduringthequarter,wenamedMikeKneidingerPresident.I'mexcitedtohaveMikeleadtheYardHouseteam.Heissupportedbyanextremelystrongteam.

MikedidatremendousjobleadingBahamaBreeze,deliveringsame-restaurantsalesgrowthof3.5%annuallyoverthepastthreeyearsandI'mconfidenthewillbuildonthemomentumatYardHouse.

Allofourspecialtyrestaurantscontinuetoperformwellandaredifferentiatedandwellpositionedtogrowmarketshareintothefuture.Overall,I'mpleasedwiththeresultsweachievedthisquarter.

Now,I'llturnitovertoRicktodiscussthoseinmoredetail.

RickCardenas (CFO):

Thankyou,Gene.Goodmorning,everyone.

Darden's'fourth-quarterdilutednetearningspersharefromcontinuingoperationswere$1.10,bothonareportedandadjustedbasis.Theywere8.9%higherthanlastyear'sadjusteddilutednetearningspershare.

Asareminder,lastyearwasa14-weekfiscalquarter.The8.9%growthassumesa13-weekquarterlastyear.

Additionally,thisquarterwepaidoutover$63millionindividendsandrepurchasedapproximately$45millioninDardenstock.

Keydriversofthisquarter'sgrowthincludedpositivesame-restaurantsalesof1.7%onafiscalbasis,continuedprogressachievingourcostsavingsinitiativesthroughouttheP&L,afavorable




commoditiesenvironmentresultinginapproximately1%deflationinfoodandbeverageexpenseanddepreciationandinterestexpensesavingsrelatedtotherealestatetransactions.

Theseresultswerepartiallyoffsetby170basispointsofincrementalrentandothertaxesrelatedtotherealestatetransactions.Excludingtheadditionalrentexpenseandothertaxes,restaurantexpenseswouldhavebeenfavorablebyapproximately20basispoints.

Whileouradjustedtaxratewasinlinewiththeexpectationswesharedlastquarter,taxexpenseasapercentofsaleswas80basispointsunfavorabletolastyear,drivenbytaxtiming.

Turningtosegmentperformance.Asareminder,FY16segmentprofitincludestheincrementalrentandothertaxexpenseassociatedwiththerealestatetransactions,whereasFY15didnotincludethesecosts.Intotal,thesecostswere$30millionforthequarter.Thebenefitsoflowerdepreciationandinterestsavings,whichwere$27million,arenotrecognizedinsegmentprofit.

O liveGardensegmentprofitmarginof19.3%was100basispointslowerthanlastyearforthequarter,asadditionalrentdrove230basispointsofmarginunfavorabilityversuslastyear.Excludingtheincrementalrent,O liveGardensegmentprofitmarginwas130basispointshigherthanlastyear.

LongHornSteakhousegrewsegmentprofitmarginby120basispointsforthequarterto19%.Excludingtheincrementalrent,segmentprofitincreased250basispointsatLongHorn.Ourfinediningandotherbusinesssegmentprofitmarginswereessentiallyflatonayear-over-yearbasisat20.1%and18.9%respectively,withourotherbusinesssegmentimpactedbyadditionalrent.

Wearepleasedwiththeprogresseachofoursegmentshasmadeimprovingprofitability.Theyareleveragingtheirsalesgrowthandcontinuingtoimprovetheguestexperience,whiletakingadvantageofDarden'sscaleandworkingcloselywithoursupportteamstoidentifyandcapturecostsavings.

Finally,asweannouncedthismorning,ourBoarddeclareda$0.56persharequarterlydividend,a12%increasefromlastquarter'sdividend.Wewereabletospinoffourrealestateintoaseparatepubliclytradedcompanyandstillincreaseourquarterlydividendaboveourpre-spinquarterlydividend.

OurspinoffofrealestateassetstoFourCornerscreatedadditionalgrowthforourshareholdersasthecurrentcombineddividendofthetwocompaniesisnow23%higherthantheDardendividendbeforethespinoffofFourCornersthispastNovember.

FY16wasayearofsignificantprogressatDarden.Weachieved4.4%totalsalesgrowthona52-weekbasis,3.3%same-restaurantsalesgrowthand38%growthinadjusteddilutednetearningspershare.

Inadditiontomeaningfulsalesandadjustedearningspersharegrowth,weprofitablygrewourmarketshare,exceedingtheindustrybenchmarkforsame-restaurantsalesbyover400basispoints,increasedadjustedoperatingmarginsbyover200basispoints,leveragedourscale,furtheroptimizingoursupplychainandmanagingcosts,resultingin$95millioninannualcostsavings,whichexceededourinitialtargets,andreturnedmorethan$450milliontoshareholdersthroughdividendsandsharerepurchases.

Importantly,wealsoexecutedourrealestatestrategybycompletingatax-freespinoffofselectrealestateassetsandrestaurantassetsintoanewpubliccompany,FourCornersPropertyTrust.Thistransactionadvancedourcommitmenttodelivervaluetoourshareholderswhileimprovingourcapitalstructureandreducingdebt.

Usingproceedsfromthistransactionandfromthesaleleasebacksofourrestaurantsupportcenterand64restaurants,pluscashonhand,wepaiddown$1billionindebtduringtheyear.Thisreductionindebtsignificantlyimprovedourleverage,resultinginareturntoinvestment-gradecreditstatusfromallthreecreditratingagencies.Overall,we'reexecutingavaluecreatingbusinessmodeltogeneratesignificant




anddurablecashflowthatwillfundgrowthandreturncapitaltoshareholders.

NowlookingforwardtoFY17.Weanticipatetotalsalesgrowthof1.7%to2.7%,whichincludessame-restaurantsalesgrowthof1%to2%and24to28newunits,capitalspendingofbetween$310millionto$350million,costsavingsofapproximately$30million,totalinflationbetween1.5%and2%,andanannualeffectivetaxratebetween26%and27%,andapproximately128.5milliondilutedaveragesharesoutstandingfortheyear,allresultinginearningsperdilutedsharebetween$3.80and$3.90.

Weanticipatefirst-quarterearningspersharetohavethehighestgrowthonapercentagebasis,asweexpectcommodity'sdeflationinthefirstquarterofFY17,whileweforecastcommoditiesinflationinsubsequentquarters.

Asareminder,inDecember,wesharedourframeworkforvaluecreation,includinga7%to10%earningsaftertaxgrowthanda10%to15%oftotalshareholderreturnscalculatedasEPSgrowthplusdividendyield.

ThemetricsforourFY17outlookarewithinthelong-termtargetswesharedthispastDecemberwiththeexceptionofnewrestaurantgrowth.Weareworkingdiligentlytobuildapipelineofnewrestaurantsforfuturegrowth.

Andwiththat,I'llturnitovertoGene.

GeneLee (CEO):

Thanks,Rick.AsIthinkaboutFY16,I'mextremelyproudoftheprogresswemadeinpursuitofourmission,whichistobefinanciallysuccessfulthroughgreatpeople,consistentlydeliveringoutstandingfood,drinksandservice,inaninvitingatmosphere,makingeveryguestloyal.

Ourresultsreinforcethatourstrategyisworkingasourrestaurantsandteammemberscontinuetobuildguestloyaltybyrelentlesslyfocusingonourback-to-basicsoperatingphilosophy,whichisrootedinculinaryinnovationandexecution,attentiveservice,engagingatmospheres,andintegratedmarketing.

