Good morning, and welcome to the Bloomin' Brands, Inc. Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Tara Kurian, Vice President, Corporate Finance and Investor Relations. Please go ahead.

Thank you, and good morning, everyone. With me on today's call are David Deno, our Chief Executive Officer, and Chris Meyer, Executive Vice President and Chief Financial Officer. By now, you should have access to our fiscal third quarter 2023 earnings release. It can also be found on our website at www.bloominbrands.com in the Investors section. Throughout this conference call, we will be presenting results on an adjusted basis. An explanation of our use of non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures appear in our earnings release on our website as previously described. Before we begin formal remarks, I'd like to remind everyone that part of our discussion today will include forward-looking statements, including a discussion of recent trends. These statements are subject to numerous risks and uncertainties that could cause actual results to differ in a material way from our forward-looking statements. Some of these risks are mentioned in our earnings release. Others are discussed in our SEC filings, which are available at www.sec.gov. During today's call, we'll provide a brief recap of our financial performance for the fiscal third quarter 2023, an overview of company highlights and current thoughts on Q4 and fiscal 2023 guidance. Once we've completed these remarks, we'll open the call up for questions. With that, I would like to now turn the call over to David Deno.

Well, thank you, Tara, and welcome to everyone listening today. As noted in this morning's earnings release, adjusted Q3 2023 diluted earnings per share was $0.44. This compares to $0.35 in Q3 2022, reflecting a growth of 26% year-over-year. Combined U.S. comp sales were down 50 basis points and traffic was 60 basis points behind the industry. Following Labor Day, sales trends in the casual dining industry softened. From August to September, there was nearly a 300 basis point decline in comparable sales trends. Our brands experienced a similar change in trend. Despite these top-line headwinds, we had 90 basis points of restaurant margin expansion versus last year, driven by our productivity initiatives. As a result, our Q3 profitability remains strong. Moving forward, although the industry landscape has changed from earlier this year, we expect U.S. comp sales to improve sequentially in Q4 from Q3. We have already seen an improvement in October, and this is incorporated within our Q4 guidance. In the long term, we are committed to the strategic priorities that are making us a stronger, leaner operation-centric company. These priorities include: first, driving in-restaurant same-store sales growth, and this is our top priority; second, increasing new restaurant openings while refreshing our existing assets; third, maintaining our off-premises momentum; fourth, becoming a more digitally-driven company; and finally, investing in technology to drive growth while preserving margins. Since 2019, we have made great progress in improving our operating model through simplification efforts and by leveraging investments to improve efficiency. The efforts have resulted in strong margin gains that have sustained despite record inflation. These achievements also provide a strong foundation for the exciting growth ahead, and we have confidence that these priorities will enable us to drive sustainable long-term sales and profit growth. In addition, our investments in the…

Thanks, Dave, and good morning, everyone. I would like to start by providing a recap of our financial performance for the fiscal third quarter of 2023. Total revenues in Q3 were $1.08 billion, which was up 2% from 2022. This was primarily driven by revenue generated from net restaurant openings, the Brazil tax exemption as well as favorable foreign exchange translation. Consistent with the broader casual dining industry, we saw a sizable change in traffic trends coming out of Labor Day and September was softer than expectations. As such, U.S. comparable restaurant sales were down 50 basis points in Q3. Average check was up 4.2% in Q3 versus 2022. As we mentioned on our last call, menu pricing is rolling off, which is translating into lower average check as we move throughout the year. This will continue in Q4 as we do not intend to take significant additional pricing for the remainder of the year. The softer industry backdrop suggests we must remain disciplined on future pricing actions to maintain proper balance on our price value equation. At approximately 25% of U.S. sales, Q3 off-premises increased 70 basis points from Q2. Importantly, the highly incremental third-party delivery business remains healthy and was flat at 12% of U.S. sales. As it relates to other aspects of our Q3 financial performance, GAAP diluted earnings per share for the quarter was $0.45 versus $0.34 of diluted earnings per share in 2022. Adjusted diluted earnings per share was $0.44 versus $0.35 of adjusted diluted earnings per share in 2022. Adjusted restaurant level operating margins were 14% versus 13.1% last year. Domestically, the benefits from our pricing and productivity initiatives continue to offset inflation. The technology we are putting into our restaurants is having an increasingly positive impact on our margins and the overall levels…

[Operator Instructions]. The first question comes from Jeffrey Bernstein with Barclays. Please go ahead.

