Greetings, and welcome to Bloomin' Brands Fiscal Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow management’s prepared remarks. It is now my pleasure to introduce your host, Mr. Mark Graff, Group Vice President of Investor Relations. Thank you, Mr. Graff. You may begin. The floor is yours.

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 fourth quarter 2020 earnings release. It can also be found on our website at 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 materially 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 sec.gov. During today's call, we'll provide a brief recap of our financial performance for the fiscal fourth quarter 2020, a discussion regarding current trends and select 2021 guidance metrics. Once we've completed these remarks, we'll open up the call for questions. And with that, I'd now like to turn the call over to David Deno.

Well, thank you, Mark, and welcome to everyone listening today. Since the beginning of the pandemic, our priorities have remained unchanged. We are focused on taking care of our people and serving great food in an environment that protects both team members and customers. Maintaining a motivated, well-trained, and engaged employee base that is committed to providing a safe dining experience is critical to our long-term success. The fourth quarter once again showed our resilience in navigating through an ever-changing landscape. Our teams had to adapt to rapidly evolving rules, regulations, and in-restaurant dining restrictions at the state and local level. I would like to thank everyone in the restaurants and the restaurant support center for doing such a great job managing through this crisis. Your dedication to providing hospitality, service, and experience every day is what makes our restaurants so successful. The strategic and financial plans we laid out in our February 2020 fourth quarter earnings call remain. In fact, the learnings developed through the pandemic have put us in even better position to capture these opportunities to drive total shareholder return. Over the past year, we have seen robust performance in our off-premises business. Convenience continues to play an important role with consumers. And we are leveraging the strength of our to-go and delivery capabilities to meet this growing demand. During the fourth quarter, off-premises represented 37% of US sales. Importantly, this momentum continues into the first quarter. We are maintaining high off-premises volumes even as dining rooms reopen. Carrabba's, in particular, has capitalized on the sales channel with its Family Bundles platform that provides convenience at an attractive price point. This offering provides a fully prepared meal for five people starting at $34.99 with eight different options to choose from. We believe off-premises will be an important growth catalyst for Carrabba's and all of our brands moving forward. 2021 has started off stronger than expected. We experienced an acceleration in sales trends due to an easing of in-restaurant dining restrictions, pent-up consumer demand, and continued strength in our off-premises sales. As a result, US comparable sales were down 12.9% through the first seven weeks of the fiscal year. We continue to outperform the industry and take share. It is clear customers want to come back to restaurants and are confident in our ability to provide a safe and welcoming dining experience. The new menu at Outback launched in September 2020 is performing even better than the test markets. This includes an increase in guest satisfaction, an improvement in positive sentiment across all key factors such as price value, service and portion size, as well as food and beverage. We designed the menu to reinforce our steak leadership through more accessible premium cuts and larger portions, while also lowering menu prices. We are seeing strong customer preference as guests are trading up to larger cuts of steak, enjoying larger portions, and increasing their attachment rate on appetizers. In addition, the efficient menu design reduces complexity, which improves execution and consistency. This results in an improved customer experience. Chris will speak to more of this in a bit, but our focus on margin improvement continues. Last year, we outlined actions to simplify our overhead structure. This is resulting in $40 million in estimated savings over a two-year period. We are making great progress against these initiatives and are ahead of schedule in realizing these benefits. In addition, the pandemic provided an opportunity to look at this business differently and reassess the operating model. This review has identified efficiencies to further optimize how to run and support restaurants. For example, simplified menus have resulted in record low levels of waste over the back half of the year. We will continue to look for ways to reduce complexity, improve consistency, and increase profitability across revenue channels. Our performance improvement resulting opportunities are not limited to the United States. The Brazil business experienced significant improvement in sales and profit trends in the fourth quarter. During Q4, we saw an easing of in-restaurant dining restrictions that helped drive effective capacity to approximately 50% in most cities. This contributed to a steady sequential increase in comp sales performance, where they ended the quarter down 14.8%. Delivery remains a strong contributor to sales, and we are retaining a large portion of this business. The team has also been actively managing costs while leveraging learnings from the pandemic to drive additional efficiencies. Outback remains a highly regarded brand with strong consumer appeal. We are well positioned in this important market. Turning back to the US. Sales growth will also help drive profitability and margins. We are confident in our ability to continue to take market share over the long-term. We will accomplish this by leveraging existing opportunities to grow healthy organic traffic, including the new menu at Outback that enhances price value, as previously mentioned; sustaining the off-premises volume we achieved amid the pandemic while building in-restaurant traffic; expanding the pipeline of the successful relocation program at Outback, where we believe we still have lots of opportunities; accelerating digital capabilities to attract and retain guests in a more targeted and personalized manner with improved ROIs; leveraging our Dine Rewards loyalty platform, which is driving strong engagement across the portfolio. We are using the rich data we have collected over the years to attract, convert, and retain customers; pursuing the virtual brand opportunity with a concept like Tender Shack. Tender Shack provides incremental sales with attractive margins and requires zero capital investment. And finally, investing in new store development in the US with Outback, Fleming's, and Aussie Grill and internationally in Brazil, given our brand regard with high consumer demand and attractive margin profile. As we move into 2021, we are prepared to adapt to the changing landscape to deliver an exceptional experience for our guests, whether in-restaurant or in the convenience of their own homes. To fully capture the off-premises opportunity, today, we are announcing the national rollout of our virtual chicken brand, Tender Shack. This is yet another lever in our very successful off-premises business. As I mentioned earlier, 37% of our revenue is currently off-premises. Our goal is to maintain and improve service levels so we can continue to grow this channel. We recently introduced Tender Shack across the country in 725 locations, primarily in Outback and Carrabba's restaurants. We have terrific geographic coverage given our national footprint. As a reminder, this virtual brand leverages the kitchens of our existing restaurants for cooking and delivery. It offers a high-quality, very limited menu featuring chicken tenders, fries, cookies, and drinks. As we rolled out Tender Shack in test markets, it was clear we had a winner. The brand exceeded all of our sales, profit, guest, and operating metrics. Our goal is to achieve $75 million in incremental sales on an annualized basis. The chicken segment is a large and rapidly growing category, and we look forward to expanding this opportunity for years to come. We expect our off-premises business to continue to be strong as in-restaurant dining trends improve. We are making significant progress against key initiatives to enhance the customer experience, simplify operations, and optimize our cost structure, all in a safe environment. We are confident we will emerge as a better, stronger operations-focused company. Bloomin' Brands has the right people, assets, and capability to meet the needs of today's consumer and capture the opportunities in front of us and beyond. And with that, I'll turn the call over to Chris.

