Bloomin' Brands, Inc. Q4 FY2021 Earnings Call

Greetings, and welcome to the Bloomin’ Brands Fiscal Fourth Quarter 2021 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, Mark Graff, Senior Vice President of Investor Relations. Thank you. Mr. Graff, you may begin.

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 2021 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 2021, an overview of company highlights and 2022 guidance. 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. As noted in this morning’s earnings release, adjusted Q4 2021 diluted earnings per share was $0.60 versus $0.32 in Q4 2019, up 88%. We also saw good sales growth in Q4 as sales outpaced the industry by 240 basis points on a two-year basis. This success is directly tied to the planning and hard work that has taken place in our company over the last few years. Back in 2019, we presented a comprehensive plan to build a stronger, leaner, operations-centric company, one focused on providing even better food and service to customers. I will talk about those plans in a minute. It’s clear our strategies are working, and this gives us confidence in our ability to deliver on key commitments and drive even more sales growth. Stepping back, we are a far different and better company today than we were in 2019. I want to highlight this in a few key measures to dimensionalize the progress we have made. In 2021, we earned $2.70 a share versus $1.54 a share in 2019, which is a two-year growth of 75% on an adjusted basis. U.S. comp sales finished up 4.5% versus 2019 and were up 30.5% versus 2020. Adjusted operating margins finished at 9.1% versus 4.8% in 2019. Our operating margins now compare favorably to many in the industry. And finally, we have a much stronger balance sheet. We generate significant free cash flow and paid down approximately $300 million of debt in 2021. As a result, our credit metrics have improved and are now below our goal of 3 times lease adjusted leverage. As Chris will lay out a bit, this now enables us to return cash to shareholders while paying down additional debt. These results would not have been possible without the talented and dedicated employees in our restaurants and restaurant support center. Your commitment to serving guests with the highest level of service, hospitality and experience is what makes our restaurants so successful. As we look forward, we will further capitalize on the success of 2021. Specifically, our focus will be on executing against the following key priorities to deliver sustainable growth. First, grow in-restaurant sales by improving service levels and food offerings. Over the last few years, we have made investments in these areas to elevate the customer experience across the portfolio, especially at Outback. We also look for ways to simplify the business to improve execution and consistency. These concerted efforts have translated into market share gains where we outperformed the industry by 590 basis points on a two-year basis versus 2019. In addition, we continue to upgrade our asset base. Investments in remodels are offering good returns and relocations at Outback are providing outsized sales lifts and volumes exceeding $4.5 million. Second, grow our leading off-premises business. We capitalized on our strong carryout and delivery capabilities during the pandemic. Retention levels in this important channel are contributing to sales outperformance. U.S. off-premises sales were over $1 billion in 2021, up 147% versus 2019. We enjoyed sales gains in both carryout and delivery. Importantly, profit margins in this channel are approaching the margins of the in-restaurant business. This is the result of initiatives that were completed the last few quarters. In addition, we are aggressively pursuing catering opportunities as return to work grows. Carrabba’s saw 46% growth in catering sales in 2021 versus 2019. We offer significant value through our bundles platforms and are expanding relationships to increase market awareness and drive penetration. We expect off-premises to remain a large and growing part of the business going forward. Third, leverage operating margin gains by growing sales and reducing costs. This starts by growing healthy traffic across the in-restaurant and off-premises channels. We also reduced reliance on discounting and promotional limited-time offers and pivoted advertising spend toward more targeted, higher-ROI digital measures. In addition, we remain disciplined in managing the middle of the P&L and are aggressively pursuing efficiencies in food, labor and overhead. Importantly, we will roll out several initiatives in the coming quarters. These include new cooking technology, including advanced grills and ovens to improve food quality and productivity. In addition, we will be deploying kitchen display systems for meal pacing and handheld technology for our servers. These innovations should further improve customer service and reduce costs. And finally, become an even more digitally savvy company. In 2021, approximately 70% of total U.S. off-premises sales were through digital channels. Digital sales were $750 million in 2021, up 268% versus 2019. Over the past year, we implemented the new online ordering system and mobile app to support our digital business. These technology initiatives are aimed at creating a frictionless customer experience while also enhancing customer engagement. We have outperformed expectations and the new app has over 1.4 million downloads. You can expect to see more activity on these fronts in the coming quarters. The priorities above will be our guide for 2022 and beyond. Because of momentum we have in so many areas and our stronger balance sheet, we are in a position to begin growing our restaurant base in a meaningful way once again. We will provide more details on our new unit development plan for 2022 and beyond during our first quarter call in April. In the meantime, just let me say our new unit priorities will be Outback, Fleming’s and Brazil. And Chris has incorporated the impact of our development plans in the 2022 guidance that he will discuss in a few minutes. In summary, Q4 was another terrific quarter, and this momentum sets us up well for 2022. We remain ruthlessly focused on executing against our key initiatives. We are optimistic about our ability to continue capitalizing on these opportunities and drive total shareholder return. And with that, I’ll now turn the call over to Chris, who will provide more detail on Q4 and provide some thoughts on 2022.

