Darden Restaurants Inc DRI
Q3 2013 Earnings Call Transcript
Transcript Call Date 03/22/2013

Operator: Welcome and thank you for standing by. Currently, all participants are on listen-only for the presentation. We will allow one question and one follow-up. Today's call is being recorded. If anyone objects, they may disconnect.

I'd like to turn the conference over to Matthew Stroud. Sir, you may begin.

Matthew Stroud - IR: Thank you, Catherine. Good morning, everyone. With me today are Clarence Otis, Darden's Chairman and CEO; Drew Madsen, Darden's President and COO; Brad Richmond, Darden's CFO; and Gene Lee, President of Darden's Specialty Restaurant Group. We welcome those of you joining us by telephone or the Internet.

During the course of this conference call, Darden Restaurants' officers and employees may make forward-looking statements concerning the Company's expectations, goals or objectives. Forward-looking statements are made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligation to update such statements to reflect events or circumstances arriving after such date.

We wish to caution investors not to place undue reliance on any such forward-looking statements. By their nature, forward-looking statements involve risks and uncertainties that could cause actual results to materially differ from those anticipated in the statements. The most significant of these uncertainties are described in Darden's Form 10-K, Form 10-Q, and Form 8-K reports, including all amendments to those reports.

These risks and uncertainties include food safety and foodborne illness concerns, litigation, unfavorable publicity, risk relating to public policy changes and federal, state and local regulation of our business, including healthcare reform, labor and insurance costs, technology failures, failures to execute business continuity plan following a disaster, health concerns including virus outbreaks, intense competition, failure to drive sales growth, failure to successfully integrate the Yard House business and the additional indebtedness incurred to finance the Yard House acquisition, our plans to expand our newer brands like Bahama Breeze, Seasons 52 and Eddie V's; a lack of suitable new restaurant locations; higher than anticipated costs to open, close or remodel restaurants; a failure to execute innovative marketing tactics and increased advertising and marketing cost; a failure to develop and recruit effective leaders; a failure to address cost pressures, shortages or interruptions in the delivery of food and other products; adverse weather conditions and natural disasters, volatility in the market value of derivatives; economic factors specific to the restaurant industry and general macroeconomic factors including unemployment and interest rates, disruptions in the financial markets, risk of doing business with franchisees and vendors in foreign markets; failure to protect our service marks or other intellectual property, a possible impairment in the carrying value of our goodwill or other intangible assets, a failure of our internal controls over financial reporting or changes in accounting standards and other factors and uncertainties discussed from time-to-time in reports filed by Darden with the Securities and Exchange Commission.

A copy of our press release announcing our earnings, the Form 8-K used to furnish the release to the Securities and Exchange Commission, and any other financial and statistical information about the period covered in the conference call, including any information required by Regulation G is available under the heading Investor Relations on our website at darden.com.

We plan to release fiscal 2013 fourth quarter earnings and same-restaurant sales for fiscal March, April and May 2013 on Friday, June, 21, 2013 before the market opens with the conference call shortly after. We released third quarter earnings results this morning. These results were available on PR Newswire and other wired services.

We recognized that most of you have reviewed our third quarter earnings, so we won't take the time to go through them in detail, once again in an effort to provide more time for your questions. We will offer a line item summary of the P&L, discuss our financial outlook for fiscal 2013 and discuss some of our brand-by-brand operating performance.

To begin, Brad will provide detail about our financial results for the third quarter, Drew will briefly discuss our larger brands and Clarence will offer some closing comments. We will then respond to your questions.

With that, let me turn it over to Brad.

C. Bradford Richmond - SVP and CFO: Thank you, Matthew. Good morning to everyone. Darden's total sales from continuing operations increased 4.6% in the third quarter to $2.26 billion. Included in this quarterly amount is approximately $87 million in sales from Yard House, which we acquired on August 29, 2012.

On a blended same-restaurant sales basis results for Red Lobster, Olive Garden and LongHorn Steakhouse declined 4.6% in the third quarter. In contrast, our Specialty Restaurant Group saw continued same-restaurant sales gains of 2.3% on a blended basis.

Food and beverage expense for the third quarter were approximately 20 basis points higher than last year on a percentage of sales basis. This unfavorability was driven by our promotional mix and higher cost for beef, partially offset by lower seafood cost.

In the third quarter, restaurant labor expenses were approximately 100 basis point higher than last year on a percentage of sales basis due to higher group insurance, wage inflation and sales deleverage, partially offset by reduced manager incentive compensation of approximately 60 basis points.

Restaurant expenses in the quarter were approximately 110 basis points higher than last year on a percentage of sales basis, and mostly due to sales deleverage about 50 basis points, and the impact of adding Yard House, about 30 basis points, which runs higher restaurant expense as a percentage of sales than our other brands, because all of the Yard House restaurants are leased.

Selling, general, and administrative expenses were approximately 30 basis points lower than last year as a percentage of sales, due primarily to reduced incentive compensation of approximately 100 basis points, partially offset by media inflation.

Depreciation expense in the quarter was approximately 40 basis points higher on a percentage of sales basis compared to last year because of increases in new units and remodel programs at our larger brands.

Overall, operating profit margins for the third quarter were down approximately 230 basis points to 9.1%. Yard House accounted for 40 basis points of the year-over-year decline because of acquisition-related cost and a slightly lower margin at the operating profit level.

