Executives: Mark Graff - VP, IR Liz Smith - CEO David Deno - EVP & Chief Financial and Administrative

Officer
Analysts: Michael Gallo - CLK Andrew Strelzik - BMO Capital Markets Sharon Zackfia - William Blair John Ivankoe - JPMorgan Jeffrey Bernstein - Barclays Karen Holthouse - Goldman Sachs John Glass - Morgan Stanley Jason West - Credit Suisse Jeff Farmer - Wells Fargo Gregory Francfort - Bank of

America
Operator: Greetings and welcome to the Bloomin' Brands' Fiscal First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow management's prepared remarks. It is now my pleasure to introduce your host, Mark Graff, Vice President of Investor Relations. Thank you, Mr.

Graff. You may begin.

Mark Graff: Thank you and good morning, everyone. With me on today's call are Liz Smith, our CEO; and Dave Deno, Executive Vice President and Chief Financial and Administrative Officer. By now, you should have access to our fiscal first quarter 2017 earnings release.

It can also be found on our website at bloominbrands.com in the Investors section. Throughout this conference call, we will be presenting results on an adjusted basis. An explanation of our use of non-GAAP financial measures and reconciliations to their most directly comparable GAAP measures appear in our earnings release on our website as previously described. Before we begin formal remarks, I'd like to remind everyone that part of our discussion today will include forward-looking statements, including a discussion of growth strategies and financial guidance. These statements are subject to numerous risks and uncertainties that could cause actual results to differ material from our forward-looking statements.

Some of these risks are mentioned in our earnings release, others are discussed in our SEC filings, which are available at sec.gov. During today's call, we'll provide a recap of our financial performance for the fiscal first quarter 2017, an overview of company highlights and a discussion regarding progress on key strategic objectives. Once we've completed these remarks, we'll open up the call up for questions. With that, I'd now like to turn the call over to Liz Smith.

Liz Smith: Thanks, Mark, and welcome to everyone listening today.

As noted in this morning's earnings release, adjusted first quarter diluted earnings per share was $0.54, up 15% from last year. Combined U.S. comp sales were down 0.2% in Q1. This reflects a meaningful sequential improvement in sales trends particularly at Outback where we posted positive comp sales and were ahead of the industry. Overall, we're pleased with our Q1 results and they leave us well positioned to achieve our earnings and comp sales objectives for the year.

On the last call we laid out assessment of the casual dining environment. We believe our consumers are seeking more differentiated experiences that deliver the best 360 degree dining occasion. They are less motivated by tier price promotion. In addition, we recognized that today's consumer is increasingly seeking more convenience in their dining occasion. In recognition of this changing landscape, we're pursuing three key strategies.

First, current and ongoing investments are prioritizes towards elevating the total customer experience. This encompasses food quality and portion enhancements, service upgrades and improved ambient. Second, we have been reducing reliance on straight discounting and have been reallocating these dollars towards our investment. Third, we've been building incremental sales layers such as the Outback remodel program, the Dine Rewards royalty program and the rapidly emerging off premise business. In addition, we have a sizeable international opportunity which is coming into focus.

In the first quarter, we made significant progress against these strategies. In February, we rolled out the next layer of Outback investments and we will discuss those more in a moment. We've built an incremental $25 million of new investments into the 2017 brand. The benefit of this strategy is showing up in strengthened brand health measures and the quality of our traffic. In addition, overall discounting was down in the first quarter.

This was particularly true at Carrabba's where we invested heavily last year in promotion to drive frequency and gain trail of the new menu. As it relates to our sales layers, the Dine Rewards loyalty program is performing very well and now has over 3.2 million members. Since its launch last July, it has consistently received high marks for its simplicity and value relative to peer programs. Dine Rewards is attracting a healthier consumer and its building to the 1% to 2% sales with contribution we saw in test markets. As I mentioned, the growing off-premise opportunity represents a sizeable and incremental sales layer.

We're currently testing to use of the third-party as well as building our own delivery network. We had 116 restaurants offering delivery at the end of Q1. Early results have been encouraging and validate our belief that there is strong demand for our food to be consumed at home and that this is largely an incremental occasion. Now turning to the brand, Outback Q1 comp sales were up 1.4%, we were pleased with these results and although we did benefit from an overall improvement in the segment we finished Q1 well ahead of the industry. We were also encouraged by the progress in our investments aimed at elevating the customer experience.

