Executives: Chris Meyer - Vice President, Investor Relations Liz Smith - Chief Executive Officer Dave Deno - Executive Vice President and Chief Financial and Administrative

Officer
Analysts: Michael Gallo - C.L. King Joe Buckley - Bank of America John Glass - Morgan Stanley Matthew DiFrisco - Guggenheim John Ivankoe - JPMorgan Howard Penney - Hedgeye Risk Management Jeff Farmer - Wells Fargo Jeffrey Bernstein - Barclays Jason West - Credit Suisse Karen Holthouse - Goldman Sachs Andrew Strelzik - BMO Capital Markets Sharon Zackfia - William Blair Brian Vaccaro - Raymond

James
Presentation:

Operator: Greetings and welcome to the Bloomin’ Brands Fiscal Second Quarter 2016 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Chris Meyer, Vice President of Investor Relations. Thank you. Mr.

Meyer, you may begin.

Chris Meyer: Thanks, operator. Good morning, everyone and thank you for joining us. 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 second quarter 2016 earnings release.

It can also be found on our website at www.bloominbrands.com in the Investors section. Throughout this conference call, we will be presenting our results on an adjusted basis. These non-GAAP financial measures are not calculated in accordance with U.S. GAAP and maybe calculated differently than similar non-GAAP information used by other companies. Quantitative reconciliations of our non-GAAP financial measures to their most directly comparable GAAP measures appear in our earnings release on our website as previously described.

Before we begin our formal remarks, I would like to remind everyone that part of our discussion today will include forward-looking statements, including our discussion of growth strategies and financial guidance. Such forward-looking statements are not guarantees of future performance and therefore you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ in a material way 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 www.sec.gov. During today’s call, we will provide a recap of our financial performance for the fiscal second quarter 2016, an overview of company highlights, a discussion regarding progress on key strategic objectives and an updated 2016 financial outlook.

Once we have completed these remarks, we will open up the call for questions. In addition, as several points in this presentation, we will be referencing consumer data from NPD Group’s CREST market research for the annual periods ending May 2006, 2010 and 2016. With that, I would now like to turn the call over to Liz Smith.

Liz Smith: Thanks, Chris and welcome to everyone listening today. As noted in this morning’s earnings release, our adjusted second quarter diluted earnings per share was $0.30, up 7% from last year and U.S.

comp sales were down 2.3%. We continue to expect our comp sales performance to strengthen meaningfully in the second half versus the first half. However, Q2 sales were somewhat softer than we anticipated. This quarter’s performance reflects the combination of lower than expected traffic from our marketing programs, increased competitive activity and industry traffic that has continued to soften. Before we drill down into the quarter, I wanted to provide our perspective on the casual dining operating environment.

For the last 11 years, casual dining traffic has declined. Price promotion, which ramped up in earnest during the recession, continues to increase, but has not restored traffic growth. At the same time, additional capacity continues to come to market. According to NPD CREST, in 2006, 16% of all casual dining occasions were deal-driven. By 2010, when we exited the recession, that percentage had increased to 21%.

Today, despite improving macroeconomic conditions, CDR discounting has increased further to now represent 22% of all occasions. This trend is unlikely to change given the sluggish start to 2016. Our segmentation study show that approximately 25% of CDR customers are truly motivated more by price than brand preference. In our view, the industry, including our brands, has overspent chasing this group through discounting and price promotions. As a result, CDR brands trade share back and forth among this subset of customers who are both less brand loyal and are less profitable.

The unintended consequence of this is that we are unnecessarily subsidizing the majority of consumers who would have visited anyway and view value as unique and differentiated experiences at affordable prices. As it relates to us, we have over-allocated our spending towards this price conscious messaging. In 2016, we began to pivot and moving forward, we will reduce the over-allocation of dollars against traditional discounting and redirect those dollars towards innovating the core customer experience. We have always defined value as total benefits divided by price. And our research suggests that our opportunity for growth lies in enhancing and differentiating our customer experiences versus further discounting prices.

We will, in effect, be more focused on the numerator versus the denominator in driving brand value. I want to be clear this does not mean there will be an abrupt end to straight price discounts. They do have a role and we will be sensitive to the macroenvironment. However, when we do value promotions, they will be executed in a more brand differentiated and ownable way. We recognize that there will be some traffic volatility as we lessen the reliance on traditional discounting, but it should not meaningfully impact profitability and it is embedded in our revised 2016 guidance.