Great. Thank you very much. Two questions. The first one, Dave, you mentioned comp slowdown, I guess, post Labor Day, but perhaps maybe a little bit of a bounce back in October. I'm just wondering if you can maybe assess what you attribute that to. I feel like we've heard three different theories. One just be the consumer headwinds that are finally taking hold, which perhaps led to that slowdown in September. But then the bounce back being a return to more seasonality versus just the fact that everyone is lapping price and therefore, the comp is optically slowing. So I'm just wondering how you think about that slowdown and then modest recovery. Is it really the consumer is a lot weaker now? Or would you attribute it more to seasonality and therefore, we're in a better place with the consumer still in relatively good shape?

Hey, hi. Good morning. We view it primarily as seasonality as we look at just the history. Obviously, we've got to keep track of various macro headwinds that are out there, student loan repayments, interest rates, et cetera. But there's some seasonality there. But also importantly, what we're doing as a company, right, and the offers that we have and what we're doing. And we talked about the uptick in September, and we feel good about November and December as well, and that's in our guidance. So we think the consumer is in a decent spot, but we think it's primarily a return to seasonality look at historically.

Got it. So when you say the softer industry backdrop to close the year, it's not so much the consumer for sale, although you're watching it, but it was just more like seasonality that led to that dip in September rather than some sort of consumer weakness?

We're watching the consumer very closely. But certainly, seasonality in September is what we primarily think. And as we look at going forward for the rest of the quarter, we feel good about what our programs and where we're going to stand, and we've tried to incorporate that in our guidance, that bounce back.

Understood. And then could we just directionally look out to next year? I think Chris, you said that your guidance for commodities and labor and restaurant expenses this year were all kind of mid-single digit and you took some pricing to mitigate that. But how do you think about that going into to next year. One, would you expect inflation to maybe moderate across those lines, even if you don't have specific guidance? And how you think of that relative to menu pricing? Because if there is a slow on consumer backdrop, some would say don't take enough price to fully offset the inflation, maybe take a hit to margin, but preserve traffic. So how do you think about that theoretically in terms of directional inflation for next year and how you think about price? Will you offset the inflation or let it hit the margin in the short term?

Yes, good morning, Jeff, conceptually, our formula is pricing plus productivity offsets inflation. I think that candidly, it's probably a little early to speculate on where inflation is going to level out next year. Obviously, we've talked about this in prior years. We don't finalize our beef outlook until December. So it's probably too early to give us a read on 2024 commodities. But look, anecdotally, outside of beef, things are looking pretty rational across the basket, which I think is a good sign. Beef is a little bit of an unknown. We're still seeing the same information as everyone else out there, overall beef production remains a challenge. But other than that, there isn't too much to say at this point other than we, as a company, have repeatedly shown the ability to navigate these markets as good as anyone else out there. So we'll monitor that. We'll be sure that we have productivity initiatives in place because we do have a good amount of rollover from our productivity that we put in place this year. And we've got a lot of new ideas for next year potentially as well that can help offset. And what that does is that does reduce the need to take as much pricing as you would normally need to take to offset that inflation because we're obviously pretty mindful of where the consumer is. And we do believe that going in with a mindset to keep the pricing as low as possible is the right place to be. Now in terms of labor and how that plays in, look, labor has been pretty consistently inflationary for a number of years now. Now look, it's come down a little bit. As the year progressed, I think every quarter, it's come down a little bit from where it was, certainly where it was last year. But look, it wouldn't surprise me at all if we're still talking in that low single to mid-single-digit kind of inflation range just sort of into perpetuity.

