Good day, ladies and gentlemen, and welcome to Brinker International's Third Quarter Fiscal 2021 Earnings Call. At this time, all participants have been placed on a listen-only mode and the floor will be opened for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Mika Ware, VP of Finance and Investor Relations. Mika, the floor is yours.

Thank you, Paul, and good morning, everyone. With me on today's call are Wyman Roberts, Chief Executive Officer and President; and Joe Taylor, our Chief Financial Officer. Results for the quarter were released earlier this morning and are available on our website at brinker.com. Wyman and Joe will first make prepared comments related to our operating performance and strategic initiatives then we will open the call for your questions. Before beginning our comments, it is my job to remind everyone of our safe harbor regarding the forward-looking statements. During our call, management may discuss certain items which are not based entirely on historical facts. Any such items should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Such risks and uncertainties include factors in the press release and the company's filings with the SEC. And of course, on the call, we may refer to certain non-GAAP financial measures that management uses in its review of the business and believes will provide insight into the company's ongoing operations. And with that said, I will turn the call over to Wyman.

Thanks, Mika, and thanks, everyone, for joining us this morning. With the rollout of vaccines in full swing and restrictions lifting across the country, our guests' pent-up demand for a dine-in experience is being released as well. People are finally starting to feel safer to venture out and spend more—spend some of the money they've been saving over the past year. We're excited about the positive momentum in our economy and the resurgence in our dining rooms. When we last talked at the end of January, we were already seeing progress in the business, even as we were navigating a COVID spike that drove another wave of capacity restrictions in our dining rooms. Just as we started to see numbers of cases come back down, we were hit with the winter storm of the century that impacted our restaurants across Texas and the southeast at levels we haven't experienced before. But despite the challenges at the start of the third quarter, we ended strong, delivering an adjusted EPS of $0.78 with Chili's sales returning to positive territory from an absolute perspective. And we've seen those sales trends continue into April. When we look at our more normalized performance of fiscal 2019, Chili's sales are up 10%, and nearly three-quarters of our restaurants are generating meaningful positive results, even though we're still social distancing and wearing masks in all of our restaurants and we're still operating under capacity restraints across the country. We believe all along, the consumers' increased demand for convenience would continue post pandemic and it's playing out that way. As our dining room traffic increases, our off-premise business continues to hold strong. We expect that when things normalize, we'll see stronger dining rooms and a takeout and delivery business stronger than it was pre-pandemic. As you think about Maggiano's in the context of this recovery, upscale casual is playing itself out a little differently. We're pleased with the significant improvements in the Maggiano's business, especially in their dining rooms. Now it's just a matter of how quickly banquets come back. We know there's significant pent-up demand and we're well positioned to meet it. We're already seeing signs of social occasions returning, and we feel good about building our corporate business back in time for the important holiday season. Staying focused on our strategy throughout the extraordinary events of the past year has served us well as we consistently outperformed the industry. We have good line of sight to hit the targets we were expecting post pandemic at both Chili's and Maggiano's. Navigating the past year taught us we can run this business even more efficiently than in the past, and we're committed to keeping our cost structure in line. We think our category leadership—driven by the multiyear investments in our infrastructure and digital capabilities—will help us continue to outpace the industry. We still have a lot of heart for our restructured marketing approach, and we'll continue to leverage our digital expertise to connect with consumers and drive traffic. The subject of labor is clearly top of mind across our industry. Today's labor market is one of the toughest ones we've experienced, but we have the tools to navigate through it successfully. While our performance throughout the pandemic enabled us to keep higher levels of staffing in our restaurants, we are hiring more team members than usual to support our increased volumes. We're also benefiting from our decision to keep our managers on board throughout the pandemic as they provide the operational leadership to staff our teams and take care of our guests. We're fortunate to be able to leverage our scale, the digital expertise we built and our PeopleWorks team to recruit talent in creative ways to keep our cost structure intact and our guests coming back. We know the best way to maintain profit margins in this business is through volume, so we leaned into virtual brands as a way to leverage our assets and tap unused capacity. It's Just Wings continues to perform well, and we're on track to hit that $150 million target we set at the beginning of the year. Almost all of our domestic franchise partners jumped on the opportunity and globally, several of our partners have already picked it up. Wings is now in nine countries and 160 locations outside the U.S., making it a formidable brand in just its first year. It's a real testament to our methodical and disciplined virtual brand strategy, how we've executed it and the leverage it brings to our P&L and to our franchise partners' business. We have the system up and running and we're executing it well, especially during high volumes. Now we're focused on building the brand and leveraging the growth opportunities ahead. We believe takeout holds a lot of potential for us. And now that we've invested in the technology and infrastructure to support it, we're working to increase awareness levels outside the delivery channel. We've learned a lot this year with the launch of It's Just Wings that we'll leverage when we're ready for our next virtual brand. We're pleased with the current results from the expanded test of Maggiano's Classics, and we're working through the timing to ensure we're able to support our operators and deliver a great guest experience. So this has been an exceptional year of learning for us, not just with virtual brands, but in many ways. We've learned the restaurant industry in general, and specifically, our team is full of unbelievably resilient, amazing human beings. I'm so impressed by how this team has risen to every challenge that's come our way. We're stronger for it and we're prepared for the growth opportunities ahead as vaccinations spread across the country and dining rooms fill up. As we look forward, our ability to navigate through any short-term cost headwinds is solid. Our scale affords us advantages in terms of forward contracting, keeping our employment base intact and delivering one of the strongest value propositions in the industry. Longer term, we see a lot of organic growth potential for Brinker. Obviously, we'll continue to execute our multiyear virtual brand strategy and protect our improved business model. And with higher volumes, we'll capture new development opportunities and keep the brand fresh through our remodel program. I'm proud of our progress on our results, the strength of our brands and our line of sight to future earnings performance. And with that, I'll turn the call over to Joe.

