Brinker International, Inc.

Good morning, ladies and gentlemen, and welcome to the third quarter fiscal year 2020 conference call. At this time, all participants have been placed on listen-only mode, and the floor will open for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Joe Taylor, CFO. Sir, the floor is yours.

Well, thank you, and good morning, everyone, and thank you for joining us. With me on today's call is our CEO, Wyman Roberts, and Micah Ware, VP, Finance and Investor Relations. Now my first comment this morning is we hope everyone participating on today's call is in good health and doing well during this unique time. This morning we released a business update related to the last several weeks of our operations, as well as our results for the recently completed third quarter of fiscal year 20. While once we anticipated this call would detail another strong quarterly operating performance for Brinker, we are for a period of time living in a different environment. As a result, our prepared comments from Wyman will focus primarily on recent business performance and trends, with less commentary devoted to our third quarter results. We will also provide some insight as to the dining room reopening process now beginning in some regions of the country. Following the comments, we'll spend most of our time answering your questions about the business. But before beginning our comments, I would remind everyone of our safe harbor regarding 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 more completely described in this morning's 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'll turn the call over to Wyman.

All right, thanks, Joe. These are indeed challenging times for the world, our country, our industry, and Brinker. We're focused on moving forward and how to effectively deal with this pandemic But let me first review how we ended third quarter. Third quarter started out strong and was shaping up to be another great quarter for Brinker. If circumstances had remained normal, we'd be marking our eighth consecutive quarter of comp sales growth and a NAP track category beat of 2% to 3%, driven largely by our focus on growing our off-premise business and our commitment to driving traffic. We've been executing that strategy for two years before the pandemic hit. It provided a strong foundation when the world changed. For us, that was March 8, our last day of positive comp sales. But that strategy sets us up as we plan our recovery. Since that day, as we narrowed our focus to effectively deal with the crisis at hand, we strengthened our resolve to remain a strong, viable company through this crisis. To us, that means three things. First, keeping our team members and guests safe. Second, getting the most out of the business we can in this environment, and third, remaining nimble and building on our strengths as we develop our strategy to emerge from this crisis. Our team reacted quickly to protect our business during the first few critical weeks of the crisis. We took significant cost-cutting measures by eliminating nonessential spend and delaying our capital projects. We worked with our vendor partners and our landlords to reduce our near-term spend, and we reduced payroll across our salary team, with the exception of our restaurant managers. With the reduction in sales, we set up a relief fund and spent more than $15 million to support hourly team members we couldn't schedule. We provided them a bridge to government assistance programs. Unfortunately, we had to furlough many of our hourly team members, but we have kept half of the team actively working to support our off-premise business. And with the continued acceleration in sales, we're busy enough that we've already brought back more than 10% of those furloughed team members. As we start to bring our dining rooms back online, we look forward to welcoming even more of our team back. We've navigated through the initial negative working capital environment and we estimate our average weekly burn rate now to be approximately $5 million, while our business is primarily operating as off-premise. We continue to work to ensure we have necessary liquidity to manage our business in this environment. As of the end of last week, our liquidity was approximately $175 million, comprised of cash on hand and revolver availability. We continue to evaluate opportunities to raise incremental capital, including increasing our revolver. And while we're taking advantage of the tax savings and deferrals that are available through the CARES Act, we are not participating in the PPP program. These actions, paired with meaningful, improved operating performance over the past several weeks, give us confidence in our liquidity position as we begin to reopen our dining rooms. For the past two years, we focused on operational execution both on and off premise, which enabled us to pivot quickly in response to the sweeping changes across the US. We became really good, really fast at running a takeout and delivery business. Our managers are on the front lines, engaging our team members and guests during every shift. They are optimizing labor, maximizing flow through, and most importantly, delivering a safe experience our guests can trust. I couldn't be more proud of the work they've been doing. While this is far from an ideal situation or a long-term business model, our team has certainly made the best of it. We're one of the few casual diners that's been able to keep nearly all of our restaurants open, and we've grown our absolute sales every week. Over the past four weeks, Chili's has gone from running close to 35% of our prior year's total sales to more than 50% of our total sales with just takeout and deliveries. This is a testament to the quality of our operators and support teams, our ability to use direct marketing effectively, our strong value propositions, and our reliable and consumer-friendly technology solutions. Our brands are resonating with consumers during this crisis. And as we compare ourselves to the category, we continue to significantly outperform. Black box data shows Chili's gap to casual dining last week at 14%, a gap that widened every week since the crisis started. Part of the reason for that performance is our unwavering commitment to keep our guests and our team members safe during these uncertain times. We've instituted enhanced safety standards to protect our guests and team members and made those efforts visible to the guests to increase their comfort and confidence in us. Our guests received touchless curbside takeout, and we're providing masks and gloves to all our team members. Additionally, our investments in technology offered a competitive advantage for us in this environment. because guests can access us in ways that are quicker and safer for both them and our team members. More than 70% of our restaurant transactions are coming through OLO, which means the majority of our guests are ordering and paying from their own devices. For the remaining few who pay at the restaurant, we're implementing touchless portal payment in the parking lot. As we are beginning to reopen our dining rooms, In parts of the country, we are prepared for an extended recovery. We're working through operational plans to adhere to CDC state and city guidelines. We're setting up our dining rooms and bars for social distancing. We're configuring takeout areas to accommodate both increased volume and safe practices. We're getting our team ready and training them to protect themselves as well as our guests. We have plenty of masks, gloves, and sanitizer, and we're putting our in-restaurant touchless order and payment systems in place. And we're putting systems in place to make sure our team members are healthy so guests can be confident when they dine with us. No one asks for this situation, and no one welcomes the upheaval it's caused in our world, but it's times like these that prove who's strong enough to weather a storm of this magnitude. We are established brands in our communities. Chili's been around for 45 years, and Maggiano's for 25 years. Guests know they can trust us to provide great food at a great value in a safe environment. and our team has demonstrated their strength, resilience, and commitment during this crisis. So I'm confident that whatever environment comes, we will overperform, just like we have over the past few years, and especially during the past couple of months. No one knows for sure what lies ahead, but I know this. If it's a half a dining room scenario, no one will get more out of a half a dining room than we will. When we return to full dining rooms, no one will outperform us. We have the best operators in this business, we've invested in the right model, and we have the technology to respond to ever-changing environments. We walked into this thing strong. We remain strong, and we will emerge strong. And with that, I'll turn it over for your questions.

Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone now. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold a moment while we poll for questions. Your first question is coming from Jeff Farmer.

Great.

Thanks, Gordon.

Great. Thanks, Gordon. Ask it. For your restaurants that are seeing off-premise sales volumes approach what looks to be almost 60% of off-premise or pre-COVID sales volumes, what are the pros and cons of reopening those restaurants to in-restaurant dining at a limited capacity? It seems like you could be giving up some some off-premise sales when you actually turn on in-restaurant dining?

Hey, Jeff. Well, I mean, first let me just talk about what it takes to do that kind of volume in a system that wasn't set up for takeout and delivery of this kind of magnitude. So it really was a testament to the investment we've been making, primarily in technology. When you are used to getting a handful of cars to pull up for takeout and delivery on a Friday night, and now it turns into 20 or 30 cars in a parking lot. And you have to figure that out. Our operators and our IT teams did an amazing job reconfiguring our table management system for the dining room to work in the parking lot. And so those cars became tables. We took our tabletop payment system, Presto, and converted the technology to be a pay-at-the-car touchless system for those guests that don't pay online, which we still have quite a few guests that call in and place their orders online. And so we were very adept at taking our technology and reconfiguring it to work in the parking lot. And so that system is well established. With regard to what we think will happen as we open the dining rooms in terms of the trade-off and the incrementality that that will bring, we're confident that it's going to be fairly incremental. And so we don't think that the cannibalization will be large up front because, again, every restaurant is open. under, as you mentioned, some restricted capacity guidelines. And so we don't see that being a huge issue for us. We think it will be incremental. It will drive the total sales number. We need to get our restaurants to some higher volumes to get to this next level in terms of growing the business back. And consumers want to get out to eat, and they want to do it in a safe place, and these restaurants are set up to do that for them.

Thank you.

Thanks, John.

Your next question is coming from Brett Levy. Your line is live.

Great. Thank you. Thanks for sharing all the information. And again, I'll echo what you said. I hope everyone over there is doing all right. Thanks for taking my call. I guess if we could just go a little bit further into just how you're planning on reopening the units, whether it's just are you going to go with a capacity above, below what you think the local jurisdictions are saying? Are you going to have a national approach? How are you thinking about it regionally? And then just when you think about the, you said you've brought back 10% of the furloughed as you're building up sales, how are you thinking about layering on costs given that we just don't know what the demand is going to look like? And you'd obviously like to Aaron, the side of caution, both for your people, but also from a financial standpoint. And what do you think you need to see to get that cash burn? What's a fair number once you start reopening the stores to get that cash burn rate to a break even? And I'll turn it to the Q from there. Thank you.

Okay, thanks, Brett. I'll cover the first part of that question, which is, you know, what's our system for reopening our dining rooms? Like I said, all of these states and counties are are appropriately limiting the capacities. So what we've got is a floor plan that is laid out for every one of our restaurants according to their configuration that's probably around 50% capacity. That's where most of the restaurants are starting. But then you have states like Texas, who then are taking it a little bit even more conservative with 25% limits in most cases. for the next couple of weeks. So we then just X out a couple more tables. So this isn't a random process. We have a system. We have a team intact that's working with every operator in every state as they become able to open their dining room to put in the system that puts in the safety, the sanitation, and the systems in place for safety, as well as the restaurant layout necessary to provide that distancing that's so important in these environments and that will work. But it's absolutely a systemized approach that then gets modified for the specific restaurant in the specific market. And Joe can talk about the costs and how we make sure we're doing this in a cost-efficient way.

Yeah, Brett, and good morning. We will take an extremely disciplined approach to any incremental spend as you kind of go through this process. And it's going to be very much guided by those traffic increases that we see. Again, it's looking at how we balance to go off-premise side of the equation and bringing dining back in. The incremental spend will lag as we kind of move through those upticks in traffic. We'll be very judicious in turning on some of those non-essential spends as we go. There's some that does come back in, We want to make sure the restaurants, you know, are obviously erring significantly on the side of being clean and sanitized and cost associated with that. But I think, you know, in short, we can manage that process. Scale and systems matter in this, again, as Wyman had indicated. The ability to give our team members very detailed labor models as they kind of move back into these systems is an important piece of the equation. Lots of guidance coming from the RSC, giving people the tools and disciplines to be able to manage those as they come back in. When I think through, I think the base of the question is to where do you see kind of cash flow neutrality from a performance standpoint? I kind of look into the down 30 range, a down 35%, something in that range. It will depend. There's a lot of inputs, and it depends to go into those numbers. But I think... That's kind of the range we would have expectations around starting to move back onto the good side of the cash flow situation.

Thank you very much.

Your next question is coming from John Ivanko. Your line is live.

Hi, thank you. I think there are two related questions. First, obviously, you guys most didn't have the financial ability to hold on to all of your workers, but putting some workers on furlough would actually allow them to make more compensation for a four-month period than they would perhaps working in certain jobs within the restaurant. Can you talk about that? you know, dynamic and, you know, your ability or, you know, what you think, you know, you know, if you wanted to turn the switch back on and reattracting some of those workers, if that's something that you think, you know, that you can do fairly easily, like as if it was a normal environment, you know, today's the first kind of point to talk about that. And then secondly, you know, obviously looking at your financials, and I'm sorry it happened, it does look like there is you know, fairly big reversal in IC, uh, in the GNA side this quarter. Um, you know, can we talk about, um, you know, as, as, as I think every company is reevaluated to fix versus, you know, variable, you know, cost within their business and what you think the underlying, you know, kind of run rate back to normal, uh, you know, GNA level is, uh, you know, for your business, if you guys have been able to sit down and go through that.

