Hello, and welcome to the Darden Fiscal Year 2024 Second Quarter Earnings Call. Your lines have been placed on a listen-only mode until the question-and-answer session. This conference is being recorded. If you have any objections, please disconnect at this time. I'll now turn the call over to Mr. Kevin Kalicak. Thank you. You may begin.

Thank you, Kevin. Good morning, everyone, and thank you for participating on today's call. Joining me today are Rick Cardenas, Darden's President and CEO; and Raj Vennam, CFO. As a reminder, comments made during the call will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Those risks are described in the company's press release, which was distributed 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 these measurements are included in that presentation. Looking ahead, we plan to release fiscal 2024 third quarter earnings on Thursday, March 21st, before the market opens, followed by a conference call. During today's call, any reference to pre-COVID when discussing second quarter performance is a comparison to the second quarter of fiscal 2020. Additionally, all references to industry results during today's call refer to Black Box Intelligence's casual dining benchmark, excluding Darden, specifically Olive Garden, LongHorn Steakhouse, and Cheddar's Scratch Kitchen. During our second fiscal quarter, industry same-restaurant sales decreased 1.3% and industry same-restaurant guest counts decreased 4.8%. This morning, Rick will share some brief remarks on the quarter, and Raj will provide details on our financial results and an update to our fiscal 2024 financial outlook. Now, I'll turn the call over to Rick.

Thank you, Kevin. Good morning, everyone. I'm pleased with our results this quarter, which outperformed the industry benchmark for same-restaurant sales and traffic. Total sales were $2.7 billion, an increase of 9.7%, and adjusted diluted net earnings per share were $1.84. We opened 17 restaurants during the quarter. Fiscal year to date, we have opened 27 restaurants in 16 states, four of which were re-openings. We continue to stick to our strategy, driven by our four competitive advantages of significant scale, extensive data and insights, rigorous strategic planning and a results-oriented culture. And our brands are relentlessly focused on executing our back-to-basics operating philosophy, anchored in food, service and atmosphere. This focus on being brilliant with the basics enables our brands to consistently perform at a high level. Our internal guest satisfaction metrics remain strong across all of our brands. In fact, Olive Garden, LongHorn Steakhouse, Yard House, Cheddar's Scratch Kitchen, Seasons 52, and Bahama Breeze reached all-time highs for overall guest satisfaction during the quarter. LongHorn also ranked number one among major casual dining brands in six of the seven key measurement categories within Technomic's industry tracking tool, including food, service, atmosphere, and value. LongHorn's continued adherence to their strategy is driving strong execution, which can also be seen in the fact that they established an all-time high stakes grilled correctly score. During the quarter, Olive Garden ran Never Ending Pasta Bowl. It was offered at the same price point as last year, making it an even stronger value. Guest demand was higher this year and our restaurant teams did a great job delivering outstanding guest experiences, achieving the highest refill rate ever. This performance was driven by our focus on ensuring every guest is offered a refill, whether it's a limited-time offer like Never Ending Pasta Bowl, or our Never Ending First Course, which is offered every day. This iconic promotion also satisfies all three of our marketing activity filters. It elevates brand equity, it's simple to execute, and it's not at a deep discount. Also, I'm excited to share that during the second quarter, and for the first time in their history, Olive Garden surpassed $5 billion in sales on a trailing 52-week basis. The holidays are the busiest time of the year for all of our restaurant teams, and they embrace the opportunity to perform at their best. On Thanksgiving Day, our teams at Ruth's Chris, The Capital Grille, Eddie V's and Seasons 52 did just that, with each setting a new daily sales record. And while we experienced some softness at our fine dining brands during the quarter, we are encouraged by the strong holiday bookings we are seeing. Now, let me provide a brief update on Ruth's Chris. Even in the midst of the integration, I'm really proud of how the entire team has remained focused on the guest experience. During the quarter, Ruth's Chris achieved the top overall rating score among all full-service dining brands within Technomic's industry tracking tool. From an integration perspective, things are progressing well, and we are on track to complete the major systems changes by the end of the fiscal year. During the quarter, we closed their former corporate office and the Ruth's Chris support team moved into our restaurant support center. We are excited to have them here. In October, we successfully transitioned 21 restaurants to one of our distribution centers, and we plan to transition the remaining company-operated restaurants to our distribution system between January and March. This phased approach allows us to gather learnings and improve the transition for the other restaurants, while capturing supply chain synergies. We are deliberate with the timing of any changes to ensure that we minimize the operational impact as much as possible. We are on track to deploy our people management systems by the end of the calendar year and begin rolling out our proprietary point of sale system after Valentine's Day with the goal of completing all systems integration by the end of the fiscal year. As part of the investments we announced on our last call, we have made some strategic decisions at company-owned restaurants that will impact total sales in the third quarter. First, we stopped third-party delivery. Second, we eliminated lunch wherever possible, and we will be closing most restaurants on Christmas Day. I can't say enough about the tremendous partnership between the Ruth's Chris team and our integration team. Integration is never easy, but it has been a collaborative process, and I’m happy with the progress we are making. We have reached the halfway point in our fiscal year, and I'm pleased with our performance thus far. All of our brands remain focused on managing the business for the long term and the power of Darden positions us well for the future. We also continue to work in pursuit of our shared purpose, to nourish and delight everyone we serve. One of the ways we do this for our team members and their families is through our Next Course Scholarship program. Applications opened last month for the program, which awards post-secondary education scholarships worth $3,000 each to children or dependents of Darden team members. Last year, we awarded nearly 100 scholarships to children of team members at both our restaurants and our support center. The Next Course Scholarship creates a lasting impact on the lives of our team members' families, and I'm excited that we are offering the program for a second year. Finally, as I said earlier, the holidays are the busiest time of the year for our restaurant teams. I am so proud of the focus and commitment that all our teams continue to have every day. On behalf of our senior leadership team and Board of Directors, I want to thank our more than 190,000 team members for everything you do to delight our guests and help create special holiday memories. I wish you and your families a wonderful holiday season. Now, I will turn it over to Raj.

