Darden Restaurants, Inc. (DRI) Q2 2016 Earnings Report, Transcript and Summary

Welcome to the Darden Fiscal 2016 Second Quarter Earnings Conference Call. Your lines have been placed on listen-only until the question-and-answer session. [Operator Instructions] This conference is being recorded, if you have any objections please disconnect at this time. I will now turn the call over to Mr. Kevin Kalicak. Thank you, you may begin.

Thank you, Gaby. Good morning and welcome everyone. With me today is Gene Lee, Darden's CEO and Jeff Davis, CFO. As a reminder, comments made during this call will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Those risks are described in the Company's Press Release, which was distributed earlier today and in its filings with the Securities and Exchange Commission. Today's discussion and presentation may also include certain non-GAAP measurements. A reconciliation of these measurements is available in the Investor Relations section of our Web site. In addition, we are simultaneously broadcasting a presentation during this call, which will be posted in the Investor Relations section of our Web site at the conclusion of the call. We plan to release fiscal 2016 third quarter earnings on Tuesday, April 5th before the market opens, followed by a conference call. This morning, following prepared remarks from Gene and Jeff, we will take your questions. Now, I will turn the call over to Gene.

Thank you, Kevin and good morning everyone. This morning we want to take time to discuss several things with you. First I'll review our quarterly performance and brand highlights and Jeff will provide more detail on our financial results from the second quarter, as well as our dividend and share purchase plans and I'll provide an update on our outlook for the fiscal year. And then I will close by sharing our framework for long-term value creation. Before we get started, I want to note one point that will help frame our performance. It's important to look at our same-restaurant sales performance on a comparable calendar basis. Due to the 53rd week last year and the shift in key holidays such as ThanksGiving moving from Q3 last year to Q2 this year, we reported same-restaurant sales on both a fiscal and a comparable calendar basis. Our brand significantly outperformed the industry during the quarter with strong same-restaurant sales growth of 2.9% on a comparable calendar basis and positive same-restaurant sales at each of our brands. We also added 14 net new restaurants which take into account to six LongHorn San Antonio restaurants that were part of the Four Corners Property Trust spin off. Second quarter adjusted margins showed strong improvement for the fifth consecutive quarter and benefited from both our top-line performance and ongoing disciplined cost management that is focused on non-guest facing elements of our business. The momentum we have built at Olive Garden continued during the quarter. Same-restaurant sales grew at 2.8% on a comparable calendar basis outperforming the industry by more than 300 basis points. This was our fifth consecutive quarter of growth. In addition, same-restaurant’s traffic was positive on a comparable calendar basis. These results are reflection of our continued focus on operating great restaurants along with developing relevant, integrated marketing initiatives that reach our guests more effectively. Equally as important is the work we're doing to evolve how our loyal guests experience Olive Garden. During the quarter, we completed the system-wide roll out of table top tablets, which enhances the guest experience. Additionally, we continued our emphasis on OG-to-go sales which addresses a key niche state for convenience. Overall, we have seen fantastic results with a two year growth rate of more than 30% for OG-to-go. Finally, the team at Olive Garden continues to make great strides on culinary innovation, filling the core menu pipeline with a number of exciting new dishes that will roll out in the coming months. LongHorn maintained strong top-line momentum during the quarter and delivered solid profit growth. Same-restaurant sales grew 3.6% on a comparable calendar basis, outperforming the industry by more than 400 basis points and same-restaurant traffic was positive on a comparable calendar basis. LongHorn's results reflect a relentless focus on in-restaurant execution. That focus was strengthened by continuous simplification of the core menu, which allows our restaurant teams to execute against menu items with the highest guest preference. LongHorn also continues to benefit from the success of its You Can't Fake Steak marketing campaign which drove excitement for two compelling promotions that featured popular steaks at a great value. Turning to our specialty restaurants, all five brands had same-restaurants sale growth on a comparable calendar basis, led by Bahama Breeze at 5.8% and Seasons 52 at 3.8%. The specialty restaurants brands remain focused on culinary innovation, providing unique guest experiences and creating personal connections with their guests, which was further enhanced by the launch of new Web sites at each of our brands. These five strong brands continue to perform well and increase share, as consumer demand grows from our polished dining experiences. Before I turn it over to Jeff, I would like to briefly comment on wage rates. There are two key factors at play, steak and local mandated minimum wage increases and the improving employment environment. First, we expect the mandated minimum wage increases which are set to take effect on January 1st will inflate our hourly wage rates by 1.2%. Each of our brands will be impacted differently based on the geographic footprint. The overall impact to Darden is mitigated compared to others even our geographic diversity. Second, low unemployment is creating increase competition for talent, and we expect it will put additional pressure on wage rates in the future. We continue to be well-positioned to deal with this competitive labor market given our strong employment proposition and industry-leading retention rates. Further, we will continue to find productivity enhancements through our simplification erforts that will enable us to effectively manage future wage inflation. With that I’ll turn it over to Jeff.

