Welcome to the Darden Fiscal Year 2022 Second Quarter Earnings Call. I will now turn the conference over to Mr. Kevin Kalicak. Thank you, sir. You may begin. Thank you, Jess. Good morning, everyone, and thank you for participating in today's call. Joining me on the call today are Gene Lee, Darden's Chairman and CEO; Rick Cardenas, President and COO; and Raj Vennam, CFO. As a reminder, comments made during this call will include forward-looking statements as defined in the Private Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Those risks are described in the company's press release, which was distributed this morning, and in its filings with the Securities and Exchange Commission. We are simultaneously broadcasting a presentation during this call, which is posted in the Investor Relations section of our website at darden.com. Today's discussion and presentation includes certain non-GAAP measurements and reconciliations of those measurements are included in the presentation. Any reference to pre-COVID when discussing second quarter performance as a comparison to the second quarter of fiscal 2020. This is because last year's results are not meaningful due to the pandemic impact on the business and limited capacity environment that we operated in during the second quarter of fiscal '21. We plan to release fiscal 2022 third quarter earnings on Thursday, March 24 before the market opens, followed by a conference call. This morning, Gene will share some brief remarks, Rick will give an update on our operating performance, and Raj will provide more detail on our financial results and an update to our fiscal 2022 financial outlook. Now I'll turn the call over to Gene.

Thank you, Kevin, and good morning, everyone. As you saw from our release this morning, we had a fantastic quarter. Sales trends remained strong throughout the quarter as all our brands stayed laser-focused on creating memorable guest experiences. Despite the toughest inflationary environment we've seen in years, we achieved strong profitable sales growth. Our ongoing success navigating the pandemic is a testament to the power of our strategy driven by our back-to-basics operating philosophy and the strength of our four competitive advantages. Our disciplined commitment to our strategy has allowed us to manage this environment well while returning significant cash to our shareholders. People and product will continue to be our focus and Rick will share more details about that in a minute. Additionally, our teams have done a great job managing inflation effectively, and Raj will provide more color on that during his remarks. The holidays are the busiest time of the year for our restaurant teams as they delight our guests and help create lasting holiday memories. This time of year is also a great reminder that being of service is at the heart of our business, which is why we're committed to serving our guests, our team members, and our communities. One of the ways we serve our communities is by helping fight hunger. This fiscal year through our foundation, Darden provided $2.5 million to help our partners at Feeding America add refrigerated trucks for 15 food banks to support mobile pantry programs, and distribution in communities facing high rates of food insecurity. We are uniquely positioned to help, and by leveraging our scale and relationships with partners like Penske Truck Leasing and Lineage Logistics, we're proudly doing our part to help get food into the hands of people who need it. On behalf of our management team and the Board of Directors, I want to thank our team members for everything you do to serve our guests and our communities. And I wish you all a wonderful holiday season. Finally, earlier today, we announced that effective May 30, Rick will succeed me as Chief Executive Officer and will join Darden's Board of Directors. This is the right time for this transition, and I look forward to continuing to serve as Darden's Chairman. Our company is in a clear position of strength, and this is also the right time for me and my family. I'm excited for Rick, who's been a tremendous partner over the last seven years, and is one of the best strategic thinkers I've worked alongside. Our brands have tremendous opportunity ahead of them, and Rick is the perfect person to lead Darden into the next chapter. On behalf of the Board, Darden's management team, and our 170,000 team members, I want to congratulate Rick and wish him all the best. Rick?

Thank you, Gene. Good morning, everyone. It is an honor to be appointed Darden's next Chief Executive Officer, and I'm grateful to Gene and the Board for their confidence in me. It is humbling to lead 170,000 outstanding team members who nourish and delight everyone we serve. I was incredibly fortunate to work with each of Darden's CEOs, so I have a strong appreciation for the legacy of leadership I am inheriting. By upholding our commitment to operational excellence and maximizing the power of the Darden platform, we will continue to execute our strategy to drive growth and shareholder value. Turning to the quarter. Our restaurants continue to execute at a high level. Our focus on simplifying operations to drive execution remains our top priority, which is why we once again paused any new initiatives during the quarter in order to eliminate distractions and allow our operators to focus on running great shifts. This pause also ensures they can zero in on people and product as we navigate through the current staffing and supply chain challenges. From a people perspective, we feel good about the progress we've made on the staffing front. Across our brands, manager staffing levels are above historical norms, and team member staffing levels continue to improve. Our new hiring system has made it easier to source talent, giving our management teams more time to focus on successfully onboarding and training new team members. We also continue to invest in our team members, further strengthening our industry-leading employment proposition. Earlier this year, we committed to increasing the minimum hourly earnings for our restaurant team members to $12, which includes income earned through gratuities by January 2023. However, given the strength of our performance, we are accelerating that timing to January 2022. This primarily impacts entry-level roles such as hosts, bussers, and dishwashers. And with this change, we expect our restaurant team members will earn, on average, approximately $20 per hour. Our people are the key to our performance. We work hard to be the employer of choice in our industry, and we're proud that our retention rates for managers and team members are both in the top quartile, and we will continue to invest in them to retain and attract the best talent in the industry. On the product side, our supply chain team continues to do a great job, making sure our restaurants have the products they need to serve our guests. Our inventory levels are strong, and the team's ability to meet the needs of the business can be seen in the fact that we shipped more cases in the last two quarters than at any time during Darden's history. The ability to maintain supply continuity for our restaurants minimizes distractions and allows our operators to focus on executing at the highest level, whether our guests are in our dining rooms or enjoying the convenience of To Go. During the quarter, To Go sales continued to benefit from the strength of our digital platform. This platform not only makes it easier for our teams to execute, but also makes it more convenient for our guests to visit, order, pay, and pick up. Off-premise sales accounted for 28% of total sales at Olive Garden and 15% of total sales at LongHorn Steakhouse. Digital transactions accounted for 60% of all off-premise sales during this quarter and 11% of Darden's total sales. Finally, we successfully opened 12 new restaurants during the quarter, including a flagship Yard House in Times Square, with minimal staffing challenges. The time to build a new restaurant is longer today than it has been historically, and we are also beginning to see longer lead times for kitchen equipment and technology hardware. Regardless, we remain on track to open approximately 35 to 40 new restaurants this fiscal year. To wrap up, I also want to recognize our team members in our restaurants and our support center for your tireless efforts in creating exceptional experiences for our guests. I wish you all a safe and happy holiday season. Now I'll turn it over to Raj.