Thank you, Rick. And good morning, everyone. Our teams did a great job managing their businesses again this quarter, resulting in meaningful restaurant level and total margin growth. This margin growth was driven by positive same-restaurant sales growth, strong labor management, and lower than anticipated restaurant and commodities expenses. We generated $2.7 billion of total sales for the second quarter, 9.7% higher than last year, driven by the addition of 78 company-owned Ruth's Chris Steak House restaurants, 45 legacy Darden new restaurants, and same-restaurant sales growth of 2.8%. Our same-restaurant sales for the quarter outpaced the industry by 410 basis points and same-restaurant guest counts exceeded the industry by 370 basis points. Our focus on managing the business and controlling costs resulted in adjusted diluted net earnings per share from continuing operations of $1.84 in the second quarter, an increase of 21% from last year's reported earnings per share. We generated $403 million of adjusted EBITDA and returned approximately $340 million of capital to our shareholders through $158 million in dividends and $181 million of share repurchases. Now, looking at our adjusted margin analysis compared to last year, food and beverage expenses were 190 basis points better, driven by pricing leverage. Total commodities inflation was flat to prior year for the quarter and slightly better than our expectations, while beef inflation continues to track in line with our expectations; most other categories are seeing some favorability. Restaurant labor was 20 basis points better than last year, driven by productivity improvements at our brands, as pricing and inflation were roughly equal at 5%. Restaurant expenses were 30 basis points favorable, primarily due to lower workers' compensation expense and deflation in utilities. Marketing expenses were 10 basis points higher than last year, consistent with our expectations. All of these factors resulted in restaurant level EBITDA of 18.8%, 230 basis points higher than last year. G&A expenses were $109 million, which was consistent with what we previously communicated. G&A as a percent of sales was unfavorable 40 basis points to last year. This unfavorability is primarily driven by higher incentive compensation expense due to the strong growth in sales and EPS for the quarter and wrapping a low incentive accrual in the second quarter of last year. Impairments were 40 basis points unfavorable to last year as we are wrapping on a $9 million gain from the sale of restaurant assets. Interest expense increased 50 basis points versus last year due to the financing expenses related to the Ruth's Chris acquisition and the increase in short-term debt as the second quarter is typically our peak funding need period for the year. And for the quarter, adjusted earnings from continuing operations were 8.1% of sales, 60 basis points better than last year. Looking at our segments, Olive Garden increased total sales by 6.3%, driven by same-restaurant sales growth of 4.1%, outperforming the industry benchmark by 540 basis points. The strength of Never Ending Pasta Bowl contributed to flat same-restaurant guest counts for the quarter, 480 basis points above the industry. This sales growth, along with improved labor productivity and higher pricing related with inflation drove segment profit margin increase of 240 basis points at Olive Garden. At LongHorn, total sales increased 7.1%, driven by same-restaurant sales growth of 4.9%, outperforming the industry by 620 basis points. Segment profit margin of 17.4% was 310 basis points above last year. Pricing leverage, favorable menu mix, and improved labor productivity drove LongHorn's strong margin growth this quarter. Total sales at Fine Dining segment increased with the addition of Ruth's Chris company-owned restaurants. Same-restaurant sales at both The Capital Grille and Eddie V's were negative as the Fine Dining category, as a whole, continues to be challenged year-over-year. This resulted in lower segment profit margin than last year. The other business segment sales increased slightly with the addition of Ruth's Chris franchised and managed location revenue. This was mostly offset by combined negative same-restaurant sales of 1.1% for the brands in the other segment. However, this was still 20 basis points above the industry benchmark. Segment profit margin of 12.9% was 130 basis points better than last year, driven by the additional royalty revenues and pricing relative to inflation. Now, turning to our financial outlook for fiscal 2024. We've updated our guidance to reflect our year-to-date results and expectations for the back half of the year. We now expect total sales of approximately $11.5 billion, same-restaurant sales growth of 2.5% to 3%, 50 to 55 new restaurants, capital spending of approximately $600 million, total inflation of 3% to 3.5%, including commodities inflation of approximately 2%, an annual effective tax rate of 12% to 12.5%, and approximately 121 million diluted average shares outstanding for the year. This results in an increased or adjusted diluted net earnings per share outlook of $8.75 to $8.90. It excludes approximately $55 million of pretax transaction and integration-related costs. Looking at the third and fourth quarters, we expect the EPS growth rate to be consistent with what we previously shared. We expect third quarter growth rate to be similar to the first quarter and the fourth quarter to have the lowest EPS growth rate for the year. This is primarily a function of the pricing cadence we communicated at the beginning of the year. We anticipate pricing and inflation to be relatively equal in the third quarter, and we expect to price significantly below inflation in the fourth quarter. So, to wrap up, we continue to be very pleased with how our teams are managing their businesses and delivering strong results. We remain disciplined in adhering to our strategy and we're confident in the strength of our business model. And, with that, we'll take your questions.