Thanks, Dave, and good morning, everyone. I would like to start by providing a recap of our financial performance for the fiscal fourth quarter of 2020. Q4 US comp sales finished down 17.7%. This was down sequentially from the third quarter, driven primarily by additional capacity restrictions that went into effect in late November. These restrictions necessitated switching back to an off-premises-only business model in approximately 15% of our company-owned portfolio. As a result of these dining room closures, we did not see the typical improvement in average unit volumes that we would seasonally expect in December. Importantly, many of the closed dining rooms have reopened in January. And we have seen significant improvement in both volumes and US comp sales thus far in Q1. I will touch more on that in a moment. As it relates to brand performance, Outback comp sales were down 15% in Q4, and Carrabba's comp sales were down 11%. The sales results at both brands were ahead of the major competitive benchmarks. As has been the case since the onset of the pandemic, these brands relied heavily on our strong off-premises business. Total Q4 off-premises sales were 40% and 46% of revenue at Outback and Carrabba's, respectively. At Bonefish Grill, comp sales were down 27% in Q4. The in-restaurant experience and bar-centric culture of Bonefish has been impacted more by capacity restrictions than our other casual dining brands. Despite this, we have built an impressive off-premises business at Bonefish, and it represented 27% of their sales in Q4. Fleming's Q4 comp sales were down 30%. Given their large California presence, 28% of Fleming's locations were closed for in-restaurant dining since mid-November. Turning now to other aspects of our Q4 financial performance. Total revenues decreased 21% versus last year to $813 million. GAAP diluted loss per share for the quarter was $0.16 versus $0.32 of diluted earnings per share in 2019. Adjusted diluted earnings per share was $0.02 versus $0.32 of adjusted diluted earnings per share last year. Adjusted operating income margin was 1.3% in Q4 versus 4.2% in 2019. This result was a 260 basis point improvement from Q3. The sequential improvement was driven by a few factors. First, the International segment increased its adjusted operating income by $13 million from Q3 to Q4 driven by improved operating results in Brazil. Brazil comps were down 15% in Q4 versus being down 55% in Q3. In the first quarter, quarter-to-date Brazil comps are down 20% as São Paulo imposed additional dining restrictions through the month of January. Given the strength of this business, we expect sales to rebound as restrictions are lifted. Second, domestic adjusted operating margins improved 70 basis points from Q3 to Q4 on relatively flat sales between the two quarters. This improvement was driven by our ongoing efforts to drive efficiency into our business through simplification. We will continue to benefit from this efficiency in 2021 as our country emerges from the pandemic. In terms of our Q4 adjusted performance by cost category, COGS was 60 basis points favorable year-over-year, driven by waste reduction. This favorability came despite some commodity unfavorability driven by higher-than-expected produce prices. The labor line was 55 basis points unfavorable year-over-year, driven by sales deleveraging. Similar to COGS, however, we also benefited from simplification efforts. This showed up in a reduction in food prep hours. We are also finding efficiencies in off-premises labor as that business continues to grow. Operating expenses were 150 basis points unfavorable due to sales deleveraging and increases in to-go supplies. These increases were offset by a $22 million reduction in domestic marketing expense year-over-year. Despite the significant sales deleveraging I mentioned, our focus on managing our expenses allowed us to generate a 12.4% adjusted restaurant margin in Q4. On the G&A front, Q4 was down $11.6 million from last year, net of adjustments. This included a $5 million benefit related to cost savings initiatives that we discussed in our February earnings call. In addition, we had another $5 million benefit from reduced travel and training expenses related to COVID. For the year, we finished 2020 with $219 million of G&A net of adjustments. For perspective, in 2018, we spent $276 million on G&A. Even though we do expect some of the pre-COVID travel and training expenses to return to our cost structure, we have made significant progress to reduce our spending on overhead. Turning to 2021. Throughout January, we have seen many of our closed dining rooms reopen. As of today, we currently have 99% of our US portfolio open for some level of in-restaurant dining. Thus far, in Q1, we have seen a meaningful increase in US comp sales. Through the first seven weeks of the quarter, we are down 12.9% with significantly higher volumes than December. There are several factors likely contributing to this momentum, including the reopening of dining rooms, the benefits from government stimulus, and, most importantly, momentum behind our growth initiatives. These initiatives include the new Outback menu, the national rollout of Tender Shack, and maintaining our off-premises volumes as in-restaurant dining sales have improved. Before I get into our 2021 guidance expectations, there are a couple of other items I wanted to discuss. On the liquidity front, as of today, our total domestic liquidity position is $675 million. Our total debt is just over $1 billion, which is effectively in line with our total debt levels at the start of the pandemic. For the foreseeable future, we will use excess free cash flow to pay down debt as we make