These investments such as our Center Cut Sirloin started in earnest in the middle of 2016 and led to a steady improvement in steak satisfaction metrics and higher social media scores. This past quarter, we rolled the next wave of initiatives that are focused on steak preparation, portion sizing and reducing complexity. In total, we will rollout an incremental 25 million of investments in 2017. To assist in measuring the success of these investments, we have also established our own customer panel to ensure we receive early and real-time feedback. Our research suggests that the traffic benefits begin to manifest in 26 to 39 weeks after the investments are implemented.

We expected healthy traffic to build overtime due to the frequency of our core consumer. In addition to these investments, we will continue to provide customers with brand appropriate value offers that surprise and delight, while we pull back on straight price promotion. This will have some impact on traffic. However, we will not revert to additional discounting to smooth out any quarter-to-quarter fluctuation. We have also been aggressively completing the multiyear rollout of the Outback exterior remodel program.

We expect to complete another 150 in 2017. This design contemporizes our restaurants with improved curb appeal and is driven approximately 4% to 5% sales growth. We also continue to relocate Outback restaurants as quickly as quality sites become available. This is a strong brand with great consumer appeal, experienced upgrades and new sales layers to restore sustainable long-term growth. Turning to Bonefish, we have made substantial progress over the past few years to return Bonefish to the lifestyle brand it is known for, offering fresh fish expertise with superior service.

To accomplish this, we’ve simplified execution while reducing our reliance on promotional activity. This has translated into improved guest satisfaction scores that remain at all time high. These positive leading indicators suggest we will continue to see sales momentum building over the back half of 2017 and beyond. At Carrabba's, Q1 sales were down 3.8% as we left our 2016 menu launch. This result was actually somewhat better than our expectations.

We anticipated meaningful traffic declines driven by a 38% reduction in marketing support in Q1 as we lap the Q1, 2016 menu launch. Although, the menu launch drove traffic over the first several months of 2016, it did not sustain as the year progress. We have refocused efforts to ensure Carrabba's is the restaurant of choice for authentic Italian dining and special occasion. This means simplicity in the restaurant and fewer LTOs that complicates the simple message of a great place to entertain and dine with family and friends. We will return to less overt marketing programs and more direct marketing to our loyal core customer with a real focus on building off-premise.

Carrabba's remains the strong brand and we will be patient in taking the necessary steps to drive healthy traffic at the brand. Turning to international, Brazil posted comp of 3.6% in the first quarter despite lapping an 8.8% comp in Q1, 2016. Our Outback restaurants remain resilient in a tough environment and are performing in line with our high expectation. In addition to Outback, we are also seeing success with Abbraccio. We have nine restaurants and sales have been similar to new Outback.

This gives us conviction in the potential for Abbraccio. As a reminder, Italian is the second largest segment in Brazil and no clear market leader providing us with significant run way for future growth. Our brand strength combined with the under penetration of casual dining in Brazil gives us confidence to continue investing capital in Brazil for high levels of returns. China represents another important long-term opportunity for international. We have been patient and deliberate in our strategy and it is now beginning to pay off.

There are now six Outback restaurants in China and we recently expanded our footprint outside of Shanghai. We’re seeing meaningful sales gains at both new and existing locations and are profitable at the restaurant level. This validates our consumer appeal and we intend to accelerate expansion. As we move into 2017, we remain focused on continuing to improve sales trends domestically and are aggressively spending on initiatives to drive healthy sustainable traffic over the medium and long term. We expect the benefits of these investments to build momentum throughout the year.

However, the industry environment remains volatile and we expect the competitive intensity to persist. We will remain nimble and agile while showing the patients necessary to do what is right for the long term. And with that, I'll turn the call over to Dave Deno to provide more detail on Q1. Dave?

David Deno: Thank you, Liz, and good morning everyone. I'll kick off with discussion around our sales and profit performance for the quarter.

As a reminder when I speak to results, I will be referring to adjusted numbers that excludes certain costs and benefits. Please see the earnings release for reconciliations between non-GAAP metrics and their most directly comparable U.S. GAAP measures. We also provided a discussion of the nature of each adjustment. In addition as mentioned on our February call when presenting non-GAAP measures, we’re no longer including adjustments for the following items.

First, expenses related to our remodel program; and second, intangible amortization expenses from our 2013 purchase of Brazil. Our 2016 Q1 results have been recast to confirm with this revised methodology. With that in mind our first quarter financial results versus the prior year as follows. GAAP diluted earnings per share for the quarter was $0.41 versus $0.29 in 2016. Adjusted diluted earnings per share were $0.54 versus $0.47 last year.