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 2021. Given the significant impact of COVID on Q4 2020 results, most of our discussion today will compare against the fourth quarter of 2019, which we believe provides better context to our underlying performance. Total revenues in Q4 were $1.05 billion, which was up 2.4% from 2019, driven by a 5.3% increase in U.S. comparable restaurant sales. Our same-store sales results increased significantly over the last half of Q4, excluding holiday shifts. This increase was driven by two factors: First, in mid-November, Outback traffic and check average improved significantly after we lapped heavy promotional activity from 2019. Second, we took additional pricing actions in November and December to offset higher inflation. I will provide more detail on the ongoing impact of these price increases when I discuss 2022 guidance. Turning to off-premises, revenues were 29% of sales at Outback and an impressive 36% of sales at Carrabba’s. This channel continues to be very sticky, and both of these results were flat versus Q3. Overall, off-premises was 26% of our U.S. volume in Q4. Importantly, the highly incremental third-party delivery business continues to grow and was 11% of U.S. revenues in Q4 versus 10% in Q3. Off-premises is a large part of our ongoing success and will remain a key part of our growth strategy moving forward. And a final note on Q4 sales. Brazil Q4 comps were up 8.5% versus 2019. Brazil’s fourth quarter reflected the combination of strong execution and a reduction of COVID-related operating restrictions. As it relates to other aspects of our Q4 financial performance, GAAP diluted earnings per share for the quarter was $0.59 versus $0.32 in 2019. Adjusted diluted earnings per share was $0.60 versus $0.32 of adjusted diluted earnings per share in 2019. This significant improvement represented a fourth quarter record for the company. Adjusted operating income margin was 7.8% in Q4 versus 4.2% in 2019. And adjusted restaurant level operating margin was 16.5% in Q4 versus 13.9% in 2019. The improvement in margins was driven by a few key items. First, our 5.3% increase in two-year same-store sales drove significant leverage in the quarter. Second, we continue to benefit from our efforts to drive efficiency into our business. For example, food waste continues to be at record low levels and our menu simplification work has reduced hours in the restaurants. In addition, the cost savings efforts that we have previously discussed helped drive G&A expense down $4.3 million from 2019. And finally, marketing expenses were down $23 million from 2019. These benefits helped to offset a more inflationary operating environment. Commodity inflation in Q4 was 4.9% and labor inflation was 8.5% in Q4. Both of these were higher than anticipated when we entered the quarter. In terms of our capital structure, we generate significant free cash flow and paid down approximately $300 million in debt in 2021. As a result, our credit metrics improved and are now below our goal of 3 times lease-adjusted leverage. A healthy balance sheet provides increased flexibility to return cash to shareholders through share buybacks and dividends as well as pursue business opportunities that will enhance shareholder value. In our press release this morning, we announced that we reinstated the quarterly dividend to $0.14 a share and authorized a new $125 million share repurchase program. Turning to our 2022 guidance. We expect total revenues to be between $4.3 billion and $4.35 billion. This includes an expectation of positive same-store sales versus 2021 and a significant sales recovery in Brazil as they lap COVID-related capacity restrictions. We expect commodity inflation of between 11% and 13%. This is higher than our previously communicated range of 10% due to increased pressure on several categories, including chicken, seafood, dairy and oil. We have, however, completed most of our 2022 contracts for beef and we expect beef inflation for 2022 will be in the mid to high teens. As a reminder, we benefited from a relatively benign commodity inflation number in 2021 of 1.7% given our contracting strategy. This will lead to an outsized year-over-year comparison in 2022. In terms of our 2022 commodity needs, we have currently contracted roughly 70% of our food basket for the year. In terms of the pacing of commodity inflation, we would expect the first half of 2022 to have higher inflation than the back half. Commodities ran 1% deflationary for the first half of 2021 and were roughly 3.5% inflationary over the back half of the year. As we lap this, it will have a big impact on the shape of 2022. Labor inflation is expected to be in the high single-digit range. This is running higher than the levels we were seeing in our last earnings call. This is the collective impact of wage legislation and a tight labor market. In terms of the pacing, we would expect labor inflation to be higher in the first half of the year than it will be in the back half. However, the overall level of labor inflation should be more consistent throughout the year than what we would expect with commodities. To address the inflationary headwinds, we have taken pricing actions across our concepts. With the pricing we took in Q4 and an expected increase later this quarter, our total effective pricing will be 5%. We would expect to maintain this level of pricing into the fourth quarter of 2022 when we will reevaluate our go-forward strategy. It became clear that the 3% pricing we previously discussed would not be enough to offset the increased inflationary pressures our industry is facing. Given that we had not taken a material menu price increase since 2019, we are confident that 5% is appropriate. As it relates to other aspects of our guidance, we expect EBITDA to be between $495 million and $515 million. We expect our effective income tax rate to be between 16% and 17%. We expect GAAP EPS to be between $2.13 and $2.22, with adjusted EPS of between $2.35 and $2.45. This adjusted EPS guidance represents 15% to 17% compound annual growth from 2019. The difference between our GAAP and adjusted EPS relates to accounting treatment of share count from our convertible bond. We expect capital expenditures of between $225 million and $240 million. This is driven by approximately 30 gross restaurant openings, half of which are international, as well as a $70 million investment in the restaurant technology that Dave discussed. Now turning to our thoughts on the first quarter. We expect Q1 revenues to be between $1.1 billion and $1.135 billion. During the first several weeks of Q1, we did have impacts from the Omicron variant. This impact appears to be largely behind us and is reflected in our Q1 guidance. We also expect adjusted EPS to be between $0.70 and $0.75. As a reminder, the cadence of our inflationary pressures will be more pronounced in the first half of the year. This is reflected in our Q1 guidance. In summary, this was another successful quarter for Bloomin’ Brands, and we are well on our way to becoming a better, stronger, operations-focused company. And with that, we’ll open up the call for questions.

