Brinker Analyst Day – March 2010, Dallas Texas
On Thursday after the close, Brinker announced the sale of its On the Border concept and expects the transaction to close in late June, if not earlier. Proceeds are $180 million and OTB generates about $330 million in revenues. Management anticipates recording a gain on the transaction at closing.
Management also revised guidance upward on Friday:
- $1.40-$1.44, excl MG
- Better comps with decline of (1%)-(2%) vs. (2%)-(4%)
- Cost of sales at 28.5% vs. previous guidance of 27.5% (the increase is pro-forma for OTB)
- Reflects the impact of promotions and OTB sale
- Interest expense down $5 million
- $50 million payment on term loan will reduce balance
Despite the downturn, EAT now has the opportunity to create value for shareholders over the next five years. While nothing comes easy, I like the direction the company is headed. Brinker is doing to its Chili’s store base what Applebee’s can’t, given DIN’s excessive leverage.
Brinker’s analyst meeting focused on the company’s ability to move to the next level from an operations standpoint. As the company has navigated these turbulent times, it has disposed of non-core assets, refranchised a significant amount of stores and reduced leveraged, while returning free cash flow to shareholders. More recently, Doug Brooks, CEO, hired and promoted talented people to the senior leadership team to help implement a plan to reinvest the company’s substantial free cash flow back into the business.
The goal is to grow EBIT margins by a net 400 bps (or more) and double EPS in 5 years.
The bulk of the margin improvement will be accomplished by using new technology in retrofitted kitchens across the company, allowing the company’s kitchens to be more efficient.
Notes and commentary on the analyst meeting are below:
Some of the margin and growth drivers to focus on for next five years:
- Chili’s remodel program - $300,000 per store
- Kitchens being modernized and made more efficient - reduce ticket time by 5 minutes
- Doubling the size of international presence to take advantage of demographic trends
- Expanding Maggiano’s reach
A look at the international opportunity: The goal is to get to 425 restaurants by 2014 from the current level of 218. Importantly 70% of the unit growth is locked down with franchise agreements in place.
- Opening 95-105 in 2011 and 2012
EAT opened 50 restaurants outside the U.S. in 2009 - most ever for Brinker or any casual dining brand.
- Partnership with CMR in Mexico will be expanded
- Already opened 19 JV restaurants there
- Largest international market
Overseas, the casual dining market is where the U.S. market was 20 years ago:
- Middle class expanding
- Need for convenience
- Buying patterns becoming more sophisticated
- Making choices based on quality
Potential markets….
- The U.S., U.K., Japan, and Germany are more mature
- BRIC’s are at the bottom provide more where the US was 20 year ago. On the BRIC side, there is an opportunity to take advantage of brand attachment
Only pursuing markets that can sustain more than 5 markets:
- Agreed franchise agreements in India and Russia for 25 units in each market
- 2 franchises open in India
Franchise partners are rigorously vetted in terms of financial stability and reputation.
Tailoring business for local tastes:
- Business doesn’t depend on expats
- Don’t serve pork in Middle East, serve more vegetarian options in India
Real Estate costs are higher in international markets.
Investment costs are calibrated according to volumes of each restaurant to maximize volume.
EAT can penetrate markets quickly and profitably seen as QSRs have laid the roadwork in terms of supply chain:
- Model provides a compelling business model with high margins
- EAT knows how to maintain strong franchise relationships
- Doubling size of international business by end of FY14
Carin Stutz
Carin is the operators’ operator at EAT. As such she is in charge of the biggest part of the Chili’s turnaround. She is empowered to reengineer kitchens and operations to innovate and improve margins. She views the restaurant as two distinct operations:
(1) Retail business
- What guests see
- New initiatives on retail side of the business
(2) Manufacturing operation
- Food
- Quality
- Process hasn’t changed much since the segment began to grow significantly
- Equipment, flow, and process have remained relatively unchanged
- Shoehorning new products into kitchen
- Menus getting bigger, consistency challenged
The idea is to introduce new technology into the kitchen that will make it faster and more productive. A comparison to QSR was used where the efficiencies in the back of the house have not been as technologically advanced.
Use of technology and back-of-house processes will give 300 of 500bps improvement EAT is seeking to achieve.