Hi, thank you, Wyman and good morning everyone. The third quarter results reported this morning represent another successful quarter for Brinker and its brands. While the quarter definitely had its unique issues, I'm most pleased with the momentum we are generating as we move closer to a more normal operating environment, setting up further success both this quarter and next fiscal year. For the third quarter of fiscal 2021, Brinker reported total revenues of $820 million with consolidated comp sales of negative 3.3%. Our adjusted diluted EPS for the quarter was $0.78. Chili's recorded flat comp sales and positive 4% traffic for the quarter, with the year-over-year performance improving throughout the quarter. Regional performance is strong nationwide, with a broad range of state markets rebuilding their dining room sales back to higher levels—above 75%, let's say, when compared to pre-COVID performance. We do still have a smaller set of state markets such as California and Illinois, which are important markets for us, that are earlier in their dining room reopening process. We anticipate they will follow similar growth patterns as we move through the next several months. A couple of items to note related to the third quarter. First, we had a holiday flip the first week, with Christmas moving into the quarter, resulting in a negative 1% comp sales impact. In February, we experienced Uri, a most unique winter storm that hit with historic sub-zero temperatures and power outages for more than a week, affecting approximately 30% of our restaurants. The material impact of the storm resulted in an estimated $10.5 million in lost revenues, a negative impact to consolidated comp sales of 1.2% and reduced adjusted EPS of approximately $0.06. Once things thawed out, our positive progression returned, with average weekly sales volume hitting record highs in March. As we started to lap the beginning of the pandemic in mid-March, as one would expect, comp sales moved significantly positive and are likely to remain elevated for the foreseeable future. While I'm pleased with this progression, we believe a two-year comp comparison is a more insightful view of our performance. In this regard the consolidated two-year comp results for Brinker for the first four weeks were a positive 6.3%, driven by Chili's results of a positive 10.1% for the same timeframe. I would note that Chili's is lapping off of a positive 2.9% in the third quarter of fiscal 2019. Increasing sales volumes also favorably impacted margins, resulting in a consolidated restaurant operating margin for the third quarter of 13.9%, compared to 12.8% for the third quarter of fiscal 2020. Again, the winter storms had a negative impact on ROM, reducing the margin by an estimated 30 basis points. Food and beverage expense, as a percent of company sales, was 70 basis points favorable to prior year, primarily driven by menu mix as we featured steak on three for $10 in the prior year. Pricing was slightly favorable and commodities were flat. Labor expense, again as a percent of company sales, was favorable 70 basis points as compared to the prior year. During the quarter, lower dining room capacity year-over-year resulted in reduced hourly labor cost. We do anticipate hourly labor to increase, importantly along with sales volumes as capacity restrictions lift in certain states. During the quarter, we meaningfully increased our manager bonus payout, impacting margins by approximately 60 basis points, as we move to reward this critical leadership level for outstanding performance. By leveraging our scale, our well-established people, practices and benefits and utilizing our digital connectivity know-how, we are confident in our ability to effectively manage through the current labor market environment. Restaurant expense was unfavorable year-over-year by 30 basis points, a reflection of increased off-premise costs such as packaging and fees, driven by our successful off-premise sales channels. Advertising expense continues in a favorable year-over-year position as we lean into our digital and loyalty-driven marketing strategy. Brinker continues to deliver strong operating cash flow. Year-to-date, we have generated $268 million in operating cash flow. During the third quarter, we used a portion of that cash flow to repay $115 million in revolver borrowings, bringing the outstanding balance to under $300 million. We anticipate further borrowing reduction in the fourth quarter. Additionally, we are investing significantly into the growth of our brands. Capital expenditures year-to-date totaled approximately $62 million. We opened two new Chili's during the third quarter and two additional locations in April, bringing our total for this fiscal year to 10. We are moving aggressively to further build our development resources and increase the NRO pipeline. We continue to target expanding new restaurant development to a range of 18 to 22 restaurants a year. We also are investing in re-images of our existing fleet, with a particular focus on the Midwest restaurants acquired in early fiscal 2020. Brinker has continually proven to be a leader in utilizing technology to enhance the guest experience and improve operational performance. In fiscal 2021, we will invest approximately $20 million of capital and technology that enhances our digital guest connectivity, supports our virtual brand growth and improves our in-restaurant dining experience. Now turning to our expectations for the final quarter of this fiscal year. We expect both Chili's and Maggiano's to maintain their current favorable sales trends throughout the quarter, assuming COVID cases continue to decline and state and local restrictions continue to ease. Let me provide some additional specifics for the fourth quarter. Total revenue is estimated to be in the $950 million to $1 billion range. Adjusted earnings per diluted share are estimated in the $1.55 to $1.70 range. Weighted average diluted shares are estimated to be in the 47 million to 48 million share range. Also, as we have previously noted, fiscal 2021 includes a 53rd week at the end of this fourth quarter. As we settle into the last quarter of the fiscal year, we are excited about the momentum we have built from the uncertainty that surrounded the restaurant industry a year ago. During the past year, the members of our support teams here in Dallas stepped up and provided innovative solutions to any number of issues since the pandemic changed how we all approach our work. And our frontline team members in the restaurants have continually delivered for our guests in ways none of us would have contemplated not too long ago. We are grateful to both these groups of team members who combined to lead the casual dining sector throughout this past year. They are all committed to finishing strong this fiscal year and then carrying the success forward. And now with our prepared comments complete, let's open that up for questions. So Paul, I'm going to turn it back to you to moderate the call.

