Bloomin' Brands, Inc. Q3 FY2024 Earnings Call

Thank you and good morning, everyone. With me on today's call are Mike Spanos, our Chief Executive Officer; and Michael Healy, Chief Financial Officer and Executive Vice President. By now, you should have access to our Fiscal Third Quarter 2024 Earnings release. It can also be found on our website at www.bloominbrands.com in the Investor Section. Throughout this conference call, we will be presenting results on an adjusted basis. An explanation of our use of non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures appear in our earnings release on our website as previously described. Before we begin formal remarks, I'd like to remind everyone that part of our discussion today will include forward-looking statements, including a discussion of recent trends. These statements are subject to numerous risks and uncertainties that could cause actual results to differ in a material way from our forward-looking statements. Some of these risks are mentioned in our earnings release. Others are discussed in our SEC filings which are available at www.sec.gov. During today's call, we will provide a brief recap of our financial performance for the fiscal third quarter 2024 and an overview of company highlights and current thoughts on fiscal 2024 guidance. Once we've completed these remarks, we'll open the call up for questions. With that, I would now like to turn the call over to Mike Spanos.

Thanks, Tara, and good morning, everyone. It is a privilege to be leading the Bloomin' Brands team. We have iconic brands, passionate and resilient team members, and a culture grounded in taking care of our people, our employees, customers, suppliers, and communities. I am excited and wanted to be part of this tremendous team for two reasons: First, my family and I are long-time loyals of all of the Bloomin' Brands, including my late father who always felt so special going to Outback with my mom every Friday night to have a high-quality steak and a beer at a great value in a fun casual environment. Whether it has been a great steak with my wife and kids at Outback, a dinner with my in-laws for Italian at Carrabba's, a birthday dinner for my mom at Bonefish for fresh seafood, or an elevated steak dinner at Fleming's, our brands have provided my family with fun and memorable experiences. The excitement to be part of the team has only increased after spending time working in our restaurants with our great team members from cutting fillets to shaking handcrafted cocktails; nothing beats the hands-on approach to learning the operations of a business. Second, I believe in the strategic growth potential of the business. Bloomin' Brands is a great business with great brands and a great team. When we consistently execute with excellence and the guest experience is right, our brands generate profitable traffic growth. Our brands have a high chance to succeed, and steak and Italian casual dining are on trend in our big categories. Within steak, we compete with strong players, and good competition enhances category growth and pushes us to deliver a better guest experience. I have a lot of confidence in the long-term value of the company with the financial resources, including a good balance sheet with ample cash flows. With an operating mindset, we will deliberately and quickly make the necessary strategic steps to unlock that value. Now that you hopefully understand my motivation to be part of the Bloomin' Brands team, I want to recognize and thank our dedicated Outbackers, team members, associates, and anglers. In addition to being outstanding operators, I've been impressed with their resiliency and capability after dealing with both Hurricane Helene and Hurricane Milton in the span of two weeks. Our teams demonstrated leadership and dedication to each other, our guests, and our communities. The examples of serving, leading, and doing what is right in the face of such adversity have been inspiring. Despite flooded and damaged homes and cars, power outages, and gas shortages, our teams took care of each other and safely reopened our restaurants to serve our communities. This kindness and support have been so impressive, and I thank and appreciate each and every one of you. We also donated $500,000 to the American Red Cross to support hurricane recovery in addition to feeding thousands of our first responders and those in need to support community recovery. I also want to thank and acknowledge the legacy and contribution of Dave Deno. He is a superb leader in person and has been invaluable during my onboarding. We've executed a smooth transition and spent detailed time together to ensure the strategic work that the team has been working on remains on track and accelerates, especially in Outback Steakhouse. As you get to know me, directly leading frontline team members in both the Marine Corps and in the Pepsi system was foundational for me. I spent the majority of my PepsiCo career on the bottling side in asset and people-intensive workplaces, starting on delivery trucks and servicing both retailers and restaurants. I also led a broad and complex portfolio of businesses at PepsiCo, Six Flags, and Delta. In addition to my operational experience, I've led marketing, consumer insights, revenue management, and food service teams. We will manage the business with an operational focus and a guest-centric lens. My time in these roles reinforces three guiding principles. First, leadership is a privilege, focused on the team member experience. We have a unique culture at Bloomin' Brands, one that originates from our founders. Our principles and beliefs state that success is measured by growth in sales and profit and is the result of taking care of our people. Our success is based on our belief that people want to be part of something they can be proud of, is fun, and that includes and values them. Throughout my career, I focused on building performance-based cultures, balancing employee well-being and driving accountability for best-in-class performance. Listening to and learning from our restaurant operators is important in order to support them working more effectively and efficiently. We will stay close to our managing partners, joint venture partners, and franchise leaders as they have the greatest insight into what we can do to better improve the guest experience. I will spend the majority of my time on our operations and how we can improve our team member experience, which in turn inspires a high-quality, welcoming, elevated, and caring experience for our guests. The second guiding principle is to focus on the guest experience. Our ability to consistently execute a memorable experience for our guests with a high-quality meal at a great value and a relaxing environment is what drives repeat visits and loyalty to our iconic brands. Consumers want memorable experiences in away-from-home occasions. Every moment matters when guests choose to spend their hard-earned money and their precious time with us. The third principle is to have a growth mindset by focusing on the core. I found every market, whether domestic or international, and every category has growth potential in terms of traffic, revenue, and profitability. It is important to control what we can control, have a clear definition of success, and execute on targeted initiatives that drive growth. This leads to disciplined capital investments, simplification of the agenda, and being great at what is important to our guests. Bloomin' Brands is a portfolio of iconic brands that have strong growth potential. By focusing on the core of our brands and operational excellence, there is a long runway ahead. As I initially evaluate our portfolio, I see two primary scalable areas for growth. The first and our biggest brand is Outback Steakhouse. This is a global brand and is on-trend in the steak category. However, we have not sustainably grown traffic. We are closely evaluating all elements of the guest experience. I am personally committed to material improvement at Outback Steakhouse that will sustainably grow traffic, comparable sales, and profitability. This brand has a high rate to succeed within the steak category. I'm excited about the strategic work that we have underway, and I will take an active role in operationalizing the work. Our second scaled growth opportunity is Carrabba's. I've been impressed with this team's capability to grow both traffic and comparable sales and to meet our guest needs across various dayparts and occasions. The team is focused on the in-restaurant experience and is assessing the white space opportunity to strategically scale the brand with margins and returns that deliver shareholder value. We plan to share a meaningful update on the Outback and Bloomin' Brands strategy on our next earnings call. Before I turn it over to Michael to discuss our financials, there are two last items that I want to address. First, our Q3 results and balance of year and full-year guidance. It is reflective of the broader challenging industry trends, the recent impact from the hurricanes, and our current execution. Our team is working hard but we are not pleased with our performance and we know we can do better. We have work to do and are committed to providing accurate and transparent forecasts of our performance. Second, I am pleased to announce our strategic partnership with Vinci Partners for our Brazil operations. We have a scale and leadership position in Brazil and are excited to have Vinci as our partner to grow the business in the future. Vinci is a significant asset management firm with a successful track record of partnerships in the restaurant space. We are retaining 33% ownership of the business. It has been my experience living and working internationally with franchise partners that combining powerful classic brands with local capability and expertise is the optimal business model to maximize future growth. We have also created aligned economic interests for both parties with a material equity stake to grow the business and to grow it profitably. This transaction will allow us to simplify and focus on our domestic operations. We anticipate closing the transaction this year and Michael will walk through more of the financial implications of the transaction.