Jeff, just 1 thing I want to add. We've been really careful about our price increases. And if you look at our comp breakdown, we've got a 4% change in PPA in Q3. And that's pretty disciplined versus what's going on elsewhere in the industry. So I think we're really trying to make sure that our price value equation as we continue to improve service and food, especially at Outback, comes together to help grow traffic.

Well, and just to piggyback off of that, if you look at our Q4 guide, that does imply that your check average is going to be in that 2.5% to, call it, 3% range, which again, as we've indicated, we do expect that check average to tick down as the year progresses, and we're going to see that again in Q4.

Understood. Thank you.

The next question comes from Alex Slagle with Jefferies. Please go ahead.

All right. Thanks. Good morning. As you look across your brands, and think about what it really takes to win market share in casual dining and drive traffic outperformance and Carrabba's performance really stands out. And I'm curious how much of that is related to the specific category dynamics versus more fundamental execution elements. And to the degree there are executional aspects that are driving that success? Are there bigger, more impactful actions that you think you need to take it out back to deliver the kind of experience that translates into more visible traffic share gains? I know some of that will come still with the equipment and technology recently deployed, but just interested in your thoughts there.

Good morning. I'll start with Outback and we'll move to Carrabba's. If you look at Outback and traffic, there are three or four things that are crucial. And the very first thing, which is our top priority is our restaurant operations -- in restaurant operations and leveraging our technology investment and providing that great customer experience with very interesting food and service. So that's job one. Our operating metrics are improving, and we're leveraging our technology, and we'll continue to stay razor-focused because that's a big way of growing sales at Outback. We are going to spend more on media because we've got some really great ideas that we like. And you'll see that in Q4, and we'll see that going into 2024. And Chris has talked about our initiatives and productivity to help pay for some of that as we look to do the magic and grow traffic and preserve margins. We want to make sure that we remodel and update our Outback restaurants to make sure that the consumer is getting that type of experience. We talked about our remodel program. And then finally, as we talked earlier about our price value equation and being very mindful about our price increase. And then we've got a really great off-premises business that we've got to continue to grow on leverage. Carrabba's is just doing extremely well on the off-premises business, especially, but also in some of the in-restaurant experiences. Their margins are improving. And like I mentioned in the script, they earn the right to grow, and we're looking to build that pipeline as we move forward. So Carrabba's has done a great job. And I think what's helped them also they have a really strong off-premises business. That doesn't mean that they're not focusing on in-restaurant dining, but they have a really strong off-premises business that they're continuing to leverage.

Thanks. And I have a follow-up on the other restaurant operating expense line. It was up quite a bit this quarter and it feels like it's one place that has seen less of a relative improvement over the years versus the peers and relative to the big gains you've made in food and labor, and realize much of this has to do with your ability to drive volumes and leverage here. But are there opportunities to explore to be more efficient or to better leverage your scale here?

I think absolutely. Certainly, the productivity initiatives that we have in place this year have been highly focused on cost of goods sold and labor, not as much focused on the restaurant operating expense line. But I think the areas such as to-go packaging supplies, things like that are areas where you could tap into potentially get more efficiency on the restaurant line. And then, again, I think that, to your point, that this quarter, in particular, it was more just a product that we didn't have the same level of productivity in that line as you saw in COGS and labor. And that's why we weren't able to leverage that line as effectively as we were the other lines. And we also had a tick up a little bit in marketing.

Got it. Thanks.

The next question comes from Sharon Zackfia with William Blair. Please go ahead.

Hi, good morning. I know you've been seeing negative mix shift for a number of reasons. I'm curious if you started to see that abate or a level of in the third quarter or into the fourth quarter. And then as you're thinking about guidance for this quarter, I know you didn't quantify how October is doing, but I'm very cognizant of you lapping Elliott later in the quarter. So does the guidance take into account kind of a potential uplift as you lap Elliott, or are you just kind of putting guidance out there that's similar to where the current trend is?