Thank you. We will now be conducting a question-and-answer session. Our first question is coming from Jon Tower from Citi. Your line is now live.

Great. Thanks. I appreciate you taking the question. I guess, maybe starting off, I'm curious to get your thoughts. It seems as if obviously the consumer backdrop has weakened a little bit as we've moved here through your fiscal second quarter and perhaps into this fiscal third quarter. And I know obviously Never Ending Pasta Bowl seems to work exceptionally well, driving traffic on a relative basis throughout the quarter. So, I'm curious how you're thinking about promotions for the balance of the year? And I know the Never Ending Pasta Bowl has traditionally been a once-a-year type of timing, but given the weakness we're starting to see broadly across the category, does that alter your thinking either with promotions at Olive Garden or any of the other brands for the balance of fiscal 2024?

Hey, Jon. Thanks for the question. Nothing that we have seen is altering our plans for the balance of the year. We're really pleased with the performance of our brands. We're right along where we expected to be. And so, we don't anticipate doing anything different.

Thank you. Next question is coming from Chris Carril from RBC Capital Markets. Your line is now live.

Hi, good morning, and thank you for the question. Can you provide more details on what influenced the change in the comparable sales and revenue outlooks for the year? It seems the outlook has slightly shifted, leaning towards the lower end of the range. Although it's still early in the third quarter, is there anything you've observed that might justify a more cautious outlook?