Our tax rate this quarter at 22.3% was approximately 240 basis points lower than the prior year, driven by increases in available tax credits and our tax planning initiatives as well as lower taxable earnings.

We estimate that our annual effective rate will be in the mid 22% range, which is about 200 to 300 basis points lower than last year's effective tax rate.

Now turning to our financial outlook; for the full fiscal year, we expect combined same-restaurant sales for Red Lobster, Olive Garden, and LongHorn Steakhouse of approximately down 1.5% to 2.5% and we expect net new restaurant increase of roughly 105 restaurants, which is approximately 5% unit growth on our current base.

With these same-restaurant sales and net new restaurant openings expectations combined with the acquisition of Yard House. We expect the total sales growth in fiscal 2013 of between 6% and 7% and that diluted net earnings per share growth from continuing operations for the year will be between $3.06 and $3.22.

The expectation regarding diluted earnings per share includes acquisition related cost and purchase accounting adjustments of approximately $0.09.

Turning to our commodities basket; we have approximately 90% of our total food spend contracted through the end of this fiscal year.

Food inflation in the third quarter was approximately 0.4% with seafood deflation in the mid-single digits and beef inflation in the low double digits.

For the fourth quarter, we expect that our commodities basket will see inflation in the range of 1% to 1.5%.

Category by category, through the balance of fiscal 2013, seafood costs are lower on a year-over-year basis with 100% of our usage covered. Beef costs are higher on a year-over-year basis, with 80% of our usage covered.

Poultry costs are moderately higher on a year-over-year basis with 100% of our usage covered. Wheat costs are slightly higher on a year-over-year basis with 100% of our usage covered. Dairy costs are moderately higher on a year-over-year basis with 60% of our usage covered.

Our energy costs are expected to be slightly lower on a year-over-year basis and we have contracted 30% of our natural gas and electricity in the deregulated markets in which we operate through fiscal year 2013.

Now, I will turn it over to Drew to comment on our brands.

Andrew H. Madsen - President and COO: Thank you, Brad. Since many of you attended or listened to our recent Analyst and Investor Meeting a few weeks ago. I thought our time this morning would be better spent only briefly commenting on the third quarter performance of our larger brands.

As we mentioned at that meeting, same-restaurant sales results for the third quarter at our larger brands were much weaker than we anticipated. Our priority now is regaining same-restaurant traffic momentum.

This quarter same-restaurant traffic at our three large brands was negative and certainly, some of the external factors were all aware of including the payroll tax increase, the spike in gasoline prices and more severe winter weather this year contributed to that.

Still we are encouraged that after trailing the industry the prior three quarters, same-restaurant traffic at our larger brands was in line with the industry this quarter. We are also encouraged that same-restaurant sales for the industry have improved so far in March as we assumed in the same-restaurant sales guidance that we provided at our Analyst Conference.

Another thing we also discussed in February is that for many guests affordability is a particularly important need. These guests want to visit casual dining restaurants generally and our restaurant in particular, more often than they do today, but they feel they cannot afford it.

It's important to keep in mind, however, that not all guests are focused solely on greater affordability. There are also economically secure guests who are looking for distinctive higher quality dishes and are willing to pay a little more for them.

While millennials are focused on affordability, they have other needs and desires as well including an interest and more convenience in their total restaurant experience, menus that offer more freshness and greater flexibility to dine the way they want.

We are responding tactically in ways that address on a day-to-day and a week-to-week basis the current need many guests have for affordability. At the same time, we are working strategically to evolve our brands, so that they are sustainably affordable for financially constrained guests and so that they meet the broader needs of our other guests.

Our traffic results for the quarter relative to the industry indicate we're making some progress tactically and while some of the strategic changes to redefine the guest experiences we offer are in their early stages, we're confident in our direction on this front as well.

Now Clarence has some final comments.

Clarence Otis Jr. - Chairman and CEO: Thanks, Drew. As we mentioned last month at our Analyst Investor Meeting here in Orlando, we are for sure in a new era for dining out that's the product of some important new, competitive and consumer realities. As Drew mentioned, we are making significant changes to make sure we take advantage of these realities. We are changing, so that we're better able to more consistently win in the marketplace today and better able to win on the sustained basis well into future.

The changes we're making involve reshaping our portfolio to increase the size and contribution of the Specialty Restaurant Group which is something that broadens our guest and occasion base. They involve a reshaping our organization, so that there are dedicated resources working on two time horizons today and tomorrow which are time horizons that involve distinctive work; the changes we are making also involve tempering average check growth across our larger brands, because we think that's what it takes to supports in restaurant traffic growth, they involve reducing unit growth at Olive Garden, so the brand can better focus on regaining momentum and the changes involve continuing to invest in our people who are the best in the business and who are the key to any success that we're going to have in any time horizon.

We think we're well-positioned as an organization, given the strength of our brands, the collective experience and expertise we have, the operating cash flows we have to make the changes that are needed, and so we're confident as we look forward in the direction of our business.

With that, we will take your questions.

Transcript Call Date 03/22/2013

Operator: David Tarantino, Robert W. Baird & Company.

David Tarantino - Robert W. Baird & Company: My question is related to the trends you are seeing in March. Drew, I think you mentioned that the industry trends have started to improve in March. I was just wondering, if you can maybe talk about your business and maybe give us a sense of the magnitude of the improvement that you've seen and whether you are currently running in line with what you've planned for the current quarter?