Thank you. At this time, we’ll be conducting a question-and-answer session. The operator provides instructions for participants on how to ask a question. Our first question comes from the line of Jeffrey Bernstein with Barclays. Please proceed with your question.

Great. Thank you. Good morning. My question relates to operating margins as we look to 2022. Clearly, you saw a significant improvement in 2021 and definitely a part of the question is whether or not you’d be able to sustain that. So I’m wondering if you can just talk to what you expect the full year operating margin to be in 2022 and maybe the confidence you have to sustain that considering that inflation is now more heavily anticipated than prior. And then I had one follow-up.

Sure. Hey, good morning. As we talked about last time, hitting that 8% operating margin goal is a key part of our long-term earnings framework. And if you look at the 2022 guidance, to your point, despite what I would say is record inflation in the market, if you look at the top end of our guidance, the EBITDA guidance range allows you to get to that 8% margin for the year. And if you think about that dynamic last quarter, I laid out sort of the puts and takes in terms of the inflation environment and how the pricing would be used to offset that. Really the only change versus that outlook from last quarter is the fact that I have more inflation in my business in commodities and in particular labor versus what we were expecting last quarter. And I’ve taken additional pricing to help offset that. And I think the only variable left in that calculus after you factor that in is really just traffic and mix shift. We talked about Omicron. The number that we believe Omicron impacted our business this year was probably about $29 million, $30 million between Omicron and a little bit of weather early on in the quarter. So that already kind of puts you a little bit behind the eight ball and that’s why our revenue guidance is where it is. But if you look at the overall guidance from a margin perspective, we feel good like you can be in that 7.5% to 8% range over the full year. It really just depends on how traffic plays out over the back half.

Got it. But if the EBITDA hit the higher end of that, do you think you can hold on to that 8% which was kind of that long-term framework?

Correct.

Yes, Jeff, it’s clearly our expectation that that’s a target we will hit over the long term. And Chris has laid out the earnings framework that gets us there for this year and what you need to expect.