- Cooking technology
- Accelerated cooking to increase speed in kitchen
- Consistency in proteins
- Overall margins (lower labor)
- Improved workflow
- Today’s station based kitchen is being adjusted
- Retrofit of kitchen, menu items will be prepared more sequentially to stop cooks having to cross kitchen
- Allows more efficient staffing
- Building kitchens from scratch, reduce overall space requirements
- Most efficient operating model
- New POS and back office systems
- Enable EAT to better understand exactly what customer wants
- Kitchen Display System (should be able to drive more than half of the margin improvement)
- Tool’s in place and working well
- Allows for significant through put enhancements
- Improved efficiency of kitchen staff
- Reducing ticket time by 5 minutes, delivering a faster yet appropriately paced experience for guests
Where the 300-400bps will come from:
- Higher execution, fewer voids and therefore better sales
- Inventory management
- Fewer labor hours
- Easier to use equipment
- Possible better wage rates
THE TIME LINE IS KEY
The time line here is very important to mapping out the success and when is expected to hit the P&L Currently EAT plan to have KDS process improvements in place by start FY11, POS by 2QFY11, retro fits of kitchens by FY2013.
- Closing for less than a day for retro fits
- No closure for POS, KDS (should be able to reduce some technology related G&A)
New tech + lower investment costs +elevated margins = effective business model
Steve Provo, President at Maggiano’s
Maggiano’s
- Maggiano’s “ain’t no Ringo”
- Maggiano’s is a very strong brand, in a segment of industry that is still growing post recession
- Poised for aggressive expansion
45 restaurants, 21 states, 1 international.
Maggiano’s is doing $8 million dollar AUVs.
Maggiano’s is a 20 year brand with three points of differentiation:
- Is it real?
- Is it truly not replicable?
- Can you make money?
Maggiano’s ability to handle large parties is a differentiating characteristic. Banquet facilities can handle, and feed, 200 people. All the differentiation in the world is meaningless without delivery.
- External survey of casual dining - Maggiano’s outperforms on taste, hospitality, and is getting better
- Internal survey - Last two years have seen significant improvement
CHALLENGES FOR MAGGIANO’S
- Business is not as strong as brand
- 1/3 of units built from 2002-2007
- 74% only use Maggiano’s once per year or less
- Birthdays, anniversary, proms
- 30 times a year, average casual dining
- Only 1 or 2 Maggiano’s occasions per year
- Need to move beyond special occasions
AWARENESS
- Marketing strategy being changed
- Email, direct mail, and social media
- Very strong returns on these marketing strategies
- Far away from Nieman Marcus type returns
- With loyalty and average check, it is possible to emulate
RELEVANCE
- Today and tomorrow
- Order on of the pastas and you take home another one for free
- Strengthens differentiation
- Value strategy – pasta is lowest food cost item
- Mixed at 20% on average in testing and food costs declined
- Doubled guest perception
- First time in 19 years the primary reason was no longer a birthday
- New promotion
- Meal for two
- Price is $40, shared appetizer, two entrees, shared dessert
- Loyalty program for preferred guest
- Refer a friend program
- Targeting admins and party planners
- Private dining sales and corporate has returned to sales growth
Returning to new restaurant growth is not about sales alone.
Variable cost structure needs to improve:
- Attacking cost of sales
- Waste-management process
- Testing baking bread again
- POS
3 closest competitors are PFCB and CAKE:
- Both have 3 times the numbers of units
- Italian bigger than Chinese, private dining capabilities are superior
- High end and corporate guests that are leading
- Next 15 years are about the baby boomers
Wyman Roberts - President of Chili’s
A lot of negativity around bar and grill. However, that is where the game is, that is where people will continue to gather with family and friends. Maggiano’s lives and dies by what it does: make a promise and then deliver, which is where the company is going with Chili’s - everyone knows Chili’s.
- 4.2 billion dollar business globally
- 1,500 restaurants
- Strong AAV – 2.8 million
- Company domestic are at AAVs of over 3m
- 55% company domestic, 32% domestic franchise, 13% int’l franchise
- Maintain a lot of share (9% of bar and grill) of market
- Competitors are vulnerable, chains should have advantage over independents also
- Scale, brand
- National network presence
- Chili’s and Applebee’s are the only ones that it continually works for (national network, effective business model, marketing all in sync)
- Affordability
- Good food
- Quick meal
- Powerful brand
Customer survey has been going on for decades and Chili’s has grown:
- 1999 Chili’s still a growing brand
- Last year Chili’s took a hit
- Almost all brands took a hit
- Leadership and operational excellence needs to sustain vision held with partners to get desired results
Brands in bar and grill can be schizophrenic:
- Promotions and specials can send contradicting messages with no clarity of focus
- 5 dollar sandwiches, high price steaks
- Best CD brand has boring marketing
- Bore you with marketing, wow you with consistency and delivery
Chili’s aligns with older and younger demographics very well:
- Not barbelled, not skewed
- Chili’s skews more to higher income demographics
- Less need for these people to eliminate occasions in casual dining
Why do people come?