Hey, John, uh, Good to hear your voice. Good to talk to you. From a compensation perspective and the unemployment benefits, you know, we have mixed feelings about it. On the one hand, obviously, you know, nobody asked for this pandemic. Nobody asked to have their businesses shuttered, and there was nothing we really could do, especially given that we weren't being supported with any other government programs to help keep our team members on the payroll. So, you know, we spent $15 million today. to bridge them to unemployment and to the relief funds checks. And then we were grateful, frankly, that they had some government support with these improved and increased unemployment checks. That said, you know, it's not a sustainable model, obviously, for the country, and we need to get back to work. The good news is what we're seeing, and we brought 10% of those furloughed team members back already, is that we're seeing them wanting to come back to work for a lot of reasons. Financially, it's probably a push, as you mentioned, for a lot of our team members. These benefits are fairly good. But they also know that they need a long-term job, and they have a commitment to this company, and they've been, in some cases, part of this company for many, many years, and they're looking to get back to work. And they're not so short-sighted to say, hey, I'm just going to take these benefits, and when the job comes, I'll take a chance that I'll get it later, especially when you look at the potential unemployment situation, you know, down the road. So I think we're going to get past that. I think the other challenge is just how strong COVID is in the market. So those two factors, you know, are kind of dictating how many people are wanting to come back to work. But right now we're bringing them back. We're not having a problem staffing our restaurants as we start to reopen. And Joe, you want to talk about the GNA?

Yeah, John, I think as you pointed out, the delta in year-over-year GNA of almost 17 is all driven by incentive comp. Some of that was a little bit of timing. A small portion of it is timing related to the previous conversations we've had about retirement-eligible comp being in the first quarter. But 15 to 16 of that number is driven by reversals of our existing annual performance comp plans, you know, we obviously are near the end of our fiscal year, so those reversals, you know, are more acute in this kind of timeframe as you're reversing what you have been accruing throughout the fiscal year. But it does show the variability in that number. I mean, again, from a go-forward basis, I think we'll have opportunities to talk about what that looks like as we get farther down this path. You know, we will be reestablishing programs of that nature as we look to the next fiscal year, and we'll talk about that as we go through that process. But that is the biggest delta you're seeing in these numbers right now. And I think it'll be a couple quarters before you would get back to probably a more traditional G&A spend that you've seen if you look at the first and second quarters. Thank you.

Your next question is coming from David Palmer. Your line is live.

Thanks. Good morning and congrats on that takeout business looking very strong there. The first question I wanted to ask you was about the timing of these stimulus checks and did that coincide with a step change in your business? I think it really started on April 15. I'm wondering how you're thinking about that as Is that a sugar rush that might burn off, or are you concerned about that? And then I guess on the other side, you're going to start to open up a lot of the restaurants, I would imagine, starting next week. Do you envision that being a vast majority of your restaurants by June being open, and what is that capacity versus previous for those dining rooms? Thanks.

Hey, David. Again, really good to hear your voice. Stimulus checks were absolutely a little bit of a boost to the category, right? I mean, you can look at everybody's – there are a lot of folks that have put out weekly results now through April, and you can see that pop, especially on that midweek direct deposit day where they just hit the direct deposits in kind of one push of a button. So you've got that. It seems to be maintaining. Again, every week we've seen sales grow. So it wasn't like it was a sugar rush that only lasted for a few days or a week. It's now moving through. I think, again, there's a lot of stimulus checks that are still going through the less efficient channels, whether it's the direct deposit they didn't have as much information on or whether it's paper checks. So there's still a lot of money that the government's going to be putting out there. Again, I think it helps to sustain an economy that's in a very unique situation, but it's not the model that we're going to obviously live under. So we see it having a nice little pop, but it's not the foundational thing that we're counting on, and I don't think it's the driver of the overall results we're seeing. And so I think as we think about opening restaurants, by this weekend, we'll have over 300 restaurants open. So Texas, Oklahoma, Utah... and parts of Tennessee open Friday. We already have Georgia open for two days, so we have two days' worth of experience with what this looks like. We will continue to open with the guidance from the states and the governors of the states that set really the precedent for us to be able to open. We are confident in how we are opening. We're being very safe, very systematic about how we do this. Our restaurants are now planning to open. Obviously, this came a little faster than we had anticipated, so we were scrambling a little bit this week to get 300 restaurants open in, in some cases, days notice. But for the rest of them, they're now prepping and getting themselves set up for for restaurant openings. And we anticipate, what do you think, Joe, by June, the majority of the system probably will be open?

I would anticipate that being the case. I think you'll probably see a steady flow of incremental opening plans. It appears that a number of other states have already made indication that those plans are forthcoming. So I'd expect to see that as we kind of move forward. But it'll still be, I mean, there'll be some levels that probably delay after the other ones.

And it'll be very interesting. Obviously, we, along with everyone in the country, will be watching the spread and the cases. And if these openings are, we don't know if they're premature. Those are big questions, right? Those are questions above our pay grade. We are relying on the guidance from the people that are running the government, frankly. And we'll monitor that with everybody else in the country to see If we're too fast, then we'll probably end up dialing it back, but we're optimistic that these levels... And when I walk into our restaurants and see the spacing and the... I feel pretty good that the distancing... I feel really good that the distancing in our restaurants is safe and that you could feel comfortable in these restaurants. There's nobody within six to eight feet of you. You're almost private dining, so... that gives us a lot of confidence that we're doing the right thing.