Finally,wecontinuetoleverageourfourcompetitiveadvantagesthatweseeaskeystounlockingsalesgrowthandexpandingmargins.TheyarethesignificantscaleofourCompany,thebreadthanddepthofourdataandconsumerinsights,ourcommitmenttorigorousstrategicplanning,andourresults-orientedpeopleculture.It'sthatlastcompetitiveadvantage,ourpeople,thattrulysetsourCompanyapart.

Together,we'veaccomplishedagreatdealoverthepasttwoyearsandwe'vedoneitbygettingalittlebettereachday.Itmaysoundsimple,butit'shardtoconsistentlydeliveroutstandingguestexperiencesdayinanddayout.Itonlyhappensbecauseofour150,000outstandingteammembersacrossourCompany.

Soletmeclosebythankingeachofthem.Weknowwe'vegotalotmoreworktodo,butI'mconfidentourteamisuptothechallenge.

Nowwe'lltakeyourquestions.

QUESTIONS&ANSWERS

Operator :

(OperatorInstructions)

BrettLevyofDeutscheBank.




Brett Levy(Analyst-DeutscheBank):

Goodmorning.Obviously,anotherquarterofanicejobonthelaborline.

Canyoudousafavorandtalkalittlebitthroughwhatyourthoughtsareandhowyou'remanaginglabor?Whatyoucandogivenallofthescarcitythat'soutthere,howyou'relookingatinflationandalso,haveyouhadanopportunitytoassesswhatimpactthechangestoovertimewillhavetoyourlaborlineandthewayyou'reapproachingbusiness?

GeneLee (CEO):

Goodmorning,Brett.Couplethings.

Letmedealwiththelastpointfirst,whichisthelaborimpact.Thatwillhavenoimpactonourorganization.Letmetalkaboutlabor.Laborissomethingthatwecontinuetofocuson,butwe'refocusingonitinadifferentway.Andwe'refocusingonitonreally,whenwethinkaboutmenudevelopment,howourmenusareconstructedandhowthatleadstoprocessesandproceduresinthekitchen.

AndwecontinuetohefocusonsimplificationinallaspectsofwhatIwouldofcalltheproductionprocessorthemanufacturingprocessofproducingourmenuitems.Ourteamsaredoingagreatjobofsimplifyingtheprocessesandthinkingabouthowproductsthatwehaveareaddingtothemenuorwehaveonthemenuimpacttheproductionprocess.Andsowe'vetakenproductsoffthemenuthatarecomplex.

We'vesimplifiedprocessesandprocedures,whichhasallowedustoimprovetheoverallproductivityinthebackofthehouse.Obviously,thefrontofthehouseisanareawhereit'skindofofflimits.Wehaveourbeliefsinwhatittakestoexecuteoutfront.Andwe'refocusedonbackofthehouse.We'vealsogotalotofenergyaroundmakingsurethatwehavetheappropriatelaborintherestaurantattherighttimes.

OneofthingsthatwedowithourP&Lreviewsattheendofeachquarteriswesitdownandwereallylookatwhat'stheproductivityofourrestaurantsbeforewehaveguestsinthereandthenafterwedon'thaveguestsinthere.Andwe'vebeenabletotakealotofhoursoutbymakingsomeadjustmentsthere.Sowefeellikewe'reimprovingtheguestexperience.We'reworkingonproductivityinthebackofthehousewiththedesignofourmenusandprocessesandprocedures.

I'llclosebysaying,andmaybepreemptsomeotherquestionsonlabor,isthatlabormarketistightanditcontinuestobetightinspecificmarkets,whichisdrivingalittlebitmoreinflation.ButasI'vesaidmanytimesonthiscall,Iprefertooperateinanenvironmentwherelaboristight.Ithinkthatwillleadtodemandintothefuture.

Brett Levy(Analyst-DeutscheBank):

Wouldyoubeabletoquantifywhatyourwagerateinflationisorwhatyou'reseeingintermsofturnover?Thankyou.

GeneLee (CEO):

We'reseeing2.5%,3.5%wageinflationdependingwhereweare,inwhichbrandinwhichpartofthecountry.We'venotseenamajortick-upinanyofourturnover.Actually,ourturnoverremainsstrong.Webelieveinouremploymentproposition.We'recontinuingtolookatthatandweprovideouremployeesatremendousopportunityforadvancement.Andsotheindustryhasseenaprettygoodtick-upinturnover,butwe'renotseeingitinourDardenbrands.

Operator :




BrianBittnerofOppenheimer&Company.

BrianBittner (Analyst-Oppenheimer&Co.):

Thanks.Goodmorning,guys.

Questionabouttheoutlookfor2017.Onthecompfront,your1%to2%guidanceisnotthesameasyour1%to3%normalizedoutlook.Atthemidpoint,it'salittlebelow.AnditisalittlebelowwhereyourtrendwasinMayandforthefourthquarter.

Sowhat'sdrivingjustaslight,slightbitmorecautionthere?Isitthecurrentenvironment,orisitthefactthatyou'relappingsomeprettyout-sizedcomps?IfyoucouldjusttalkabouthowyouconstructedthecompoutlookI'dappreciateit.

GeneLee (CEO):

Goodmorning,Brian.

Ithinkthatwhat'sinvolvedinouroutlookguidanceof1%to2%iswe'regivingguidanceforaverylongperiodoftime,overthenext12months.Andbasedonallthethingsthatweknowtodayandallthatwedon'tknowaboutthenext12months,wethink1%to2%isaprudentguide.Thatwouldindicatethatit'sstillsignificantoutperformanceovertheindustry.Andsowebelievethat'stheappropriateguidanceatthispointintimewithalltheknowledgethatwehave.

BrianBittner (Analyst-Oppenheimer&Co.):

Thatmakesalotofsense.It'sprettysolid.

OntheEPSfront,whyareyouguidingtoalittlehighersharecountyear-over-yearwhenyou'realsosayingyou'regoingtobuybackacouplehundredor$100millionto$200millionofstock.Istherethatmuchdilutiongoingonwithstock-basedcompensation,orwhat'sgoingonthere?

RickCardenas (CFO):

Yes,Brian,thisisRick.

Acoupleofthings.There'sjustalotofassumptionsandfactorsthatmakeupoursharecount,includingdilution,asyoumentioned,optionexercises,newequitygrants,whichreallyaren'tthatdifferentthanlastyear,andshareprice.Sotheassumptionsthatwemakeforsharepriceandthetimingofourbuyback.Sowethoughtitwasmostprudenttojustgiveyouasharecountnumberthatwe'reusingforourEPS,whichwehaven'tdoneinthepast.

Operator :

WillSlabaughofStephensInc.

Unidentif iedPart icipant (Analyst-stephensInc.):

Thanks.ThisisactuallyBillyonforWillthismorning.

Wasinterestedtohearwhatyou'reseeingfromtheconsumeracrossyourbrandportfolio.Areyouseeingdifferenttrendsatsomeofyourhigher-enddiningrelativetothelower-endandwhatyouthink,fromyourperspective,isdrivingthatbehavior?Clearly,we'veheardmanycompaniesalludetoarecentshiftinconsumerbehavior,buthaveyouatDardenseenanythingdiscernable,oratleastworthnoting?