Thank you, Mike, and hello, everyone. I would like to start by providing a recap of our financial performance for the fiscal third quarter of 2024. Total revenues in Q3 were $1 billion, which is down 4% from 2023. This was primarily driven by a decline in comparable restaurant sales, the FX translation of the Brazilian dollar relative to the U.S. dollar, and the net impact of restaurant openings and closures. U.S. comparable restaurant sales were negative 150 basis points and traffic was negative 440 basis points, which was in line with the casual dining industry. At Outback, we introduced greater value in our LTOs beginning in Q3. While this allowed Outback to outperform Black Box on traffic in a very promotional environment, our focus is on building sustainable traffic growth, particularly at Outback. Average check was up 2.9% in Q3 versus 2023, in line with expectations. Value is critical right now, and we are committed to taking the least amount of pricing as necessary. Q3 off-premises was approximately 23% of total U.S. sales. Our third-party delivery business is 13% of total U.S. sales, which is an increase from 12% in Q3 2023, driven by our growth in catering. Our Q3 GAAP diluted earnings per share for the quarter was $0.08 versus $0.45 in 2023. Our Q3 adjusted diluted earnings per share was $0.21 versus $0.41 in 2023. The primary difference between GAAP and adjusted diluted earnings per share is due to the asset impairment and closure-related charges associated with the decision we made in Q2 to close 9 restaurants in Hong Kong, executive transition costs, and professional fees related to our revenue growth management strategic efforts. Q3 adjusted operating margins were 3% versus 5.3% last year. There are a number of factors contributing to the margin decline this quarter. Overall, restaurant-level margins declined by 150 basis points. 110 basis points were driven by labor primarily due to hourly and field management wage rate inflation. Labor wage inflation for the quarter was 3.8%. Other restaurant operating margin declined 90 basis points driven by higher operating and supply expenses primarily due to inflation as well as higher pre-opening expenses as we open more restaurants this year. Cost of goods was 50 basis points favorable from pricing benefits and supply chain productivity initiatives. Commodities were better than expected in Q3 at approximately 2%, driven by more modest inflationary expectations across seafood, oil, and dairy. We continue to see positive signs within our Beef program but this category remains inflationary. Depreciation expense was higher in Q3, consistent with our increased levels of capital spending in recent years and our investments in infrastructure to support growth. We are operating in a challenging market environment, and we are focused on managing the costs that are in our control. Turning to our capital structure; total debt net of cash was $1 billion at the end of Q3. During the quarter, we upsized our revolver to $1.2 billion, which provides additional liquidity for our business and provides broader financial flexibility. Importantly, we remain committed to being at or below our long-term lease adjusted leverage ratio target of 3x. Year-to-date, we have repurchased a total of 10.1 million shares of stock for approximately $266 million. This included shares issued in connection with the repurchase in March of a portion of our convertible notes. We have $97 million remaining under our share authorization program. The Board also declared a quarterly dividend of $0.24 a share that is payable on December 11. Now, turning to our full year 2024 guidance. We are updating our full year guidance to reflect the continued industry softness and our trends. As a result, we are updating our comp guidance range to be down 100 basis points to down 50 basis points. We are being very mindful of pricing and have not contemplated pricing actions above prior guidance. Given the volatility the industry is seeing in traffic trends, we are updating our adjusted diluted earnings per share guidance to be between $1.72 and $1.82. Prior guidance assumed industry trends would strengthen, but our updated view assumes no improvement. Additionally, the hurricanes have had a negative impact on our business and were a distraction for our teams. U.S. domestic comparable sales were negatively affected by approximately 30 basis points in the fourth quarter, with a total impact on profitability of approximately $0.03 on an earnings per share basis. Both of these are included in our updated full year guidance. We are updating our commodity inflation guidance to be approximately 1%. We are updating our adjusted tax rate to be between 6% and 7%. As we mentioned on the last call, the negative calendar shift experienced in Q1 of $0.05 is recaptured in Q4. The Brazil tax benefit is expected to be approximately $0.15 for the year. As it relates to the fourth quarter of 2024, we expect U.S. comparable restaurant sales to be down 200 basis points to down 100 basis points on a comparable calendar basis. This reflects the current environment than what we are seeing in the restaurant industry as well as the approximate 30 basis points impact from the hurricane experienced at the start of the fourth quarter. We expect Q4 adjusted diluted earnings per share to be between $0.32 and $0.42. Importantly, this guidance includes the revised Brazil value-added tax exemption benefit of approximately $0.07 and an approximate $0.05 benefit from the calendar shift, offset by an FX headwind of $0.02 and a $0.03 impact from the hurricane. This morning, we announced a strategic partnership with Vinci Partners for our Brazil operations. The total enterprise value for the business is BRL2.06 billion or 6.5x trailing 12 months EBITDA, net of royalties through Q3 2024. Vinci will purchase a 67% ownership interest based on this valuation, and as Mike mentioned, we will retain a 33% ownership in the business. We believe our economic interests are aligned and expect the business to continue to grow. We have an option to monetize our remaining equity stake in 2028. We anticipate the transaction to close in 2024. We will receive 52% of the proceeds upon closing and the remaining 48% one year later. We will provide more details on the use of those proceeds on our February earnings call after we complete our strategic planning efforts later this year. Additionally, the ongoing royalty stream will allow us to continue to benefit from a high-growth, market-leading business. In summary, we are not satisfied with our results in 2024 and we are committed to the actions necessary to deliver consistent long-term sales and profit growth. While Outback is our primary focus, all of our brands play a role in the success of Bloomin' Brands.