I think the other thing, too, David, from an opening standpoint, is that even within a state, you're going to see, I think, some different approaches based on urban versus suburban versus rural, particularly in your bigger states. And when you think about, again, the footprint we have, which tends to err on the suburban and ex-urban side of the equation, and in some states, great, like Texas, great rural penetrations, I think... you'll probably see some expediency in some of those openings around the country. So I think that plays well in that regard.

And Georgia's been a good example, you know, of where our size helps. You know, our dining rooms are fairly large, and they give us a lot of room. And so when you end up with the Georgia, major Georgia constraint was 10 guests per 500 square feet. You know, a lot of restaurants, especially smaller independent and a lot of urban restaurants, 500 square feet could be your dining room. A lot of fast casual. You don't have a whole lot more room than that. So with us, we have significantly larger dining rooms than that, so we can put quite a few more bodies in there, and that's going to be a constraint for some of the competitive, for some of the competition.

Interesting. Thank you.

Yep.

Your next question is coming from Brian Vaccaro. Your line is live.

Thanks, and good morning. On that last point, Wyman, on reopening and just two days into it in Georgia, obviously, but give a little more detail or context around what that will look like from the guest experience standpoint, whether it be the safety measures that are in place, whether it be the spacing that you're going to have in Texas versus Georgia, just maybe some broader context of what it will look like from the guest experience. And is there any early feedback? I know we're two days in, but any early feedback on how the customers are using it and what's been the response thus far?

Hey, Brian. So let me just maybe paint a visual for you. So if you walk into our restaurants, the doors will be open. There'll be sanitizer right there at the front of the doors. you'll be sat at a table, and the two tables next to you, for the most part, won't be sat. And so there won't be a table next to you that's sat. There'll be a table that's usually a sanitizing station that has paper towels and sanitizer. The table will be clear of almost... There won't be anything on the table, and the menu will be... We're working quickly to get new menus out, but they'll either be paper or they'll be... easily cleanable menus, kind of one or two pagers. So everything that's gone into it, the bars will not be sat at the bar top. So the bars, we won't have patrons at the bar because that's very hard to distance and it's also hard to regulate. So we will have some tables pushed up to the bar so the bartender could react with a party, interact with a party, but they'd be six feet away or more. And that's how it feels. And so when you walk in, again, the spacing is there and all of our servers will be masked and gloved. And they will also have been asked before they can check in several questions about how they're feeling. Have they taken their temperature that day? We have a temperature. you know, thermometer in the restaurant that they can use if they haven't. And before they can check in, they have to validate that they feel good and they're ready to work and they haven't come in contact with anyone they're aware of. So we're taking all the steps necessary, we think, and I think as a guest. And everything we've heard in Georgia over the last couple of days has confirmed that the guests that are coming in are feeling good about it. Joe, you want to talk about what we've seen in Georgia for two days? So let me just caveat it. Two days worth of data in 38 restaurants on a Monday, Tuesday, but here's what we've seen in two days.

Yeah. And Brian, one of the things too that I think that's very relevant here is that we've had operators in restaurants game planning this for a couple of weeks now. So the ability to go into restaurants and you know, work the floor plans, you know, have the design teams helping from a safety and security standpoint, understanding how these flows can work. I mean, again, we're getting a little – we've got some openings happening slightly faster than we thought they might, but we're prepared for that because of the work, again, and the backdrop and the scale that we can bring to the operators and helping in this regard. First couple days in Georgia, again, we think the dining room piece of the equation has been incremental. We've seen on an aggregate basis down in the mid-20s has kind of been the first two days' response. The interesting thing is, and there's going to be some great learnings over the next several weeks coming out of these areas, that you do see some variances, too. We actually have had several restaurants with positive comp sales year over year. That's positive comp sales. So you do get a wide variety of responses depending, again, I think some of my comments about the regional flavor and responses and where people's heads might be at from a, but there's clearly a demand side out there that we're seeing in a number of locations. All right, that's really helpful.

And Joe, switching back to the weekly cash burn that you gave, the $5 million a week Can you run through the primary buckets within that burn rate, and does it include full rent payments?

It's a comprehensive number, looking at, again, the entire revenue and disbursement sides of the equation, so it does include CapEx and some of those things. It does not include full rent payments. We, in April, made rent payments that approximated about $56,000, $57,000 percent of expected rent. We've obviously been working aggressively with landlords and in a very cooperative environment, too. I think, I mean, again, we're pleased with the discussions on what deferrals look like kind of going forward. But it'll be, there will definitely be a level, a meaningful level of rent incorporated into that. And, of course, those numbers will adjust, Brian, you know, as we now move into the new environment. So, yeah. But it's comprehensive besides that. All right, thanks. I'll pass it along.

Your next question is coming from Greg Francourt. Your line is live.

Hey, guys. I have two quick questions. The first is, can you talk about how you're thinking about 2021? And I think a lot of people who are listening to this call are trying to balance maybe a more pressured consumer with significantly reduced competition. And I'm curious just what your thoughts are. And then the other question I had was a couple of your competitors have done equity raises to kind of, I don't know if it's shore up the balance sheet or maybe kind of increase the flexibility coming out of this. And I'm curious what your thoughts are on the possibility of Brinker doing that and kind of balancing raising cash with the dilution that that would bring. Thanks.

Hey, Greg. you know, we're in the same boat with everybody else, right? You know, what's the recovery going to look like? Is it a V? Is it a U? Is it an L? Who knows? So what we are committed to doing is just really performing at the top of the industry in whatever environment it shows or we're given in our fiscal 21, which starts in a couple months. So I can't tell you. I know there will be obviously some headwinds. The unemployment situation isn't going to rectify itself overnight, but there are also going to be some tailwinds. There are going to be less seats in the category. I mean, there are absolutely going to be less seats. And so how that all maps itself out and how much pressure you get from the front versus push you get from the back, I don't know. We'll start to get a sense for that here. over the next couple of months. But, you know, we're kind of going to commit to just performing at the top of whatever environment gets put in front of us.