progress towards a three times lease-adjusted net debt-to-EBITDAR target. As you may recall, we amended our credit agreement given the significant impact the pandemic had on our financial results. Among the important terms, our total net leverage covenant was waived over the last three quarters of 2020. This total net leverage test returns in Q1 with a modified formula. Based on our quarter-to-date results, we expect to be comfortably in compliance with this covenant. Also of note, we recently entered into an agreement with one of our franchise partners that operates 93 Outback locations primarily in California. This agreement allows for certain concessions to support this franchisee in this particularly hard-hit area of the country. Among the key items in this agreement, we will reduce our marketing fees and defer certain royalties until such time as the business recovers. As we discussed last quarter, we will only record revenue for amounts owed for these locations when the cash is received. In 2021, we do expect to begin collection of future and past-due amounts as sales recover and excess cash is available. More information on this agreement will be available in our 10-K. Our non-California franchise locations, both domestically and internationally, continue to perform well. And we expect to collect revenue from these locations in 2021 based on the sales they generate. In terms of overall 2021 guidance, given the ongoing nature of the pandemic, we are not going to provide comp sales guidance or EPS guidance at this time. However, there are some key areas of our performance that we are prepared to discuss. We expect 2021 commodity inflation to be flat. We expect favorability in beef and seafood costs, which will be offset by higher freight, poultry, and produce expenses. Labor inflation is expected to be 3% to 3.5%. This inflation estimate only contemplates wage legislation impacts that have already been passed into law. G&A expense is expected to be between $225 million and $230 million in 2021. This is a modest increase from 2020. This is primarily due to higher travel and training costs. In addition, we will also face higher compensation expense to our area operating partners as performance improves. These will be offset by additional transformational savings in 2021. Depreciation expense is expected to be approximately $165 million to $175 million. The decreased level of capital spending over the last several years has contributed to the decline in depreciation expense. For perspective, in 2019, depreciation expense was $194 million. Capital expenditures are expected to be between $170 million and $185 million. This includes $48 million of spend from projects deferred in 2020 as we manage through covenant restrictions on our overall capital spending. Finally, we expect to open between 20 to 25 system-wide locations. Most of the new locations will be in Brazil. We also expect four new restaurants and six relocations at Outback. There will also be four new Aussie Grill units as we expand that test within the Florida market. Before I complete my prepared remarks, I wanted to provide some perspective on our margin improvement opportunity. In 2019, our adjusted operating margins were 4.8% on $4.1 billion of total revenues. Our learnings during this pandemic, combined with $40 million of previously identified cost savings, give us confidence we can achieve 150 to 200 basis points of operating margin expansion at 2019 sales levels. These improvements will come from a number of areas within our cost structure. First, as it relates to the $40 million of transformational savings I mentioned, we realized approximately $25 million of these savings in 2020 with most of that benefit impacting the G&A line. In 2021, we will realize another $15 million of savings. This cumulative total represents approximately 100 basis points of operating margin improvement from 2019. Second, in 2019, our food and beverage cost was 31.4%. Since that time, simplified operations and optimized menu offerings have resulted in increased efficiency and record low waste. Going forward, we expect sustained benefits from these efforts. Similar to food and beverage costs, our learnings can be applied to the labor line as well. We have seen a reduction in prep hours in the kitchen and better throughput in service labor. This gives us confidence that we can more than offset near-term inflationary headwinds. In-restaurant operating expense, we will continue to see higher expenditures in to-go supplies and third-party fees given our growth in the important off-premises channel. These increases will be partially offset by a reduction in marketing expense. Marketing expense will be significantly lower than 2019, given our pivot to digital channels that deliver higher ROIs. Lower depreciation will also play a role in our operating margin improvement going forward as our current level of expense represents upside from 2019 levels. These collective actions would allow us to achieve an adjusted operating margin of between 6.3% and 6.8% once sales fully return to 2019 levels. This represents significant progress towards achieving the 7.5% operating margin goal that we outlined at our last Investor Day. We expect to close the remaining gap by improving average unit volumes and realizing further efficiencies at both the restaurant level and in G&A. Margin improvement is a key pillar in our strategy to maximize total shareholder return. In closing, even though it has been a challenging year, we are proud of the progress we have made. Moving forward, our focus is on emerging as a stronger, more efficient restaurant operating company. And with that, we will open up the call for questions.