Thank you, Rick, and good morning, everyone. Total sales for the second quarter were $2.3 billion, 37% higher than last year, driven by 34.4% same-restaurant sales growth and the addition of 34 net new restaurants. Average weekly sales grew by more than 7% compared to pre-COVID. Diluted net earnings per share from continuing operations were $1.48. Total EBITDA was $335 million, resulting in an EBITDA margin of 14.7%. The significant business model improvements we made over the past year and a half, combined with strong sales, resulted in margin growth of 270 basis points compared to pre-COVID. We expect this to be the highest quarterly EBITDA margin growth this fiscal year as this quarter has the most opportunity given its low seasonality. We continue to return significant cash to shareholders, paying $143 million in dividends and repurchasing $266 million in shares, totaling over $400 million of cash returned to investors in the quarter. While we're happy with our performance, cost pressures continue to exceed our expectations on both commodities and labor with total inflation of 6% this quarter. Our teams continue to demonstrate agility in managing through this environment. This quarter, we implemented several mitigating actions to preserve the strength of our business model while balancing the impact to our guests and team members. One of these actions was taking additional pricing. For the second quarter, total pricing was 2%, and we expect back-half pricing to approach 4%, resulting in total pricing of just under 3% for the full fiscal year. We continue to execute our strategy of pricing significantly below our overall inflation to strengthen our value leadership position by leveraging our scale. This level of pricing covers most of what we consider to be the structural and long-lasting impacts of the current inflationary environment, absorbing what we consider to be more short-term fluctuations while providing future flexibility should there be a need. For the rest of the fiscal year, we expect commodity and labor inflation to peak in our third quarter and then start to slow down as we enter the fourth quarter, and lap commodities inflation of 4.3% in the fourth quarter of last year. Now turning to our P&L and segment performance for the second quarter. We're comparing against pre-COVID results in the second quarter of 2020, which we believe are more comparable to normal business operations and with how we've been framing our margin expansion opportunity. For the second quarter, food and beverage expenses were 220 basis points higher, driven by elevated commodity inflation of 9% as well as investments in food quality, portion size, and pricing significantly below inflation. Restaurant labor was 90 basis points favorable, driven by sales leverage and efficiencies gained from operational simplifications, and was partially offset by elevated wage pressures. Hourly wage inflation during the quarter was almost 9%. Restaurant expenses were 130 basis points lower due to sales leverage, which more than offset higher utilities costs. Marketing spend was $44 million lower, resulting in 230 basis points of favorability. As a result, restaurant-level EBITDA margin for Darden was 18.8%, 230 basis points better than pre-COVID levels. G&A expense was 40 basis points lower, driven by savings from the corporate restructuring in fiscal 2021, a decrease in mark-to-market expense, and sales leverage. Turning to our segment performance. Second quarter sales at Olive Garden increased 5% versus pre-COVID, strong performance, especially as we were wrapping against nine weeks of never-ending possible. This sales growth, combined with the business model improvements at Olive Garden, helped drive a segment profit margin increase of 320 basis points, even while offsetting elevated inflation. LongHorn continued its strong sales growth with an increase of 22% versus pre-COVID. However, inflationary pressures, including double-digits for commodities, were at their highest level in the second quarter, resulting in a reduction of segment profit margin by 80 basis points. Sales at our Fine Dining segment increased 22% versus pre-COVID as this segment continues to see a strong rebound in performance. Segment profit margin grew by 140 basis points, driven by strong sales leverage and operational efficiencies, which more than offset double-digit commodities inflation. Our other segment grew sales by 7% versus pre-COVID and segment profit margin by 250 basis points. This segment continues to perform well, and we're pleased to see the business model transformation persist. Finally, turning to our financial outlook for fiscal 2022. We updated our outlook for the full year to reflect our performance year-to-date and our expected performance for the remainder of the year. We now expect total sales of $9.55 billion to $9.7 billion, representing growth of 9% to 11% from pre-COVID levels. Same-restaurant sales growth of 29% to 31%, and 35% to 40% new restaurants. Capital spending of approximately $425 million. Total inflation of approximately 5.5%, with commodities inflation between 7% and 8%. Total restaurant labor inflation between 6% and 6.5%, which includes hourly wage inflation approaching 9%. EBITDA of $1.55 billion to $1.6 billion, and the annual effective tax rate of approximately 14%, and approximately 130 million diluted average shares outstanding for the year, all resulting in diluted net earnings per share between $7.35 and $7.60. This outlook implies EBITDA margin growth versus pre-COVID, similar to our previous outlook of 200 to 250 basis points with flow-through from pricing and higher sales helping offset elevated inflation. Now we'll take your questions.