And today's first question comes from Jeffrey Bernstein with Barclays.

Great. My first question is just in terms of the operations and the opportunity you talked about. I know in the press release, you talked about consistent and elevated guest experience which was key. I'm just wondering in your early days where do you think Outback has been falling short on that which presumably has pressured repeat traffic. I know you mentioned deliberately and quickly taking action. I'm just wondering whether you think there's any low-hanging fruit that we could see being implemented over the next quarter or two to stem the tide? And then I had one follow-up question.

Thanks, Jeffrey. Yes, it might be better to simply refer to Spanos as our CEO and Healy as our CFO for clarity. Good morning. To address your question about operations and my observations regarding Outback, I’ll begin by noting that we are currently experiencing a decline in same-store sales and traffic, and we have been losing our share in the steak category. That is our current reality. On a positive note, we have a strong, iconic brand and a dedicated team that is passionate about the guest experience. They embody the Aussie spirit and the ethos of our brand. We are also aligned with trends in the steak category, which gives me confidence. Furthermore, we have ample liquidity, strong cash flows, and a solid balance sheet, which is reassuring. Looking forward, I believe we need to focus more on enhancing the guest experience. It’s essential to provide great meals, good value, and a fun casual atmosphere, which lies at the core of our brand. Operational excellence, defined as consistency, is crucial, and the team has emphasized this. We need to be strategic about controlling what we can control and simplify our menu. We are also actively revisiting our brand positioning; we don't want to be perceived merely as a bar and grill. We are continuously working to improve and differentiate our experience while reconnecting with our roots. I will provide more updates in February, but I want to emphasize that I am personally very involved with Outback. I’m collaborating closely with the team, accelerating strategic initiatives, and focusing on daily improvements through coaching and accountability.

Got it. And Spanos, you mentioned Outback and you mentioned Carrabba's in terms of near-term priorities. I'm wondering if you could just talk about thoughts on the portfolio. More broadly, the pros and cons, whether it's of keeping Carrabba's or just the thought process around Bonefish; any thoughts there, especially we're aware that there's an activist in the names. So, I'm just wondering if there's any thoughts you could share in terms of your relationship or your priorities or whatnot relative to that of an activist investor.