And, Greg, to the second part of the question, I don't have anything really specific to say to any type of capital raise. But, again, we kind of start the position being much more comfortable today from a liquidity standpoint. I think the numbers... we gave you this morning show the ability to work through the bridge to the other side of the equation. The bridge is actually starting in short order here as we move back into dining room openings. I do believe those will be over time positive to the liquidity set. So we're comfortable from a liquidity standpoint. That being said, we're monitoring capital markets closely. We have great conversations you know, with our bank group. They're important partners in working through these situations. We'll continue to have those constructive comments, particularly as it relates to some of the incremental availability on the revolving credit. And we'll just monitor capital markets as we kind of go forward from that position.

Thank you guys for the thoughts and good to talk to you. Great. Thanks, Greg. Thanks, Greg.

Your next question is coming from Nicole Miller. Your line is live.

Thank you. Good morning. Could you talk a little bit about the supply chain? Now we've heard about plants closing down, and I'm just wondering if there's going to be a lag there, if there's any concerns that might materialize or not. Thank you.

Hey, Nicole. Really not right now, not in the near term. And again, I think if you're And I know you are aware that a lot of the supply chain issues that are out there are because of the lack of demand in the food service sector. And obviously, we're one of the bright spots in that sector that's allowing them to produce product that gets to us. And again, a lot of our protein has already been put up, and we're not dealing with a lot of fresh products. protein so we're in pretty good shape and we don't see any near-term issues obviously if this goes on forever or for a longer extended period of time then there could be something but but in the near term we don't see any major issues in our supply chain feels pretty confident in that and earlier you addressed labor and the ability to get the employees back into the restaurant across the board and restaurants and retails some premiums have been paid

in the market recently. What's your outlook on labor inflation, please? And thank you very much for your time today.

Well, there's two things that I'll mention. One is just it's been really uplifting to see the generosity of our guests during this crisis and the level of tips and I could tell you stories of people of multiple stories of guests coming in and tipping team members hundreds of dollars. And so there's a lot of, again, a lot of our team members rely on tips. And that piece of the income has been really done, they've done really well with that. So they're making good money, the ones that are employed with us. And with regard to what we're going to need to bring people back so far, it hasn't taken a lot. Again, this is the good news, bad news of unemployment. So, you know, with 26 million people looking for work, I don't think we're going to have a hard time finding jobs, finding people to fill our jobs. You know, that's going to have a bigger issue with, you know, what's the economic impact of that on the other side. But we're not seeing or don't anticipate a big inflationary impact due to this virus or this crisis. Thanks again. I will say, Nicole, let me just mention one more thing with regard to the people in the restaurant. Our managers, they're doing an amazing job. When we talk about frontline workers through the pandemic, people that are out there allowing businesses to stay open, to keep people employed in the face of the pandemic, I couldn't be prouder of the work they're doing. And because of the financial implications it's had on the business, they're not getting the level of bonuses and some of the things that they used to get because of just what's happened financially to the economy. And our first commitment is to making sure that we take care of those people. And so we may pay bonuses out to team members for levels of performance that we typically wouldn't during this crisis. And that has nothing to do with what we have to do to keep them. That has more to do with what we need to do to really recognize the sacrifices they're making during this crisis.

Your next question is coming from Chris O'Call. Your line is live.

Thanks. Good morning, guys. First, Joe, I appreciate the update on the Georgia locations, but I'm wondering if you could quantify the limits to sales recovery as a result of maybe reducing the capacity of those locations.

Well, you know, Chris, again, it's going to depend because you're dealing with typically capacity restraints that are based on your occupancy requirements. levels, or in Georgia's case, you've got a square footage restriction. But that plays differently in each restaurant and, frankly, you know, almost every day part, you know, throughout the week. So, obviously, capacity constraint on a Friday night is different than capacity constraint on a Monday lunch. You know, so, you know, we'll see the progression of that. We'll learn from that as we kind of go. But different restaurants are going to react differently. You know, there are going to be restaurants that from their traditional operating performance level may not have as much of a capacity constraint. And then there'll be others that have a more significant one, particularly in those busier day parts. But you also have the robust to-go side of the equation. And we don't expect that to go away any time in the near future. Again, I think we have introduced a significant number of guests to Chili's during this process in particular. And Maggiano's has had some of the same and folks getting to experience, you know, the to-go operations and how we perform to their liking in that regard. So, you know, I think, you know, to the extent that the consumer continues to gravitate towards an off-premise environment, we will benefit from that.

Yeah, I'll just add, Chris, the tradeoffs are going to be, as Joe mentioned, really on those high-volume time periods, how much you're going to shift from takeout to dine-in and how does that play. I also think it's going to be a very interesting dynamic to see how long people will wait for a table. So my hometown here in Texas, Colleyville, opened up their patios this weekend, you may have seen in national news, and people were waiting two and a half hours to get a patio seat. Now we have a great table management system that allows people to wait in their cars and we can page them when their table's ready. And I anticipate people will wait a little longer to get a seat and to be taken care of in the dining room. We're seeing people kind of dine in our parking lot in the back of their cars and their trucks. So it'll just be very interesting to see how they play out this summer as we get through some of these capacity issues. But overall, the tradeoff between dining room and takeout and delivery will be the dynamic that really matters to overall volumes.

And then just one last one, Wyman. How does a company plan to utilize advertising as stores reopen? You talk about the long waits right now. I mean, is it worth using advertising to generate more demand, or do you plan to maybe delay that?

Yeah, we're right now really leaning into advertising Again, this is where all the investments and all the expertise we've developed over the years with direct and digital and loyalty have really come in handy and paid dividends for us. And that's what we're leaning into now. I think mass and broad traditional marketing is probably not going to be as effective in this environment where we've got capacity demands and we're really being much more targeted and we'll evaluate future marketing spins as the environment starts to move. But right now, we're really doubling down on the digital, social, and direct marketing, and our team's doing a great job with that.