At this time, we will begin the question-and-answer session. Our first question comes from Jeffrey Bernstein with Barclays. You may proceed with your question.

Thank you very much. I have one question and a follow-up. My question pertains to the to-go business. Both your company and your peers seem very enthusiastic about the chance to maintain to-go sales when your dining rooms reopen. I believe you mentioned that 37% of your sales were to-go in the last quarter. I'm curious about how you assess the potential to achieve that, specifically how you distinguish between incrementality and cannibalization. It seems challenging to envision that much of the industry could retain that level without a significant shift in dynamics. I’d like to hear your thoughts on retention. Additionally, could you compare your average check and margins between to-go and in-restaurant sales? Then I have one follow-up.

Good morning. We have developed a robust off-premises business over the years, including carryout and delivery, well before the pandemic. We view this as primarily an incremental business, and we monitor it closely. The key metric for us is the total revenue per channel, in addition to the mix. Our aim, which we are observing in the first quarter as restaurants reopen, is to maintain that profitable revenue and continue to grow from there. We approach these channels differently, including in-restaurant, carryout, and delivery experiences. Today, we discussed Tender Shack, which contributes to the overall customer experience. Since this is mostly an incremental and profitable business, it benefits us significantly. We are also very attentive to important consumer metrics that drive our success, such as delivery times, customer satisfaction, and accuracy. Now, I'll pass it over to Chris to discuss margins.

Good morning, Jeff. The traditional in-restaurant consumer provides the best flow-through for our business. However, when considering off-premises options, curbside is almost on par with in-restaurant service in terms of margin profile, as we save on service labor and delivery fees associated with third-party services, which helps mitigate lower check averages. The margin and flow-through for delivery are somewhat lower than curbside. While I can't disclose specific numbers for competitive reasons, the flow-through for our to-go and delivery business remains strong. Additionally, third-party transactions present a significant opportunity for us moving forward. We are continuously working to enhance the economics of all these channels to ensure our margins remain attractive enough that it would be hard to prioritize in-restaurant over them.

And Jeff, just one more thing. You asked how we're going to grow the business. Obviously, our job is to take share from competitors. I think people are seeing that casual dining can be a very viable part of our business. And also, we're making significant investments in the digital business to make it easier for people to order through third parties in our restaurants.

Understood. And then the follow-up, just as you mentioned, the incremental sales, and you talked about the virtual brand, exciting to hear. I guess officially today, you're launching Tender Shack nationwide. I think you said $75 million in annual sales which, if I think about your roughly $3 billion for the system for the year, so maybe you're talking about a 2% to 3% sales or comp lift. I'm just wondering if you could offer any color in terms of whether that's what you've seen in tests or whether you're assuming an uptick with presumably more advertising. Same question, how you measure the incremental sales and what the margins might be. Thank you.

This business is very incremental, which is evident from our customer base and other factors. The ordering pattern is different, and the time of day varies as well. We recently launched this, and we are witnessing restaurants achieving high sales levels, with some exceeding 1,500 a week. We have not utilized any additional channels or invested much in advertising exclusively with DoorDash. Our operators and customers are very pleased with it. Importantly, these figures do not account for our franchise partners or operations in Brazil. We have a clear view of reaching the $75 million in volume with a strong incremental flow-through of 35% to 40% for the brand.

Our next question comes from the line of Brian Mullan with Deutsche Bank. You may proceed with your questions.

Hey, thank you. Chris, thanks for the color on the operating margins being better than 2019 by up to 150 to 200 basis points in a normalized year. Obviously, that's a function of in-restaurant and out-restaurant efficiencies that you laid out. So if we could just zero in on the labor expense piece. You only experienced about 50 basis points of deleverage in the quarter, pretty notable in the comps you reported. You spoke to this a bit in the prepared remarks, but could you just discuss any specific initiatives that were put in place that are driving this? And could you clarify, did some of those only go in place more recently, like in the back half of 2020, whether it's menu reduction initiatives or otherwise?

Thank you for the question. Much of this stems from initiatives we implemented in the latter half of 2020, primarily in response to COVID. We've taken those insights and are now applying them to our business going forward. There are numerous examples, but one that stands out involves labor and streamlining our overall model. Previously, we had six different menus at Outback Steakhouse, including a drink menu, an LTO menu, a core menu, and a happy hour menu, among others. The time it took for servers to explain all these options was not efficient. Small changes like this can lead to a more effective service model than what we had before. This is just from the front of house. Additionally, simplifying the menu will lead to savings in the back of house, allowing us to reduce kitchen prep hours. If you had asked me about labor before the pandemic, I may have been uncertain about our ability to align it with ongoing challenges. However, I now believe we can grow in that area moving forward.

Thank you. And then just quick clarification. Does – your operating margin framework that you provided, does that require $75 million in sales from Tender Shack, or is that independent of where we're getting at?

No. The entire concept is a framework aimed at returning to 2019 sales levels, regardless of how we achieve that. Currently, we expect that the incremental traffic we receive will convert at normal levels. This framework simplifies our discussion and allows us to concentrate on efficiencies, not only from lessons learned during the pandemic but also from the $40 million in cost savings. This gives you a clearer view of our insights and commitments beyond any leverage considerations. We intentionally removed leverage from this discussion. This isn't a comment about Tender Shack; it's simply about returning to 2019 sales levels.

Okay. Thank you.

Our next question comes from the line of Alex Slagle with Jefferies. You may proceed with your question.

Thanks. Good morning. I wanted to follow up on the previous question and see if you could provide more details on the current run rate and restaurant-level margins where current sales are. I'm not sure if I missed it, or if you have any insight into how we should model the first half.

I think that anything within the first half is challenging. However, if we consider the opportunity of 150 to 200 basis points that we discussed, the short answer is that when you exclude the sales deleveraging, our restaurant margin levels are nearing that today. For instance, in Q4, we experienced a 150 basis point decline in restaurant margins year-over-year, and we likely faced nearly 300 basis points of deleveraging in that figure. Looking ahead, as we move past the pandemic, we may offset some of that with marketing investments, and our off-premises mix could shift somewhat. However, in 2021, we will have a full year of transformational savings that will contribute to our numbers throughout the year. There are many factors at play, which is why we framed our outlook this way; in the short term, there's considerable volatility. It will be easier for us to predict margins when we reach a more normalized environment. For the time being, it remains uncertain, but we believe that a normalized perspective is likely more of a consideration for 2022.