Clarence Otis Jr. - Chairman and CEO: David, this is Clarence, and we will talk about the industry, but not about our business, which is our practice. What we would say, and I think Malcolm Knapp was on Bloomberg yesterday. So, this is comments that he made, and he is (out) for a lot of reasons has a very good look at what's going on in the industry. The turn in March has been significant. I mean February was a month that was down mid-single digits in the casual dining part of the industry and March is a positive month. So, a pretty significant turn. We think February suffered beyond weather, from really, as Drew mentioned, the consumer just weren't prepared despite all the conversation for the payroll tax increase and there was a pretty rapid spike up in gasoline prices, but March indicates that consumers have adjusted. When we talked about our expectations for the year from a same-restaurant perspective, from an earnings perspective, we assume that the industry would bounce back.

David Tarantino - Robert W. Baird & Company: I guess just maybe a quick follow-up on that. As you look at the overall consumer environment, it has been choppy lately and I guess how are you viewing the March trend? Is this consistent with what your economic models and your thoughts on the overall consumer environment should be going forward? How should --?

C. Bradford Richmond - SVP and CFO: Yeah, I think we look beyond the month and so as we look back over to last 12 months, our point of view is the next 12 is not going to be all that different. So GDP growth is roughly 2%, a little bit less than that. It's going to be roughly 2% going forward is how we think about it, maybe slightly more than that, but there's probably equal probabilities on slightly more slightly less and so that's sort of how we're planning the business around that point of view.

Operator: Jeff Omohundro, Davenport & Company.

Jeff Omohundro - Davenport & Company: First on the Olive Garden in relative value, it does appear that in the category we're seeing quite a bit of abundance – offers abundance strategies and a lot of clutter out there. I'm just wondering in terms of your comfort with the – or need to tweak the current strategy really to breakthrough that and connect more on abundance with guests. Just what you're thinking might be around that, and then I have a follow-up on the Red Lobster?

Andrew H. Madsen - President and COO: Well, certainly as we've said we need to address affordability more aggressively than we have been doing. We've started that and we are seeing an improvement in traffic, all three of our large brands including Olive Garden. In terms of abundance, we want to make sure that while we're addressing affordability, we're also evolving the guest experiences that each brand offers in ways to keep them distinct and relevant and highly compelling. So, generosity has always been an important part of Olive Garden's promise which is – which help them be one of the strongest overall value leaders in the industry. So we're confident that, that's going to continue to be a part of the experience that we offer, but we going to have to go beyond that because it's clear now that there are other meaningful guest segments that want aspects to their experience that we are not now providing so lighter, fresher, is one example. That's why we introduce that section on the menu recently convenience and speed of service at lunch in particulars and other one that we're working on. So, generosity and abundance will be part of it, but we want to keep very distinct compelling brands going forward and that's true for Olive Garden as well.

Jeff Omohundro - Davenport & Company: Then on Red Lobster, I'm just wondering regarding the Seaside Express test, just how that fits in perhaps at the longer-term concept evolution?

Andrew H. Madsen - President and COO: That's a test that we have just started in the last week at a couple of locations locally. So it's too soon to comment on the what we're seeing there, but we would say that the lunch daypart in particular is one where we know that for a large number of guests affordability and speed convenience is very important, and lunch is a big growth opportunity for Red Lobster in particular and that's really why they're looking at this sort of test to just more aggressively address the need for affordability and convenience and overall speed and experience, but very, very early at this stage.

Clarence Otis Jr. - Chairman and CEO: The other thing I would say, Jeff, is – so we have got delivering two experiences in two different dining rooms. So conventional full-service lunch experience in one, the express lunch in another, we will very closely watch the guest experience in the more conventional dining room to see how guests in that dining room feel about the whole experience with what's going on elsewhere in the (building) and that will be an important part of whether this thing is successful or not.

Operator: Brian Bittner, Oppenheimer & Company.

Brian Bittner - Oppenheimer & Company: Just want to go back to this tempering of the average check growth and the strategy there. Is this something that is going to be gradual over time or is there going to be a step change in the menu that we're going to see? Just going forward in general, I mean, how big of a handle as you (indiscernible) are you really going to have on the ability to kind of tweak average share growth? Why not just allow check growth to possibly decline, because it feels though if you did that and you got the traffic, that would probably be applauded?

Clarence Otis Jr. - Chairman and CEO: Well, I think, there are a couple of things. One is, it is tempering check growth as opposed to check decline and will be gradual and it will be driven by a couple of things. So one is our promotional mix and that's gradual almost by definition, because the preference on promotions ranges from 5% to something more like high single-digit which is typical, a blockbuster promotion would be 15% or 20%. So that's by definition going to be gradual effect. Then the second part of it really is making sure that we introduce platforms on the core menu that have more approachable pricing. Those platforms are going to get some preference, but there is still going to be fair amount of preference elsewhere on the core menu. The reason why we wouldn't drop check average is because that sort of preference elsewhere on the core menu is not asking for a lower check. So if you think about a Red Lobster 1299 promotion, there you might get 15% preference on that dinner and that total check maybe $15.5, $16. The other 85% of preference is rather check that's north of $20. So to drop that price when that's not what those folks are looking for, they are looking for us to redefine the experience in ways it drive up quality and may ask if you're willing to pay a little bit more if we can do that effectively.

Operator: Michael Kelter, Goldman Sachs.