Thank you, Gene and good morning everyone. Adjusted diluted net earnings per share from continuing operations were $0.54, an increase of $0.26 or 93% versus last year's adjusted EPS. Key drivers of the $0.26 of EPS growth were continued improvement in core operating performance which accounted for $0.27. Favorable settlement of legal matters added $0.05 and is reflected in G&A. This was mostly offset by $0.04 of expense from three restaurant impairments. Additionally, this quarter we began realizing the effects of real-estate transactions, resulting in $0.02 of net incremental expense. Adjusted EBIT margin expanded 300 basis points in the quarter, principally from leveraging positive same-restaurant sales, commodities deflation driven by dairy and sea food. Accelerated progress with cost and expense reduction initiatives and reduced marketing spend in line with annual expectations. Our reported tax rate for the quarter was a credit of 23%. This was driven by the discreet tax impact of expenses incurred related to the execution of our real-estate transactions. On an adjusted basis, our effective tax rate was 22.9% for the quarter. Before reviewing our performance by segment, I want to point out that fiscal 2016 segment profit now includes incremental rent and other tax expense associated with the completed real-estate transactions. While the benefits of lower depreciation and interest savings are not recognized in segment profit. Starting with Olive Garden, Olive Garden's segment profit grew $16.6 million, excluding the incremental rent from the real-estate transactions segment profits grew $23.9 million or 17%. This growth was primarily the result of leveraging positive same-restaurant sales, dairy and sea food cost deflation and continued progress on cost reduction initiatives. LongHorn segment profit increased $12 million, excluding the incremental rent from the real-estate transactions. Segment profit grew $13.4 million or 31%. The growth was supported by leveraging positive same-restaurant sales, improved cost of sales and lower marketing expense. Fine dining segment profit grew $1.3 million by leveraging positive same-restaurant sales and then finally in other business, segment profit grew more than $9 million this quarter. Reduced food costs and improves labor productivity at Seasons 52 and the Yard House were the key drivers to this quarter’s segment profit growth. Turning to our real-estate plan. We completed the spent off of Four Corners Property Trust. Additionally, we finalized the sell lease back of our restaurant support center in Orlando and an additional 15 restaurant sell lease backs, bringing the total to 62 with two more properties remaining. We received net proceeds of approximately $631 million related to these transactions. These proceeds in addition to existing cash on our balance sheet were used to retire approximately $1 billion in total debt. $270 million was retired by the end of the quarter and $743 million was retired after the close of the quarter. This strengthens our balance sheet and credit profile and is expected to position us within our adjusted debt-to-EBITDA targeted leverage range of 2 to 2.5 times. For fiscal 2016 we expect to realize a net $0.08 per diluted share from net incremental expenses related to the real-estate transactions. On an annualized basis, we anticipated net incremental expense from the real-estate transactions to be approximately $20 million to $25 million. This includes approximately $130 million to $135 million from incremental rent and other taxes, a $60 million reduction in depreciation and $50 million in interest savings. Completing our strategic real-estate plan was a key part of our commitment to deliver value to shareholders and given the current trading multiples of both companies, we believe we have created significant value. And in addition to providing an approximate $7.00 stock dividend value from the spinoff of Four Corners the Board of Directors declared a regularly quarterly cash dividend of $0.50 per common share this quarter. This represents a 14% increase compared to the minimum post-spin dividend of approximately $0.44 per share which was disclosed on November 9th. Darden’s Board of Directors also authorized a new share repurchase program. Within this program the Company may repurchase up to $500 million of its outstanding common stock. This combined with our dividend program demonstrates our confidence in the strength of our business and our commitment to returning capital to shareholders. For fiscal 2016 we are increasing our outlook for same-restaurant sales to a range of 2.5% to 3% and we are increasing our outlook for adjusted diluted net earnings per share from continuing operations to a range of $3.25 to $3.35. This includes approximately $0.08 per diluted share of net incremental expense related to the real-estate transactions. Finally, we are raising the range for our adjusted effective tax rate to 23% to 25% to reflect a higher earnings outlook. We are not in the place to practice of giving quarterly guidance, but we do expect Q3 and Q4 EPS to be similar not unlike what we saw last year once you adjusted for the 53rd week. In addition to improvements in our core operating business, we continue realize savings from specific cost expense initiatives. We are on-track to deliver an additional $30 million to $35 million of savings from our previous outlook of $50 million to $55 million for a total of $80 million to $90 million for fiscal 2016. To-date, we have also identified savings of $30 million to $40 million in fiscal 2017 which will bring the total identified annualized savings to $145 million to $165 million which is $45 million to $55 million more than our previous outlook. And now I will turn it back over to Gene for some closing remarks.

Thanks Jeff. The Board of Directors along with our executive leadership team has spent the last 12 months developing and implementing several strategic priorities, most significantly our comprehensive real-estate plan. Recognizing that our Company looks different today, I would like to spend a few minutes providing some perspective on our framework for long-term value creation. At its core our business is relatively simple and success for us is really predicated on two key areas. First, we must remain laser focused on executing against our operating philosophy at all times. This means relentlessly pursuing perfection across four key elements, culinary innovation and execution, attentive service, engaging atmospheres and integrated marketing. Second, we must support our brand by leveraging our four competitive advantages that drive sales and expand margins. These advantages include significant scale, expensive data and insights, rigorous strategic planning and our results-oriented culture. Doing so provides a value creating business model that generates significant and durable cash flow to fund growth and return capital to shareholders. Looking at our framework, our goal is to deliver a long-term total shareholder return of 10% to 15%, which we believe is a compelling and attractive investment for our shareholders. Achieving this type of return will come through a combination of our business performance and returning cash to our shareholders. Looking at the components of our long-term operating targets, we expect same restaurant sales growth of 1% to 3% driven by the strategy I just outlined, new restaurant growth of 2% to 3% and EBIT margin expansion of 10 to 40 basis points by leveraging sales growth and our scale. This should result in approximately 7% to 10% growth in earnings after tax. It’s important to remember that the growth in the individual components will vary year-to-year based on several factors, including but not limited to the macroeconomic environment and commodities. In addition, we are committed to returning capital to shareholders. We anticipate a dividend payout ratio of 50% to 60% $100 million to $200 million in share repurchases, which should deliver a return of cash in the 3 to 5% range. This framework is meant to be long-term in nature and we will continue to provide annual guidance as well. Before we move into Q&A, on behalf of the Darden Board of Directors I would like to conclude by acknowledging the 150,000 hard working women and men across our Company. The holidays are the busiest time of the year for our restaurant teams as they create exceptional experiences and lasting memories for our guests. Thank you for all you do to make our Company successful, we've made great progress together and I look forward to making even more in the New Year ahead. Now we'll open it up for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Participants, please be advised to limit to one question and a follow-up question. Thank you. Our first question comes from the line of Brian Bittner of Oppenheimer & Company. You may ask your question.