Got it. And then my follow-up is just on the menu pricing. The 5% surprisingly is on the lower end of some of what your peers are taking, so that’s encouraging. Your confidence that there might not need to be further increases or your willingness, if necessary, to take some. Especially with steak, I mean I’m surprised, I’m expecting you to say that you were going to be floating steak in anticipation that prices ease. So what led you to ultimately decide to lock in steak prices? I think you said mid to high teens inflation, which obviously seems extraordinary. But any color on steak and the related pricing would be great. Thank you.

Sure. On the pricing piece, our formula is pricing plus productivity offset inflation. And we tried to be as modest as possible on pricing because we want to be a great value equation for our consumers, and that’s extremely important. We work very hard to try and protect that. Obviously, we had to take the 5% price this year because of some of the extraordinary inflation in front of us. But I laid out some of the productivity things we have coming up in our restaurants, back in the kitchens with our cooking equipment and our handheld in the front of the house. So that’s enabled us to keep pricing pretty muted. Obviously, we’ve got to survey the marketplace; we hope we don’t have to take much more than that, but we’ll have to watch and see what happens. I’ll turn it over to Chris now to talk about the supply chain and cost and what that means.

Well, I think specifically as it relates to beef, for us, and we’ve talked to you guys about this before, having supply assurance has benefited us greatly over the course of the last couple of years. The good news is that we’re 100% locked on beef, we have that supply assurance, but we do try to structure the contracts to help allow us to participate in a portion of the upside should beef prices fall towards the back half of the year. I think that’s just a byproduct of having great supply chain partners. And I think we’re being prudent in our approach.

And Jeff, I just want to say, as you consider the year-on-year gain and increase in supply chain costs, as Chris mentioned, we had a really good supply chain performance in 2021 of 1.7%. So we do have to lap some of that, but the team has done a great job keeping on top of things. And we have not had any product issues to speak of of any significance in our company. So we’re serving our menu each and every day.

Understood. Thank you so much.

Thank you. Our next question comes from the line of Brett Levy with MKM Partners. Please proceed with your question.

Great, thanks. So you talked about your expansion targets with Outback, Fleming’s and Brazil. But you’ve obviously seen some great successes on Carrabba’s. What’s your thoughts on what you’re seeing from Carrabba’s, how you’re looking at its growth prospects, both the in-store and the off-premise? And what did you see in the near-term? What did you see really across the general landscape, regional and different customer cohorts? Thanks.

Is the back half of that question on Carrabba’s? Or is it against the broader company?

That was across all segments.

Okay. First of all on Carrabba’s, the team did a magnificent job in 2021. Hats off to the Carrabba’s team. The level of sales and profitability they achieved is really an unlock for our company. What I challenge them in a friendly way is, you’ve had a great year, now you’re going to lap it. You’ve got to grow it. And when you do that, there will be opportunities to expand the business. Our team there is working with Mark Graff, our Head of Business Development, on what that could look like. The mix at Carrabba’s for off-premises carryout and delivery is 37%. Catering is way up. We’ve got a whole new business here that we’ve never had before. They’re doing a great job in restaurant dining as well. So Brett, that is a piece of our portfolio that is now an opportunity that two years ago we might not have prioritized as highly. As a friendly challenge, they’ve got to lap it and grow it. We certainly believe they will. And then Mark’s got to work with them on the asset prototype and things to go forward. On the broader customer cohorts and channels, third-party delivery is more prevalent with a younger crowd at different times of day, and in-restaurant dining is returning. Carryout and in-restaurant dining can shift back and forth. From a geographic perspective, the Southeast continues to do really well, and we’re seeing some pickups in the Midwest and the Northeast.

Thank you very much.

Thank you. Our next question comes from the line of Alex Slagle with Jefferies. Please proceed with your question.

Thanks good morning. I have a question on your people strategy. People are pretty much the most important ingredient for success right now in the industry, it seems. And you guys took a pretty bold people-first stance at the onset, holding on to all your staff. It seems to be paying dividends. So, now as we’ve shifted into this new phase on the staffing front, I’m curious what you’re doing that differentiates Bloomin’ and elevates its brands in the eyes of the employees. We hear a lot of the same tactics across the industry. I’m just curious what you’re doing differently given you’ve taken a bit of the bolder stance in the past.