The primary difference between the GAAP and adjusted numbers in the first quarter of 2017 was due to $15 million of restaurant closing expenses resulting from our decision to close 43 underperforming restaurants as we discussed on our February call. Also as a reminder in our first quarter results from 2016, we have $27 million of the seasons expense that we incurred with we repaid our CMBS loan. This expense was not included in our adjusted 2016 Q1 results. Total revenues decreased 1.7% to $1.1 billion in the first quarter. This decrease was driven primarily by the 2016 sale of our Outback business in South Korea.

These are partially offset by a positive benefit from foreign currency translation and the net benefit of restaurant openings and closures. Combined U.S. comp sales in Q1 down 20 basis points; this result was ahead of the industry and represents a significant improvement from the fourth quarter. At Outback, Q1 comp sales were up 1.4%. This was a 620 basis points sequential improvement from our Q4 comp, which was down 4.8%.

We’re seeing progress in our efforts to built healthy sales growth within the brand. At Carrabba's comp sales were down 3.8%. As Liz mentioned, Carrabba's Q1 comp was impacted by the lapping of our new menu rollout in the first quarter of 2016. We support this launch with elevate levels of promotional activity to drive trail. We chose not to replicate this activity in the first quarter of 2017 and had a significant impact on traffic.

At Bonefish comp sales were down 80 basis points, this included a 130 basis point unfavorable holiday impact primarily from the timing of Eastern. At Fleming's comp sales were down 2.9%, the Q1 holiday impacted Fleming's was unfavorable and favorable by 360 basis points driven by the timing of New Years, Valentine's Day as well the timing of Easter. Without the holiday shift, the comp at Bonefish and Fleming's would have been positive in Q1. The holiday shifts at Outback and Carrabba's were relatively small. Turning to Brazil, Q1 comp sales were up 3.6%.

Our restaurants in Brazil continue to perform at a very high level and give us confidence that we can continue to capitalize on growth opportunities in this market. Adjusted restaurant level margin was 17% this year versus 17.6% a year ago. The decline driven primarily by wage inflation, the impact in service and product enhancement with Outback, higher rent from sales leaseback initiatives and operating expense inflation. These items are partially offset by the benefit of increase with an average check, lower advertising expense and productivity savings. Turning to G&A, after removing all adjustments from Q1 2017 and Q1 2016, general administrative costs were $69.6 million and $72.4 million respectively.

Reduction in G&A is primarily related to the timing of our annual managing partner's conference. The conference took place in the first quarter of 2016, was not held in to the second quarter of 2017. This shift represents a $3 million headwind to our second quarter results. There is one thing I’d like to mention is as you look at our reporting segment. International adjusted operating margin was down a 120 basis point to 7.9% in Q1 versus last year.

Included in this result is $3.4 million of certain legal and tax contingency within our Brazilian business. These expenses had a 10 basis points negative impact on international margins. As it relates to Bloomin' Brands, these expenses no tax impacted Q1 EPS by about $0.02. On the development front, we opened 11 system wide locations in the first quarter consisting up one Outback location, two Bonefish locations and eight international locations. As we’ve discussed on prior calls, we continue to monetize our own real estate.

In the first quarter, we sold the total of 12 properties for $46 million. We have now less than 50 properties remaining to be sold and we expect to largely be complete with this process by the end of 2017. We expect over 700 million in proceeds once the total program is completed. We have utilized the proceeds from these transactions for two primary purposes. First, we have fully paid off our $370 million bridge loan.

Since our IPO, we have demonstrated a proven commitment to debt reduction. Second, we have taken the remaining sales leaseback proceeds and used them to repurchase shares. Since the beginning of the year, we have repurchased $78 million worth of stock and given current valuation levels, we will continue to opportunistically repurchase shares. Through system effort last week the Board of Director cancelled our existing share repurchase authorization and approved a new $250 million share authorization which will expire on October 21, 2018. Also of note, last week the Board of Directors declared a cash dividend of $0.18 a share payable on May 19th.

As it relates to our 2017 guidance, we are reconfirming all aspects of our guidance we provide in February. As Eliz mentioned, we are off to a very good start and are pleased with Outback Q1 performance. We will continue to update 2017 as the quarter progress. There are four things, so I would like to mention about the core lease flow of our earnings in 2017. First, as I mentioned earlier, the second quarter will have an incremental $3 million of expense due to our annual managing partner's conference and this taxes about $0.02 a share in the quarter.