GeneLee (CEO):




No,IthinkthewayIwouldtalkaboutconsumerbehavioristheguestcontinuestolookforvalueandaffordabilityisonlyonecomponentofthatvalue.Butit'snotreallyenoughtodrivesustainabletrafficgrowth.Soobviously,inanOliveGarden,weservealotofdifferentgueststogetto5,000guestsaweek.Andeachguestislookingforsomethingdifferent.

Butwheneverwefindsomethingthattheconsumerreallybelieveshasgotvalue,that'swheretheconsumergoes.Andthat'snotalwaysthelowestpricepointorthethingthat'sdiscountedthemost.WestillseealotofguestsinLongHornjustgravitatetowardsagreatfiletbecauseit'sagreatvalue.WesawahighpreferenceinOliveGardenwithseafoodlasagna,whichcaughtusalittlebitbysurprise,butitwasthebestvalueintheofferingthatwehad.

SoIbelievetheguestcontinuestolookforvalueandthevalueequationisnotalwaysjustwhat'sinthenumerator.Whenwethinkaboutourbrands,allthewayfromOliveGardentoCapitalGrille,obviouslypriceplaysalotmoreimportanceincreatingthatvalueinanOliveGarden,whereinCapitalGrille,it'smuchmoreabouthowwemakeyoufeelthatcreatesthevalueinthatexperience.SowethinkaboutitandgoalongthatlineinbetweenOliveGardenandCapitalGrille.

We'relookingforthatrealvaluedifferentiatorthatwilldrivetraffic.Andsometimesit'saffordabilityandpriceandsometimesit'smoresomeoftheotherattributes.Andwekeeppullingonalloftheattributes,notjustone.Wecontinuetomakeimprovementsinquality.Wecontinuetomakeimprovementsinservice.That'swhywefocussomuchonexecution.

Webelieveattheendoftheday,we'vegottoexecuteatwhatwecalltheninesquarefeet.Atthattableandeverybodyoneofourrestaurants,onetableatatime,thatreallydrivesthemostvaluetotheconsumer.

Overall,theirbehaviorcontinuestobethesame.Weseethemstillusingthefullmenu.We'vegotgood,interestingappetizers,they'rebuyingthem.Ifwe'vegotgood,interestingdeserts,they'rebuyingthem.It'scompellingforustokeepcomingupwithgreatculinaryinnovationthatmakespeoplewanttobuyourproducts.

Unidentif iedPart icipant (Analyst-stephensInc.):

Gotit.Thanks.That'sactuallyveryhelpful.

Onerealquickfollow-up,ifIcould,withregardstotheoffpremiseandtogosales.A,whatdoyouthinkhasbeenthebiggestcontributionfromtheCompany'spartindrivingthegrowthandtheguestsassimilatingtothatplatform?Andthensecond,wouldyoubychancebewillingtobreakoutwhatyoubelievethecontributionfromthat,theonlinesalesweretothisquarter'scomp?

GeneLee (CEO):

Letmeaddressthefirstpartofthatquestion.Ithinkweidentifiedfourorfiveyearsagothattheneedsdataconveniencewasgoingtocontinuetogrow.That'stheonethingtheconsumerwastellingusintheinsightswasthatwedon'thaveenoughtimetodoallthethingsthatwewanttodo.Wewantyoutomakethismoreconvenientforus.

Andso,webuiltaplatformthatenabledustodothat.We'vebeenabletomarketiteffectively.We'vebeenabletodeliveritindifferentways,whetherit'sthroughatraditionaltogoexperience,whetherit'sthroughanonlineorderingexperience,withit'sthroughbulk.Andnowwiththisdeliveryandcateringthatwe'redoing,we'rejustgivingtheconsumeranotheraccesspointtogetwhattheywant,whichissomethingthat'sconvenient,that'shighquality,andagreatvalue.

Andthat'swhyIthinktakeout'sworking.We'vegotabrandthat'smeetingtheconsumerwherethe




consumerwantstobemet.Dowehaveonthepercentage?

RickCardenas (CFO):

20%.

GeneLee (CEO):

Yes.About20%ofourbusinesstodayisonlineandthatcontinuestogroweachquarter.

Operator :

MattDiFriscoofGuggenheimSecurities.

MattDiFrisco (Analyst-GuggenheimSecuritiesLLC):

Thankyou.

BeforeIgettomyquestion,Ijustwondered,canyouelaboratealittlemorewhatyouconsideronline?Isthatanonlinereservation?Orareyousayingthat20%ofthepeopleareactuallypayingonlineandorderingonline?

GeneLee (CEO):

No,20%ofthepeopleorderingtakeoutonline.


Okay.20%ofyourtakeoutbusiness.

GeneLee (CEO):

That'sabigpointoffocusforus,becausethemoreweconvert,numberone,wehaveahighercheck.Butoperationally,it'smucheasierwhenwegetthatorderonline.


Howmuchisonlineinaggregaterightnow?

GeneLee (CEO):

20%.


Overall,howmuchofyourbusinessatO liveGardenistakeout,20%?

GeneLee (CEO):

No,10.8%.


Gotit.Andthen20%ofthat10.8%isonline.Understood.Okay.

MyquestioniswithasfarasthegaptoyourNAPpeers,youaccelerated,andevenwidenedthattowardstheendofthequarterinwhatitappearstobethemonthofMay.Obviously,yourcalendar,NAPhasadifferentperiodsomewhat,somaybeit'snotaperfectscience,butbothbrandsseemtohave




acceleratedinthebackhalfofyourfiscalquarter.

Iwonderedifyoucouldelaborateonmaybesomeofthepromotionalactivityorsomethingthatyousawcompetitivelythatreallylititupinthebackhalfofthequarter.Myfollow-upquestionwouldbe,youdidcommentthatthecommodityenvironmentsuggeststhattheEPSinthefirsthalfofFY17wouldprobablydrivegreaterearningsgrowth.

Isthatthesameforthesame-storesalesfront,asfaraswhatwesawinthemonthofMay?Arewecarryingfaster,greatermomentum?Andlookingatthecompares,itwouldsuggestprobablythatthefirsthalfalsowillbeacomp-strongerperiodthanthebackhalf.

GeneLee (CEO):

Yes,Matt.Letmedealwiththesecondpartofyourquestion.

We'renotgoingtocommentonsalestrendsinJuneandIwouldn't--Idon'tthinkyoushouldmakethatleap.Ithinkyoushouldlookatthesame-restaurantsalesas1%to2%asprettyflatthroughouttheyear,asbasedonwhatweknowrightnow.

AsfarasMaygoes,youarecorrect,wedidaccelerateagainsttheindustryinMay.IthinkthatwefocusedalotonMother'sDayandinandaroundMother'sDaywhich,gaveusagreatboost.AsIsaid,O liveGardenhadarecordMother'sDay.LongHornhada--everyoneofourbrandshadarecordMother'sDayandthedaysaroundMother'sDayaswereallyfocused.Andwethinkthatdrovealotoftheactivityinthemonth.

Wereallyhavelikedfocusingonthesedays,bothfromacommunicationsstandpoint,butalsofromanoperationalstandpoint.WhenyoulookataMother'sDayinbothOGandLongHorn,it'sjustabouthowmanyguestsyoucangetthroughandexecuteperfectlythroughouttheday.