We have spent the past year understanding the impact of this approach. Our experience at Bonefish also gives us confidence that this portfolio strategy will restore high quality, more predictable traffic growth over the medium to long-term. Over the past year at Bonefish, we have reduced our reliance on discounting, simplified the menu and returned to our polished casual roots of fresh grilled fish and superior service. Although it had a negative impact on traffic in the short-term, it showed up quickly in strength in brand satisfaction, which is beginning to result in the return of healthy traffic. You will see more investment of this kind across the portfolio in the form of enhanced food quality, differentiated service and ambience.

In addition, we will be supporting two emerging opportunities, our newly introduced Dine Rewards program and the promising off-premise dining occasion. Firstly, as you may have seen, on July 19, we launched our first multi-brand loyalty program called Dine Rewards. It has already received high marks for its simplicity and value relative to peer programs. Guests also appreciate the ability to enjoy the benefits across our portfolio of brands. This program has been in test since 2013 and has proven to be an effective means to drive frequency and increase sales.

When it reaches maturity, we expect Dine Rewards to drive a 1% to 2% lift in sales consistent with what we have received in six test markets. The program was just launched nationally 2 weeks ago and we now have over 800,000 members enrolled. We also see significant opportunity in increasing off-premise dining occasions for our brands. People want convenience and they want CDR food quality, but not always in the restaurant. We pioneered curbside dining over 20 years ago and believe that 2016 represents an inflection point to expand this opportunity even further.

Our upgraded online ordering platform represents approximately 30% of to-go sales, an increase of 10% versus a year ago. Importantly, the average check for online orders is 15% higher than phone-ins. We will continue to promote and support bundled offers to meet the growing interest of our customers. In addition, there has been a lot of discussion about the potential of deliveries for the casual dining industry. Our own research suggests this is a sizable and incremental sales layer and that this optimism is well founded.

We are testing delivery in 10 restaurants. And although it is very early, consumer acceptance is high and it is driving additional sales. We will be prudent and deliberate in our approach to capturing this opportunity to ensure we deliver our customer expectations and that the benefits are incremental and profitable. Now, turning to our brands in Q2, at Outback, we launched several initiatives, including the new center cut sirloin. It is the highest quality sirloin we have ever served.

This investment will continue to reinforce our steak credentials. In addition to the product enhancements, we are focused on improving service and execution in the restaurants. In Q2, we began to invest dollars into the labor model during peak hours to improve the experience for our guests. At the same time, we are simplifying the menu to improve execution. The product upgrades and labor investments demonstrate our commitment to elevate all aspects of the customer experience without raising prices to cover the cost of these investments.

This is an example of what we mean by offering sustainable value to our guests. Since the rollout of these initiatives, we have driven overall satisfaction to the highest recorded levels. This is very encouraging and is the key part of the plan to drive future sales growth. We also introduced a new marketing campaign and spokesman that represents our brand differentiation and moves us away from the LTO price promotion of statements. The ad campaign features Australian celebrity chef Adrian Richardson and highlights our steak credentials and the unique, spirited Aussie experience you can only get at Outback.

We are very pleased with the initial success of the campaign and will leverage Adrian to introduce new and innovative ideas in the second half of the year. A great example of how this works is in our current big Australia promotion. We are offering those loaded Bloomin’ Onions, a twist on our signature item. It’s generated a lot of buzz, interest and demand without detracting from sales of the traditional Bloomin’ Onion. Lastly, we are aggressively rolling out the Outback exterior remodel program.

We expect to complete 150 renovations in 2016 with approximately 80% completed in the second half. The design contemporizes our restaurants with improved curb appeal and has driven 4% to 5% sales growth in these locations. We will also continue to relocate Outback restaurants as quickly as higher quality sites become available. We expect these initiatives will build through the back half of the year. We are confident in the quality of the investments and anticipate a return to growth in the second half.

And more importantly, continued strengthening of the brand’s health. Turning to Bonefish, we saw positive same-store sales growth in Q2 as we execute the playbook to return the brand to its polished casual roots. Our efforts to simplify the execution of the experience has led to meaningful improvement in brand health metrics, including all-time high overall guest satisfaction scores in Q2. These positive leading indicators suggest we will continue to see sales momentum building over the back half of 2016 and beyond. During the second quarter, we began a new marketing campaign to reengage the consumer in the Bonefish experience.

This included the launch of the brand’s first television advertisement in select markets. The television spots used our employees to highlight the brand strength in fresh fish expertise and innovative seasonal specials featuring the highest quality fish and fresh ingredients. Bonefish remains a consumer favorite and we are back on track with this lifestyle brand. At Carrabba’s, we were disappointed in the second quarter performance, the new menu improved suitability for everyday dining and we spent meaningfully against this in Q1 to increase awareness and drive trials. We did not see this traffic sustain in the second quarter.