The conference took place in the first quarter of last year. Next, our incremental investments spend in the second quarter will be significantly higher than either quarter in the back half of the year, many of our new investments begin in February of 2017. In addition, we will not fully lap our 2016 investments such as the Center Cut Sirloin until later this year. Also, we see a higher commodity cost in the second quarter, driven by some unfavorable weather conditions impacting produce. Our supply chain team does a great job of minimizing the impact of these issues over the course of the year and these developments will not change our full year commodity guidance of flat to down one.

And finally in 2017, as when we have our 53 week, the benefit from the week will come in the fourth quarter as a result the fourth quarter is expected to be our highest earnings growth quarter of the year. We ask that you take these four items into account as we develop your quarterly estimates. Having said that, I would like to mention again, we are off to a very good start and feel very good about achieving all of our financial objectives for the year. We’re confident that we’re making the right and necessary investments both domestically and internationally to support long-term growth. We remain disciplined towards the capital and our improving capital structure provides increase flexibility to return cash to shareholders.

And with that, we will now open the call for question.

Operator: [Operator Instructions] Our first question comes from Michael Gallo of CLK. Please proceed with your question.

Michael Gallo: My question Liz is just on the discounting, reduction of discounting, you've been through this for a little while. You're making these investments, which again is going to continue through this year.

How are you measuring the success of those and the return off of those? And how you're ensuring that you have the right mix and an environment that suddenly continue to be pretty promotional here in Q1? And how do you plan as the year unfolds the kind adjust in the event that -- would you see softness? Or would you see improvement might you pull those further back? And how you're measuring whether these investments are driving the desired return? Thanks.

Liz Smith: Michael, great questions. So, one of other things we've been talking about is we certainly are going to remain nimble and agile as we go through the year because this is a very volatile environment. But we're committed to continuing the march towards reducing discounting across our portfolio and we like what we're saying. We had another kind of low double digit decline in discounting across the portfolio as we march through and take out those strict price promotions.

We’re investing them back into the customer experience. Part of your question was how do we know that working? How do we measure that? We were pretty rigorous analytics team that and we use a number of different customer experience, measures. I also indicated that we put in place our proprietary panels and do mobile intercepts. So, we have a very good read on exactly what we're getting for our investments as they roll out. Now, as you know this category has a purchase frequency of two to three times a year, right, so you got to read those long-term investments over time and continue to see them build and that gives you the confidence to know that you're on the right path.

We will always have brand appropriate surprise and delights in terms of promotion, but we're not going to work to additional discounting in an environment where somebody might chose to aggressive to try to restore their trend. We know that that is not the right solutions for us. We would like to have a brand metrics are building. We're going to stay the course and we've given ourselves kind of the bandwidth, which we able to continue with that strategy which is very successful for us.

Operator: Our next question comes from Andrew Strelzik of BMO Capital Markets.

Please proceed with your question.

Andrew Strelzik: Just first I had a clarification, you made the comment at the end of the quarter that you were significantly outperforming the industry with Outback. Was that any March comment or was that just broadly for further quarter?

David Deno: No, we always, Andrew, we don’t get into monthly cadence, so it's for the quarter.

Andrew Strelzik: And then my other question. How much is price mix at Outback being impacted by the discounting? I'm just trying to get a sense for what actual pricing is.

And then secondarily, I guess I would have thought that the food cost would have been more favorable given some of the dynamics in the healthier traffic that you are talking about. Was there anything specific to the quarter that maybe gave less favorability on outline item this quarter?

David Deno: Yes. Sure. Couple of things, when you look at our pricing, discounting pieces, it's a pretty big part of that. So, and we do have some pricing, but we don’t break that up between pricing discount.

But our strategy to not do as much discounting is paying off on the profitability side because of that, but that’s we still breakout, we don’t break out pricing and discounting. But, part of PPA change is due to obviously our discounting. On the margin side, couple of things one our investments at Outback had an impact on food cost margins because we did -- we like what we saw and tick that up. And secondly, we have little un-favorability in seafood during the quarter, nothing to heard our guidance for the year. But overall, it was a little higher than we had planned, but overall we’re in very good shape on the commodity side.

Operator: Our next question comes from Sharon Zackfia with William Blair. Please proceed with your question.

Sharon Zackfia: So on Outback, good start to the year, just curious if those trends are pretty consistent in the first quarter and you have some easier comparison coming up. How you feel about the potential for Outback to maybe inflect in the positive traffic this year? And then just a quick question on commodities, David, are you expecting commodities to actually tick up then sequentially as well as year-over-year in the second quarter? It will be helpful to get some clarification.