We'll take our first question from Brian Bittner at Oppenheimer.

Thank you so much for the question and good morning. And first and foremost, congratulations to both Gene and Rick on the big announcement today. Gene, I know this is not goodbye yet, but I just want to say, it's truly been a pleasure as an analyst to witness what you've done to reshape and better position the Darden enterprise over the last seven years. My question is related to pricing and cost. And it's not surprising that you moved your total cost inflation guidance up a bit given the turbulent environment, but your EBITDA margin guidance at its midpoint is unchanged versus your prior inflation guidance. So you're obviously taking a bit more price, which you talked about in your prepared remarks. Should we interpret these actions as a firm commitment to the EBITDA margin goals that you've been talking about? And are you confident that you have the pricing levers if it's something you need to continue to use in the future to hold the line on these margins? Or is this about as far as you want to go on pricing for the foreseeable future? Thanks.

Hi, Brian, this is Raj. I think as you alluded to, we committed to the 200 to 250 at the beginning of the year, and we've shown through the two quarters now that we're adjusting our business model, adjusting our thinking on pricing based on where our business model is coming out. So as we look at our P&L, we continue to look at opportunities to manage costs better. And we are focused on doing some of that before we take pricing. But with that said, we preserved a lot of flexibility, and we have - and we are tapping into some of that. But we do believe we have more dry powder if needed. And I think the way we're thinking about it is really some of these excess sales are going to help offset some of this elevated inflation. The other piece I mentioned in my prepared remarks was that we're really focused on pricing to cover for the structural parts of it, and then trying to kind of weather through the short-term fluctuations. And - but we are committed to the margin growth.

We'll take our next question from Andrew Charles at Cowen.

First and foremost, echo Brian. Gene, congrats on a storied career, not just at Darden, but RARE as well. And Rick, congrats to you as well for a very deserved promotion. I had two questions. The first one is Olive Garden saw steady improvement on a two-year basis in 2Q without really changing the advertising and promotional strategy much. And as you guys mentioned, really focusing on operations. And as we're at the start here of calendar 2022, how do you think about the competitive environment changes that are likely to occur this year? And how this will impact your marketing promotion plans that thus far, really not changed that much over the last few months?

Andrew, this is Rick. First of all, I just want to say how proud I am of the work that Dan and his team have done, keeping with our strategy. We did have trends improve in Q2, and we exceeded industry two-year comp growth. So thanks for noticing that. I think one of the things that we've been thinking about through marketing spend is we're going to continue to look for equilibrium and react accordingly to whatever happens in the marketplace. Advertising will always be a part of Darden's mix because of the scale advantage they have. And if and when we increase our marketing spend, we'd expect it to earn a return compared to where we were if we didn't have any marketing spend. So we're going to continue to see what happens. We don't know that there's some advertisers out there with some heavy TRPs. We had $44 million less in media this quarter than we did two years ago. And we feel good about where we were.

Then Rick, just a follow-up question. The Olive Garden off-premise to 28% was pretty steady from 1Q to 2Q. This had been decelerating in quarters before that as the dine-in business picked up. And I know historically, you'd said longer term Olive Garden off-premise sales would likely settle at 20%, at least. But has the recent experience led you to believe that off-premise mix can perhaps be 25% plus longer term?

Andrew, yes, you mentioned our To Go sales at Olive Garden were a little bit higher than they were in Q1. We had a - this is a typically lower volume quarter for us and the To Go sales stayed up there. So that helped our total percentage. To answer your question about what we expect it to be, we do expect it to be higher than our 20% that we said. It is a little bit stickier than we thought. You guys were all right about that, a little stickier than we thought. We're not going to necessarily say we should expect to be at 25%, but probably above 20%.

We'll move to our next question from Eric Gonzalez at KeyBanc Markets.

Thanks for the question. I'd also like to give my congratulations to Gene and to Rick. My question is, it looks like November was a relatively strong month for the industry as the Knapp-Track accelerates to a little over 6%. And can you talk about the sustainability of that trend line? How much of a pull forward of demand is that given the earlier holiday shopping? And maybe which of your brands might have benefited more from that phenomenon?

Yes, Eric. Yes, we saw the same increase in November that the industry did. And as I said, Olive Garden was ahead of the industry, and so was LongHorn. What I would say is it's too early to tell if it was a pull forward from shopping. We do know that retail sales were a little bit more online this year than a normal kind of after Thanksgiving, and some of the retailers were closed on Thanksgiving Day. But it's too early to tell about that. We do have a shift, as we've said before, that Thanksgiving shifted back into our second quarter from our third quarter two years ago, and we're seeing that kind of impact this quarter. So still too early to tell, but the holidays do lineup pretty well for us. I will caveat all that by saying weather is the biggest fluctuation in this quarter, and we'll see what happens. If weather hits during a holiday period, then that could be a little bit of a challenge on the comp.

And then just on the seasonality of the business. I think Raj was talking about how EBITDA growth was highest in the second quarter. I'm guessing there's a lot of staffing that needs to happen during the holiday period, just given that the overall number of crew members is higher. So can you talk about what the margin implications are for the third quarter? And how staffing in this environment might impact the margins?