Yes. So I'll start with the mix piece, and then we'll move on to the traffic assumptions for Q4. Menu mix was down as you start with Q3, it was down a little over 2% in the quarter. And that's pretty consistent with what we saw in Q2. There's a piece of that we've talked about. We think is consumer trade, app mix and alcohol mix are a bit lower. But the majority of that negative mix has to do with revenue center shifts, which have been engineered, right? So we know these areas have such as catering, et cetera, they carry a lower check average, which has been highly influencing the mix in our numbers. Now the good news is that you start to transition to Q4, we get the benefit of starting to lap some of the negative mix trends that we started to experience late last year. So as such, I do think we expect mix to moderate some in Q4. It will still be down, but probably down closer to the 1% to 1.5% range versus the 2% range that you've seen in the last couple of quarters. Now as it relates to traffic and the traffic assumptions and what would be embedded in the guide, I think, look, so the way to think about it is, first, we've seen the improved trends in October from where we were in September. That's built in. Second, we're lapping a fairly soft November from last year, which we did call out on our Q4 call. We do get the benefit of lapping that. So that's built into the guidance as well. Third, there is an increased marketing presence that Dave talked about. We're not going to give the exact dollar amount for competitive reasons, but that is also built into the guide. And there is a favorable holiday shift, right, from the timing of Christmas holiday. It works in our favor. And why that's a little more impactful for us than maybe some others are that our brands do tend to skew a little more special occasion. So that is going to have a little more of a positive impact in Q4 than maybe it might for some others. In terms of the Winter Storm Elliott, I think our approach is we can't really predict weather. So we know we're going to be lapping Winter Storm Elliott in Q4, but that's really not contemplated extensively in the guide because it's just as likely that you're going to have some things go the other way as well.

The next question comes from John Ivankoe with JPMorgan. Please go ahead.

Hi, thank you. There's, I guess, a lot of discussion about kind of taking Outback as a brand back to its maybe it's peak, which we could argue maybe was in the early to mid-90s, I mean, where it really was a very different brand, very high average unit volumes dinner-only, in some cases, three hours kind of lines. I mean it was a concept that really had a lot of excitement in just like the American populace including your own staff. And obviously, "No Rules, Just Right" is kind of part of that. And I understand that you kind of want to bring Outback back to some of that energy and even bring the Outback U.S. business maybe back to what Brazil is today and presumably will continue to be. So, long set up to the question. Now maybe I'm embarrassed to say, but I do remember that in the mid-90s starting as an associate. And Outback was always a transaction-driven model at that point. In other words, the money was not really made on margin. It was just made on pure customer counts as the exceptional value that was given to customers and being dinner only, of course, the PPA was higher and higher alcohol mix and some other things, and it was a higher-margin business than being for lunch. So the question that I'm asking is, do we have an opportunity to kind of get back to that transaction-driven model? And if so, might major price investments kind of be made at the Outback business as you basically sacrifice gross margin and you sacrifice kind of your prime costs in order to just bring more customers to get back into the store over time? In other words, do we have an opportunity for maybe doing kind of a major brand and price reset of just kind of reestablishing Outback more from a perception of value for the customer that arguably it was 25 years ago? And hopefully, it's an okay question, Dave. Thank you.

I think clearly, John, we agree with you on getting the reference fund service into the business, and we're working very hard to do just that. And we talked on prior calls that one of our leading executive in Brazil is here and to help with our marketing efforts, and he's doing a fabulous job here. So that's part one. Part two is it's the service and food elements that are going to win the day for us. And so making sure our service metrics, you've seen the investment in our food, John. We're investing in remodels. We're going to be very, very, very conscious of price changes at Outback, which we talked about earlier in the call today. So getting that price value back. And price value is not just price, it's the value you provide to customers in service and food while being very thoughtful about the type of price increases you take. Now if you look at within the menu itself, there are some really attractive price points like combo meals and like the offer we're doing right now, our Steak 'N Mate Combo. So I think if we bring back the fun in their reference as we continue to do that, continue to improve our service levels, we've invested in the food. We've invested in technology. We're investing in our assets. We can move forward and push forward with transactions. Now as far as launch goes, that's a very important part of our business, and I think we'll continue to offer that. But on the dinner occasion, that's exactly where we're going.