David Deno: Let me answer the second question first.

The commodities, it is not going to tick up year-over-year in the second quarter, it's just a matter of time I talked about. But sequentially, we've got those -- that little produced headwind I talked about. But overall, Sharon, we’re in very good shape on commodities.

Liz Smith: Hi, Sharon. So, yes, as you said we’re quite pleased with Outback start to the year and let me give you as much color as I can about where we are in that.

So, these are brand health investments. We view them as like less episodic and more as they will continue to build throughout the year as all of the measurements that we see that drive intend returns, continue to climb and continue to strengthen behind these layers of investments that we’re rolling out. So, we don’t breakout quarter-to-quarter guidance, but when you look at what's driving the Outback traffic, it's very healthy levered whether it's Dine Rewards, which is now at 3.2 million and is performing extremely well. You see the exterior remodels which are 4% to 5% growth, there at a critical math. So, they're showing up in the numbers.

You see the investment in food and service that is showing up in the core experience. And you see beginning of delivering starting to come through, we exited the quarter with a 160 restaurants across Outback in Carrabba's. So, what I would say is, we feel very good about the quality of what is driving our traffic and we’re going to be -- as I said, we’re g going to be patient and deliberate and put the investment and elevating to 360 degree experience, and we think that that will continue to build. And when we talk about traffic health, we’re constantly focused on balancing between responsible in the short-term, but that medium-and long-term health that that’s going to pay off in multi quarters. So, I feel very good about what's happening on the Outback brand, but we’re going to continue to roll through those investments.

Operator: Our next question comes from John Ivankoe of JPMorgan. Please proceed with your question.

John Ivankoe: The question is on G&A, I think in the last quarter we talked about keeping core G&A flat in dollars from '16 to '17 and having an incentive comp reload at least [indiscernible], I think it was $18 million or so. Are we still on track for about '16 or '17 or were there other kind of efficiencies that you found in the organization, the key overall level of spends lower despite a full ICE accrual?

David Deno: Yes, John, we’re on track. We didn’t make our judgments in the large on the incentive comps.

Shall we say, give back last year until second quarter and beyond, so we didn’t have much in the first quarter, but overall our G&A is in great shape.

John Ivankoe: Can I ask for just because of such an important part of the overall piece and especially in this quarter was very important piece. Could you help us guide to what would be kind of the reported G&A for fiscal '17, if you can help with that specific guide?

David Deno: It's flat year-over-year. I mean other than the reload, I mean it's on a record-by-quarter we haven’t done that in the past. I'm going to show you, John, I mean our strategy on managing overhead, the overhead growth and the investing headed growth is unchanged.

John Ivankoe: And I think you made the kind of the point on Brazil, I mean there was something unusual regarding a lawsuit or something else taxes perhaps down there. Is any of that recurring or was that just kind of a one-time clean up and we should begin to expect margin expansion in the international segment for that growing business?

David Deno: Yes, for the overwhelming part of it, it is one-time. There is obviously on the tax side, we do have to continue to [indiscernible] the Brazil tax environment is very tricky. But we did have one or two cases we need to address in the quarter. So much of it was one-time and it was $0.02 in the quarter.

John Ivankoe: And just finally related to Brazil obviously the Olympics last year took place over the second and third quarter and as we come in it 2017 and we have to last that. How you're feeling from a profitability perspective in Brazil lot in the Olympics last year?

Liz Smith: John, it's Liz. We don’t give quarter-to-quarter commentary, but what I will tell you is that I feel very, very bullish about Brazil's performance for the remainder of the year and I look forward to updating you on the Q2 trend during our next earnings call.

Operator: Our next question comes from Jeffrey Bernstein of Barclays. Please proceed with your question.

Jeffrey Bernstein: Two questions just one on the broader industry comp. I'm just wondering what your assumption is for broader casual dining comps for the year I guess relative to your forecast flat or down? Something like there, some sort of disconnect while hearing and maybe you can also some quality so let's but -- maybe disparity between the large public chains that are seeing more challenge based on a lipid in that track for example, relative to maybe stronger results of the smaller and private chains. So, I'm just wondering, what you're expectation is for the broader industry? And why you think we might be seeing diversions for the better for the small guys more challenge for the larger players? And then I had a one follow-up.

Liz Smith: Sure, Jeff. So, our assumption on the industry is that it will be down 1% to 2% probably in traffic.