First of all, culture and how you treat people is job one. Economics and compensation are important, but culture and the environment you create in the restaurants is critical. The decisions we made during the pandemic helped build that culture and trust. How do you know? Our retention and turnover levels are among the best in the industry. That’s job one. Then turning to the economics, we do a very good job with the person we call our managing partner; their leadership and compensation systems work well. We also do a good job with hourly associates in both front and back of house. The area we need to work on is that second level of management, and we’ll continue to improve their quality of life because they were the heroes during the pandemic. We’re looking at shifts, expanding our manager bonus program, and other measures to improve culture and retention.

Great. And just a follow-up on Brazil, any sort of first quarter commentary expectations, things we should look out for?

They’re doing great. We have the best market position in the industry there, many well-positioned restaurants, and comps in Q4 were up 8.5% on a two-year basis. We’re up 26.5% on a one-year basis. Strong trends continue. We’re adding restaurants aggressively. Peter and his team are doing a fabulous job. They are doing their version of Carrabba’s called Abbraccio, and we’ve taken the Aussie Grill fast-casual business down there as well. It’s been a fabulous business for us. On a two-year basis, they’re up 10% in the first quarter to date, so the first quarter trends are very strong.

Great. Thanks.

Thank you. Our next question comes from the line of John Glass with Morgan Stanley. Please proceed with your question.

Thanks and good morning all. My first question is, Chris, thank you for all the detail on 2022 in terms of guidance. How do you think about the shape of the sales growth in 2022? There’s some big laps, particularly in the second and third quarter, across your brands. And related to that, you’ve reduced marketing pretty significantly versus 2019. Does marketing come back in your plans in 2022 as part of a formula to continue to grow the business off of that reopening lap later this year?

First, one of the things I’ve learned during the pandemic is to pay attention to revenue trends because the laps year-over-year can be volatile. My comments have nothing to suggest we’re not bullish about 2022, but the lap in Q2 and into Q3 will be more difficult because we’re lapping some extraordinary stimulus-driven sales in 2021. On the marketing side, yes, we will bring some marketing back through the balance of the year, but it will be different than 2019. We’ve developed strong digital capabilities and a really good understanding of our customers. We’re now a multichannel environment with delivery and carryout that are very digital-heavy alongside in-restaurant dining. We’ll invest behind ideas and products with good ROI. We don’t anticipate broadscale discounting; we’ll focus on product and marketing ideas and measure the returns quarter by quarter.

I would add that marketing expense overall can be flexed depending on the environment because these digital and targeted activities can yield positive returns without being margin dilutive. That is a sweet spot we plan to maintain, allowing us to flex marketing up or down depending on what we see and still yield a good result while maintaining margin.

And my second question is, how do you think about the tailwind potentially for the dine-in business to come back? It’s a more profitable visit with higher beverage attach and higher check. How do you think about the benefits you might see or the differential margin as the dining room business comes back more than it did in 2021?

Revenue trends are tough to predict, but we would love to see tailwinds as the virus calms and people return to restaurants. Yes, dine-in visits are generally higher margin. We’ve worked to make the off-premises business closer in margin to in-restaurant dining, but we do get higher drink attach and higher checks in dining rooms. We’re hopeful for tailwinds beyond our guidance, but we put our best thinking forward. As channels evolve, delivery will continue to grow, particularly third-party delivery. There’s a trade-off between carryout and in-restaurant visits which we will monitor. Also, catering is a growing channel; Carrabba’s is doing very well and Outback is pursuing it aggressively.

Can you just remind us what was catering as a percentage of sales pre-pandemic, just to understand how big that business was?

Tiny.

Tiny.

Thank you.

Thank you. Our next question comes from the line of John Ivankoe with JPMorgan. Please proceed with your question.

Hi, thank you very much. In your prepared remarks, David, you specifically pointed out Fleming’s, Outback and Brazil in terms of opening restaurants and where your focus would be. So I guess that leads to two interesting questions. Do you have an intention to now own Brazil at least in the medium term? The economics there have come back stronger. And regarding Bonefish and Carrabba’s, are you perhaps thinking about some alternatives you may have with those mid-scale domestic brands?