We have a strong collaborative relationship with Starboard, who provides valuable insights. The board members are very passionate about enhancing the guest experience and recognize the importance of the team member experience in achieving that. They are focused on doing what's best for the business, particularly regarding its sustainability through exceptional guest experiences. Regarding our portfolio, I want to clarify that our decision on Brazil is not connected to our domestic portfolio. My international experience has taught me that the greatest future value comes from combining an iconic brand with local capabilities and insights. In terms of our domestic portfolio, we are committed to it and see significant growth opportunities, particularly with Outback, which is focused on enhancing the guest experience through team member excellence. Carrabba's is also an exciting business with consistent traffic and same-store sales growth. Pat Hafner and the team have been doing an excellent job since 2019 of elevating the brand and focusing on in-restaurant traffic. We're also deliberately exploring growth opportunities for the brand while ensuring the right margins and returns. As for Bonefish, the focus is on maintaining the essence of the brand, which emphasizes polished dining with fresh seafood and an energetic bar atmosphere. The team is working on simplifying the menu to highlight fresh seafood and energize the bar experience, reflecting the original concept of Bonefish.

The next question comes from Alex Slagle with Jefferies.

Thanks, and welcome aboard, Mike. I thought it was interesting. You talked about your history with the brand as a consumer as you've dug in and worked with the operators; I mean, what are you hearing that stands out, differs from what you initially expected coming in?

The operators, our managing partners, JVPs, and franchisees have all provided consistent feedback. Firstly, they are seeking simplification in the operations. Secondly, they emphasize the importance of enhancing the guest experience, particularly regarding center-of-the-plate improvements and removing barriers to simplify our agenda. They want to ensure a strong and reliable value that guests can trust in the brand. Additionally, one key point raised is about frequency; our average guest visits about twice a year, and they believe we should aim to increase that number to three. They also stress the importance of attracting the right new guests who are interested in the steak and seafood category. Lastly, there is a strong belief in the brand and its potential, and there's a genuine passion for serving our guests and each other.

Helpful. I mean, I guess it's early but do you expect any investments back into the brand around food quality, marketing, labor, or other areas that could have an impact on margins or just that sort of reinvestment as we look ahead to '25?

Yes, Alex. I won't get into '25. We'll be real clear with you on what we're doing as we finish our long-range planning into February. But maybe I'll give you a framework on how I think about this in terms of how you lead the P&L and lead the team. I start with one. I'm a believer you can reward yourself for the free dividend; what I mean by that is step one is coaching, leading, controlling what you can control, focusing on the guest, that accountability factor can unleash a lot of potential when the team is focused. I start there. Second, you've got to look at redeploying resources that can be financial; it could be time, but redeploying your resources on the point of main effort priorities is important as well. We also should be looking at reducing wherever we have costs or any type of cost we don't think is driving revenue or top line growth. We've got to take a hard look at that. And then after that, I think it's fair to say we can look at reinvestments, but those reinvestments are going to be sharp. They got to be targeted. They got to have clear returns on them. So we have revenue outgrowing our cost growth sustainably.

Next question comes from John Ivankoe with JPMorgan.

I want to grab that last word reinvestment and apply it to your existing asset base. Obviously, the majority of your sales are presumably always will be on-premise, a modern experience, at least relative to expectations, really matters. And at least in previous conversations with the company, we've heard anywhere between 30% and 50% of the asset base is considered to be modern. In other words, the majority are considered not to be modern. So I wanted you to just kind of address the asset base, how much of a front burner need/opportunity is there? And are you willing to make that investment even if it doesn't necessarily pencil out from a financial return perspective just because it's the right thing for the brand, your employees, your customers long term?

Yes, you bet. So I think that's a really fair question. And that is very much part of the work we're doing, asset condition and asset quality across all the brands and how we think about that. But I would also start with the one thing I've learned over the years calling on food service customers and servicing them and what I've learned here so far is the best results inside the four walls of a restaurant start with the leadership of our managing partners. What I've seen is results that tell me when we get the right leadership with the right accountability and we simplify the agenda, we can unlock growth everywhere. What I think you're also getting to is capital allocation. And again, we'll be clear on that. But what you're getting at is what I would call is investment in the base business. To me, that's always where you start in terms of capital allocation. And part of that is repair and maintenance. Part of that can be remodel, part of that could be a relocation, etc. But we're going to make those right moves because it does pencil out if you're doing the right things with sustainability and if you have the right process, which we do and Michael's team is leading that process. And we'll do those things. Beyond that, our capital allocation, which I think is a bit of the inference of your question, we're going to continue to be thoughtful on that. We're going to obviously stay focused on paying down debt to lease net leverage ratio long term of 3.0, as Michael pointed out, we'll be disciplined in new store openings. And then after that, we'll look at how we properly return cash to shareholders. But it pencils out. What I found is I've been leading asset-heavy and people-intensive companies for a lot of years; you have to reinvest in the base of the business for sustainable growth, and we're committed to that.