The average Carrabba guest visits the brand two to three times a year, so it will take some time to build, but the sales results in Q2 were below our expectations. It is apparent the Italian category remains increasingly competitive with elevated levels of promotional activity in the market. According to NPD CREST, over the last year, 26% of all Italian dining occasions were deal driven, which is the highest level in segment history and well above the CDR average of 22%. We will direct our efforts towards expanding occasions with brand appropriate promotions. Carrabba’s has high brand regard and we need to build opportunities for people to encounter that experience.

We see a significant opportunity in the off-premise occasion as people want the quality of Carrabba’s and convenience that comes with eating at home. To help address this opportunity, we launched family bundles in April, offering complete meals that feed a family of four at an attractive value. The early indications have been very positive. In the second half, we will focus on product innovation that leverages our authentic Italian heritage. Before we turn to international, I would like to announce that after more than 25 years with the company and 11 years of passionate stewardship of our Outback brand, Jeff Smith has decided to retire from Bloomin’ Brands.

I want to take this opportunity to thank Jeff for all his efforts and the leadership that has made the brand so successful. I am pleased to announce that Gregg Scarlett, our current President of Bonefish, will be moving over to Outback to lead the next phase of growth. Greg joined Outback more than 20 years ago and has held numerous leadership positions within the portfolio. No one is better suited to lead Outback in this next era. Replacing Greg as President of Bonefish will be Dave Schmidt.

Dave joined Bonefish in 2006 and has held numerous leadership positions within both operations and finance. He has been an integral part of the Bonefish revitalization over the past 18 months. I would like to turn now to the international business. This has been an important quarter in advancing our international growth strategy. First, we made a decision to franchise our restaurants in South Korea.

This is a mature market and we believe this new ownership structure will allow it to compete more effectively. Our focus is on developing the high growth emerging markets in Asia and Latin America, where CDR capacity is well below demand. China represents an important long-term opportunity. We have been purposeful, patient and deliberate in China for the past 4 years, implying a go slow to go fast strategy. This quarter, we reached a significant milestone for the business.

Our five Outback locations are seeing meaningful sales gains. And in total, we see profitability at the restaurant level for the first time. This validates our consumer appeal and puts us in a position to accelerate expansion. Turning to our largest market, Brazil continues to be resilient in a tough environment. The Outback restaurants are performing in line with our expectations and we are on track to have over 18 restaurants by year end.

In addition to Outback, we are also seeing success with Abbraccio. We have five restaurants opened and sales have been similar to new Outbacks. This gives us conviction in the potential for Abbraccio. As a reminder, Italian is the second largest segment in Brazil with no clear market leader, providing us with significant runway for future growth. Our brand strength, world class leadership team and the relative under-penetration of casual dining in Brazil gives us confidence that we can continue to invest capital in Brazil with high levels of return.

The International growth strategy is to have an ownership position in high growth markets, while partnering with experienced local franchisees to expand the brand in non-core countries. Building a growing and strong franchise business overseas is a priority for us. As you may have seen, we signed a multi-country agreement with two partners in the Middle East. This agreement will add up to 26 Outback and Abbraccio locations as franchises over the next 5 years and reflects the portability, relevance and attractiveness of our leading brands. We will continue to pursue opportunities that balance risk and reward and feed the market.

Perhaps our strongest asset is the world-class team we have built, both at headquarters and on the ground with experienced developing brands in emerging markets. And finally, another major priority for us is maximizing total shareholder return. As we mentioned last quarter, we are making great progress monetizing our owned real estate assets. The real estate market remains attractive and we will balance speed and value through bulk and individual transactions. The sale-leaseback progress coupled with our significant free cash flow enabled us to announce a new share repurchase authorization that increases our capacity to buyback shares to $300 million.

These are just two aspects of the overall strategy to increase total shareholder return. Our significant cash flow enables us to do this while investing in incremental opportunities, which include international expansion and off-premise dining. In summary, our top priority is restoring sales growth in the U.S. While the second quarter was softer than expected, we took significant steps to elevate the core guest experience. We are confident that this is the right area of focus and will return the domestic portfolio to growth over the back half of the year.

Equally important, Q2 represented major progress against our other core strategies. We are in an even stronger position to expand our brand in Asia and Latin America, where casual dining is taking off. And finally, we are making significant progress in returning cash to shareholders and driving total shareholder return. With that, I will turn the call over to Dave Deno to provide more detail on Q2 and 2016 guidance. Dave?

Dave Deno: Well, thank you, Liz and good morning, everyone.

I will 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 reconciliations between non-GAAP metrics and their most directly comparable U.S. GAAP measures. We also provide a discussion of the nature of each adjustment.