AndsoIthinkwewereactive,bothdigitallyandinotherpromotionalactivity,andweexecutedextremelywell.WealsogotabigbumpincateringanddeliveryforMother'sDayinOG,whichwasastrongbump.SoIthinkitwas--ourteamsdidagreatjob.Wecapitalizedonthevolumewhenthevolumewasthere.

Operator :

DavidPalmerofRBCCapital.

DavidPalmer (Analyst-RBCCapitalMarkets):

Great.Thanks.Goodmorning.

IfyouweretoauditthesalesdriversatO liveGardenfor2016,foodrenovation,LTOs,thevalueplatforms,togo,whatwerethebiggestdriversinyouropinionfortheyear,whetheryouwanttonumbersonitornot?Andhowdoyouthinkaboutcontributorsgoinginto2017?Doyouhaveasenseofhowdifferentlythesalesdriverswillshapeupthisnextfiscalyear?

GeneLee (CEO):

Ithinkthere'safew.First,Iwanttostartwith,Ithinkwe'reexecutingbetter.AndIknowsometimeswewanttolookforsomeotherthings.ButIwanttopivotbacktoIthinkDaveGeorgeandDanKarenandtheteamatOliveGardenhavejustdoneagreatjobimprovingtheday-to-dayexecutions.Ithinkthat'sbeenthenumberonesalesdriver.AndasIsaidinmycomments,wethinkwestillhavemeaningfulimprovementtomakethere.




Second,wethinktogohasbeenagreatsalesdriver.Thishasbeenaleaderinwhatwe'vebeendoing.Wethinkwe'reexposingmoregueststoOliveGarden.It'sbeenaterrificsalesdriver.We'vedonegreatculinaryinnovation.We'vehitsomereallybigproducts.Ourpotpieswereabighit.Ourculinarytourwasabighit.OurcreateyourownTourofItaly'sbeenabighit.

Z ioskhasbeenasalesdriver.Soit'sbeenagoodleverthatwedon'tthinkthatwe'vefullyhitourfullstridewiththat;we'vestillgotsomeroomthere.Andthenremodelshavebeenasolidsalesdriver,outperformingthebasebyalmost4%intraffic,between3%and4%intraffic.SoIfeellikethere'smultiplelevers.ButIwanttowrapthatbackaroundwithourmaniacalfocusontryingtoexecutebetterattherestaurant.

Weasateamandme,especially,believethatisthekeydriverofwinninginthisbusiness,it'sthatinteractionbetweentheserverandtheguest.Ifwedon'twinthere,alltheotherthingsare,Idon'twanttosaythey'remeaningless,butthey'reclose.We'vegottoexecuteataveryhighlevel.AndcongratulationstoalltheOliveGardenpeoplewhoarelisteningoutthere.Youdidagreat,greatjob.

DavidPalmer (Analyst-RBCCapitalMarkets):

Thanks.I'llleaveitthere.

Operator :

DavidTarantinoofBaird.

DavidT arantino (Analyst-RobertW.Baird&Company,Inc.):

Goodmorning.Ihaveaquestionaboutthe2017marginguidance.Itlookslikeyou'reassumingmarginimprovementinlinewithyourlongruntargets,butIthinkyoualsoshouldbeseeingsomecarryoverbenefitsandnewbenefitsfromsomeofthecostsavingsthatyou'veachieved.

Somyquestionis,istheresomethingoffsettingthecostsavingsfromaninvestmentperspectivethat'spreventingthemarginexpansionfrombeingabovetherangeyounormallywouldexpectgoingforward?

RickCardenas (CFO):

Yes,David,there'sacoupleofthings.Iwouldsayone,wehavethesecondhalfoftherealestatethatwehavetowrapon.Sorealestateprimarilyoffsetsthe$30millionofcostsavesthatwetalkedaboutfornextyear.Ifwegetcostanythinggreaterthanthat,we'regoingtocontinuetoreinvestinourbusinesstodrivesalesgrowth.So,whilewe'restillinourlong-termframework,again,therealestatetransactionandtherents,etcetera,areoffsettingourcostsaves.


Great.That'shelpful.

Onemoreclarificationontheguidance.Onthecompsoutlook,canyougiveusasenseofwhatthebreakdownonthecompsmightlooklikefromacheckandtrafficstandpoint,oratleastwhatyou'reassumingatthisstage?

GeneLee (CEO):

Whatwe'reassuming,David,iswe'regoingtobeatthelowendofour1%to2%pricinginnextyear.Sowedoassumesometrafficgrowthinourguidance.





Great.Thankyouverymuch.

Operator :

JohnGlassofMorganStanley.

JohnGlass (Analyst-MorganStanley):

Thanksverymuch.

Iwantedtogobacktothe1%to2%outlookfornextyearaswell.Itisalittlelowerthanyour1%to3%.One,whatisyourassumptionontheindustry,isthisjustanindustry-generatedslower?Somaybeyoucouldbemoreexplicitaboutthat.

Ithinkyou'vebeenalittlebitmorerestrainedaroundpricing.Doyouthinkpricevalueisbecomingabiggerissueintheindustryandthat'swhyyou'rebeingmorerestrainedonthat,aswell?

GeneLee (CEO):

John,that'sagreatquestion.

AsRicksaid,we'rerightnowatthelowerendonourpricingthinkingisthatwe'regoingtobeinthe1%kindofrange,dependingonthebusiness,butwedefinitelythinkOliveGardencan'tbemorethan1%inthecurrentenvironment.We'relookingatanindustrylastyearthatwasdown1.3%,buttrending--I'msorry,thatwasthequarter.We'relookingatanindustrythatwasdowncloserto2%,high1%'s.We'reworkingoffthatnumber.

Andsowe'relookingatameaningfuloutperformancewithminimalpriceaswecontinuetotrytoimprovethevalueofferingsinourbusinesses.Weneedtocontinuetoinvest.There'salotoftalkabouthowpromotionaltheenvironmentisrightnow.

Butthefactsare,theindustry'sstillchargingtheguest2%plusmorethanthatdidlastyearfortheexperience.Andwebelievethat2017,withwhatweknowrightnow,isayeartoinvest,tocontinuetoinvestbackintotheguestexperience,tocontinuetogrowmarketshare.Andifwebelieveiftheoverallindustrywastoimprove,thenIthinkwethinkwewouldimprovealso.Butbasedonthecurrenttrendsandwhat'shappenedinthelastcoupleyears,wethinkthisistherightwaytoheadintoFY17.


Justafollow-up.OnLongHorn,doyouthinktheshiftinpromotionalactivityishurtingsalesthere?Iunderstandyou'restilloutperforming,butthesaleswerelowerandtrafficisnownegative.Isthatshiftinpromotionpartlytoblameforthatornot?

GeneLee (CEO):

Ithinkthat'sonlyhalfthequestion.IthinkyouhavetogototheP&Landlookathowmuchmoremoneythatwe'remaking.Whatwe'redoingrightnowis,throughourdataandinsights,weidentifiedthattherewerecertainguestsintheLongHornsystemthatwewerelosingmoneyon.Anditwasobvioustous.

AndRick'steamdidanoutstandingjobandwe'vebackedofftryingtoattractthoseguestsintotherestaurantandsayingifwecan'tmakemoneyontheguesttakingupthetableonaSaturdaynight,we'renotgoingtopushtobringthemin.Sothereareafewgueststhatareslippingoutthatwereinourbaselastyear,buttheyweren'tprofitable.