Thanks for that, Dave.

Yeah, thank you, John.

The next question comes from Jeff Farmer with Gordon Haskett. Please go ahead.

[Technical Difficulty].

We'll go to Sara Senatore from Bank of America. Please go ahead. Sorry about that.

Hi, thank you. This is Katherine Griffin on for Sara. First, I wanted to ask just about the kind of casual dining, maybe Italian category specifically. And as it relates to Carrabba's, just can you talk about any sort of additional sales layers, whether dayparts, menu items that you're contemplating in order to catch up with some of the public company peers that seem to be outpacing the brand? Thank you.

Well, I think Carrabba's is doing quite well. So I'll take -- if you don't mind, a little exception on that. So I think we have a lot of white space for development. And I think we got to be careful about adding menu items in complexity in the restaurants because we want to continue to drive the service and drive it forward. But we think there's white space in development. There's a chance to continue to improve our operating metrics. There's a very strong off-premises business there. There's another sales layer in our catering business, which is very easy to do because we can prepare that food in the morning and get that ready to go for our lunch business. So that sales layers there. Continued innovation in the restaurants with Carrabba's is there. Our off-premises business, which is doing so well is there. And then our new units in white space that we have with Carrabba's is going to be also an opportunity for us. So it really is performing well and is a growth vehicle for us going forward.

Okay, thank you. And then I guess maybe just a follow-up then on Carrabba's. Just as we think about sort of the return to normal seasonality trends, what does that mean in terms of your expectations for Carrabba's catering business, this holiday season?

That is certainly our hope. We've tried to incorporate that in our guidance, but we are very -- without getting ahead of my keys here, we're very bullish on what the catering business and what the off-premises looks like at Carrabba's. And we've seen sales levels that are just terrific. So it's early days. I don't want to get ahead of it, but the team has done a great job growing that business.

Thank you.

[Operator Instructions] The next question comes from Brian Vaccaro with Raymond James. Please go ahead.

Hi. Thanks, and good morning. I guess I wanted to start on Outback specifically. And it seems like the brand's traffic relative to industry trends softened a bit in the third quarter. I guess it depends on what indices you want to compare to. But would you agree with that assessment? And if so, I guess curious what you would attribute that to? And can you also just clarify on October? It seems like the year-on-year casual dining comps have improved by, say, roughly 300 basis points or so versus September. Has Outback seen a similar level of sequential improvement versus September?

Yes, I will answer the second question. We don't want to get into monthly comps per se. But again, we have seen a nice trend change in October, and it's incorporated in our guidance. As far as Outback goes, they do overlap -- and this is where we've really got to be careful in managing this brand for the long term. They do overlap with some competitors that have had some pretty significant discounting and promotions. And we do not want to offer some of those deep discounts to drive traffic. We'd rather get back to some of the things we talked about earlier in the call in driving great service, great food at a great price point, and we want to offer some very interesting LTOs like the one we have right now. But at the same time, to go into some deep discounting, Brian, I think, for the short term, to make some short-term goals would not make a lot of sense. So we're going to focus on the things that we talked about today.

Okay. All right. Thank you for that. And Chris, on the marketing spend, what was the marketing spend in the third quarter? And could you ballpark the level of spend you embedded in your fourth quarter guidance?

Yes. So if you look at -- so marketing was up about, I think, $2.5 million in Q3 put us at about $31 million on quarter. Q4, we're not going to quantify the amount that we are going to increase the spend, but I think the base for Q4 is about $24 million from last year.

And the $2.5 million, is that up year-on-year?

Yes, year-on-year, and that's primarily in the U.S., Brian, and there's actually an additional up. There's a digital increase in Brazil, but $2 million of the $2.5 million that we see here in the U.S. in terms of increased marketing spend is Outback. And then there's another couple of million dollars in Q3 that Brazil was actually up year-on-year.