Got it. And then just a question on debt and leverage. Historically, you talked about comfort with a three times adjusted debt-to-EBITDAR leverage?

Yeah. Look, yeah, and I think…

Or is there opportunity?

Well, yeah, I think that we're comfortable. I think we still feel like the three times leverage on a lease adjusted basis is a good balanced level of debt. Right now, that implies $200 million to $400 million of debt pay down from current levels, depending on what you believe about EBITDA moving forward. So in 2021, we're going to use all of our excess cash flow to pay down debt. At the end of the year, we're going to see where we are and then we'll make a call then about reintroducing things like the dividend and when that might make sense. We do believe that a healthy dividend is a key pillar in our TSR strategy, but it's going to take a backseat to debt pay down for a while.

Great. Thank you.

Our next question comes from the line of John Ivankoe with JPMorgan. You may proceed with your question.

Hi, thank you. I have two unrelated questions and I'll ask the first one. What kind of market disparities are you observing? During the last call, you provided helpful insights about certain markets in Florida, Texas, Tennessee, and possibly Georgia. How have these earlier markets performed so far this quarter, especially in comparison to California?

So far, we've noticed some variability. In markets like Georgia, Tennessee, Texas, and Alabama, we've experienced positive comparable sales, and those locations have been performing well. In Florida, the situation is mixed. Orlando has seen some weakness in tourist areas, while Tampa and Jacksonville are doing well. In contrast, Michigan, Illinois, Minnesota, and California have faced challenges due to restrictions. However, regarding California, it's worth noting that Fleming's has a significant presence there. Last week, when looking at Fleming's overall performance in a 2019 context, even with just outdoor dining in California, it would have been their third best week of 2019. This indicates that consumers are returning, although it varies by market depending on the restrictions. We are observing positive same-store sales in some of the markets I mentioned.

Thank you for that information. I wanted to ask about Brazil, as you've mentioned it in the past. I'm curious about the current status of the strategic review process for that market. What are your thoughts on it now, especially considering that paying down debt is a key aspect of your strategy? I know losing the EBITDA from that market is a factor, but do you see Brazil as a region that could potentially be valuable in the near to medium term?

Yes, of course, John. First and foremost, as you know and appreciate, it's a fantastic business. They have experienced some fluctuations in their sales due to government mandates in São Paulo and other areas requiring dining closures. This explains the variability in their sales. However, their market share, growth, profitability, and cash flow are all very robust. We need to consider what to do next with this business. They have an excellent management team and may be appealing to other buyers. We will certainly assess all of our options and explore what's best for the market there. We're not in a hurry, but we do have a great business down there. That's the main point I want to convey, and we will evaluate all alternatives as we have in the past.

Our next question comes from the line of John Glass with Morgan Stanley. You may proceed with your question.

Thanks. Good morning. First, just, Chris, I appreciate the incremental color on the margin targets, both kind of the near term and the long-term. On the 7.5% margin target, can you just remind us what are the conditions necessary to get there? I presume it's volume-driven. But is there a contemplation that volumes are some percentage higher than they are today that gets you there? Does that include a full reload of marketing, or do you think that marketing is just sort of structurally maybe lower in the future? And I think at your Investor Day, you talked about 200 to 250 basis points. And so this would be the high end of that. Are you just more confident now on the high end, or is that 200 to 250 still in play and you're just talking about the higher end?

No. I believe it's a sign of confidence that the insights we've gained during the pandemic have boosted our optimism regarding our margin progress compared to prior expectations. To provide context on our marketing strategy, in 2019, we allocated 3.5% of sales to marketing expenses. Currently, we're operating in the low 2% range, and in some quarters, it has even dipped to 1% to 1.5%. This low spending level is not sustainable going forward, and we anticipate an increase in marketing expenses, although it won't return to the 3.5% level. Internally, our current perspective suggests that aiming for around 3% is more realistic for the long term than going back up to 3.5%. Regarding the goal of reaching a 7.5% operating margin, we hope that 2022 will be the first year without sales pressures. If that happens, it would be reasonable to expect our operating margin to hit approximately 6.5% by the end of 2022. The journey to 7.5% will be supported by further labor and general and administrative efficiencies we can explore. There will also be a necessity for higher average unit volumes. Achieving the transition from 6.5% to 7.5% will likely require an incremental improvement of 50 basis points each year, which means we could reach the 7.5% target by the end of 2024. The growth in average unit volumes, along with ongoing cost-saving opportunities, makes this goal manageable—about 1% improvement per year is our mindset. As we look towards the long term, we aim to exceed this target. Additionally, we plan to approach pricing strategically by keeping any price increases as minimal as possible to maintain value for our customers. This sums up how we view the opportunity to reach 7.5% and the factors influencing our sales and margins.

I want to add a couple of points regarding our confidence, John. First, we've gained valuable insights about digital marketing and its return on investment. It's quite adaptable, allowing us to understand the effectiveness of our marketing expenditures well. We plan to adjust our spending based on the returns we see. Chris's overall framework continues to be effective. Second, although it may not have been evident due to changes in sales during the pandemic, we have already implemented significant cost-saving measures. As volumes recover, you'll notice the positive impact on our profit and loss statement. Much of this work is already completed, which is the source of our confidence, John.