I mean you know we talked a lot about it's been an 11 years of traffic declines. We think that that maybe ticked up a bit, it's certainly not going to be annualized of that Q4 number. But we do think Q4 was a harbinger of how things are going to change during the holiday season with the retail landscape. So, we have assumed with that industry and trend will be negative 1% to negative 2%. That being said, the macros are certainly supportive of the good consumer environment, but that hasn’t translated into casual dining growth.

And as you pointed out, this is a highly fragmented $80 billion category and you're going to have winners and you're going to have share losers. And a lot of that is driven by -- are you delivering what the customer wants, which is an elevated 360 degree experience in the box that has signature service and signature elements that says, why do I want to come in directly and specifically to your restaurant. You’ve noted that maybe the larger chains are struggling versus the independent. I think that there is a couple of things going on there as well, the first one is, you got even if you're large, you got to be nimble and agile and that’s certainly where we're driving ourselves. So that, we are changed but each box that you walk into you have to feel independent and has to have those signature elements that’s the customers want.

And so, I think what you're seeing that play out. The second thing that has to happen in this environment is you’ve got to continue to upgrade and investment and design and in the assets, and just have a prudent balance between the two. So, we think that you're going to continue to see share gainers and share losers and it's going to be driven by who can drive the most unique customer experience in the box while continuing transferring to that notion of that just great food and service to full entertainment in the box. The other thing that I will just say is that I think that the change will increasingly have an advantage on is the emerging off-premise category. I think it's going to be something that we can deliver at scale and that’s going to swing towards the large chain advantage as it grows out.

So, it's about remaining nimble and agile and given the best experience you can in the box and really building out that incremental sales lever, which is the most exciting structural tailwind that we’ve had in quite some time. When you think about the fact that we’re moving our brands into occasions where they could be consumed at home.

Jeffrey Bernstein: Got it. And then my one follow-up was just on the more on the margin side of things and then versus our model at least you've experienced greater than expected pressure across your restaurant level expenses. I'm wondering whether that was true relative to your own internal, and as it relates to I mean that Outback comp was a pretty solid better than expected results.

So, I'm just wondering what type of comp you think you need in this cost environment to hold the restaurant margins relatively flat like when might be able to see something like that?

David Deno: Yes. Sure, Jeff. Couple of things, first of all it was right within our expectations. Second of all, we talked about cost of goods sold improved, labor had some pressure, wage rate inflation, but also we’re investing the service model. And then also in restaurant margins, please remember that we’ve got rent increase from the sales leaseback flowing through that number and incorporate that in your model and it plays off tremendously, economically for the Company.

But on restaurant margins, there is a decrement there as we begin to put that into our system. So, right on track, Joe I talked about having 1% to 2% same-store sales growth. We got the productivity on track. We got the margin management on track. We're making the investment though and that will hurt margins at a little bit on the sale leaseback.

Operator: Our next question comes from Karen Holthouse of Goldman Sachs. Please proceed with your question.

Karen Holthouse: Looking at Outback where you have seen a return to positive track to stronger comps. There is lot of noise in the numbers we're trying to sort out, sort of investments what's going on with different brands. Is there anything to talk about interim numbers of -- do you have an idea of its profit per guest actually not rising either at the restaurant level the gross profit level, something that sort of shows this broader shift towards investing in quality you starting to flow through?

David Deno: Yes, we don’t disclose profit per guest, but I can tell that the quality of traffic when you don’t have the discounted customer is helping in profitability.

For instance even though we don’t break out Fleming's, Fleming's had its high profit growth in the first quarter that we have ever had, profit amount. So, overall, our profitability is improving because we're not seeing the discounted guest go through our restaurants.

Karen Holthouse: Well I guess another way of asking the same question, if you'd worked it, this quarter versus the same quarter last year, was there any increase or decrease in sort of meals on promotion or meals on coupon at Outback?

Liz Smith: So, Outback, specifically, I think I gave you that number that that we were down approximately 10% on discounting for the quarter.

Operator: Our next question comes from John Glass of Morgan Stanley. Please proceed with your question.

John Glass: You talk a little bit just about the off-premise business broadly at Outback. Was that a key contributor to comp this quarter? So, I'm thinking about take out as well as may be what you're doing in delivery. And you mentioned considering that just using third-party but actually building your network. What's sort of process behind that just given through all the networks already out there and at least the limit experience of the chain that have built those networks themselves? It’s a pretty costly early on or it can be costly early on. So what you're thinking about why you would choose to build it versus just used existing?