Thanks very much and congratulations on a great quarter, guys. A quick question on the reporting first, just if you could clarify this, so the profit leverage that you got this quarter, should we think of that as leverage you got on the fiscal comps or is that on the counter comp or maybe it doesn't matter, if you could clarify that?

Brian, it's on the fiscal comp.

Okay, okay. I just want to go back to Olive Garden you know I realize that you guys really changed out the incentives for store level managers at the beginning of this fiscal year. Can you just talk about what it is that you exactly did there and how you think that may affect the business performance growth as we look forward?

Brian, what we did was we simplified the bonus program. The emphasis on our bonus programs have always been sales and profit growth but prior to what -- the big change was we really just simplified it and it's on a -- I would say the framework is on a 3%, 3% for the managers for what they grow same-restaurant sales year-over-year and then they get a percentage of the profit growth also. That is what we were doing in the past it was just much more complicated, today you can walk in the restaurant and the managers understand what their bonus program is, there's also a competitive component of the program today that’s really helpful is that we are basically ranking the profit performance of every restaurant and the ones who are at the top-end of that curve will get a kicker in their bonus. So there's competition amongst the general managers in the system.

Okay, thank you.

Thank you. The next question comes from the line of Brett Levy of Deutsche Bank. You may ask your question.

Good morning everyone, if you could do me a favor and just talk a little bit about where you are in terms of unit extension, remodels, refreshes, what do you think you can still do for this year, next year and what kind of sales lifts we should expect?

Yes I'm not going to comment on -- I will give guidance in June for the following year but let me give you an update on where we are in the Olive Garden remodels. To-date we've remodeled 32 locations at various investment levels. The lift is about 5% in guest counts. We have 13 more that we're going to do in '16. I think the team has done an exceptional job of developing different packages for different sites. We're still reading some of the last work that we've done, but we're optimistic about the lift that we're going to get from these remodels in the future, so it’s been successful, we've done -- one of the thing that's been helping us is that we've gone in to 40 restaurants and we've just refreshed the bar and spent minimum money. However we're getting a 1% lift just from that exercise as we turn that area into a much more functional area. Today in some of our older restaurants it's not as functional and Dave and his team have done a great job of going in, putting in some tables and just making a much more comfortable place to enjoy an Olive Garden meal.

Any other questions Brett?

Oh I'm sorry I was not doing a -- I wasn't going to do a follow-up. Any thought on, no I guess we'll leave it at that, thank you.

Thank you. The next question comes from the line of Will Slabaugh of Stephens Inc. You may ask your question.

Yes, thanks guy. Just curious if you could speak to the cost savings you mentioned earlier and the addition. So can you remind us now of the general buckets and the size of those buckets for the savings that are going to fall out given the update you made this morning?

Yes, thanks for your question, the size of the buckets and once again we've increased for the quarter going from -- actually for the year going from 50 million to 55 million, we have increased that to now $80 million to $90 million, that’s about a $35 million increase. The buckets that we talked about was basically food and beverage also in our restaurant expenses and G&A. We did not necessarily break that down if you will in between the three. But what you can see from of the presentation of we have included and I would refer you to may be take a look at that. It's about now -- about a third, a third, a third as to how we see those savings actually being realized during the course of fiscal ’16.

Got it, that's helpful and a quick call, if I could, just given on what we've heard from some of your peers and seen from some industry data, in that you have concepts reaching across the full-service spectrum, I'm curious to hear your thoughts on how the restaurant consumer is behaving right now. Are there any notable changes to consumer behavior through particular purchases or [indiscernible]. Clearly you are outperforming the industry. So I'm just curious if you have any sort of maybe your rationale for why the industry has seen some slowing here recently?

Yes I would and this is Gene, I would say that the consumer has been consistent quarter-to-quarter in our observations it is still buying a little less on daily using the whole menu. They are buying appetizers, they are buying deserts, they are buying high value items we are seeing a lot of migration into the 9.99 Cucina Mia in Olive Garden. But an interesting dynamic with that is that over 50% of people that buy that item will add on to it and turn it into a 12.99 entre by adding some protein. So we have seen consistency, obviously I am aware of the slight turndown in the NAP track numbers in Black Box, I really don’t have an idea of what caused that. But I would say that it deals from our standpoint it feels pretty good out there right now. And I like the environment we are operating in and I think the consumer is going to value but value today isn’t all about price. We are seeing consumers do some things in LongHorn where we have got actually we have increased the size of our filet we have got a 10 ounce filet on the menu that’s doing really-really well. And the -- because the consumer is rewarding high quality execution and so we will continue to monitor, but right now I am pleased with how the consumer is behaving in our restaurants.

Okay thank you.

Thank you. Our next question comes from line of Matt DiFrisco of Guggenheim Securities. You may ask your question.

Thank you. One quick question on the commentary from the call, the script, as well as just your outlook for some potential future business opportunities, one on the marketing side, it sounds like across the board the brands pulled back a little bit on marketing dollars in the quarter and helped out margins. Is that an ongoing thing in the initiative to sort of use marketing dollars more efficiently or is it a reflection that perhaps the marketing dollars are shifting to more efficient, cheaper ways such as mobile apps and mobile advertising or digital rather than TV? And then I do have a follow-up question.

Okay, Matt. What I would tell you is that the savings in advertising dollars in the quarter was strictly at LongHorn and they were driven by moving from national cable strategy back to a spot market strategy. From immediate standpoint, we are being much more effective with that, we have eliminated a lot of waste that was in the national cable buys and that’s a -- we are into it just about a second or third quarter on shifting on this strategy. So that’s the primary reason for the savings. Following up a little bit on what you are telling but we are migrating dollars from traditional television media into digital and we have continued to find that to be affective. But we are also continuing to find the television advertising is affective. You did see some choppiness in Olive Garden sales to relative quarter as we have started to play a little bit with reduction in TRPs or moving our TRPs from different points in the promotional cycle to understand, if they are really driving consumer traffic and through that promotion we found out at the television is still of a very-very effective medium to drive traffic. And lastly on digital, digital is very effective so we can get very targeted and we can measure that. So that’s why the advertising expenses were down 40 basis points in the quarter.