Yes, Eric. I think when you think about Q3, it's historically has been a strong seasonal quarter, right? From - the volumes are higher. Our margins are really high. I mean if you go back to pre-COVID, I think we were in the 15-plus range for the third quarter when our annual was around 14%. So the point I think we're trying to make here is that, once you start approaching that 17-plus percent, it starts to get hard-harder. So that's really what we're trying to talk about is that there was a lot more opportunity in Q2 because you're able to leverage that low volume period some of the fixed costs better, and it just gets harder and harder when you're at the high volume. The staffing is higher. We do staff - we want to staff - over staff, especially during peak periods, during the holidays, so that's part of that. But overall, 17-plus is - starts to get harder.

We'll go next to Chris O'Cull with Stifel.

Thanks for taking the question. I'd also like to congratulate Gene and Rick. Gene, it's been a pleasure to follow the success you've had over the past 20 years, covering RARE and Darden. So, congrats. So, Rick, given the promotional level remains low at Olive Garden, was the acceleration in the comps you think due more to an improvement in staffing and capacity utilization quarter-to-quarter? Or have you seen customers really start to respond to some of the ongoing quality improvements the company has made there?

Sorry about that, guys. Sorry. Chris, thanks a lot for the question. This is Rick. As a reminder, the second quarter is our lowest seasonal quarter. We did run NAPB two years ago. So, we're really proud of the fact that we comped over two years ago without any possible running. And this was really aided by the point you made up in staffing, aided by productivity enhancements we made during the quarter, and the fact that our two new team members were moving up the learning curve more quickly and becoming more productive. There could be something about vaccination rates being above Q1 levels, so maybe people are more comfortable dining out. And the fact that we have, as you mentioned, made these investments in our core items. They are: we've made great investments in the items that people really want. The value ratings are great, and we're just executing at a high level.

That's helpful. And then just one other question related to commodity inflation. I don't know if this is for Rick or Raj, but I'm wondering if you have any insights into how processors, packers, distributors are going to pass through the inflation that they're experiencing. And what I'm trying to understand is how much commodity inflation could be permanent versus temporary? And whether you believe restaurants can get back to that kind of pre-COVID cost of sales if commodity prices were at comparable levels to that period?

Chris, it's Gene. Let me just jump in here. I think about this. The commodity infrastructure pre-COVID was able to feed the world without a lot of inflation. And that's what the world getting richer. I believe that the commodity infrastructure will get back to an equilibrium where we'll be able to produce the food needed to feed everyone. I don't think there'll be a lot of inflation in that. I think where the inflation is going to come in, in commodities is going to be whatever labor impact there is to grow and deliver that food. I think we still have 12 to 18 months for that to all work its way out. But there was something happening over the last decade where we weren't seeing a tremendous amount of inflation in food. I think it had to do with technology and other aspects. I think that all that global capabilities are still there. I'll end by saying what we don't know is how much labor is involved in each product to grow, deliver, and harvest, and so on and so forth. I think we're in a wait and see. I think the end of your question was, are we going to get COGS back to historical levels? Yes, I think over time, it will take time, but I think these models will drift back to the same what I would call prime cost model, we add labor and COGS.

We'll take our next question from John Glass with Morgan Stanley.

Good morning and hats-off, Gene, and congrats, Rick as well. Gene or Rick, first, just on - can you talk about the wage increases? I guess broadly, when I see a number like $12 an hour, when you compare it to other retailers or even some others in other segments in retail of restaurants, it still seems low. I know you're a top quartile payer in your industry. Do you think the casual dining industry in general, though, is maybe underpaying relative to others in retail, and there's the need just to continue to advance that? And maybe if you could just unpack the $12 - the hybrid number includes gratuities. So maybe what is the back of the house starting wages, for example, just so we can maybe better benchmark without including the gratuities which we don't really have exactly a handle on.

Yeah. John, I think where I'd start is that we expect our average to be approximately $20 after this goes into effect. Now very few people in our company make minimum wage. This is what I would call an entry-level wage, and more rural America. In the major cities, you're not hiring anybody for $12 an hour today. This is an increase in the guarantee to our workforce, will probably have more impact on Cheddar's than any of our other brands. Starting wages or wage rates vary depending on geography and overall demand. We have people in our environment that make $25 to $28 an hour in the back of the house. In some parts of the country, you're doing that same job for $18 an hour depending on the environment. I don't believe that in your macro question around this casual dining paying too little, I don't think that's true. I think casual dining is paying the appropriate rates in the marketplace based on supply and demand. Our teams are doing a very good job of looking at the overall situation and ensuring that we're paying probably a little bit more of the competitive wage in each market to ensure that our restaurants are fully staffed. We're encouraged by Rick's comments that our restaurants today are better staffed than they were last quarter and they're better staffed in the quarter before. We still have strong, strong retention rates. The way we think about it is that there may not be enough service workers to staff every restaurant in America, but there are enough service workers out there to staff Darden's restaurants, and that's what we're focused on.

That's great to hear. One follow-up, Rick, I think you mentioned putting on pause some initiatives to focus on operations right now. What are some examples of those initiatives that you've put on pause? Are they sales-driving initiatives that we could think about coming back over time? Are they more marginally - I don't know what they are, but what maybe is some examples of those? And when do you think they come back?

I think about a couple of things that are not directly related to training and staffing. So those initiatives, we're still working on making sure that we've got our restaurants staffed and we have our people trained. But things like new product development, that for years, we've done a lot of new development, but we're focusing on just developing one or two products a year that are really great. We thought it was right for us to not go ahead and do that during this time when we can keep managers focused entirely on staffing their restaurant, making sure they train their people. So that's an example. We're still doing a lot of things here in the support center that are getting ready to gear up, a lot on the technology front, but that was one example.