And John, just to piggyback on that, I think to focus on better operations and better execution works when we reinvest in the restaurants as well. And so it has to be an and as we think about the investments or what we would need to do to support Outback. And that's how we're prioritizing them as we go through this strategic planning, certainly an asset component as part of that conversation.

I’d like to follow up on reinvestment. You’ve mentioned several interesting points. We want to limit the amount of pricing increases while avoiding becoming a bar and grill. I understand both perspectives. How do we view the overall average ticket? Is there an opportunity to reduce prices to increase customer frequency from twice to three times? When we take a fresh look at the business and compare prices to consumers' expectations, what is our perspective on current price levels and the overall average ticket that customers pay?

Yes, John. So I'll ladder up to what I've always found to be your levers on revenue management. There is a volume lever which is traffic. There's obviously an inflationary price lever, and there's a mix lever. And what I found is you got to be balanced on all three levers in terms of what you got to do internally on the P&L as well as being thoughtful externally on what's going on competitively and what the guest or consumer gives you credit for between a price and benefits equation. So we're going to be balanced moving forward and we're going to have a very sharp lens on all those levers.

The next question comes from Brian Harbour with Morgan Stanley.

Maybe I just wanted to start with Q4. Obviously, you did change your annual EPS guide quite a bit. And part of that is sales; it sounds like the hurricane impact wasn't too significant from an earnings perspective. But could you help us on some of the pieces that are kind of driving that change to your Q4 outlook?

Good morning, it's Spanos. I'll begin by saying that we are not satisfied with our results. Looking at the initial forecast for Q4, we were perhaps too optimistic. We expected casual dining to improve, as well as our ability to capture market share and outpace our competitors, but that did not occur. Therefore, our Q4 forecast aligns with the trends we've seen throughout Q3. In terms of same-store sales, traffic, pricing, and our internal EBIT metrics, we are where we are. Again, we are not pleased with this situation. Moving forward, I want to assure you that both Michael and I will be very open and honest regarding our forecasts. I prefer to take a balanced approach and will share what we believe are the various factors at play, both positive and negative. Ultimately, what will drive our business forecasting is a return to delivering an outstanding guest experience, supported by a great team member experience, and that is our focus moving ahead.

Yes. Overall, it's a fairly straightforward situation for us regarding our expectations for Q4 traffic. There are a few unique factors to consider, such as the hurricane and the Brazilian tax situation, which have both positive and negative impacts, along with the calendar shift. However, primarily, we expect traffic to remain consistent with what we've seen so far, and that's how we view the end of the year.

Yes, Brian. The last piece, just one last point on the hurricane. And I am saying this as well to acknowledge our teams again. This was consuming three weeks during the hurricanes. If you look at whether it was Helene or Milton, we still have team members that are in the land of remediation and recovery and all the fun that goes with putting your lives back together, and they're still getting through it. So it was a big drain of capacity and bandwidth and energy of the team, and everybody has been positive. But that has been one of the distractions, and it's good to be past that.

Yes, I understand, and I appreciate it. Perhaps this is something you'd like to address later. Regarding the menu, specifically for Outback, do you believe there have been changes? I know there have been. Do you think further changes are needed in terms of the menu? You mentioned some simplification. What is your perspective on the current food offerings at Outback?

I like your question, Brian. Again, I think it starts with simplification and getting back to the core of that Aussie spirit, that steak seafood core and being all things to some people on the menu and not necessarily being all things to all people on the menu. Our operators want that simplification in the back of the house. And we are looking at that, and I found over the years just fewer items execute more consistently, drives a way better guest experience.

The next question comes from Jeffrey Farmer with Gordon Haskett.

Mike, in answering some of the earlier questions, you pointed out the importance of value. Can you just elaborate on where you see the core Outback concept currently positioned on the value front?

So if I think about where we're at, first, I start with value. To me, value has always been a function again of what's the price and what's the benefit, and that value is accentuated with the fantastic outstanding guest experience. I start there, and it's that great meal, great value, great experience of fun casual environment. That enhances that value because part of that value is that benefit, that feel, that memory you get when you walk out of an Outback. As I said, what I am drilling into and what the team has given me feedback on is how we execute LTOs relative to other innovation versus everyday value. And that's part of the work we're doing right now is can we simplify the value of the promotional equation and also simplify the menu, which was where Brian was going as well before in his question, to make it a simpler offering for not only the guests but our team members.

Okay. Just to follow up on that, I'll keep it brief. Regarding the third quarter, Outback reduced its promotional price from $16.99 to $14.99. Is this price reduction aligned with your strategic vision, or do you have a different approach for the future?

Yes, when discussing Great Barrier Eats in relation to Q3 and affordability, we are exploring that aspect. In the past, we've offered three-course meals and are broadly assessing our entry price points and overall affordability. Regarding these types of limited-time offers, we intend to integrate them into our core menu. Our goal is not to introduce numerous new items for these programs; rather, we want to focus on leveraging our core menu with appropriate value to attract consistent customer traffic.