All right, Chris. Let’s begin with the guidance at a high level. From a sales perspective, if we look back to when we first provided our guidance, we noted that while the consumer environment was challenging, it wasn’t excessively negative for us. We anticipated that if the situation eased, the inflation outlook would also improve somewhat. Now, halfway through our fiscal year, this is indeed what we are experiencing. We’ve noticed some softness in spending that is being counterbalanced by lower inflation, which is why we adjusted to the lower end of our sales range while raising our earnings expectations. Specifically, our baseline traffic expectation suggests that traffic will remain flat or slightly decline for the year, with a decrease in spending of about 50 basis points. Overall, we are discussing a midpoint adjustment of 25 basis points from where we began the year. Looking at the current quarter in December, we are just two weeks in, with the holiday season still ahead. As Rick mentioned in his remarks, we are optimistic about the strong holiday bookings we are witnessing at our reservation brands, and our guidance takes into account everything we are aware of.

Got it. Thank you. And then, I guess, on pricing, Raj, you did mention some detail in your prepared remarks around pricing, but is there anything else you could add there, maybe perhaps at a brand level, any incremental insight about how you're thinking about pricing here going forward? Thanks.

Sure, Chris. Let's begin with our pricing. Earlier this year, we indicated that the pricing carryover from last year is approximately 3% for the full year, and our guidance suggests it will be between 3.5% and 4%. This implies that there won't be many pricing changes this fiscal year. For instance, at Olive Garden, we haven't adjusted pricing this year, and we do not anticipate making any additional adjustments in the near future. Therefore, when considering check growth, it is likely to moderate to the mid-2s in the third quarter and approach 2% in the fourth quarter. That's our current assumption.

Thank you. Next question is coming from Brian Bittner from Oppenheimer. Your line is now live.

Thanks. Good morning. Rick, I wanted to ask about your updated thoughts on delivery. Recently a QSR competitor of yours that's long been against third-party systems has decided to jump on, and you seem to be varying further in the opposite direction given you said this morning that you're taking third-party delivery away from Ruth's, and it seems like at this point you could price third-party delivery in a way that would represent a very incremental, profitable transaction, an incremental customer, particularly at Olive Garden. So, can you just refresh us on why this seems to still be off the table as a sales opportunity and profit opportunity?

Hey, Brian. Yes, it's still off the table for us. As we mentioned, we eliminated it at Ruth's Chris. And it's not all about the price and the profit, and it is also the execution of the restaurant, what it does to our teams, and how we can execute our existing to-go business. And we've made investments over the last few years to make that experience even better for our consumer, and we continue to do that. We have had third-party delivery in a few restaurants for quite a while, and the performance in those restaurants isn't significantly different than the ones that don't have it. So, we still feel really confident about our decision to stay out of the third-party delivery. Even if we had to price more to cover that, our consumer would see that as our price, not necessarily the price for delivery. So, as of now, we're still steadfast in our resolve to stay out of third-party delivery.

Thanks for that. And, Raj, as my follow up, you said in your prepared remarks that you anticipate to price significantly below inflation in 4Q. That word significantly perked my ears a little bit. I'm just curious if you could give any color on what you do think price versus costs will be in 4Q?

Yes, Brian, I'd say we're looking at somewhere in the 150 to 200 basis point range in the fourth quarter, because we do expect pretty low price in the fourth quarter, and we expect inflation to be a little bit higher. Just for a function of wrap, I think really on the inflation, the first half of the year benefited from chicken deflation. Chicken is about 8% of our sales, and we don't have that tailwind going into the back half.

Thank you. Next question today is coming from Eric Gonzalez from KeyBanc Capital Markets. Your line is now live.

Hey, good morning, and thanks for taking the question. My question is on the other business segment, since your sales growth in the segment was negative for the first time in a few years. So, I'm wondering if you can give us a sense about what's happening within that division, which I know includes Cheddar's. So, I'm wondering if this says something about the low-income consumer, if there's anything else worth calling out with regards to that division?