Michael Kelter - Goldman Sachs: I wanted to ask, have you guys talked about traffic being in line with the industry for the quarter. But, I guess, my question is at what cost, because your restaurant margins were the lowest in a fiscal third quarter for as far back as my model goes. I guess, I'm wondering is that the new normal? Will it require margin investment just to maintain share at this point?

C. Bradford Richmond - SVP and CFO: No, the investment in check we made during the third quarter specifically during the third quarter was a little more than we anticipated and we've learned some things during the quarter that we're going to apply to our promotions in core menu tactics in the near-term going forward, but we are seeing meaningful improvement in traffic, so for instance at Olive Garden during the second quarter traffic was 5.5 points behind the industry and the third quarter traffic was even. A little more investment in check than we anticipated like I said during the quarter and we've identified some ways that we can help address that.

Andrew H. Madsen - President and COO: I would say that the third quarter was a relatively weak quarter overall for the industry and so being even in that quarter had margin effects, because being even that's being relatively negative. So we don't expect on a go forward basis that kind of industry weakness. Then the other part of it as Brad talked about when we look forward next couple years given the strategic choices that we're making, we would expect EBIT margin expansion of 10 to 30 basis points a year that is lower than what we would have told you a couple years ago, which would have been more like 30 to 50 basis points a year, but still EBIT margin expansion.

C. Bradford Richmond - SVP and CFO: So Michael, when you look particularly at the third quarter, there is about 35, 40 basis points of Yard House acquisition late impact, so if you're comparing backwards, there is little noise in the number there as well.

Michael Kelter - Goldman Sachs: Then on a separate note, I was curious to get a little color, one of the rating agencies asked that you have to maintain your credit rating at this point and what does that mean about our debt leverage levels and the capital allocation going forward?

C. Bradford Richmond - SVP and CFO: We've shared our plans with the – much of the information that we shared at the Investor and Analyst Conference, we shared that with them as well as well some of our thinking that we outlined for the next fiscal year. And so, they look at many things, they also look at the trend of things as well. But our amount of debt or the ratio of debt that we have is within – will be within the year, within the range that we target to maintain investment grade credit profile. Our coverage ratios are little bit outside of that range. So, they've looked at that, within the past few weeks, they've come out and have changed their outlook to negative. But they haven't any of the ratings at this point. So, they are going to look at many of the same things that you are looking at from where the business is? How is it trending on sales and operating cash flows? What I would say is, they look back at our history of how we've adjusted and reacted to other business environments and situations and that we do have for an organization of our size and number of levers and number of activities, many of which we are doing right now to protect that invest grades in our credit profile. So, no one has downgraded the stock at this point, but they do have a negative outlook. In terms of maintaining an investment grade rating, right now we're at the equivalent of BBB with the three agencies that are rating us. So, we do have room should we needed for one level of downgrade and still remain investment grade profile and advantages that come with that.

Clarence Otis Jr. - Chairman and CEO: I would say that we're very focused on maintaining an investment grade credit profile. So, we'll make (capital occasion) choices that are consistent with that. If you look back over our history since our spin-off, we've been downgraded before, we've been upgraded from those levels because we've demonstrated that kind of discipline.

Operator: Keith Siegner, Credit Suisse.

Keith Siegner - Credit Suisse: To follow-up on that question quickly. Just the dividend that was just declared, the $0.50, sounds like it was last dividend at $0.50. It was very clear at the Analyst Day that you have plans to increase it. When thinking through this maintaining of an investment grade credit profile, et cetera, et cetera, and you think about this upcoming increase in the dividend, what factors are you looking and deciding how much to increase it? What's fits in with the broader capital management strategy?

Clarence Otis Jr. - Chairman and CEO: We're looking at our CapEx budget and to the extent that we bring that down fairly significantly, it accommodates (a lot of) dividend increase in our view.

Keith Siegner - Credit Suisse: One other question from me. Clarence, you talked a several minutes ago about the tempering of average check growth and one of the things that was part of that was using promos especially to address the lower end affordability. At Olive Garden, 2 for $25 promos is ending soon, I think at April 7. Could that possibly be replaced with the promo that's more geared towards the lower check or addressing entry-level affordability because I think one of the plans of 2 for $25 was – that it actually wasn't resulting in a lower check per person. Could that change with the promos at Olive Garden going forward?

Clarence Otis Jr. - Chairman and CEO: 2 for $25 does result in lower check, but beyond that we're not going to comment about our promotional plans for competitive reason.

Operator: Joe Buckley, Bank of America/Merrill Lynch.

Joseph Buckley - Bank of America/Merrill Lynch: Two questions again on the promotional positioning of the brands. You're saying the 15% and 85% split. What is your confidence that you can manage to check up and don't have to do something much more dramatic to improve the value ratings of the brands. What we're seeing promotionally from you, it doesn't appear to be very new or different or either aggressive on your part given the traffic trends?

Andrew H. Madsen - President and COO: I would say in terms of addressing affordability and value promotions is one lever that we're pulling and based on the traffic trend improvement and the percent of guest that are ordering those dishes certainly it has been noticed by our guest, but in addition we're doing other things on our core menu. So for instance a significant core menu change at Red Lobster that really increased the preference on items under $15 is working together with the promotions that we're offering and we are seeing improvement in value stores, value perception at Red Lobster as a result. So, it isn't just what we're doing in our promotions to strengthen value and affordability.