We'll take our next question from Peter Saleh at BTIG.

Great. Thank you and good morning and congrats to both Gene and Rick. A couple of questions on my end. I think you guys mentioned longer lead times to open units, really getting some of the equipment in there. Can you give us a little bit more color on that? Are we talking weeks or months? And do you see any end to that? Is that something that you think persists for a while? Or is that kind of more short-term in nature?

Yes, this is Rick. We're talking weeks, not months, a couple of weeks here or there. We may have a restaurant or two that might go a little bit longer than that, but on average, we're a few weeks. We are starting to order a lot of these long lead time items a lot sooner and actually holding them in inventory, which is not driving our inventory costs up, but making sure that we have the kitchen equipment to open the restaurant when the restaurant is ready to open. So not very long.

And then just lastly on my end. Is there any other technology or any other processes that you guys are implementing or looking at maybe kitchen equipment or other that could help reduce some of the labor hours necessarily in the restaurant?

Yes, Peter. We've always focused on our technology in three places, and I'll talk about the two big ones, guest-facing and restaurant technology. If you think about what we're doing on the restaurant side, we are doing a lot of things to help improve productivity, simplifying processes for managers so that they don't have to hunt and pack and do other things so they can spend their time training their people. But we don't foresee bringing in technology that will reduce the number of people that we need to do the job. We are a full-service restaurant company, and we're going to maintain that to provide the service that our guests expect. We will bring technology into help that, but not to necessarily replace.

Peter, one of the things that's most interesting is machine learning for forecasting, forecasting our business is - forecasting our restaurant business is one of the most important things that we do every single day. We think there's some real upside in the machine learning around that, and our team has developed some pretty slick stuff. I'm fairly excited about that potential. That turns into productivity. If you can predict your business correctly, then you can really increase your productivity at the store level.

We'll take our next question from Chris Carroll at RBC Capital Markets.

Thanks and good morning. And I also want to echo my congratulations to both Gene and Rick on the announcement today. Following up on pricing, clearly, a still challenging cost environment, but curious to hear how you're thinking, how you expect today's pricing levels to be received by guests. How does that pricing flow through the different brands? Are you expecting to take relatively more pricing at your higher-end brands, while keeping pricing closer to historical levels for the others?

Yes. Hey, Chris, yes, let me start with the latter question first. Yes, we do. So when you look at our overall pricing, you can almost assume that Olive Garden and Cheddar's are going to be below the Darden level of pricing and all other brands are going to be higher. Obviously, the spectrum being the fine dining will probably have the highest pricing. As far as guest reactions, we track this over time. One of the things we noticed - one of the key factors is how much do you price relative to CPI. As we look at how we have been pricing, we've been pricing a lot below that. That helps - that gives us a lot more comfort in the fact that the elasticity - we're not hitting that portion of that curve that's actually more elastic. The level of pricing we have is significantly below CPI, which means it's a fairly inelastic impact.

Just as a follow-up, at the risk of asking this question too early, can you provide us with any sense on whether you're seeing any shift in guest behavior in recent weeks in response to just latest COVID concerns perhaps any observations on a regional basis that would suggest there is or is not any change in demand levels today? That would be helpful. Thank you.

Yes. I would - that's a pretty simple answer, no. We haven't seen any change in behaviors in the regional. It's real early in this - what seems to be this next wave. I think if you study the New York Times map, you could see this surge heading towards New England for a few weeks now, and that's been a part of the country that's been most sensitive into, maybe what I would call, overreacting. But we'll see. I mean we - as of today, we haven't seen any big change. I would just say that there's significant COVID fatigue out there, and it's going to take a lot to modify a certain percentage of the population's behavior of a certain percentage of the population that is going to react to this, but there's a certain set of it that's just going to continue on. All you have to do is look at stadiums and concert halls to see who those people are.

We'll go next to Brett Levy at MKM.

Great. Thank you. And best of luck to everyone in their next endeavors. So thanks, Rick. Thanks, Gene. When you think about the guidance items that you provided, and obviously, you've unpacked a lot with the commodity and the inflationary talk on labor. Where do you still see the greatest opportunities beyond the sales line to improve your fundamentals at the unit level? And when you think about your CapEx, you obviously raised it to the high end. Can you walk us through how you're thinking about where that comes from and just your capital thoughts for the year? Thanks.

Yes. Brett, it's Gene. I'll start with the fundamentals. I think the fundamentals for us right now is how do we bring along the most - the population of new employees - the percentage of the population of new employees, how do we bring them along. As Rick said earlier, make them as productive as possible and bring our brands to life the way we wanted to do so. As we head into the busiest part of the year, we're just laser-focused on trying to keep things simple and ensure that we can execute at a high level. We know that our competitors are having similar - the same problems that we have, and our goal is to out-execute them and win guest loyalty through this very difficult period. That's really where our advantage is right now. We're better staffed. We've got - we're doing great training, and we're really confident that we're executing at a high level, and that's what our research is telling us. Raj, you want to take the CapEx?

Yes. Look, clearly, in this environment with inflation, there are construction costs on the CapEx that are going up a little bit. But overall, CapEx levels give what we said was the high end of the guidance we had provided earlier, the efficiency of this capital spend is still very high. We're actually still - especially with the improvements we made at the unit level, the returns are really strong. Even with the elevated CapEx, we're getting stronger returns than we did before COVID.