That's super helpful, both of you. Thank you. Dave, can I just ask you about branding and virtual brands? How do you think about marketing this brand? Is it only going to live in DoorDash, or have you thought about or learned from others that you need to co-brand it with your brand, that you could tag it in your own advertising? I'm thinking about how one creates a brand out of ether, if you will, right now and if there's an opportunity to leverage your own marketing spend more than just – rather than just using DoorDash's channels.

Yes. I think one of the things that we're learning is marketing these type of brands, this kind of guerilla marketing, using the experience that we have and the channels that we have is really, really important. We don't expect to do any co-branding, John, saying I'm now - tagging Outback commercial with DoorDash. This can live on its own. And in this digital environment, there is all kinds of great things that we can do. And I think the other thing, too, is we've got a really, really strong partnership with DoorDash. And they're very helpful to us, and they have been during this journey. And so that, coupled with the improving operations and everything – and as you know, John, there's no greater marketing than great operations and great product. But we will be a very strong guerilla marketer on this as we go forward.

Our next question comes from the line of Jeff Farmer with Gordon Haskett. You may proceed with your question.

Great. Thank you. You guys currently have restaurants operating at really the full spectrum of indoor capacity, so 100%, 75%, 50% capacity. The question is what do the off-premise sales volumes look like for those group of restaurants that are at a full 100% capacity versus those that are only at 50%.

They're still good, Jeff. And our goal is to keep them at that revenue level as we go forward. So they still are moving forward in a good way. And it's an opportunity for us to keep that revenue going forward.

Yes. And the only thing I would add to that is that if you just look at the month of January and this idea of preserving off-premises volumes, our average unit weekly sales volumes, if you take out kind of the first week and the Valentine's Day week because they were holiday-driven and they were higher volumes, we're in that $23,000 a week sales range for off-premises across our portfolio, which is actually a step-up from where it was in Q4, when we had more of our restaurants that had more capacity restrictions. So we are seeing volume growth in off-premises in January, which is really encouraging.

All right. That's helpful. And just one other follow-up. So any color you guys could provide on the deferred royalties, whether or not we'll see some of that begin to roll back on to the revenue line in 2021? And if so, sort of what timing across the year?

Yes. Our goal certainly is to see that happen. Jeff. It depends on the revenue curve and how the marketplace acts out in California. I got to tell you, one of the things that's come out of this is we really have a strong partnership with this franchise group and their Board. And we're working very closely together to bring back that California marketplace. So I don't mean to be dodgy on that. I think, Jeff, it depends on the revenue curve coming out of California. The revenue curve we see will be collecting some deferred royalties this year. How much and how fast – it will be mainly the back half of the year. But how much and how fast will depend on what the revenue looks like in California.

All right. Thank you.

Our next question comes from the line of Brian Vaccaro with Raymond James. You may proceed with your question. Brian, your line is now live.

Sorry, still getting used to the mute button after all these years. So, good morning. Sorry about that. I wanted to zero in on the quarter-to-date sales improvement that you're seeing. And I know you said Outback was down around 11%. But can you help level set sort of the average weekly sales volumes that you're seeing at Outback specifically? It's a little difficult given historical seasonality with the bigger Q1, et cetera. So just wanted to make sure I'm on the same page there.

Yes. I'll give you some perspective on that, Brian. I'll talk in terms of the total portfolio. And then I'll narrow it in on Outback just because I have the total portfolio more on top of head. So if you go back to early December, sort of the pre-Christmas, our average unit volumes for the portfolio were in that $55,000 a week range. That's when we had 15% of our US portfolio closed for in-restaurant dining. And so in mid-January, we talked about seeing the easing of the restrictions. And now we have 99% as we talked about of our portfolio open with some level of in-restaurant dining with really the only exception being Fleming's locations in California. So in terms of year-to-date volumes, you got to remember we had two holidays, two big holidays. The first, we contained the week between Christmas and New Year's. And the most recent week contained Valentine's Day. And traditionally, these are going to be two of your busiest weeks of the year. So if you exclude those to try to get a sense of that run rate on the non-holiday weeks, our average weekly sales volumes are in that $60,000 to $62,000 a week range across the portfolio. Obviously, that's much higher than it was in December. But it does show that our volumes continue to be pretty resilient. And that would – the blended comps on that are in that down 9% range outside of those big holiday weeks. And we obviously are a little worse in comps on those big holiday weeks given what we're lapping from the previous year. Outback volumes in that same time period, they're going to be a little higher just because the Bonefish in – is a little lower just given the – they're more impacted by the pandemic. But the Outback average weekly volume is going to a little higher than the system average.

All right. That's super helpful. And I appreciate all the color on Tender Shack. I was wondering if you could also give a quick update on Aussie Grill. I know, it's still very early but we've seen that offered, I think, as a virtual brand in a couple of markets and maybe even an opening in Hong Kong. So, just maybe an update on the latest thinking on the opportunity there.

Brian, I congratulate you. You do your homework. So yes, Aussie Grill is a virtual brand in Brazil, in Hong Kong. And it is being tested in New York to see if that broader menu is more interesting than Tender Shack, because we always like to test in different markets. And so – and then we're opening up new Aussie Grills in Hong Kong, Saudi Arabia. And then we'll be opening up four more here in the Tampa Bay Area, maybe one a little south of here. And obviously, we're opening it because we like the volumes and profitability we see out of that business. Right now, we have 19 Aussie Grill virtual businesses in Brazil. Our hope is to have 50. And it's very similar in thinking and marketing and style as Tender Shack.