Liz Smith: Sure, John.

We ended the quarter with a 116 stores across Carrabba's and Outback, so while we're really pleased with what we're seeing it certainly was in any meaningful contributor to the comp for the quarter, right. This is just -- the great news is, this is, it is all in front of us as we deliberately and slowly build and roll it out. Pivoting to your second question, which is why we have elected to take a hybrid approach, we're certainly testing with all those third-party delivery systems that you mentioned that are out there. But now two years ago, we started to build our own internal capability to manage structure and staff having our own delivery network. And there is a couple of reasons, that’s a group that reports in the day, so I'm going to let him enumerate the reasons why.

But one thing I will say you for a turn it over to him is, we're going to let the customer decide right, that why we're testing both. If the customer decides they want to do third-party, just because it makes more economic sense to you personally, you got to know what the customers want. I will tell you that I don’t want to tip my hat and get this thing is that -- our customer service metrics and do it yourself and our profitability in doing it yourself really increases the attractiveness of our chosen strategy. So, all this what, Dave kind of enumerate some of the benefits and where we are.

David Deno: Yes.

Thanks a lot Liz. First of all, from a people capability standpoint, we have a fair number of people in our company that have significant delivery experience including myself. So, we know how to do this, first of all. Second of all, if you look at the third-party pieces, yes, the network is there and yes you do get the benefit of the marketing on the side. But you pay price for that.

So, there is the flow through on a delivery of third party is not favorable as flow through on do it yourself. But more importantly, do it yourself, we control the experience, we know the customers, we can do some surprise and delights very directly with the customers, and we think that these things offers some pretty nice potential for the Company going forward. So, we’re being very deliberate and how we role this out and we want to make sure the experience is topnotch from when we start the marketplace, but those three or four things from do-it-yourself standpoint really are attractive as we look at rolling this out.

Liz Smith: It is John as I said, you know with our average check, right, some of the other groups that are billing out delivery, I think they have more of a challenge with that than our average check and I think we’ve talked about, how on delivery are actual average check is actually greater than our off-premise pickup at the restaurant levels. The economic are proven to be quite attractive.

By going direct, you also -- that’s your customer, you get that database, you have the ability to communicate with them, you have the ability to give them Dine Awards credit, you have the ability to give them a cheaper service because you're not adding on that third-party intermediary. So, we’ll let the customer decide, but they’re pleased and we’re pleased with what we’re seeing by going direct.

John Glass: Thanks for all that. And you've just clarified my first question really didn’t have to do with the delivery business contribution to the first quarter. But just generally off-premise which is I think been growing at a lot of brands.

Is that meaningfully the pick up business itself meaningfully grow in the first quarter?

Liz Smith: Got it. No, it wasn’t a meaningful contributor to comp in the quarter. I think you saw a lot more in the exterior remodels the Dine Rewards, it has some positive impact and improved modestly, but a lot of it wasn’t exactly in the core experience that we talked about that elevated all those dining metrics that drive intensive return.

Operator: Your next question comes from Jason West from Credit Suisse. Please proceed with your question.

Jason West: Yes. Thanks. Just a quick clarification less than 116 stores you just mentioned. I missed, was that further the stores you're doing your own delivery or is that your total delivery offering in the system?

Liz Smith: That was our own, that’s our own and I think it does include how many of third party.

David Deno: It’s a small number of third party, but that’s a total third party and our own at the end of the first quarter.

Liz Smith: But the majority of that is direct.

David Deno: Correct.

Jason West: Okay. Got it. And then just a bigger picture question, I know we’re ways off from the holidays, but given what happen in 4Q in the industry last year.

Just curious how you guys are thinking about that going into this year given the potential volatility now around that time of year what's people shopping at home. How do you think you want to approach that especially with this new focus on removing some of the sort of called action promotions and things like that?

Liz Smith: Sure. So, as we -- the good news is this year we have a year right to get in front of it. And we know that that shift really happened and hit seem like a tipping point in terms of number of feed on the street, shopping retail. So, the way that we're approaching it is kind of twofold, the first thing is, if you want to get people in the restaurant and out of their house, it has to be more about just great product and services got to be, those entertainment queue.