Great.

Thanks, guys. All right, Chris, good talking to you.

Your next question is coming from Robert Darrington. Your line is live.

Yeah, thank you. Bob Darrington with Telsey Advisory. My question, you know, I guess, Joe Wyman, I'm not sure who best handles this. You know, typically we've seen, you know, illness, foodborne illness across the industry pop up from time to time. And all of a sudden you've got lawyers chasing lawsuits. And yeah, I'm just wondering, how do you minimize that risk? Or is there any risk of an employee a customer leaving and ultimately saying, listen, I got ill by visiting a Chili's restaurant in a certain location. Do you require your employees to wear masks? Do you take their temperature? Does that vary by store? And what about consumers? Do you require them to wear a mask? I'm just curious from your standpoint.

So, Bob, yeah, we don't, first, our standards are nationwide, and we are strictly adhering to them and making sure that that happens. And so it's masks and gloves and sanitizer and distancing, and we take it very, very seriously. I think one of the reasons, if not the most important reason, as to why we continue to see our sales grow every week is and our gap to the category grow every week since the pandemic hit is because of the obvious seriousness with which we've taken safety. And it's visible to our guests and to our team members. And that's kind of non-negotiable. Now, we do ask them, as I mentioned, you know, are they feeling well? Have they taken their temperature? Have they been in contact? Do they feel ill? They have to answer these questions before they can clock in. And if they haven't taken their temperature and can verify that they don't have a temperature, we have a thermometer in the restaurant that they can go take their temperature and verify for us that they're not feeling bad. So we're doing everything we can on that side. And then from a consumer standpoint, we really rely on whatever the restrictions are in the in the county or in the state. So if the state mandates everyone wears masks, then we expect everyone to be wearing a mask. And if they don't, then we're not going to be enforcing a standard above and beyond. We know social distancing is the right thing to do, and we have social distancing set up within our restaurants while we work through this next phase. So that's kind of how we're dealing with it. In terms of how do we deal with future lawsuits, we're not focused on that. We're doing the right thing. We know that If we just do the right thing, we should be okay relative to kind of everything that you can expect in this crazy world of COVID.

It's comforting to hear, Wyman. As we look at one other question on the sales mix of the beginning of April to the most recent trend, can you give us some color on how that mix has varied? I know that a number of states have allowed delivery of Of alcohol per se how have your alcohol trends, you know changed over that time? Is that one of the key contributors and will that be there available after the dining rooms reopen?

well, so first that you know again back to the the quality of this team You know you'd have told us two months ago that we'd be selling mixed drinks to people in cars and You know, it just was not on anyone's radar screen. And as soon as those became viable options, in some states being able to sell a drink in a sealed container, in some cases being able to sell packaged goods with margarita kits, we got all over it. And our supply chain really supported us in ways that were pretty amazing. And we've grown that piece of the business. It represents over a million dollars a week now. in sales and has grown nicely. And we feel very good about it. Now, what the future holds, I mean, again, most of these things were temporary kind of acts that were put in place by the governments. And so we'll see how they hold and how long they hold. But as long as they hold, we're comfortable now. We've got a great product. Guests really enjoy it. And we're having a good success selling margaritas to people in cars.

A Presidente on the ride home with a straw. That's a great way to do it.

Oh, no, no, no. Not with a straw. Nobody's drinking them. Not until you get home. Thank you.

Your next question is coming from John Tower. Your line is live.

Great. Thanks. Just a question on the balance sheet specifically. I'm curious to know how long the covenant waivers last that you received and then In terms of thinking this out along the lines of how your business progresses, when you return to the negotiating table with some of the lenders, how can we think about your total shareholder return potentially changing given that your dividends and your purchases have been a significant piece of the TSR over the past several years? Thank you.

Hey, John. I think as we indicated in the press release relating to the that we received waivers for the two quarters at that point. So basically it would be this quarter and the fourth quarter reestablished a covenant mark on the leverage side of the equation, 4.75 for the first quarter of fiscal 21. So that's kind of the dynamic as it relates to that. And as I indicated, obviously ongoing conversations with the banks, and particularly as you start to move now into these next phases, kind of understand what that looks like, understand what some of the go-forward dynamics, and that includes how you structure a covenant package in this new environment going forward after those timeframes. So a lot of good conversations going on there. As it relates to the other part of the question, I think that's a discussion for down the road. you know, some of the dynamics you mentioned were suspensions. We'll talk about capital allocation, you know, on a go-forward basis at a future time and how that impacts the TSR question.

Okay. Then just it's great to hear that the majority of your stores are still open, but in terms of thinking about your asset base, you know, is this giving you an opportunity to potentially, I don't want to put it, too crassly, but in terms of pruning the portfolio of stores where you felt like they were marginal with respect to operating relative to the rest of the system. Is this giving you an opportunity to essentially say this is time to get rid of them?

Well, John, we do those looks on an ongoing basis. I think we talked to you about twice a year in-depth reviews on performance. Frankly, we've done a good job of incrementally pruning stores over time. So again, this is a new data set. It'll create a new environment that will play into those decisions. But we aren't sitting with a lot of restaurants that you think, as you described, kind of teetering on the edge. I think, again, the actions we've taken on an ongoing basis and the fact that we've kept really all the restaurants open except some that might have been in a physical location that couldn't open because of that location. speaks well to the condition of the fleet.

Great. Thanks, and good luck with everything. Thanks, John.

Your next question is coming from John Glass. Your line is live.