Okay, and then shifting gears to Olive Garden or OG on the go there. Where do you think that could be -- top out as a percentage of sales, if you have sort of a goal in mind as well? I mean is this an avenue that maybe you would test delivery with potentially third-party sources out there on a broader more approachable basis than just some select opportunities?

Yes, good question. We started off this OG to go journey thinking that 20% was going to be a great target, 20% of over 4 million is a heck of a business inside an Olive Garden. We are over 10% now and growing rapidly. We are very in tune to what’s going on with third-party delivery and we are studying that very-very closely. As you know we are also testing our own delivery for large catering parties and having some success with that but we are monitoring the situation we believe that there is going to be some sort of massive change in third-party delivery. There are a lot of people that are playing in that environment today and we are looking for the partner with who we think is going to be the clear winner. But that is going to be an avenue for continued growth in Olive Garden. And I want to keep reiterating the fact that the type of food the cuisine that we serve in Olive Garden travels extremely well and we follow back up with our consumers who use an Olive Garden to go experience, this satisfaction level is very-very high. And so we are excited about this business, our people are doing a great job.

Excellent, good luck in the New Year.

Thank you.

Thank you. The next question comes from the line of Joseph Buckley of Bank of America. You may ask your question.

Thank you good morning. Just a follow-up on Matt’s question, do you sense of how much third-party delivery is going on now in terms of your sales mix?

Yes and I would say 50% of our Olive Gardens are being covered by some third-party where it is a local deal but I am not sure it’s as productive as it can be, I am not sure that we are a preferred provider in some of those arrangements and so we have got tests, we are working with Postmates, we are working with Google, Hoover is going to come in into play. We are working from a corporate standpoint at 50,000 feet here trying to determine where do we want to step a partnership and where are we’re going to harvest, so how does this all play out. A fragmented system is not going to be the way to go, it’s going to be some sort of national system, we can cover 70% or 80% of our Olive Gardens with one provider so that we can use our scale to drive the best possible financial outcome for both parties.

Okay, then Gene, the long-term a normalized guided I'd ago how you would characterize it for 7% to 10% can't remember now if it was EPS, I think it was EPS growth. Talk about the timeframe for that versus these terrific numbers you're putting up currently?

Joe, as we look at this portfolio today consider the operating we're using kind of the operating environment that we've operated in the last three years has kind of five that job. What is it that we can do over the next four to five years or so? What we think is available to ask you might we think we can drive earnings after-tax from 7% to 10% and we're going to drive that suit same restaurant sales growth. We think we have the portfolio gives us 2% to 3% new unit growth that we think we can leverage margins anywhere from 10 basis points to 40 basis points depending on what's going on in the environment. We think we can supplement that with a dividend that 50% to 60% of our earnings in a significant share repurchase program to get us into that 10% to 15% EPS growth. And we think with the portfolio we have today the environment that we're operating in our brands we have some really strong brand that are really well positioned. And when you look back over time when you look back over the last 10 years Olive Garden has outperformed not track by close to 20%. Over the last seven years old one is outperformed Track by over 20% so we really strong brands. We think we can compete in any type of economic environment going to use our scale and are insights to give our brands and advantage in the marketplace. So we think this is a good framework is how we're describing it as a framework. We will continue to give and provide yearly guidance and so we're focused and we believe this is a good framework for us.

Okay that’s helpful thank you.

Thank you. The next question comes from the line John Glass of Morgan Stanley. You may ask your question.

Thanks good morning. First off, if I could just come back to this quarter in the beat maybe it's a two-part about one is relative to expectations when you the gap on the most and I'm asking on the context offs G&A a court G&A specifically seem to be significantly lower when you string of the one-time items in your adjustments year at 4.4% of sales so I think would suggest a $70 million something which is materially lower than the last quarter and also a year ago. Is that the now ongoing run rate of G&A or where there some one-time items in that were seasonality that affected it?

So a couple of things going on with G&A this particular quarter, first off as we had mentioned earlier we had the legal settlement that added approximately $0.05 to G& A. We also would have had as a relates to those impairments offset by $0.04 but that's in a separate line item the G&A rate that we are seeing right now is where we would believe we start to moderate to through the end of the year.

And I am sorry, the adjusted 4.4%, that would exclude legal settlement or did it not?

That did not. I'm sorry the 4.4% was net of the $0.05 of legal settlement.

Got it, okay, so it could be higher in the future, and then on the capital structure side of the business, you had mentioned on a rent adjusted basis you were kind of in a range you were comfortable with. Can you talk about your willingness to use debt in the future? Does your share buyback the you announced today assume just using free cash from the cash from operations or leverage in the future? How do you think about capital structure going forward?

I think in the near-term we're going to use free cash flow to do as share repurchase. We will continue to look at the capital structure going forward. Right now our objectives is to firmly get in between the two is to firmly get in between the 2% to 2.5% adjusted debt-to-EBITDA and we're really focused on maintaining our investment grade credit profile.

Thank you.

Thank you. The next question comes from the line of David Tarantino of Robert Baird. You may ask your question.

Hi, good morning. Gene, just a couple of questions, first, maybe on your outlook for the second half raising the comps guidance for this year seems like you're feeling very good about the trajectory of the business, but that being said, it looks like the comparisons on an absolute and relative basis start to get a little tougher. So maybe frame up your thoughts on your confidence level and in achieving that implied second half guidance in light of the more difficult comparisons?