John, you know Brazil well and our market position down there. It’s coming back strong and when it does we’ll ride that momentum, grow and develop it, and then we’ll evaluate options. We’re not marketing the business or doing anything like that now; the business is growing rapidly both same-store and unit expansion, including Outback and Abbraccio (our Carrabba’s-branded concept). In Q1 we’ll talk more about development plans. On Outback, we’ve developed a smaller prototype that is carryout and delivery friendly with the new kitchen equipment and operating systems. Relocations continue to perform very well. Fleming’s has performed exceptionally within fine dining and new openings do very well; we’re targeting core markets in California, Texas, Florida and Nevada. The two smaller brands have changed—revenues and profits are a completely different business now than in 2019. Carrabba’s and Bonefish have built substantial takeaway and delivery businesses and improved economics. They need to lap last year’s strong comps and continue to grow. Mark Graff will work with the teams on asset prototypes and next steps.

That was very helpful. Let me pivot. You mentioned several initiatives you’ve talked about before. Can we get timing and an expected basis point impact from the advanced grills and ovens, handhelds, and the kitchen display systems? I understand there are supply constraints. Also, I think I heard $70 million of CapEx—does that relate to these items and would that CapEx number drop from 2022 to 2023?

Yes, that $70 million specifically relates to those technology and kitchen items. Our goal is to roll them out in sequence. KDS (kitchen display systems) will roll in first; handhelds depend on availability but we’ve made progress and those will roll out over the next four to six quarters. The new grills and ovens will be rolled out over the next couple of years depending on supply chain; we’re meeting the manufacturer next week and pushing for faster deployment. As we roll these out, CapEx will drop a bit, but if the portfolio grows and we find more restaurants, new unit capital may increase. As for basis point improvement, we target at least a 20% return on investment for that type of equipment.

A big part of the profit bridge to reach our margin goals is productivity. The $30 million or so of productivity we would like to get this year is fueled by these initiatives, and there will be a tail into next year as we continue to roll out and deploy additional units.

And as we test things at Outback, successful innovations will be applied across other brands, so our capital plans will continue to evolve based on returns and supply availability.

Thank you very much.

Thank you. Our next question comes from the line of Lauren Silberman with Credit Suisse. Please proceed with your question.

Thank you. I just wanted to follow-up on the first quarter, noting Omicron largely behind you at this point. Can you just talk about where recent trends are running relative to pre-Omicron levels and if you’ve seen any outsized differences in certain brands or regions?

January saw the impact of Omicron; Chris referenced the roughly $29 million to $30 million impact between Omicron and some weather. The last few weeks have been very good and we’re bullish those trends will continue. We previously noted the Southeast remains stronger, with improvements in the Midwest and Northeast. Fine dining has been the best performing segment. We expect recent positive trends to persist, and the Omicron effect is largely behind us as reflected in Q1 guidance.

From a volume perspective, when you look at pre-Omicron, in-Omicron and post-Omicron, post-Omicron volumes have been very healthy. We’ve maintained and even increased our volume gap versus a black box benchmark, which is encouraging.

Great. And then just on labor, can you expand on what you’re seeing in the labor environment that’s different than what you saw last quarter prompting the higher inflation? And more broadly, what are you seeing with respect to retention for hourly employees as well as managers relative to historical levels?

It was a tale of two parts in the quarter. January was rugged—not necessarily due to more illness, but due to strict adherence to guidelines and people temporarily being out, which required supplemental staffing. Staffing availability was most difficult in the early part of the quarter, but that’s getting better. The labor market remains tight and there is ongoing wage pressure. However, our retention and turnover metrics are in good shape compared to peers, and recruiting has improved in recent weeks.

Thank you.

Thank you. Our next question comes from the line of Brian Mullan with Deutsche Bank. Please proceed with your question.

Hey, thanks. Chris, could you let us know your thinking on G&A spend in 2022 that is embedded in that guide? And you spoke to continuing to look for efficiencies. Is there an opportunity to get that number down further toward 5% of sales over time?

Our 2022 guide implies a G&A level around $2.35 to $2.40 per share for the year. The long-term goal is 5% of sales for G&A. We believe we can get there with a combination of modest further reductions in G&A and, importantly, top-line growth. So it will be a mix of both.

Okay. Great improvement on the balance sheet—congrats. I see the reinstatement of the dividend. It looks like maybe about a $50 million plus ongoing annual use of capital. Can you talk about why that’s the right use of capital versus more aggressive share repurchases or accelerated deleveraging?