- Don’t want to cook
- Night out
- Want to unwind with friends
- Treat myself
Focusing on the “not cooking tonight” category
- Great for Chili’s
- Handheld food
- Burgers, tacos, quesadillas, chicken tenders
Advertising needs to gain traction with social media:
- National media needs to be complemented with electronic marketing
- Bennigan’s never maintained relevance
***Better food***
- Upgraded burgers
- Better beef, better preparation, fresh product
- Ribs
- Elongated smoking process, will fall off the bone
- New tacos
- New pulled pork sandwich
- New soup
- Caribbean salad
Difficult sometimes to get permission to move forward from the core customers.
- Have received positive feedback from customers
Efficiency:
- Shrunk menu from 12 pages to 8 pages
- Reduce time, greater focus
Remodel program
- Ignite revitalization of the brand
- Fleet isn’t that old
- A lot were built in the last ten years
- Target budget for first remodel opening this summer is 300k
- Getting the chain back to a position where they can start thinking about growing again
Business model
- Casual dining in the last two years has focused on deals
- 3C has been a bold strategy
- Brand building message was incorporated with the deal
Mix lowered in promotional package
- Goal is to become less dependent on mix
- Focus on quality and freshness
- Using promotions as a key messaging platform
Competitors driving core customers but Chili’s has been focusing on exposure and changing how people perceive the brand versus competition.
Marketing
- Make sure that staying focused and resonating in key markets
- Use media and focus it, use scale, TV, electronic, direct mail
- Bringing Maggiano strategies to Chili’s
- Less aggressive promotions
- Will, however, remain competitive
- MRT and RUTH would never have anticipated the promotions they are doing right now
- But the goal is to build a strong brand and not be too promotion-focused
- Seeing a $5 increase on to-go check because of new online ordering program
- Prompts customers to have a dessert etc.
- Virtual gift cards
- Go online, customize gift cards, and print it out
- No need to ship, passes a major hurdle for online gift cards
- Grew gift card sales this year, even in this economy
Looking to improve margins 300 bps target in next few years in “manufacturing” process - Looking at front of the house, 3 benefits:
- Better guest experience
- Costs less money, less ancillary support
- Teammates make more money
Franchisees
- “Big 6” franchisees
- Meet quarterly, share P&Ls, best practices and initiatives
Utilities
- Reducing energy costs
- Lightbulbs – changing to LED bulbs
- Return is instant, customer looks better
Hoping to be focusing on new unit growth in the not-too-distant future
Chuck Sonsteby - Financials
Strengthened business model while improving balance sheet
- Goal wasn't merely survival
- Rationalized asset base
- Prepared for success with improving macro environment
- Closing 59 under performing restaurants
- Constantly evaluating portfolio
Returning cash to shareholders - from 2004 to 2008 the share base shrank by 37%
- Paid down 295m of long term debt in a difficult sales environment during downturn
- Improved margins without compromising quality
Introduced new items that favorably impacted cost of sales that, in checking with guests, did not negatively impact the brand or the experience:
- G&A held steady at 4.5% of sales
- Maintained dividend while others did not, actually increased it
- Strong free cash flows
- Cash of 110m
- Free cash flow continues to grow
- $237m in FCF this year
Annual cash flows for chili's restaurants that have been open for at least a year
- None is negative
- Underlying asset base is very healthy
- A lot of earnings power left in the system
Signs that the macroeconomic environment is improving
- Need to focus to maximize earnings stream
- How can we get margin improvement without taking away from experience?
Trend in operating margins?
- Average annual sales hasn’t changed much in last few years
- Operating margins have decline significantly since 2004
- Biggest driver of this increase is labor
- Wages and wage hours have been increasing over time
- There is a lot of room for progress
- Need to improve in the kitchen and provide a better product and experience
- More consistent food and faster service while eliminating some kitchen positions and inefficiencies
- Operating margins will improve 300 bps with 100m in investment
- ROI of over 50% after tax, payback in two years
Labor has always been cheap in the U.S and technology has been expensive
- The lines have now crossed
Credit markets opening up
Capex in 2011 will be 125m, 2012 will be 160m
- Cost of 100 bps of depreciation that will offset 500 bps of improvement
Not anticipating much investment in domestic market until it can be justified
- It will be some time before capital will be committed to domestic growth
Use of free cash flow
- Dividends and share repurchases
- 27% increase in dividends, as announced this morning
Authorized 250m of share repurchases
- Total authorization of 300m+
Maintaining investment grade rating is crucial to maintain ease of access to capital
Existing term loan due in October this year
- Will pay down 50m in 4QFY10
Expecting to refinance term loan over three-to-five years
- Provides additional liquidity without needing to draw down on revolver
Impact on EPS
- Capital investments
- Proceeds from OTB
Full year guidance will be given in August on 4Q earnings call.
Long-term growth model - 10-12% EPS growth per year:
- Operating margin expansion accounts for 1%
- International and domestic growth development accounts for 2-3%
- Share repurchases accounts for 3-4%
- Same-store sales accounts for 3-4%
Q&A:
Q: Expound on the GEM guest satisfaction scores at Chili’s.