Thanks very much. Just a couple of follow-ups. First, I know that franchising isn't as big a piece of your business as it once was, but can you comment on the health of your your domestic franchisees as well as maybe some of your international franchisees as they've probably gone through the same issues that the whole rest of the industry has faced. And can you talk about on delivery, is there any capacity constraints? Are you noting that third parties having difficulty getting the capacity and drivers to fulfill your demand as others are also seeing that? Or has that been a pretty smooth transition to a greater delivery percentage from their perspective?

Hey, John. Good to hear from you. Yeah, our franchisees are performing consistent with us, with company-owned restaurants. Obviously, we have a couple of franchisees that are unique, like our airport franchisee who is having their own situation relative to the airport environment. But the majority of ours are similar to us with regard to their locations and their markets, and they're seeing similar kind of results. So I feel good about how the bulk of the franchise base is kind of weathering the crisis. The international market is a much more, you know, it's just a much more dynamic situation. A lot of closures and then reopenings, you know, again, as you've tracked the global markets, you know how the pandemic has kind of moved through different parts of the of the world, and our restaurants and franchisees have had to deal with that. So we've seen more closures in the international markets than we have as a percentage in the U.S., but again, overall, I think they're faring as well as can be expected or consistent with how retail and restaurants are doing in those markets, and they're working their way through, and in some cases, they're further along in the process of moving out of the COVID crisis than we are in the U.S. So it's continuing to monitor it. It's not a huge part of our business, so that's important to note on the international side, and it's more volatile. But, again, it just doesn't impact our overall earnings performance that much.

And on delivery?

Oh, delivery. Yeah, we've got no problems. I mean, the biggest challenge we're seeing – You know, the online world is just, you know, the demand has been tremendous, and they're setting new records every weekend with regard to number of users on the systems. And so just getting all of that to work smoothly and making sure that everything is kind of working under the pressure that it's being put under has been probably their biggest challenge. But we haven't had a problem with... with getting drivers to pick up orders. That's not been our issue. And we've had really good, in our partnership with DoorDash, we're just pleased with it. We think they're a great partner. And the work we've done over the last year to grow the business and to understand their business and our business, you know, we couldn't be happier with that relationship. Thank you. Yep.

Your next question is coming from Eric Gonzalez. Your line is live.

Hey, thanks for the question and glad everyone, you know, sounds like they're doing well. Just wondering if you could discuss how consumer behaviors have changed with regards to off-premise. So in other words, like how much has check size increased and are there specific items or deals that you're seeing a higher menu preference as people experience cooking fatigue?

Thanks. Eric, it's interesting, right? So first... You know, the check size increases have been there. I think as we've seen more families kind of move into this category than probably were there before. The biggest challenge and kind of one of the things that, you know, we've talked a lot about, you know, our comp sales. When you look at the difference between comp sales and comp traffic, our comp traffic numbers are five to six points better because the to-go check and the delivery checks tend to run a little lower, primarily because they don't have alcohol sales. And while we're pleased with the million dollars a week we're selling in margaritas to-go, that's a fraction of what we used to sell when we used to have a dining room and a bar. And so that's been probably the biggest difference between the mix of what we were seeing inside the restaurant and outside. Beyond that, the value propositions that we had... So interestingly, when we went into the crisis, we thought we were going to have to simplify our menu like many have done. And then we actually challenged ourselves to say, hey, listen, that creates a lot of problems for our guests who love their favorites and for our supply chain because there's a lot of product out there that if we simplify the menu, what's going to happen to that product? So we challenged ourselves to run the full menu, and we've done that. And we've been able to pull that off and still deliver – the kind of P&L performance that we needed to, and the operational side of the equation. And that's partly because our dining rooms, this to-go experience is complicated, but our kitchens aren't as busy as they've normally been. So they're able to pull this off, and our operators did a great job, our supply partners and our distributors adjusted, and we've made all these changes to the system to make that work for us. And so overall, our mix is leaning a little heavier into the value propositions that we have always had, and that was also really, I think, a strength of ours. We didn't have to innovate or create a whole lot of packages or new deals or family bundles that we've seen a lot of other folks do. We've just ran our menu, and our menu has inherent strength in it, and that's Chili's. Maggione's had to make a few more modifications just because of the nature of their sit-down dining experience, but for Chili's, We just ran what we ran. They eat it, and for the most part, with the exception of alcoholic sales, the checks kind of line up.

Thanks, guys.

Stay safe out there. Yeah, everyone, as we're coming up against the hour, we will go over for a short period of time, probably five or ten minutes. We'll get through as many of the questions as we can. We know there's a lot of folks. Obviously, we'll have a chance to talk individually after the call, but we'll keep going on comments, but I just want to let you know we are Yeah, we're probably down to about the next 10 minutes or so.

We're cognizant of your time, too. And if we miss you, those that have to check off, we appreciate you joining us.

Next question is coming from Catherine Fogarty.

Your line is live. Great. Thank you. So just one point of clarification here. When you reopened the dining room, you mentioned having a one or two page menu. Is that going to be an abridged menu, or have you figured out a way to condense all the prior menu items onto that page? How are you thinking about menu in the dine-in when you reopen? And I have a follow-up.

Well, again, it's going to take us a couple of days to get menus out in an abridged format, but it will be the full menu. It will just be in a different layout. So, yeah, we don't need to change it. And we're going to encourage guests, too, to, you know, listen, they can always, if guests are nervous about menus, you know, they can pull up their phone and pull up our app and scan our menu from their phone. And that's an easy way to order as well. Again, so if anyone's nervous or at all not comfortable with a menu, There's touchless systems that are – there's pretty much a touchless system that we have that they can take advantage of if that's at all important to them.

And then on – and I apologize if you gave this figure explicitly, but do you have an update on MyChile Rewards members and any findings you're seeing about new additions to the platform given your digital strength as of late?

The platform is kind of holding its own. You know, we signed up a lot of people into MyChilliesRewards through our dining room. And so when we lost our dining room, we did lose a source of acquisition. But obviously that's been traded off with online acquisitions. So net-net, it's a little bit, actually a little bit down, but it's still kind of robust and doing well for us, working as hard as it's ever worked.