And the first question is coming from John Glass. John, your line is live. Please announce your affiliation and pose your question.

Sure. Thanks. It's Morgan Stanley. First, can you just maybe be a little more explicit as you think about the fourth quarter versus 2019, what the embedded comp for Chili's is? Are you thinking about winning stimulus benefits? How do you balance kind of what you're experiencing now versus what you might experience throughout the quarter? And I had a follow-up on the margins, please.

Yes. Again, I think—John, this is Joe. We're thinking about it in a very positive manner. I think we're going to continue to see the same progression that we saw coming out of March and into April. There is a stimulus environment out there. I think that's very apparent. It's more than simply the stimulus checks. I think you have again that pent-up demand that is getting a lot of publicity and discussion. And not only pent-up demand, you have pent-up capability to meet that demand on the consumer side of the equation. So we're pretty bullish on where the consumer is and how they will continue to reenter kind of back into a more normalized environment. And we also continue to see restaurant reopenings and capacity restrictions lifting. The progression that we're seeing in the performance of our restaurants as a percentage of 2019 continues to go up materially as we work through each of the months. So I think we'll see some favorable progression there helping to drive the successful quarter we're guiding you to for fiscal 4.

And just as a follow-up, Wyman, you mentioned labor shortages. Obviously, it is top of mind. Can you just talk about how you think about margins over the medium-term because of that? First of all, labor shortages actually if there are some, actually becoming an impediment for example, opening dinners. Can you just talk about what is the growth impact of the delivery cost in the business? Did you—what is the structural layer of cost and there's other offsets, but what's the layer costs that have been added into this, you know, as the delivery channel both through virtual brands and as your own brand has grown so much?

I think there's two questions there. One is around what we are seeing with regard to the challenges with the current labor environment, and then there might be a labor or margin impact from delivery. So let me just talk to the labor situation because I know it is top of mind for really everybody, not just in the restaurant industry, but in a lot of places right now as we are in this unprecedented situation with a fairly significant unemployed population and real challenge staffing. So we don't think that's obviously a long-term situation, right—it's never happened, as far as I can remember, that you've seen this kind of a robust economy and 9 million to 10 million people out of work and not really aggressively looking to get hired. So what we're focused on is, again, leveraging our scale and our systems to staff our restaurants so that we can provide the support that we need to our managers to open and stay open and provide great guest experiences, but to also make sure that we're doing it in a way that doesn't significantly and permanently impact our cost structure. And so there are some additional things we're doing to entice and recruit, but for the most part they're more variable and they're incentives to get people to join, and not so much about a long-term wage rate impact that will live with us for a longer period of time. So we feel good about that. We also feel good about the fact that we're not out there as aggressively having to hire, because we just didn't cut as many. And we didn't cut any managers. So those are things that are keeping us probably in a little bit of a better situation than maybe some that didn't fare as well as we did through the pandemic. So again, more short-term impacts than longer-term, and we'll continue to monitor this and see how it plays out over the next couple of months.