Clarence Otis Jr. - Chairman and CEO: I would say the core menu is the key and I would lock in on 15%. That would be a blockbuster preference for promotion. Red Lobster does have higher preference in Olive Garden, but double-digit would be fairly significant for either one of them.

Joseph Buckley - Bank of America/Merrill Lynch: Then a numbers question, Brad one of those I've got – I have a lot of questions since your meeting, is the bonus reset comments for next year in the $0.30 to $0.34. So just a couple of questions. The (indiscernible) fiscal '12, I think in your comments at the meeting you may have referenced fiscal 2012, is that clearly that would have anything to do with that, so I'm just trying to clarify if you meant to say that or there is some connection there? Then how definitive is that $0.30 to $0.34? How performance-based is that number or how automatic does that number become in fiscal 2014?

Clarence Otis Jr. - Chairman and CEO: Let me start and then I'll hand it off to Brad. But we have a bonus pool absolute dollar amount, but that doesn't vary much from year-to-year. That assumes that we achieve the plan for the year. To the extent that we fall short of that plan, we are going to pay out a lot less. That payout can be dramatically less. There is a floor for about 60% of that bonus pool that goes to restaurant managers essentially. They don't go to zero regardless of performance, but for the other 40% it can go to zero. So when we talk about a planned bonus number for next year, it depends on performance. If it's a performance like this year, then it certainly won't be $0.32 to $0.35, it will be dramatically less than that. We hope it's 32% to 35%, that would be our preference.

C. Bradford Richmond - SVP and CFO: I think, Clarence said it pretty well. I guess, the only think I would add is, making that plan, paying out those targeted bonus, that's what we would accrue to. You see this year we are much under that. We've been adjusting that accrual down throughout the year as our performance has dictated. I think the other piece of information just to reflect back a year, what would be fiscal 2012, we anticipated a higher bonus payout. We started accruing to that, but as the year went on, we accrued less. In that case, going back to that pool that Clarence was talking about, it was about $0.15 less. So we'd turn to what it would be for achieving our plan. We could exceed that plan, which would add meaningful to the earnings, value creation, but a portion of that would go out into bonus payouts as well. So we've got a couple of years where the accrual has been too high and we've adjusted it down. So what we're really pointing out as we look to '14 is how much that accrual going back to a targeted amount would expect to be. So to your point, it could still change some this year, depending on our actual performance. So we'll update you on what that amount looks like in June.

Operator: John Glass, Morgan Stanley.

John Glass - Morgan Stanley: Actually, if I can just first follow-up on that bonus question. Whether or not it was up or down depending on performance is understood, but the absolute magnitude is what I think still strikes investors as being high in dollars. I understand a lot of it's at the store level. Do you feel like you're – are you overcompensating your store level employees relative to peers in line or under and so once you I guess normalize their compensation versus peers, or do you feel like that's not an issue?

Clarence Otis Jr. - Chairman and CEO: No, I would say – I mean, we do market studies all the time and we're certainly in line with peers. These are peers who run restaurants that have similar complexity that means similar volumes, similar staffing. So we got volumes and staffing above the industry average. So that peer group is not an industry average peer group, it's the high volume portion of the industry.

John Glass - Morgan Stanley: If I can follow-up on this check question, I don't want to beat it to death, but as I understand that and I'm sorry I don't have the numbers in front of me, but your check decline it quite often in this quarter given promotional activity. The traffic improved but your goal would not to have – be to have traffic check growth essentially flat, right, maybe mix – negative mix offsetting pricing, is that right? Have you ever have that experience that is so hypothetical and you haven't really figured out the real balance yet between the right promotions and driving traffic and keeping checks sort of flat?

Andrew H. Madsen - President and COO: Our expectation is not for the check at Olive Garden or any of our brands to be down versus prior year over an extended period and so the changes that we're making tactically in our promotions being more aggressively focused on affordability, as well as the changes we're making on affordability in our core menus are all things that are moving us in the right direction from a traffic standpoint, but there are also things we're learning from as we go. So we wouldn't anticipate in the future going – the same check dynamics that we saw during the third quarter.

Operator: Jeff Bernstein, Barclays.

Jeff Bernstein - Barclays: Just two questions, first on the labor side of things, it seems like that's perhaps a greater concern than commodities which have gotten more of your attention over the past couple of years, so if you want to consider the minimum wage in healthcare and whatnot, and I know you mentioned earlier on the call that investing in your people and at the Analyst Day you talked about perhaps adding a layer of management for additional (oversight age) to the core brands. Just wondering if you can talk to us about the cost saving opportunity you see on the labor line to mitigate that, I know you've been good in terms of layering out kind of your annual cost savings target and what not, but specific to that labor line, do you have things that you think could help mitigate and offset kind of where are they in terms of their rollout?

C. Bradford Richmond - SVP and CFO: Jeff, this is Brad. I will start off with this. We did talk about at the conference about additional opportunities in labor optimization in terms of our transformation opportunities and so, there will be some opportunity to work on that. I think if you look back on the quarterly basis we have been quite well on managing and leveraging our restaurant labor. I think more what you see this year is essentially in this quarter is the sales deleveraging impact and Drew has talked some about that, but we also had an increase which was more simple in nature in our group insurance claims partially as we are rolling off the self-insurance that we've had in the prior years at judicial reviews to the corporate exchange. So, there is a little bit of noise in that third quarter number.