I'mincrediblyimpressedwiththemarginimprovementandtheprogressthatwe'remakingwithLongHorn.Theteam'sdoneanoutstandingjobandI'mnotasconcernedaboutwherewearefromatrafficstandpoint.Thismodelisstartingtogetbacktoworkthewaythemodelwasdesignedtoworkmany,manyyearsago.AndI'msuperexcitedaboutthetrajectoryofthisbusiness,especiallywhenIlookatwherethesalesareandthemargins.


Gotit.Thankyou.

Operator :

JasonWestofCreditSuisse.

JasonWest (Analyst-CreditSuisse):

Yes,thanks.

Coupleofquestions.One,Gene,youhaveaprobablybettervisiblethanwedoontheindustrytrendsandyounowthatwe'reattheendofJune,wehadbeenseeingsomeslightimprovementinMayfortheindustryasyoutalkedaboutmovingawayfromtheEastershift.HaveyouseentheindustrygivethatbackabitinJune?Isthatpartofthecautionthatyou'rereferringto?

GeneLee (CEO):

Well,I'mnot,again,Ireallydon'twanttocommentonJune.Youguyshaveaccesstodifferentbenchmarks.Atthispoint,IwanttotalkaboutfourthquarterandFY16andwe'renotgoingtotalkaboutwhat'shappeningintheindustryinJune.


Okay.Andthenaseparatequestion.Onthesavingsoutlook,Ithinkyousaid$30millionbakedintotheguidance.Ithinktheoriginaltargetfor2017was$30millionto$40millionandmaybetherewassomehopethatasyou'restilldiggingthroughthebusinesslinesthatyou'llfindsomeadditionalsavings.Sowouldyousaythat$30millionisconservativeandyou'restilllookingforotheropportunitiesorhaveyoukindoftappedoutwhatyoucandothere?

GeneLee (CEO):

Coupleofthings,Jason.One,wegotalittlebitmoreofthesavingsinthefourthquarterofthisyear.Sothatwas$5millionmorethanwehadoriginallyanticipated.Thatgetsyouto$30millionto$35million.Wejustmadethedecisionthatwe'regoingtoinvestsomeofthosesavings.Soifwefindover$30million,we'regoingtoreinvestinourbusiness.

So,we'regoingtocontinuetolookforcostsavingswhereitmakessense,whereitdoesn'timpacttheguestexperience,andusethosecostsavingstocontinuetoimprovethevalueequationatallofourbrands,especiallyatO liveGarden.So$30millioniswherewethinkweare.I'mnotsayingit'sconservative.I'msayingthat'swherewe'regoingtobenet.Andifwefindmore,we'llprobablyreinvestthose.


Great.Thanks.

Operator :




JeffFarmerofWellsFargo.Yourlineisyounowopen.

Jef f Farmer (Analyst-WellsFargoSecurities,LLC):

Thanks.Justtofollow-uponsharerepurchaseandfreecashflow.Acoupledifferentquestionsthere.Sodeliveredasecondyearofalmost$600millioninfreecashin2016andI'mjustcuriouswhyyouwerenotmoreaggressivewithputtingsomeofthattoworkintermsofsharerepurchase.

GeneLee (CEO):

Acoupleofthings,Jeff.Oneiswe'vegivenyouthelong-termframeworkof$100millionto$200millionofsharerepurchase.Wehave$500millionofsharerepurchasethattheBoardhasauthorized.Wehave$315millionleftinthat.We'llcontinuetofindopportunitiesandworkwithourBoardtounderstandthebestusesofourcashgoingforward.Butthesharerepurchasewehaveiswithinourlong-termframework.


Okay.Andthentobeatahorseonthisone,soFY17similarsetup?YouaregoingtoraiseyourCapExbyabout$100million,butstillabout$0.5billionfreecash,soitstillseemslikeasimilarniceproblemtohave.You'rejustthrowingoffatonoffreecash.

Soagain,Iwouldbecuriousabouttherepurchase,butthenalso,youjustalludedtothis,thebestuses.Whatelseisoutthere?Whatareyouconsideringotherthanpotentiallymodestlyacceleratingunitgrowth,remodels,returningcashtoshareholdersthroughtheformofrepo?WhatelseistheBoardthinkingabout?

GeneLee (CEO):

ThisisGene.

We'reconstantlyinconstantcommunicationwithofourBoardaboutwhat'sthebestthingforustodoaswemoveforward.We'relooking--we'llcontinuetolookatallthealternativesavailabletouswithourexcesscash,ourcapitalstructure,andwe'llcontinuetomaketheprudentdecisionstoinvestinthebusinesslong-term.

Andwe'llevaluatewhattheopportunitiesareeveryquarter.Wejustfinishedouryear-endBoardmeetingandwe'llgetbacktogetherinSeptemberandwe'llevaluatetheopportunitiesthatareavailabletousatthattime.Youalludedtothisisagoodopportunityforus,andwe'llcontinuetoevaluateandmaketherightdecisions,butatthispointintime,wehavenofurthercomments.


Okay.Justoneothertechnicalquestion.SocertainshareholdersexitingtheCompanyoverthelastseveralmonths,andIwasjustcuriousifthatinanywaytiedyourhandsfromaregulatorystandpointintermsofbeingmoreaggressivewithsharerepurchase.

GeneLee (CEO):

No.


Okay.Thankyou.

Operator :




ChrisO 'CullofKeyBanc.

ChrisO'Cull(Analyst-KeyBancCapitalMarkets):

Thanks.Goodmorning.

Gene,manyrestaurantsaretalkingaboutretoolingorchangingtheirvalueplatformsormessagebecausetheybelievethattheirmessageisstale.ButdoyoufeelO liveGardenneedstoalterorenhanceitseverydayvalueplatformatall?

GeneLee (CEO):

IthinkwhatweneedtofocusinonOliveGarden,withouttalkingtoomuchdirectlytoourcompetitorsrightnow,iscontinuingtoexpandtheofferingsbetween$10and$15.We'vegotthe$9.99platform,whichreallyanchorsourselvesatdinner.Wehavethe$6.99atlunch.But,we'relookingfordifferentwaystodelivervaluesomewhereinthat$10to$15rangetogivetheconsumerjustafewmoreoptions.Wethinkwehavetheinnovationtodothat.Andsowe'llcontinuetofocusonthat.

ButbacktoastatementImadeearlier,we'rejustasfocusedonothercomponentsofvaluethanwearejustonprice.AndDaveandtheteamarereallyworkingonotherwaystoprovidevaluefortheguests.Letmegiveyouanexampleofthat.OnethingaboutanOliveGarden,whereweseethevalueperceptionsgodownishowlongthepeoplehavetowaittocomeintoourrestaurants.Sowhatcanwedowhilethey'reonawaittoimprovethatprocess?

We'restartingtoplaywithandtestafewthingsand,ifwedoitcorrectly,weactuallyimprovetheoverallvalueexperiencewithoutchanginganythingelseonthemenuorpricing.Andsowe'vegottocontinuetofocusontheothercomponentsofvaluewherewetalkaboutothercomponentsinthenumerator,andjustnotfocusonwhat'sonthedenominatorofthevalueequation.Sowedoneedtoworkatcertainpricepoints,butwedoneedtoexecutesomeofthoseothervariables.