And then, John, as it relates to the delivery side of the equation and the virtual brand side of the equation, from a cost perspective, systemically what you're really thinking about is delivery fees and packaging supplies—the incrementality of that. Now that's obviously embedded into the modeling we do around the channel itself, but that's, looking at company sales, you're talking a couple percent there, probably 2% to 3% from an incremental cost standpoint. And then some restaurants you will see some additional labor in the equation, but that's simply volume-driven. So as you see successful volumes, at certain restaurants you may have additional labor, which clearly is tied to the volumes we're driving on that side of the equation. But I think systemically that's really the major difference in those channels.

And the next question is coming from Nicole Miller. Nicole, your line is live. Please announce your affiliation and pose your question.

Thank you. Piper Sandler. Good morning. I wanted to ask about the comment around development resources—what are those resources? Is it something to do with bench strength or is it just the actual commitment around the pipeline? And what's the incremental cost, if any, of the development resources to accelerate?

Yes. It's really the people side of the equation. We're increasing our development team to make sure that they have the ability to broaden their scope as much as possible around the country. There could be some incrementality around some outsourced brokerage opportunities and support staff there. But it's really headcount. And it can be very effective if they're given the right tools and support behind the effort. We want to make sure that they're out aggressively looking at opportunities on a nationwide basis.

And is the 18 to 22 goal the run-rate or is that the first step in a continued acceleration?

It is the level we are getting to. I put it probably more in the first step than the run-rate. As we get closer to that over the next two years, we'll continue to evaluate it. Again, we think there's great opportunity to grow this brand, maybe in some different ways and footprints. We'll continue to look at all those opportunities as we move forward. So it's nothing to say that you can't go beyond that, but we definitely plan to get to that level, at least.

And the real estate market is going to be critical there as well. We know there's a lot of expectation that with the results of the pandemic real estate prices will have come down. We just haven't seen that yet. Whether or not that comes to fruition we'll see, but if it does that opens up more opportunities. So there are a couple of things in the current environment we know we can grow. Depending on what happens in the future, there could be even more aggressive growth.

And the next question is coming from Alex Slagle. Alex, your line is live. Please announce your affiliation and pose your question.

Thanks. Good morning. Jefferies. Just to follow-up on the short-term variable incentives around labor, do you think the magnitude will be similar to what we've seen in 3Q or should we expect some sort of step up into the fourth quarter?

I think there'll be a little bit of step up, but it's not going to be meaningful. We don't anticipate it will be huge. One of the things we're seeing, which is a little bit of good news for our operators and some of our team members, is we'll likely use more overtime than we've used in the past. A lot of our team members, especially in the kitchens in the heart of the house, prefer to work a few more hours and get the overtime. We may have to use a little more overtime than we would historically use. Again, that's a short-term solution to get us through what is a very unique and non-sustainable situation here with labor.

Alex, in the past when we've talked about labor inflation we've typically looked at that 3% to 5% kind of range. That includes overtime and training and bonus structures. We'll probably, in the short run, be running at the higher end of that level. The numbers I talked about for the fourth quarter embed that thought process into it. We'll see how it develops, but we're very comfortable—we have all the tools in place to manage through this short term.

And now that It's Just Wings has established a strong delivery business on DoorDash and expanded in pickup, with the brand's website now integrated with Google, what's the next phase of marketing for the brand and building awareness outside DoorDash?

You're a little ahead of schedule. We do obviously have a great DoorDash relationship on the delivery side. We've integrated with Google and our website. Our marketing push to a broader consumer about pickup hasn't taken off yet—that's going to happen more here in the fourth quarter as we continue to see the upside with the pickup aspect of Wings, which we're very optimistic about. We think there's a real nice growth vehicle there for that brand and for future brands. A lot of infrastructure work has to go into play to make that happen and we're almost finished with that. Then we get to push it to the consumer to see how they react, and that's coming.

And the next question is coming from Eric Gonzalez. Eric, your line is live. Please announce your affiliation and pose your question.