Okay, thank for that. And Dave, you just sort of mentioned it for -- but more broadly, I think you've increased the spend through the year at Outback like you just said in the quarter and even maybe in Q2, but you've increased the spend and the traffic doesn't seem to yet be responding. So I guess what gives you confidence that a higher level of spend can break through, so to speak? And I understand you don't want to get into deep discounts, but is part of the answer that you need some price levels on certain LTOs to move a little lower to gain traction in this current environment? It seems like your LTOs have maintained upper teens, if not into the 20s. And is that just too high of a price point in the current environment?

We've got a great steak offer right now for $16.99, which we think holds a lot of promise, and has been tested well and researched well. And we have other ideas like that, that we want to spend behind. And importantly, when you couple that with the food investments we've made and the service that we're going to continue to drive -- service improvements we're going to continue to drive, which we're seeing, that will help drive traffic, but over the long term. But we have taken a look at some of our LTOs, Brian, and got into those -- that kind of price point I'm talking about.

Yes. And the only thing I would add to that is that just in terms of deep discounts, and again, you can still use LTOs and you can use price points and LTOs. But I don't think we believe that deep discounting is where Outback plays in the spectrum of casual dining. It's a steak-centric model, higher price points. It doesn't lend itself necessarily to pursuing a customer cohort that's heavily motivated by couponing. We'll use the LTO strategy, like Dave said, to keep value front and center, some windows may be more aggressive than others. But as a general strategy, we're focused on maximizing the price value equation, like Dave said, through exceptional food, service and ambience at a price point that our guests are comfortable with.

All right. Great. And then last one for me, just on the new tech and equipment package rollout I wanted to confirm, is that now rolled out to all Outbacks at this point? And could you elaborate on how it's benefiting operations and maybe quantify any of the important metrics like ticket times, table turns, cost savings you're seeing in some of the stores that are fully ramped on it and efficient?

Yes, I'll talk about some of the service elements and then I'll come to Chris, if you want to follow up anything on the financial side. We're excited about the financial benefits of the equipment. But for me and for our company, it's the service and food that's really going to help. And so like steak accuracy, right, that's the number one thing in the restaurant in the steak category, improving steak accuracy for our customers and the grills certainly help with that. And that's been embedded, rolled out, and we're seeing improvements there. Certainly, service attentiveness because we have the servers on the floor at all time because they don't have to toggle back and forth to enter the information. That's also extremely important and another measure that we're looking at very carefully. So those are just two examples, Brian, from an operating standpoint that we're looking at. Obviously, table turns will help, too, but we don't want to push the customer too fast. But the service, the measure and the steak accuracy measure is extremely important for us. And I'll turn over to Chris for any other financial comments.

Well, yes, the only thing I would say is when we started this year, we targeted like $50 million of productivity benefits for the year. We've actually had to increase that number. We're up closer to $55 million for the full year, and a lot of that increase is due to the fact that we're seeing very strong effectiveness of the technology that we're putting into the restaurants. In terms of benefits, again, a lot of the $50 million is incorporated in that. You certainly are seeing improved ratios of servers to tables. In terms of the front-of-house technology that's driving benefit financially. In the back of the house, we effectively reduced the amount of recooks, that it's a very, very record low number. Our food waste is now at a record low number. So look, this whole package really works. It really helps benefit the entire P&L. But importantly, looking just beyond just the productivity aspect of this, Brian, I do believe that, again, when we talk about building a business that is maximizing the price value equation with exceptional food, service, ambiance, et cetera, all of these investments are not just layers to drive productivity, but they are also layers to drive future guest frequency when you have a great -- it's not this business as we learn time and time again, it's not that terribly complicated. When you provide excellent service at a great value to a guest, they want to come back. And that's what this technology really at its core is designed to do. It does take time to see given the kind of the amount of frequency that our guests come into the restaurant, that takes time to show up in traffic. But boy, I'll tell you, it certainly is something that we're confident that we'll build traffic over the long term.

All right, thank you very much. I'll turn it back over.

Those are all the questions we have for today. I would like to turn the conference back over to David Deno for any closing remarks.

Thank you, everyone. Thank you for attending the call today, and we look forward to talking to you on our Q4 call. Have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.