If I could just follow-up on labor with one quick question. Where do you see yourselves right now in terms of where you want to be at staffing levels? And how that compares to pre-COVID staffing levels? Thank you.

Yes. Brett, this is Rick. I'll start with the second part. We're at about 95% of pre-COVID staffing levels, where at the end of the first quarter, we were at 90%. So we continue to increase that percentage. I will say that we don't - because of the productivity enhancements that we've made over the years in these brands, it means we don't need as many people as before. The majority of our restaurants are well staffed. The exclusions that we've seen are still the most complicated factor. As exclusions for COVID are still the most complicating factors, especially on the weekends when we're busy. So we feel good about our staffing levels. We just want to keep trying to make sure we get people that can work and not be excluded and continue to hire people every week and train them.

We'll go next to David Palmer at Evercore ISI.

Thanks. Congratulations, Gene and Rick. The on-premise traffic in the US full-service segment, it's down in the high 20s versus pre-COVID levels. That's a pretty striking number. Perhaps you can comment on why you think that is? What are the biggest reasons for this at this point? Is it covered comfort levels diminished capacity out there or something else? And then focusing on Darden, how much is on-premise traffic down across your major brands versus pre-COVID levels? I'm curious if you're really not assuming an on-premise traffic recovery in the second half of your fiscal 2023 guidance? Thank you.

David, let me just answer the part about the on-premise traffic, and then I'll let Rick or Gene jump in on the other aspects of it. We are not seeing the level of decline you're talking about. We're not 20% down on on-premise. We are - when you look at on-premise overall across the system, we're probably in the single digits of decline. That's different from what you're referring to the industry is, but we are - yeah, and LongHorn, actually on-premise is higher than pre-COVID. So, the overall Darden in the single-digit decline, but not double digits like you're alluding to.

Yes. I'll take the other part of that. As we've been making investments in our off-premise experience, making it easier for our guests to order, pick up, and pay, we still see people coming back more often and more often on the off-premise side. That's why we think the off-premise is going to stay at a little bit more elevated level, which could become very convenient so maybe people won't come in as often. But we believe that in the long run, we'll get back to our pre-COVID levels of on-premise experiences as we continue to invest in our food, as we continue to increase our staffing levels, as people become more confident and comfortable going out to eat. We believe that in the long run, we will get back to our in-restaurant experience.

We'll take our next question from Jeffrey Bernstein of Barclays.

Great. Thank you very much and congratulations, Gene and Rick. Rick, you have some big shoes to fill. I had one follow-up on the last question and then another. The follow-up is just related to what you just mentioned about the expectation to get in-restaurant dining back to full strength at a certain point. I just want to then couple that with Olive Garden and LongHorn's performance in the earlier stores that have returned to full in-store dining. Just wondering what the range of averages of that To Go businesses, I know you mentioned it's 28% and 15%. Just trying to get a sense of the range around that because it would seem like fantastic win if you could get the on-premise back to 100% and still hold on to what you suggested might be north of 20% at Olive Garden in terms of To Go. So any color you could add in terms of how much of that you think is incremental would be great.

Yes. Jeff, it's Gene. As Rick alluded to earlier and stated that we believe that this off-premise is stickier than what we originally thought. And Rick gave you guys credit, you guys were right. We were wrong on that. We don't get to say that often. But it seems as though that the technology that we've created and the friction we've taken out that experience and our ability to deliver a quality experience have made this a lot stickier. We don't know - we can keep wanting to go back to equilibrium. We haven't got to equilibrium. We're not close to equilibrium yet. We still have pockets where we're struggling a little bit. I think my key takeaway is that we believe that in the long run, we will get back to our in-restaurant experience and the brand will continue to outperform.

We'll take our next question from Andy Barish with Jefferies.

Gene, I'm just happy, it's showing in Colorado, finally. Quick question on - can you give us a little bit of a Cheddar's, kind of review in terms of the progress that's made here during the pandemic? And from a people side of things, which I think has been the biggest challenge, are you building bench strength to start to see a noticeable ramp in the unit growth in fiscal 2023 for that brand?

Yes, Andy. This is Rick. We're really proud of the work Cheddar's has done on the people front. Let me give you a couple of statistics without getting into too much detail on our P&L. They've added - they're back close to where LongHorn and Olive Garden is on the percent of their general managers that have been general managers for a year or more, where they were way far away from that a couple of years ago. Their management turnover continues to improve. I believe the last 45 restaurant general managers are managing partners that they added were all promotions within. You couldn't say that a couple of years ago. We've got a strong pipeline that we're building of managers. We do expect to have more openings in fiscal 2023 at Cheddar's than we did in - I'm sorry, in - yeah, in fiscal 2023 at Cheddar's than we had in fiscal 2022. So we're really excited where they are, partly because of the business model improvements they've made, which we don't highlight, because they're in the other segment, but they've had a significant improvement in their business model, which gives us more confidence that they can grow with this pipeline that they're building in people.

We'll take our next question from James Rutherford at Stephens.

Thanks for the questions. Rick, marketing is still one of the biggest sources of margin expansion within your business. What main factors will you consider as you work to determine when it's time to start adding some marketing dollars back into the business incrementally?