Yeah, the active database is still over 8 million folks, so it has the capability to do what it needs to do.

And as we open dining rooms again, we'll start to grow that. We'll get that acquisition vehicle back up and running.

Great. Best of luck. Thank you. Your next question is coming from Dennis Geiger. Your line is live.

Great, thanks guys. Wondering if you could talk a bit more about new guests, and if you have any sense that you could share as it relates to the relative magnitude of newer guests using the brand. Maybe just on top of that, any sense on sort of customer perceptions and perception scores over the last several weeks, and as we kind of think about marrying those two, how do you think about the stickiness of new guests that you've seen over the last several weeks?

Well, every channel is a little different, right? So I think on the delivery side where the businesses, again, both our takeout and delivery business have more than doubled, almost tripled. The delivery side of the business, we're getting a lot of new users, a lot of people that are experiencing delivery for the first time and then finding the Chili's delivery experience for the first time. So that bodes well. All of our metrics through that system confirm that we do a good job and that our guests are happy and and that we have a good kind of conversion rate. With regard to new guests with takeout, it's probably not as many. Here's where the loyal guests of Chili's are coming to find that experience that they can trust and count on in these uncertain times, and we see a lot of our loyalty. This is where leveraging our loyalty database really comes in and is working hard for us. So we are getting new people into the brand every day, but it's different by category or by column. And we have seen our experience. So we have guest metrics, and our guest metrics on delivery and takeout have significantly improved through this process. Really, we've improved them to a magnitude of 30% better than they were in that channel prior to being a delivery takeout-only model. Great. Thank you. Thanks, Dan.

Your next question is coming from Andrew Strzelczyk. Your line is live.

Hey, good morning. I guess just two questions for me, and I apologize if you mentioned this and I missed it. As you're seeing a lot of the new delivery customers come into the brand, has your mix changed between the two channels? You know, is it still primarily coming through third party would be the first question. The second one, just as we think, you know, in a post-recovery environment about sanitation and cleaning measures or anything like that, would you anticipate any structural kind of margin implications as we kind of move past the recovery phase?

So on the first one, Andrew, I'm not sure I understand your question. All of our delivery comes through DoorDash.

Delivery to go.

Oh, so you're asking about the to-go delivery mix, how those two? Yeah, they've both grown significantly. They've most more than doubled. They're pushing on triple. The relationship has been, the growth has been a little better, both absolutely presented with to-go. But the delivery business has also grown very nicely. And then, Joe, on sanitation, the costs associated?

You know, again, we would anticipate some incremental costs associated to those. Again, sanitation and safety are already embedded in the business model. There's probably some incremental level. We'll go for some period of time. But it's incorporated in thinking, and it's going to be very manageable in that regard.

Okay. Thank you very much.

Thanks, Anne. Your next question is coming from Peter Saleh. Your line is live.

Great. Thank you, and I appreciate all the color you guys provided today. I just want to come back to the comment on supply chain. I think you said you're not seeing any real impacts on the supply chain. With that said, do you expect or do you anticipate any sort of either deflation or inflation in any particular commodity? Anything that may be different than what you guys were anticipating a few quarters ago?

Yeah, I think, Peter, overall, we're seeing a little more, a little less inflation, I have to say, so the expectations on the inflation level are down probably about a percent or so now. Again, remembering that our contracting is designed to try and mitigate as much volatility as possible. So it gives us a little bit more of a steady state there. We do expect commodity markets will probably have in some areas some higher level of volatility as you kind of move through an economic cycle like this. We're protected on one side and, frankly, have the ability in some cases to take advantage of some volatility when we see it, particularly in some of the proteins and how we structure and extend contracts if we choose to do that. Again, supply chain's all over it, and I think as we look farther down the line, probably a little bit better environment overall than what we might have been expecting a couple months ago.

Yeah, I think the other one that probably hasn't played out yet is just if gas prices continue to stay at these extremely low levels, that will roll through commodity pricing as well as distribution, obviously. So we'll see how that plays, but again, more upside to the P&L than downside.

Great, thank you very much.

Yep. Your next question is coming from Christopher Carroll. Your line is live.

Hi, good morning, and thanks for taking the question. So it was noted in the release that online ordering accounted for 70% of off-premise orders in the most recent month of data provided. How did that trend since March and where is that currently running? And can you talk a little bit more about how you plan to leverage those digital relationships over the long term? Thanks.

Well, the trend obviously has tripled with the business. So we went from a business that was running 18% to 20% to 100% takeout and delivery. And the mix within that, it's pretty much stayed the same. You know, we get a percentage of our guests prefer to call in. And as much as we would rather them get online, they're just going to call us and we're happy to answer their phones and take their order that way. So that's kind of just the difference. And I'm sorry, Chris, what was the second part of the question?

Yeah, just asking about how you just plan to leverage any more of these kind of digital relationships, the new ones, over the long term.

Yeah, we're always trying to both within our formats and even with our DoorDash partner working to create a more – what I'll call sticky relationship, a more direct relationship. We share information for a reason. We offer benefits through our loyalty programs. Whenever we have an opportunity to make a connection through one of these vehicles, we look to cement that through a more permanent relationship through our loyalty program. That's what we're doing. As I mentioned earlier, we're growing the database through Our digital, very nicely, it's just being offset a little bit because we don't have that same relationship building the opportunity in dining rooms. We look forward to getting that back, and the two of those will help us continue to grow our database nicely.

So everybody, we've actually hit that time period that we're going to end the call. Our apologies to the queue that continues to remain. Micah is available. I will be available. We'll obviously welcome the continued conversations as we kind of go forward. Thank you for participating this morning, and I'm sure we will be talking soon. Everybody, please stay safe. Yeah.

Thank you.

Appreciate it. Thanks, everybody.

Bye-bye. 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.