Thanks, KeyBanc. You said you haven't seen any degradation in the off-premise business as capacity restrictions eased. Are we to assume that the digital mix is sustained in that mid-40% range?

We have seen some denigration, Eric. At the peak we were running much higher, and we're now seeing it go from the 40s down into the mid- to low-30s as restaurant dining rooms get closer to historic levels. So we do see some reduction but we think it will stay closer to that 30% range. Pre-pandemic we were just starting to push up to 20%. Between everything we're doing and all the different aspects of the business, we're thinking it will probably stay in that low-30% range as dining rooms get back to full capacity.

If I can sneak one about It's Just Wings: directionally, how has the sales contribution trended in recent weeks as dining rooms opened up? Are you seeing anything to suggest you might need to invest more to support that brand as things normalize?

The brand is performing as we expected. The third quarter was the strongest quarter as we learned how to use the brand around some of the major sporting events. It's trending as we need it to trend to hit the results we've discussed. There will be some seasonality as you look through the year and we expect a little seasonality in the fourth quarter. Based on the first couple of weeks we're seeing trends right in line with what we need to hit our targets.

We also didn't have a college football season last year, so we're excited about what the fall will hold for the brand. It's been a great year of learning around virtual brands—including how to market them effectively and who the target is. We've experimented and tested several brands and all have unique aspects. Getting these insights this year has been very helpful. Operationally, getting our restaurants to execute as dining rooms pick back up has been hugely important and something we've been encouraged by.

And the next question is coming from Dennis Geiger. Dennis, your line is live. Please announce your affiliation and pose your question.

Thank you. UBS. Curious if you could share some more thoughts on regional performance, specifically what you've seen in off-premise in those markets. Maybe touching on It's Just Wings' performance in those markets as well with the greatest capacity as things have reopened. And Wyman, you just gave some good color on how off-premise has trended and what you expect, but curious if you could share what you've seen in those regions specifically?

By far, the biggest variable to regional performance is still restrictions. All the other things are relatively insignificant compared to dining room capacity restrictions. In states such as Michigan, California and Illinois where we're still seeing stringent capacity issues, that's what's driving regionality. In states that have been open more, we're seeing much better performance. We anticipate as those states see better COVID results and capacity constraints are lifted we'll see similar performance. Regarding It's Just Wings, it's almost market-by-market and sometimes restaurant-by-restaurant. Depending on who the consumer is for a virtual brand really drives performance. There are some regional moves nationally, but the real interesting learnings are often at the restaurant or market level. Delivery and takeout trends have been broadly similar nationally.

Great. And maybe one more: given your perspective on industry supply, how do you think this plays out going forward and how do the brands benefit from that? Have you seen any discernible benefit yet from supply coming in? Overall, how do you think this benefits you from a market share gain perspective going forward, recognizing it might be early to make that call?

I think you're asking about closures. We're not out there tracking the exact number of restaurants open now versus prior year. Estimates have been in a range, but in most of our trade areas it's probably on the lower end. I think there will be significant restructuring in major metropolitan areas; how quickly they come back will be interesting, but that doesn't really impact our business as much. We're not counting on a great tailwind. We see what we see today and think it's projectable into the near future. We'll see what happens with competition as we get past COVID.

One thing anecdotally we're seeing on the development side is more opportunities to look at sites that are closed restaurants from other brands. We're seeing that at a higher rate than in the past—another data point to consider.

And the next question is coming from Jared Garber. Jared, your line is live. Please announce your affiliation and pose your question.

Thanks. Goldman Sachs. Can you give a little bit more color on the $20 million tech investments you mentioned earlier and how you see that flowing through, whether that's in-store technology or more sort of mobile or website technology? And then also on the new unit opens that you talked about, any color on maybe shifting in asset design, especially as it relates to potentially supporting these digital brands through the Chili's kitchens? Thanks.

I'm not going to walk through a detailed breakdown, but one example is the rollout of our handheld devices across the country. We've been working on a handheld solution for multiple years. It's been employed in over 100 restaurants but wasn't quite ready. We've invested significant time, energy and capital into getting it right. We now feel like we have it solved and will roll that technology out across the system. It will provide a better guest experience and allow us to run more efficient restaurants in the front of the house. That's one example of what goes into that $20 million bucket. One thing to add is that this is not a one-time unique investment—think of it as a run rate from a capital investment standpoint. We've been consistent on this level of investment into technology for a number of years. It's building on a base that I think outpaces many in the industry and gives us a competitive advantage. Supporting that capital spend is an infrastructure spend at an even higher level that ensures we have the development capabilities and innovation to support things like our apps, websites and connectivity. Technology is a key component of how we approach the business and those spends are embedded in our base thinking going forward.