Okay.Fairenough.Andthen,Rick,youmentionedcommodityinflationafterthefirstquarter.Isthatbasedonknowncontractprices,orjustyouranticipationcommoditieswillstarttoinflateagain?

RickCardenas (CFO):

SoChris,we'vegotabout60%ofourcoverageforthefirsthalfoftheyear.Sowe'rekeepingopeninsomeplaces.Butwe'rejustmakingtheforecastthatcommoditiesaregoingtoincreaseinthebackhalfoftheyear.Oninflationonthecommodities.Soitdependsonwhenyoubuy,aswell.Sowe'vegotjustslightcommodityinflationinthebackhalfoftheyear.


Isbeefpartofthatcontractyou'vealreadyhaveforthe--?

RickCardenas (CFO):

Beef?Isbeefpartofthecontract?Yes,we'reprettyopeninthebackhalfoftheyearonbeef.We'vegot,asIsaid,60%ofourtotalcommoditiescoveredinthefirsthalf,but45%ofthatisbeef.


Great.Thanks.

Operator :




JeffBernsteinofBarclays.

Jef f Bernstein (Analyst-BarclaysCapital):

Great.Thankyou.

Justtwoquestions.One,followinguponthebalancesheetdiscussionbeforeandspecificallyaroundmaybeleverage,itdoesseemliketheindustryisrampingup,oftenwiththehelpfromfranchisingorIshouldsayrefranchising,whichiscontrarytoDarden,whichhasbeenpayingdown,Ithinkyoumentioned$1billionthisyear,butposttherealestatespinandyou'vegottheupgradetotheinvestment-grade.

SoI'mjustwondering,maybeyoucangiveanoutlookonbothfronts.Bothdebt,maybeyourtargetdebtlevels,andthepotentialforanyrefranchising.Ithinkinthepast,youhadmentionedmaybeaLongHornopportunity.Butjustwonderinghowyouthinkaboutthatleverageopportunityrelativetotheconservativeleveltoday.

GeneLee (CEO):

Sure,Jeff.Aswesaidbefore,ourfirstpriorityistomaintainourinvestment-gradeprofile.Wejustwereupgradedbyallthreeagenciesinthefourthquarter.Wethinkthat'sgreatnews.

Ourtargeteddebtcoverageistwotimestotwoand-a-halftimesadjusteddebttoadjustedEBITDAR,andrightnow,we'reattheverylowendofthatrange.Wecontinuetosaywe'regoingtobewithinthatrangeandwe'llcontinuetodemonstratesoundfiscalpolicy.We'renotgoingtotalkmuchaboutfranchisinggoingforward,butjustthetwototwoand-a-halfiswhereweexpecttobe.


Gotyou.

AndthenjustthecommentyouguysmadeIthinkontheunitgrowthwhereyousaidthatwaswhereyou'regoingtofallshortpotentiallyinFY17.Iseeintheslide,youbreakoutunitgrowthbybrandintermsofexpectation.SoI'mjustwonderingifyoucanofferalittlecolor,again,beingbelowyourtargetlevel.

ItseemslikeOliveGardenandLongHornarethetwobrandsthatarestillcarryingitin2017,whereastheotherbrandsthatalldoingquitewellisverymodestgrowth.SoI'mwonderingyouroutlookforO liveGarden,perhaps,infutureyears,whetherthat'sthenumberthatgoesuporwhetheryouwouldexpectsomeoftheotherbrandstostarttorampthingsupbasedontheirstrongperformance.

GeneLee (CEO):

Goodquestion,Jeff.

Whenyouturnthedevelopmentpipelineoff,it'sprettydifficulttoturnitbackon.Sowe'reintheprocessofturningthedevelopmentpipelinebackon.It'seasierandyourresultscomequickerinyourcasualdiningbrands:yourOliveGardenandyourLongHorns.Ourspecialtybrands,it'salongerleadtimefromadevelopmentstandpoint.Andsowewouldlookforthesmallerbrandstoactuallypickupandmakeupthatdifferentialinthegap.

WeneedYardHousetogrowat8%to10%.WeneedSeasonstogrowat5%to8%intothefuture.We'reverypleasedwithwhat'sgoingonwithBreeze.Weneedthemto--we'remakingsomecommitmentsthere.




Iwouldjustsay,thisisjustafunctionoftheleadtimeofthespecialtybrandsandthekindofpropertiesthatweneed.We'reworkingdiligently.We'vegotthewholedevelopmentfunctionworkingongettingusin,makingsurethatwe'reinrangeinFY18.


Understood.AndjusttoclarifythecommentearlieraboutMaycompsseeinganimprovement,IthinkyousaidabigfocusonMother'sDayandotherwise,wasthereanyshiftfromaMemorialDayperspective?Iknowyouhadsaidearlieronthecallthatmaybetherewasafewdifferentshiftsintheendthathurtyou.I'mjustwonderingMemorialDayspecificallyinMaymighthavehelped.

RickCardenas (CFO):

MemorialDayforthefiscalandthecalendarreallyoffseteachother.MemorialDaywasn'treallythatbigofanimpactforus.

Operator :

--goahead,sir.

GeneLee (CEO):

Goahead.

Operator :

KarenHolthouseofGoldmanSachs.

KarenHolthouse (Analyst-GoldmanSachs):

Hello.Thankyoufortakingthequestion.

Soanotherquestiononthelaborline.Ifyoulookat--itseemslikeyourlabor,oryourwageinflationoutlookhastickedupalittlebitfromhowyouweretalkingaboutthat,takingthenpricedownalittlebit,costcutsareslowing.Wouldtheexpectationbethatyoucanstillleveragethelaborlineonanoverallbasis,orisitsomethingwherewemightactuallyseealittlebitofdeleveragethisyear?

GeneLee (CEO):

Karen,Ithinkthatwe'regoingto,probablynotgoingtoseeawholelotofleveragethereunlesswegetoutsideoursalesrange.Ithinkthatwe'llcontinuetosearchforproductivityenhancementsinthebackofthehousethroughourprocessesandprocedures.Andwe'llcontinuetomanagewagerateseffectively.

We'realsogoingtocontinuetoevaluatehowdoweimproveouroverallemploymentpropositionsothatwehaveotherwaystoattractemployees,notjustthroughpayingthemmoreinasalary.Sooverall,Ithinkwe'relookingatthisrightnowtotrytoholdlaborflatthroughouttheyear.

KarenHolthouse (Analyst-GoldmanSachs):

Great.Thankyoufortakingthequestion.

Operator :

AndyBarishofJefferies.

AndyBarish (Analyst-JefferiesLLC):




Justtwoquickonesonanydaypartcommentaryordifferences,particularlyintheOliveGardenbusiness,andthenalsoonOliveGarden,whereyoustandforFY17remodels,bothasyoulookatthebarsaswellasthefullremodels.

GeneLee (CEO):

We'reseeingnodifferenceindayparts,Andy.InOliveGarden,there'salittlebitoffluctuationdependingonwhatwe'redoingandwhatwedidtheyearbefore.Butoverall,whenyoureallylookatitonatrailingtrend,there'snotalotofnoisethere.

Asfarasremodels,we'regoingtodo62fullremodelsin2017,andwe'vegot155plannedbarrefreshesand,justtoremindeverybody,that'swhenwegoinandwetakethesebarsthatdon'thaveverycomfortableseatingandweputinverycomfortableseating,weaddTVs,andbasically,weturnthesebarareasthataren'tveryproductivetodayintoproductivediningseatsandwe'reseeingaverysmalllift.