A: Guest scores at Chili’s are mixed. Some solid improvement and scores that typically align with traffic growth, like value. Also saw pressure in operations around other scores, like pace. The speed and the pace issue came home to roost for us.
Got pushback from people who didn’t like change but slowly people are starting to move back up.
There hasn’t been much reduction at restaurant level, in operating cost. Cost of sales, and labor, have not been significantly cut. The new menu improvement didn’t cut portions.
Q: Understanding 300 bps…
A: A lot of room to improve was observed. Burger cooked in 7 minutes, shouldn’t take till 15 minutes to deliver. In KDS, instead of using it as a ticket system, now will be used as a throughput tool. New kitchen and cooking equipment.
Q: Refranchising?
A: Going to read an analysis the company carried out before we get back into further refranchising.
Q: 300 bps…are incremental benefits a couple of years out? What is the timeline?
A: You’ll see it step up a bit. 2011 before we start to see progress.
Building restaurants with new technology in place in international markets, like in Mexico. In December, did a full mock up. Could produce up to 200 plates per hour. Went from eight cooks down to five. Back to front manufacturing process is being streamlined effectively. The cook times are significantly faster. In the first month, month and a half, the cook times are impacting the front of the house.
Another opening in May with that technology and another in July.
Q: Detail about Mexico and 5 minute time vs restaurant itself?
A: Technology helps to cook food faster. Medium rare burger will be the same every time. Engineering the guest experience. It does cook the product faster.
Q: The online ordering system, a 5% increase…percentage of online vs to-go business?
A: Without any marketing, above 5% of to-go are already using online where available. The 5% impact is significant. Don’t want to get into too much detail.
Q: BPS improvement, when it will take, plus or minus for OTB, comps?
A: Assumption for margin expansion is on an apples to apples basis, applies to chili’s. If you look at today’s release vs comparable quarter, the difference is about 20 cents per share. On discontinued operations for OTB, it does not include shared cost, cannot break out anything but directly attributable costs for OTB.
Q: G&A leverage coming from OTB deal?
A: Has not been determined as yet with deal not being closed.
Q: 400 bps is as reported, not excluding OTB?
A: Yes.
Q: Implicit SSS number included in assumption?
A: Between 1% and 2%.
Q: Increased profitability as scale grows in global business?
A: Anticipate that to be quadrupling in size, in terms of where we are today.
Q: Return on investment?
A: 15% return on gross investment is the aim while holding the topline. That’s a low target but as volume grows we see returns get very substantial: similar to that of a Chipotle.
Looking at more JV opportunities.
Q: More detail on remodeling program versus the one you did in 2007?
A: Expecting a return…franchisees won’t invest unless it’s worth it. They keep us honest.
Versus the one a couple of years ago, this remodeling effort is clearer as to what’s going to revitalize the brand and drive traffic. We saw traffic improvement with the last remodel.
Q: The Maggiano’s consumer demographic vs competitors?
A: High end casual dining guests do have more of a population of every day guests. Sliver of population use Maggiano’s regularly. Our guest base are generally more affluent and are heavy users of the category.
Q: How do you view the business in a couple of years?
A: We can drive sales higher but there is a lot of work to do and it is a choppy environment out there. Comps at a 1 or 2% in the shorter term.
Q: Investment and returns…
A: Kitchen technology will drive 300 bps of margin improvement. 100m of investment.
Reimage program is more modest, looking at 18m in first year and 35m in the second. They are still looking for 15% ROI.
Q: How will you strategize reinvestment and reimage based on profitability of store base?
A: Benchmark is 300k. Will fluctuate depending on whether there is a need, whether it can be afforded.
It’s going to be done case by case. From a marketing perspective we would like to bring the message from market to market, although that’s easier said than done.
Q: Portion and price…
A: Grain based proteins will be up, will have price uncertainty in that regard. There is a connection between commodities and the topline and economy. Escalating commodity costs generally mean escalating sales…
Q: How is the impact of healthcare imbedded in labor line?
A: Trying to understand how it will impact, just like everyone else. Reconciliation bill got passed. Brinker covers students on policy and no preexisting conditions so short term no incremental cost. Everything we’re talking about from remanufacturing and remodeling puts more pressure on us to make effective impact on the operating margin.
Q: Same restaurant sales…
A: Still a company with multiple brands. Our focus is on getting better before getting bigger. Two differentiated brands right now. Iconic brand in Chili’s, have to reposition it in the market. Italian brand is very strong. Down the road we will have more businesses.
Weekday night and lunch business, banquet business coming back. Chili’s is choppier; consumer confidence is still bad.
Howard Penney
Managing Director