All right. That's helpful. I’ll pass it along. Thank you.

Thank you.

Our next question comes from the line of Brett Levy with MKM Partners. You may proceed with your question.

Thank you for taking the call. It's snowing here in New York while you're enjoying spring training in Florida. Using a baseball analogy, could you provide an overview of your current position in various areas and identify any remaining opportunities at the unit level? Additionally, how should we approach the integration of these initiatives in terms of priority and timing? You've provided insights into the virtual aspect, but I'm interested in your thoughts on operations, virtual expansion, and digital initiatives as well. Thank you.

I'll try and answer it as best I can in a relatively brief amount of time, because that's a broad question. But I'll – so first of all, we talked about the sale of different parts of this country with the states. And I think you can realize that in some of these states, we're back to where we have been. Some states still have capacity to open back up. From an operations standpoint in-restaurant, our first priority has always been to offer great service and product in a safe environment. That continues. And as restaurants reopen, we are able to do that quite importantly and flawlessly. And the other thing that's really helped us is our retention levels are really high and our turnover rates are really low as we do this. So that is – that's a big part of it. So that's kind of the sales side of things. From a digital standpoint, I talked earlier about the journey that we're on. I mean, we have had – continued to have record online ordering performance in our restaurants. That's really helped drive some of our off-premises sales. And we continue to make large investments in digital. We have more to do. We're not as far along there probably as in the operations and sales side in our restaurants. But I'm very enthusiastic about the opportunities we have here. And we're studying other companies and working with other companies to improve our own performance as we look across the landscape. From a development standpoint, we believe that Outback Steakhouse, in particular, has an opportunity to expand its footprint greatly. We are testing a smaller footprint building. We've done it in Brazil with great success. We've done a little bit here in the U.S. And we think a delivery-enabled smaller box at Outback makes a lot of sense that can help enable growth. And we think we have opportunities with Fleming's Prime Steakhouse in our stronghold markets of California, Arizona, Nevada, and Florida. So that's on the development side. And on the margin side, I'll turn it over to Chris to just walk through anything else in his mind.

Well, I think we've talked about most of it. What I would say is that, the margin mindset and the things that we've put in place, a lot of that is already in place, but again, when we talk about the transformational savings, for example, impacting G&A, that's something that we'll layer in throughout the course of 2021. That's why I really wanted to make sure that everyone had a perspective that once we get back to 2019 sales, which, again, could be in 2022, we're in position to have that 6.5% operating margin in place that we can build off of towards our long-term goal.

Our next question comes from the line of Greg Francfort with Bank of America. You may proceed with your question.

Hey. Thanks. A quick question. Just, Chris, I think you made a comment in an earlier answer about keeping pricing pretty low the next couple of years. And I guess I'm surprised because I would think with capacity coming out of the industry and competitors maybe closing up shop, there might be an opportunity for that to be higher. Can you just maybe expand on that a little bit on your pricing thoughts? Thanks.

Yes, this is Dave. I'll address it first and then hand it over to Chris. Our goal is to gain market share while providing excellent service and convenience to our customers. We believe our cost structure allows us to achieve this. Any pricing adjustments we consider will be highly competitive, and we will explore other avenues for growth. Chris, I apologize, but I think I may have veered off topic regarding profits or pricing.

Yes. I would say we've always talked about this idea of pricing plus productivity offsetting your inflation. And obviously, we're outlining a strategy here where we have a lot of productivity and cost opportunities that we've identified that allow us to not have to take as much pricing to offset the inflationary headwinds. Now look, we're going to continue to monitor this as we go, but that's our mindset. If we can improve the price value equation in our brands, it gives us that opportunity to take share. So that's our mindset.

Our next question comes from the line of Lauren Silberman with Credit Suisse. You may proceed with your question.

Thank you. Good morning.

Good morning.

So just a follow-up on Tender Shack, building off of John's question. How are consumers using Tender Shack relative to delivery of your other brands? So how does demand differ based on time of day or even the overall customer demographic? And then given the low barriers to entry to launch a virtual brand, can you share your thoughts on the medium to long-term strategy? So will this brand exist solely on marketplaces? Do you plan to supplement this with its own direct digital channel and just leverage marketplace to fill the delivery? And is there a world where Tender Shack can be added to Dine Rewards?

Yes to all those. We will take a look at how it fits within our company. We don't know if, for instance, at Dine Rewards, we would do that or not, but that would be something we've looked at. Interestingly, 80% of the Tender Shack customer has never ordered from our brands. So that's a really fascinating statistic. And you can see it in who's ordering it, what time of day, etc. And so we believe that this business can certainly stand on its own and we can grow it from there. Chicken is a very large category. It's growing rapidly. We have a great product. And our goal is to maximize this virtual brand. That's what we're thinking about totally here.

Great. That's really helpful. And then just on labor, a lot of discussion around labor reform and the elimination of the tip credit. Can you give some color on your staffing levels and what portion of your hourly employees are tip versus non-tips? And then in markets where there's no tip minimum wage like California, how does the margin structure differ relative to markets that allow for tip credit?