Yes, James, thanks for the question. As we mentioned in an earlier question, Olive Garden will always be a marketer because of their scale. The advantage they have in size gives them the ability to spend money in marketing. We'll continue to look at the time when equilibrium comes. We still have a lot of demand to come into our restaurants today. We have reduced our marketing spend overall. And as I said, whenever we make that decision, I don't want to tell you when we would do that based on strategic implications. Whenever we would make that decision, we would ensure that that marketing is profitable, whether it's when we compare it to what we would do if we didn't have that marketing. We've had a couple of hundred basis points of improvement in marketing spend. Even if we increase our marketing dollars, we will still have some margin improvement or margin maintained with marketing. So don't assume that when we bring marketing back, it's going to basically reduce our margins by the amount that we bring it back.

My second question is on LongHorn, which has clearly benefited from strong execution, as well as general robust consumer appetite for steak as a category. What do you think it will take to retain these high sales levels if and when the consumer potentially begins to shift back to more of a value-focused mindset?

Yes. Thanks for asking about LongHorn. Todd and his team have been on a journey for years. That journey has been to invest in food quality. As we've mentioned before, we've improved all our steaks. We've increased the size of our steaks. We've increased our portion sizes of our sides, and we've improved our execution of all of that food. Yes, the steak category has been helped by consumer demand, but we believe we will continue to execute at this level and continue to grow LongHorn. I can't tell you what our comp will be in the future, but we're proud of what they've done over the years to continue to invest and make sure they have the best product. They're number one in quality and casual dining, and they continue to do those things.

We'll take our next question from Brian Mullan at Deutsche Bank.

Thank you. I'd just like to echo all the congrats to both Gene and Rick. Just a question on fine dining, specifically related to development. I know it's a smaller piece of the puzzle. But Gene, can you just talk about how you see development in this segment over the next, say, three to five years? Is there a lot more room across the country for your brands? And if you could discuss any structural changes in that segment or learning throughout the pandemic might have changed your answer from what you would have said two years ago, if at all?

Yes. Two parts to that answer. Number one, we think that we can push Capital Grille in suburban areas a little bit further than what maybe we have thought in the past. We've had some recent openings that give us confidence that there are additional trade areas, in which we can compete with that brand and get a great return on our investment. The real opportunity is can we take Eddie V's and get it to mirror Capital Grille and get to the same size company. We're thrilled with our - what we refer to as our COVID Eddie V's for the Eddie V's that we've opened during COVID. All have gone to the market very well and accepted very well. Our business model is really strong and getting stronger. There's no reason why we can't get that from the high 20s into the low 60s and do that very profitably. Now, again, that's three to four a year. You've got to wait for the right sites, but we're just thrilled. And for those who - anybody traveling to Nashville, please go visit our new Nashville Eddie V's. It's just a spectacular venue and doing extremely well. We're confident that Fine Dining will still continue to be a big contributor to what we're doing, and the margin structure - we just have a lot more flexibility in that business to deal with some of this inflation that we don't have in our casual brands.

We'll take our next question from David Tarantino with Baird.

Hi, good morning, everyone and wow Gene, what a terrific career, congrats on your decision to retire. And Rick, my congrats on your promotion. Rick, I had a question about sort of a big picture view of the long-term strategy at Darden. I just wanted to ask with the upcoming transition to you as CEO, certainly, not much needs to change, but just wondering your thoughts on what maybe some new strategic priorities or new priorities for you as you take over the CEO role. Thanks.

David, thanks for the question. I just want to first say that I've been with Gene for his seven years as the CEO, partnering on developing our strategy. I really think the strategy that we have is the right strategy. We've got our four competitive advantages. We're going to continue to invest in those advantages to make them stronger. We're a platform company that helps our brands succeed and drive back to basic operating philosophy. We are going to continue to improve our operations execution and continue to invest in our competitive advantages. I don't see a big change in our strategic priorities, partly because that was a big part of writing them. So it would be a little weird if I did change those. But we'll look and see as we go through our five-year plan process, which we just did last year. So there's not a whole lot for us to talk about right now.

We'll take our next question from Andrew Strelzik of BMO Capital.

Thanks for taking the questions. I wanted to first just clarify on the commodity commentary. I think you said that inflation would peak in 3Q when you called out the inflation comparison in 4Q from the year ago as part of the reason why that would ease this year. But you also mentioned that some of the underlying commodity prices have eased as well. So does the outlook reflect that underlying kind of easing? Or is there a timing dynamic where that's not included in that? And then my question is really on unit growth, and just at this point, the visibility to hitting the high-end of the framework that you've talked about in 2023. I know you talked about some construction cost increases and delays, which doesn't sound like that big of a deal, but just wanted to see about the visibility and anything that you can comment on the brand mix would be great. Thank you very much.

Hi, Andrew, this is Raj. On the commodities front, yes, we did see - the way we think about it is we're looking at what we have covered. Then based on our best estimate of where the costs are going to be, right? When you look at the cadence, Q2 was around 9% commodity inflation. We expect Q3 to be a little bit north of 10%. By the time we get to Q4, because we're wrapping on elevated number two years ago or a year ago, it's not going to be at size. We expect Q4 to be landing in the range of around 10% to 11%. As for unit growth, we feel pretty confident that we have a good shot at getting to the high end. There may be a few slips here and there, but we still think that 55% to 60% is a good number to think of. A few could get pushed out, but we are still targeting that higher end.

We'll go next to Jared Garber with Goldman Sachs.