Jeff Bernstein - Barclays: Just from a follow-up perspective in terms of the comps we talk about the spike in gas, delayed tax refunds which would seem temporary in nature relative to the structural impact from higher employment tax. When you think about those three things in terms of the extreme volatility we've seen recently, how much do you attribute I guess to the structural one which is the higher employment tax or maybe said in other way, I mean if you look back how much of the benefit did you get and over how long did you benefit when the rate was lowered two years ago to kind of see what kind of the reversion might be?

Clarence Otis Jr. - Chairman and CEO: I don't think we have anyway of really knowing that because there is so many other variables in that environment when it was lowered and in this environment where it's been raised. On the delayed refund side, we have no visibility to that dynamic. We listen very closely to people who do, so Wal-Mart has talked extensively about it. They have pretty good visibility because they cash a lot of refund checks and they can track what they cash this year against what they cash last year and the various patterns and it seems to have amounted to a decent amount of money inside their system and of course doing a fraction of the entire system. So we think that that probably had an effect on February, but all we can go by is what we read from others who have more visibility on it.

Operator: Matthew DiFrisco, Lazard Capital Markets.

Matthew DiFrisco - Lazard Capital Markets: I just wondered Clarence if you can sort of just follow-up on that as far as a regional basis, there has been a lot of differences as far as reports we see with employment data, housing market data and certainly weather impacts. Can you give us from either a broad perspective of your portfolio or an industry perspective what you're seeing in the same-store sales trends if there is a certain regional differences or any sort of correlations with those economic catalyst or weather roadblocks?

Clarence Otis Jr. - Chairman and CEO: We certainly have the weather differences. We see those pretty clearly. So we had significant weather in December and February and it was pretty localized Midwest and Northeast mostly, but in terms of the non-weather macroeconomic portions, Brad?

C. Bradford Richmond - SVP and CFO: Yeah, I've got a little bit of information. I think if you look at a sequential basis where we're seeing the weakness really is in that South Atlantic, Mid-Atlantic area that's kind of lagging the other areas. When you look at it on a year-over-year basis, it's those same areas that are lagging a little bit and I think as Clarence already have strip out the weather maybe a little bit of weakness in that upper Midwest, but it's not too significant. So I'd say none of them are really striking differences when you look at across all of our brands other than maybe a tad like I said in that South Atlantic, Mid-Atlantic region.

Matthew DiFrisco - Lazard Capital Markets: Then I guess just as a follow-up you mentioned in the month of March and you referred to welcome Knapp's comments yesterday about sort of the improvement that he was citing from February to stepped-up improvement. I guess both you, the industry and your brands, have significantly easier year ago comparisons ahead. I guess is that a comment on business strength and momentum as we look at it, as far as sometimes you'll talk about the two-year comp trend showing a uptick or are you just basically saying what we'd expect to see the benefit of softer year ago comparisons also would bring about a one year improvement?

C. Bradford Richmond - SVP and CFO: Yeah, I think we try to make some adjustments on a year-over-year basis. So, for example, February last year had a huge weather positive. So we don't have the weather number in March. So we're looking at all of those different variables. So if you look at February year ago was up 3%. So on a two-year basis, I guess you're talking about roughly 2.5% down in February last year whereas March last year was up, I think Knapp-Track was about a point. So March was a tougher month than February, and we're seeing improvement in March. So it's not the two-year stuff that's going on. I think February just had beyond weather a couple of jolts that consumers took some time to adjust to.

Operator: Jason West, Deutsche Bank.

Jason West - Deutsche Bank: Drew, I heard you mentioned that some of the investments in check were a little more significant than you expected, and you made some warnings around that. Are you referring to something that happened earlier on in the quarter or kind of before you updated guidance? Or some things that happened kind of later on in February, if you could just talk a bit more kind of what those issues were and what kind of changes you're making?

Andrew H. Madsen - President and COO: It was really what occurred throughout the quarter and probably the biggest thing that we've learned is the percent of guests that were ordering these dishes, which had a bigger impact than we thought. It also had an impact on appetizer add-ons. Those are probably the two biggest things that we learned and those are the areas that we're going to be looking at refining as we go forward.

Jason West - Deutsche Bank: So you mean, the promotional items and the appetizers were higher preference than kind of you expected and that put some downward pressure on check?

Andrew H. Madsen - President and COO: The promotional items, yes, not the appetizers.

Jason West - Deutsche Bank: Then I have seen recently a little more what seems like more couponing around some of the deals such as Lobsterfest coming through places like Twitter. I don't know, if that's something new or if that's sort of what you were doing last year, but if you could talk about sort of that couponing effort or sort of (Bogo) effort and if that's a significant driver, if it's something that impacts check that's helping traffic or maybe it's just sort of more what you've always been doing?

Andrew H. Madsen - President and COO: Lobsterfest is a promotion we believe in. We think it's a very distinctive brand-defining offer that you can't get anywhere else. There are a lot of guests that are very excited about Lobsterfest and willing to pay a premium price for very distinction cravable dishes. There are other guests who are a little more aspirational and would love to come if we're a bit more affordable and those are the guests this year that we made some tactical adjustments to try and give them more – a little bit more of affordability incentive to come in for a great experience during Lobsterfest.

Operator: Jeff Farmer, Wells Fargo.

Jeff Farmer - Wells Fargo: Just taking a step back a little bit. At the Analyst Day, there was a lot of discussion about what you get and what you pay. I guess meaning that it takes both to win market share in the current environment. So I guess, I'm pretty clear on what you mean on the pay side of the equation, but what are some of the near-term changes you can make with what you get at both the Olive Garden and Red Lobster, and what can you do in the near-term to help them drive top line using that side of the equation?