I'll take the first part and then pass it to Dave for more details. When you look at the hours worked in our restaurants compared to the total pay, there's an interesting inversion happening. The average hours in our restaurant amount to about 67, with two-thirds being tipped hours and one-third being non-tipped. However, when we examine the pay structure, it shifts to approximately 35% from tips and 65% from non-tipped sources. Now, I'll hand it over to Dave for further insights.

Yes. And I think if you look at the markets that have higher minimum wage, California, Minnesota, other places, you'll see more technology in the restaurant with the servers to expand their coverage. And that's basically how we do it.

Fantastic. Thank you so much.

Sure.

Our next question comes from the line of Andrew Strelzik with BMO Capital Markets. You may proceed with your questions.

Hey. Good morning, guys. This is actually Dan on for Andrew today. Thanks for taking the question. David, I think last quarter, you mentioned you guys hadn't seen a whole lot of competitive closures yet. But I'm wondering whether that's starting to play out more in some of your markets since we last spoke, if you're starting to see maybe any sort of uptick in real estate availability that could be attractive? Is either new builds or relocations, what have you, or if that level of closures has stayed relatively muted over the last few months?

Yes, it's still a bit early, but many have noticed the closures ranging from 5% to 10%. A lot of these are independent restaurants, and some smaller chains have also shut down. We're observing about 5% to 10% of supply exiting the market. The PPP has likely helped some of our independent operators, but we're seeing them close nonetheless. For example, one of my favorite steakhouses in Minneapolis is shutting down. We anticipate that around 5% to 15% of restaurants might close, and we're keeping a close eye on this situation. We don't wish harm on any restaurant operator, but this has created real estate opportunities for us, such as relocations and new restaurants. We are ready and capable of taking advantage of these opportunities.

Thanks. That's helpful. Appreciate the color there. And then just one quick follow-up. We've seen commodities sort of broadly ticking higher over the past several weeks in spot markets. And I know you guys are forecasting flat commodity inflation for the year. And you talked about some of the puts and takes there in the prepared remarks. But can you just talk about maybe how locked you are in the basket for this year and where there might be exposure, if there is any?

Yes, we are approximately 80% secured, which aligns with our usual position at this time of year. The positive aspect is that we have mostly finalized our beef commitments for 2021, leaving minimal exposure in that area. The regions where we still have open contracts are typically the same as in the past, such as seafood and produce, where we expect to encounter some volatility. However, being 80% secured gives us a sense of price stability as the year moves on.

Great. Thanks for taking the questions.

Our next question comes from the line of Sharon Zackfia with William Blair. You may proceed with your question.

Hi, good morning. I think, I have heard you talk about multi-brand delivery in the past. And I guess Tender Shack and the 80% kind of new customers makes me wonder about that again and the opportunity you might have to deliver Tender Shack with Outback product or Outback with Carrabba's. I know you had some, I think, delivery-only locations in test at one point. I mean, is that an opportunity that makes sense, or do you find that customers really just want to silo their orders rather than order from multiple brands at once?

Yes. We typically find that due to the 80% unique order rate at Tender Shack, we see it being siloed. We are always exploring different asset types to provide products to our customers. We will continue to look into delivery-only restaurants, different configurations for our sit-down establishments, and the virtual brand potential with Tender Shack. All of these aspects are included in our overall asset portfolio.

Thanks. And then just one follow-up. I may have missed this. But could you break out quarter-to-date comps for locations that have had dine-in versus those that haven't?

Yes. Looking at the current quarter, locations with dine-in service have experienced a decline of 7.5% at Outback, 4.5% at Carrabba's, 18.6% at Bonefish, and 11% at Fleming's.

Our next question comes from the line of Jared Garber with Goldman Sachs. You may proceed with your question.

Good morning. Thanks for taking the question. Can you just walk us through the unit growth guidance for a moment? I just want to make sure I'm understanding correctly. 20 to 25, you said primarily in Brazil outside of four Outback opened in the US and four Aussie Grill opens. So can we assume that the balance of that 20 to 25 is Brazil? And then can you also talk about, how you're thinking about the Outback relocation program restarting here and what your outlook is, how many restaurants you have in that group that you think can be relocated?

Yes, there will be a Fleming's, and you mostly have it right. The majority will be in Brazil, along with four Outback and four Aussie Grill locations. There will also be a Fleming's included. Now I'll hand it over to Dave for the rest.

Yes. I mean I think, we've done, what, 50-ish Outback relos. I mean, they're really strong performers, over $5 million in revenue with good profitability and cash flow. So, we said so at the outset, we have opportunity for up to 100. That number has expanded, especially with the smaller footprint building we're looking at. So this is something that we will aggressively pursue because of the sales and returns we're getting. When you have restaurants doing well over $5 million, it's clear that the brand is very highly regarded. And we were just real estate disadvantaged in certain cases and we're trying to correct that.

Thanks. And just one follow-up on that. The smaller footprint stores, if you're thinking about that as part of the relocation program, should we still be thinking about those at that $5 million level even with their smaller footprint given the off-premise acceleration, or how are you thinking about that opportunity?

Yes, we are. And the reason why we have confidence is because we tested it in Brazil, where volumes are incredibly high.

Yes. And you're not sacrificing a ton of seats either in that configuration. It's more kitchen design and things of that nature.

Thank you.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Dave for closing remarks.

Well, thank you, everybody. We appreciate your interest in our company. And we look forward to talking to you more about it and look forward to the earnings call in April. Have a great day.

Thank you for joining us today. This concludes today's conference. You may disconnect your lines at this time.