It'sa$20,000to$25,000investmentandit'smorethanpayingforitself.Andit'sjust,whenwegoinanddothefullremodelandthebar'sdone,thatjustmeansthebar'sdoneandwedon'thavetotouchit.

Operator :

SarahSenatoreofBernstein.Yourlineisyounowopen.

SaraSenatore (Analyst-SanfordC.Bernstein&Co.):

Thankyou.Justacoupleoffollow-upquestions.

ThefirstonLongHorn:Ithinkyouhadbeensayingnowforacoupleofquartersthatit'saverydeliberatedecisiontotrytolookatwho'sprofitableinyourcustomerbase,butthat,Ithinkinpart,youhadthoughtthatassomeofthoselessprofitablecustomersleave,itmakesroomformoreprofitablecustomers,thehighermargincustomers,whoarenotturnedawaybythelinesorthecapacityrestaurants.

ButIguess,giventhattrafficisnegative,isitgoingtotakeawhileforthattohappen?Becauseitseemslikethelessprofitablecustomersareleaving,butyou'renotgetting--you'renotbringinginsomeofthesemoreprofitablecustomersthatIhadthoughtyouhadinmindwouldsortoffillthegaps.IguessI'mjusttryingtounderstandthedynamicoverthenextcoupleofquarters,whenthatmighthappen.Sothat'salong-runquestion.AndthenIdohaveanotherfollow-uponOliveGarden,please.

GeneLee (CEO):

Okay.WhenwethinkaboutLongHorn,let'sstart--we'restillfromaguestcountbasis,still200basispointsabovetheindustry.Sowe'restilltakingmarketsharefromaguestcountstandpoint.Ithinkthat's,initself,veryimpressivewhenyoulookattherestofthecompetitiveset.

We'recontinuingtomakequalityimprovementsthataregoingtotaketimetoshowthroughtotheguest.We'vedonesomethingswhenthepriceofbeefwasincreasingthatIthinkhurtthebusiness.Butjustbychangingthemorgoingbacktothemtomorrowdoesn'tmeanaguestisgoingtocomethenextday.

It'sgoingtotaketimeforourgueststocomethroughandexperience,haveadifferentexperienceandgrowthebusiness.AndsowhenIlookatthisbusiness,andthisistheonethatI'mpersonallythemostfamiliarwith,thisisabusinessthathasbeenunderperformingfromaprofitabilitystandpointandhasbeenrunalittledifferentlyovertheyearsthanIthinkitshouldhavebeenrunandnowwe'rerunningitback.

Thishasneverbeenabusinessthatneededalotof,ahighguestcountstoachieveitsprofitability.Thesearesmallboxesthataredesignedtoputoutastrongprofitablereturnandthenwhenthat




businessbuildinggetsfull,youbuildanotherbuildingfourmilesdowntheroad.YoulookathowthisbusinessisreallysetupinAtlantawherewehave45restaurants.There'snooneindining,casualdining,thatcomesclosetohavingthekindofpenetrationthatwehavewiththestrategyweputinplacethere.

We'rebacktobuildingsmallerrestaurantsandfocusedonensuringthatwe'regettingtherightprofitabilityfromthoseunits.Wearegoingtomakestrategicchoicestoimprovetheoverallqualityoftheexperience.It'sgoingtotaketimeforthosethingstogetintotheconsumer,fortheconsumertoseethose,andthenstartimprovingtheirfrequency,orreachingothergueststhatweweren'treachingbecauseofouradvertisingandhowweweretalkingaboutthebrand.

AndsoI'mreallyconfidentdirectionallywithwherewe'regoingandthisbusinessiscontributingnowatalevelthat's,Ithink,appropriate,whereithasunder-contributed,eventhoughitwasgrowingsalesallthesequarters,itwasn'tmakinganymoney.


Thankyou.

AndthenjustonOliveGarden,you'dmentionedmeaningfuloperationsimprovementsyoucanstillcapture.Canyoutalkaboutwhatthatlookslikeandisthatmoreabouttoplineorefficiencyaroundthecostline?JustasIthinkaboutallthatyou'vedonesofar,there'sbeenatremendousamountofchange,itfeelslike,atO liveGarden.I'mjusttryingtounderstandmaybewhat'sleftintermsofadriverofthebusinessgoingforward.

GeneLee (CEO):

WhenIthinkaboutmeaningful,Ithinkaboutitonafewdifferentdimensions.Butfirst,IthinkthatwestillbreakdowntoomanytimesinOliveGardenwheresomewhereintheserviceexperience,wehaveadeficiency,whetherit'sthetimingwasn'tright,theserverdidn'tgettothetableattherighttime,thefooddidn'tcomeoutright.

Whenyou'retalkingaboutthenumberofgueststhatweserve,improvingthatby1%or2%hasasignificantimpactonimprovingoursame-restaurantsales.Sowhenwethinkaboutjustconsistentlydeliveringabetterexperience,Ithinkthat'sthenumberoneopportunityforus.

We'vestillgotroomtoimproveonproductionandmenusimplification.SomeoftherecipesarestillcomplexandDaveandtheteamarethinkingaboutiteveryday.HowdoImakethatlesscomplextobeabletodeliverthattotheconsumer?

There'slaborproductivityopportunities.Westill,inasystemthesizeofO liveGarden,wecanseeinourowndata,wehaveopportunitiesforcertainrestaurantstoimproveproductivity.Sometimes,andwhattheteamhasdoneareallygreatjobwas,theyjusthaven'tgonetothelowervolumerestaurants.

Someofthetime,themostopportunitywehaveisinourhighervolumerestaurants.Andsothey'redevelopingwaystoanalyzeandreallydiscernwherearemyrealopportunitiestoimproveproductivity?There'ssomecontrollablecostandmanagementofcontrollablecostthat'sstill--wehavepeoplethatdon'tperformatthesamelevelofothers.Sothere'sexecutionalopportunitythere.

Andthenlastly,westillthinkwecanexecutetogobetterandwethinkthat'sahugeopportunityforus.Aswellaswe'redoing,webelievethere'sanopportunitytoimprovethatevenfurther.


Understood.Thankyou.




Operator :

AndrewStrelzikofBMOCapitalMarkets.

AndrewStrelz ik(Analyst-BMOCapitalMarkets):

Hello,goodmorning,everyone.Justhadabigger-picturequestionontogoanddelivery.We'rehearinganumberofconceptsacrosstheindustrytalkaboutfocusingondeliveryandtogoandputtingupverynicegrowthrates,likeyourselves.SoI'mwonderingoverthenextcoupleofyearshowyou'rethinkingthatthisplaysout.

Imean,isthisarisingtide,liftsallboats,typeofequationwherewe'regivingguestssomethingthatthey'vebeenlookingforand,sobroadly,thiswasgoingtowork?OristheresomethingspecifictoDarden?

Andwheredoyouthinkthoseeatingoccasionsarecomingfrom?Isitallcomingfromeatingathomeorhowdoyouthinkthisplaysoutovertime?

Thankyou.

GeneLee (CEO):

Goodquestion.