Andrew H. Madsen - President and COO: Yeah, that is exactly what we were talking about at the Analyst Day in particular about Olive Garden. So beyond affordability, we know that there is different guests that have different needs and one of the biggest needs at Olive Garden beyond affordability is the opportunity to have an experience, it's a little lighter and a little fresher and that's why we introduced the Lighter Italian Fare section recently and we've seen very good response to that core menu section. It's also why we introduced some new lunch items at Olive Garden, more daypart appropriate news, Italian sandwiches and some new calzones, and we've seen a very positive response there as well. The biggest opportunity we have beyond affordability at Red Lobster is the (indiscernible) not everyone in the party wants a seafood item and that's why they were very focused on that in their core menu introduction back late September, early October and we've seen not only an increase in the number of people buying their new mainstay dishes that are under $15. We've also seen an even bigger percentage increase in guests who are buying the new non-seafood items at Red Lobster, so those are some of the things that we're focused on.

Jeff Farmer - Wells Fargo: Just one quick follow-up, I have been listening to lot of your responses to some of these questions and just looking at the FY'14 as it relates to sort of the promotional strategy. Is it fair to think or assume that we're going to see several quarters of continued negative mix numbers as we get into FY'14 at both Olive Garden and Red Lobster, is that a fair assumption?

C. Bradford Richmond - SVP and CFO: We'll, talk about FY'14, I guess in June.

Operator: Will Slabaugh, Stephens.

Will Slabaugh - Stephens: I had a question regarding operating cash flow for fiscal '14, just given your commentary at the analyst day and how would you think about that number. Is it just with the backdrop of your guidance you talked about were roughly flat, earnings growth for next year and it looks like on the operating cash line, roughly $90 million or so benefit on the balance sheet that's going to help you get to that call it $955 million in operating cash flow for this year, just wondering what that trajectory might look like as we carry on into fiscal '14?

C. Bradford Richmond - SVP and CFO: I think from where we're stepping up from fiscal '13, you're going to see it modestly grow from there, one from the operating side with what we've talked about on our expected performance, also as well as some of the other items that are going to that around working capital, the progress there, so this early juncture, I think you are going to see it move modestly up from there into fiscal '14,

Will Slabaugh - Stephens: Just a quick follow-up there, wanted to get your thoughts on what has been impacting same-store sales. We've talked about a number of things, but now that we're through the quarter and into March, I know it's difficult to do but wondering kind of how you think weather compares might have impacted that potentially more so than when you initially thought, or people who talked about payroll tax increases, delayed refund checks, et cetera? Now that we're in the March, we're seeing this fairly dramatic improvement, where we maybe discounting the weather impact a little bit more so than we should have?

Clarence Otis Jr. - Chairman and CEO: February was a month that had decent weather effect year-over-year. So 130, 150 basis points I think we said. But much of that is really because February a year ago was so mild, I mean this February is fairly typical winter. March, I don't know. I mean I don't get the sense that it's particularly severe month, and March a year ago was not a particularly severe month either.

C. Bradford Richmond - SVP and CFO: This is Brad. We've kept a similar convention of looking at the weather impacts and really weather impacts for us is precipitation, is the big one for us. So snow or ice is what really has the impact, not so much the temperature side. I think last year, we talked about a pretty big lift in last year's number. I believe for the quarter it's about 200 basis points. So, we're wrapping over a pretty big lift, that same analytical convention that (indiscernible) gave the numbers this year that Clarence has talked about with about 110 basis points of impact in December, really nothing in January and 150 in February. So, I don't think there is much in the weather per se other than what we've detailed that's impacting the business.

Will Slabaugh - Stephens: But same was March a big change in weather.

C. Bradford Richmond - SVP and CFO: Not so far. I mean we did have – we always seem to have one late storm that comes during March, it varies from week to week but nothing that seems unusual at this point.

Operator: Nicole Miller Regan, Piper Jaffray.

Nicole Miller Regan - Piper Jaffray: There has got to be a silver lining somewhere here. I was wondering, could you please talk about the higher end brands. Talk to us about either SRG in total or in pieces? I am mostly curiously about how did the weather impact us? Basically, did it look different than your core brands in terms of the things that slowed you down or tripped you up so far (year-to-date)?

Clarence Otis Jr. - Chairman and CEO: Before I turn it over to Gene, I mean one of the highest priority we've got right now at our larger brands is regaining traffic momentum. So, same-restaurant traffic negative this quarter, lot more negative than we like, but after trailing the industry for each of the prior three quarters, matching it on same-restaurant traffic was, we think, important and we would expect to establish a positive gap to the industry on traffic as we go forward. That's our objective. So, we think we saw some progress there. I'll turn it over to Gene.