Yes, the team is fully focused. We recognized the need to provide more value, so we intentionally adjusted our opening price points for limited-time offers in Q3 to $14.99. The team can create these offers, which significantly influence our product mix. While the lower entry price point impacts our overall offerings, our more featured and iconic items also help drive the mix. Thus, our overall economics are strong. However, we acknowledge the necessity to lower those opening price points, as affordability is important to us. Our pricing in comparison to other steak competitors is a critical factor we are analyzing. These aspects are particularly important as we consider the longer-term strategic work of determining the right pricing for our business.

Yes, Jeffrey, the last piece on that is Michael is exactly right in terms of making it work financially engineering it. My bigger focus based on feedback from the team members is whatever we offer, we want to make sure it's generating traffic that retains our loyals or recruits the right kind of guests we want long term. That's the focus for me as we look at pricing and promotions.

The next question is from Sara Senatore with Bank of America.

I have two questions. First, you mentioned that you expected the demand environment to improve along with your performance. I'm curious about this because my understanding is that the demand environment has been getting better. From what I've seen in industry trends, July seemed to be the weakest month, but there has been a consistent improvement into and through October across various segments. Can you clarify whether you anticipated more improvement or if it's primarily about relative performance? My second question relates to a comment made by Mike Spanos regarding managing partners.

Yes, I can kind of jump in on how we thought about the forecast. So certainly, July was the low point from an industry standpoint, so I think everybody assumed that we would have some rebound off of that. And we did have some rebound off of that. If we look at sequentially how we perform first Black Box, we performed better in Q3 versus Black Box than we did in Q2. So we saw some improvement, especially as we move to some of the lower price point LTOs. In our prior guidance, we assumed that trajectory would continue through Q4, and our gap to the industry would continue. I think that optimism is now not contemplated in our guidance, and we're sort of assuming the industry is what the industry is. And so we continue to fight for share with that. We still think we have some very compelling offers that can take share, but we sit pretty much flattened that expectation as we think about finishing the year. That's just mechanically how the forecast was rebuilt.

Okay. And then on the sort of getting the right managing partners, and I think that makes perfect sense. The General Manager role is the most important in the system. But I guess I'm wondering how you do that in the sense that I think they participate in the economics of the box. So it seems like your approach to aligning incentives is about as good or sort of optimal. And I'm curious what you see as an opportunity to make sure that you do have the best partners there, if it's not an incentive; if it's not a change in how you incentivize them, is there something else because that model has worked very well for others.

Yes, Sara. So it has worked well, and I like aligned economic interests. And I like the model. And that's the feedback I've been given by our managing partners. What many of them have also said to me is their aligned economic interest in ours and the model also need to incent sales growth and profit growth in addition to a percent or mix of the discounted cash flow. But the bottom line, what we're seeing with our managing partners when we get great results is we have retention of our good team members. We have their engagement, and with that, most importantly, we get a great guest experience. And that's it. So we will stay consistent with that. And I do, to your point, we feel good about that model where they have aligned economic interest and they get contribution from our profitability and our growth.

The next question comes from Dennis Geiger with UBS.

I wanted to ask a bit more on marketing. I know it's early and we'll hear more from you on the next call, but curious if anything high level to share today. We've seen really good traction from a couple of others in the industry who have leaned in and made some enhancements to marketing. They've tied it into social media, etc. So I'm curious how you guys think about the current marketing, where the brand is positioned in that marketing, in the ad spots and relative maybe to how you should be positioned and Mike, relative to your thoughts earlier on what the brand stands for.

Dennis, I'll start maybe with the bigger picture, and I think you've got questions in how we're positioned for Q3 and Q4 as well, and I'll give you that insight as well. To me, with the brand, when you're building brand trust or brand loyalty, you usually go down a curve of awareness to trial to repeat into loyalty. So for me, I start with the loyals and retaining the loyals and getting the loyal guest frequency up. So if the average is 2, as I said, I want to get them to 3. And you do that with a great guest experience. That's the foundation of a brand trust, and that's the foundation of an intent to return. I also then look at that same sort of curve; we want to recruit the right guests who also want that great experience if it's Outback again. It's going to be a focused steak and seafood experience with that Aussie Spirit at a reverence where they get that great meal at that great value, that great experience. And then we want to get them past the trial. We want to get them in to repeat. On both of those, regardless of what we're saying, whether it's social or traditional TV, we've got to be consistent in our operational excellence to deliver a great guest experience. To me, that's really important. More tactically, if you look at Q3 or Q4, our spends year-over-year are basically flat, our weeks year-over-year are basically flat, and our TRPs year-over-year are basically flat, specific for those quarters.

Yes. Just to jump in, I think we have pretty good analytical capability to evaluate our marketing spend, what the ROIs are, what channel, what message is most relevant. And we look at those every quarter. There's no doubt there are some other players; share of voice is very competitive right now as others have leaned into broader marketing spend. And that's certainly a consideration for us as we think about our larger strategic plan, right, operationalize and accelerating the work that we're doing at Outback. When we get to the other side of that, we are going to have to be able to communicate who Outback is, what Outback is and really drive trial when we have a much better experience. And so that's certainly a consideration as we think about that longer strategic plan.