Yes. Let me begin with the other segment and then I’ll pass it to Rick to discuss the consumer situation. Overall, we are quite pleased with the performance of our other segment when you consider both the topline and bottom line. Although there were negative same-restaurant sales, they still outperformed the industry by 20 basis points. Without going into too many details, there are year-over-year dynamics at one of our southeast brands that are largely influenced by weather and patio usage, which I won’t elaborate on. However, the traffic during the quarter for the other segment was very strong, exceeding the industry benchmark by over 100 basis points. This makes us feel positive about the performance. Additionally, this segment was more profitable this quarter; even excluding the franchise income from Ruth's, their segment profit was higher than last year. So overall, that represents a solid outcome. Now, I'll let Rick talk about the consumer aspect.

Yes, Eric. I want to emphasize that we are very pleased with the performance of our various segments. Our goal is profitable sales growth, and all segments achieved this, even if some experienced negative comparisons. Overall, consumers seem to be both resilient and somewhat more selective, as we've noted in our checks over the past few quarters. Our data indicates we are gradually returning to our pre-COVID demographic mix, with a significant change in Q2 that suggests we are nearing a more normal state. I should mention that household incomes above $200,000 represent a larger share than last year, but they remain below pre-COVID levels. Incomes under $75,000 have decreased compared to last year but are still above pre-COVID levels, with the most significant drop occurring for those earning under $50,000. This shift is most notable in our Fine Dining segment. Additionally, consumers over 65 years old are dining out more frequently than in prior quarters, with a shift toward lunchtime dining. So, what does this mean for us and our brands? We believe operators can fulfill their brand promises, and value will continue to resonate with consumers. I am confident that we are well-equipped for what lies ahead, thanks to the strength of our portfolio and the dedication of our team members in creating exceptional experiences for our guests.

That's really helpful. As a follow-up, could you provide some insights on the Fine Dining segment? Are we past the challenges related to abnormal seasonality and the post-COVID period? Should we expect to see positive comparisons in the latter half of this part of the business?

From a Fine Dining perspective, we previously discussed the normalization of seasonality trends and last year's increased activity during the summer that carried into the fall. Looking at this quarter, we ended with positive same-restaurant sales in November, which was bolstered by record Thanksgiving sales across all our Fine Dining and reservation brands. November showed improvement. However, the Fine Dining segment is experiencing a notable decline in check mix year-over-year, primarily due to reduced alcohol sales. Currently, the preference for alcohol aligns with pre-COVID levels, but last year saw much higher figures, resulting in a significant drag this year. Our Fine Dining mix is down nearly 200 basis points, which has been a key observation. We expect some of these dynamics to ease as we approach the holidays, similar to what we experienced in our fiscal Q4 last year. Lastly, we are pleased to see strong bookings for both reservations and private events as we head into the holiday season.

Thank you. Next question today is coming from Andrew Charles from TD Cowen. Your line is now live.

Great. Thank you. Rick, does the early access to Never Ending Pasta Bowl for eClub members this quarter leave you encouraged to lean more into the 15 million or so Olive Garden eClub member database in the back half of the year, recognizing this won't be an avenue for discounting, obviously, as you're focused on profitable growth. Or is it that it was an immaterial impact just for that extra week of early access in the quarter?

Yes, Andrew. The early access didn't have a significant impact, but it certainly pleased our eClub users. They received something that wasn't available to others. We will keep looking for ways to engage with them and provide benefits of being in the eClub without having to resort to discounts. That's what we're focusing on. This was one of our initial attempts, and we were pleased with the results, so we will continue to explore other opportunities for the eClub.

Yes. We're generally looking at about a 2% cost of goods sold for the full year, which means the latter half is closer to 2.5% to 3%, with the first quarter being a bit lower and the fourth quarter experiencing the highest food inflation. This situation is influenced by contract adjustments rather than absolute price increases, reflecting year-over-year changes. In terms of labor costs, we expect an annual increase of around 5%. From the first quarter to the second quarter, we noticed a slight decline of about 50 basis points in total labor inflation. While we do not anticipate significant further moderation, any reduction would be appreciated. For now, we expect labor costs to remain close to that 5% for the second half of the year.

Thank you. Next question today is coming from Brian Harbour from Morgan Stanley. Your line is now live.

Yes. Thank you. Good morning, guys. Raj, just on your comment about maybe a little bit lower check versus what you'd previously expected, is that specific to any brand? Is it more than non-Olive Garden brands or is it something you're seeing in Olive Garden as well?