Thanks and certainly, I would like to also echo my congratulations to Gene and Rick. Exciting to watch you both progressing your careers. I had two questions. One on the top-line in Olive Garden and one on cost. You noted that you're lapping over the never-ending possible from two years ago. Can you help frame maybe what some of the headwinds were in that business? Obviously, the Olive Garden trends seem like they're pretty strong. Just any color on maybe what you were lapping and the headwinds that you saw related to that that would have essentially pushed that to your comp a little bit higher? And then on costs, Raj, I appreciate all the color on the commodity front. If I look at your deck, it looks like on beef, you're very, very low contracting at this point, about 25% versus the normal 80%, 80%-plus. I just wanted to get a sense of exactly how you're thinking about beef purchases and maybe some of the risks that beef prices move higher.

Hi, Jared, it's Rick. I'll comment on the other headwinds at Olive Garden, if it's never-ending possible with providing not much of a comment. We don't want to talk about the impact that never-ending possible had. We know it was a negative impact over the years, but the profitability wasn't as high as the guests that we're doing today. We decided to reduce the dependency on never-ending possible this year because we didn't need to drive volume into our restaurants. As we think about our better performance, even lapping the earning possible, as I said, it was productivity. We just got better at serving the gas when they came in the restaurant. Our To-Go business stayed strong, which is a productive business for us. We don't know if we'll bring and when we'll bring that possible never-any back because we have a never-ending abundance every day with our never-any first course.

Yes. Jared, on the coverage on beef, really, the way we're thinking about it is, at this point, the forward premium is too much. This is really purposeful. We feel like there's opportunity to be more short and not be long given where the levels are. To the extent there is risk, I think we've shown over the last two quarters that if inflation ends up being higher, our teams are agile will react, we'll adjust accordingly. We have a good line of sight into what we think the costs are going to be, and that's where we're sitting here, but could this change? Yes, but we'll adjust, and we'll still get to the commitments we made.

We'll take our next question from John Ivankoe at JPMorgan.

Thank you very much. Since the transformative rare acquisition, that's obviously brought in Gene, the business has made a number of acquisitions with Cheddar's, Yard House, AUVs. I did want to get a sense of maybe this is where there could be a little bit of a difference in the CEO change. In terms of appetite or potentially even need for future acquisitions, I ask this, obviously, in the context, the organizational ability, which I'm sure you have about the organization's desire, especially as there's probably a number of businesses that are out there that you could acquire with probably not adding much G&A, if at all, based on what your scale is. I just want to get your sense in terms of what you see in the current market, and as we think about the Darden business over the next 24 months or so, if we could potentially see something else?

John, this is Rick. I'll just start by saying, I've been involved with some of these acquisitions, but our management team and Board regularly evaluate all of our alternatives. How do we allocate capital, how do we manage our business to achieve our long-term goals? M&A is part of that. We'll continue to act the same way we have over the last 10 years or 15 years since we bought rare.

Yes. And John, I'll just jump in and say that we are thrilled with our current portfolio today with the business model enhancements that we've made to these businesses. We do not need to do something to achieve our long-term framework. We believe that I won't - probably I won't be driving it, but I believe that we'll continue to be opportunistic if the timing is right. At the end of the day, we love our portfolio of brands today, of market share as we move forward.

We'll take our next question from Brian Vaccaro of Raymond James.

Thanks and good morning. Just two quick ones, I had two quick clarifications as most of might have been asked. But on menu pricing, are you currently at around 4% today? Or are you working towards that level? And where do you expect pricing to be as we move through Q3 into Q4 for your fiscal year?

Hi, Brian, we are not at that level. The level we're - I would say, we exited the quarter around 3-ish. For Q3, we expect to be in the mid-threes, and Q4 would be a little bit, north of - in the low-fourths.

All right. That's helpful. And then, the Thanksgiving shift, I just wanted to confirm that that was about a 100 bps headwind to the comps versus 2019, and that should reverse in the fiscal third quarter. Is that right?

Yes. But I would caution that Q3, again, is a high-volume quarter, so just be careful how you read into that. But yeah, it was a headwind in Q2. It should help in Q3.

We'll take our next question from Joshua Long of Piper Sandler.

Thank you for taking the questions, squeezing me in, and again, echoing congratulations to everyone on their next chapters. Gene, following on some of the comments you made about the kind of COVID fatigue and the experiential nature that we're seeing in terms of consumer dining choices. Curious if you might be able to provide some context around your high-end brands, especially as we head into year-end, around some sort of return to a more normalized celebratory occasion. I imagine that's more on the social high-end dining and some of your high-end brands. But curious if you're seeing any sort of business customer return or kind of what your thoughts are or what the teams thought kind of the equilibrium there overtime would be on the high end?

Yes. I think we're still experiencing business travel at the level of pre-COVID. But as you've seen from our results, we're experiencing some fairly strong sales, I would just say - I would tell you that our holiday bookings are very strong. The demand for private dining is very strong. I would say it's smaller groups than larger groups. But overall, the demand for Fine Dining experiences, holiday celebrations is strong. I would expect it to be strong throughout. The Fine Dining business is going to be interesting. As business travel returns, a lot of people have really enjoyed the experiential part of Fine Dining, and it's something that we're not going to give up easily as we move forward. I love the business. I think we've really positioned those well, and I think they'll continue to do well.

With no other questions holding, Mr. Kalicak, I'll turn the conference back to you for any additional or closing comments. Thank you. That concludes today's call. I'd like to remind you that we plan to release third-quarter results on Thursday, March 24, before the market opens, with the conference call to follow. Thank you for participating in today's call, and happy holidays. That will conclude today's call. Thank you for your participation. You may disconnect at this time.