And the next question is coming from Sara Senatore. Sara, your line is live. Please announce your affiliation and pose your question.

It's Bernstein. I wanted to ask about virtual brands and the competitive set. A lot of restaurants have followed you into the virtual market and many offer fairly similar menu items. Could you talk about the competitive environment there and how it informs how you're thinking about growth? Also, do you think those menu items benefited from pandemic-related at-home dining similar to what we've seen in pizza? Wings in particular seems to have benefited.

Great question. There's two important aspects to a virtual brand strategy. One is scale—how many locations can you put out there. With 1,200 restaurants in the U.S., we meet that criteria. Yes, many people are doing it, but not many with scale, and scale matters. Operationally, getting it right and positioning a brand is not easy. Many can throw something on a delivery platform, but to execute, price it and provide a compelling value proposition is difficult. We believe our positioning in the wings business is strong. Our scale to buy and source product and all the things we bring to the table give us a competitive advantage. Another often overlooked, but very important question is what it does to your base business—are you able to pull this off operationally? I've seen examples of people launching many virtual brands, and it's hard to imagine how that executes operationally. So you must be diligent from both a brand and consumer perspective. There will be winners and losers. Regarding whether these businesses are artificially pumped because of the pandemic, we don't think so. The wings business is a strong baseline business and we don't expect significant deterioration as operations normalize. Some concepts may see more support as we go back to historic levels.

And the next question is coming from Greg Badishkanian. Greg, your line is live. Please announce your affiliation and pose your question.

Sure thing. From Wolfe Research, this is Fred Wightman on for Greg. In the release you mentioned you're meaningfully above 2019 levels for sales and traffic. I'm wondering if you could give some context for that 10% quarter-to-date Chili's comp that you highlighted, and maybe touch on how you think traffic and check are going to progress over the next few quarters?

Currently it's traffic-driven, and that's by design. We're leaning into making this a traffic story and have been for over the last year and going back two years. That's why we're disciplined around pricing. Over the course of last year, certain mix components like alcohol and appetizers were limited due to capacity restrictions. As you start to reopen restaurants we think there's a nice opportunity year-over-year on the mix side. We're gratified that traffic numbers align tightly with the comp numbers we provided. So it's a traffic-driven story and we think that will continue as we move forward.

Perfect. You alluded to uncertainty on the event side at Maggiano's, which makes sense. Is the holiday season the line in the sand or your best guess for when that could normalize? Are there market-level indicators that suggest it could come back sooner than the holiday season?

The CDC came out with new guidelines around vaccinations and people that have been vaccinated congregating in larger numbers without masks. We're very encouraged by the overall impact vaccinations are having on allowing people to move more freely. As more people get vaccinated, we anticipate people will feel more comfortable gathering. You're already seeing this in travel and other industries. Sporting events and social gatherings are likely to come back high on the list. If the positive trend with vaccinations continues, by the end of the year and the holiday season we could be in a very nice place where people feel comfortable gathering again.

And the next question is coming from Chris O'Cull. Chris, your line is live. Please announce your affiliation and pose your question.

Stifel. Good morning. Wyman, are you seeing It's Just Wings growth rate level off period-to-period or are there indications you could see significant growth over the $150 million into next year?

We've talked about measuring the takeout potential of the brand. Consumers tend to take out more than they deliver, so we need to build brand awareness outside of delivery. We don't yet know the full potential, but early indicators are encouraging. We're learning how to market against seasons—this was our first season of sports—and it's a very sports-oriented product. We'll get smarter about how we market against different seasons and we are aware of market-by-market performance. We already have people in restaurants picking up orders; numbers are small because we haven't pushed our proprietary website with an aggressive marketing plan yet. The biggest opportunity is pickup/takeout, and the lessons we'll learn in the next couple of months will tell us how heavy a lift that is and what the response will be.

Do you anticipate being aggressive with marketing efforts to build awareness or will you build gradually given operational complexities?

We feel comfortable in our ability to execute Wings at high volumes. We're going to be targeted and deliberate in our approach. We'll be aggressive in targeting but not through a national TV campaign. We'll be focused on targeted ways to connect with the right consumers.

And the next question is coming from Brian Vaccaro. Brian, your line is live. Please announce your affiliation and pose your question.

Thanks. Raymond James. Wanted to circle back on recent sales trends. Joe, could you help translate that into average weekly sales? We don't have monthly AWS back in 2019, so can you level set quarter-to-date average weekly sales dollars for each brand?