With that in mind, our second quarter financial results versus the prior year are as follows. GAAP diluted earnings per share for the quarter was negative $0.08 versus $0.26 in 2015. Adjusted diluted earnings per share, was $0.30 versus $0.28 last year. The primary difference between our GAAP and adjusted numbers in the second quarter was the sale of South Korea. This includes $40 million of impairment charges and related cost as well as $3.5 million of tax expense associated with the repatriation of proceeds from the sale.

Total Bloomin’ Brands revenues decreased 1.9% to $1.1 billion. This decrease was driven primarily by a 2.3% decrease in U.S. comp sales and the unfavorable impact of foreign currency translation. This was partially offset by the net benefit of restaurant openings and closures. Adjusted restaurant level operating margin was 15.5% this year versus 16.2% a year ago.

The year-over-year decline in operating margin was driven primarily by higher labor expense, changes in product mix and higher commodity cost driven by both product enhancements at Outback and inflation in Brazil. These items are partially offset by the benefit of productivity savings and menu pricing. It is also important to note that embedded in our Q2 restaurant margin is approximately $4 million of investments to enhance the guest experience, including the training and rollout of new center cut sirloin and adjusting the service model to optimize labor during peak hours. These are part of the $15 million of investments we are making into our business in 2016 as discussed on prior earnings calls. As a reminder, we are not raising prices to cover the cost of these investments.

As it relates to G&A, after removing all adjustments from Q2 2016 and Q2 2015, general and administrative costs were $68.3 million and $75.7 million respectively. The decrease was primarily related to the timing of our Annual Manager Partners Conference shifting from Q2 in 2015 to Q1 in 2016. There also was some favorability in deferred partner compensation and foreign exchange. Outside of key investment areas such as international and digital, we remain committed to zero overhead growth in G&A and will look for ways to continue to operate more efficiently. Turning to reporting segments, international adjusted restaurant margin was 16.2% in Q2.

This was down from last year as we are experiencing double-digit inflation in Brazil and are not pricing at levels to fully offset these costs. Despite these added pressures, international margins are significantly higher than margins in the U.S. As we grow key equity markets internationally, our consolidated Bloomin’ Brands margins will benefit from the success of our overseas investments. On the development front, we opened 6 system-wide in the second quarter consisting of two Outbacks, one company-owned locations and one franchise location and four company-owned international restaurants. As we have discussed on prior calls, we continue to monetize our owned real estate that is held in the entity we call Propco.

In Q2, we sold a total of 44 properties for $155 million, including the previously disclosed 41 property institutional deal at the end of March. We expect to close between 60 and 80 properties in Q3, which should provide between $205 million and $275 million of gross proceeds. Given this opportunity, we remain confident that we can substantially complete the sale of available portfolio by early 2017. The attractive real estate environment combined with the high level demand for these properties will unlock significant value for our shareholders once the expected transactions are completed. First, it enables us to delever our balance sheet as we pay off our bridge loan and second, we will use excess sale leaseback proceeds to repurchase shares.

As it relates to 2016 full year results, we expect the overall financial benefit of the sale leaseback strategy to be limited given the timing of the transactions. Turning to our capital structure, we repurchased $65 million of stock in the second quarter. This left $110 million remaining on the existing $250 million authorization. Earlier this week, the Board of Directors canceled the $250 million authorization and approved a new $300 million authorization which will expire on January 26, 2018. This increase will allow us to use excess balance sheet cash as well as excess sale leaseback proceeds to repurchase shares.

Given current valuation levels, we will continue to be opportunistic with excess cash as well as future sale leaseback proceeds to repurchase shares. Also of note, in July, the Board of Directors declared a cash dividend of $0.07 a share payable on August 25. As Liz discussed earlier, we re-franchised the Outback business in South Korea for $50 million. These locations will operate at franchise locations moving forward and we will collect a royalty from the new ownership. This transaction is a big win for our company as we focus our international efforts on high growth areas such as Brazil and China.

This sale also provides a great opportunity for this business to grow under the experienced leadership of our new ownership team. In terms of the financial impact of the transaction, we expect Bloomin’ Brands diluted earnings per share to be approximately $0.01 lower in the second half of 2016, excluding the impact of impairments, fees and expenses related to the transaction. This transaction is dilutive in 2016 versus our original guidance due to heavier sales and profits in the fourth quarter relative to the balance of the year. On a pro forma full year basis, we do not expect this transaction to materially impact EPS. The Korea sale brings the total number of international franchise locations to 126.