Yes. I mean, Dennis, to me, last thing, again, I'll say on this. I think the foundation of any brand and any push or pull marketing starts with service. And that's guest experience. And that to me is what we've got to focus on and first get right as we think about spends in terms of our voice to the consumer base.

Just one more. Just on Brazil, maybe and the refranchising transaction and that partnership. Anything more to share right now on thinking about modeling that, whether it's royalty looking ahead, more near in when roughly in the fourth quarter, we should think about that closing and impact to the fourth quarter. Any more details on that today?

Yes. I believe we have already shared most of the details regarding the enterprise value, specifically that we are selling two-thirds of the business. We aim to close this deal by the end of the year. While we will not disclose the royalty rate, we will receive a royalty as that business continues to expand. To be specific, we sold two-thirds of the business for BRL2.06 billion. We will obtain 52% of the proceeds at the closing and the remaining 48% a year later. We also have the option to sell the last third of the business in 2028. We anticipate that this business will keep growing. We've partnered with the right company, which will effectively lead and enhance that business with more talent and capabilities. We are very excited about this opportunity, as it allows us to concentrate on our core domestic operation. Our partner in Brazil will dedicate all their efforts to developing that business. The financial terms were favorable for us, and we stand to benefit from the growth, making this a significant opportunity for us.

The next question comes from Brian Mullan with Piper Sandler.

I just want to come back to capital allocation. I wanted to ask specifically on the dividend, that's about an $85 million annual cash outflow. You might make the case to the market maybe isn't giving you credit for it given where it looks like the yield is. Mike Spanos, I was just wondering how you feel about the dividend if that has been under any kind of review, if there might be a better use of cash, whether that be remodels, debt paydown, or share repurchases? Any early thoughts on that?

Brian, you raised a point about whether we are being recognized for our efforts. I believe we are undervalued, which is contributing to the current yield challenge. I am confident and hopeful that over time, we will return to the appropriate valuation levels. I won’t delve into the specifics of the capital allocation related to the Long Range Plan, but I will say that once we are assured that we’ve made the right decisions concerning our core business and managed our debt effectively, we will clearly communicate our plans for returning cash to shareholders. As you know, we recently approved a dividend this quarter, and we are committed to it. The key takeaway is that we need to be prudent with our investments and cash usage, ensuring we achieve the right operational returns and also being fair to shareholders when we believe we do not have the appropriate returns to distribute that cash back to them.

And then, just a question on the domestic store base. In the first quarter, there were some strategic closures. Mike Spanos, that was before you got here. Just my question is given the tough industry trends since then and the fresh set of eyes, would you think there could be some more closures here in the next year or two as you do this asset review? Just any early thoughts?

Brian, as we've always done each year, we're consistently reviewing our assets, focusing on their condition and quality. Initially, I rely on our managing partners to inform us about what is effective or ineffective within our operations before deciding to close any restaurants. If that is indeed the issue, we will address it. If we identify an asset where the guest experience is lacking, the next question will be whether we should remodel or relocate, which is part of our standard procedure. We are diligently working through this process as we engage in long-term planning. Similarly, this approach applies to new store openings; we follow the same disciplined process when considering the cash involved.

The next question comes from Jon Tower with Citigroup.

I apologize for that. I need to learn how to use my mute button. Quickly returning to the Brazil business, can you share what the capital expenditures over the past 12 months were allocated to that business, even if you can't provide too many details about the royalties?

About $40 million.

All right. And then one part, Spanos, so I'll refer to as Tower from this point forward. One thing you spoke about was the idea of speaking with managers and so far meeting with them at the Outback brand? And what they liked about the business, what they wanted to have improved? And what was absent in your comments was any commentary regarding the off-premise business or delivery. And Outback, it's a much larger chunk of the business than it is for some of your direct competitors. So I'm just curious what feedback you heard from them and frankly, your own thoughts on that channel going forward?

Absolutely. Thank you for pronouncing the Greek American name correctly. Regarding your question about off-premise, I want to emphasize that we have been pioneers in this area. I remember my own experiences as a consumer, often calling in orders at Outback and picking them up; we were at the forefront of that. It has proven to be successful. We do have a good mix of that business. However, the focus is on the guest experience. The operators and managers have expressed that they want guests to have a great experience, whether dining in or off-premise. This means being strategic about the menu, considering which foods travel best off-premise, and ensuring that the delivery and guest interactions are satisfactory. We are committed to enhancing our off-premise capabilities while maintaining balance and thoughtfulness. Whatever we pursue, it needs to provide a great guest experience with excellent meals, delicious food, and good value.

And the next question comes from Brian Vaccaro with Raymond James.

Just a couple of quick follow-ups, if I could. Back to the Brazil transaction, can you share what the expected tax bill or after-tax proceeds will be? And also, can you remind us how much of the annual G&A budget is in Brazil?

Yes. We're not going to get into the after-tax because we still have to close and go through all of those components at this time. And I don't have their G&A on me but we can get back to you with that.