When you look at average weekly sales compared to 2019, there are differences—Midwest wasn't in our system then and wings didn't exist. We've been running consistently up in the mid- to upper-60s for the Chili's brand. For Maggiano's, you're running in the $5 million to $6 million level on a weekly basis. Coming out of Uri and building into March, weekly average sales moved north and we hit record levels in March. We've seen consistent maintenance of those levels in April.

Seasonally, these are our biggest months—spring is when Chili's typically sees its highest volumes. We're seeing absolute high volumes and not grappling on those.

Parlaying that into your fiscal 4Q guide, it would seem to embed perhaps a little lower AWS volume than that at Chili's. Is there a degree of seasonality we should be mindful of as we think about May and June, or is it broader conservatism as you set the 4Q guide?

I don't think there's significant seasonality beyond what we've discussed. We're projecting similar trends as April through the rest of the quarter and the absolute levels are in the ballpark of what we've been talking about.

On effective capacity, you said Chili's is in the upper 70s on average. What does that look like in markets like Florida and Texas? Are you able to get back closer to 100% or is there a natural ceiling with social distancing and other considerations in place?

You see differences across markets. Some markets are back above 100%, others are in the 90s. As you get reopened, the progression tends to move from the 70s into the 90s as people get more comfortable. Vaccinations are driving a lot of that progression.

It's hard to get to 100% without being fully open. Even if states say they're fully open, we're still doing some social distancing and wearing masks. Until it's fully open and people are comfortable, there will be some constraints. The takeout business covers some of the gap, but to get all the way to 100%—especially on weekends—will be a bigger challenge. We're optimistic that will happen fairly soon.

Last one: on the tightness in the labor market, where does your employee count stand at the end of the fiscal third quarter? How many employees do you think you need to hire to catch up to sales? And could you ballpark one-time hiring and training costs embedded in your 4Q guide?

We can follow up with some of those specific numbers. I don't have the team count on this call. We've maintained a level of staffing throughout this. We're hiring consistently—around 5,000 team members per month—which is a bit higher than typical and driven by reopening. Regarding specific cost numbers, that's a bit into the weeds and we'd follow up with more detail.

And the next question is coming from John Ivankoe. John, your line is live. Please announce your affiliation and pose your question.

Thank you. JPMorgan. With labor costs running at the higher end of 3% to 5% and stimulus in the economy, what is your thought on menu pricing? Might we expect a significantly above-average menu pricing year over the next 12 months? And then I have a follow-up as well.

Good to hear you, John. With regard to pressures we're anticipating, the good news is for a lot of our cost structure it's locked down—particularly on the cost-of-sales side and commodities. We're feeling pretty good and have a good line of sight with some costs locked down. The labor issue could put pressure, but we're talking maybe 3% to 5%. We like to keep pricing discipline; historically we've liked to price 1% to 1.5%. We haven't priced much at all during the pandemic. If we need to be more aggressive on pricing, we have the flexibility to do so. It's our last option—we prefer to keep restaurants busy and give guests great value propositions. We feel comfortable that if this thing plays out longer than expected, we have more pricing flexibility than many others.

Makes sense. There might be an expectation for higher prices from the consumer, so it will be interesting to see how that plays out. Second, regarding cost of sales—including base commodities, shipping costs and distribution—there seems to be underlying COGS pressure that may not impact you immediately due to contracts but could in six to 18 months. Could you talk beyond 4Q about the COGS environment and your fiscal 2022 exposure?

There are some pressures out there, but the spot pressures typically don't come into play in the next couple of quarters because of the contracting positions we've built. We are protected across all major commodity components for the rest of this fiscal year and have protections in place into calendar 2022 for proteins and similar items. Distribution channels are unwinding and those do have impacts from time to time. Our nationwide distribution relationships are solid and delivering for the restaurants. Scale and support systems matter and we have an excellent supply chain group. We're not seeing the broad-based disruptions you hear about from some folks. The disruptions are more sporadic than systemic and will correct themselves.

Two additional points: distribution issues are more market-based than national, and our team is doing a good job dealing with those. Also, the Chili's menu uses proteins broadly and is flexible, with a lot of chicken breast. The commodity market looks fairly good; it seems to be another solid year. Things that typically drive commodity costs, like droughts, don't appear to be a major risk right now as the grain harvest looks solid. Those factors bode well and we'll get through labor issues better than most.

And the next question is coming from Jeffrey Bernstein. Jeffrey, your line is live. Please announce your affiliation and pose your question.