Franchises now represent 57% of the total international portfolio. We will continue to build our franchise business overseas in geographies such as Southeast Asia, certain parts of Latin America and the Middle East. I would now like to take you through our thoughts on 2016. We have decided to update the financial outlook for the year driven primarily by softer than expected sales trends, both in our brands and in the segment. We now expect U.S.

combined comp sales to be flat versus our previous guidance of positive. We still expect significant improvement in comp sales in the back half of the year given the conference in our growth levers and easier second half comparisons. However, given our Q2 performance and persistent industry headwinds, we believe it is prudent to modestly lower the full year outlook. We now expect adjusted EPS of at least $1.35. This is down from our previous expectations of at least $1.40.

It is important to note that we lose $0.01 in the back half versus the original guidance from the sale of Korea. The remainder of the change in the guidance reflects our updated comp sales assumptions. We expect adjusted operating margin to be flat. This change is driven by the revision to comp sales. This does not factor in any increases in rent from sale leaseback transactions that have not yet been closed.

Their impact to 2016 margins will depend on the timing, size and rent as we execute this strategy. Based on the forward curve, we expect foreign exchange represent a $3 million headwind for the year. This is better than the $6 million headwind we anticipated on the last call. While we are hopeful of recent appreciation of the Brazilian real will continue, we remain cautious due to the volatile macro and political environment. We also expect our adjusted tax rate to be 25% to 26%.

This is slightly lower than our original guidance driven by lower expected pre-tax income. Original guidance on commodities, CapEx and new restaurants remain unchanged. In terms of productivity expectations, we are in excellent shape to deliver on our goal of at least $50 million of productivity savings in 2016 with cost of sales representing approximately 50% of the overall benefit. In summary, we believe a more cautious approach to 2016 sales is appropriate in this volatile operating environment. We remain confident that we are making the right and necessary investments both domestically and internationally to support long-term growth.

We remain disciplined stewards of capital and our improving capital structure provides us increased flexibility to return cash to shareholders. And with that, we will now open the call for questions.

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Michael Gallo with C.L. King.

Please proceed with your question.

Michael Gallo:

Liz Smith:

Michael Gallo:

Liz Smith:

Michael Gallo:

Operator: Our next question comes from the line of Joe Buckley with Bank of America. Please proceed with your question.

Joe Buckley:

Liz Smith:

Dave Deno:

Joe Buckley:

Liz Smith:

Joe Buckley:

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

John Glass:

Liz Smith:

John Glass:

Dave Deno:

Liz Smith:

John Glass:

Operator: Our next question comes from the line of Matthew DiFrisco with Guggenheim. Please proceed with your question.

Matthew DiFrisco:

Dave Deno:

Liz Smith:

Matthew DiFrisco:

Liz Smith:

Matthew DiFrisco:

Liz Smith:

Matthew DiFrisco:

Dave Deno:

Matthew DiFrisco:

Dave Deno:

Matthew DiFrisco:

Liz Smith:

Matthew DiFrisco:

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

John Ivankoe:

Liz Smith:

John Ivankoe:

Dave Deno:

John Ivankoe:

Dave Deno:

John Ivankoe:

Dave Deno:

Operator: Our next question comes from the line of Howard Penney with Hedgeye Risk Management.

Please proceed with your question.

Howard Penney:

Liz Smith:

Howard Penney:

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

Jeff Farmer:

Dave Deno:

Jeff Farmer:

Dave Deno:

Chris Meyer:

Dave Deno:

Jeff Farmer:

Chris Meyer:

Jeff Farmer:

Dave Deno:

Jeff Farmer:

Dave Deno:

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

Jeffrey Bernstein:

Liz Smith:

Jeffrey Bernstein:

Operator: Our next question comes from the line of Jason West with Credit Suisse. Please proceed with your question.

Jason West:

Dave Deno:

Liz Smith:

Jason West:

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

Karen Holthouse:

Dave Deno:

Karen Holthouse:

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

Please proceed with your question.

Andrew Strelzik:

Liz Smith:

Dave Deno:

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

Sharon Zackfia:

Liz Smith:

Dave Deno:

Liz Smith:

Sharon Zackfia:

Operator: Our final question comes from the line of Brian Vaccaro with Raymond James. Please proceed with your question.

Brian Vaccaro:

Dave Deno:

Brian Vaccaro:

Dave Deno:

Brian Vaccaro:

Dave Deno:

Brian Vaccaro:

Operator: There are no further questions at this time. I would like to turn the call back over to Ms. Liz Smith for any closing remarks.

Liz Smith: Thank you, operator. We appreciate everybody for joining us today and we look forward to updating you on the portfolio of progress on our Q3 call, which is on October 28.

Thanks a lot.

Operator: This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.