Good question. The work we did in 2021 reduced debt and put us below our three times lease-adjusted leverage target ahead of schedule. We’re at roughly $805 million of debt, the lowest since we’ve been public. That gives us flexibility. First priorities for cash are CapEx for new restaurants and technology investments—2022 CapEx is the $225 million we guided. Taxes and interest will consume another portion. That leaves $175 million to $200 million to deploy for shareholders or other uses. The $0.14 quarterly dividend is a modest step up from prior levels and signals confidence in cash flow stability; it represents about $50 million annually and we hope to grow it over time. The $125 million repurchase authorization is a good use of cash at current valuation and helps offset dilution from the convertible bond. We’ll evaluate options as we move through the year, including potential actions related to the convertible bond offering if it makes sense versus buybacks. The pandemic taught us to remain flexible and we’ll continue to deploy capital in a way that is best for the company and shareholders.

I want to add we’ve come a long way from two years ago: paid down debt, improved leverage, reinstated a dividend, and announced a share buyback program. We now have the resources to pursue capital opportunities and grow the business.

Thank you.

Thank you. Our next question comes from the line of Brian Vaccaro with Raymond James. Please proceed with your question.

Hey, thanks. Chris, could you walk us through the dollar bridge versus 2021 to get to the 2022 EBITDA guide similar to what you did in Q3—pricing, expected dollar inflation, COGS, labor, productivity? You gave G&A, but could you walk through the puts and takes getting you to around that $500 million midpoint?

Sure. Last time we said inflation would be about a $170 million headwind. That number is now about $230 million, by far the most inflationary environment we’ve seen since being public. That breaks down to roughly $120 million at the midpoint for commodity inflation and about $80 million for labor inflation, with the remainder for operating expense inflation. To offset that we expect about $155 million of benefit from pricing with the 5% effective price increase. Brazil recovery should add $30 million to $40 million if trends continue. Productivity initiatives should yield $25 million to $30 million. There’s also some incentive comp normalization that gives about $10 million of benefit. Those items bring the picture closer to neutral. The remaining variance to get to the EBITDA guide is largely traffic and mix—how check average holds and the Omicron revenue impact that we previously discussed of roughly $30 million. The back half of the year remains the main unknown, but we feel good about the levers we can control.

All right. Thank you. Could you give a sense of where average weekly sales (AWS) are quarter-to-date at Outback and Carrabba’s and the degree of improvement in recent weeks? And have you seen any slowdown in Brazil due to Omicron?

The first week of our year ended January 2 is an outlier and should be stripped out. If you take out that week and the most recent Valentine’s week, Outback AWS has been in the mid $70,000 per week range, which is a very good result. That’s pre-Valentine’s; historically we see a volume pop in the weeks after Valentine’s. The important point is that the volume gap versus a black box benchmark has maintained or grown, which is encouraging. Regarding Brazil, we have not seen any material slowdown; trends have been strong.

All right. Last one—on the kitchen equipment, as you tested and studied that opportunity, do you have a tighter sense of the labor efficiencies, the number of bodies in the back of house that you might realize as you roll out? I understand it’s over a few years, but do you have a tighter sense of those efficiencies?

I don’t want to get into competitive detail on that. We’ve targeted at least a 20% return on investment for that type of capital, and we’re seeing the equipment works in high-volume restaurants. You can infer some of the labor benefits from that ROI target.

All right. Thank you. I will pass along.

Thank you. Our next question comes from the line of Jeff Farmer with Gordon Haskett. Please proceed with your question.

Thank you. A couple follow-ups. First, I believe you said $150 million to $155 million of menu pricing benefit all-in in 2022 with the menu price increases. What does that assume in terms of price increase levels at Outback and Carrabba’s? Any context across concepts?

The pricing benefit is weighted toward Outback because Outback is the largest concept. The average price increase is slightly higher at Outback and a bit lighter at the other casual dining brands, so the overall company average yields the $150 million to $155 million benefit.

And to be clear, have you already implemented the incremental price increase at Outback or is that rolling out now?

March.

Okay. And then on staffing levels—given sales volumes are up materially versus pre-COVID, how do you think about the most efficient staffing levels as you move forward, and where are staffing levels right now relative to those efficient levels?

We’re a different business today than in 2019 due to menu simplification and equipment changes, so comparing to 2019 staffing is not a helpful metric. We build labor engineering based on the business we have today and the equipment in place. We’re in really good shape on staffing levels relative to our needs, though there’s always work to do. The team has done a great job, supported by strong culture, retention and turnover metrics.