Idothinkthere'sanopportunityforeverybodyintheindustrytocapturethis.WherewebelievethatOliveGardenisbettersituatedisthekindoffoodthatweserve.Andso,ifyou'reabarandgrill,it'snotlikeyoucanput20hamburgersinacontainerandsendtherollshomeandhavethemputeverythingtogetherandstillhaveaqualityproduct.Butwecansendhomepansoflasagna,pansofchickenparmesan.Ithinkthestyleoffoodthatweservereallylendsitselftothistrendthat'stakingplace.

AndsoIthinkwe're,atO liveGarden,we'rebettersituated.We'reseeingtogosalesincreaseinLongHorn,butweneedtogowithwhattheconsumerwantsthere.Wedon'tbelievewehaveaplatformtoreally,inLongHornwiththestyleoffood,beabletopushthattoa20%ofouroverallbusiness,wherewethinkthatit'ssomethingOliveGardenhasarealcapability.

Thirdpartydeliveryissomethingthat'sgoingtoevolve.It'sgoingtoaffecttheoverallindustry.Andtherearealotofbignamesouttheretryingtofigureouthowthey'regoingtocomeupwithasolutiontosolvethisproblemandIwouldsaythat'sastaytuned.Becausethere'sjustalotofactivitytherewiththebigone,butthere'salotofdollarsforacompany,andIwon'tmentionanynames,iftheycancomeupwithasolutionforusandforourcasualdining,andallofdining,there'ssomemoneytobemadethere.

AndrewStrelz ik(Analyst-BMOCapitalMarkets):

Great.Thankyouverymuch.

Operator :

SteveAndersonofMaximGroup.

SteveAnderson (Analyst-MaximGroup):

Embeddedinyourguidanceof,whatnumberareyoulookingatforinterestexpenseforthefullyear?

RickCardenas (CFO):

Forinterestexpensefortheyear?





Yes.

RickCardenas (CFO):

Sowe'vegotanotherreductionof--well,interestisabout$45millionIthinkfortheyear,whichmeansit's$26millionlessnextyearthanitwasthisyear.


Okay.Thanks.

Operator :

JoshuaLongofPiperJaffray.Yourlineisyounowopen.

JoshuaLong (Analyst-PiperJaffray):

Great.Thankyoufortakingmyquestion.

Myquestionswasonthetechnologyupdateandjustreallythetechnologyopportunity.YoumentionedthatZ ioskhasalreadybeenasalesdriverforyou.Wascuriousinwhatcapacityorwhatinningyouthinkyouareintermsofbeingabletoturnonthosefeatures.

Youhaveitrolledouttotherestaurants,butI'msureyou'restillgoingthroughitandlearninghowtouseit,andnotonlyfromaguestperspective,butmaybetheremightbeanopportunityforittohelpwithlabormanagementorthingsinbackofthehousetheguestdoesn'tsee.Justcuriouswhereyouarewiththatupdateandwhattheopportunitiesmightbetolayeronadditionalfeaturesgoingforwardin2017andbeyond.

GeneLee (CEO):

Sure.Sowehaven'twrappedyetonourimplementationofZ iosk.

Sowestillhavealittlebittogoandalotmoretrainingtodototeachtheserversandtheteamshowtousethatmosteffectivelytoimprovetheserviceexperiencefortheguests.Aswesaid,thebenefitofthatdeviceisn't--we'renotexpectingtotakelaboroutofthesystemsbecauseofthatdevice.

Weexpectittocontinuetoincreasesales.Wegetalotofdatafromourguests,manymoreofthemarefillingouttheirsurveys,sowelearnalotmore.Anditactuallyimprovesthebiggestpayingpointthataguesthasispayingatthetable.Webelievethatwe'restillearlystagesofgettingallofthebenefitsfromtheZ ioskdevicethatwecanget,aswebuildonotherthingsfromthatdevice.

Again,nothinginthebackofthehousethatwouldbesavedfromthat.We'rethinkingaboutlookingatloyaltyandhowdoweuseloyaltywithZ iosk.Butwe'restillintheveryearlystagesofthat,aswell.Butwe'relearningsomethingsthatwecanusetousethatfortrainingandotherthings.Stillalongwaytogothere,butwefeelreallygoodaboutwhereweare.


That'shelpful.Thankyou.

HowmuchofthesystemhasZ iosk,ormaybeatO liveGarden,hasZ ioskrightnowandwhat'stheexpectedrolloutfor2017?




GeneLee (CEO):

AtOliveGarden,100%ofthesystemhasZ iosk.We'relookingatittoseeifitmakessenseinotherbrands.Butrightnow,OliveGardenisthebrandthatwe'refocusingmostonfortheZ iosk.


Allright.Thankyou.

Operator :

JakeBartlettofSunTrust.

JakeBart lett (Analyst-SunTrustRobinsonHumphrey):

Thanksfortakingthequestion.

Thequestionjustisondelivery.Inthelastquarter,youtalkedabouthowmuchitcontributedtocomp.I'mjustwonderinghowmuchitcontributedinthefourthquarter,aswellasmaybewhatweshouldexpectin2017.

RickCardenas (CFO):

Yes,Jake.

Deliverywasnotaverybigpartofouroveralltogo.Wejustactuallylaunched,rolledoutcateringdeliveryjustaboutaweekagoandseeingsomeprettygoodresultsthere.Butagain,theonlinecateringseeinggoodresultsthere.But,deliveryisn'tatremendouspartofourtogobusiness.It'sstillgrowing.


Youknowwhat?Actually,Imeantcatering.

RickCardenas (CFO):

Catering.Okay.That'swhatIthought.Cateringisabout25%ofouroveralltogo.


Great.

RickCardenas (CFO):

Andnotallofthatisdelivery.Sowhenwetalkaboutcatering,italsomeanspeoplecancomeinandgetabigorderandtakeitwiththem.


Okay.Andthenin2017,isthereanyreasonweshouldn'texpecttogotocontinuetogrowatthisrateandtohavethissimilarcontributiontocomps?

RickCardenas (CFO):

Well,IcansaythatwelaunchedtogoonlinetwoyearsagoinJulyandwesaw20%increasesinthefirstyearand20%increasesinthesecondyear.Ican'ttellyouthatwe'llsee20%increasesinthethirdyear.However,wecontinuetoimproveourtogoexperienceandconvenienceisabigdriverofourtogoexperience.




Iwillsay,onthecateringside,thedeliveriesthatwe'redoing,we'regettingalmost100%ofthepeoplesayingthatthey'regoingtoreorder,they'regoingtodothisagain.Asthatbecomesbiggerandbigger,itwillbecomeabiggerandbiggerpartofourpie.Wewouldcontinuetoexpectdeliveryandcateringandtogotogrowforus.AndIthinkwe'vesaidinthepastthatweexpecttogotobe,inthelongrun,20%ofourbusiness.


Gotit.Thankyouverymuch.

Operator :

Iseenofurtherquestionsatthistime.IwillnowturnthecallbackovertoMr.KevinKalicak.

KevinKalicak(InvestorRelations):

Thankyou,Operator.Thatconcludesourcall.

I'dliketoremindeveryonethatweexpecttoreleaseourFY16fourth-quarterresultsonTuesday,October4,beforethemarketopens.Excuseme,that'sfirst-quarterFY17results,withtheconferencecalltofollow.Thankyouforparticipatingintoday'scall.

Operator :

Thatconcludestoday'sconference.

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Darden Restaurants (DRI) Earnings Report: Q4 2016 ... · PDF fileCompany Name: Darden...

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