Yes I think the confidence comes from the momentous we have in the business. When we look at what's going on in Olive Garden between the promotional schedule that we have coming, the value and the feedback that were getting from consumers, the trajectory in the to go business, we believe that Olive Garden is set up and has done a tremendous amount of work over the last year to really position that brand to be able to compete effectively. We think that we're getting more effective in our digital marketing efforts. We're much more segmented and how we're talking to our consumer. We think we've got relative messaging out there, and we just believe that this momentum will continue into the back half of the year is the environment stays the way it is right now. We really think one of the big changes that we made was anchoring every menu with a $9.99 price point at lunch and excuse me $9.99 at dinner and $6.99 at lunch and that provides our guests are looking for value the every day option to come to Olive Garden and it's a full meal at a price that is a great value and one that's extremely competitive in the casual dining segment. And Longhorns got some great momentum to what I think that business is really focused on improving the overall experience and we continue to make subtle improvements to our menu. We've simplified. We've gone from 125 menu items back down to 100. We're focused on moving a lot of high-volume items and doing it very-very well. We're confident not overconfident but we believe that our hard work is starting to play forward and we've got momentum. The thing that I've been think a lot of you over time is when you get one is a dozen people in the Olive Garden system trying to do the same think they create great dining experiences and that creates great feelings and communities. Olive Garden right now feels as though it's very relevant with the consumer.

Thanks, and thank you. And then a separate question. On the long-term value creation framework the unit growth requires a step up in the number of openings and I was wondering if you could comment on which brands do you think are really going to drive up the step up as you look at the next couple of years?

I think we're going to get back on a path where we're opening between somewhere between 8 to 12 Olive Garden's eight years of that will be a big boost to our numbers. Olive Garden still an incredible investment from a new restaurant perspective. There will be some cannibalization but we think Dave and the team have a strategy to identify trade areas that could support and Olive Garden but without so much cannibalization that can't make the returns work is so we think that we could do there. Obviously were going to continue to push on Yard House and we think LongHorn to get back up to the double digits also and so with those types of new restaurant development, we can firmly be in that 2% to 3% range.

Great that’s very helpful. Thank you.

Thank you. Our next question comes from the line of Jeffrey Bernstein of Barclays. You may ask your question.

Great thank you. Two questions, one theoretically if you look at of the next 12 months seems that were talking about higher labor costs presumably offset by lower commodity costs. I know over the past few years perhaps most would agree that that was the reverse just wondering which is preferential when you think about it as an operator, you prefer the outlook you have going for versus what you had before commodity me just in the context of your ability to price to offset it would seem like might affect great opportunity to price of the commodity inflation less opportunity do so labor that I'm just wondering how you think about the dynamic of the two of them?

Good question, Jeff. First they want to clarify that at this point in time, we are not seeing a have a lot of wage rate completion in our direct labor is actually less than it was last to what you're seeing a labor costs is bonus payments this year are up for our managers so I think about the dynamics that you outlined which I think are really a good way to describe the situation that our operating in historically when there has been wage pressure and wage growth, that has been good for the demand of the casual dining restaurant business. What we tried to request variables back, wage growth is much more favorable than discretionary income. And so that in environments where we've seen significant wage growth in casual dining, we've been in environments where we've had stronger demand. And so that's been a more preferable environment then having food inflation and not having wage growth. So I guess the crux of your question is which environment what I personally prefer to compete in is the environment that we are in today.

Got you, and just as a follow-up that ties into the cost savings I know you mentioned some of the wage rate inflation. Despite you can Medicaid the cost savings initiatives and I think it's quite impressive that even for this fiscal year you raise your cost savings from 50 to 55 to 8290 where halfway through the year it seems like a big increase that I know you had that chart that shows that they third a third a third between the three components but is there any meaningful bucket. It's just a price that you can see such a big increase what's been the biggest driver to raise not only this year's but effectively you not raise your cumulative numbers pretty meaningfully. Looks like there are just a couple years are you guys are thinking about 59 does camel to our talking about North of $150 million cumulative?

Jeff, the dynamic there is what's happening is our action capturing some costs quicker than we thought we would. We've had incredible relationship between the supply chain and operations. They have partnered very effectively to move these costs forward into this year and additionally what we've done is we've identified additional costs in the last quarter that we've been able to talk on to ’17. For me, what's really impressive is the job that both teams our supply chain and our operations teams have done to be able to implement these effectively at a pace that we did think that we could get to and so that's what's really happening here. We're pulling forward and we've identified new ones. So it really wasn't new cost saves that were identified that were pulled into ’16 they were identified for ’17. We pulled them for but subsequently we've identified additional once were ’17. Everything that we're doing I want to reiterate this everything that were doing as transparent to the guest and that every conversation we have around some sort of cost save is the first thing we ask is how does it affect the guest and if it affects the guest comments off the table. So this is all stuff that's not affecting our guest in the guest experience.

Got you, thank you.

Thank you. The next question comes from the line of Keith Siegner of UBS. You may ask your question.

Thank you and happy holidays everybody. Just a follow-up on that are one of the best questions so we have the wage inflation should be better for demand about the pricing piece of it though right so Olive Garden has been a roughly 1% pricing for the last two quarters a little below the prior trend LongHorn actually is a little puppy trend with a 4Q and one qubit now running in the low twos pulling all these pieces together, how do you think about the pricing? And I asked because one of the most frequent questions we've been getting is, is the industry at risk of losing pricing momentum as we head into next year? So just pulling all of those pieces together how do you see pricing going for the brands and even for the industry? Thanks.