Okay. In terms of capital allocation, it appears that more than half of your capital expenditure budget is being directed towards new unit growth in recent years. You mentioned the $40 million allocated to Brazil, but also some investments in the domestic market. Could you discuss the returns you are experiencing from your domestic unit growth? Are they meeting your expectations, and what are your thoughts on potentially optimizing your capital expenditure budget, possibly through maintenance and remodels to enhance free cash flow?

The restaurants we have opened in recent years are performing as we anticipated, and we are pleased with their success. This includes both new locations and relocations. As we have mentioned in recent quarters, we have observed increases in build costs. If these costs rise to a level where we cannot achieve our returns, we will not proceed with those deals. Our main priority is to ensure we deliver the expected returns to our shareholders rather than just opening stores for the sake of it. We do believe that opening new locations is appropriate for us, whether through relocations or additional restaurants for Outback. We have noted that Carrabba's is a significant growth opportunity, and the team has done a commendable job of increasing sales and revenue. They are currently working on how to refine and improve the return on that investment since there is considerable potential for expanding Carrabba's locations. Fleming's also remains a strong business with great returns, and we will continue to open a few Fleming's each year, though we have to consider the scale of the builds. We are content with the returns but continuously review them to ensure we maintain those standards. Could you clarify your question regarding capital allocation for remodels?

Yes, potential to just optimize CapEx to bolster free cash flow. Obviously, you want to stay focused on maintenance and remodels but just see any opportunities there as you think about the CapEx. I understand you don't turn these things off like a light switch but over the next year or two, perhaps just to optimize free cash flow.

Yes. That will be a key part of our strategic work. Ultimately, how we allocate capital will be crucial. As we consider capital expenditures, this will be an important factor. We want to open new restaurants, but we want to ensure they provide great returns. We can't open as many restaurants unless we can achieve those returns, and that could influence our allocation. However, we are currently confident that we can continue opening restaurants. The scale of that remains to be seen as we move through this process. It is essential to maintain the restaurants, so that is a firm requirement. Additionally, a remodel of our restaurant base will be necessary. That reflects our current thinking, particularly regarding prioritization. I just want to respond to one thing on, you know, obviously going through this and making sure that as we think about our CapEx allocation, we'll clearly marry the maintenance and the remodeling component along with new restaurants. It's going to be a team effort to explore those opportunities.

Okay. And last one, just on pricing, if I could. Can you remind us what was pricing in the third quarter? And maybe you could level set how you see pricing trending if you don't take any additional pricing in the next couple of quarters?

Yes, we are around 4% in Q3 and anticipate staying in that range for Q4. Our pricing has decreased compared to 2023, and we are committed to keeping price increases minimal. We believe our pricing aligns with industry standards, but we are still facing challenges with beef, which remains the most inflationary item in our basket. However, the beef situation is better than we anticipated. We plan to be deliberate with our pricing strategy to ensure we can continue to provide value to our customers. We do not see any additional pricing opportunities at this moment, and we'll evaluate commodity prices and other inflation factors as we move into next year. Our objective is to minimize price increases as we enter the next year.

The next question comes from Andrew Strelzik with BMO.

Just 2 quick ones for me. You talked about growing revenue faster than costs. The company has always spoken to like a $50-plus million productivity run rate. Is that still the right way to think about productivity in your opinion and kind of high level where those buckets remain outside of menu simplification which you've certainly spoken to?

Yes, productivity is always a key focus for us. As we engage in our strategic and annual planning, we'll align our goals. I believe that estimating productivity at $50 million may be too high for our future direction. A lot of this is driven by technology as we consider the evolution of productivity over time. Initially, we achieved some base efficiencies, followed by the deployment of technology, both in the front and back of house at our restaurants, which helped enhance operations and deliver efficiencies. We see ongoing potential in our supply chain and in simplifying processes. While the opportunity remains significant, the scale may be less than the historical $50 million run rate, but it is still substantial, and we will provide further updates as we move into next year.

Okay. That's helpful. And then actually, a question on Fleming's. That was the only segment that saw a comp acceleration in the quarter. So I was curious kind of what you thought was driving that. And more broadly, what you're seeing from a consumer perspective and if you think you're seeing a shift maybe in how consumers are interacting with fine dining?

Andrew, I would agree with you on Fleming's side. Shelina Henry and the team have done a really, really nice job. And to me, what they've told me and I agree is Fleming's is a reputational brand. And as you're in the fine dining space, there are on that reputational brand, that is all about elevating the experience, and that is the team has been so, so dialed in on everything from the attentiveness to the pace, the experience, and it's just really a phenomenal experience. And I really do want to complement them on our flagship opening here in Tampa is just a tremendous new Fleming's and it's very high energy, and the guest experience is tremendous. And that's how we think about Fleming's. And as Michael said, to get that fine dining experience right, we're going to be thoughtful. We got 63 Fleming's, and the bandwidth of the team would suggest it's 2 or 3 a year. If we get them right on the new store because we don't want to sacrifice the fine dining elevated experience there.

Thank you. This concludes today's question-and-answer session. I would now like to turn the conference back over to Mr. Mike Spanos for any closing remarks.

We appreciate everyone for joining us today. We look forward to updating you on our progress in our next earnings call. Thank you.

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