Last one related—since Omicron eased, how have applicant numbers and qualified applicants trended? How much easier has it gotten to bring on staff?

It’s gotten better. It was tough for a while, though our retention really helped. The labor market is a war for talent, but recruitment and applicant flow have improved in the last few weeks and months. We’re well positioned to hire, though not all issues are fully resolved.

Alright, thank you.

Thank you. Our next question comes from the line of Jared Garber with Goldman Sachs. Please proceed with your question.

Hi, thanks and congrats on another strong quarter. Quick modeling question on pricing: you’re taking another incremental price in March. Can you help frame what effective pricing should look like for Q1? I know you said 5% once you pass that increase, but what are the first quarter implications?

It will be approaching that 5% in Q1—call it roughly 4.5% to 5%—and be the full 5% going into Q2.

Okay, cool. That’s helpful. And a second question—if we go back a year or 18 months, you adjusted the menu at Outback to improve value and shrink the gap versus steakhouse peers. Can you update us on what you’re seeing in customer perception or behavior and how Outback’s value proposition compares to primary steakhouse competitors?

We made significant progress with that menu change. Mix and drink attach are up, guests are trading up to higher cuts and sizes. The combos added to the menu have performed well. The team did a thoughtful job and we’re seeing benefits in sales and profitability and in mix. When setting the price increases, we considered preserving that advantage because it has been a meaningful competitive benefit for us.

Tactically you can manage price tiers across markets to preserve the elements of value that were introduced previously.

Great. One follow-up: as we head further into the year, if there’s pressure on lower-income consumers, how are you thinking about trade-down risk and how does that factor into your guidance?

That’s one reason we were deliberate on the price increase and continue to offer value in other ways, such as combos. We don’t intend to move into heavy discounting; we’ll focus on strong products at attractive prices, supported by targeted marketing. That value equation is central to our approach and drove our deliberate pricing decision.

Great. Thank you.

Thank you. Our next question comes from the line of Sharon Zackfia with William Blair. Please proceed with your question.

Hi. Most of my questions were asked, but I wanted to inquire about menu simplification and how that might enable more robust product or menu innovation going forward. Should we expect a more frequent cadence of new product news in 2022?

Clearing the deck is a good way to put it. Yes, menu simplification enables new product innovation. We’ll continue product innovation focused on what works well in each concept—steak innovation and combo ideas at Outback, and menu innovations that don’t lead to proliferation that undermines execution. Also, carryout and delivery create opportunities for family bundles, packaging and digital-driven offerings. Those channel-specific product ideas will be an important part of our innovation cadence.

No, appreciate that. Thanks.

Thank you. Our final question this morning comes from the line of Andrew Strelzik with BMO Capital Markets. Please proceed with your question.

Hey, good morning and thanks for squeezing me in. Two follow-ups on Brazil. First, you mentioned easing restrictions there being a help. How much are restrictions continuing to impact sales trends, and do you have a sense of how much capacity has come out of the industry in Brazil? Second, what does inflation look like in Brazil and is there any need to take price? How do margins look there?

Brazil’s trends have been very strong as they’ve progressed through the virus. The team there is excellent at identifying pricing opportunities and balancing them with value. We can learn from them. They’ve executed well on both pricing and operations while managing the value equation carefully.

A couple of data points: Brazil is effectively at over 95% capacity now, with Rio and São Paulo at 100%. Other outlying areas are slightly behind. Regarding industry capacity, it’s difficult to get precise data, but there were significant closures during COVID down there—possibly 20% to 30% of restaurant capacity could have come out of the category—which creates opportunity for us. Inflation in Brazil is also elevated, roughly high single digits overall, and they’re taking an appropriate level of pricing—ironically in the similar 5% range. Off-premises has grown dramatically and now represents about 16% of the business, which lowers the average check somewhat compared to pre-pandemic in-restaurant mix. Overall the environment in Brazil is similar to the U.S., but with attractive capacity opportunity.

Great. Thank you very much.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I’ll turn the floor back to Mr. Deno for any final comments.

Thank you, everybody, for the questions and interest today. We really appreciate it. Hopefully, we gave you a good sense of what’s going on in our company, and we look forward to talking to you after our first quarter call in April. Have a good day.

Thank you. This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.