I think pricing in any competitive environment we're in pricing is going to be cautious. I think we need to continue to price at or below inflation but I think there is a couple of components the way we think about it. You've got to use price effectively on your core menu to help offset some of the inflationary costs you're facing. But how we introduce new products and what price points we introduce new products to create a mix is very, very important. We have been over time been able to use our menu mix as a lever to increase our pricing. As a pullback in some of the heavily discounted a lower price point promotions by moving up a dollar or two, you are effectively getting a positive menu mix begin not really increasing pricing for giving the consumer choice to purchase that whatever price point level they want to purchase that. And so I think as we move forward, I think there will be pressure on our ability to price. However, I want to come back to what I think is really important in our business which is execution at the restaurant level and if we create an environment where our executing our food, we've got great service and atmospheres a compelling, overall value will be defined by much more than price and we talk a lot about that organization. And that is that we're not going to compete just on price. We're going to create on creating a great experience and the better the experience, the more tolerance you have for pricing. And so that's that were thinking about a. We've got to continue to improve our experience so that we can price effectively and be able to still drive our top-line sales and driver guest counts.

That’s good perspective thank you very much.

Thank you. Our next question comes from the line of Karen Holthouse of Goldman Sachs. You may ask your question.

Hi good morning this is Greg on for Karen this morning. With tablets rolled out at Olive Garden do you have any data of how it might help serving your response rates maybe satisfaction scores or tablet versus non-tablet users check or the number of e-mail club sign ups?

Yes great question we are excited about what the team did to be able to get this rolled out as quickly as they did. This has been incredibly positive for our guests. Guest satisfaction scores are really high with people who use the tablet. The other thing and you mentioned it that’s been very positive is the fact that the e-mail club sign-offs, we are getting 80% of the guests that interact with the device are signing up for the e-club and over half of those are new sign ups. So we continue to build this database that allows us to communicate more effectively with those guests. Game revenues have been stronger than we thought and our servers are embracing this as an enhancement to creating a better dining experience for the guest. But most of all I think as we have said that one of the biggest upside surprises of this was our ability to get instantaneous feedback on the servers’ experience that that server is providing, it allows us to coach and help those servers become more effective. So Ziosk on our tabletop tablets has exceeded our expectations and now we have spent the last nine months working to get those on the table. Now the management team needs to develop plans to further enhance their productivity and how they create a better dining experience for the guests and how they merchandise on that device, how they advertise on that device and how they keep the games relevant and up-to-date so the consumer wants to interact with them.

Thank you.

Thank you. Our next question comes from the line of Chris O'Cull of KeyBanc. You may ask your question.

Thanks good morning. I had a question regarding the long-term framework Gene should we assume there are no other strategic options that are being considered at this time such as brand divestitures?

No our primary focus right now is running the business and executing at a very high level and I am really proud of the work that the team has done over the past year. Our management team and our Board will sit down and regularly evaluate alternatives we have to manage our business more effectively and to be able to achieve our financial goals. But as we think about this framework this is within the current portfolio it’s something else with the change we will adjust the framework.

Okay. Fair enough and then can you give us some more color on what future productivity enhancements you mentioned that you plan to implement to help mitigate wage inflation?

Yes it’s going to be all based on simplification. I believe overtime our menus and process and procedures have just become too complex. And both Olive Garden and LongHorn have done a great job and initial efforts to continue to simplify but when I look at who I really admire in this business, it’s folks who are -- have real simplified operations the execution level is designed in a way that simplified that allows for the product to be delivered at a really high quality level. And so we are going to continue to push to simplify our menus to ensure we have the right range of menu products on our menu. But more importantly behind that, that as we develop the recipes and we think about how we operate inside the restaurant, have we made them as simple as we possibly can while increasing the quality of the menu item itself. And I believe that's where this future productivity enhancements.

Okay, great and one last one. Jeff can you remind us what debt remains outstanding and the rates on each of those notes?

Yes, the remaining debt would be approximately $450 million spread between two tranches of long-term debt, the 35 bonds being 150 million and the 37 bonds being roughly 300 million.

Thank you. The next question comes from the line of Sara Senatore of Bernstein. Ma'am you may ask your question.

Thanks, just a couple of I think follow-ups. The first is on just overall competitive environment, it feels like what you're seeing is different than a lot of others and in particular we've heard some pretty big competitors say they're going to get more aggressive on value whether it's price point value or kind of bundled value. Have you seen that and has it affected your business at all, it certainly sounds like you don't think so but just trying to gauge whether it's already started manifested and you feel like you're inflated or not, you haven't yet seen what the, a big tick-up in aggressive kind of price and value competition. And then I have another follow-up on margins please.

Okay, Sara what I'm seeing or what we're seeing is that yes our competitor set is getting a little more competitive and going back to some of the tactics that were used three or four years ago with bundles, and we know what we're monitoring it, we're watching closely what others are doing obviously is they're watching what we're doing. But we're focused on value, just not price. And that's where we're having our most success right now and especially in Olive Garden we're able to offer our consumer great value and it starts with soup, salad and bread sticks. And I think that really creates a value gap and the consumer's telling us through our offers that they're not that interested in the bundles. We had actually an interesting dynamic in the fall where we never any possible and we actually saw Cucina Mia actually have a pretty good preference through that promotion when in fact we thought it was going to basically go to nothing and that tells us that the consumer is more interested in ordering what they want to order. They want to be able to customize their order versus being told this is what I have to order to receive value. And there's so much value on our menus. So we're monitoring it and we'll stay on top of it.

Thank you, that's very helpful. And then on the margins, you know you’d said you're capturing cost more quickly than you thought you would. Yet if I look at the restaurant margins they're largely in line with consensus maybe not with what you expected but the beat you know again seems to be below that line. So I guess that the two questions are, is the cost of it sort of incremental cost days is that more heavily weighted to the back half of your fiscal year, as opposed to what we've seen in this quarter and second are there inflationary pressures that you didn’t expect that might be offsetting those incremental cost saves because again the restaurant margins look pretty consistent with what I think many of us thought they would be?

Yes a couple of things here Sara, first remember that we had rent in the restaurant expenses that wasn't planned to be there from the real-estate transaction which was a big offset to some of our restaurant expenses. We picked up 60 basis points in restaurant expenses throughout the quarter, we picked up 110 at the Food and Beverage line so there was some consolidation there and we're getting some pretty good savings in G&A so it's being spread amongst the buckets. The rent -- the restaurant expenses when you adjust for rent would be a lot more significant than 60 basis points.