Yes. I believe we've discussed that we're experiencing a continuation of trends from the first quarter, particularly at our casual brands, where we're seeing about 50 basis points of negative mix, primarily due to alcohol. When considering check growth in the mid-single digits, 50 basis points isn't as significant as it used to be. In a typical scenario with a 2% check growth, we would view 50 basis points as a major concern, but in the context of mid-single digit check growth, it has less impact. Additionally, I mentioned earlier that the larger issue is with Fine Dining, which we expect to improve as we move into Q4. This was an unexpected factor regarding check mix for the fiscal year. However, we're more focused on traffic, and it's encouraging that after six months, our traffic levels are aligning with our expectations from the start of the year. I think, as I said in my remarks, pretty much all categories except beef came in a little bit better than we thought. We did further up, just negotiate a contract for chicken that now we're locked in for the rest of the year basically at 90%, and that's going to be low single-digit inflation for the back half, which is something we can deal with. And from other items, seafood continues to be deflationary. And then produce was a little bit better than we thought. Going into the year, we thought there was going to be some challenges with produce based on just some of the contracts we had, but our team was able to go back to our partners and negotiate given the environment and the market, and that was favorable to us from what we thought six months ago or three months ago.

Thank you. Next question is coming from Jeffrey Bernstein from Barclays. Your line is now live.

Great. Thank you very much. Rick, I think you mentioned to an earlier question that there was no change in your second half promotional plans. Things seem to be going as expected. I'm just wondering if you could talk about the broader competitive behavior across casual dining. I think, there are some that are incrementally concerned of an uptick in promotions and discounting to drive traffic, kind of in conjunction with the industry, maybe seeing some softening sales trends, especially if commodities continue to ease. So, can you just talk about, again, beyond just your plans, what you're seeing across broader casual dining in terms of that outlook? And then I had one follow up.

Jeff, we're seeing what you see, an increase in television advertising, sometimes at a discount. But we're, as I said, focused on profitable sales growth. Even with the increase in competitive activity we saw in Q2, we exceeded the industry by 410 basis points, which was the same as second quarter. We exceeded by 410 in the second quarter, I'm sorry, last quarter as well. This is on top of the 370 basis point gap we had last year. So, we feel like what we're doing is working, even with competitive and a little bit of an increase in competitive intensity. By the way, we also improved our segment profit margin by 230 basis points from last year. And so, we're going to stick to our strategy, providing everyday value to our guests, and continue to use our filters, which we've talked about many times, to evaluate any marketing activity.

Sure, Jeff. Let me start by discussing the increase in restaurant openings for the year. We were able to open some locations earlier than we initially anticipated. Honestly, our team was a bit cautious this time around. After facing overly optimistic projections in the last two years, we chose to take a more conservative approach based on those experiences. As a result, our timeline is improving, which is helping us achieve better results. Our goal remains to grow in a cost-effective manner, and our teams are focused on balancing both aspects. Regarding capital expenditure, it is indeed influenced by the increase in new restaurant openings.

Thank you for your feedback. I would like to discuss the trends in segment profitability. It's impressive to see the consistency, especially with LongHorn and Olive Garden, despite various challenges. As we look to the second half of the year, are there specific areas that stand out to you? I understand that the back-to-basics strategy reflects a comprehensive approach to the business, but are there particular aspects that you find noteworthy or that are significantly contributing to the improved segment profit margins?

Yes. The primary growth in segment profit this year is largely due to changes in COGS, which had been unfavorable for the past two years. As commodities stabilize, this is positively impacting food costs on a year-over-year basis, contributing to segment profit growth. We've also noted a slight advantage in pricing compared to inflation in the first half, which helped as well. In terms of overall segment profits, they were robust in the fourth quarter of last year, exceeding 20% at the Darden level. We believed there was more potential for improvement in the first half than in the second half. However, across all segments and teams, the focus has been on what we can control, and our teams have rallied around effectively managing costs. This is reflected in our financial results. Overall, we are pleased with the progress made by our teams and will maintain our disciplined approach.