Thank you. Barclays. Following up on earlier comments, Wyman, you mentioned a goal for off-premise to hold in the low-30% range versus pre-pandemic 20%. That's about a 10% incrementality. How do you think about that incremental sales from a margin perspective? Getting 10% more sales should help leverage fixed costs and improve margins. Where do you see that incremental sales flowing through from a margin upside perspective relative to historical highs? And I have one follow-up.

I do think that's central to our organic growth story. The leverage we get through higher sales, much of which will come through off-premise, delivers good margins in itself and allows us to leverage fixed costs and grow the margins further. Without getting specific on exact numbers, that's the strategy and we're excited about it—it's playing out as we'd expect. We're also rethinking things to be as efficient as possible while supporting operators and delivering great guest experiences. Some efficiencies are proving to be sustainable as we return to historic levels of dining and traffic.

Then on cost perspective, could you address marketing and G&A? Marketing seems down year-over-year with less national television. What's your outlook on continued favorability and what do you think of normalized core G&A spend as we wrap 2021 and look into fiscal 2022—relative to revenue or opportunities from G&A?

We didn't just cut marketing; we rethought our marketing approach. While national network TV is down, we've reinvested in different places in our P&L that are more effective and measurable—digital and loyalty-driven channels. We like the model we've been running and don't anticipate returning to a very aggressive national TV campaign. We prefer more targeted and measurable channels.

On G&A, think of 4% as a rule of thumb to model. G&A is highly leverageable, and there is opportunity to improve that as we move forward. Embedded in that G&A number is significant technology spend that's important to drive the business. We have flexibility to invest in development, technology and growth initiatives without fundamentally altering the structure going forward.

Another point: manager bonus doesn't show up in G&A but in the labor line. We paid manager bonuses at a higher level this year to keep them whole through the pandemic. Next year, we don't have a big hole to fill in bonuses—so as sales and traffic come back we're not trying to close a significant bonus gap. We feel good about how we've maintained our cost structure and supported our people through the pandemic.

And the next question is coming from David Palmer. David, your line is live. Please announce your affiliation and pose your question.

Evercore ISI. A question on restaurant margins: the margin implied by your guidance for 4Q seems to imply new peak levels already—near 17% for the quarter, better than past fourth-quarter peaks. Obviously staffing levels and partially reopened restaurants make this a weird time, but how are you thinking about where margins can go versus past peaks around 15%? What are some gives and takes as you're thinking about margins?

David, I won't argue with your math on the guidance and perceived margin. I'm optimistic—more so today than a year ago. The strategy does drive incrementality from a margin standpoint and I'm comfortable with the trajectory getting back into those ranges over time. Note that the fourth quarter includes a 53rd week, which creates a leverageable event in that last week. Even taking that into account, it wouldn't surprise me to see fourth-quarter margins demonstrate the ability to leverage and move above where we were pre-COVID.

And on complexity: some worry that pursuing virtual brands might jeopardize the on-premise experience—e.g., on a busy Saturday night, kitchen stress could impact guests. How are you feeling about that today? Are you confident you can deliver on busy nights?

We do have busy Saturday nights now and we're setting records. We have two virtual brands in a number of restaurants and are learning the lessons you're asking about. It's a critical issue and we're focused on ensuring operators have the tools and systems to execute—especially on busy nights like Mother's Day. With higher volumes you get additional labor in the kitchen and sometimes a dedicated person for the virtual brand. If you set the system up correctly, other operations continue without being impacted. We take this very seriously and won't roll out another virtual brand until we're confident we can fully support operators on busy nights.

And the next question is coming from Andrew Strelzik. Andrew, your line is live. Please announce your affiliation and pose your question.

BMO. Two quick ones. On unit growth, how long will it take to build the development pipeline to get to about 20 openings? And for virtual brands, is there a sales threshold you think about that warrants a national rollout?

On the development side, I expect it to be a stair-step over the next couple of fiscal years. We'll build the pipeline further over fiscal 2022 and 2023, and there's work underway to bring those opportunities in line.

For a national rollout of a virtual brand you want it to be significant. You don't want to add complexity for something that doesn't sell. We have targets for those thresholds—we want it to be significant. I won't put a precise number today, but $150 million is significant and we'd likely look for something meaningful, certainly not a small-scale experiment. Also, some restaurants or markets may not perform as well with a particular virtual brand, so you can choose not to burden those restaurants or find a better-fit virtual brand. It's an iterative learning process.

All right. That was our last question. So thank you everybody. We appreciate you joining us on the call today and look forward to updating you on our fourth quarter results in August.

Thank you everybody.

Thanks.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.