Okay, so it's not the case that these cost savings are going to be offset by unexpected inflation and I think many of us did adjust for rent so just trying to gauge whether anything else besides that may have been a headwind that sounds like you're pretty much able to benefit from the entirety of the cost saves that you're identified? Okay.

We're giving you on a cost save a net basis not what we are -- because we are investing some of this money back in fact into a savings back into the business but we're giving you a net number.

Okay, thank you.

Thank you. Our next question comes from the line of Howard Penney of Hedgeye Risk Management. You may ask your question.

Thanks so much, I have two questions, one can you just comment on your process of a new unit openings relative to the prior regime and what kind of returns do you expect and I mean in the past obviously that didn't work out too well for them so just kind of your philosophy on returns and new units and that process going forward and then and to follow-up on a previous question about the portfolio, will you rule out making acquisitions to add to your portfolio? Thanks

Good morning Howard, our philosophy on new restaurants is that we want to exceed our cost of capital which we have as approximately 9%. We are looking at a risk adjusted return on investment I would say that from a process standpoint we have established the committee that oversees the investment in all new restaurant properties. I look at -- I personally look at every restaurant property that we are going to make an investment in. And then we talk about it with the brand presidents and our development department and we are using our collective knowledge of developing restaurants for 20-30 plus years to ensure we are making a best possible decision. More importantly on new restaurant performance, we have a detailed tracking methodology from month one on every new restaurant that we open and I get -- I personally get that report every 30 days to understand what the performance is and there is the appropriate pressure on our operating teams to ensure that these restaurants are performing at a high level. And so I think that’s really what's different today lot more engagement at the senior levels, lot more follow-up and we are reacting quickly when they have a restaurant that is not performing. As of now all of our restaurants and all of our classes are performing above the required return on investment. As far as the portfolio question goes, as I have been saying we are not going rule out anything but - we will continue to meet with the management team and the Board and we will evaluate all of the alternatives that are there for us to create value for our shareholders.

Which includes potential acquisitions?

It will includes everything.

So can I Just sort of, just going back to the previous question about units, how was is it done in the past of just out of curiosity more than anything else?

And I am not much sure. I want to define the process in the past, I think what I would say it was handle a little bit more at the brand level than -- and it's still a brand level decision I am just heavily involved in.

Okay thank you.

Thank you. Our next question comes from line of David Palmer of RBC Capital Markets. You may ask your question.

The protein players include things that these costs are going to be going down for the next few years, one supplier was saying that it's going to be the most meaningful multi-year move in terms of the beef cycle since the early 90s what do you think this will mean for Darden does this mean that the supermarket becomes more competitive essentially with eating and there is more protein-oriented deals from competitors and it's all a little bit more of a nice side ultimately sales are less? Or do you think this is more of a tailwind for margins and Darden earnings ultimately? Thanks.

Good morning David. So here is what I think about where we are in the beef market, beef has -- the animal itself has been declining in price, middle meats continue to be strong, we haven't seen that much decline in the overall cost of the middle meat which you strips and aligns the short lines and such. We have seen some weakness in ground beef which is really good for the hamburger players. We do expect there to be some tailwinds, we do expect to be able purchase beef in a deflationary environment for the next couple of years, as the herds continue to build and the cycle starts to change. I don’t believe that beef is going back to levels that it was at 10 or 15 years, I do believe it's coming down year-over-year. But beef is still going to be a very expensive commodity, in comparison to the other options. Now, does some of this beef get back in the retail maybe but I am not sure. I still believe that a steak, people come to a steak house because a steak house has the capability of preparing its steak in a way that they can't at home and they are much more comfortable making that purchase that more expensive purchase and trusting that experience to professionals who cook steaks every single day. So will there be a little bit more pressure from retail if this pulls back, yes however, I see this is a positive tailwind from primarily LongHorn and therefore a tailwind for Darden.

Thank you.

Thank you. Our next question comes from the line of Jason West of Credit Suisse. You may ask your question.

So Gene you had mentioned that you guys saw some choppiness during the quarter at Olive Garden as were generally testing some different levels of TV advertising, can you talk about what was going on there and what you learned from that? And was there a material change in the TV leaks during the quarter and how you are thinking about that going forward?

Yes a couple of things at play here. First of all, Never Ending Pasta Bowl started a couple weeks later on a calendar basis than it did at the prior year. We didn’t heavy up as much on the TRPs on the front-end to see what would happen if we took a promotion that everybody knew and understand and we didn’t load it up with TRPs. What we learned in that is that the TRPs still matter and taking off a promotion with a little up to heavy weight does get things going a little bit quicker. So we were trying to go in with a more balanced approach in a few less TRPs and try to switch some of that into digital. Digital, throughout the quarter, our digital efforts were much more targeted and one of the things that we are trying to do is we are trying to get into these shorter redemption periods to understand how quickly we can get a message out there and a get a consumer to act. The consumer dynamic is changing dramatically and how they use incentive to come in to the restaurant. It’s getting at the point where if it has any age on it at all, it’s forgotten. And so what you are seeing us try to do and understand is, if we put a message out for a couple of days and then we talk to a guest and we know this guest likes this offer what’s the likelihood of them utilizing that offer. And we continue to learn and so when we talk about data insight, that’s where we are really creating some great capabilities.

Okay that’s really helpful. And then one other on, you guys have mentioned that you tried out have some bar remodels that were pretty minimal expense that had a nice lift on I guess 1% with some comps. Is that something you think you could move quickly on going forward and maybe would do a separate for the full remodel program or is it something that would be sort of a one-off here and there situation?