Great. Thanks for taking the question. I did just want to come back to the conversation around development and construction costs. Could you just give us an update on where the individual construction costs are coming in? Are they coming in lower than you guys expected in line? How's that trajectory? And then just more broadly, what are you seeing from independents? Are you seeing more of a willingness to build more units? Are you seeing more restaurant formation out there? Or is it kind of more of the same that you've been seeing over the past several quarters? Thank you.

Let me begin by discussing the costs. Overall, development costs are in line with our expectations. Although there are some specific instances where costs are higher than anticipated, we accounted for some increased costs in our projections based on our recent experiences. At this moment, we believe inflation has peaked. We are starting to receive more bids that align with our project budgets, which is encouraging. However, from an independent perspective, the data suggests there isn't significant enthusiasm for building new restaurants, largely due to the current interest rate climate which has raised financing costs. This situation appears to be influencing some developers as well. While you are likely aware of the broader economic landscape, I want to emphasize that we remain pleased with our development progress, the number of new restaurant openings, and our strategic approach. As I mentioned earlier, our goal is to build these restaurants efficiently while still pursuing growth, and we will continue to prioritize cost-effectiveness in our efforts.

Thanks. A question on labor productivity. You guys have done a great job there. It looks like labor cost per unit was up maybe 2%, a little bit over that in the quarter, versus up a little over 5% in the first quarter. I think, you said wage increase was roughly 5% in both quarters. So, if I'm hearing that right, is labor hours down a few percent in fiscal 2Q? And if so, could you clarify maybe what are some of the drivers of that productivity?

We've maintained a strong track record of discipline and productivity improvements, and this year is no exception. We're seeing greater enhancements due to lower turnover rates compared to previous years. We're continuously investing in training to ensure new team members become effective more quickly, while also allocating training resources to boost the productivity of our current employees. The productivity improvements have effectively balanced out the impact of wage and labor inflation. Additionally, our teams have improved in forecasting our business performance, thanks to the incorporation of AI tools that allow them to project restaurant outcomes in 15-minute increments, yielding even better results than before. The benefits from lower turnover are also contributing positively to this process.

That's great. Do you think that the labor productivity will keep up in the second half? Additionally, I am curious about your thoughts on California and the upcoming minimum wage changes in April. How will that impact your wage outlook or overall labor projections? Thank you.

Yes, David, our total labor outlook isn't significantly different from the first half of the year. We're still experiencing wage increases in the mid-single digits, which aligns with pre-COVID levels. We expect turnover to decrease, bringing us closer to pre-COVID levels, which will enhance productivity. Regarding the FAST Act in California, we are keeping an eye on it, and everything we have planned is reflected in our guidance. I can say we offer an exceptional employment proposition nationwide, but it's even better in California. Our turnover is lower there than in most other locations, and our wages are higher. So, we are quite confident about our position in California. However, if anything changes, we will respond accordingly.

Thank you. I have one question and a follow-up. Regarding pricing in relation to inflation, historically, you have priced below inflation and experienced traffic gains as a result. Are you expecting that as the difference between your pricing and inflation narrows in the second half, with inflation outpacing pricing, you might see an increase in traffic? I understand you are already outperforming the industry, but it seems there has been either a coincidental or consistent 500 basis point gap between traffic and your pricing. This leads to my first question about how you view the trade-off between margin and traffic. I have a quick follow-up as well.

Hey, Sara. Let me start by giving you some context on our pricing over the last four years. Our cumulative pricing at the Darden level has been just under 17%. In comparison, the full-service restaurant Consumer Price Index has increased by 24% during the same period, creating a 700 basis point gap between us and that segment. If we look at limited service restaurants, they are at 29%, resulting in a 1,200 basis point gap. Throughout these four years, we've been careful with our pricing strategy, ensuring we maintain this gap. Additionally, our overall pricing is below the general CPI by 300 basis points. This adherence to a pricing strategy beneath inflation has contributed to our strong traffic performance. Moreover, another significant factor is our commitment to execution and delivering the best possible experience for our guests, which our teams are dedicated to. Together, this strategy of pricing below inflation and our focus on execution help distinguish us from the industry, and we plan to continue on this path.

Thank you. We reached end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Thank you. That concludes our call. Remind you that we plan to release third quarter results on Thursday, March 21 before the market opens with a conference call to follow. Thanks again for your participation and have a happy holiday.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.