Darden Restaurants, Inc.

Hello and welcome to Darden's fiscal year 2021 first quarter earnings call. All lines have been placed on listen only until the question and answer session. To ask a question, you may press star one on your touchtone phone. The conference is being recorded. If you have any objections, please disconnect at this time. I will now turn the call over to Mr. Kevin Kalachak. Thank you. You may begin. Thank you so much.

Thank you, Marcella. Good morning, everyone, and thank you for participating on today's call. Joining me on the call today are Gene Lee, Darden's CEO, and Rick Cardenas, CFO. As a reminder, comments made during this 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 include certain non-GAAP measurements, and reconciliations of these measurements are included in the presentation. We plan to release fiscal, 2021 second quarter earnings on December 18th before the market opens, followed by a conference call. This morning, Jean will share some brief remarks about our quarterly performance and business highlights, and then Rick will provide more detail on our financial results and share our outlook for the second quarter. As a reminder, all references to the industry benchmark during today's call refer to Estimate and Aptract, excluding Darden, specifically Olive Garden and Longhorn Steakhouse. During our first fiscal quarter, industry same-restaurant sales decreased 26%. Now I'll turn the call over to Gene.

Thank you, Kevin, and good morning, everyone. Given the ever-changing environment we continue to operate in, I am very pleased with what we accomplished during the quarter. We are focused on four key priorities, the health and safety of our team members and guests, in restaurant execution in a complex operating environment, investing in and deploying technology to improve the guest experience, and transforming our business model. The progress we made in these areas, combined with our operating results, gave us the confidence to repay the $270 million term loan and reinstate a quarterly dividend. Let me provide more detail on the four priorities. First, the health and safety of our team members and guests remains our top priority. Following CDC guidelines and local requirements, our teams continue to practice our enhanced safety protocols, including daily team member health monitoring. We also continue to configure our diagrams for social distancing to create a safe, welcoming environment while maximizing allowable capacity. A key part of this work is installing booth partitions to enable us to safely increase capacity where permissible. At the end of August, we had completed installation in just over 500 restaurants in our total portfolio. Operating in this environment adds another layer of complexity to an already complex operation, and I'm proud of the commitment our teams make every day to keep our guests and each other safe. Second, we are laser-focused on our back-to-basics operating philosophy to drive restaurant-level execution that creates great guest experience, whether that's in our dye rooms, outdoors on our patios or in their homes. But it's not easy. Executing at a high level is more complex today due to COVID-19 restrictions that vary by market. Additionally, the constantly changing mix between on-premise and off-premise, plus expanded outdoor dining that is weather dependent, leads to unpredictability in sales. This is why the work we continue to do to streamline our menus and improve our processes and procedures is so important. Removing complexity from our operations has allowed our restaurant teams to execute more consistently in this unique environment. Our operators continue to deliver great guest experiences by displaying a high level of flexibility, creativity, and passion every day, and I'm thrilled to see that reflected in our guest satisfaction metrics. Third, we are continuing to invest in and implement technology to remove friction from the guest experience. This includes providing multiple ways for our guests to order inside and outside the restaurant across our digital storefronts. Additionally, we are deploying mobile solutions to make it easier for our guests to let us know when they have arrived to dine or pick up curbside order to go. We are also expanding mobile payment options, providing additional convenience for our guests. For our three largest brands combined, more than 50% of our off-premise sales during the quarter were fully digital transactions where guests ordered and paid online. Finally, and most importantly, we transformed our business model. Even with the sales declines we are experiencing, our restaurants continue to produce high absolute sales volumes. Therefore, we made the strategic decision to focus on adjusting our cost structure in order to generate strong cash flows while making the appropriate investments in our businesses. This provides a stronger foundation for us to build on as sales trends improve. The first step in this process was to reimagine our offerings. This resulted in simplified menus across the platform, driving significant efficiencies in food waste and direct labor productivity. Additionally, due to capacity restrictions, we significantly reduced marketing promotional spending, along with other incentives we have historically used to drive sales. We will continue to evaluate our marketing promotional activities the operating environment involves. Finally, we have further optimized our support structure, which is driving G&A efficiencies. The results of all these efforts to transform our business model can be seen in the fact that we generated adjusted EBITDA of $185 million for the quarter. Turning to our business segments, Olive Garden delivered strong average weekly sales per restaurant of $70,000 while significantly strengthening their business model. resulting in higher segment profit margin than last year. They were able to capitalize on simplification initiatives that strengthened the business model while making additional investments in abundance and value. This work was critical to position Olive Garden to drive future profitable top-line sales as capacity restrictions ease. Olive Garden's same-restaurant sales for the quarter declined 28.2%, 220 basis points below the industry benchmark. Overall, capacity restrictions continue to limit their top-line sales, particularly in key high-volume markets like California and New Jersey where dining rooms were closed for the majority of the quarter. In fact, restaurants that had some level of dining room capacity for the entire quarter averaged more than $75,000 in weekly sales, retaining nearly 80% of their last year's sales. Given the limited capacity environment during the quarter, Olive Garden made the strategic decision to reduce their marketing spend as well as incentives and eliminate their promotional activity. They will continue to evaluate their level of marketing activity as capacity restrictions ease. Additionally, off-premise continued to see strong growth, with off-premise sales increasing 123% in the quarter, representing 45% of total sales. Thanks to technology investments we continue to make, online sales made up almost 60% of total off-premise sales, more than tripling last year's online sales. Finally, Olive Garden successfully opened three new restaurants in the quarter, which are exceeding expectations. Longhorn had a very strong quarter. Same restaurants, the sales declined 18.1%, outperforming the industry benchmark by 790 basis points. Their strong guest loyalty and operational execution helped drive their outperformance, while they also benefited from their geographic footprint. In fact, same restaurant sales were positive for the quarter in Georgia and Mississippi. Additionally, the Longhorn team made significant investments in food quality and operational simplicity, which led to improved productivity and better execution. They also took a number of steps to improve the overall digital guest experience, Off-premise sales grew by more than 240%, representing 28% of total sales. Finally, Longhorn successfully opened two restaurants during the quarter. The brands in our fine dining segment are performing better than anticipated. While weekday sales continue to be impacted by reduction in business travel, conventions, and sporting events, we saw strong guest traffic on the weekends, and believe there will be additional demand as capacity restrictions begin to ease. And lastly, our other business segment also delivered strong operational improvement with segment profit margin of 12.8%. This was only 130 basis points below last year, despite a 39% decline in same restaurant sales. Yardhouse's footprint in California is impacting same restaurant sales in this segment. Pauline, I continue to be impressed by how our team members are responding to take care of our guests and each other. We know our people are our greatest competitive advantage, and I want to thank every one of our team members. We are succeeding thanks to your hard work and resilience. Now I'll turn it over to Rick.