Eugene Lee - President, Specialty Restaurant Group: Thanks, Clarence. Nicole, let me just – I'll comment on Capital Grille, it's the largest brand inside the Group and had the strongest quarter. As we said at the Analyst Day, the environment is very positive for the Group. We've seen strong business travel. We're seeing luxury growth in other aspects; in retail and hotel, we had a very strong holiday season with private dining. We also believe in Capital Grille. One of the reasons for the strength throughout the quarter is that we're adapting to the new world of online reservations. We believe we're getting much better at dealing with OpenTable and allowing access to our restaurants. I think we're a little slow to react to that trend, but we are getting much better there. We're working on that also at (LEVs). We think that's a key going forward as people continue to change the way they book and fine dining. So we had a very, very strong quarter. We're seeing a lot of growth in our restaurants that have been open three to four, five years ago, where we have some capacity opportunities and we performed pretty well. Seasons had a decent quarter. We got back to the positive side of the ledger. They had also had a great quarter with private dining. So overall, I think our business continues to remain strong; the environment is strong for us. We've done a lot of great work from our culinary standpoint. We're in a good place with our service platforms and we think we're positioned to continue to grow into the future.

Operator: Sara Senatore, Sanford Berstein.

Sara Senatore - Sanford Berstein: I just wanted to step back and ask kind of a broader question on, you've talked about some of the strategic maybe missteps, but now going forward, corrections that you're making around checking and menu offering. Can you just talk a little bit about the idea that some of the varied menu competitors out there have really broadened their menu to include a lot of offerings that might be similar to what you have? So I guess, the question is generally, is there any limitation because you have sort of these more single and focused concept brands? Maybe another way to ask that question is just, can you tell where your customers have been going in lieu of the Darden brands?

Clarence Otis Jr. - Chairman and CEO: Yeah, I would say that – I think we talked about a lot of it at the Analyst Meeting. So the attrition that we have seen is really on the lower end of the household income continuum. So a lot of those folks have really traded out of dining out, because they are that financially constrained. So their visit frequency overall is down. Some have traded to lower check within casual dining lower check brands and some have traded from casual dining to lower check segments. So that's really, because we are talking about attrition at the margin and that is what we are seeing. We are not seeing a whole lot of change in the rest of the income continuum. We've certainly not seen attrition there.

Andrew H. Madsen - President and COO: The only thing I would add to that is, we believe that we can make our brands more relevant and remained broadly appealing, recapture guests without becoming a varied menu brand and without losing brand distinctiveness. So that's why I mentioned, at Olive Garden we are focused so much on beyond affordability on lighter fresher fare, that's why at Longhorn we are focused in particular on stake distinctiveness and really establishing that brand as the best casual dining steakhouse in the segment, introducing things like the 30-ounce Porterhouse or the new Rancher's Sirloin. So we don't believe we need to become varied menu, we need to remain distinctive and just understand the need states that we need to become more relevant in.

Clarence Otis Jr. - Chairman and CEO: I would say that as we look at it and we think about national casual dining brands, those that are distinct and differentiated enjoy the high unite volumes. So that speaks to the importance of not being sort of varied menu, the varied menu brand, the unit volumes that essentially range from $2.2 million to $3 million and LongHorn is at the bottom of our list at $3 million, but they don't advertise anywhere near where the rest of the national brands are because they are national yet and Olive Garden and Red Lobster dramatically higher than that, so is Outback, so is Texas, Roadhouse and so the people who are differentiated and are viewed as a varied menu until they have a strongest competitive position.

Sara Senatore - Sanford Berstein: I think that make sense I just I was trying to figure out if you're lagging the industry then presumably either you're losing more customers than other people are or you're losing customers to other restaurants. It sounds like, to be extent that that's happening; it's more just potentially lowering from consumer trading down to…

Andrew H. Madsen - President and COO: Yes I mean that's really at the bottom end. The players that have the higher unit volumes continue to have the higher checks and that's – and we're pretty well developed there and – so we think it really is – that's really the affordability question we're talking about and the reason why we have to be pretty targeted with it, because we've got lot of other guests. Affordability is important, but it's not their highest priority, the highest priority is high quality.

Operator: John Ivankoe, JPMorgan.

Amod Gautam - JPMorgan: It's Amod Gautam filling in. First, I'd like to get more color around your same-store sales expectations as 1% to 2% and really in the near-term, I think specifically there was a traffic expectation of 0% to 1% and I know maybe a few years ago, you are outperforming the industry by up to the 300 basis points, and obviously that's converge more recently. So within that flat to 1% expectation, where do you think the industry kind if flushes out and is there sort of an implicit assumption that Darden will outperform?

Clarence Otis Jr. - Chairman and CEO: Industry has been negative in same-restaurant sales, (I forget) negative. So any positive would be outperformance, and that is the expectation. We talked about – that means not only so winning the day-to-day market share contest within casual dining, but making sure that we win the sort of larger battle within the entire dining out spectrum.

Amod Gautam - JPMorgan: Then I'm just trying to get a sense for kind of the puts and takes within the new unit CapEx for the next few years. How many units of the LongHorns and Olive Gardens you are expected to open annually in the near-term or kind of committed in fiscal 2014 and then 2015 maybe?

Andrew H. Madsen - President and COO: I would say at this point in juncture, we've shared what 2014 looks like at the conference, I'd say, 2015 with what we know today and what our expectations are will be much similar to 2014. We have lots of opportunity with strong performance in SRG, if anything within the deployment for new restaurants, you might see a little bit more going to SRG just given their strong performance.

Matthew Stroud - IR: We'd like to thank everybody for joining us on the call today. We recognize that there are few folks in queue. We apologize we couldn't get to you this morning. We will be happy to take your calls, of course, here in Orlando. We thank everybody for their participation and we look forward to speaking with you in June.

Operator: Today's conference has concluded. Participants may disconnect at this time. Thank you for attending today's conference.