So what during the holiday getting it specifically into your restaurant because I can get an experience that I can't get just by sitting at home and for competitive reasons, I'm going to leave at that, but I think during the holidays one thing doesn’t change, people are looking to be entertained. And so I think the burden on, on having that 360 degree experience be unique in the box and Q4 is something that all casual diners will be focused on ourselves included. The second thing is that this is tailor made for the growing off-premises occasion. People are very health proud, if you look at the spending on housing and investments in there ambience, so their house are very health part and they want the quality of casual dining, but sometime they wanted in the privacy of their own home. We think that has a huge opportunity during the holidays when you're gathering with friends and family and you have a desire to have that occasion but may be you don’t want to go out specifically per se.

So, we do think that off-premise has a real opportunity in Q4 as well as delivery, but again we're going to be paced and so I think, one it's about getting me entertainment to make you want to come out for the holidays specifically; and two, about really helping them when they do want to eat at home, have our brands right in there home.

Operator: Our next question comes from Jeff Farmer of Wells Fargo. Please proceed with your question.

Jeff Farmer: Dave, just wanted a follow-up on the cost of goods sold line, so lot of moving pieces out there but I think you flat to plus or minus one on commodity, baskets mass menu pricing and I think the majority of this year's productivity savings are expected to benefit the food cost line. So with all those drivers in place, can we assume that the year-over-year COGS favorability in '17 can approach I think it was 50 or 60 basis points of favorability that we saw in '16? Is that a realistic assumption or something else prevent us from potentially not getting to that same level of favorability?

David Deno: Yes, Jeff, we're not going to guide by line item, but I think if you build up the various pieces of our cost to goods sold, we will make progress this year.

Productivity, yes, we go to that in particular line, but don’t forget the investment, right at Outback and other places. We will make progress in food cost margins this year; we're not going to get that level of granularity and providing and that kind of guidance by a particular line item.

Operator: [Operator Instructions] Our next question comes from Gregory Francfort of Bank of America. Please proceed with your question.

Gregory Francfort: Maybe now on the guidance, but during the quarter in the cost of sales line, how much of that is from deflation being offset by investments that you made? Can you quantify these investments and how much that is I guess offsetting deflation in the quarter?

David Deno: We're going to make $25 million incremental investments this year, bunch of that would be in food cost, productivity helps and the commodity deflation helps.

But we improved in cost of goods sold this quarter by 30 basis points which is good -- which is a good result. So that is -- excuse me, 40 basis points. So, that’s a good result for us and we will continue to and make the investments in the product that we need to make and we will have a very good year on commodities. So, we expect continued cooked food cost, good food cost management during the year.

Gregory Francfort: And then maybe going back to delivery, anything on incrementality you’ve seen so far or the necessary incrementaility to see it as a profitable -- profitable addition to your business?

Liz Smith: Sure.

So, the great thing that we’re seeing is that, it's primarily incremental. And we’re seeing as 85% incremental and that’s consistent with the market structure. When people decide or either decide they're going to eat in or go out versus saying, do I want Outback tonight, do I want it in or do I want to go out. So, the exciting thing is it's moving our brands into an occasion eating at home that’s four times a size of the dinner business that they have eating outside. So, that’s been holding pretty consistent at that 85% level and we’re going to monitor that and look at that but that has been what has been coming in at across the brands.

Gregory Francfort: Got it. And maybe asking one last one, are you talked about China in expanding outside the Shanghai. I guess what's the strategy going to be going forward, are you going to continue to target major cities potentially expanding into lower? I know this is probably ways off, but just what deal are you thinking there.

David Deno: Well, first of all much like the deliver, we have the people capability in China to make this happen. We’ve got Pat Murtha and Joseph Hsu [ph], Joseph Hsu [ph] in country, Pat on International business, so it's really terrific.

We will be expanding -- we expanded the first -- first Tier 2 city and remind me if everybody at Tier 2 city in China is 5 million to 10 million people. We expanded in Hangzhou and so we’re looking -- we're looking at higher margins in Tier 2 cities, great volume and a better economic mile for us. We started in Shanghai. We've gone to Hangzhou. We will accelerate expansion in China because we have the sales and the profits now at the restaurant level that has the ability to expand.

So we are very, very excited about this opportunity and China is the biggest restaurant market in the world. So, you look at our people capability, our economics, our expansion plan and everything else. We think there is a huge runway coming for China.

Operator: There are no further questions. I’d like to turn the call back over to Ms.

Liz Smith for closing remarks.

Liz Smith: Thank you. We appreciate everyone for joining us today and we look forward to updating you on the portfolio during the Q2 call. Thanks so much.

Operator: This concludes today's conference.

You may disconnect your line at this time. Thank you for your participation.