No .Great question Jason that is something that we believe that we can continue to do. We are not doing anything in these bar remodels that we would have to undo when we would go in and do more of a floor refresh in the restaurant. So it’s just we have restaurants out there where that center dining area in the bar is just not very comfortable and the team can get in there for minimal amount of money make it much more comfortable to have a meal and it becomes very -- all of a sudden becomes very productive on the high volume nights. And so Dave and the team are going to continue to do some more of that here as we move into ’17 and again I will give you much more guidance on that in June.

Great thanks a lot.

Thank you. The next question comes from the line of Diane Geissler of CLSA. You may ask your question.

Good morning and thanks for the question. I just wanted to ask a follow-up on the remodels and it’s really from the perspective of capital allocation. So it sounds like you are planning to open more new units, increase your dividend, increase your share repo. So where does the investment behind remodeling fit within the overall capital plan and maybe you could just frame it up a little bit in terms of your how the costs I know you have different packages that you can utilize at different store basis but how we should be thinking about the range of potential spend on a per unit basis?

I will start with the range on a per unit basis. It’s anywhere between 250 and 450 depending on the size and the age of the unit and it also has a little bit to do with once we start opening up walls and moving things around what we might find in some of these 20-30 year old restaurants. As we think about this in our capital plan, we have set on our slide in the deck we have got 145 to 170 designated this year for our refresh and our maintenance cap. We believe we have ample capital to be able to both increase new units slightly and continue to reinvest in Olive Garden over the next two or three years. And we will give you some more details in June on the exact cap expenses, capital expenses for fiscal ’17.

Okay great thank you.

Thank you. Next question comes from the line of Peter Saleh from BTIG you may ask your question.

Great thank you. I just wanted to circle back on the tablets. A couple of things, are you seeing any throughput of benefit from the tablets of the some of the higher volume locations on Friday and Saturday night?

Yes good question we are seeing Peter we seeing six to seven minute decline in the overall table turn. So something that was a minute seven now down to a minute -- one hour and seven minutes and now down to an hour. So we are picking up seven minutes. Primarily that savings comes primarily on the backend. However as the consumer becomes more comfortable with it, it will pick sometime in the front end too.

Excellent and then just the implementation of the tablet, is that helping to drive any of the cost savings that you are forecasting either later this year or into 2017?

No, it is service enhancement we are trying to improve the quality of the experience.

Excellent thank you very much.

Thank you. The next question comes from the line of Andrew Strelzik of BMO Capital Markets. You may ask your question.

Hi thanks for taking the question. We have seen on a two year basis the LongHorn traffic decelerate a little bit here and you've already even asked about a step up in promotional activity and the value equation at steakhouses lower beef prices, it doesn't sound like you think those components are really playing a role. So what would you attribute that to or do you think it's kind of much ado about nothing?

I do -- I think we've backed off a little bit on our lower price point promotions. We're trying to get back off the 11.99 six ounce top sirloin promotional activity. Some of that activity wasn't as profitable as you probably would have liked so I think it's -- in this business there's some slight pressure there but nothing to be concerned about. I think you've seen that in the margin improvement too as we back off some of that stuff.

Got it, okay, great thanks.

Thank you. Our next question comes from the line of Steve Anderson of Maxim Group. You may ask your question.

Yes, I wanted to ask about any kind of regional discrepancies you saw in your data and I wanted to also point out the -- I guess the what you saw in the increase at Capital Grille probably less than maybe some of us are looking at and I just want to see if you see any broader trends in the higher end steakhouse category that points to deceleration in business trends.

Yes Stephen, we're seeing, good question, we're seeing some weakness in Texas in both Capital Grille and Eddie V's, some of our other competitors have noted. We've had in Cap Grille we've had a couple big restaurants that have had some significant competitive intrusion, we've also had some other onetime events that were significant in the quarter that won't happen again that affected same restaurant sales for Capital Grille. These brands are well positioned, they're executing at extremely high level and I'm confident that they will continue to take market share in the future.

Right, thank you.

Thank you. Our next question comes from the line of Todd Duvick of Wells Fargo. You may ask your question.

Yes, good morning. Quick question for you on the balance sheet, you've been very busy there and have done a really nice job of taking down the debt. You do have two bonds outstanding with relatively high coupons and I'm just wondering are you considering liability management for that to potentially reduce your coupon, is that something that you're looking at.

No, not at this time, we're not looking at doing anything additional to what we have already done.

Okay. And then I guess just related to that, with the share buyback program that was announced today you do have an elevated cash balance as of the most recent quarter. Can you tell us and I think some of that was probably used to take down some of the debt. Is there a minimum cash balance that you like to run with to keep on hand for working capital purposes?

As you mentioned yes, at quarter end we had a elevated cash balance and as I’d mentioned we’ve actually, surely after the quarter paid down approximately $740 million of additional debt, as relates to minimum cash balance we do take that into account as we think about running the business and that's in a range of approximately $100 million.

That's helpful, thank you.

Thank you. Next question comes from the line of Joshua Long of Piper Jaffray. You may ask your question.

Great, thank you for taking my question. I appreciate all the color on a lot of the restaurant level initiatives that have been going on, a lot to get excited about there but I was curious maybe we could take a step back and talk about the opportunity for your branded products at the grocery level in the CPG category and maybe perhaps an update there or at least a recap in the opportunity to expand that into new products and your skews going forward?

Josh, we have a small presence in the CPG market primarily Olive Garden salad dressing, it's a strong performer and does very well, at this time we are not pursuing any other alternatives or options with CPG.

Thank you.

Thank you, no question at this time. [Operator Instructions]

Any more questions Gaby.

There're no questions at this time.

All right, well thank you everyone for your participation in Darden's second quarter earnings conference call this morning. I want to remind you that we expect to release our third quarter results on Tuesday, April 5th before the marker opens with a conference call to follow, thanks again and happy holidays.

Thank you. That concludes today's conference call, thank you all for joining, you may now disconnect.